<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 2000
1933 ACT FILE NO. 333-
1940 ACT FILE NO. 811-09571
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOXES)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
AND
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 2
NUVEEN SENIOR INCOME FUND
Enter Name of Registrant as Specified in Charter
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
Address of Principal Executive Offices (Number, Street, City, State and Zip
Code)
(312) 917-7700
Registrant's Telephone Number, including Area Code
GIFFORD R. ZIMMERMAN, ESQ. -- VICE PRESIDENT AND SECRETARY
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
Name and Address (Number, Street, City, State and Zip code) of Agent for Service
Copies of Communications To:
<TABLE>
<S> <C> <C>
DAVID A. STURMS, ESQ. ERIC F. FESS, ESQ. THOMAS A. HALE, ESQ.
VEDDER PRICE KAUFMAN & KAMMHOLZ CHAPMAN & CUTLER SKADDEN, ARPS, SLATE,
222 N. LASALLE STREET 111 W. MONROE MEAGHER & FLOM (ILLINOIS)
CHICAGO, IL 60601 CHICAGO, IL 60603 333 WEST WACKER DRIVE,
SUITE 2100
CHICAGO, IL 60606
</TABLE>
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement
If any of the securities being registered on this Form 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
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Taxable Auctioned Preferred Shares Series
.......................................... 2,000 shares $25,000 $50,000,000 $13,200
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to filing.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
The undersigned registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective. (2) 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.
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<PAGE> 2
The information in this Prospectus is not complete and may be changed.
These securities may not be sold until the Registration Statement filed
with the Securities and Exchange Commission is effective. This Prospectus
is not an offer to sell these securities and is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, , 2000
(LOGO) $
NUVEEN SENIOR INCOME FUND
TAXABLE AUCTIONED PREFERRED SHARES ("TAPS")
SHARES, SERIES
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------------
Nuveen Senior Income Fund (the "Fund") is a non-diversified, closed-end
management investment company. The Fund's investment objective is to seek a high
level of current income, consistent with preservation of capital. The Fund seeks
to achieve its objective primarily by investing in senior secured loans whose
interest rates float or adjust periodically based on a benchmark interest rate.
Senior loans hold the most senior position in the capital structure of the
borrower, are usually secured with specific collateral, and have a claim on the
assets of the borrower that comes before other lenders to and holders of
securities of the borrower, such as holders of subordinated debt, preferred
stock or common stock. However, senior loans typically are below investment
grade quality and have speculative characteristics. See the "Risk Factors"
section beginning on page of this Prospectus for a discussion of the
investment risks you should consider in making an investment decision.
Nuveen Senior Loan Asset Management Inc. (the "Adviser") is the Fund's
investment adviser. The Adviser is a wholly-owned subsidiary of the John Nuveen
Company.
<TABLE>
<CAPTION>
Per Share Sales Load(1) Proceeds to Fund(2)
----------- ------------- -------------------
<S> <C> <C> <C>
Public Offering Price.................................... $ 25,000 $ $
Total.................................................... $ $ $
</TABLE>
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(1) The Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933. See "Underwriting."
(2) Plus accumulated dividends, if any, from the Date of Original Issue.
The dividend rate for the initial Dividend Period for the shares of TAPS
issued pursuant to the Offering will be % per anum. For each Dividend Period
following the initial Dividend Period, the dividend rate on shares of TAPS will
be the Applicable Rate for such series in effect from time to time as
determined, except as described herein, on the basis of Orders placed in an
Auction conducted on the Business Day preceding the commencement of such
Dividend Period, as set forth herein. The Applicable Rate that results from an
Auction for any Dividend Period will not be greater than the Maximum Rate then
in effect or less than the Minimum Rate then in effect.
Dividends on shares of TAPS will accumulate at the Applicable Rate from the
Date of Original Issue and shall be payable on each Dividend Payment Date
thereafter, commencing , 2000. The initial Dividend Period for the
shares of TAPS will be (28 days) days. Dividend Periods after the initial
Dividend Period for Shares of TAPS shall be either Standard Rate Periods or,
subject to certain conditions and with notice to the holders of TAPS, periods
longer or shorter than 28 days and having such durations as the Board of
Trustees shall specify (each, a "Special Rate Period"). The initial Auction Date
will be , 2000.
The Fund is offering shares of TAPS at a price per share of $25,000 (the
"Offering"). It is a condition of the Underwriters' obligation to purchase the
TAPS that the TAPS be rated "aaa" by Moody's as of the Date of Original Issue.
(continued on next page)
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus sets forth concisely information about the Fund that you
should know before investing. You should retain it for future reference. A
statement of additional information ("SAI") dated , 2000,
containing additional information about the Fund, is on file with the SEC and is
incorporated by reference into this Prospectus. The table of contents of the SAI
appears on page of this Prospectus. You may obtain a copy of the SAI without
charge by calling the Fund at 1-800-257-8787, or writing the Fund at 333 West
Wacker Drive, Chicago, Illinois 60606.
------------------------
PAINEWEBBER INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS , 2000.
<PAGE> 3
(continued from previous page)
TAPS having a Dividend Period of one year or less than one year may be
redeemed at the option of the Fund, in whole or in part, on any Dividend Payment
Date at a redemption price equal to $25,000 per share, plus accumulated and
unpaid dividends thereon to the date fixed for redemption. TAPS 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, at a redemption price equal to $25,000
per share, plus accumulated and unpaid dividends thereon to the redemption date,
plus a redemption premium, if any, determined by the Board of Trustees after
consultation with the Broker-Dealers. See "Description of TAPS
-- Redemption -- Optional Redemption." The TAPS are, under certain conditions,
subject to mandatory redemption, in whole or in part, if the Fund does not
maintain the "aaa" Credit Rating for the TAPS or if the Fund, on any Valuation
Date or the last Business Day of any month, shall fail to meet the TAPS Basic
Maintenance Amount or the 1940 Act TAPS Asset Coverage, respectively, and in any
such case such failure is not cured on a timely basis as specified herein. See
"Description of TAPS -- Redemption -- Mandatory Redemption."
Certain capitalized terms not otherwise defined in this Prospectus have the
meanings provided in the Statement included as Appendix A to the SAI.
The Underwriters are offering the shares of the TAPS subject to various
conditions. It is expected that the shares of TAPS will be delivered to the
Underwriters through the facilities of The Depository Trust Company on or
about , 2000.
------------------------
THE TAPS 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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Use of Proceeds............................................. 7
Capitalization and Information Regarding Senior
Securities................................................ 8
Portfolio Composition....................................... 9
The Fund's Investments...................................... 9
Risk Factors................................................ 20
Management of the Fund...................................... 27
Description of TAPS......................................... 29
Description of Commercial Paper Program..................... 42
The Auction................................................. 43
Description of Common Shares................................ 46
Certain Provisions in the Declaration of Trust.............. 46
Repurchase of Common Shares; Conversion to Open-End Fund.... 47
Net Asset Value............................................. 47
Federal Taxation............................................ 49
Underwriting................................................ 51
Custodian and Transfer Agent, Dividend Disbursing Agent and
Redemption Agent.......................................... 51
Legal Opinions.............................................. 51
Available Information....................................... 52
Special Note Regarding Forward-Looking Statements........... 52
Table of Contents for the Statement of Additional
Information............................................... 53
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER
THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU
WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION
APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
<PAGE> 4
PROSPECTUS SUMMARY
THE FUND................... The Fund is a non-diversified, closed-end
management investment company organized as a
Massachusetts business trust. See "The Fund." The
Fund's common shares, $.01 par value ("Common
Shares"), are traded on the New York Stock Exchange
under the symbol "NSL." See "Description of Common
Shares." As of , ,
the Fund had Common Shares outstanding
and net assets of $ .
INVESTMENT ADVISER......... Nuveen Senior Loan Asset Management Inc. (the
"Adviser") is the Fund's investment adviser. The
Adviser is a wholly-owned subsidiary of The John
Nuveen Company.
INVESTMENT OBJECTIVES AND
POLICIES................... The Fund's investment objective is to seek a high
level of current income, consistent with
preservation of capital. There can be no assurance
that the Fund will achieve its investment
objective.
The Fund seeks to achieve its objective primarily
by investing in senior secured loans whose interest
rates adjust periodically based on a benchmark,
such as the prime rate offered by one or more major
United States banks, or the London Inter-Bank
Offered Rate (known as "LIBOR").
Under normal circumstances, the Fund will invest at
least 80% of its total assets in adjustable rate,
U.S. dollar-denominated senior loans ("Senior
Loans") that are secured. Senior Loans are made to
corporations, partnerships, limited liability
companies and other entities ("Borrowers") to
finance leveraged buyouts, recapitalizations,
mergers, acquisitions, stock repurchases, debt
refinancings and, to a lesser extent, for general
operating and other purposes.
Although Senior Loans have the most senior position
in a Borrower's capital structure and the Fund
normally will invest at least 80% of its total
assets in Senior Loans that are secured by specific
collateral, Senior Loans are typically below
investment grade quality and may have below
investment grade ratings; these ratings are
associated with securities having speculative
characteristics. Because of the features of Senior
Loans, the Fund's Adviser believes, based on its
experience, that these ratings do not necessarily
reflect the true risk of loss of principal or
interest on a Senior Loan. For example, the Fund's
Adviser believes that Senior Loans tend to have
more favorable loss recovery rates as compared to
other types of below investment grade quality debt
obligations. Accordingly, the Fund's Adviser
generally does not take ratings into account when
determining whether to invest in a Senior Loan and,
in any event, does not view ratings as a
determinative factor in its investment decisions.
Investing in Senior Loans does, however, involve
investment risk, and some Borrowers default on
their Senior Loan payments. The Fund attempts to
manage these risks through portfolio
diversification and ongoing analysis and monitoring
of Borrowers. As a result, the Fund is highly
dependent on the credit analysis abilities of the
Fund's Adviser.
For additional information on the Fund's objective
and policies, see "The Fund's Investments" below.
1
<PAGE> 5
LEVERAGE................... The Fund uses financial leverage for investment
purposes. Including the proceeds of the TAPS, it is
currently anticipated that the amount of leverage
will represent approximately 40% (and in no event
exceeding 50%) of the Fund's total assets. In
addition to issuing shares of TAPS, the Fund
borrows money pursuant to a credit facility and/or
issues commercial paper or notes. It is currently
anticipated that the amount of leverage represented
by a credit facility and/or a commercial paper
program will be approximately 30% of the Fund's
total assets. See "Description of Commercial Paper
Program." The Fund's obligations under any credit
facility and/or commercial paper program are senior
to the TAPS. Payments to holders of TAPS in
liquidation or otherwise will be subject to the
prior payment of all outstanding indebtedness,
including the Fund's obligations under any credit
facility and/or the commercial paper program. On
December 14, 1999, the Fund entered into a credit
agreement pursuant to which a commercial bank
provides the Fund with access to a $150 million
revolving credit facility. The Fund expects to
replace the revolving credit facility by entering
into a definitive agreement with a syndicate of
commercial banks to establish a $150 million
commercial paper program and an associated $155
million liquidity facility. However, there can be
no assurance that any commercial paper or notes
will be issued, that the commercial paper or notes
will remain outstanding, or that the Fund will
borrow or, if it borrows, that such borrowing will
be continued. See "Description of Commercial Paper
Program."
THE OFFERING............... The Fund is offering shares of TAPS, each
at a purchase price of $25,000 per share, plus
accumulated dividends, if any, from the date the
share is issued. The TAPS are being offered by
PaineWebber Incorporated. See "Underwriting."
PRINCIPAL INVESTMENT
RISKS...................... Risk is inherent in all investing. Therefore,
before investing in the Fund you should carefully
consider certain risks. The primary risks of
investing in TAPS shares are:
- if an auction fails you may not be able to sell
some or all of your shares;
- because of the nature of the market for TAPS
shares, you may receive less than the price you
paid for your shares if you sell them outside of
the auction, especially when market interest
rates are rising;
- a rating agency could downgrade TAPS shares,
which could affect liquidity;
- the Fund may be forced to redeem your shares to
meet regulatory or rating agency requirements or
may voluntarily redeem your shares in certain
circumstances;
- in extraordinary circumstances the Fund may not
earn sufficient income from its investments to
pay dividends;
- if an issuer of a Senior Loan in which the Fund
invests defaults, there may be a negative impact
on the income and net asset value of the Fund's
portfolio;
2
<PAGE> 6
- the TAPS are junior to certain senior
indebtedness of the Fund, including obligations
under any credit facility and/or commercial paper
program;
- senior indebtedness of the Fund (including any
credit facility and/or commercial paper program)
may constitute a substantial lien and burden on
the TAPS by reason of its prior claim against the
income of the Fund and against the net assets of
the Fund in liquidation; and
- the Fund will not be permitted to declare
dividends or other distributions with respect to
the TAPS or purchase TAPS unless at the time
thereof the Fund meets certain asset coverage
requirements and payments of principal and of
interest on the senior indebtedness are not in
default.
For additional general risks of investing in the
Fund, see "Risk Factors -- General Risks of
Investing in the Fund" below.
TRADING MARKET............. TAPS are not listed on an exchange. Instead, you
may buy or sell TAPS at an auction that normally is
held every 28 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. In addition to the auctions,
Broker-Dealers and other broker-dealers may
maintain a secondary trading market in TAPS outside
of auctions, but may discontinue this activity at
any time. There is no assurance that a secondary
market will provide shareholders with liquidity or
that the trading price in any secondary market
would be $25,000. You may transfer shares outside
of auctions only to or through a Broker-Dealer or a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer.
The first auction date for the TAPS will be
, 2000, the business day before the
dividend payment date for the initial rate period
for the TAPS. The start date for subsequent rate
periods normally will be the business day following
the auction date unless the then-current rate
period is a special rate period, or the day that
normally would be the auction date or the first day
of the subsequent rate period is not a business
day.
DIVIDENDS AND RATE
PERIODS.................... The table below shows the dividend rate for the
initial rate period on TAPS offered in this
Prospectus. For subsequent rate periods, TAPS will
pay dividends based on a rate set at auctions,
normally held weekly. In most instances dividends
are also paid weekly, on the day following the end
of the rate period. The Applicable Rate that
results from an Auction will not be lower than 70%
of the applicable AA Composite Commercial Paper
Rate (the "Minimum Rate") or greater than 150% (the
"Maximum Rate") of the applicable AA Composite
Commercial Paper Rate (for a Dividend Period of
fewer than 184 days) or the Applicable Treasury
Index Rate (for a Dividend Period of 184 days or
more) at the close of business on the Business Day
next preceding such Auction Date. See "Description
of TAPS -- Dividends and Dividend Periods --
Determination of Dividend Rate" and "The Auction."
3
<PAGE> 7
The table below also shows the date from which
dividends on the TAPS will accumulate at the
initial rate, the dividend payment date for the
initial rate period and the day on which dividends
normally will 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 rate period for TAPS. Subsequent
rate periods generally will be twenty-eight days.
The dividend payment date for special rate periods
of more than twenty-eight days will be set out in
the notice designating a special rate period. See
"Description of TAPS -- Dividends and Dividend
Periods -- Notification of Dividend Periods."
<TABLE>
<CAPTION>
DIVIDEND
DATE OF PAYMENT SUBSEQUENT
INITIAL ACCUMULATION DATE FOR DIVIDEND
DIVIDEND AT INITIAL INITIAL RATE PAYMENT
RATE RATE* PERIOD* DATE
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
%
------------
* All dates are 2000.
</TABLE>
RATINGS.................... It is a condition of the Underwriter's obligation
to purchase the TAPS that the TAPS receive a rating
of "aaa" from Moody's. A rating of "aaa" is the
highest category of ratings that Moody's assigns to
preferred stock.
RESTRICTIONS ON DIVIDEND,
REDEMPTION AND OTHER
PAYMENTS................... Under the 1940 Act, the Fund is not permitted to
declare any dividend on TAPS unless, after giving
effect to such dividend, 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 the credit
facility and/or commercial paper programs, if any,
is at least 200%. In addition, the Fund is not
permitted to declare any distribution on or
purchase or redemption of TAPS unless, after giving
effect to such distribution, purchase or
redemption, asset coverage with respect to the
Fund's senior securities representing indebtedness,
including the Fund's obligations under the credit
facility and/or commercial paper programs, if any,
is at least 300%. Dividends or other distributions
on or redemptions or purchases of TAPS are also
prohibited at any time that an event of default
under the credit facility and/or commercial paper
program, if any, has occurred and is continuing.
See "Description of TAPS -- Restrictions on
Dividend, Redemption and Other Payments" and
"Description of Commercial Paper Program."
ASSET MAINTENANCE.......... The Fund must maintain Eligible Assets having an
aggregated Discounted Value at least equal to the
TAPS Basic Maintenance Amount as of each Valuation
Date. The Fund also must maintain asset coverage
for the TAPS on a non-discounted basis of at least
200% as of the last business day of each month. See
"Description of TAPS -- Asset Maintenance."
The Discount Factors and guidelines for calculating
the Discounted Value of the Fund's portfolio for
purposes of determining whether the
4
<PAGE> 8
TAPS Basic Maintenance Amount has been satisfied
have been established by Moody's in connection with
the Fund's receipt from Moody's of the "aaa" Credit
Rating with respect to the TAPS on their Date of
Original Issue.
The Fund estimates that on the Date of Original
Issue, the 1940 Act TAPS Asset Coverage, based on
the composition of its portfolio as of
, 2000, after giving effect to the
issuance of the TAPS ($ million) and the deduction
of sales loads and estimated offering expenses for
such shares ($ ), will be %.
In addition, under a credit facility and/or
commercial paper program, the Fund would not permit
the Fund's asset coverage ratio (as defined by
agreement) to fall below 300% for more than four
consecutive business days or below 275% at any
time. See "Description of Commercial Paper
Program."
REDEMPTION................. Although the Fund ordinarily does not redeem TAPS,
it may be required to redeem shares if, for
example, the Fund does not meet an asset coverage
ratio required by law or correct a failure to meet
a rating agency guideline in a timely manner. The
Fund voluntarily may redeem TAPS under certain
conditions. See "Description of
TAPS -- Redemption."
VOTING RIGHTS.............. Except as otherwise indicated, holders of TAPS have
one vote per share and vote together with holders
of Common Shares as a single class.
In connection with the election of the Board of
Trustees, the holders of outstanding shares of
Preferred Shares, including TAPS, as a class, shall
be entitled to elect two trustees of the Fund. The
holders of outstanding shares of Common Stock and
Preferred Shares, including TAPS, voting together,
shall elect the remainder. However, upon the Fund's
failure to pay dividends on the Preferred Shares in
an amount equal to two full years of dividends, the
holders of Preferred Shares have the right to
elect, as a class, the smallest number of
additional Trustees as shall be necessary to assure
that a majority of the Trustees has been elected by
the holders of Preferred Shares. The terms of the
additional Trustees shall end when the Fund pays or
provides for all accumulated and unpaid dividends.
See "Description of TAPS -- Voting Rights."
FEDERAL INCOME TAXES....... The Distributions with respect to TAPS (other than
distributions in redemption of TAPS 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 and will not qualify for the dividends
received deduction available to corporations under
Section 243 of the Code. Dividends designated by
the Fund as capital gain distributions 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 stocks 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
5
<PAGE> 9
made with respect to TAPS as capital gain
distributions in proportion to the TAPS share of
total dividends paid during the year. Because the
Fund's portfolio income will consist principally of
interest income, corporate investors in the TAPS
generally will not be entitled to the 70% dividends
received deduction. See "Federal Taxation."
This Summary is qualified in its entirety by reference to the more detailed
information included elsewhere in this Prospectus, the Fund's Statement of
Additional Information and the Fund's Statement Establishing and Fixing the
Rights and Preferences of Taxable Auctioned Preferred Shares (the "Statement")
attached as Appendix A to the Statement of Additional Information. Capitalized
terms used but not defined in this Prospectus shall have the meanings given to
such terms in the Statement.
6
<PAGE> 10
FINANCIAL HIGHLIGHTS
(UNAUDITED)
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's operations
on , until , .
<TABLE>
<S> <C>
Per Share Operating Performance:
Net Asset Value, Beginning of Period......................
Net Investment Income..................................
Net Gains or Losses on Securities (Both Realized and
Unrealized)...........................................
Total From Investment Operations..................
Organization and Offering Costs...........................
Net Asset Value, End of Period**..........................
Per Share Market Value, End of Period.....................
Total Return on Net Asset Value...........................
Total Return on Market Value..............................
Ratios/Supplemental Data:
Net Assets, End of Period (In Thousands)..................
Ratio of Expenses to Average Net Assets Before Expense
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets
Before Expense Reimbursement...........................
Ratio of Expenses to Average Net Assets After Expense
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets After
Expense Reimbursement..................................
Portfolio Turnover Rate...................................
</TABLE>
- ---------------
* Annualized
** Immediately after the initial public offering of Common Shares on October 26,
1999, the net asset value of the Fund's Common Shares was $9.54.
7
<PAGE> 11
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on August 13, 1999, pursuant to an Agreement and
Declaration of Trust governed by the laws of The Commonwealth of Massachusetts
(the "Declaration"). The Fund's principal office is located at 333 West Wacker
Drive, Chicago, Illinois 60606, and its telephone number is (800) 257-8787. On
October 26, 1999, the Fund issued an aggregate of 26,000,000 common shares of
beneficial interest, par value $.01 per share ("Common Shares"), pursuant to the
initial public offering thereof and commenced its operations. On November 16,
1999 and December 10, 1999, the Fund issued an additional 2,000,000 and
1,600,000 Common Shares, respectively, in connection with the partial exercises
by the Underwriters of the over-allotment option. The Fund's Common Shares are
traded on the New York Stock Exchange (the "Exchange") under the symbol "NSL."
On December 14, 1999, the Fund entered into a credit agreement pursuant to which
a commercial bank provides the Fund with access to a $150 million revolving
credit facility. The Fund expects to replace the revolving credit facility by
entering into a definitive agreement with a syndicate of commercial banks to
establish a $150 million commercial paper program and an associated $155 million
liquidity facility. However, there can be no assurance that any commercial paper
or notes will be issued, that the commercial paper or notes will remain
outstanding, or that the Fund will borrow or, if it borrows, that such borrowing
will be continued. See "Description of Commercial Paper Program."
The following table provides information about the Fund's outstanding
shares as of , :
<TABLE>
<CAPTION>
AMOUNT AMOUNT HELD BY THE AMOUNT
TITLE OF CLASS AUTHORIZED FUND OR FOR ITS ACCOUNT OUTSTANDING
- -------------- ---------- ----------------------- -----------
<S> <C> <C> <C>
Common.................................... Unlimited 0
TAPS Series ............................ Unlimited 0 0
</TABLE>
USE OF PROCEEDS
The estimated net proceeds of this offering will be approximately $
after payment of offering expenses and the sales load.
The estimated net proceeds of the offering will be invested in accordance
with the Fund's investment objective and policies as stated below. The Fund will
invest the estimated net proceeds of the offering in accordance with the Fund's
investment objective and policies as soon as practicable. It is anticipated
that, under normal market conditions, such investments will be completed no
later than one month after the completion of the offering. The Fund's actual
investment timetable will depend on the availability of Senior Loans and other
market conditions. Pending such investment, it is anticipated that the proceeds
will be invested in high-quality, short-term debt securities.
8
<PAGE> 12
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
(UNAUDITED)
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
, , and as adjusted to give effect to the issuance of the shares
of TAPS offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Shareholders' Equity:
Preferred Shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no
shares issued; shares issued, as adjusted,
respectively)..........................................
Common Shares, $.01 par value per share; unlimited shares
authorized, shares outstanding*...................
Paid-in surplus...........................................
Balance of undistributed net investment income............
Accumulated net realized gain (loss) from investment
transactions...........................................
Net unrealized appreciation (depreciation) of
investments............................................
Net assets................................................
</TABLE>
- ---------------
* None of these outstanding shares are held by or for the account of the Fund.
SENIOR SECURITIES
The following table shows certain information regarding each class of
senior security of the Fund as of the date indicated. The Fund borrowed $ in
aggregate principal amount of bank debt. On , , the Fund paid its
bank debt with proceeds of the issuance of commercial paper or notes with an
aggregate principal amount of $ .
<TABLE>
<CAPTION>
DATE
--------
<S> <C>
Total amount outstanding
Short-term loan........................................
Commercial Paper/Notes.................................
Asset coverage
Per $1,000 of short-term loan(1).......................
Per $1,000 of Commercial Paper/Notes(1)................
Approximate market value
Per $1,000 of short-term loan..........................
Per $1,000 of Commercial Paper/Notes...................
</TABLE>
- ---------------
(1) Calculated by subtracting the Fund's total liabilities (not including senior
securities) from the Fund's total assets and dividing such amount by the
number of notes outstanding.
9
<PAGE> 13
PORTFOLIO COMPOSITION
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek a high level of current income,
consistent with preservation of capital. The Fund's investment objective is a
fundamental policy of the Fund, meaning that it may be changed only by a vote of
a majority of the shareholders of the Fund. See "Investment Restrictions" in the
Statement of Additional Information. The Fund will invest primarily in
adjustable rate U.S. dollar-denominated secured Senior Loans. Investment in such
floating rate instruments is expected to minimize changes in the underlying
principal value of the Senior Loans, and therefore the Fund's net asset value,
resulting from changes in market interest rates. The Borrowers of such Senior
Loans operate in a variety of industries and geographical regions. The Fund
provides individual investors with access to a market normally accessible only
to financial institutions and larger corporate or institutional investors.
Under normal circumstances, the Fund will invest at least 80% of its total
assets in adjustable rate, U.S. dollar-denominated, secured Senior Loans. The
Fund may invest up to 20% of its total assets in U.S. dollar-denominated Senior
Loans of Borrowers that are organized or located in countries outside the United
States. The Fund may invest up to 20% of its total assets, in the aggregate, in:
- Senior Loans which are not secured by any collateral;
- other income producing securities such as investment and non-investment
grade corporate debt securities, high quality, short-term debt securities
with remaining maturities of one year or less and U.S. government
securities (subject to the limit that the Fund may not invest more than
5% of its total assets in junior debt securities or fixed rate income
securities with effective maturities greater
10
<PAGE> 14
than one year, provided that the 5% limitation does not apply to
securities acquired in connection with the Fund's investments in Senior
Loans); and
- equity securities and warrants acquired in connection with the Fund's
investments in Senior Loans.
Pending initial investment in Senior Loans, or 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 high quality,
short-term debt securities.
CERTAIN CHARACTERISTICS OF SENIOR LOANS
General Description. Senior Loans generally are negotiated between a
Borrower and the Lenders represented by one or more Lenders acting as agent
("Agent") of all the Lenders. The Agent is responsible for negotiating the loan
agreement ("Loan Agreement") that establishes the terms and conditions of the
Senior Loan and the rights of the Borrower and the Lenders. The Agent is paid a
fee by the Borrower for its services.
Rates of Interest. Interest rates on Senior Loans adjust periodically. The
interest rates are adjusted based on a base rate plus a premium or spread over
the base rate. The base rate usually is the LIBOR, the prime rate offered by one
or more major United States banks (the "Prime Rate") or the certificate of
deposit rate ("CD Rate") or other base lending rates used by commercial lenders.
LIBOR, as provided for in Loan Agreements, usually is an average of the interest
rates quoted by several designated banks as the rates at which they pay interest
to major depositors in the London Inter-Bank market on U.S. dollar-denominated
deposits. The Adviser believes that changes in short-term LIBOR rates are
closely related to changes in the Federal Reserve federal funds rate, although
the two are not technically linked. The Prime Rate quoted by a major U.S. bank
is generally the interest rate at which that bank is willing to lend U.S.
dollars to its most creditworthy borrowers, although it may not be the bank's
lowest available rate. The CD Rate, as provided for in Loan Agreements, usually
is the average rate paid on large certificates of deposit traded in the
secondary market.
Interest rates on Senior Loans may adjust daily, monthly, quarterly,
semi-annually or annually. The Fund will not invest more than 10% of its total
assets in Senior Loans with interest rates that adjust less often than
semi-annually. The Fund's portfolio of Senior Loans will at all times have a
dollar-weighted average time until the next interest rate adjustment of 90 days
or less. The Fund may use interest rate swaps and other investment practices to
shorten the effective interest rate adjustment period of Senior Loans. If the
Fund does so, it considers the shortened period to be the adjustment period of
the Senior Loans. See "Risk Factors -- General Risks of Investing in the
Fund -- Investment Practices and Special Risks."
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 net asset value will vary, the Fund's
management expects the Fund's policy of acquiring interests in Senior Loans, the
interest rates on which are adjustable, to limit fluctuations in net asset value
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 net asset value. In addition to changes in interest
rates, changes in the credit quality of Borrowers (and Lenders where the Fund
holds a Participation) will also affect the Fund's net asset value. Further, a
serious deterioration in the credit quality of one or more Borrowers could cause
a prolonged or permanent decrease in the Fund's net asset value. Fluctuations in
net asset value would be magnified as a result of the Fund's use of leverage.
Maturity. The Fund expects that its Senior Loans will have stated
maturities ranging from three to ten years, although the Fund has no policy
limiting the maturity of the Senior Loans that it purchases. Senior Loans
usually have mandatory and optional prepayment provisions. Because of
prepayments, the
11
<PAGE> 15
actual remaining maturity of Senior Loans may be considerably less than their
stated maturity. The Fund estimates that the actual maturity of the Senior Loans
in its portfolio at any given time will be approximately 18-24 months. Because
the interest rates on Senior Loans adjust periodically, the Fund and the Adviser
believe that reinvestment by the Fund in Senior Loans after prepayment generally
should not result in a significant reduction in the interest payable to the
Fund.
Protective Provisions of Senior Loans. Secured 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.
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. 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 such as 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. The Fund may invest in Senior Loans
which are not secured by any collateral, subject to the limitations set forth
under "The Fund's Investments -- Investment Objective and Policies." Senior
Loans that are not secured by specific collateral generally pose a greater risk
of non-payment of interest or loss of principal than do collateralized Senior
Loans.
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.
Investing in Senior Loans involves investment risk despite these covenants,
and some Borrowers default on their Senior Loan payments. The Adviser and the
Fund attempt to manage these risks through selection of a varied portfolio of
Senior Loans and analysis and monitoring of Borrowers and any collateral pledged
to secure the loans.
Borrowers. Borrowers operate in a variety of industries and geographic
regions. The Fund does not intend to invest more than 10% of its total assets in
Senior Loans of a single Borrower. In addition, the Fund will not invest more
than 25% of its total assets in Borrowers that conduct their principal
businesses in the same industry. Most Senior Loans are made to U.S. Borrowers.
The Fund may, however, invest up to 20% of its total assets in Senior Loans made
to Borrowers organized or located outside the U.S. These Senior Loans must be
U.S. dollar-denominated. Investing in the Senior Loans of foreign Borrowers
involves special risks. See "Risk Factors -- General Risks of Investing in the
Fund -- Investment in Foreign Issuers."
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. Senior Loans typically have the most senior claim on Borrower's
assets and common stock the most junior claim. The proceeds of Senior Loans that
the Fund will purchase usually will be used by Borrowers to finance leveraged
buyouts,
12
<PAGE> 16
recapitalizations, mergers, acquisitions, stock repurchases, debt refinancings
and, to a lesser extent, for general operating and other purposes. Although
Senior Loans have the most senior position in a Borrower's capital structure and
are usually secured by specific collateral, they are typically below investment
grade quality and may have below investment grade ratings; these ratings are
associated with securities having speculative characteristics. See "Risk
Factors -- General Risks of Investing in the Fund -- High Yield/ High Risk
Securities."
The Fund may purchase and retain in its portfolio Senior Loans of Borrowers
that have filed for protection under the federal bankruptcy laws or that have
had involuntary bankruptcy petitions filed against them by creditors. Because of
the protective features of Senior Loans, the Fund and the Adviser believe that
Senior Loans of Borrowers that either are experiencing, or are more likely to
experience, financial difficulty may sometimes represent attractive investment
opportunities.
The Adviser performs its own credit analysis of the Borrower in addition to
utilizing information prepared and supplied by an Agent or other Lenders. When
evaluating a Borrower, the Adviser considers many factors, including the
Borrower's past and future projected financial performance. The Adviser also
considers a Borrower's management, collateral and industry. The Adviser
continues to monitor a Borrower on an ongoing basis for so long as the Fund
continues to own the Senior Loan. Although the Adviser will use its best
judgment in selecting Senior Loans, there can be no assurance that such analysis
will disclose factors that may impair the value of a Senior Loan. You should
expect the Fund's net asset value to fluctuate as a result of changes in the
credit quality of Borrowers and other factors. A serious deterioration in the
credit quality of one or more Borrowers could cause a permanent decrease in the
Fund's net asset value. See "Risks -- General Risks of Investing in the
Fund -- Credit Risk."
The Adviser generally relies on its own credit analysis of Borrowers and
not on analyses prepared by ratings agencies or other independent parties.
Because of the features of Senior Loans, the Adviser believes, based on its
experience, that ratings may not necessarily reflect the true risk of loss of
principal or interest on a Senior Loan. For example, the Adviser believes that
Senior Loans tend to have more favorable loss recovery rates as compared to
other types of below investment grade quality debt obligations.
There is no minimum rating or other independent evaluation of a Borrower or
its securities limiting the Fund's investments. Although a Senior Loan often is
not rated by any rating agency at the time the Fund purchases the Senior Loan,
rating agencies have become more active in rating an increasing number of Senior
Loans and at any given time a substantial portion of the Senior Loans in the
Fund's portfolio may be rated. The lack of a rating does not necessarily imply
that a Senior Loan is of lesser investment quality; however, most Senior Loans,
when rated, are below investment grade quality. The Adviser generally does not
take ratings into account when determining whether to invest in a Senior Loan
and does not view ratings as a determinative factor in its investment decisions.
There is no limit on the percentage of the Fund's assets that may be invested in
Senior Loans that are rated below investment grade or that are unrated but of
comparable quality. Investing in Senior Loans involves risk and the Fund
attempts to manage these risks through portfolio diversification and ongoing
analyses and monitoring of Borrowers.
THE SENIOR LOAN MARKET
The volume of newly issued Senior Loans increased from approximately $66
billion in 1987 to approximately $273 billion in 1998 (Source: Donaldson, Lufkin
& Jenrette; Loan Pricing Corporation) and transactions in Senior Loans in the
secondary market increased from approximately $8 billion in 1991 to
approximately $67 billion in 1998 (Source: Loan Pricing Corporation; Securities
Data Corporation).
THE SENIOR LOAN PROCESS
The Fund normally relies on the Agent to collect principal and interest
payments on a Senior Loan. Furthermore, the Fund also relies in part on the
Agent to monitor compliance by the Borrower with the restrictive covenants in
the Loan Agreement and to notify the Fund (or the Lender from which the Fund has
purchased a Participation) of any adverse change in the Borrower's financial
condition. The Fund will act as a Lender with respect to a syndicated Senior
Loan only where the Agent, at the time of the Fund's
13
<PAGE> 17
investment, has outstanding debt or deposit obligations rated investment grade
by a rating agency, or where such debt or obligations are unrated but determined
by the Adviser to be of comparable quality. A rating agency's top four major
rating categories generally are considered to be investment grade. The lowest
tier of investment grade rating is considered to have speculative
characteristics. The Fund will not purchase interests in Senior Loans unless the
Agent, Lender and any other person positioned between the Fund and the Borrower
has entered into an agreement that provides for the holding of assets in
safekeeping for, or the prompt disbursement of assets to, the Fund. Insolvency
of the Agent or other persons positioned between the Fund and the Borrower could
result in losses for the Fund. See "Risks."
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 include three primary types:
facility fees, commitment fees and prepayment penalties. Facility fees are paid
to Lenders when a Senior Loan is originated. Commitment fees are paid to Lenders
on an ongoing basis based on the unused portion of a Senior Loan commitment.
Lenders may receive prepayment penalties when a Borrower prepays a Senior Loan.
The Fund receives these fees directly from the Borrower if the Fund is an
Original Lender (as defined below) or, in the case of commitment fees and
prepayment penalties, if the Fund acquires an Assignment. Whether the Fund
receives a facility fee in the case of an Assignment, or any fees in the case of
a Participation, depends on negotiations between the Fund and the Lender selling
such interests. When the Fund buys an Assignment, it may be required to pay a
fee, or forego a portion of interest and fees payable to it, to the Lender
selling the Assignment. Occasionally, the assignor pays a fee to the assignee. A
person selling a Participation to the Fund may deduct a portion of the interest
and any fees payable to the Fund as an administrative fee. The Fund may be
required to pass along to a person that buys a Senior Loan from the Fund a
portion of any fees that the Fund is entitled to. Fees that the Fund
occasionally may receive may enhance the Fund's income.
TYPES OF SENIOR LOAN INVESTMENTS
The Fund may act as one of the group of Lenders originating a Senior Loan
(an "Original Lender"), act as an Agent, purchase Assignments of portions of
Senior Loans from third parties and invest in Participations in Senior Loans.
Senior Loans also include certain foreign debt obligations that are in the form
of notes rather than Loan Agreements. All of these interests in Senior Loans are
sometimes referred to simply as Senior Loans.
The Fund as Original Lender. When the Fund acts as an Original Lender it
may participate in structuring the Senior Loan. The Fund will not act as sole
Agent or sole principal negotiator of a Senior Loan. When the Fund is a member
of the originating syndicate group for a Senior Loan, it may share in a fee paid
to the Original Lenders. When the Fund is an Original 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 of interest on or principal
of a Senior Loan, releasing all or substantially all of the collateral or
changing the maturity of a Senior Loan, frequently require the unanimous vote or
consent of all Lenders affected.
The Fund as Agent. Acting in the capacity of an Agent in a Senior Loan may
subject the Fund to certain risks in addition to those associated with the
Fund's current role as a Lender. In consideration of such risks, the Fund will
invest no more than 20% of its total assets in Senior Loans in which it acts as
an Agent or co-Agent and the size of any such individual Senior Loan will not
exceed 5% of the Fund's total assets. The Fund's ability to receive fee income
may also be constrained by certain requirements for qualifying as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund intends to comply with those requirements and may limit its
investments in Senior Loans in which it acts as Agent in order to do so.
14
<PAGE> 18
Assignments. 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. Assignments may, however, be arranged
through private negotiations, 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.
Participations. 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 have 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.
After the period of initial investment, the Fund does not currently intend to
invest more than 20% of its total assets in Participations.
The Fund has taken the following measures in an effort to minimize risks
from investing in Participations. 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
Standard & Poor's Corporation ("S&P"), Baa or P-3 or higher by Moody's Investor
Service, Inc. ("Moody's") or BBB or F3 or higher by Fitch IBCA, Inc, ("Fitch"))
or has debt or obligations that are unrated by S&P, Moody's and Fitch and
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 and debt
rated BBB by Fitch is regarded by Fitch as having adequate capacity for timely
payment of financial commitments. 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, 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 and issues of commercial paper rated F3 by Fitch are
considered to be of fair credit quality with an adequate capacity for timely
payment of financial commitments but near-term adverse changes could result in a
reduction to non-investment grade.
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 above, the Fund will take measures which it
believes reduce its exposure to any risks incident to this practice, the Fund
may be more susceptible than an investment company without such a practice 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 capital raising
activities generally and fluctuations in the financial markets generally.
When the Fund holds a Participation in a Senior Loan, the Fund generally
will not have the right to enforce compliance by the Borrower with the Loan
Agreement, nor rights to any funds acquired by other Lenders through set-off
against the Borrower. In addition, the Fund may not have the right to vote on
whether 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
15
<PAGE> 19
Fund and may not consider the interests of the Fund. The Fund may not benefit
directly from the collateral supporting a Senior Loan in which it has purchased
the Participation, although Lenders that sell Participations generally are
required to distribute liquidation proceeds received by them pro rata among the
holders of such Participations. For purposes of the Fund's policy of investing
at least 80% of its total assets in secured Senior Loans, a Participation in a
Senior Loan will be deemed to be secured if the underlying Senior Loan is
secured.
Role of Agent. On behalf of the several Lenders, an 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. Loan Agreements may provide for the
termination of the Agent's agency status in the event that it fails to act as
required under the relevant Loan Agreement, becomes insolvent, enters FDIC
receivership or, if not FDIC insured, enters into bankruptcy. Should such an
Agent, Lender or assignor with respect to an Assignment interpositioned between
the Fund and the Borrower become insolvent or enter FDIC receivership or
bankruptcy, any interest in the Senior Loan of such person and any loan payment
held by such person for the benefit of the Fund should not be included in such
person's or entity's bankruptcy estate. If, however, any such amount were
included in such person's or entity's bankruptcy estate, the Fund would incur
certain costs and delays in realizing payment or could suffer a loss of
principal or interest. In such event, the Fund could experience a decrease in
net asset value.
Prepayments. 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.
Commitments to Make Additional Loans. 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 Policies and Techniques" in the Statement of Additional Information.
WARRANTS, EQUITY SECURITIES AND JUNIOR DEBT; SHORT-TERM DEBT SECURITIES
The Fund may acquire equity securities and warrants issued by a Borrower or
its affiliates as part of a package of investments in the Borrower or its
affiliates issued in connection with a Senior Loan of the Borrower. The Fund
also may convert a warrant so acquired into the underlying security. The Fund
may acquire junior debt securities as part of a package of investments in the
Borrower or its affiliates issued in connection with a Senior Loan of the
Borrower, and may invest separately up to 5% of its total assets in junior debt
securities. The Fund generally will acquire interests in warrants, equity and
junior bonds or other debt securities only when the Adviser believes that the
value the Fund gives in exchange for such interests is substantially outweighed
by their potential value. However, investments in warrants, equity and
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junior debt securities entail certain risks in addition to those associated with
investments in Senior Loans. The value of these securities may be affected more
rapidly, and to a greater extent, by company-specific developments and general
market conditions. These risks may increase fluctuations in the Fund's net asset
value. The Fund may frequently possess material non-public information about a
Borrower as a result of its ownership of a Senior Loan of such Borrower. Because
of prohibitions on trading in securities of issuers while in possession of such
information the Fund might be unable to enter into a transaction in a security
of such a Borrower when it would otherwise be advantageous to do so. The Fund's
investments in warrants, equity securities and junior debt securities are
subject to the limitations set forth under "The Fund's Investments -- Investment
Objective and Policies."
The Fund may invest in high quality, short-term debt securities with
remaining maturities of one year or less. These may include commercial paper
rated at least in the top two rating categories by S&P, Moody's or Fitch, 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 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. These securities may pay interest at adjustable rates or at
fixed rates. The Fund's investments in high quality, short-term debt securities
are subject to the limitations set forth under "The Fund's
Investments -- Investment Objective and Policies." In spite of those
limitations, pending initial investment in Senior Loans, or 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 high
quality, short-term debt securities.
STRUCTURED NOTES
The Fund may invest up to 10% of its total assets in structured notes,
which are privately negotiated debt obligations with rates of return determined
by reference to the total rate of return on one or more Senior 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 Senior Loan could result in a relatively large loss in the value of a
structured note.
USE OF LEVERAGE
The Fund uses financial leverage through borrowing, issuing commercial
paper or notes and preferred shares of beneficial interest ("Leverage
Instruments") in an amount currently intended to be approximately 40% of its
total assets (including the proceeds from such Leverage Instruments). See
"Description of TAPS" and "Description of Commercial Paper Program" below. The
Fund employs Leverage Instruments for the purpose of acquiring additional
income-producing investments when the Adviser believes that such use of proceeds
will enhance the Fund's net income. The amount of outstanding Leverage
Instruments may vary with prevailing market or economic conditions. Leverage
entails special risks. See "Risk Factors -- Risks of Investing in
TAPS -- Leverage Risk." The management fee paid to the Adviser will be
calculated on the basis of the Fund's total managed assets, including proceeds
of Leverage Instruments, so the fees will be higher when leverage is utilized.
INTEREST RATE AND OTHER HEDGING TRANSACTIONS
The Fund may enter into various interest rate hedging and risk management
transactions. Certain of these interest rate hedging and risk management
transactions involve derivative instruments. A derivative is a financial
instrument whose performance is derived at least in part from the performance of
an underlying index, security or asset. The values of certain derivatives can be
affected dramatically by even small market movements, sometimes in ways that are
difficult to predict.
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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.
- The Fund may also engage in hedging transactions to seek to protect the
value of its portfolio against declines in net asset value resulting from
changes in interest rates, credit conditions 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 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. 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 Fund could exchange the Borrower's obligation to make fixed rate
payments 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 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.
Because 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 net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
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 New York Stock Exchange or
other entities determined by the Adviser 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
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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
creditworthy 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. 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" or "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.
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<PAGE> 23
The Fund will make commitments to purchase 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" or "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 New York Stock Exchange. 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. 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 Fund might experience delays in
recovering its cash. 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. 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
Statement of Additional Information under "Investment Restrictions." The Fund
will not hold more than 5% of the value of its total assets in reverse
repurchase agreements.
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RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in TAPS shares.
RISKS OF INVESTING IN TAPS
Auction Risk. You may not be able to sell your TAPS shares at an auction if
the auction fails; that is, if there are more TAPS shares offered for sale than
there are buyers for those shares. Also, if you place hold orders (orders to
retain TAPS 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 TAPS 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. If you try to sell your TAPS 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 or less than 28 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 TAPS 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.
TAPS shares are not registered on a stock exchange or the NASDAQ stock market.
If you sell your TAPS 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, especially during a Special Rate
Period. Accrued TAPS dividends, however, may partially compensate for the
increased market interest rates.
Ratings and Asset Coverage Risk. While Moody's assigns a rating of "aaa" to
TAPS shares, the ratings do not eliminate or necessarily mitigate the risks of
investing in TAPS shares. A rating agency could downgrade TAPS shares, which may
make your shares less liquid at an auction or in the secondary market, though
probably with higher resulting dividend rates. If a rating agency downgrades
TAPS shares, the Fund will alter its portfolio or redeem TAPS shares. The Fund
may voluntarily redeem TAPS shares under certain circumstances. See "Description
of TAPS -- Asset Maintenance" for a description of the asset maintenance tests
the Fund must meet.
Inflation Risk. Inflation is the reduction in the purchasing power of money
resulting from the increase in the price of goods and services. Inflation risk
is the risk that the inflation adjusted (or "real") value of your TAPS
investment or the income from that investment will be worth less in the future.
As inflation occurs, the real value of the TAPS shares and distributions
declines. In an inflationary period, however, it is expected that, through the
auction process, TAPS dividend rates would increase, tending to offset this
risk.
Payment Restrictions. The Fund is prohibited from declaring, paying or
making any dividends or distributions on TAPS unless it satisfies certain
conditions. See "Description of TAPS -- Restrictions on Dividend, Redemption and
Other Payments." The Fund is also prohibited from declaring, paying or making
any dividends or distributions on Common Shares unless it satisfies certain
conditions. These prohibitions on the payment of dividends or distributions
might impair the Fund's ability to maintain its qualification as a regulated
investment company for federal income tax purposes. The Fund intends, however,
to redeem shares of TAPS if necessary to comply with the asset coverage
requirements. There can be no assurance, however, that such redemptions can be
effected in time to permit the Fund to distribute its income as required to
maintain its qualification as a regulated investment company under the Code. See
"Federal Taxation -- Federal Income Tax Treatment of the Fund."
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Leverage Risk. The Fund uses financial leverage for investment purposes by
employing Leverage Instruments in an amount currently anticipated to represent
approximately 40% (and in no event exceeding 50%) of its total assets (including
the proceeds from such Leverage Instruments. In addition to issuing shares of
TAPS, the Fund borrows money pursuant to a credit facility and/or issues
commercial paper or notes in an aggregate amount currently representing
approximately 30% of the Fund's total assets. The Fund may also borrow funds (a)
in connection with a loan made by a bank or other party that is privately
arranged and not intended to be publicly distributed or (b) in an amount equal
to up to 5% of its total assets for temporary purposes only.
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 or
commercial paper or note issuance, to 300% of the aggregate value of borrowings
represented by senior securities. Upon the issuance of TAPS, the value of the
Fund's total assets, less all liabilities and indebtedness of the Fund not
represented by senior securities, must be at least equal, immediately after the
issuance of the TAPS, to 200% of the aggregate value of borrowings represented
by senior securities and the TAPS.
If the Fund seeks an investment grade rating from one or more nationally
recognized statistical rating organizations for any commercial paper and notes
(which the Fund expects to do), asset coverage or portfolio composition
provisions in addition to and more stringent than those required by the 1940 Act
may be imposed in connection with the issuance of such a rating. In addition,
restrictions may be imposed on certain investment practices in which the Fund
may otherwise engage. Any lender with respect to borrowings by the Fund may
require additional asset coverage and portfolio composition provisions as well
as restrictions on the Fund's investment practices.
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. The
money borrowed pursuant to any credit facility or any commercial paper or notes
may constitute a substantial lien and burden on the TAPS by reason of their
prior claim against the income of the Fund and against the net assets of the
Fund in liquidation. The Fund will not be permitted to declare dividends or
other distributions, including shares with respect to TAPS or purchase or redeem
shares, including TAPS unless (i) at the time thereof the Fund meets certain
asset coverage requirements and (ii) there is no event of default under any
credit facility or commercial paper program that is continuing. See "Description
of TAPS -- Restrictions on Dividend, Redemption and Other Payments" and
"Description of Commercial Paper Program -- Restrictive Covenants and 1940 Act
Restrictions." In the event of a default under a credit facility and/or
commercial paper program, the Lenders have the right to cause a liquidation of
the collateral (i.e., sell Senior Loans) and if any such default is not cured
within 40 days, 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.
Because the fee paid to the Adviser will be calculated on the basis of
total managed assets, the fee will be higher when leverage is utilized, giving
the Adviser an incentive to utilize leverage.
There can be no assurance that any commercial paper or notes will be issued
or, if issued, that the commercial paper or notes will remain outstanding or
that the Fund will borrow or, if it borrows, that such borrowing will be
continued.
GENERAL RISKS OF INVESTING IN THE FUND
Borrower Credit Risk. Senior Loans, like most other debt obligations, are
subject to the risk of default. Default in the payment of interest or principal
on a Senior Loan results in a reduction in income to the Fund, a reduction in
the value of the Senior Loan and a decrease in the Fund's net asset value. This
decrease in the Fund's net asset value would be magnified by the Fund's use of
Leverage
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<PAGE> 26
Instruments. The risk of default increases in the event of an economic downturn
or a substantial increase in interest rates. An increased risk of default could
result in a decline in the value of Senior Loans and in the Fund's income which
could impair the ability of the Fund to pay dividends on TAPS shares.
The Fund may acquire Senior Loans of Borrowers that are experiencing, or
are more likely to experience, financial difficulty, including Senior Loans of
Borrowers that have filed for bankruptcy protection. Borrowers may have Senior
Loans or other outstanding debt obligations that are rated below investment
grade or that are unrated but of comparable quality to such securities. Debt
securities rated below investment grade are viewed by the rating agencies as
speculative and are commonly known as "junk bonds."
Senior Loans may not be rated at the time that the Fund purchases them.
However, rating agencies (including, but not limited to, Moody's, S&P and Fitch)
have begun rating Senior Loans. If a Senior Loan is rated at the time of
purchase, the Adviser may consider the rating when evaluating the Senior Loan
but, in any event, the Adviser does not view ratings as a determinative factor
in investment decisions. As a result, the Fund is more dependent on the
Adviser's credit analysis abilities. Because of the protective terms of most
Senior Loans, the Adviser believes that the Fund is more likely to recover more
of its investment in a defaulted Senior Loan than would be the case for most
other types of defaulted debt securities. The values of Senior Loans of
Borrowers that have filed for bankruptcy protection or that are experiencing
payment difficulty will reflect, among other things, the Adviser's assessment of
the likelihood that the Fund ultimately will receive repayment of the principal
amount of such Senior Loans, the likely duration, if any, of a lapse in the
scheduled payment of interest and repayment of principal and prevailing interest
rates.
In the case of collateralized Senior Loans, there is no assurance that sale
of the collateral would raise enough cash to satisfy the Borrower's payment
obligation or that the collateral can or will be liquidated. In the event of
bankruptcy, liquidation may not occur and the court may not give lenders the
full benefit of their senior positions. If the terms of a Senior Loan do not
require the Borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Fund will be exposed to the risk
that the value of the collateral will not at all times equal or exceed the
amount of the Borrower's obligations under the Senior Loan. To the extent that a
Senior Loan is collateralized by stock in the Borrower or its subsidiaries, such
stock may lose all of its value in the event of bankruptcy of the Borrower.
Uncollateralized Senior Loans involve a greater risk of loss. Some Senior Loans
in which the Fund may invest are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar 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.
Because the primary source of income for the Fund is the interest and
principal payments on the Senior Loans in which it invests, any default by an
issuer of a Senior Loan could have a negative impact on the Fund's ability to
pay dividends on the TAPS shares and could result in the redemption of some or
all of the TAPS shares. Information about most Senior Loans is less readily
available and reliable than is the case for many other types of securities. In
addition, there is no minimum rating or other independent evaluation of a
Borrower or its securities limiting the Fund's investments. The Adviser relies
exclusively or primarily on its own evaluation of Borrower credit quality in
selecting Senior Loans for purchase. As a result, the Fund is particularly
dependent on the analytical abilities of the Adviser.
Interest Rate Risk. When interest rates decline, the value of a portfolio
invested in Senior Loans can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested in Senior Loans can be expected to
decline. Although the income available to the Fund will vary, the Adviser
expects the Fund's policy of acquiring primarily interests in floating rate
Senior Loans to minimize fluctuations in net asset value to the Fund resulting
from changes in market interest rates. However, because floating or variable
rates on Senior Loans only reset periodically, changes in prevailing interest
rates can be expected
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<PAGE> 27
to cause some fluctuations in the Fund's net asset value. Similarly, a sudden
and significant increase in market interest rates may cause a decline in the
Fund's net asset value.
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 which in turn may affect the Fund's
ability to pay dividends on the TAPS shares. A material decline in the Fund's
net asset value may impair the Fund's ability to maintain required levels of
asset coverage.
Senior Loans. Information about most Senior Loans is less readily available
and reliable than is the case for many other types of securities. In addition,
there is no minimum rating or other independent evaluation of a Borrower or its
securities limiting the Fund's investments. The Adviser relies exclusively or
primarily on its own evaluation of Borrower credit quality in selecting Senior
Loans for purchase. As a result, the Fund is particularly dependent on the
analytical abilities of the Adviser.
No active trading market currently exists for many Senior Loans. Senior
Loans are thus relatively illiquid. Liquidity relates to the ability of the Fund
to sell an investment in a timely manner at a price approximately equal to its
value on the Fund's books. The illiquidity of Senior Loans may impair the Fund's
ability to realize the full value of its assets in the event of a voluntary or
involuntary liquidation of such assets. Because of the lack of an active trading
market, illiquid securities are also difficult to value and prices provided by
external pricing services may not reflect the true fair value of the securities.
However, many Senior Loans are of a large principal amount and are held by a
large number of financial institutions. In the Adviser's opinion, this should
enhance their liquidity. In addition, in recent years the number of
institutional investors purchasing Senior Loans has increased. The risks of
illiquidity are particularly important when the Fund's operations require cash,
and may in certain circumstances require that the Fund borrow to meet short-term
cash requirements. To the extent that a secondary market does exist for certain
Senior Loans, the market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The Fund has no
limitation on the amount of its assets that may be invested in securities that
are not readily marketable or that are subject to restrictions on resale (except
as noted elsewhere herein). The substantial portion of the Fund's assets
invested in Senior Loans 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 impair the ability of the Fund to pay dividends on TAPS
shares. The market for Senior Loans could be disrupted in the event of an
economic downturn or a substantial increase or decrease in interest rates. This
could result in increased volatility in the market and in the Fund's net asset
value and market price per share.
If legislation or state or federal regulators impose additional
requirements or restrictions on the ability of financial institutions to make
loans that are considered highly leveraged transactions, the availability of
Senior Loans for investment by the Fund may be adversely affected. In addition,
such requirements or restrictions could reduce or eliminate sources of financing
for certain Borrowers. This would increase the risk of default. If legislation
or federal or state regulators require financial institutions to dispose of
Senior Loans that are considered highly leveraged transactions or subject such
Senior Loans to increased regulatory scrutiny, financial institutions may
determine to sell such Senior Loans. Such sales could result in prices that, in
the opinion of the Adviser, do not represent fair value. If the Fund attempts to
sell a Senior Loan at a time when a financial institution is engaging in such a
sale, the price the Fund could get for the Senior loan may be adversely
affected.
Acting in the capacity of an Agent in a Senior Loan may subject the Fund to
certain risks in addition to those associated with the Fund's current role as a
Lender. Should an Agent or a Lender positioned between the Fund and a Borrower
become insolvent or enter FDIC receivership or bankruptcy, where the Fund is an
Original Lender or has purchased an Assignment any interest of such person in
the Senior Loan and in any loan payment held by such person for the benefit of
the Fund should not be included in the person's estate. If, however, these items
are included in their estate, the Fund would incur costs and delays in realizing
payment and could suffer a loss of principal or interest.
Some Senior Loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate the Senior Loans
to presently existing or future indebtedness of the
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<PAGE> 28
Borrower or take other action detrimental to Lenders. Such court action could
under certain circumstances include invalidation of Senior Loans. Such court
action could under certain circumstances include invalidation of Senior Loans.
Any Lender, which could include the Fund, is subject to the risk that a court
could find the Lender liable for damages in a claim by a Borrower arising under
the common laws of tort or contracts or anti-fraud provisions of certain
securities laws for actions taken or omitted to be taken by the Lenders under
the relevant terms of a Loan Agreement or in connection with actions with
respect to the collateral underlying in the Senior Loan.
Participations. The Fund may purchase Participations in Senior Loans. Under
a Participation, the Fund generally will have rights that are more limited than
the rights of Lenders or of persons who acquire a Senior Loan by Assignment. In
a Participation, the Fund typically has a contractual relationship with the
Lender selling the Participation, but not with the Borrower. As a result, the
Fund assumes the credit risk of the Lender selling the Participation in addition
to the credit risk of the Borrower. In the event of insolvency of the Lender
selling the Participation, the Fund may be treated as a general creditor of the
Lender and may not have a senior claim to the Lenders' interest in the Senior
Loan. A Lender selling a Participation and other persons interpositioned between
the Lender and the Fund with respect to Participations will likely conduct their
principal business activities in the banking, finance and financial services
industries. The Fund does not currently intend to invest more than 20% of its
total assets in such Participations but may invest a greater portion of its
assets in Participations during its period of initial investment. To the extent
the Fund invests in Participations, the Fund may be more susceptible than a fund
without such a policy to any single economic, political or regulatory occurrence
affecting such industries. The Fund has taken measures which it believes reduce
its exposure to such risks but no assurances can be given as to their
effectiveness.
Investment in Foreign Issuers. The Fund may invest up to 20% of its total
assets, measured at the time of investment, in U.S. dollar-denominated Senior
Loans to Borrowers that are organized or located in countries outside the United
States. Although the Senior Loans will require payment of interest and principal
in U.S. dollars, these Borrowers may have significant non-U.S. dollar revenues.
Investment in foreign Borrowers involves special risks, including that foreign
Borrowers may be subject to:
- less rigorous regulatory requirements and accounting and reporting
requirements than U.S. Borrowers;
- differing legal systems and laws relating to creditors' rights;
- the potential inability to enforce legal judgments;
- economic adversity that would result if the value of the Borrower's
non-U.S. dollar-denominated revenues and assets were to fall (in U.S.
dollar-denominated terms) because of fluctuations in currency values; and
- the potential for political, social and economic adversity in the foreign
Borrower's country.
High Yield/High Risk Securities. The Fund may invest up to 100% of its
assets in Senior Loans and other securities that are rated below investment
grade, or that are unrated but determined by the Adviser to be below investment
grade quality. Securities rated below investment grade quality are commonly
known as "high-yield/high risk" or "junk" bonds. Junk bonds, while generally
offering higher yields than investment grade securities with similar maturities
and features, involve greater risks, including the possibility of default or
bankruptcy. They are regarded as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The price volatility of
these securities due to factors such as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity is
likely to result in increased fluctuation in the Fund's net asset value,
particularly in response to economic downturns. See "Additional Information
About the Fund's Investments" in the Statement of Additional Information.
Investment Practices and Special Risks. The Fund may use interest rate and
other hedging transactions, lend portfolio holdings, purchase and sell Senior
Loans and other securities on a "when
25
<PAGE> 29
issued" or "delayed delivery" basis, and use repurchase and reverse repurchase
agreements. These investment practices involve risks. The values of certain
derivatives can be affected dramatically by even small market movements,
sometimes in ways that are difficult to predict. The successful utilization of
hedging and risk management transactions requires skills different from those
needed in the selection of the Fund's portfolio securities. Although the Adviser
believes that these investment practices may aid the Fund in achieving its
investment objective, there is no assurance that these practices will achieve
this result. If these transactions are not successful, they may result in losses
to the Fund and may impair the Fund's ability to pay dividends on TAPS shares.
INTEREST RATE FLUCTUATIONS
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 net asset value will vary, the Adviser
expects the Fund's policy of acquiring primarily interests in floating rate
Senior Loans to minimize fluctuations in net asset value resulting from changes
in market interest rates. However, because floating or variable rates on Senior
Loans only reset periodically, changes in prevailing interest rates can be
expected to cause some fluctuations in the Fund's net asset value. Similarly, a
sudden and significant increase in market interest rates, may cause a decline in
the Fund's net asset value.
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 and in turn, dividends paid
to Common Shareholders.
Net Asset Value Fluctuations. The Senior Loans in which the Fund will
invest generally are not listed on any securities exchange. Certain Senior Loans
are traded by institutional investors in an over-the-counter secondary market
for Senior Loan obligations that has developed over the past several years. No
active trading market currently exists for many of the Senior Loans in which the
Fund will invest. The secondary market for those Senior Loans generally is
comparatively illiquid relative to markets for other income securities. Because
of the lack of an active trading market, Senior Loans are generally more
difficult to value than liquid securities for which an active trading market
exists. In determining net asset value, the Fund will utilize the valuations of
Senior Loans furnished by an independent third-party pricing service provider,
which typically values Senior Loans at the mean of the highest bona fide bid and
lowest bona fide ask prices when current quotations are readily available.
Senior Loans for which current quotations are not readily available are valued
at a fair value as determined by the pricing service provider using a wide range
of market data and other information and analyses, including credit
considerations considered relevant by the pricing service provider, to determine
valuations. If the pricing service provider does not provide a value for a
Senior Loan or if no pricing service provider is then acting as such for the
Fund, a value will be determined by the Adviser. To the extent that an active
secondary trading market in Senior Loan interests develops to a reliable degree,
the pricing service provider may rely to an increasing extent on such market
prices and quotations in determining valuations of the Senior Loan interests in
the Fund's portfolio. The Fund purchases Senior Loans primarily to seek to
achieve its investment objective of high current income, consistent with
preservation of capital, and does not anticipate that it will actively trade
Senior Loans. To the extent a trading market continues to develop, certain
participants in the market may have objectives other than current income and may
pursue short-term trading strategies, which may result in erratic movements in
the market prices for Senior Loans as a result of movements in short-term
interest rates or otherwise. Although the Fund's policy of acquiring interests
in floating rate Senior Loans is intended to minimize fluctuations in net asset
value resulting from changes in market interest rates, the Fund's net asset
value will fluctuate.
NON-DIVERSIFICATION
The Fund has registered as a "non-diversified" investment company. This
means that it may invest more than 5% of the value of its assets in the
obligations of any single issuer, including Senior Loans of a single Borrower
and Participations purchased from a single Lender. However, the Fund does not
intend to
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<PAGE> 30
invest more than 10% of the value of its assets in Senior Loans of a single
Borrower. If the Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund will be more at risk to any
single corporate, economic, political or regulatory event that impacts one or
more of those issuers. In addition, the Fund must satisfy certain asset
diversification rules to qualify as a regulated investment company for federal
income tax purposes.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by the Adviser. There are six
Trustees of the Fund, one of whom is an "interested person" (as defined in the
1940 Act) and five of whom are not "interested persons." The names and business
addresses of the Trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
INVESTMENT ADVISER
Nuveen Senior Loan Asset Management Inc., 333 West Wacker Drive, Chicago,
IL 60606, serves as the investment adviser to the Fund. In this capacity, the
Adviser is responsible for the selection and ongoing monitoring of the assets in
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and administrative services. The Adviser
is a recently-formed, wholly-owned subsidiary of The John Nuveen Company. The
John Nuveen Company is a majority-owned subsidiary of The St. Paul Companies,
Inc., a publicly-traded company which is principally engaged in providing
property-liability insurance through subsidiaries. See the Statement of
Additional Information under "Management of the Fund -- Investment Adviser."
Day to day operations and execution of specific investment strategies is
the responsibility of the Adviser. Jeffrey W. Maillet is the Executive Managing
Director of the Adviser and is primarily responsible for the day to day
management of the Fund's portfolio. Mr. Maillet has been employed by the Adviser
since August 1999. Prior to joining the Adviser, Mr. Maillet was a Senior Vice
President of Van Kampen Investment Advisory Corp. since 1989. Mr. Maillet has 18
years experience in managing portfolios and creating investments, particularly
those featuring floating rate senior collateralized loans to companies and other
entities in diverse industries and regions. Over the past 18 years, he has
managed the purchase of over 2,000 Senior Loans with an aggregate principal
amount of approximately $28 billion.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between the Adviser and the
Fund, the Fund has agreed to pay for the services and facilities provided by the
Adviser an annual management fee, payable on a monthly basis, according to the
following schedule:
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGED ASSETS* MANAGEMENT FEE
- ----------------------------- --------------
<S> <C>
Less than $1 billion................................. .8500 of 1%
$1 billion to $2 billion............................. .8375 of 1%
$2 billion to $5 billion............................. .8250 of 1%
$5 billion to $10 billion............................ .8000 of 1%
$10 billion and over................................. .7750 of 1%
</TABLE>
- ---------------
* For purposes of calculation of the management fee, the Fund's "managed
assets" shall mean the average daily gross asset value of the Fund, minus
the sum of the Fund's accrued and unpaid dividends on any outstanding
Preferred Shares and accrued liabilities (other than the principal amount of
any borrowings incurred, commercial paper or notes issued by the Fund and
the liquidation preference of any outstanding Preferred Shares).
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<PAGE> 31
Because the fee paid to the Adviser will be calculated on the basis of the
Fund's managed assets, which include the proceeds of leverage, the dollar amount
of the Adviser's fees from the Fund will be higher (and the Adviser will benefit
to that extent) when leverage is utilized.
In addition to the fee of the Adviser, the Fund pays all other costs and
expenses of its operations, including compensation of its Trustees (other than
those affiliated with the Adviser), custodian, transfer and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses of preparing, printing and distributing shareholder reports,
notices, proxy statements and reports to governmental agencies, and taxes, if
any.
For the first ten years of the Fund's operations, the Adviser has agreed to
reimburse the Fund for fees and expenses in the amounts, and for the time
periods, set forth below:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
YEAR ENDING (AS A PERCENTAGE YEAR ENDING (AS A PERCENTAGE
OCTOBER 31, OF MANAGED ASSETS) OCTOBER 31, OF MANAGED ASSETS)
----------- ------------------ ----------- ------------------
<S> <C> <C> <C>
1999* .45% 2005 .35%
2000 .45% 2006 .25%
2001 .45% 2007 .15%
2002 .45% 2008 .10%
2003 .45% 2009 .05%
2004 .45%
</TABLE>
- ---------------
* From the commencement of operations.
The Adviser has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond October 31, 2009.
LEGAL PROCEEDINGS
A lawsuit brought in June 1996 (Green et al. v. Nuveen Advisory Corp., et
al.) by certain individual common shareholders of six leveraged closed-end funds
sponsored by Nuveen is currently pending in federal district court. The
plaintiffs allege that the leveraged closed-end funds engaged in certain
practices that violated various provisions of the 1940 Act and common law. The
plaintiffs also alleged, among other things, breaches of fiduciary duty by the
funds' directors and Nuveen Advisory Corp., an affiliate of an Adviser, and
various misrepresentations and omissions in prospectuses and shareholder reports
relating to the use of leverage through the issuance and periodic auctioning of
preferred stock and the basis of the calculation and payment of management fees
to Nuveen Advisory Corp. and Nuveen. Plaintiffs also filed a motion to certify
defendant and plaintiff classes.
The defendants are vigorously defending the case and filed motions to
dismiss the entire lawsuit asserting that the claims are without merit and to
oppose certification of any classes. By opinion dated March 30, 1999, the court
granted most of the defendants' motion to dismiss and denied plaintiffs' motion
to certify defendant and plaintiff classes. The court dismissed all claims
against the funds, the funds' directors and Nuveen. The court dismissed these
claims without prejudice (which means that the plaintiffs can re-file the claims
if they can correct the defects that led to the claims being dismissed) on the
ground that the claims should have been brought as derivative claims on behalf
of the funds. The only remaining claim is brought under Section 36(b) of the
1940 Act against Nuveen Advisory Corp., and relates solely to advisory fees
Nuveen Advisory Corp. received from the six relevant funds. Discovery is
underway on that single claim. While the Fund cannot assure you that the
litigation will be decided in Nuveen Advisory Corp.'s favor, the Adviser
believes a decision, if any, against the defendants would have no material
effect on the Fund, its Common Shares, the TAPS or the ability of the Adviser to
perform its duties under the investment management agreement.
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<PAGE> 32
DESCRIPTION OF TAPS
The following is a brief description of the terms of the shares of TAPS.
This description does not purport to be complete and is subject to and qualified
in its entirety by reference to the more detailed description of the shares of
TAPS in the Fund's Statement Establishing and Fixing the Rights and Preferences
of Taxable Auctioned Preferred Shares (the "Statement") attached as Appendix A
to the Statement of Additional Information.
GENERAL
The Fund's Declaration authorizes the issuance of an unlimited number of
preferred shares, par value $.01 per share, in one or more classes or series,
with rights as determined by the Board of Trustees without the approval of
common shareholders. The Statement currently authorizes the issuance of shares
of TAPS as follows: . The shares of TAPS have a liquidation preference of
$25,000 per share, plus all accumulated but unpaid dividends (whether or not
earned or declared) to the date of final distribution. The TAPS when issued and
sold through this Offering (i) will be fully paid and non-assessable, (ii) will
not be convertible into Common Shares or other capital stock of the Fund, (iii)
will have no preemptive rights, and (iv) will not be subject to any sinking
fund. The TAPS will be subject to optional and mandatory redemption as described
below under "-- Redemption."
Holders of TAPS will not receive certificates representing their ownership
interest in such shares. DTC will initially act as Securities Depository for the
Agent Members with respect to the TAPS.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, the Auction Agent will act as the transfer agent,
registrar, and paying agent for the TAPS. Furthermore, the Auction Agent will
send notices to holders of TAPS of any meeting at which holders of TAPS have the
right to vote. See "-- Voting Rights" below. However, the Auction Agent
generally will serve merely as the agent of the Fund, acting in accordance with
the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any share of TAPS, so long
as the Fund is current in the payment of dividends on the TAPS and on any other
capital shares of the Fund ranking on a parity with the TAPS with respect to the
payment of dividends or upon liquidation.
DIVIDENDS AND DIVIDEND PERIODS
General. Holders of TAPS will be entitled to receive, when, as and if
declared by the Board of Trustees, out of funds legally available therefor,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "-- Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the Common
Shares.
On the Business Day next preceding each Dividend Payment Date, the Fund is
required to deposit with the Paying Agent sufficient funds for the payment of
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 record 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.
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<PAGE> 33
Dividends in arrears for any past Dividend Period may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment shall first be
credited against the earliest declared but unpaid dividends.
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" below. No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"-- Default Period" below.
The amount of dividends per outstanding share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be 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 365,
multiplying the amount so obtained by the liquidation value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
shall be computed as described in the preceding sentence, except that it will be
determined on the basis of a year consisting of twelve 30-day months.
Determination of Dividend Rate. The dividend rate for the initial Dividend
Period (i.e. the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date are set forth
on the inside cover page of the Prospectus. For each subsequent Dividend Period,
subject to certain exceptions, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Fund has resulted from an Auction.
The initial Dividend Period for the TAPS shall be days. Dividend
Periods after the initial Dividend Period shall either be Standard Rate Periods
(28 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
Orders exist at the Auction in respect of such Special Rate Period (that is, in
general, the number of shares subject to Buy Orders by Potential Holders is at
least equal to the number of shares subject to Sell Orders by Existing Holders).
If Sufficient Clearing Orders 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. For
Dividend Periods of one year or less, Dividend Payment Dates shall occur on the
Business Day next succeeding the last day of such Dividend Period and, if any,
monthly thereof. For Dividend Periods of more than one year, Dividend Payment
Dates shall occur on a monthly basis on the first day of each month within such
Dividend Period and on the Business Day following the last day of such Dividend
Period. Dividends will be paid through the Securities Depository on each
Dividend Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from Auction will not be greater than the Maximum Rate, which is equal
to 150% of the applicable AA Composite Commercial Paper Rate (for a Dividend
Period of fewer than 184 days) or the applicable Treasury Index Rate (for a
Dividend Period of 184 days or more (each, a "Reference Rate")), in each case
subject to upward but not downward adjustment in the discretion of the Board of
Trustees after consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund would be in compliance with the TAPS Basic
Maintenance Amount.
The Maximum Rate for the shares of TAPS will apply automatically following
an Auction for such shares in which Sufficient Clearing Orders have not been
made (other than because all shares of TAPS were subject to Submitted Hold
Orders) or following the failure to hold an Auction for any reason on the
30
<PAGE> 34
Auction Date scheduled to occur (except for circumstances in which the Dividend
Rate is the Default Rate, as described below).
The Minimum Rate will apply automatically following an Auction in respect
of a Standard Rate Period or fewer in which all of the outstanding shares are
subject to (or are deemed to be subject to) Submitted Hold Orders. The Minimum
Rate is 80% of the applicable AA Composite Commercial Paper Rate. No minimum
rate is specified for Auctions in respect of Dividend Periods of more than the
Standard Rate Period.
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 TAPS; provided, however, that no such designation is
necessary for a Standard Rate Period and that any designation of a Special Rate
Period greater than 28 days 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 TAPS shall have been cured as set forth under "-- Default Period," (iii)
Sufficient Clearing Orders 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" below, 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 TAPS Basic Maintenance Amount (as defined below) and
has consulted with the Broker-Dealers and has provided notice and a TAPS Basic
Maintenance Certificate (as defined below) to each Rating Agency which is then
rating the TAPS and so requires.
If the Fund proposes to designate any Special Rate Period greater than 28
days, not fewer than 15 (or two Business Days in the event the duration of the
Dividend Period prior to such Special Rate Period is fewer than 28 days) nor
more than 30 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. Notwithstanding the foregoing, if the duration of the Dividend
Period prior to such Special Rate Period is fewer than 28 days, such notice
shall be given not less than two Business Days prior to such Special Rate
Period. 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 an 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 an Special Rate Period.
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<PAGE> 35
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" will commence on the applicable date set
forth below if the Fund fails to (i) declare prior to the close of business on
the second Business Day preceding any Dividend Payment Date, for payment on, or
(to the extent permitted as described below) within two Business Days after,
such Dividend Payment Date to the persons who held shares of TAPS as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date, the full amount of any dividend payable on such Dividend Payment Date,
(ii) deposit, irrevocably in trust, in same-day funds, with a designated paying
agent by 12:00 noon, New York City time, (A) on or (to the extent permitted as
described below) within two Business Days after any Dividend Payment Date the
full amount of any declared dividend on the relevant series of TAPS payable on
such Dividend Payment Date (together with the failure to timely declare
dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
Business Days after any date fixed for redemption of shares of TAPS called for
redemption, the applicable redemption price (a "Redemption Default"), or (iii)
maintain the "aaa" Credit Rating unless the "aaa" Credit Rating is restored by
the Dividend Payment Date next following the date on which the Fund fails to
maintain the "aaa" Credit Rating (a "Rating Default"). A Default Period with
respect to a Dividend Default or a Redemption Default will consist of the period
commencing on and including the aforementioned Dividend Payment Date or
redemption date, as the case may be, and ending on and including the Business
Day on which, by 12:00 noon, New York City time, all unpaid dividends and unpaid
redemption price shall have been so deposited or shall have otherwise been made
available to the applicable holders in same day funds. A Default Period with
respect to a Rating Default shall commence as of the date on which the Fund
fails to maintain the "aaa" Credit Rating (provided that such Rating Default
shall be deemed not to have occurred and such Default Period shall not commence
if such Rating Default is cured by the next succeeding Dividend Payment Date)
and shall end on the earlier of the date on which such default is cured as
provided herein or the date on which the TAPS is mandatorily redeemed as
provided herein. Holders of two-thirds of the TAPS then outstanding may waive
any Dividend Default, Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend Period
commencing during a Default Period, will be equal to the Default Rate. The
Default Rate is the Reference Rate multiplied by three.
Each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Minimum Rate Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Dividend
Period. Any dividend due on any Dividend Payment Date (if, prior to 12:00 noon,
New York City time, on such Dividend Payment Date, the Fund has declared such
dividend payable on or within two Business Days after such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to such shares not paid to such persons when due may (if such default is
not solely due to the willful failure of the Fund) be paid to such persons in
the same form of funds by 12:00 noon, New York City time, on any of the first
two Business Days after such Dividend Payment Date or due date, as the case may
be, provided that such amount is accompanied by an additional amount for such
period of non-payment at the Default Rate applied to the amount of such default
based on the actual number of days comprising such period divided by 365. For
the purposes of the foregoing, payment to a person in same-day funds made on or
before 12:00 noon New York City time on any Business Day at any time will be
considered equivalent to payment to that person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any payment
made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made
32
<PAGE> 36
instead in the same form of funds and to the same person before 12:00 noon, New
York City time, on the next Business Day.
Subject to the foregoing, and any requirements of Massachusetts law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the TAPS, it will be distributed to the holders of the
Common Shares. The term "net investment income" includes interest, dividends,
short-term capital gains and other income received or accrued less the advisory
fee, bank custodian charges, taxes (except capital gains taxes) and other
expenses properly chargeable against income, but generally does not include net
capital gains, dividends paid in shares of stock, transfer taxes, brokerage or
other capital charges or distributions designated as a return of capital. Any
realized net capital gains (defined as the excess of net long-term capital gains
over net short-term capital losses) of the Fund will be distributed annually to
the holders of the Common Shares (subject to the prior rights of the holders of
the TAPS) subject to the foregoing and any requirements of Massachusetts law.
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not (i) declare any dividend with respect
to the TAPS 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 or commercial
paper 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 TAPS or purchase or redeem shares of TAPS 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). "Senior
securities representing indebtedness" generally means any bond, debenture, note
or similar obligation or instrument constituting a security (other than stock)
and evidencing indebtedness and includes the Fund's obligations under any credit
facility or commercial paper program. See "Description of Commercial Paper
Program". For purposes of determining asset coverage for senior securities
representing indebtedness in connection with the payment of dividends or other
distributions on or purchases or redemptions of stock, the term "senior
security" does not include any promissory note or other evidence of indebtedness
issued in consideration of any loan, extension or renewal thereof, made by a
bank or other person and privately arranged, and not intended to be publicly
distributed. The term "senior security" also does not include any such
promissory note or other evidence of indebtedness in any case where such a loan
is for temporary purposes only and in an amount not exceeding 5% of the value of
the total assets of the Fund at the time when the loan is made; a loan is
presumed under the 1940 Act to be for temporary purposes if it is repaid within
60 days and is not extended or renewed; otherwise it is presumed not to be for
temporary purposes. For purposes of determining whether the 200% and 300% asset
coverage requirements described above apply in connection with dividends or
distributions on or purchases or redemptions of TAPS, such asset coverages may
be calculated on the basis of values calculated as of a time within 48 hours
(not including Sundays or holidays) next preceding the time of the applicable
determination. In addition, a declaration of a dividend or other distribution on
or purchase or redemption of TAPS is prohibited (i) at any time that an event of
default under the credit facility and/or commercial paper program, if any, has
occurred and is continuing; or (ii) after giving effect to such declaration, the
Fund would not have eligible portfolio holdings with an aggregated Discounted
Value at least equal to the Note Basic Maintenance Amount.
Upon failure to pay dividends for two years or more, the holders of TAPS
will acquire certain additional voting rights. See "-- Voting Rights" below.
Such rights shall be the exclusive remedy of the holders of TAPS upon any
failure to pay dividends on the TAPS.
For so long as any shares of TAPS are outstanding, except in connection
with the liquidation of the Fund, or a refinancing of the TAPS as provided in
the Statement, the Fund will not declare, pay or set
33
<PAGE> 37
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, if any, ranking junior to the TAPS
as to dividends or upon liquidation) in respect to Common Shares or any other
shares of the Fund ranking junior to or on a parity with the TAPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Shares or any other such junior
shares (except by conversion into or exchange for shares of the Fund ranking
junior to the TAPS as to dividends and upon liquidation) or any such parity
shares (except by conversion into or exchange for shares of the Fund ranking
junior to or on a parity with the TAPS as to dividends and upon liquidation),
unless (i) there is no event of default under the credit facility and/or
commercial paper program, if any, that is continuing; (ii) immediately after
such transaction, the Fund would have Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount (as defined
below) (see "-- Asset Maintenance"); (iii) immediately after such transaction,
the Fund would have eligible portfolio holdings with an aggregated discounted
value at least equal to the asset coverage requirements under the credit
facility and/or commercial paper program, if any. See "Description of Commercial
Paper Program -- Restrictive Covenants"; (iv) full cumulative dividends on the
TAPS due on or prior to the date of the transaction have been declared and paid;
and (v) the Fund has redeemed the full number of shares of TAPS required to be
redeemed by any provision for mandatory redemption contained in the Statement
(see "-- Redemption").
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem shares of TAPS 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. Shares of TAPS 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 TAPS by reason of the
redemption of TAPS 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
TAPS Basic Maintenance Amount.
The Fund also reserves the right to repurchase TAPS in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the TAPS, but is
under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any Valuation
Date, Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount or, as of the last Business Day of any month, the
1940 Act TAPS Asset Coverage, and such failure is not cured within two Business
Days following such Valuation Date in the case of a failure to maintain the TAPS
Basic Maintenance Amount or the last Business Day of the following month in the
case of a failure to maintain the 1940 Act TAPS Asset Coverage as of such last
Business Day (each an "Asset Coverage Cure Date"), the TAPS will be subject to
mandatory redemption out of funds legally available therefor. See "-- Asset
Maintenance." The number of shares of TAPS to be redeemed in such circumstances
will be equal to the lesser of (i) the minimum number of shares of TAPS the
redemption of which, if deemed to have occurred immediately prior to the opening
of business on the relevant Asset Coverage Cure Date, would result in the Fund
having sufficient Eligible Assets to restore the TAPS Basic Maintenance Amount
or 1940 Act TAPS Asset Coverage, as the case may be, in either case as of the
relevant Asset Coverage Cure Date (provided that, if there is no such minimum
number of shares the redemption of which would have such result, all shares of
TAPS then outstanding will be redeemed), and (ii) the maximum number
34
<PAGE> 38
of shares of TAPS that can be redeemed out of funds expected to be available
therefor on the Mandatory Redemption Date (as defined below) at the Mandatory
Redemption Price (as defined below).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the TAPS Basic Maintenance Amount or the 1940 Act TAPS Asset Coverage,
as the case may be, among the holders of TAPS in proportion to the number of
shares they hold and shares of other Preferred Shares subject to mandatory
redemption provisions.
If the Fund at any time fails to maintain the "aaa" Credit Rating for the
TAPS, and such failure is not cured within 90 calendar days thereafter (the
"Rating Default Cure Date"), all shares of TAPS will be subject to mandatory
redemption out of funds legally available therefor, on the Mandatory Redemption
Date, and dividends thereon will be payable at the Default Rate until such
redemption is effected as provided above under "-- Dividends and Dividend
Periods -- Default Period." To maintain the "aaa" Credit Rating, the Fund must
maintain a rating for the TAPS in the highest rating category from a nationally
recognized statistical rating organization, as used in the rules and regulations
under the Exchange Act, which shall be Moody's.
Shares of TAPS may be subject to mandatory redemption in accordance with
the foregoing redemption provision notwithstanding the terms of any Specific
Redemption Provisions.
The Fund is required to effect such a mandatory redemption not later than
30 days after the Asset Coverage Cure Date or the Rating Default Cure Date, as
the case may be (the "Mandatory Redemption Date"), except that if the Fund does
not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of shares of TAPS 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 shares of TAPS on the earliest practicable date on which the Fund
will have such funds available, upon notice to record owners of shares of TAPS
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 TAPS 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 record of shares of TAPS
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 TAPS 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 shares of TAPS 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 TAPS 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
35
<PAGE> 39
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. Shares of TAPS may be subject to mandatory redemption as
described herein notwithstanding the terms of any Specific Redemption
Provisions. The Auction Agent will give notice to the Securities Depository,
whose nominee will be the record holder of all of the shares of TAPS, and the
Securities Depository will determine the number of shares to be redeemed from
the account of the Agent Member of each beneficial owner. Each Agent Member will
determine the number of shares to be redeemed from the account of each
beneficial owner for which it acts as agent. An Agent Member may select for
redemption shares from the accounts of some beneficial owners without selecting
for redemption any shares from the accounts of other beneficial owners.
Notwithstanding the foregoing, if neither the Securities Depository nor its
nominee is the record holder of all of the shares, the particular shares to be
redeemed shall be selected by the Fund by lot, on a pro rata basis between each
series or by such other method as the Fund shall deem fair and equitable, as
contemplated above.
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 shares of TAPS called for redemption on such date and
(ii) such other amounts, if any, to which holders of shares of TAPS 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. 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 shares of TAPS are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no shares of
TAPS may be redeemed unless all dividends in arrears on the outstanding shares
of TAPS, and all capital stock of the Fund ranking on a parity with the TAPS
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 shares of TAPS and all shares
ranking in a parity with the TAPS must receive proportionate amounts.
Except for the provisions described above, nothing contained in the
Statement limits any legal right of the Fund to purchase or otherwise acquire
any shares of TAPS outside of an Auction at any price, whether higher or lower
than the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any shares of TAPS for which Notice of Redemption has been
given and the Fund is in compliance with the 1940 Act TAPS Asset Coverage and
has Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount after giving effect to such purchase or
acquisition on the date thereof. Any shares which are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the outstanding shares of TAPS 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.
36
<PAGE> 40
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance requirements
in respect of the TAPS: (i) 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 TAPS plus specified
liabilities, payment obligations and other amounts; and (ii) the Fund must
maintain asset coverage for TAPS of at least 200%.
TAPS Basic Maintenance Amount. The Fund must maintain, as of each Valuation
Date on which any share of TAPS is Outstanding, Eligible Assets having an
aggregate Discounted Value at least equal to the TAPS Basic Maintenance Amount,
which is calculated separately for Moody's (if Moody's is then rating the TAPS)
and any Other Rating Agency which is then rating the TAPS and so requires. If
the Fund fails to maintain Eligible Assets having an aggregated Discounted Value
at least equal to the TAPS Basic Maintenance Amount as of any Valuation Date and
such failure is not cured on or before the related Asset Coverage Cure Date, the
Fund will be required in certain circumstances to redeem certain of the shares
of TAPS. See "-- Redemption -- Mandatory Redemption."
The "TAPS Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to:
(1) (A) the sum of the products resulting from multiplying the number
of outstanding shares of TAPS on such date by the Liquidation Value per
share of such series; (B) the aggregate amount of dividends that will have
accumulated at the Applicable Rate (whether or not earned or declared) to
and including the first following Dividend Payment Date for each share of
TAPS outstanding that follows such Valuation Date (or to the 42nd day after
such Valuation Date, if such 42nd day occurs before the first following
Dividend Payment Date); (C) the aggregate amount of dividends that would
accumulate at the then current Maximum Rate for a Standard Rate Period
multiplied by the Volatility Factor on any shares of TAPS outstanding from
the first day following the Dividend Payment Date referred to in (B) above
through the 42nd day after such Valuation Date, but only if such 42nd day
occurs after the first day following the Dividend Payment Date, except that
if such Valuation Date occurs during a Default Period, the dividend for
purposes of the calculation would accumulate at the Default Rate; (D) the
amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date; (E) any current liabilities, including, without limitation,
indebtedness due within one year and any redemption premium due with
respect to shares of TAPS for which a Notice of Redemption has been given,
as of such Valuation Date to the extent not reflected in any of (1)(A)
through (1)(D); and (F) without duplication, 10% of the exercise price of
any call option written by the Fund and the exercise price of any put
option written by the Fund;
less
(2) the sum of any cash or the value of any Fund assets irrevocably
deposited by the Fund for the payment of any of (1)(B) through (1)(F)
(values for purposes of this clause (2) shall mean 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 P-1 by Moody's, it will be valued at its face
value).
Solely for purposes of calculating the TAPS Basic Maintenance Amount,
interest on borrowed funds outstanding as of any date will be treated as
dividend payments, at a deemed dividend rate equal to the interest rate payable
on such funds on the relevant date, but shall be subject to multiplication by
the larger of the factors that the Fund has been informed by each applicable
Rating Agency are applicable (as described in 1(C) above) only in the event that
interest on such borrowed funds is payable on the basis of a variable rate of
interest, and the interest rate is subject to change within the relevant 43-day
period.
The Market Value of the Fund's portfolio securities (used in calculating
the Discounted Value of Eligible Assets) is calculated by using the valuations
of Senior Loans furnished by one or more independent third-party pricing service
approved by the Board of Trustees. The pricing service typically
37
<PAGE> 41
values Senior Loans at the mean of the highest bona fide bid and lowest bona
fide ask prices when current quotations are readily available. Senior Loans for
which current quotations are not readily available are valued at a fair value as
determined by the pricing service using pricing matrices and other information
and analysis, including credit considerations considered relevant by such
pricing services to determine valuations. If the Adviser believes that a value
provided by the pricing service does not represent a fair value as a result of
information, specific to that Senior Loan or Borrower or its affiliates, which
the Adviser believes that the pricing agent may not be aware, pursuant to
procedures approved by the Board of Trustees, the Adviser may in its discretion
value the Senior Loan and the Fund will utilize that price instead of the price
as determined by the pricing service. If the pricing service does not provide a
value for a Senior Loan, pursuant to procedures approved by the Board of
Trustees, a value will be determined by the Adviser. See "Net Asset Value."
The discount factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets, and guidelines for determining
the market value of the Fund's portfolio holdings for purposes of determining
compliance with the TAPS Basic Maintenance Amount are based on criteria
established in connection with rating the TAPS. In no event shall the Discounted
Value of any asset of the Fund exceed its unpaid principal balance or face
amount as of the date of calculation. The Discount Factor relating to any asset
of the Fund, the TAPS Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio and
certain definitions and methods of calculation relating thereto may be changed
from time to time by the Fund, without shareholder approval, but only in the
event that the Fund receives written confirmation from each Rating Agency which
is then rating the TAPS and which so requires that any such changes would not
impair the "aaa" Credit Rating. If the Fund fails to maintain the "aaa" Credit
Rating and is unable to restore the "aaa" Credit Rating by the Rating Default
Cure Date, the Fund will be required to redeem the TAPS. See
"-- Redemption -- Mandatory Redemption" above.
A rating agency's guidelines will apply to shares of TAPS only so long as
such rating agency is rating such shares. The Fund will pay certain fees to
Moody's for rating shares of TAPS. The ratings assigned to TAPS are not
recommendations to buy, sell or hold shares of TAPS. Such ratings may be subject
to revision or withdrawal by the assigning rating agent at any time. Any rating
of TAPS should be evaluated independently of any other rating.
1940 Act TAPS Asset Coverage. The Fund is also required to maintain, as of
the last Business Day on any month in which any share of TAPS is outstanding,
asset coverage of at least 200% (or such other percentage as may in the future
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities representing shares of a closed-end investment company as a condition
of declaring dividends on its common shares) ("1940 Act TAPS Asset Coverage").
If the Fund fails to maintain the 1940 Act TAPS Asset Coverage as of the last
Business Day of any month and such failure is not cured as of the related Asset
Coverage Cure Date, the Fund will be required to redeem certain shares of TAPS.
See "-- Redemption -- Mandatory Redemption."
The Fund estimates that based on the composition of its portfolio as of
, 2000, after giving effect to the issuance of the TAPS ($ ) and
the deduction of sales loads and estimated offering expenses for such shares
($ ), and giving effect to any credit facility and/or commercial paper
program, the 1940 Act TAPS Asset Coverage will be computed as follows:
<TABLE>
<S> <C> <C> <C>
Value of Fund assets less liabilities not representing
senior securities $ %
- ---------------------------------------------------------------------- = ---
Senior securities representing indebtedness plus aggregate
liquidation preference of the TAPS $
</TABLE>
Notices. Upon the Date of Original Issue and in certain other
circumstances, the Fund is required to deliver to the Auction Agent and to any
Rating Agency which is then rating the TAPS (i) a certificate with respect to
the calculation of the TAPS Basic Maintenance Amount and the value of the
portfolio holdings of the Fund; (ii) a certificate with respect to the
calculation of the 1940 Act Asset Coverage; and
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<PAGE> 42
(iii) a letter proposed by the Fund's independent accountants regarding the
accuracy of such calculations. See "Description of TAPS -- Notices" in the
Statement of Additional Information.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of TAPS then outstanding and any
other shares ranking on a parity with the TAPS then outstanding, in preference
to the holders of Common Shares, will be entitled to payment, out of the assets
of the Fund, or the proceeds thereof, available for distribution to shareholders
after satisfaction of claims of creditors of the Fund, of a liquidation
distribution in the amount equal to $25,000 per share of the TAPS, plus an
amount equal to accumulated dividends (whether or not earned or declared but
without interest) to the date of payment of such distribution is made in full or
a sum sufficient for the payment thereof is set apart with the Paying Agent.
However, holders of TAPS will not be entitled to any premium to which such
holder would be entitled to receive upon redemption of such shares of TAPS.
After payment of the full amount of such liquidation distribution, the owners of
the TAPS will not be entitled to any further participation in any distribution
of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the assets of the Fund or proceeds thereof available
for distribution to shareholders after satisfaction of claims of creditors of
the Fund shall be insufficient to pay in full the liquidation distribution to
which owners of any shares of TAPS are entitled, such assets or the proceeds
thereof will be distributed ratably among the owners of the shares of TAPS and
any other shares ranking on a parity with TAPS until payment in full is made to
the owners of the shares of TAPS of the liquidation distribution to which they
are entitled, no dividend or other distribution shall be made to the holders of
Common Shares and no purchase, redemption or other acquisition for any
consideration by the Fund shall be made in respect of the Common Shares.
A consolidation or merger of the Fund with or into any other company or
companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any designation, right,
preference or limitation of the TAPS or any shares issuable in exchange for
shares of TAPS in any such consolidation or merger.
To the extent other shares of TAPS are issued by the Fund, such shares will
share equally and on a pro rata basis with the TAPS then outstanding in
connection with any liquidation, dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated herein and except as otherwise required by
applicable law, holders of shares of TAPS have one vote per share and vote
together with holders of shares of Common Shares as a single class. Under
applicable rules of the New York Stock Exchange, the Fund is currently required
to hold annual meetings of shareholders.
In connection with the election of the Board of Trustees, the holders of
outstanding Preferred Shares, including the TAPS, represented in person or by
proxy at said meeting, shall be entitled, as a class, to the exclusion of the
holders of all other securities and classes of capital stock of the Fund, to
elect two Trustees of the Fund. The holders of outstanding Common Shares and
Preferred Shares, including the TAPS, voting together as a single class, shall
elect the balance of the Trustees. Notwithstanding the foregoing, if (a) at the
close of business on any Dividend Payment Date accumulated dividends (whether or
not earned or declared) on outstanding shares of the Preferred Shares, including
outstanding TAPS, equal to at least two full years' dividends shall be due and
unpaid; or (b) any time holders of any other Preferred Shares are entitled under
the 1940 Act to elect a majority of the Trustees of the Fund, then the number of
members constituting the Board shall automatically be increased by the smallest
number that, when added to the two Trustees elected exclusively by the holders
of Preferred Shares as described above,
39
<PAGE> 43
would constitute a majority of the Board as so increased by such smallest
number; and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which Trustees are to
be elected, the holders of outstanding Preferred Shares, including the TAPS,
voting as a separate class, will be entitled to elect the smallest number of
additional Trustees that, together with the two Trustees which such holders will
be in any event entitled to elect, constitutes a majority of the total number of
Trustees of the Fund as so increased. The terms of office of the persons who are
Trustees at the time of that election will continue. If the Fund thereafter
shall pay, or declare and set apart for payment, in full all dividends payable
on all outstanding Preferred Shares, including the TAPS, for all past Dividend
Periods, the voting rights stated in the preceding sentence shall cease, and the
terms of office of all of the additional Trustees elected by the holders of
Preferred Shares, including the TAPS (but not of the Trustees with respect to
whose election the holders of Common Shares were entitled to vote or the two
Trustees the holders of Preferred Shares, including the TAPS, have the right to
elect in any event), will terminate automatically. Any shares of TAPS issued
after the date hereof shall vote with the TAPS as a single class on the matters
described above, and the issuance of any other shares of TAPS by the Fund may
reduce the voting power of the TAPS.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares determined with reference to a "majority of outstanding voting
securities" as the term is defined in Section 2(a)(42) of the 1940 Act,
including the TAPS, voting as a class, is required to (i) amend, alter or repeal
any of the preferences, rights or powers of such class so as to affect
materially and adversely such preferences, rights or powers; (ii) increase the
authorized number of shares of TAPS; (iii) create, authorize or issue shares of
any class of capital stock ranking senior to or on a parity with the TAPS with
respect to the payment of dividends or the distribution of assets, or any
securities convertible into, or warrants, options or similar rights to purchase,
acquire or receive, such shares of capital stock ranking senior to or on parity
with the TAPS or reclassify any authorized shares of capital stock of the Fund
into any shares ranking senior to or on parity with the TAPS (except that, the
Board of Trustees, without the vote or consent of the holders of TAPS, may from
time to time authorize, create and classify, and the Fund may from time to time
issue, series or shares of Preferred Shares, including TAPS, ranking on a parity
with the TAPS with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up to the affairs of the Fund,
subject to continuing compliance by the Fund with the 1940 Act TAPS Asset
Coverage and TAPS Basic Maintenance Amount requirements, or in connection with a
refinancing of the TAPS); (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 credit facility and/or commercial paper program, see
"Description of Commercial Paper Program" below; (D) liens, pledges, charges,
security interests, security agreements or other encumbrances arising in
connection with any indebtedness permitted under clause (vi) below and (E) liens
to secure payment for services rendered including, without limitation, services
rendered by the Fund's custodian and the Auction Agent, or (vi) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money
or any direct or indirect guarantee of such indebtedness for borrowed money or
any direct or indirect guarantee of such indebtedness, except the Fund may
borrow as may be permitted by the Fund's investment restrictions; provided,
however, that transfers of assets by the Fund subject to an obligation to
repurchase shall not be
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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 TAPS Basic Maintenance Amount as of the
immediately preceding Valuation Date.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of TAPS, 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 such series in a manner different from that of
other series of 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 foregoing voting provisions will not apply with respect to the TAPS if,
at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption, and sufficient funds shall have been
deposited in trust to effect such redemption.
The Board of Trustees, without the vote or consent of any holder of the
Preferred Shares, including the TAPS, or any other shareholder of the Fund, may
from time to time amend, alter or repeal certain definitions primarily related
to Moody's rating of the TAPS provided that the Board of Trustees receives
written confirmation from Moody's (if Moody's is then rating the TAPS) (with
such confirmation in no event being required to be obtained from a particular
rating agency in the case of the definitions relevant only to and adopted in
connection with the rating of the TAPS, if any, by any Other Rating Agency) that
such amendment, alteration or repeal would not impair the rating then assigned
by Moody's.
In addition, the Board of Trustees, without the vote or consent of any
holder of Preferred Shares, including TAPS, or any other shareholder of the
Fund, may from time to time adopt, amend, alter or repeal any or all of any
additional or other definitions or add covenants and other obligations of the
Fund (e.g., maintenance of minimum liquidity level) or confirm the applicability
of covenants and other obligations set forth herein in connection with obtaining
or maintaining the rating of Moody's, or any Other Rating Agency with respect to
TAPS and any such amendment, alteration or repeal will not be deemed to affect
the preferences, rights or powers of TAPS or the holders thereof, provided the
Board of Trustees receives written confirmation from the relevant rating agency
(such confirmation in no event being required to be obtained from a particular
rating agency with respect to definitions or other provisions relevant only to
another rating agency's rating) that any such amendment, alteration or repeal
would not adversely affect the rating then assigned by such rating agency.
Also, subject to compliance with applicable law, the Board of Trustees may
amend the definition of Maximum Rate to increase the percentage amount by which
the Reference Rate is multiplied to determine the Maximum Rate shown therein
without the vote or consent of the holders of the Preferred Shares, including
TAPS, or any other shareholder of the Fund, and without receiving any
confirmation from any rating agency after consultation with the Broker-Dealers,
provided that immediately following any such increase the Fund would be in
compliance with the TAPS Basic Maintenance Amount.
Unless otherwise required by law, holders of shares of TAPS shall not have
any relative rights or preferences or other special rights other than those
specifically set forth in the Statement. The holders of shares of TAPS shall
have no rights to cumulative voting. In the event that the Fund fails to pay any
dividends on the shares of TAPS, the exclusive remedy of the holders shall be
the right to vote for Trustees as discussed above.
RESTRICTIONS ON TRANSFER
Shares of TAPS 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,
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in the case of a transfer between persons holding shares of TAPS through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of TAPS issued to the Securities Depository
will bear legends with respect to the restrictions described above and
stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar. See "The Auction."
DESCRIPTION OF COMMERCIAL PAPER PROGRAM
General. The Fund is authorized to borrow money in an amount up to 33 1/3%
of the Fund's total assets (including the amount borrowed) without the consent
of holders of Preferred Shares. In this connection, the Fund may issue notes,
commercial paper or other evidences of indebtedness and may secure such
borrowings by mortgaging, pledging, or otherwise granting a security interest in
the Fund's assets. The Fund may use the proceeds from borrowings for investment
purposes. The terms of any such borrowings are subject to the provisions of the
1940 Act, as further described below. The terms of such borrowings also will
subject to the provisions of any credit agreements related to the borrowings
and, to the extent that the Fund seeks a rating for the borrowings, any
additional guidelines imposed by such rating agencies. Such provisions and
guidelines may be more restrictive than those imposed by the 1940 Act.
The Fund expects to establish a commercial paper program and related
liquidity facility (the "CP Program") before the end of the second calendar
quarter of 2000 and has established an interim credit facility pending the
finalization of the terms of such program (the "Interim Facility"). Any
subsequent senior indebtedness issued by the Fund may have terms which differ
substantially from the terms of the CP Program and Interim Facility described
below.
Ranking of Senior Indebtedness. The rights of lenders to receive payments
of interest on and repayments of principal of any borrowings made by the Fund,
including those made under the CP Program or Interim Facility, will be senior to
the rights of holders of Preferred Shares with respect to the payment of
dividends or upon liquidation. Notes issued by the Fund in connection with the
CP Program will be secured by a first priority perfected security interest in
the portfolio of Senior Loans held by the Fund. The Interim Facility is
unsecured.
Interim Facility. The Fund has entered into a credit agreement pursuant to
which a commercial bank will provide the Fund with access to a $150 million
revolving credit facility. Draws under the Interim Facility bear interest at a
rate of either (i) the higher of the announced prime rate of the agent under the
Interim Facility and the Federal Funds Rate plus .50% (the "Base Rate"); or (ii)
LIBOR plus .50%, as selected by the Fund. The Interim Facility matures on
December 12, 2000 and individual LIBOR draws under the facility may have
interest periods of one, two, three or six months. Outstanding amounts may be
prepaid at any time prior to maturity, subject to breakage costs. Overdue
principal, interest or other amounts will bear interest at a rate which is 2% in
excess of the greater of the then current Base Rate or the rate then applicable
to the loan. In addition, the Fund will pay a commitment fee equal to .125% per
annum on the average undrawn amount of the Interim Facility. The Fund will bear
administrative and other expenses in connection with maintaining the facility.
The aggregate annualized cost of the facility is not expected to exceed an
amount equal to LIBOR plus %.
CP Program. The Fund expects to enter into a definitive agreement with a
syndicate of commercial banks to establish a $150,000,000 commercial paper
program and an associated $155,000,000 liquidity facility (the "Liquidity
Facility"). Pursuant to the CP Program, a special purpose bankruptcy-remote
Delaware entity (the "CP Issuer") will be established for the sole purpose of
issuing commercial paper and lending the proceeds to the Fund under a revolving
credit facility. The amount owed by the Fund pursuant to the credit facility
will be evidenced by a noted issued in favor of the CP Issuer (the "Senior
Note"). The Senior Note would bear interest at a rate sufficient to cover the
aggregate of (i) interest payable on (or a discount in connection with the
issuance of) the CP Issuer's commercial paper; (ii) interest payable on loans
made pursuant to the Liquidity Facility; (iii) commitment fees payable under the
Liquidity Facility; and (iv) other fees, costs, and expenses payable in
connection with the operation of the CP Program and Liquidity Facility. Loans
made in connection with the CP Program will mature at the date which is [two
years] following the closing date of the CP Program or upon acceleration
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following an event of default. The Fund expects to use the initial issuance of
commercial paper to pay down the outstanding balance of borrowings made under
the Interim Facility and thereafter to repay maturing commercial paper. The
aggregate annualized cost of the CP Program and related Liquidity Facility is
not expected to exceed an amount equal to LIBOR plus %. The Senior Note will
be secured by a first priority perfected security interest in the entire
portfolio of Senior Loans held by the Fund.
Liquidity Facility. If commercial paper proceeds are insufficient to
finance advances under the credit facility or repay maturing commercial paper,
the CP Issuer would be able to borrow under the Liquidity Facility. Loans made
under the Liquidity Facility will mature at the date which is [two years]
following the closing date of the CP Program or upon acceleration following an
event of default. Loans made under the Liquidity Facility are expected to bear
interest at a rate of either (i) the higher of the announced prime rate of the
agent under the Liquidity Facility and the Federal Funds Rate plus .50%; or (ii)
LIBOR plus .50% as selected by the Fund. Any unused portion of the Liquidity
Facility will be subject to a commitment fee that is expected to be
approximately .125% per annum. The Liquidity Facility will be secured by a first
priority perfected security interest in the CP Issuer's right, title and
interest in and to (i) the Senior Note; (ii) the collateral securing the Note;
and (iii) the credit agreement.
Restrictive Covenants and 1940 Restrictions. The credit agreements
governing the Interim Facility and the CP Program (the "Credit Agreement")
include usual and customary covenants for this type of transaction including
limits on the Fund's ability to (i) incur additional debt or issue preferred
shares without approval of the lenders, (ii) incur liens or pledge portfolio
securities; (iii) incur obligations under derivative instruments; and (iv)
change its investment objective or fundamental investment restrictions without
the approval of lenders. In addition, the Credit Agreements do not permit the
Fund's asset coverage ratio (as defined in the Credit Agreements) to fall below
300% for more than four consecutive business days or below 275% at any time (the
"Credit Agreement Asset Coverage Test").
Under the requirements of the 1940 Act, the Fund must have asset coverage
of at least 300% immediately after any borrowing under the Interim Facility or
CP 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 represented by
senior securities issued by the Fund. The Credit Agreement limits the Fund's
ability to pay dividends or make other distributions, including with respect to
the TAPS, or purchase or redeem shares, including shares of TAPS, unless the
Fund complies with the Credit Agreement Asset Coverage Test. In addition, the
Credit Agreement does not permit the Fund to declare dividends or other
distributions with respect to the TAPS or purchase or redeem shares of TAPS (i)
at any time that an event of default under the Interim Facility or Credit
Agreement for the CP Programs has occurred and is continuing; or (ii) if, after
giving effect to such declaration, the Fund would not meet the asset coverage
ratio set forth in the Credit Agreement.
THE AUCTION
GENERAL
AUCTION AGENCY AGREEMENT. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company), 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 TAPS so long as the Applicable Rate
for shares of such series is to be based on the results of an Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of TAPS.
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
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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 any error of judgment
made in good faith unless the Auction Agent will have been negligent in
ascertaining the pertinent facts.
The Auction Agent after each Auction for shares of TAPS will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate Period
of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of TAPS placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of TAPS will be placed by a Broker-Dealer if such shares were (a) the
subject of Hold Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (i) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (ii) a Submitted
Bid of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (iii) a valid Hold Order.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of a
series of TAPS, each customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of such series (a "Beneficial Owner") may submit orders ("Orders") with respect
to shares of such series to that Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold shares of such series without
regard to the Applicable Rate for shares of such series for the next Rate
Period thereof.
- Bid -- indicating its desire to sell shares of such series at $25,000 per
share if the Applicable Rate for shares of such series for the next Rate
Period thereof is less than the rate specified in such Bid (also known as
a hold-at-a-rate order).
- Sell Order -- indicating its desire to sell shares of such series at
$25,000 per share without regard to the Applicable Rate for shares of
such series for the next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of TAPS then held by such
Beneficial Owner. A Beneficial Owner of shares of such series that submits a Bid
with respect to shares of such series to its Broker-Dealer having a rate higher
than the Maximum Rate for shares of such series on the Auction Date therefor
will be treated as having submitted a Sell Order with respect to such shares to
its Broker-Dealer. A Beneficial Owner of shares of such series that fails to
submit an Order with respect to such shares to its Broker-Dealer will be deemed
to have submitted a Hold Order with respect to such shares of such series to its
Broker-Dealer; provided however, that if a Beneficial Owner of shares of such
series fails to submit an Order with respect to shares of such series to its
Broker-Dealer for an Auction relating to a Rate Period of more than 91 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order
with respect to such shares to its Broker-Dealer. A Sell Order shall constitute
an irrevocable offer to sell the shares of TAPS subject thereto. A Beneficial
Owner that offers to become the Beneficial Owner of additional shares of TAPS
is, for purposes of such offer, a Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of a
series of TAPS but that wishes to purchase shares of such series, or that is a
Beneficial Owner of shares of such series that wishes to purchase additional
shares of such series (in each case, a "Potential Beneficial Owner"), may submit
Bids to its Broker-Dealer in which it offers to purchase shares of such series
at $25,000 per share if the Applicable Rate for shares of such series for the
next Rate Period thereof is not less than the rate specified in such Bid. A Bid
placed by a Potential Beneficial Owner of shares of such series specifying a
rate higher than the Maximum Rate for shares of such series on the Auction Date
therefor will not be accepted.
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The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of TAPS held by it or customers who are Beneficial Owners
will be treated in the same manner as a Beneficial Owner's failure to submit to
its Broker-Dealer an Order in respect of shares of TAPS held by it. A
Broker-Dealer may also submit Orders to the Auction Agent for its own account as
an Existing Holder or Potential Holder, provided it is not an affiliate of the
Fund.
If Sufficient Clearing Bids for shares of a series of TAPS exist (that is,
the number of shares of such series subject to Bids submitted or deemed
submitted to the Auction Agent by Broker-Dealers as or on behalf of Potential
Holders with rates equal to or lower than the Maximum Rate and higher than the
Minimum Rate for shares of such series is at least equal to the number of shares
of such series subject to Sell Orders submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Existing Holders), the
Applicable Rate for shares of such series for the next succeeding Rate Period
thereof will be the lowest rate specified in the Submitted Bids which, taking
into account such rate and all lower rates bid by Broker-Dealers as or on behalf
of Existing Holders and Potential Holders, would result in Existing Holders and
Potential Holders owning a the shares of such series available for purchase in
the Auction. If Sufficient Clearing Bids for shares of a series of TAPS do not
exist, the Applicable Rate for shares of such series for the next succeeding
Rate Period thereof will be the Maximum Rate for shares of such series on the
Auction Date therefor. In such event, Beneficial Owners of shares of such series
that have submitted or are deemed to have submitted Sell Orders may not be able
to sell in such Auction all shares of such series subject to such Sell Orders.
If Broker-Dealers submit or are deemed to have submitted to the Auction Agent
Hold Orders with respect to all Existing Holders of shares of a series of TAPS,
the Applicable Rate for shares of such series for the next succeeding Rate
Period thereof will be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of TAPS that is
fewer than the number of shares of such series specified in its Order. To the
extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as Existing Holders or Potential Holders in respect of
customer Orders will be required to make appropriate pro rata allocations among
their respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
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DESCRIPTION OF COMMON SHARES
In addition to the shares of TAPS, the Declaration authorizes the issuance
of an unlimited number of Common Shares. All Common Shares have equal rights to
the payment of dividends and the distribution of assets upon liquidation. Common
Shares are fully paid and, subject to matters discussed in "Certain Provisions
in the Declaration of Trust," non-assessable when issued and have no preemptive,
conversion rights or rights to cumulative voting. So long as any shares of TAPS
are outstanding, the Fund is not permitted to declare dividends on, make any
distributions with respect to, or purchase its Common Shares unless, at the time
of such declaration, distribution or purchase, as applicable (and after giving
effect thereto), all accumulated dividends on Preferred Shares have been paid.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
contains an express disclaimer of shareholder liability for debts or obligations
of the Fund and requires that notice of such limited liability be given in each
agreement, obligation or instrument entered into or executed by the Fund or the
trustees. The Declaration further provides for indemnification out of the assets
and property of the Fund for all loss and expense of any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Fund believes that the likelihood of such circumstances is very
remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and Preferred Shares, voting together as a
single class, except as described below, to authorize (1) a conversion of the
Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization or
recapitalization of the Fund, or a series or class of the Fund, (3) a sale,
lease or transfer of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of the Fund, or a series or class of the Fund, or
(5) a removal of Trustees by shareholders, and then only for cause, unless, with
respect to (1) through (4), such transaction has already been authorized by the
affirmative vote of two-thirds of the total number of Trustees fixed in
accordance with the Declaration or the By-laws, in which case the affirmative
vote of the holders of at least a majority of the Fund's Common Shares and
Preferred Shares outstanding at the time, voting together as a single class, is
required; provided, however, that where only a particular class or series is
affected (or, in the case of removing a Trustee, when the Trustee has been
elected by only one class), only the required vote by the applicable class or
series will be required. None of the foregoing provisions may be amended except
by the vote of at least two-thirds of the Common Shares and Preferred Shares,
voting together as a single class. In the case of the conversion of the Fund to
an open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of Preferred Shares, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's Preferred
Shares outstanding at the time, voting as a separate class, or, if such action
has been authorized by the affirmative vote of two-thirds of the total number of
Trustees fixed in accordance with the Declaration or the By-laws, the
affirmative vote of the holders of at least a majority of the Fund's Preferred
Shares outstanding at the time, voting as a separate class. The votes required
to approve the conversion of the Fund from a closed-end to an open-end
investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of Preferred Shares are
higher than those required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes are in the best
interest of the Fund and its shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
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REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end management investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Common Shares will trade in the open market at a price that will be
a function of several factors, including dividend levels (which are in turn
affected by expenses), net asset value, price, dividend stability, relative
demand for and supply of such shares in the market, general market and economic
conditions and other factors. Because shares of closed-end investment companies
may frequently trade at prices lower than net asset value, the Fund's Board of
Trustees has currently determined that, at least annually, it will consider
action that might be taken to reduce or eliminate any material discount from net
asset value in respect of Common Shares, which may include the repurchase of
such shares in the open market or in private transactions, the making of a
tender offer for such shares at net asset value, or the conversion of the Fund
to an open-end investment company. The Fund cannot assure you that its Board of
Trustees will decide to take any of these actions, or that share repurchases or
tender offers will actually reduce market discount.
If the Fund converted to an open-end investment company, it would be
required to redeem all Preferred Shares then outstanding (requiring in turn that
it liquidate a portion of its investment portfolio) and repay all outstanding
borrowings including those made pursuant to the CP Program on Liquidity
Facility. The Common Shares would no longer be listed on the New York Stock
Exchange. In contrast to a closed-end investment company, shareholders of an
open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the 1940
Act) at a price based on their net asset value, less any redemption charge that
is in effect at the time of redemption. Because its shares are redeemable, an
open-end fund is required to invest no more than 15% of its total assets in
illiquid securities. Many Senior Loans are illiquid, which might require that
the Fund change its overall investment strategy if a decision were made to
convert the Fund to an open-end fund. The Board of Trustees believes that the
closed-end fund structure is desirable, given the Fund's investment objective
and policies, and the generally illiquid nature of Senior Loans. Investors
should assume, therefore, that it is highly unlikely that the Board would vote
to convert the Fund to an open-end investment company. See "Certain Provisions
in the Declaration of Trust" for a discussion of the voting requirements
applicable to the conversion of the Fund to an open-end investment company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
extent to which the fund is leveraged, the impact of any action that might be
taken on the Fund or its shareholders, and market considerations. Based on these
considerations, even if the Fund's shares should trade at a discount, the Board
of Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
NET ASSET VALUE
The Fund's net asset value per Common Share will be determined as of the
close of trading (normally 4:00 p.m. eastern time) on each day the New York
Stock Exchange is open for business. Net asset value is calculated by taking the
fair value of the Fund's total assets, including interest or dividends accrued
but not yet collected, less liabilities (including Leverage Instruments), and
dividing by the total number of shares outstanding. The result, rounded to the
nearest cent, is the net asset value per share.
The Senior Loans in which the Fund will invest generally are not listed on
any securities exchange. Certain Senior Loans are traded by institutional
investors in an over-the-counter secondary market for Senior Loan obligations
that has developed over the past several years. This secondary market for those
Senior Loans generally is comparatively illiquid relative to markets for other
income securities and no active trading market exists for many Senior Loans. In
determining net asset value, the Fund will utilize the valuations of Senior
Loans furnished to the Adviser by an independent third-party pricing service
approved by the Board of Trustees. The Board of Trustees has reviewed the
various alternatives for pricing the Fund's portfolio of Senior Loans and has
determined that the use of a pricing service is a reasonable, fair and
appropriate method of valuing Senior Loans. The Adviser has entered into an
agreement with a
47
<PAGE> 51
pricing service provider to provide pricing services for the Fund. The Agreement
is terminable by either party upon notice and has an initial term of six months.
The Agreement provides that the pricing service provider assumes no fiduciary
responsibility to the Fund or to any investor in the Fund, and that the pricing
service provider will have no liability under the Agreement to any third party,
including any investor in the Fund. The Agreement provides that the pricing
service provider will be indemnified by the Adviser unless the pricing service
provider has acted with willful misconduct. The pricing service provider is
explicitly permitted to act as principal for its own account in connection with
the purchase and sale (from or to the Fund or otherwise) of any Senior Loan at
any price simultaneously while it provides pricing services to the Fund.
Furthermore, the pricing service provider can only provide valuations for a
limited number of the Senior Loans that may trade from time to time in the
market. The pricing service provider has no obligation to provide a valuation
for a Senior Loan if it believes that it cannot determine such a valuation.
There can be no assurance that the pricing service provider will continue to
provide these services or will provide a value for each Senior Loan held by the
Fund. However, the Adviser believes that if the pricing service provider
declines to continue to act as such for the Fund, or does not provide values for
a significant portion of the Senior Loans in the Fund's portfolio, one or more
alternative independent third-party pricing service providers will be available
to provide comparable services on similar terms. During any period in which no
pricing service provider is acting as such for the Fund, or for any Senior Loan
for which no value from a pricing service provider is available, the Adviser
will value the Fund's Senior Loans as described below.
A pricing service provider typically will value Senior Loans at the mean of
the highest bona fide bid and lowest bona fide ask prices when current
quotations are readily available. Senior Loans for which current quotations will
not be readily available are valued at a fair value as determined by the pricing
service provider using a wide range of market data and other information and
analysis, including credit considerations considered relevant by the pricing
service provider to determine valuations. The procedures of any pricing service
provider and its valuations will be reviewed by the officers of the Adviser
under the general supervision of the Board of Trustees. If the Adviser believes
that a value provided by a pricing service provider does not represent a fair
value as a result of information, specific to that Senior Loan or Borrower or
its affiliates, which the Adviser believes that the pricing agent may not be
aware, the Adviser may in its discretion value the Senior Loan subject to
procedures approved by the Board of Trustees and reviewed on a periodic basis,
and the Fund will utilize that price instead of the price as determined by the
pricing service provider. In addition to such information the Adviser will
consider, among other factors, (i) the creditworthiness of the Borrower and (ii)
the current interest rate, the period until next interest rate reset and
maturity of such Senior Loan interests in determining a fair value of a Senior
Loan. If the pricing service provider does not provide a value for a Senior Loan
or if no pricing service provider is then acting, a value will be determined by
the Adviser in the manner described above.
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 nature of such
instruments, 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 longer term fixed-income
securities.
Because a secondary trading market in Senior Loans has not yet fully
developed, the pricing service or the Adviser may not rely solely on but may
consider, to the extent they believe such information to be reliable, prices or
quotations provided by banks, dealers or other pricing service providers with
respect to secondary market transactions in Senior Loans. To the extent that an
active secondary trading market in Senior Loan interests develops to a reliable
degree, the pricing service provider or the Adviser may rely to an increasing
extent on such market prices and quotations in reviewing the valuations of the
Senior Loan interests in the Fund's portfolio. To the extent a trading market
continues to develop, certain participants in the market may have objectives
other than current income and may pursue short-term trading strategies, which
may result in erratic movements in the market prices for Senior Loans as a
result of movements in short-term interest rates. Although the Fund's policy of
acquiring interests in floating rate Senior Loans is intended to minimize
fluctuations in net asset value resulting from changes in market interest rates,
the Fund's net asset value will fluctuate. In light of the senior nature of
Senior Loan
48
<PAGE> 52
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 Adviser 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 in order to review the value of such Senior Loan
interests. Accordingly, the Adviser generally will not systematically consider
(but may consider in certain instances) and, in any event, will not rely solely
upon such ratings or price fluctuations in determining or reviewing valuations
of Senior Loan interests in the Fund's portfolio.
FEDERAL TAXATION
The following is intended to be a general summary of certain federal income
tax consequences of investing in TAPS. It is not intended as a complete
discussion of all such tax consequences, nor does it purport to deal with all
categories of investors. Investors are therefore advised to consult with their
tax advisers before making an investment in the Fund.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code and intends to qualify under those provisions each
year. As a regulated investment company, the Fund generally will not be subject
to federal income tax on its investment company taxable income and net capital
gains (net long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers from prior years), if any, that it
distributes to shareholders. However, the Fund would be subject to corporate
income tax (currently at a 35% maximum effective rate) on any undistributed
income. The Fund intends to distribute to its shareholders, at least annually,
substantially all of its investment company taxable income and net capital
gains.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% federal
excise tax. To prevent imposition of the tax, the Fund must distribute during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the twelve month period ending
on October 31 of the calendar year, and (3) all such ordinary income and capital
gains for previous years that were not distributed during such years. A
distribution will be treated as having been paid on December 31 if it is
declared by the Fund in October, November or December with a record date in such
months and is paid by the Fund in January of the following year. Accordingly,
such distributions will be taxable to shareholders in the calendar year in which
the distributions are declared. To prevent application of the excise tax, the
Fund intends to make its distributions in accordance with the calendar year
distribution requirement.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, would constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholders' hands
as long-term capital gains.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TAPS
Under present law and based in part on the advice of counsel, the Fund is
of the opinion that TAPS will constitute stock of the Fund, and thus
distributions with respect to TAPS (other than distributions in redemption of
TAPS subject to Section 302(b) of the Code) will constitute dividends to the
extent of the Fund's current or accumulated earnings and profits, as calculated
for federal income tax purposes. Such dividends generally will be taxable as
ordinary income to holders and will not qualify for the dividends
49
<PAGE> 53
received deduction available to corporations under Section 243 of the Code.
Dividends designated by the Fund as capital gain distributions will be treated
as long-term capital gains in the hands of holders. The Service currently
requires that a regulated investment company that has two or more classes of
stocks 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 made with respect to TAPS as capital gain
distributions in proportion to the TAPS share of total dividends paid during the
year. See "Tax-Matters -- Federal Income Tax Treatment of Holders of TAPS" in
the Statement of Additional Information.
SALE OF SHARES
The sale of shares of TAPS will be a taxable transaction for federal income
tax purposes. Selling holders of shares of TAPS will generally recognize gain or
loss in an amount equal to the difference between their basis in the TAPS and
the amount received in exchange therefor. If such shares of TAPS 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 shares of TAPS by the Fund generally will give rise to
capital gain or loss if the shareholder does not own (and is not regarded under
certain tax law rules of constructive ownership as owning) any Common Shares in
the Fund and provided that the redemption proceeds do not represent declared but
unpaid dividends. Any loss realized upon a taxable disposition of shares of TAPS
held for six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gain received with respect to such
shares.
BACKUP WITHHOLDING
The Fund may be required to withhold, for U.S. federal income taxes, 31% of
all taxable distributions 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.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident aliens,
may be subject to U.S. withholding tax on certain distributions at a rate of 30%
or such lower rates as may be prescribed by any applicable treaty. Investors are
advised to consult their own tax advisors with respect to the application to
their own circumstances of the above-described general taxation rules and with
respect to the state, local or foreign tax consequences to them of an investment
in TAPS.
50
<PAGE> 54
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York 10019,
as lead representative, and and , as their representatives
(together with PaineWebber Incorporated, the "Representatives"), have severally
agreed, subject to the terms and conditions of the Underwriting Agreement with
the Fund and the Adviser (the "Underwriting Agreement"), to purchase from the
Fund the number of TAPS set forth opposite the respective names. The
Underwriters are committed to purchase all of such TAPS if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER TAPS
- ----------- ---------
<S> <C>
PaineWebber Incorporated.................................
Total..........................................
</TABLE>
The Underwriters have advised the Fund that they propose initially to offer
the TAPS to the public at the public offering price set forth on the cover page
of this Prospectus, and to certain dealers at such price less a concession not
in excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share to other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed. Investors must pay for any TAPS purchased in the initial public
offering on or before , 2000.
The Underwriters will act in Auctions as a Broker-Dealer as set forth under
" " and will be entitled to fees for services as a Broker-Dealer as set
forth under " ." The Underwriters also may provide information to be
used in ascertaining the Reference Rate.
The Fund anticipates that the Underwriters from time to time may act as
dealers in connection with the execution of the Trust's portfolio transactions.
The Trust and the Adviser have agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act of 1933, as
amended.
CUSTODIAN AND TRANSFER AGENT,
DIVIDEND DISBURSING AGENT AND REDEMPTION AGENT
The custodian of the assets of the Fund is Chase Bank of Texas, National
Association, 600 Travis Street, Houston, Texas 77002. The Custodian performs
custodial, fund accounting and portfolio accounting services. The Fund's
transfer, shareholder services and dividend paying agent is The Chase Manhattan
Bank, 4 New York Plaza, New York, New York 10004. Bankers Trust Company, 4
Albany Street, New York, New York 10006, a banking corporation organized under
the laws of New York, is the Auction Agent with respect to shares of TAPS and
acts as transfer agent, registrar, dividend disbursing agent, and redemption
agent with respect to such shares.
LEGAL OPINIONS
Certain legal matters in connection with the shares of TAPS offered hereby
will be passed upon for the Fund by Vedder, Price, Kaufman & Kammholz, Chicago,
Illinois, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom
(Illinois) and its affiliates. Vedder, Price, Kaufman & Kammholz will rely as to
certain matters of Massachusetts law on the opinion of Bingham Dana, LLP,
Boston, Massachusetts.
51
<PAGE> 55
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's New York Regional Office, Seven World
Trade Center, New York, New York 10048 and Chicago Regional Office, Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Reports, proxy statements, and other information about the Funds can
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
This Prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and TAPS shares can be found in the
Fund's Registration Statement (including amendments, exhibits, and schedules) on
Form N-2 filed with the SEC. The SEC maintains a web site (http://www.sec.gov)
that contains each Fund's Registration Statement, other documents incorporated
by reference, and other information the Fund has filed electronically with the
Commission, including proxy statements and reports filed under the Securities
Exchange Act of 1934. Additional information may be found on the Internet at
http://www.nuveen.com.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this Prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity or achievements, and neither the Fund nor any other person
assumes responsibility for the accuracy and completeness of such statements.
52
<PAGE> 56
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies........................... S-1
Investment Policies and Techniques.......................... S-3
Management of the Fund...................................... S-7
Portfolio Transactions...................................... S-12
Net Asset Value............................................. S-13
Description of TAPS......................................... S-15
Additional Information Concerning the Auctions for TAPS..... S-16
Certain Provisions in the Declaration of Trust.............. S-17
Repurchase of Common Shares; Conversion to Open-End Fund.... S-18
Tax Matters................................................. S-20
Certain Owners of Record.................................... S-23
Experts..................................................... S-24
</TABLE>
53
<PAGE> 57
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NUVEEN SENIOR INCOME FUND
SHARES
TAXABLE AUCTIONED PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
(LOGO)
-------------------
PROSPECTUS
-------------------
PAINEWEBBER INCORPORATED
------------------------
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 58
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED
-------- ---, -----
NUVEEN SENIOR INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relating to this offering does not
constitute a prospectus, but should be read in conjunction with the Prospectus
relating thereto dated ________ __, ____ (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing shares of TAPS 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)
257-8787. Capitalized terms used but not defined in this Statement of Additional
Information have the meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
Investment Objective and Policies.........................................................S-1
Investment Policies and Techniques........................................................S-3
Management of the Fund....................................................................S-7
Portfolio Transactions...................................................................S-12
Net Asset Value..........................................................................S-13
Description of Taps......................................................................S-15
Additional Information Concerning the Auctions for TAPS..................................S-16
Certain Provisions in the Declaration of Trust...........................................S-17
Repurchase of Common Shares; Conversion to Open-End Fund.................................S-18
Tax Matters..............................................................................S-20
Certain Owners of Record.................................................................S-23
Experts ................................................................................S-24
</TABLE>
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS __________, 1999.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 59
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek a high level of current
income, consistent with preservation of capital. The Fund seeks to achieve its
objective primarily by investing in senior secured loans whose interest rates
adjust periodically based on a benchmark index such as the Prime Rate or LIBOR.
Although the Fund's net asset value will vary, the Fund's policy of acquiring
interests in floating or variable rate, U.S. dollar-denominated senior loans
("Senior Loans") is expected to minimize the fluctuations in the Fund's net
asset value as a result of changes in interest rates. The Fund's net asset value
may be affected by changes in the credit quality of Borrowers with respect to
Senior Loan interests in which the Fund invests. Fluctuations in net asset value
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. For further discussion of the
characteristics of Senior Loan interests and associated special risk
considerations, see "The Fund's Investments" in the Prospectus.
INVESTMENT RESTRICTIONS
The Fund's investment objective and certain fundamental investment
policies of the Fund are described in the Prospectus. The Fund, as a fundamental
policy, may not, without the approval of the holders of a majority of the shares
of the Fund:
1. 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 and provided
further that for purposes of this limitation, the term "issuer" shall not
include a lender selling a participation to the Fund together with any other
person interpositioned between such lender and the Fund with respect to a
participation.
2. Borrow money, except as permitted by the 1940 Act.
3. Issue senior securities, as defined in the 1940 Act, other than (i)
preferred shares which immediately after issuance will have asset coverage of at
least 200%, (ii) indebtedness which immediately after issuance will have asset
coverage of at least 300%, or (iii) the borrowings permitted by investment
restriction 2. above.
4. Make loans of money or property to any person, except for obtaining
interest in Senior Loans in accordance with its investment objective, through
loans of portfolio securities or the acquisition of securities subject to
repurchase agreements.
5. Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in certain cases when disposing of its
portfolio investments or acting as an agent or one of a group of coagents in
originating senior loans.
6. 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.
S-1
<PAGE> 60
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
1. 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 10% 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. 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.
3. 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.
4. 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.
For purposes of non-fundamental investment restriction number 1, 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
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.
The foregoing restrictions and limitations will apply only at the time
of purchase of securities and the percentage limitations will not be considered
violated unless an excess or deficiency occurs or exists immediately after and
as a result of an acquisition of securities, unless otherwise indicated.
The foregoing fundamental investment policies, together with the
investment objective of the Fund, cannot be changed without approval by holders
of a "majority of the Fund's outstanding voting shares." As defined in the 1940
Act, this means the vote of (i) 67% or more of the Fund's shares present at a
meeting, if the holders of more than 50% of the Fund's shares are present or
represented by proxy, or (ii) more than 50% of the Fund's shares, whichever is
less.
The Fund is an entity commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of a trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration contains an express disclaimer of shareholder liability
for acts or obligations of the Fund and requires that notice of this disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund
S-2
<PAGE> 61
for all loss and expense of any shareholder personally liable for the
obligations of the Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
both inadequate insurance existed and the Fund itself were unable to meet its
obligations. The Fund believes the likelihood of these circumstances is remote.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the
Prospectus.
ORIGINATING SENIOR LOANS
Senior Loans are typically arranged through private negotiations
between a borrower (the "Borrower") and several lenders (the "Lenders")
represented in each case by one or more such Lenders acting as Agent of the
several Lenders (the "Agent"). On behalf of the several Lenders, the Agent,
which is frequently the entity that originates the Senior Loan and invites the
other parties to join the lending syndicate, will be primarily responsible for
negotiating the Senior Loan agreements that establish the relative terms,
conditions and rights of the Borrower and the several Lenders (the "Loan
Agreements"). The co-agents, on the other hand, are not responsible for
administration of a Senior Loan, but are part of the initial group of Lenders
that commit to providing funding for a Senior Loan. In large transactions, it is
common to have several Agents; however, one such Agent typically has primary
responsibility for documentation and administration of the Senior Loan. The
Agent is required to administer and manage the Senior Loan and to service or
monitor the collateral. The Fund will not act as sole Agent in a transaction.
The Agent is also responsible for the collection of principal and interest and
fee payments from the Borrower and the apportionment of these payments to the
credit of all Lenders that are parties to the Loan Agreement. The Agent is
responsible for monitoring compliance by the Borrower with the restrictive
covenants in the Loan Agreement and of notifying the Lenders of any adverse
change in the Borrower's financial condition. In addition, the Agent generally
is responsible for determining that the Lenders have obtained a perfected
security interest in the collateral securing the Senior Loan.
Lenders generally rely on the Agent to collect their portion of the
payments on the Senior Loan and to use appropriate creditor remedies against the
Borrower. Typically under Loan Agreements, the Agent is given broad discretion
in enforcing the Loan Agreement. The Borrower compensates the Agent for these
services. Such compensation may include special fees paid on structuring and
funding the Senior Loan and other fees paid on a continuing basis. The precise
duties and rights of an Agent are defined in the Loan Agreement.
When the Fund is an Agent, it has, as a party to the Loan Agreement, a
direct contractual relationship with the Borrower and, prior to allocating
portions of the Senior Loan to Lenders, if any, assumes all risks associated
with the Senior Loan. The Agent may enforce compliance by this Borrower with the
terms of the Loan Agreement. Agents also have voting and consent rights under
the applicable Loan Agreement. Action subject to Agent vote or consent generally
requires the vote or consent of the holders of some specified percentage of the
outstanding principal amount of the Senior Loan, which percentage varies
depending on the relevant Loan Agreement. Certain decisions, such as reducing
the amount of increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing all or substantially all of the
collateral therefor, frequently require the unanimous or consent of all Lenders
affected.
Pursuant to the terms of a Loan Agreement, the Fund as Agent typically
has sole responsibility for servicing and administering a loan on behalf of the
other Lenders. Each Lender in a Senior Loan is generally responsible for
performing its own credit analysis and its own investigation of the financial
condition of the Borrower. Generally, Loan Agreements will hold the Fund liable
for any action taken or omitted that amounts to gross negligence or willful
misconduct. In the event of a Borrower's default on a loan, the Loan Agreements
generally provide that the Lenders do not have recourse against the Fund for its
activities as Agent. Instead, Lenders will be required to look to the Borrower
for recourse.
Acting in the capacity of an Agent in a Senior Loan may subject the
Fund to certain risks in addition to those associated with the Fund's role as a
Lender. An Agent is charged with the above-described duties and responsibilities
to Lenders and Borrowers subject to the terms of the Loan Agreement. Failure to
adequately discharge such
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<PAGE> 62
responsibilities in accordance with the standard of care set forth in the Loan
Agreement may expose the Fund to liability for breach of contract. If a
relationship of trust is found between the Agent and the Lenders, the Agent will
be held to a higher standard of conduct in administering the loan. In
consideration of such risks, the Fund will invest no more than 20% of its total
assets in Senior Loans in which it acts as Agent or co-agent and the size of any
individual loan will not exceed 5% of the Fund's total assets.
LENDING FEES
In the process of buying, selling and holding Senior Loans, the Fund
may receive and/or pay certain fees. These fees are in addition to interest
payments received and may include facility fees, commitment fees, commissions
and prepayment penalty fees. When the Fund buys a Senior Loan it may receive a
facility fee, and when it sells a Senior Loan it may pay a facility fee. On an
ongoing basis, the Fund may receive a commitment fee based on the undrawn
portion of the underlying line of credit portion of a Senior Loan. In certain
circumstances, the Fund may receive a prepayment penalty fee upon the prepayment
of a Senior Loan by a Borrower. Other fees received by the Trust may include
covenant waiver fees and covenant modification fees.
BORROWER COVENANTS
A Borrower must comply with various restrictive covenants contained in
a Loan Agreement. Such covenants, in addition to requiring the scheduled payment
of interest and principal, may include restrictions on dividend payments and
other distributions to shareholders, provisions requiring the Borrower to
maintain specific minimum financial ratios, and limits on total debt. In
addition, the Loan Agreement may contain a covenant requiring the Borrower to
prepay the Senior Loan with any free cash flow. Free cash flow is generally
defined as net cash flow after scheduled debt service payments and permitted
capital expenditures, and includes the proceeds from asset dispositions or sales
of securities. A breach of a covenant which is not waived by the Agent, or by
the lenders directly, as the case may be, is normally an event of acceleration;
i.e., the Agent, or the lenders directly, as the case may be, have the right to
call the outstanding Senior Loan. The typical practice of an Agent or a Lender
in relying exclusively or primarily on reports from the Borrower may involve a
risk of fraud by the Borrower. In the case of a Senior Loan in the form of a
Participation, the agreement between the buyer and seller may limit the rights
of the holder of a Senior Loan to vote on certain changes which may be made to
the Loan Agreement, such as waiving a breach of a covenant. However, the holder
of the Participation will, in almost all cases, have the right to vote on
certain fundamental issues such as changes in principal amount, payment dates
and interest rate.
ADMINISTRATION OF LOANS
In a typical Senior Loan, the Agent administers the terms of the Loan
Agreement. In such cases, the Agent is normally responsible for the collection
of principal and interest payments from the Borrower and the apportionment of
these payments to the credit of all institutions that are parties to the Loan
Agreement. The Fund will generally rely upon the Agent or an intermediate
participant to receive and forward to the Fund its portion of the principal and
interest payments on the Senior Loan. Furthermore, unless under the terms of a
Participation Agreement the Fund has direct recourse against the Borrower, the
Fund will rely on the Agent and the other members of the lending syndicate to
use appropriate credit remedies against the Borrower. The Agent is typically
responsible for monitoring compliance with covenants contained in the Loan
Agreement based upon reports prepared by the Borrower. The seller of the Senior
Loan usually does, but is often not obligated to, notify holders of Senior Loans
of any failures of compliance. The Agent may monitor the value of the collateral
and, if the value of the collateral declines, may accelerate the Senior Loan,
may give the Borrower an opportunity to provide additional collateral or may
seek other protection for the benefit of the participants in the Senior Loan.
The Agent is compensated by the Borrower for providing these services under a
Loan Agreement, and such compensation may include special fees paid upon
structuring and funding the Senior Loan and other fees paid on a continuing
basis. With respect to Senior Loans for which the Agent does not perform such
administrative and enforcement functions, the Fund will perform such tasks on
its own behalf, although a collateral bank will typically hold any collateral on
behalf of the Fund and the other lenders pursuant to the applicable Loan
Agreement.
A financial institution's appointment as Agent may usually be
terminated in the event that it fails to observe the requisite standard of care
or becomes insolvent, enters Federal Deposit Insurance Corporation ("FDIC")
receivership,
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<PAGE> 63
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the Loan Agreement should remain available to holders of Senior
Loans. However, if assets held by the Agent for the benefit of the Fund were
determined to be subject to the claims of the Agent's general creditors, the
Fund might incur certain costs and delays in realizing payment on a Senior Loan,
or suffer a loss of principal and/or interest. In situations involving other
intermediate participants, similar risks may arise.
PREPAYMENTS
Senior Loans usually require, in addition to scheduled payments of
interest and principal, the prepayment of the Senior Loan from free cash flow or
asset sales. The degree to which Borrowers prepay Senior Loans, whether as a
contractual requirement or at their election, may be affected by general
business conditions, the financial condition of the Borrower and competitive
conditions among Lenders, among others. As such, prepayments cannot be predicted
with accuracy. Upon a prepayment, either in part or in full, the actual
outstanding debt on which the Fund derives interest income will be reduced.
However, the Fund may receive both a prepayment penalty fee from the prepaying
Borrower and a facility fee upon the purchase of a new Senior Loan with the
proceeds from the prepayment of the former. Prepayments generally will not
materially affect the Fund's performance because the Fund should be able to
reinvest prepayments in other Senior Loans that have similar or identical yields
and because receipt of such fees may mitigate any adverse impact on the Fund's
yield.
OTHER INFORMATION REGARDING SENIOR LOANS
From time to time, the Adviser and its affiliates may borrow money from
various banks in connection with their business activities. Such banks may also
sell Senior Loans to or acquire them from the Fund or may be intermediate
participants with respect to Senior Loans in which the Fund owns interests. Such
banks may also act as Agents for Senior Loans held by the Fund.
The Fund may acquire interests in Senior Loans which are designed to
provide temporary or "bridge" financing to a Borrower pending the sale of
identified assets or the arrangement longer-term loans or the issuance and sale
of debt obligations. The Fund may also invest in Senior Loans of Borrowers who
have obtained bridge loans from other parties. A Borrower's use of bridge loans
involves a risk that the Borrower may be unable to locate permanent financing to
replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.
To the extent that collateral consists of the stock of the Borrower's
subsidiaries or other affiliates, the Fund will be subject to the risk that this
stock will decline in value. Such a decline, whether as a result of bankruptcy
proceedings or otherwise, could cause the Senior Loan to be undercollateralized
or unsecured. In most credit agreements there is no formal requirement to pledge
additional collateral. In addition, the Fund may invest in Senior Loans
guaranteed by, or fully secured by assets of, shareholders or owners, even if
the Senior Loans are not otherwise collateralized by assets of the Borrower;
provided, however, that such guarantees are fully secured. There may be
temporary periods when the principal asset held by a Borrower is the stock of a
related company, which may not legally be pledged to secure a Senior Loan. On
occasions when such stock cannot be pledged, the Senior Loan will be temporarily
unsecured until the stock can be pledged or is exchanged for or replaced by
other assets, which will be pledged as security for the Senior Loan. However,
the Borrower's ability to dispose of such securities, other than in connection
with such pledge or replacement, will be strictly limited for the protection of
the holders of Senior Loans. During any such period in which the Senior Loan is
temporarily unsecured, such Senior Loans will not be treated as secured Senior
Loans for purposes of the Fund's policy of investing in normal circumstances at
least 80% of its total assets in secured Senior Loans.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the loan collateral or subordinate
the Fund's rights under the Senior Loan to the interests of the Borrower's
unsecured creditors. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the loan collateral to
the Fund. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Loan were not received or retained by the
Borrower, but were instead paid to other persons (such as shareholders of the
Borrower) in an amount which left the Borrower insolvent or without
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<PAGE> 64
sufficient working capital. There are also other events, such as the failure to
perfect a security interest due to faulty documentation or faulty official
filings, which could lead to the invalidation of the Fund's security interest in
loan collateral. If the Fund's security interest in loan collateral is
invalidated or the Senior Loan is subordinated to other debt of a Borrower in
bankruptcy or other proceedings, it is unlikely that the Fund would be able to
recover the full amount of the principal and interest due on the Loan.
INTEREST RATE AND OTHER HEDGING TRANSACTIONS
The Fund may enter into various interest rate hedging and risk
management transactions. Certain of these interest rate hedging and risk
management transactions involve derivative instruments. A derivative is a
financial instrument whose performance is derived at least in part from the
performance of an underlying index, security or asset. The values of certain
derivatives can be affected dramatically by even small market movements,
sometimes in ways that are difficult to predict. There are many different types
of derivatives, with many different uses. The Fund expects to enter into these
transactions primarily to seek to preserve a return on a particular investment
or portion of its portfolio, and 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. The Fund may
also engage in hedging transactions to seek to protect the value of its
portfolio against declines in net asset value resulting from changes in interest
rates or other market changes. 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 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. 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 with an interest rate redetermination period of one year. The Fund
could exchange the Borrower's obligation to make fixed rate payments for one
year for an obligation to make payments that readjust monthly. 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. The
Fund will not sell interest rate caps or floors that it does not own.
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.
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<PAGE> 65
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.
Because 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 net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
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 New York Stock Exchange or
other entities determined by the Adviser, pursuant to procedures adopted and
reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a
default occurs by the other party to 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.
The Fund may also engage in credit derivative transactions. Default
price risk derivatives are linked to the price of reference securities or loans
after a default by the issuer or borrower, respectively. Market spread
derivatives are based on the risk that changes in market factors, such as credit
spreads, can cause a decline in the value of a security, loan or index. There
are three basic transactional forms for credit derivatives; swaps, options and
structured instruments. The use of credit derivative is a highly specialized
activity which involves strategies and risks different from those associated
with ordinary portfolio security transactions. If the Adviser is incorrect in
its forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these techniques were not used. Moreover, even if the Adviser is
correct in its forecasts, there is a risk that a credit derivative position may
correlate imperfectly with the price of the asset or liability being hedged.
Credit derivative transaction exposure will be limited to 10% of the total
assets of the Fund.
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.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of Trustees of the Fund is
currently set at six, one of whom is an "interested" person (as the term
"interested" persons is defined in the 1940 Act)
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<PAGE> 66
and five of whom are not "interested" persons. None of the Trustees who are not
"interested" persons of the Fund has ever been a director or employee of, or
consultant to, Nuveen or its affiliates. The names and business addresses of the
Trustees and officers of the Fund and their principal occupations and other
affiliations during the past five years are set forth below, with those Trustees
who are "interested persons" of the Fund indicated by an asterisk.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS DURING THE PAST
NAME AND ADDRESS DATE OF BIRTH OFFICES WITH THE FUND FIVE YEARS
---------------- ------------- --------------------- ----------
<S> <C> <C> <C>
Timothy R. Schwertfeger* 3/28/49 Chairman, President Chairman since July 1, 1996 of The John
333 West Wacker Drive and Trustee Nuveen Company, John Nuveen & Co.
Chicago, IL 60606 Incorporated, Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp., prior
thereto, Executive Vice President and Director
of The John Nuveen Company, John
Nuveen & Co. Incorporated, Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.; Chairman and Director (since January
1997) of Nuveen Asset Management, Inc.;
Director (since 1996) of Institutional Capital
Corporation; Chairman and Director of
Rittenhouse Financial services Inc. (since
1999); Chairman and Director of the Adviser
(since 1999).
James E. Bacon 2/27/31 Trustee Business consultant; Director of Lone Star
114 W. 4th St. Industries, Inc. (cement); retired.
New York, NY 10036
Jack B. Evans 10/22/48 Trustee President, The Hall-Perrine Foundation, a
115 Third Street, S.E. private philanthropic corporation (since
Cedar Rapids, IA 52401 1996); formerly President and Chief
Operating Officer, SCI Financial Group, Inc.,
a regional financial services firm.
William L. Kissick 7/29/32 Trustee Professor, School of Medicine and the
University of Pennsylvania Wharton School of Management and
224 NEB/2L Chairman, Leonard Davis Institute of Health
Philadelphia, PA 19104 Economics, University of Pennsylvania.
Thomas E. Leafstrand 11/11/31 Trustee Retired, previously Vice President in charge
412 W. Franklin of Municipal Underwriting and Dealer Sales
Wheaton, IL 60187 at The Northern Trust Company.
Sheila W. Wellington 2/24/32 Trustee President (since 1993) of Catalyst (a
250 Park Avenue not-for-profit organization focusing on
New York, NY 10003 women's leadership development in business
and the professions).
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS DURING THE PAST
NAME AND ADDRESS DATE OF BIRTH OFFICES WITH THE FUND FIVE YEARS
---------------- ------------- --------------------- ----------
<S> <C> <C> <C>
Alan G. Berkshire 12/28/60 Vice President and Vice President and General Counsel (since
333 West Wacker Drive Assistant Secretary September 1997) and Secretary (since may
Chicago, IL 60606 1998) of the John Nuveen Co. Incorporated;
Vice President (since Sept. 1997) and
Assistant Secretary (since July 1999) of
Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp., prior thereto,
Partner in the law firm of Kirkland & Ellis.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of John Nuveen & Co.
333 West Wacker Drive Treasurer Incorporated (January 1999); Vice President
Chicago, IL 60606 and Treasurer of the Adviser
(September 1999); prior thereto, Assistant
Vice President (January 1997); formerly,
Associate of John Nuveen & Co.
Incorporated; Chartered Financial Analyst.
Lorna C. Ferguson 10/24/45 Vice President Vice President of John Nuveen & Co.
333 West Wacker Drive Incorporated; Vice President (since
Chicago, IL 60606 January 1998) of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.
Stephen D. Foy 5/31/54 Vice President and Vice President of John Nuveen & Co.
333 West Wacker Drive Controller Incorporated; Certified Public Accountant.
Chicago, IL 60606
Jeffrey W. Maillet 9/30/56 Vice President Executive Managing Director of the Adviser
333 West Wacker Drive (since September 1999); prior thereto, Senior
Chicago, IL 60606 Vice President of Van Kampen Investment
Advisory Corp. (since 1989). Prior to 1989,
Mr. Maillet was an assistant portfolio manager
and credit officer for The Pilgrim Group.
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary and
333 West Wacker Drive Assistant Secretary Assistant General Counsel of John Nuveen &
Chicago, IL 60606 Co. Incorporated; Vice President and
Assistant Secretary of Nuveen Advisory Corp.
and Nuveen Institutional Advisory Corp.; Vice
President and Assistant Secretary (since
January 1997) of Nuveen Asset Management,
Inc.; Assistant Secretary of The John Nuveen
Company; Vice President and Assistant
Secretary of the Adviser (since
September 1999).
Stuart W. Rogers 5/l/56 Vice President Vice President of John Nuveen & Co.
333 West Wacker Drive Incorporated.
Chicago, IL 60606
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS DURING THE PAST
NAME AND ADDRESS DATE OF BIRTH OFFICES WITH THE FUND FIVE YEARS
---------------- ------------- --------------------- ----------
<S> <C> <C> <C>
Gifford R. Zimmerman 9/9/56 Vice President and Vice President, Assistant Secretary and
333 West Wacker Drive Secretary Associate General Counsel of John Nuveen &
Chicago, IL 60606 Co. Incorporated; Vice President (since
May 1993) and Secretary (since July 1999) of
Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Assistant
Secretary, The John Nuveen Company (since
May 1994); Chartered Financial Analyst.
</TABLE>
Jeffrey W. Maillet is the portfolio manager of the Fund. Mr. Maillet
has more than 18 years of experience in Senior Loan fund management and has
managed the purchase of more than 2,000 senior secured bank issues totaling in
excess of $28 billion.
Thomas E. Leafstrand and Timothy R. Schwertfeger serve as members of
the Executive Committee of the Board of Trustees of the Fund. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees. Mr.
Schwertfeger is also a director or Trustee, as the case may be, of 102 Nuveen
open-end and closed-end funds advised by Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
The other Trustees of the Fund are directors or Trustees, as the case
may be, of 6 Nuveen open-end funds and 6 Nuveen closed-end funds advised by
Nuveen Institutional Advisory Corp.
At the next annually scheduled meeting, holders of TAPS shares, voting
as a separate class, will elect two Trustees and the remaining Trustees shall be
elected by Common Shareholders and holders of TAPS shares, voting together as a
single class.
The following table sets forth estimated compensation to be paid by the
Fund projected through the end of the Fund's first full fiscal year. The Fund
has no retirement or pension plans. The officers and Trustees affiliated with
Nuveen serve without any compensation from the Fund.
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<PAGE> 69
<TABLE>
<CAPTION>
ESTIMATED TOTAL
ESTIMATED AGGREGATE COMPENSATION FROM FUND
NAME OF TRUSTEE COMPENSATION FROM FUND* AND FUND COMPLEX**
- --------------- ----------------------- ------------------
<S> <C> <C>
James E. Bacon $13,528 $_____(l)
Jack B. Evans $13,528 $_____(1)
William L. Kissick $14,327 $_____(1)
Thomas E. Leafstrand $13,528 $_____(1)
Sheila W. Wellington $13,528 $_____(1)
</TABLE>
- -------------
* Based on the estimated compensation to be earned by the independent
Trustees for the period from inception to the fiscal year ending July
31, 2000 for services to the Fund.
** Based on the total compensation paid (including both deferred
compensation and compensation received in cash) to the Trustees for the
one-year period ending December 31, 1999 for services to the open-end
and closed-end funds advised by the Adviser.
(1) Includes deferred fees. Pursuant to a deferred compensation agreement
with certain Funds, deferred amounts are treated as though an equivalent
dollar amount has been invested in shares of one or more eligible Nuveen
Funds. Total deferred fees for the Funds (including the return from the
assumed investment in the eligible Nuveen Funds) payable are ______,
______, ______, ______ and ______ for Messrs. Beacon, Evans, Kissick and
Leafstrand and Ms. Wellington, respectively.
The Fund has no employees. Its officers are compensated by the Adviser
or Nuveen.
INVESTMENT ADVISER
The Adviser acts as investment adviser to the Fund, with responsibility
for the overall management of the Fund. Its address is 333 West Wacker Drive,
Chicago, Illinois 60606. The Adviser is also responsible for managing the Fund's
business affairs and providing day-to-day administrative services to the Fund.
For additional information regarding the management services performed by the
Adviser, see "Management of the Fund" in the Prospectus.
The Adviser is a wholly-owned subsidiary of The John Nuveen Company and
is an affiliated entity of John Nuveen & Co. ("Nuveen"), which is also a
co-managing underwriter of the Fund's TAPS. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market. Overall,
Nuveen and its affiliates manage or oversee more than $70 billion in assets in a
variety of products. Nuveen currently sponsors 59 funds traded on the New York
or American Stock Exchange, with more than $27 billion in assets. Nuveen, like
the Adviser, is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul
is a publicly traded company located in St. Paul, Minnesota, and is principally
engaged in providing property-liability insurance through subsidiaries.
Pursuant to an investment management agreement between the Adviser and
the Fund, the Fund has agreed to pay for the services and facilities provided by
the Adviser an annual management fee, payable on a monthly basis, according to
the following schedule:
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<PAGE> 70
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE
- ---------------------------- --------------
<S> <C>>
Less than $1 billion...................................... .8500 of 1%
$1 billion to $2 billion.................................. .8375 of 1%
$2 billion to $5 billion.................................. .8250 of 1%
$5 billion to $10 billion................................. .8000 of 1%
$10 billion and over...................................... .7750 of 1%
</TABLE>
- -------------
* For purposes of calculation of the management fee, the Fund's "managed
assets" shall mean the average daily gross asset value of the Fund,
minus the sum of the Fund's accrued and unpaid dividends on any
outstanding Preferred Shares and accrued liabilities (other than the
principal amount of any borrowings incurred, commercial paper or notes
issued by the Fund and the liquidation preference of any outstanding
Preferred Shares).
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested Trustees of the Fund and the sole shareholder of
the Fund.
For the first ten years of the Fund's operation, the Adviser has agreed
to reimburse the Fund for fees and expenses in the amounts, and for the time
periods, set forth below:
<TABLE>
<CAPTION>
PERCENTAGE REIMBURSED PERCENTAGE REIMBURSED
YEAR ENDING (AS A PERCENTAGE OF YEAR ENDING (AS A PERCENTAGE OF
OCT. 31 MANAGED ASSETS) OCT. 31 MANAGED ASSETS)
------- --------------- ------- ---------------
<S> <C> <C> <C>
1999* .45% 2005 .35%
2000 .45% 2006 .25%
2001 .45% 2007 .15%
2002 .45% 2008 .10%
2003 .45% 2009 .05%
2004 .45%
</TABLE>
- -------------
* From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount
of income available for the Common Shareholders and to pay dividends on
Preferred Shares during the period of reimbursement. The Adviser has not agreed
to reimburse the Fund for any portion of its fees and expenses beyond October
31, 2009.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for
the Fund and for the placement of the Fund's securities business, the
negotiation of the prices to be paid for principal trades and the allocation of
its transactions among various dealer firms. Portfolio securities will normally
be purchased directly from an underwriter or in the over-the-counter market from
the principal dealers in such securities, unless it appears that a better price
or execution may be obtained through other means. Portfolio securities will not
be purchased from Nuveen or its affiliates except in compliance with the 1940
Act.
With respect to interests in Senior Loans, the Fund generally will
engage in privately negotiated transactions for purchase or sale in which the
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
S-12
<PAGE> 71
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 "Risks" in the Prospectus.
The Fund expects that substantially all other portfolio transactions
will be effected on a principal (as opposed to an agency) basis and,
accordingly, does not expect to pay any brokerage commissions. Purchases from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include the spread between the bid
and asked price. It is the policy of the Adviser to seek the best execution
under the circumstances of each trade. The Adviser evaluates price as the
primary consideration, with the financial condition, reputation and
responsiveness of the dealer considered secondary in determining best execution.
Given the best execution obtainable, it will be the Adviser's practice to select
dealers who, in addition, furnish research information (primarily credit
analyses of issuers and general economic reports) and statistical and other
services to the Adviser. It is not possible to place a dollar value on
information and statistical and other services received from dealers. Since it
is only supplementary to the Adviser's own research efforts, the receipt of
research information is not expected to reduce significantly the Adviser's
expenses. While the Adviser will be primarily responsible for the placement of
the business of the Fund, the policies and practices of the Adviser in this
regard must be consistent with the foregoing and will, at all times, be subject
to review by the Board of Trustees of the Fund.
The Adviser may manage other investment accounts and investment
companies for other clients who have investment objectives similar to those of
the Fund. Subject to applicable laws and regulations, the Adviser seeks to
allocate portfolio transactions equitably whenever concurrent decisions are made
to purchase or sell assets or securities by the Fund and another advisory
account. In making such allocations the main factors to be considered will be
the respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment and
the size of investment commitments generally held. While this procedure could
have a detrimental effect on the price or amount of the securities available to
the Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from the Advisers organization will outweigh any disadvantage
that may arise from exposure to simultaneous transactions.
NET ASSET VALUE
The Fund's net asset value per share is determined as of the close of
trading (normally 4:00 p.m. eastern time) on each day the New York Stock
Exchange is open for business. Net asset value per Common Share is calculated by
taking the fair value of the Fund's total assets, including interest or
dividends accrued but not yet collected, less liabilities, and dividing by the
total number of shares outstanding. The result, rounded to the nearest cent, is
the net asset value per share.
The Senior Loans in which the Fund will invest generally are not listed
on any securities exchange. Certain Senior Loans are traded by institutional
investors in an over-the-counter secondary market for Senior Loan obligations
that has developed over the past several years. This secondary market for those
Senior Loans generally is comparatively illiquid relative to markets for other
income securities and no active trading market exists for many Senior Loans. In
determining net asset value, the Fund will utilize the valuations of Senior
Loans furnished to the Adviser by an independent third-party pricing service
approved by the Board of Trustees. The Board of Trustees has reviewed the
various alternatives for pricing the Fund's portfolio of Senior Loans and has
determined that the use of a pricing service is a reasonable, fair and
appropriate method of valuing Senior Loans. The Adviser has entered into an
agreement with a pricing service provider to provide pricing services for the
Fund. The Agreement is terminable by either party upon notice and has an initial
term of six months. The Agreement provides that the pricing service provider
assumes no fiduciary responsibility to the Fund or to any investor in the Fund,
and that the pricing service provider will have no liability under the Agreement
to any third party, including any investor in the Fund. The Agreement provides
that the pricing service provider will be indemnified by the Adviser unless the
pricing service provider has acted with willful misconduct. The pricing service
provider is explicitly permitted to act as principal for its own account in
connection
S-13
<PAGE> 72
with the purchase and sale (from or to the Fund or otherwise) of any Senior Loan
at any price simultaneously while it provides pricing services to the Fund.
Furthermore, the pricing service provider can only provide valuations for a
limited number of the Senior Loans that may trade from time to time in the
market. The pricing service provider has no obligation to provide a valuation
for a Senior Loan if it believes that it cannot determine such a valuation.
There can be no assurance that the pricing service provider will continue to
provide these services or will provide a value for each Senior Loan held by the
Fund. However, the Adviser believes that if the pricing service provider
declines to continue to act as such for the Fund, or does not provide values for
a significant portion of the Senior Loans in the Fund's portfolio, one or more
alternative independent third-party pricing service providers will be available
to provide comparable services on similar terms. During any period in which no
pricing service provider is acting as such for the Fund, or for any Senior Loan
for which no value from a pricing service provider is available, the Adviser
will value the Fund's Senior Loans as described below.
A pricing service provider typically will value Senior Loans at the
mean of the highest bona fide bid and lowest bona fide ask prices when current
quotations are readily available. Senior Loans for which current quotations will
not be readily available are valued at a fair value as determined by the pricing
service provider using a wide range of market data and other information and
analysis, including credit considerations considered relevant by the pricing
service provider to determine valuations. The procedures of any pricing service
provider and its valuations will be reviewed by the officers of the Adviser
under the general supervision of the Board of Trustees. If the Adviser believes
that a value provided by a pricing service provider does not represent a fair
value as a result of information, specific to that Senior Loan or Borrower or
its affiliates, which the Adviser believes that the pricing agent may not be
aware, the Adviser may in its discretion value the Senior Loan subject to
procedures approved by the Board of Trustees and reviewed on a periodic basis,
and the Fund will utilize that price instead of the price as determined by the
pricing service provider. In addition to such information the Adviser will
consider, among other factors, (i) the creditworthiness of the Borrower and (ii)
the current interest rate, the period until next interest rate reset and
maturity of such Senior Loan interests in determining a fair value of a Senior
Loan. If the pricing service provider does not provide a value for a Senior Loan
or if no pricing service provider is then acting, a value will be determined by
the Adviser in the manner described above.
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 nature
of such instruments, 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 longer
term fixed-income securities.
Because a secondary trading market in Senior Loans has not yet fully
developed, the pricing service or the Adviser may not rely solely on but may
consider, to the extent they believe such information to be reliable, prices or
quotations provided by banks, dealers or other pricing services providers with
respect to secondary market transactions in Senior Loans. To the extent that an
active secondary trading market in Senior Loan interests develops to a reliable
degree, the pricing service provider or the Adviser may rely to an increasing
extent on such market prices and quotations in reviewing the valuations of the
Senior Loan interests in the Fund's portfolio. To the extent a trading market
continues to develop, certain participants in the market may have objectives
other than current income and may pursue short-term trading strategies, which
may result in erratic movements in the market prices for Senior Loans as a
result of movements in short-term interest rates or otherwise. Although the
Fund's policy of acquiring interests in floating rate Senior Loans is intended
to minimize fluctuations in net asset value resulting from changes in market
interest rates, the Fund's net asset value will fluctuate. 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 Adviser
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 in order to
review the value of such Senior Loan interests. Accordingly, the Adviser
generally will not systematically consider (but may consider in certain
instances) and, in any event, will not rely solely upon such ratings or price
fluctuations in determining or reviewing valuations of Senior Loan interests in
the Fund's portfolio.
Other portfolio securities (other than short-term obligations, but
including listed issues) may be valued on the basis of prices furnished by one
or more pricing services which determine prices for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships
S-14
<PAGE> 73
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 such 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 which mature in 60 days or less will be valued
at amortized cost, if their original term to maturity when acquired by the Fund
was 60 days or less, or will be 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 will be valued at a fair value as determined in good faith by
or on behalf of the Trustees.
DESCRIPTION OF TAPS
NOTICES. The Fund must deliver a certificate with respect to the
calculation of the TAPS Basic Maintenance Amount and the value of the portfolio
holdings of the Fund (a "TAPS Basic Maintenance Certificate") (i) to the Auction
Agent, each Rating Agency which is then rating the TAPS and which so requires as
of (a) the Business Day preceding the Date of Original Issue and (b) any
Valuation Date on which the Fund fails to have Eligible Assets with an aggregate
Discounted Value at least equal to 125% of the TAPS Basic Maintenance Amount,
(ii) to the Auction Agent, each Rating Agency which is then rating the TAPS and
which so requires as of (a) every fourth Valuation Date after the Date of
Original Issue for the first year following the Date of Original Issue, (b) if
the Fund fails to have Eligible Assets with an aggregate Discounted Value at
least equal to the TAPS Basic Maintenance Amount, and (c) on request by each
Rating Agency, as applicable, (iii) to the Auction Agent, each Rating Agency
which is then rating the TAPS and which so requires as of (a) the Valuation Date
next following the date of redemption by the Fund of shares of Common Shares
which, together with all other shares of Common Shares purchased during the six
months preceding such date, equal in excess of ______ shares of Common Shares,
and (b) the last Valuation Date of each fiscal quarter and a Valuation Date
during such fiscal quarter randomly selected by the Fund's independent
accountants as provided below, and (iv) to the Auction Agent, each Rating Agency
which is then rating the TAPS and which so requires as of a Business Day on or
before any Asset Coverage Cure Date relating to the Fund's cure of a failure to
have Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount. Such TAPS Basic Maintenance Certificate shall be
delivered in the case of clause (i)(a) on the Date of Original Issue and in the
case of clauses (i)(b), (ii), (iii) and (iv) above on or before the third
Business Day after the relevant Valuation Date or Asset Coverage Cure Date.
The Fund is required to deliver to the Auction Agent, each Rating
Agency which is then rating the TAPS and which so requires, a certificate with
respect to the calculation of the 1940 Act TAPS Asset Coverage and the value of
the portfolio holdings of the Fund (a "1940 Act TAPS Asset Coverage
Certificate") (i) as of the Business Day preceding the Date of Original Issue
with respect to TAPS, and (ii) as of (a) the last Valuation Date of each quarter
thereafter, and (b) as of the Business Day on or before the Asset Coverage Cure
Date relating to the failure to satisfy the 1940 Act Asset Coverage (as defined
under "Description of Senior Notes -- Asset Maintenance"). Such 1940 Act TAPS
Asset Coverage Certificate shall be delivered in the case of clause (i) on the
Date of Original Issue and in the case of clause (ii) on or before the third
Business Day after the relevant Valuation Date or the Asset Coverage Cure Date.
Such certificate must be accompanied by a certificate from the Fund's
accountants certifying as to the accuracy of the Fund's calculations.
On the Date of Original Issue, the Fund shall deliver to the Auction
Agent, each Rating Agency which is then rating the TAPS and which so requires, a
letter prepared by the Fund's independent accountants (an "Accountant's
Certificate") regarding the accuracy of the calculations made by the Fund in the
TAPS Basic Maintenance Certificate and the 1940 Act TAPS Asset Coverage
Certificate required to be delivered by the Fund on the Date of Original Issue.
Within eight Business Days after the last Valuation Date of each fiscal quarter
of the Fund on which an TAPS Basic Maintenance Certificate is required to be
delivered, the Fund will deliver to the Auction Agent, each Rating Agency which
is then rating the TAPS and which so requires, an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund in such TAPS Basic
Maintenance Certificate and in any other TAPS Basic Maintenance
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<PAGE> 74
Certificate randomly selected by the Fund's independent accountants during such
fiscal quarter. Within eight Business Days after the last Valuation Date of each
fiscal quarter of the Fund on which a 1940 Act TAPS Asset Coverage Certificate
is required to be delivered, the Fund will deliver to the Auction Agent, each
Rating Agency which is then rating the TAPS and which so requires an
Accountant's Certificate regarding the accuracy of calculations made by the Fund
in such 1940 Act TAPS Asset Coverage Certificate. In addition, the Fund will
deliver to the relevant persons specified in the preceding sentence an
Accountant's Certificate regarding the accuracy of the calculations made by the
Fund on each TAPS Basic Maintenance Certificate and 1940 Act TAPS Asset Coverage
Certificate required to be delivered as of a Business Day on or before any Asset
Coverage Cure Date, within five days after the relevant Asset Coverage Cure
Date. If an Accountant's Certificate delivered with respect to an Asset Coverage
Cure Date shows an error was made in the Fund's report with respect to such
Asset Coverage Cure Date, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund with respect
to such reports. If any other Accountant's Certificate shows that an error was
made in any such report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund; provided,
however, any errors shown in the Accountant's Certificate filed on a quarterly
basis shall not be deemed to be a failure to have Eligible Assets with an
aggregate Discounted Value at least equal to the TAPS Basic Maintenance Amount
on such prior Valuation Dates. In the event that a TAPS Basic Maintenance
Certificate or 1940 Act TAPS Asset Coverage Certificate or the applicable
Accountant's Certificates with respect to an applicable Asset Coverage Cure Date
are not delivered within the time periods specified in the Statement, the Fund
shall be deemed to have failed to have Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount or the 1940
Act TAPS Asset Coverage, as the case may be, as of the related Valuation Date,
and such failure shall be deemed not to have been cured as of such Asset
Coverage Cure Date for purposes of the mandatory redemption provisions.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR TAPS
GENERAL
AUCTION AGENCY AGREEMENT. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company), 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 TAPS so long as the Applicable Rate
for shares of such series is to be based on the results of an Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of TAPS. 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 TAPS. One certificate for all of the shares of each series of TAPS
will be registered in the name of Cede, as nominee of the Securities Depository.
Such certificate will bear a legend to the effect that such certificate is
issued subject to the provisions restricting transfers of shares of TAPS
contained in the Statement. The Fund will also issue stop-transfer instructions
to the transfer agent for shares of each series of TAPS. 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 TAPS-Voting Rights" in
the Prospectus, Cede will be the holder of record of all shares of each series
of TAPS and owners of such shares will not be entitled to receive certificates
representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in shares of TAPS, whether for its own account
or as a nominee for another person.
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<PAGE> 75
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 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 TAPS, 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 TAPS" in the Prospectus and
notices from the Fund. The Auction Agent is not required to accept any such
notice for an Auction unless it is received by the Auction Agent by 3:00 p.m.,
New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent, provided that prior to such removal, the Fund shall have entered into
such an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of TAPS will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of shares of TAPS placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
shares of TAPS will be placed by a Broker-Dealer if such shares were (a) the
subject of Hold Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (i) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (ii) a Submitted
Bid of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it
might have an advantage over other Bidders because it would have knowledge of
all Orders submitted by it in that Auction; such Broker-Dealer, however, would
not have knowledge of Orders submitted by other Broker-Dealers in that Auction.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under the Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder liability
for debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the
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<PAGE> 76
obligations of the Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund would be unable to meet its obligations. The Fund believes that the
likelihood of such circumstances is very remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the Common
Shares and TAPS shares, voting together as a single class, except as described
below, to authorize (1) a conversion of the Fund from a closed-end to an
open-end investment company, (2) a merger or consolidation of the Fund, or a
series or class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund or (5) removal of Trustees, and then only for cause,
unless, with respect to (1) through (4), such transaction has already been
authorized by the affirmative vote of two-thirds of the total number of Trustees
fixed in accordance with the Declaration or the By-laws, in which case the
affirmative vote of the holders of at least a majority of the Fund's Common
Shares and TAPS shares outstanding at the time, voting together as a single
class, is required; provided, however, that where only a particular class or
series is affected (or, in the case of removing a Trustee, when the Trustee has
been elected by only one class), only the required vote by the applicable class
or series will be required. None of the foregoing provisions may be amended
except by the vote of at least two-thirds of the Common Shares and TAPS shares,
voting together as a single class. In the case of the conversion of the Fund to
an open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of TAPS shares, the action in question will also require the affirmative
vote of the holders of at least two-thirds of the Fund's TAPS shares outstanding
at the time, voting as a separate class, or, if such action has been authorized
by the affirmative vote of two-thirds of the total number of Trustees fixed in
accordance with the Declaration or the By-laws, the affirmative vote of the
holders of at least a majority of the Fund's TAPS shares outstanding at the
time, voting as a separate class. The votes required to approve the conversion
of the Fund from a closed-end to an open-end company or to approve transactions
constituting a plan of reorganization which investment adversely affects the
holders of TAPS shares are higher than those required by the 1940 Act. The Board
of Trustees believes that the provisions of the Declaration relating to such
higher votes are in the best interest of the Fund and its shareholders.
Reference should be made to the Declaration on file with the Securities
and Exchange Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company, and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Trustees will decide to take any of the these
actions, or that share repurchases or tender offers, if undertaken, will reduce
market discount.
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<PAGE> 77
Notwithstanding the foregoing, at any time when the Fund's TAPS shares
are outstanding, the Fund may not purchase, redeem or otherwise acquire any of
its Common Shares unless (1) all accrued TAPS shares dividends have been paid
and (2) at the time of such purchase, redemption or acquisition, the net asset
value of the Fund's portfolio (determined after deducting the acquisition price
of the Common Shares) is at least 200% of the liquidation value of the
outstanding TAPS shares (expected to equal the original purchase price per share
plus any accrued and unpaid dividends thereon). The staff of the Securities and
Exchange Commission currently requires that any tender offer made by a
closed-end investment company for its shares must be at a price equal to the net
asset value of such shares on the close of business on the last day of the
tender offer. Any service fees incurred in connection with any tender offer made
by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board at the time it considers such issue, it is
the Board's present policy, which may be changed by the Board, not to authorize
repurchases of Common Shares or a tender offer for such shares if (1) such
transactions, if consummated, would (a) result in the delisting of the Common
Shares from the New York Stock Exchange, or (b) impair the Fund's status as a
regulated investment company under the Code (which would make the Fund a taxable
entity, causing the Fund's income to be taxed at the corporate level in addition
to the taxation of shareholders who receive dividends from the Fund) or as a
registered closed-end investment company under the 1940 Act; (2) the Fund would
not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objectives and policies in order to
repurchase shares; or (3) there is, in the Board's judgment, any (a) material
legal action or proceeding instituted or threatened challenging such
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the New York
Stock Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States banks in which the
Fund invests, (d) material limitation affecting the Fund or the issuers of its
portfolio securities by Federal or state authorities on the extension of credit
by lending institutions or on the exchange of foreign currency, (e) commencement
of war, armed hostilities or other international or national calamity directly
or indirectly involving the United States, or (f) other event or condition which
would have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. The Board of Trustees may
in the future modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's Common Shares and TAPS shares
outstanding at the time, voting together as a single class, and of the holders
of at least two- thirds of the Fund's TAPS shares outstanding at the time,
voting as a separate class; provided, however, that such separate class vote
shall be a majority vote if the action in question has previously been approved,
adopted or authorized by the affirmative vote of two-thirds of the total number
of Trustees fixed in accordance with the Declaration or By-laws. See the
Prospectus under "Certain Provisions in the Declaration of Trust" for a
discussion of voting requirements applicable to conversion of the Fund to an
open-end company. If the Fund converted to an open-end company, it would be
required to redeem all TAPS shares then outstanding and repay outstanding
borrowings including those made pursuant to the CP Program and Liquidity
Facility and the Fund's Common Shares would no longer be listed on the New York
Stock Exchange. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of redemption. In
order to avoid maintaining large cash positions or liquidating favorable
investments to meet redemptions, open-end companies typically engage in a
continuous offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
The Board of Trustees may at any time propose conversion of the Fund to an
open-end company depending upon their judgment as to the advisability of such
action in light of circumstances then prevailing.
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The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets, which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when TAPS shares are outstanding will increase the leverage applicable to the
outstanding Common Shares then remaining.
Before deciding whether to take any action if the Common Shares trade
below net asset value, the Board would consider all relevant factors, including
the extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken.
TAX MATTERS
The following is intended to be a general summary of certain federal
income tax consequences of investing in TAPS. It is not intended as a complete
discussion of all such tax consequences, nor does it purport to deal with all
categories of investors. Investors are therefore advised to consult with their
tax advisers before making an investment in the Fund.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund elected to be treated as a regulated investment company under
Subchapter M of the Code and intends to qualify under those provisions each
year. To qualify as a regulated investment company, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in stocks,
securities or currencies; and (b) diversify its holdings so that, at the end of
each quarter of its fiscal year, (i) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities, securities of
other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies).
As a regulated investment company, in any fiscal year with respect to
which the Fund distributes at least 90% of its net investment income (i.e., the
Fund's investment company taxable income, as that term is defined in the Code,
without regard to the deduction for dividends paid), the Fund (but not its
shareholders) generally will be relieved of U.S. federal income taxes on its net
investment income and net capital gain (i.e., the Fund's net long-term capital
gain in excess of the sum of net short-term capital loss and capital loss
carryovers from prior years, if any) that it distributes to shareholders.
However, the Fund will be subject under current tax rates to a federal income
tax at a maximum effective rate of 35% on any undistributed net investment
income and net capital gain. Amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax payable by the Fund. To avoid the tax, the Fund must
distribute, or be deemed to have distributed, during each calendar year an
amount equal to the sum of (1) at least 98% of its ordinary income for the
calendar year, (2) at least 98% of its capital gain net income for the
twelve-month period ending on October 31 of the calendar year, and (3) all
ordinary income and capital gain net income for previous years that were not
distributed during such years. For this purpose, any income or gain retained by
the Fund that is subject to corporate tax will be considered to have been
distributed by year-end. To prevent application of the excise tax, the Fund
intends to make its distributions in accordance with the
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calendar year distribution requirement. Compliance with the calendar year
distribution requirement may limit the extent to which the Fund will be able to
retain its net capital gain for investment.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Code, the Fund will be taxed in the same manner as
an ordinary corporation, and distributions to its shareholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of failure to qualify, the Fund's distributions, to the extent derived
from the Fund's current or accumulated earnings and profits, will constitute
dividends (eligible for the corporate dividends-received deduction) which are
taxable to shareholders as ordinary income, even though those distributions
might otherwise (at least in part) have been treated in the shareholder's hands
as long-term capital gain.
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of the
Common Shares and/or the Preferred Shares until the asset coverage is restored.
See "Description of TAPS -- Dividends and Dividend Periods." Such a suspension
of distributions might prevent the Fund from distributing 90% of its net
investment income, as is required in order to qualify for taxation as a
regulated investment company, or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) TAPS in order to maintain or restore the requisite asset coverage and
avoid failure to remain qualified as a regulated investment company. The
determination to repurchase or redeem TAPS and the amounts to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem TAPS may adversely
affect the Fund's ability to distribute annually at least 90% of its net
investment income, which distribution is required to qualify for taxation as a
regulated investment company. The Fund may also recognize income in connection
with funding repurchases or redemptions of TAPS, and such income would be taken
into account in determining whether or not the above-described distribution
requirements have been met. Depending on the size of the Fund's assets relative
to its outstanding senior securities, redemption of TAPS might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances.
Investments of the Fund in securities issued at a discount (or treated
as if issued at a discount) or providing for deferred interest or payment of
Interest in kind are subject to special tax rules that will affect the amount,
timing and character of distributions to shareholders. For example, with respect
to certain securities issued or treated as if issued at a discount, the Fund
will be required to accrue as income each year a portion of the discount and to
distribute such income each year in order to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Fund may have to borrow money or dispose of securities that it would
otherwise have continued to hold.
The Fund's transactions in forward contracts and options and futures
contracts will be subject to special provisions of the Code that, among other
things, may affect the character of gain and loss realized by the Fund (i.e.,
may affect whether gain or loss is ordinary or capital), accelerate recognition
of income to the Fund, defer Fund losses, and affect the determination of
whether capital gain and loss is characterized as long-term or short-term
capital gain or loss. These rules could therefore affect the character, amount
and timing of distributions to shareholders. These provisions also may require
the Fund to mark-to-market certain types of the positions in its portfolio
(i.e., treat them as if they were closed out), which may cause the Fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections, and will make the appropriate entries in its books
and records when it acquires any option, futures contract, forward contract, or
hedged investment in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company and minimize the
imposition of income and excise taxes.
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If the Fund fails to qualify as a regulated investment company for any
year, it generally must pay out its earnings and profits accumulated in that
year, less an interest charge to the Treasury on 50% of such earnings and
profits, before it can again qualify as a regulated investment company.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TAPS
Under present law and based in part on the advice of counsel and on the
Fund's representation that there is no express or implied agreement between or
among a Broker-Dealer or any other party, and the Fund or any owners of the
TAPS, that the Broker-Dealer or any other party will guarantee or otherwise
arrange to ensure that an owner of TAPS will be able to sell his or her shares,
TAPS will constitute stock of the Fund, and thus distributions with respect to
the TAPS (other than distributions in redemption of the TAPS subject to section
302(b) of the Code) will constitute dividends to the extent of the Fund's
current or accumulated earnings and profits, as calculated for federal income
tax purposes. The following discussion assumes such treatment will apply.
The Fund's income will consist of net investment income and may also
consist of net capital gain. The character of the Fund's income will not affect
the amount of dividends to which the holders of the TAPS are entitled. Holders
of the TAPS are entitled to receive only the amount of dividends as determined
by periodic auctions. For federal income tax purposes, however, the Internal
Revenue Service currently requires that a regulated investment company that has
two or more classes of shares allocate to each such class proportionate amounts
of each type of its income (such as ordinary income and net capital gain) for
each tax year. Accordingly, the Fund intends to designate distributions made
with respect to the Common Shares and the TAPS as consisting of particular types
of income (net capital gain, dividend income and ordinary income), in accordance
with each class's proportionate share of the total dividends paid to both
classes. Thus, each dividend paid with respect to the TAPS during a year will be
designated as ordinary income dividends and, if the Fund designates any dividend
as a capital gains dividend, capital gains in proportion to the TAPS's
proportionate share of the total dividends paid on the TAPS during the year to
the total distributions paid on both the TAPS and the Common Shares during the
year. Each holder of the TAPS during the year will be notified of the allocation
within 60 days after the end of the year. The amount of the net capital gain
realized by the Fund may not be significant, and there is no assurance that any
such income will be realized by the Fund in any year. Distributions of the
Fund's net investment income are taxable to shareholders as ordinary income.
Distributions of the Fund's net capital gain, if any, are taxable to
shareholders at rates applicable to long-term capital gain, regardless of the
length of time the TAPS have been held by holders. Distributions in excess of
the Fund's earnings and profits will first reduce a shareholder's adjusted tax
basis in his or her shares of TAPS and, after the adjusted tax basis is reduced
to zero, will constitute capital gains to a holder of shares of TAPS who holds
his or her shares of TAPS as a capital asset.
Although the Fund is required to distribute annually at least 90% of
its net investment income, the Fund is not required to distribute net capital
gain to the shareholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gain").
However, it is unclear whether a portion of the net undistributed capital gain
would have to be allocated to the TAPS for federal income tax purposes. Until
and unless the Fund receives acceptable guidance from the Internal Revenue
Service as to the allocation of the net undistributed capital gain between the
Common Shares and the TAPS, the Fund intends to distribute its net capital gain
for any year during which it has shares of TAPS outstanding. Such distribution
will affect the tax character but not the amount of dividends to which holders
of shares of TAPS are entitled.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December with a record date in such
months, and paid in January of the following year, will be treated as having
been distributed by the Fund and received by the shareholders on December 31. In
addition, solely for the purpose of satisfying the 90% distribution requirement
and the distribution requirement for avoiding income taxes, certain
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid during such taxable year. In such case, shareholders
will be treated as having received such dividends in the taxable year in which
the distribution was actually made. The Service has ruled privately that
dividends paid following the close of the taxable year that are treated for tax
purposes as derived from income from the prior year will be treated as dividends
"paid" in the prior year for purposes of determining the proportionate share of
a particular type of income for each class. Accordingly, the Fund intends to
treat any such dividends that are paid following the close of a taxable year as
"paid"
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in the prior year for purposes of determining a class's proportionate share of a
particular type of income. However, the private ruling is not binding on the
Internal Revenue Service, and there can be no assurance that the Internal
Revenue Service will respect such treatment.
Most of the Fund's net investment income is expected to be derived from
interest-bearing securities. Accordingly, dividends paid with respect to the
TAPS generally will not qualify for the dividend received deduction available to
corporate shareholders. However, from time to time, a portion of the Fund's net
investment income may be attributable to dividends on equity securities which
are eligible for the dividends received deduction under Section 243 of the Code.
Corporate shareholders who otherwise are eligible to claim the dividends
received deduction under Section 243 of the Code can deduct 70% of the portion
of the TAPS dividend representing the shareholder's portion of the Fund's
eligible dividend income. The Internal Revenue Service has ruled that corporate
shareholders of a regulated investment company must meet the 45-day holding
requirements of Section 246(c)(1)(A) of the Code with respect to the shares of
the regulated investment company to qualify for the dividends received
deduction. The Fund will inform holders of shares of TAPS of the source and tax
status of all distributions shortly after the close of each calendar year.
SALE OF SHARES
The sale of shares of TAPS will be a taxable transaction for federal
income tax purposes. Selling holders of shares of TAPS will generally recognize
gain or loss in an amount equal to the difference between their basis in the
TAPS and the amount received in exchange therefor. If such shares of TAPS 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 shares of TAPS by the Fund generally will give rise to
capital gain or loss if the shareholder does not own (and is not regarded under
certain tax law rules of constructive ownership as owning) any Common Shares in
the Fund and provided that the redemption proceeds do not represent declared but
unpaid dividends. Any loss realized on a sale or exchange will be disallowed to
the extent the shares disposed of are replaced within a period of 61 days
beginning 30 days before and ending 30 days after the disposition of the shares.
In such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon a taxable disposition of shares of TAPS
held for six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gain received with respect to such
shares.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or who fail to make
required certifications, or if the Fund or a shareholder has been notified by
the Internal Revenue Service that 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.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions at a
rate of 30%, or such lower rates as may be prescribed by any applicable treaty.
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the state, local or foreign tax consequences to them
of an investment in TAPS.
CERTAIN OWNERS OF RECORD
As of _______ __, 2000, no person is known to the Fund to own, of
record or beneficially, five percent or more of the outstanding Common Shares or
TAPS, except Cede & Co., Bowling Green Station, P.O. Box 20, New York, NY,
10274-0020, which owned of record _____% of the outstanding Common Shares.
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EXPERTS
The Statement of Net Assets of the Fund as of ________ __, ____
appearing in this Statement of Additional Information, has been audited by KPMG,
303 East Wacker Drive, Chicago, Illinois 60601, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and is included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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APPENDIX A
NUVEEN SENIOR INCOME FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND
PREFERENCES OF TAXABLE AUCTIONED PREFERRED SHARES (THE "STATEMENT")
Nuveen Senior Income Fund, a Massachusetts business trust (the
"Trust"), certifies that:
FIRST: Pursuant to the authority expressly vested in the Board
of the Fund by Article VI of Fund's Declaration of Trust (which, as
hereafter restated or amended from time to time, are together with this
Statement herein called the "Declaration"), the Board of Trustees has,
by resolution, authorized the issuance of _____ Preferred Shares, $.01
par value, liquidation preference of $25,000 per share, classified as
Series __ Taxable Auctioned Preferred Shares ("TAPS").
SECOND: The preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of such series of TAPS are as follows:
DESIGNATION
Series __: A series of ____ Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series __ Taxable Auctioned Preferred
Shares" ("TAPS Series __"). Each share of TAPS Series __ shall have an
Applicable Rate for its initial Dividend Period equal to _____% per annum and an
initial Dividend Payment Date of __________, 2000; and each share of TAPS Series
__ shall have such other preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, in addition to those required by applicable law or set forth in the
Declaration applicable to preferred shares of the Fund, as are set forth in Part
I and Part II of this Statement. The TAPS Series __ shall constitute a separate
series of Preferred Shares of the Fund.
Subject to the provisions of Section 12(c) of Part I hereof, the Board
of Trustees of the Fund may, in the future, reclassify additional shares of the
Fund's Preferred Shares as TAPS Series __, with the same preferences, rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption and other terms of the respective series
herein described, except that the Applicable Rate for its initial Dividend
Period, its initial Dividend Payment Date and any other changes in the terms
herein set forth shall be as set forth in this Statement reclassifying such
shares as TAPS Series __.
As used in Part I and Part II of this Statement, capitalized terms
shall have the meanings provided in Section 18 of Part I.
PART I: TAPS TERMS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting
TAPS Series __ is _______ shares. No fractional shares of TAPS Series __ shall
be issued.
(b) Any shares of TAPS Series __ which at any time have
been redeemed or purchased by the Fund shall, after such redemption or purchase,
have the status of authorized but unissued shares of Preferred Shares.
(c) The shares of TAPS Series __ shall rank on a parity
with shares of any other series of Preferred Shares (including any other shares
of TAPS) as to the payment of dividends to which such shares are entitled and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund.
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(d) No holder of shares of TAPS Series __ shall have,
solely by reason of being such a holder, any preemptive or other right to
acquire, purchase or subscribe for any shares of TAPS Series __, shares of
Common Shares of the Fund or other securities of the Fund which it may hereafter
issue or sell.
2. Dividends.
(a) The Holders of shares of TAPS Series __ shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor, cumulative cash dividends on their shares at
the Applicable Rate, determined as set forth in paragraph (c) of this Section 2,
and no more, payable on the respective dates determined as set forth in
paragraph (b) of this Section 2. Dividends on the Outstanding shares of TAPS
Series __ issued on the Date of Original Issue shall accumulate from the Date of
Original Issue.
(b) (i) Dividends shall be payable when, as and if
declared by the Board of Trustees following the initial Dividend Payment Date,
subject to subparagraph (b)(ii) of this Section 2, on the shares of TAPS Series
__ as follows:
(A) with respect to any Dividend Period
of one year or less, on the Business Day next succeeding the
last day thereof and, if any, monthly thereof; and
(B) with respect to any Dividend Period
of more than one year, on a monthly basis on the first day of
each month within such Dividend Period and on the Business Day
following the last day of such Dividend Period.
(ii) If a day for payment of dividends resulting
from the application of subparagraph (b)(i) above is not a Business
Day, then the Dividend Payment Date shall be the day next succeeding
such day, or if the day next succeeding such day for payment of
dividends is not a Business Day, then the Dividend Payment Date shall
be the first Business Day prior to such day for payment of dividends
that is next succeeded by a Business Day; provided, however, that if
the Securities Depository pays dividends in same-day funds, and such
day for payment is not a Business Day, the Dividend Payment Date shall
be the first Business Day following such day for payment of dividends.
(iii) The Fund shall pay to the Paying Agent not
later than 3:00 p.m., New York City time, on the Business Day next
preceding each Dividend Payment Date for the shares of TAPS Series __,
an aggregate amount of funds available on the next Business Day in the
City of New York, New York, equal to the dividends to be paid to all
Holders of such shares on such Dividend Payment Date. The Fund shall
not be required to establish any reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the
payment of dividends shall be held in trust for the payment of such
dividends by the Paying Agent for the benefit of the Holders specified
in subparagraph (b)(v) of this Section 2. Any moneys paid to the Paying
Agent in accordance with the foregoing but not applied by the Paying
Agent to the payment of dividends, including interest earned on such
moneys, will, to the extent permitted by law, be repaid to the Fund at
the end of 90 days from the date on which such moneys were to have been
so applied.
(v) Each dividend on TAPS Series __ shall be
paid on the Dividend Payment Date therefor to the Holders of that
series as their names appear on the share ledger or share records of
the Fund on the Business Day next preceding such Dividend Payment Date.
Dividends in arrears for any past Dividend Period may be declared and
paid at any time, without reference to any regular Dividend Payment
Date, to the Holders as their names appear on the share ledger or share
records of the Fund on such date, not exceeding 15 days preceding the
payment date thereof, as may be fixed by the Board of Trustees. No
interest will be payable in respect of any dividend payment or payments
which may be in arrears.
(c) (i) The dividend rate on Outstanding shares of
TAPS Series __ during the period from and after the Date of Original
Issue to and including the last day of the initial Dividend Period
therefor shall
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be equal to the rate per annum set forth under "Designation" above. For
each subsequent Dividend Period with respect to the shares of TAPS
Series __ Outstanding thereafter, the dividend rate shall be equal to
the rate per annum that results from an Auction for Outstanding shares
of TAPS Series __ on the respective Auction Date therefor next
preceding such subsequent Dividend Period; provided, however, that if
an Auction for any subsequent Dividend Period of TAPS Series __ is not
held for any reason or if Sufficient Clearing Orders have not been made
in an Auction (other than as a result of all shares of TAPS Series __
being the subject of Submitted Hold Orders), then the dividend rate on
the shares of TAPS Series __ for any such Dividend Period shall be the
Maximum Rate for such shares on the Auction Date for such Dividend
Period (except (i) during a Default Period when the dividend rate shall
be the Default Rate, as set forth in Section 2(c)(ii) below) or (ii)
after a Default Period and prior to the beginning of the next Dividend
Period when the dividend rate shall be the Maximum Rate at the close of
business on the last of such Default Period). With respect to a
Dividend Period of 93 days or fewer, the Minimum Rate will apply
automatically following an Auction in which all of the Outstanding
shares of TAPS Series __ are subject (or are deemed to be subject) to
Hold Orders. The rate per annum at which dividends are payable on
shares of TAPS Series __ as determined pursuant to this Section 2(c)(i)
shall be the "Applicable Rate."
(ii) A "Default Period" will commence on the
applicable date set forth below if the Fund fails to (A) declare prior
to the close of business on the second Business Day preceding any
Dividend Payment Date, for payment on or (to the extent permitted as
described below) within two Business Days after such Dividend Payment
Date to the persons who held shares as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend payable on such Dividend Payment Date, (B)
deposit, irrevocably in trust, in same-day funds, with the Paying Agent
by 12:00 noon, New York City time, (I) on or (to the extent permitted
as described below) within two Business Days after any Dividend Payment
Date the full amount of any declared dividend on TAPS Series __ payable
on such Dividend Payment Date (together with the failure to timely
declare dividends described in (A) above, hereinafter referred to as a
"Dividend Default") or (II) on or (to the extent permitted as described
below) within two Business Days after any date fixed for redemption of
shares of TAPS Series __ called for redemption, the applicable
redemption price (a "Redemption Default") or (C) maintain the "aaa"
Credit Rating unless the "aaa" Credit Rating is restored by the
Dividend Payment Date next following the date on which the Fund fails
to maintain the "aaa" Credit Rating (a "Rating Default" and, together
with a Dividend Default and a Redemption Default, hereinafter referred
to as a "Default"). Holders of two-thirds of the TAPS then outstanding
may waive any Dividend Default, Redemption Default or Rating Default. A
Default Period with respect to a Dividend Default or a Redemption
Default will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case
may be, and ending on and including the Business Day on which, by 12:00
noon, New York City time, all unpaid dividends and unpaid redemption
price shall have been so deposited or shall have otherwise been made
available to the applicable holders in same-day funds. A Default Period
with respect to a Rating Default shall commence as of the date on which
the Fund fails to maintain the "aaa" Credit Rating (provided that such
Rating Default shall be deemed not to have occurred and such Default
Period shall not commence if such Rating Default is cured by the next
succeeding Dividend Payment Date) and shall end on the earlier of the
date on which such default is cured as provided herein or the date on
which TAPS Series __ is mandatorily redeemed as provided herein. The
Applicable Rate for each Default Period, and each Dividend Period
commencing during a Default Period, will be equal to the Default Rate;
and each subsequent Dividend Period commencing after the beginning of a
Default Period shall be a Minimum 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. Any dividend due on any Dividend Payment Date (if,
prior to 12:00 noon, New York City time, on such Dividend Payment Date,
the Fund has declared such dividend payable on or within two Business
Days after such Dividend Payment Date to the persons who held such
shares as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date) or redemption price with respect
to such shares not paid to such Persons when due may (if such default
is not solely due to the willful failure of the Fund) be paid to such
persons in the same form of funds by 12:00 noon, New York City time, on
any of the first two Business Days after such Dividend Payment Date or
due date, as the case may be, provided that such amount is accompanied
by an additional amount for such period of non-payment at the Default
Rate applied to the amount of such non-payment based on the actual
number of days comprising such period divided by 365. For the purposes
of the
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foregoing, payment to a person in same-day funds made on or before
12:00 noon New York City time on any Business Day at any time will be
considered equivalent to payment to that person in New York Clearing
House (next-day) funds at the same time on the preceding Business Day,
and any payment made after 12:00 noon, New York City time, on any
Business Day shall be considered to have been made instead in the same
form of funds and to the same person before 12:00 noon, New York City
time, on the next Business Day. The Default Rate is equal to the
Reference Rate multiplied by three.
(iii) The amount of dividends per share payable
(if declared) on each Dividend Payment Date of each Dividend Period of
less than one (1) year (or in respect of dividends on another date in
connection with a redemption during such Dividend Period) shall be
computed by multiplying the Applicable Rate (or the Default Rate) for
such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period
(or portion thereof) that such share was Outstanding and for which the
Applicable Rate or the Default Rate was applicable and the denominator
of which will be 365, multiplying the amount so obtained by $25,000,
and rounding the amount so obtained to the nearest cent. During any
Dividend Period of one (1) year or more, the amount of dividends per
share payable on any Dividend Payment Date (or in respect of dividends
on another date in connection with a redemption during such Dividend
Period) shall be computed as described in the preceding sentence,
except that it will be determined on the basis of a year consisting of
twelve 30-day months.
(d) Any dividend payment made on shares of TAPS Series __
shall first be credited against the earliest accumulated but unpaid dividends
due with respect to TAPS Series __.
(e) For so long as the shares of the TAPS are
Outstanding, except as contemplated by Sections 3(j) and 7(e), 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, if any,
ranking junior to the TAPS as to dividends or upon liquidation) in respect to
Common Shares or any other shares of the Fund ranking junior to or on a parity
with the TAPS as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or any
other such junior shares (except by conversion into or exchange for shares of
the Fund ranking junior to the TAPS as to dividends and upon liquidation) or any
such parity shares (except by conversion into or exchange for shares of the Fund
ranking junior to or on a parity with the TAPS 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 TAPS
Basic Maintenance Amount and the 1940 Act TAPS Asset Coverage would be achieved,
(ii) full cumulative dividends on the TAPS due on or prior to the date of the
transaction have been declared and paid and (iii) the Fund has redeemed the full
number of shares of the TAPS required to be redeemed by any provision for
mandatory redemption contained in Section 3(a)(ii).
3. Redemption.
(a) (i) After the initial Dividend Period, subject
to the provisions of this Section 3 and to the extent permitted under
the 1940 Act and Massachusetts law, the Fund may, at its option, redeem
in whole or in part out of funds legally available therefor shares of
TAPS Series __ herein designated as (A) having a Dividend Period of one
year or less, on the Business Day after the last day of such Dividend
Period by delivering a notice of redemption not less than 15 days and
not more than 40 days prior to such redemption, at a redemption price
per share equal to $25,000, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to the
date fixed for redemption, or (B) having a Dividend Period of more than
one year, on any Business Day prior to the end of the relevant Dividend
Period by delivering a notice of redemption not less than 15 days and
not more than 40 days prior to the date fixed for such redemption, at a
redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to the date fixed for redemption, plus a redemption premium,
if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption
Provisions at the time of the designation of such Dividend Period as
set forth in Section 4 of this Statement; provided, however, that
during a Dividend Period of more than one year no shares of TAPS Series
__ will be subject to optional redemption except in accordance with any
Specific
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Redemption Provisions approved by the Board of Trustees after
consultation with the Broker-Dealers at the time of the designation of
such Dividend Period. Notwithstanding the foregoing, the Fund shall not
give a notice of or effect any redemption pursuant to this Section
3(a)(i) unless, on the date on which the Fund intends to give such
notice and on the date of redemption (a) the Fund has available certain
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less
than the amount (including any applicable premium) due to Holders of
TAPS Series __ by reason of the redemption of TAPS Series __ on such
date fixed for the redemption and (b) the Fund would have Eligible
Assets with an aggregate Discounted Value at least equal the TAPS Basic
Maintenance Amount immediately subsequent to such redemption, if such
redemption were to occur on such date, it being understood that the
provisions of paragraph (d) of this Section 3 shall be applicable in
such circumstances in the event the Fund makes the deposit and takes
the other action required thereby.
(ii) If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an aggregate Discounted Value at
least equal to the TAPS Basic Maintenance Amount or, as of the last
Business Day of any month, the 1940 Act TAPS Asset Coverage, and such
failure is not cured within two Business Days following such Valuation
Date in the case of a failure to maintain the TAPS Basic Maintenance
Amount or the last Business Day of the following month in the case of a
failure to maintain 1940 Act TAPS Asset Coverage as of such last
Business Day (each an "Asset Coverage Cure Date"), the TAPS will be
subject to mandatory redemption out of funds legally available
therefor. The number of shares of TAPS to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of
shares of TAPS the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the relevant Asset
Coverage Cure Date, would result in the Fund having Eligible Assets
with an aggregate Discounted Value at least equal to the TAPS Basic
Maintenance Amount, or sufficient to satisfy 1940 Act TAPS Asset
Coverage, as the case may be, in either case as of the relevant Asset
Coverage Cure Date (provided that, if there is no such minimum number
of shares the redemption of which would have such result, all shares of
TAPS then Outstanding will be redeemed), and (B) the maximum number of
shares of TAPS that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date at the Mandatory
Redemption Price set forth in subparagraph (a)(iv) of this Section 3.
(iii) If the Fund at any time fails to maintain
the "aaa" Credit Rating and the Fund is unable to restore the "aaa"
Credit Rating within 90 calendar days thereafter (the "Rating Default
Cure Date"), all shares of the TAPS will be subject to mandatory
redemption out of funds legally available therefor, on the Mandatory
Redemption Date at the Mandatory Redemption Price set forth in
subparagraph (a)(iv) of this Section 3.
(iv) In determining the shares of the TAPS
required to be redeemed in accordance with the foregoing Section
3(a)(ii), the Fund shall allocate the number of shares required to be
redeemed to satisfy the TAPS Basic Maintenance Amount or the 1940 Act
TAPS Asset Coverage, as the case may be, pro rata among the Holders of
shares of the TAPS in proportion to the number of shares they hold and
shares of other Preferred Shares subject to mandatory redemption
provisions similar to those contained in this Section 3, subject to the
further provisions of this subparagraph (iv). The Fund shall effect any
required mandatory redemption pursuant to subparagraph (a)(ii) or
(a)(iii) of this Section 3 no later than 30 days after the Asset
Coverage Cure Date or the Rating Default Cure Date, as the case may be
(the "Mandatory Redemption Date"), except that if the Fund does not
have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, the number of shares of the TAPS which
would be required to be redeemed by the Fund under clause (A) of
subparagraph (a)(ii) or subparagraph (a)(iii) of this Section 3 if
sufficient funds were available, together with shares of other
Preferred Shares which are subject to mandatory redemption under
provisions similar to those contained in this Section 3, or the Fund
otherwise is unable to effect such redemption on or prior to such
Mandatory Redemption Date, the Fund shall redeem those shares of the
TAPS, and shares of other Preferred Shares which it was unable to
redeem, on the earliest practicable date on which the Fund will have
such funds available, upon notice pursuant to Section 3(b) to record
owners of shares of the TAPS to be redeemed and the Paying Agent. The
Fund will deposit with the Paying Agent funds sufficient to redeem the
specified number of shares of the TAPS with respect to a redemption
required under subparagraph (a)(ii) or subparagraph (a)(iii) of this
Section 3, by 1:00 p.m., New York City time, of the
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<PAGE> 88
Business Day immediately preceding the Mandatory Redemption Date. If
fewer than all of the Outstanding shares of the TAPS are to be redeemed
pursuant to this Section 3(a)(iv), the number of shares to be redeemed
shall be redeemed pro rata from the Holders of such shares in
proportion to the number of such shares held by such Holders, by lot or
by such other method as the Fund shall deem fair and equitable,
subject, however, to the terms of any applicable Specific Redemption
Provisions. "Mandatory Redemption Price" means $25,000 per share, plus
an amount equal to accumulated but unpaid dividends thereon (whether or
not earned or declared) to the date fixed for redemption, plus (in the
case of a Dividend Period of one year or more only) a redemption
premium, if any, determined by the Board of Trustees after consultation
with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions.
(b) In the event of a redemption pursuant to Section
3(a), the Fund will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Fund shall deliver a notice of redemption to the Auction Agent (the "Notice of
Redemption") containing the information set forth below (i) in the case of an
optional redemption pursuant to subparagraph (a)(i) above, one Business Day
prior to the giving of notice to the Holders, (ii) in the case of a mandatory
redemption pursuant to subparagraph (a)(ii) or subparagraph (a)(iii) above, on
or prior to the 30th day preceding the Mandatory Redemption Date. The Auction
Agent will use its reasonable efforts to provide telephonic notice to each
Holder of shares of TAPS Series __ called for redemption not later than the
close of business on the Business Day immediately following the day on which the
Auction Agent determines the shares to be redeemed (or, during a Default Period
with respect to such shares, not later than the close of business on the
Business Day immediately following the day on which the Auction Agent receives
Notice of Redemption from the Fund). The Auction Agent shall confirm such
telephonic notice in writing not later than the close of business on the third
Business Day preceding the date fixed for redemption by providing the Notice of
Redemption to each Holder of shares called for redemption, the Paying Agent (if
different from the Auction Agent) and the Securities Depository. Notice of
Redemption will be addressed to the registered owners of TAPS Series __ at their
addresses appearing on the share records of the Fund. Such Notice of Redemption
will set forth (i) the date fixed for redemption, (ii) the number and identity
of shares of TAPS Series __ to be redeemed, (iii) the redemption price
(specifying the amount of accumulated dividends to be included therein), (iv)
that dividends on the shares to be redeemed will cease to accumulate on such
date fixed for redemption, and (v) the provision under which redemption shall be
made. No defect in the Notice of Redemption or in the transmittal or mailing
thereof will affect the validity of the redemption proceedings, except as
required by applicable law. If fewer than all shares held by any Holder are to
be redeemed, the Notice of Redemption mailed to such Holder shall also specify
the number of shares to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of
this Section 3, but subject to Section 7(e), no shares of the TAPS may be
redeemed unless all dividends in arrears on the Outstanding shares of the TAPS
and all capital stock of the Fund ranking on a parity with the TAPS with respect
to payment of dividends or upon liquidation, have been or are being
contemporaneously paid or set aside for payment; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all Outstanding
shares of the TAPS pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, Holders
of all Outstanding shares of the TAPS.
(d) Upon the deposit of funds sufficient to redeem shares
of TAPS Series __ with the Paying Agent and the giving of the Notice of
Redemption to the Auction Agent under paragraph (b) of this Section 3, dividends
on such shares shall cease to accumulate and such shares shall no longer be
deemed to be Outstanding for any purpose (including, without limitation, for
purposes of calculating whether the Fund has maintained the requisite TAPS Basic
Maintenance Amount or the 1940 Act TAPS Asset Coverage), and all rights of the
holder of the shares so called for redemption shall cease and terminate, except
the right of such holder to receive the redemption price specified herein, but
without any interest or other additional amount. Such redemption price shall be
paid by the Paying Agent to the nominee of the Securities Depository. The Fund
shall be entitled to receive from the Paying Agent, promptly after the date
fixed for redemption, any cash deposited with the Paying Agent in excess of (i)
the aggregate redemption price of the shares of TAPS Series __ called for
redemption on such date and (ii) such other amounts, if any, to which Holders of
shares of TAPS Series __ called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of two years from such redemption date
shall, to the extent permitted by law, be paid to the Fund, after which time the
Holders of shares of TAPS Series __ so called for redemption may look only to
the Fund for payment of the
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<PAGE> 89
redemption price and all other amounts, if any, to which they may be entitled.
The Fund shall be entitled to receive, from time to time after the date fixed
for redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of
Redemption has been given is not made by reason of the absence of legally
available funds therefor, or is otherwise prohibited, such redemption shall be
made as soon as practicable to the extent such funds become legally available or
such redemption is no longer otherwise prohibited. Failure to redeem shares of
TAPS Series __ shall be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Fund shall have failed, for any
reason whatsoever, to deposit in trust with the Paying Agent the redemption
price with respect to any shares for which such Notice of Redemption has been
given. Notwithstanding the fact that the Fund may not have redeemed shares of
TAPS Series __ for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of TAPS Series __ and shall include those shares of
TAPS Series __ for which Notice of Redemption has been given but for which
deposit of funds has not been made.
(f) All moneys paid to the Paying Agent for payment of
the redemption price of shares of TAPS Series __ called for redemption shall be
held in trust by the Paying Agent for the benefit of holders of shares so to be
redeemed.
(g) So long as any shares of TAPS Series __ are held of
record by the nominee of the Securities Depository, the redemption price for
such shares will be paid on the date fixed for redemption to the nominee of the
Securities Depository for distribution to Agent Members for distribution to the
persons for whom they are acting as agent.
(h) Except for the provisions described above, nothing
contained in this Statement limits any right of the Fund to purchase or
otherwise acquire any shares of TAPS Series __ outside of an Auction at any
price, whether higher or lower than the price that would be paid in connection
with an optional or mandatory redemption, so long as, at the time of any such
purchase, there is no arrearage in the payment of dividends on, or the mandatory
or optional redemption price with respect to, any shares of TAPS Series __ for
which Notice of Redemption has been given and the Fund is in compliance with the
1940 Act TAPS Asset Coverage and has Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount after
giving effect to such purchase or acquisition on the date thereof. Any shares
which are purchased, redeemed or otherwise acquired by the Fund shall have no
voting rights. If fewer than all the Outstanding shares of TAPS Series __ are
redeemed or otherwise acquired by the Fund, the Fund shall give notice of such
transaction to the Auction Agent, in accordance with the procedures agreed upon
by the Board of Trustees.
(i) In the case of any redemption pursuant to this
Section 3, only whole shares of TAPS Series __ shall be redeemed, and in the
event that any provision of the Declaration would require redemption of a
fractional share, the Auction Agent shall be authorized to round up so that only
whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary,
including, without limitation, Sections 2(e), 6(g) and 12 of Part I hereof, the
Board of Trustees may authorize, create or issue any class or series of stock
ranking prior to or on a parity with the TAPS with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund, to the extent permitted by the 1940 Act, as
amended, if, upon issuance, the net proceeds from the sale of such stock (or
such portion thereof needed to redeem or repurchase the Outstanding TAPS) are
deposited with the Auction Agent in accordance with Section 3(d) of Part I
hereof, Notice of Redemption as contemplated by Section 3(b) of Part I hereof
has been delivered prior thereto or is sent promptly thereafter, and such
proceeds are used to redeem all Outstanding TAPS.
4. Designation of Dividend Period.
(a) The initial Dividend Period for TAPS Series __ is as
set forth under "Designation" above. The Fund will designate the duration of
subsequent Dividend Periods of TAPS Series __; provided, however, that no such
designation is necessary for a Minimum Rate Period and, provided further, 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 a
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timely manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, TAPS Series __ shall have been cured as provided above,
(iii) Sufficient Clearing Orders 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, the redemption price with respect to such shares shall have been
deposited with the Paying Agent, and (v) in the case of the designation of an
Special Rate Period, 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 TAPS Basic Maintenance
Amount, and the Fund has consulted with the Broker-Dealers and has provided
notice of such designation and an TAPS Basic Maintenance Certificate to Moody's
(if Moody's is than rating the TAPS) and any Other Rating Agency which is then
rating the TAPS and so requires.
(b) If the Fund proposes to designate any Special Rate
Period, not fewer than 15 (or two Business Days in the event the duration of the
Dividend Period prior to such Special Rate Period is fewer than 15 days) nor
more than 30 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, subject to 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
Minimum 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 an
Special Rate Period, specifying the first and last days thereof and (B)
the terms of any Specific Redemption Provisions; or
(ii) a notice stating that the Fund has
determined not to exercise its option to designate an 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 provided in clause (v) of Paragraph (a) of this Section 4 by
3:00 p.m., New York City time, on the second Business Day next preceding the
first day of such proposed Special 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 Minimum Rate
Period.
5. Restrictions on Transfer. Shares of TAPS Series __ 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 shares of TAPS
Series __ through different Broker-Dealers, advises the Auction Agent of such
transfer. The certificates representing the shares of TAPS Series __ issued to
the Securities Depository will bear legends with respect to the restrictions
described above and stop-transfer instructions will be issued to the Transfer
Agent and/or Registrar.
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6. Voting Rights.
(a) Except as otherwise provided in the Declaration or as
otherwise required by applicable law, (i) each Holder of shares of TAPS Series
__ shall be entitled to one vote for each share of TAPS Series __ held on each
matter submitted to a vote of shareholders of the Fund, and (ii) the holders of
Outstanding shares of Preferred Shares, including TAPS Series __, and shares of
Common Shares shall vote together as a single class; provided, however, that, at
any meeting of the shareholders of the Fund held for the election of trustees,
the holders of Outstanding shares of Preferred Shares, including TAPS Series __,
represented in person or by proxy at said meeting, shall be entitled, as a
class, to the exclusion of the holders of all other securities and classes of
capital stock of the Fund, to elect two trustees of the Fund, each share of
Preferred Shares, including TAPS Series __, entitling the holder thereof to one
vote. Subject to paragraph (b) of this Section 6, the holders of Outstanding
shares of Common Shares and Preferred Shares, including TAPS Series __, voting
together as a single class, shall elect the balance of the trustees.
(b) During any period in which any one or more of the
conditions described below shall exist (such period being referred to herein as
a "Voting Period"), the number of trustees constituting the Board of Trustees
shall be automatically increased by the smallest number that, when added to the
two trustees elected exclusively by the holders of shares of Preferred Shares,
including TAPS Series __, would constitute a majority of the Board of Trustees
as so increased by such smallest number; and the holders of shares of Preferred
Shares, including TAPS Series __, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of capital stock of the Fund), to elect such smallest
number of additional trustees, together with the two trustees that such holders
are in any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or declared)
on Preferred Shares, including TAPS Series __, equal to at least two
full years' dividends shall be due and unpaid; or
(ii) if at any time holders of any other shares
of Preferred Shares are entitled under the 1940 Act to elect a majority
of the trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the Holders of shares of Preferred Shares,
including TAPS Series __, upon the further occurrence of any of the events
described in this paragraph (b) of Section 6.
(c) As soon as practicable after the accrual of any right of the
holders of shares of Preferred Shares, including TAPS Series __, to elect
additional trustees as described in paragraph (b) of this Section 6, the Fund
shall notify the Auction Agent, and the Auction Agent shall call a special
meeting of such holders, by mailing a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 30 days after
the date of mailing of such notice. If the Fund fails to send such notice to the
Auction Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting shall be
the close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
shares of Preferred Shares, including TAPS Series __, held during a Voting
Period at which trustees are to be elected, such holders, voting together as a
class (to the exclusion of the holders of all other securities and classes of
capital stock of the Fund), shall be entitled to elect the number of trustees
prescribed in paragraph (b) of this Section 6 on a one-vote-per-share basis.
(d) The terms of office of all persons who are directors of the
Fund at the time of a special meeting of holders of the TAPS and holders of
other Preferred Shares to elect trustees shall continue, notwithstanding the
election at such meeting by the holders and such other holders of the number of
trustees that they are entitled to elect, and the persons so elected by such
holders, together with the two incumbent trustees elected by such holders and
the remaining incumbent trustees elected by the holders of the Common Shares and
Preferred Shares, shall constitute the duly elected trustees of the Fund.
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(e) Simultaneously with the termination of a Voting
Period, the terms of office of the additional directors elected by the Holders
of the TAPS and holders of other Preferred Shares pursuant to paragraph (b) of
this Section 6 shall terminate, the remaining trustees shall constitute the
trustees of the Fund and the voting rights of such holders to elect additional
trustees pursuant to paragraph (b) of this Section 6 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.
(f) So long as any of the shares of Preferred Shares,
including TAPS Series __, are Outstanding, the Fund will not, without the
affirmative vote of the holders of a majority of the Outstanding shares of
Preferred Shares determined with reference to a "majority of outstanding voting
securities" as that term is defined in Section 2(a)(42) of the 1940 Act, voting
as a separate class, (i) amend, alter or repeal any of the preferences, rights
or powers of such class so as to affect materially and adversely such
preferences, rights or powers; (ii) increase the authorized number of shares of
Preferred Shares; (iii) create, authorize or issue shares of any class of
capital stock ranking senior to or on a parity with the Preferred Shares with
respect to the payment of dividends or the distribution of assets, or any
securities convertible into, or warrants, options or similar rights to purchase,
acquire or receive, such shares of capital stock ranking senior to or on a
parity with the Preferred Shares or reclassify any authorized shares of capital
stock of the Fund into any shares ranking senior to or on a parity with the
Preferred Shares (except that, notwithstanding the foregoing, but subject to the
provisions of Sections 3(j) and 12, the Board of Trustees, without the vote or
consent of the holders of the Preferred Shares, may from time to time authorize,
create and classify, and the Fund may from time to time issue, shares or series
of Preferred Shares ranking on a parity with the TAPS with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up to the affairs of the Fund, and may reclassify and/or
issue any shares of the TAPS previously purchased or redeemed by the Fund
subject to continuing compliance by the Fund with 1940 Act TAPS Asset Coverage
and TAPS Basic Maintenance Amount requirements); (iv) institute any proceedings
to be adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or file a petition seeking or
consenting to reorganization or relief under any applicable federal or state law
relating to bankruptcy or insolvency, or consent to the appointment of a
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Fund or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(v) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness permitted under
clause (vi) below and (D) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's custodian and the
Auction Agent; or (vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions;
provided, however, that transfers of assets by the Fund subject to an obligation
to repurchase shall not be deemed to be indebtedness for purposes of this
provision to the extent that after any such transaction the Fund has Eligible
Assets with an aggregate Discounted Value at least equal to the TAPS Basic
Maintenance Amount as of the immediately preceding Valuation Date.
(g) The affirmative vote of the holders of a majority of
the Outstanding shares of Preferred Shares, including TAPS Series __, voting as
a separate class, shall be required to approve any plan of reorganization (as
such term is used in the 1940 Act) adversely affecting such shares or any action
requiring a vote of security holders of the Fund under Section 13(a) of the 1940
Act. In the event a vote of holders of shares of Preferred Shares is required
pursuant to the provisions of Section 13(a) of the 1940 Act, the Fund shall, not
later than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's (if Moody's is then rating TAPS Series __) and any Other
Rating Agency which is then rating TAPS Series __ and which so requires that
such vote is to be taken and the nature of the action with respect to which such
vote is to be taken and shall, not later than ten Business Days after the date
on which such vote is taken, notify Moody's and any such Other Rating Agency, as
applicable, of the results of such vote.
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(h) The affirmative vote of the holders of a majority of
the Outstanding shares of TAPS 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 TAPS Series __ in a
manner different from that of other series of 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 TAPS Series __ described in this Section 6(i)
will in each case be in addition to a separate vote of the requisite percentage
of Common Shares and/or TAPS necessary to authorize the action in question.
(i) The Board of Trustees, without the vote or consent of
any Holder of the Preferred Shares, including TAPS Series __, or any other
shareholder of the Fund, may from time to time amend, alter or repeal any or all
of the definitions of the terms or provisions listed below, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of TAPS or the Holders thereof, provided that the
Board of Trustees receives written confirmation from Moody's (if Moody's is then
rating TAPS Series __) (with such confirmation in no event being required to be
obtained from a particular rating agency in the case of the definitions relevant
only to and adopted in connection with the rating of TAPS Series __, if any, by
any other rating agency) that such amendment, alteration or repeal would not
impair the rating then assigned by Moody's. In addition, the Board of Trustees,
without the vote or consent of any Holder of the Preferred Shares, including
TAPS Series __, or any other shareholder of the Fund, may from time to time
adopt, amend, alter or repeal any or all of any additional or other definitions
or add covenants and other obligations of the Fund (e.g., maintenance of minimum
liquidity level) or confirm the applicability of covenants and other obligations
set forth herein in connection with obtaining or maintaining the rating of
Moody's or any Other Rating Agency with respect to TAPS Series __, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of TAPS Series __ or the Holders thereof, provided the Board of
Trustees receives written confirmation from the relevant rating agency (such
confirmation in no event being required to be obtained from a particular rating
agency with respect to definitions or other provisions relevant only to another
rating agency's rating) that any such amendment, alteration or repeal would not
adversely affect the rating then assigned by such rating agency.
Definitions and Provisions Subject to Change by Trustee Action:
<TABLE>
<S> <C>
Asset Coverage Cure Date Minimum Rate
Deposit Securities Moody's Discount Factor
Discounted Value Moody's Eligible Assets
Exposure Period Moody's Industry Classification
Market Value (including certain provisions 1940 Act Asset Coverage Cure Date
relevant to futures and options)
Maximum Rate 1940 Act TAPS Asset Coverage
Short Term Money Market Instruments
Volatility Factor
Last Paragraph of Section 12 (discussing
valuation of certain option provisions)
TAPS Basic Maintenance Amount
TAPS Basic Maintenance Certificate
</TABLE>
In addition, subject to compliance with applicable law, the
Board of Trustees may amend the definition of Maximum Rate to increase
the percentage amount by which the Reference Rate is multiplied to
determine the Maximum Rate shown therein without the vote or consent of
the holders of the shares of the Preferred Shares, including TAPS
Series __, or any other shareholder of the Fund, and without receiving
any confirmation from any rating agency after consultation with the
Broker-Dealers, provided that immediately following any such increase
the Fund would be in compliance with the TAPS Basic Maintenance Amount.
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(j) Unless otherwise required by law, holders of shares
of TAPS Series __ shall not have any relative rights or preferences or other
special rights other than those specifically set forth herein. The holders of
shares of TAPS Series __ shall have no rights to cumulative voting. In the event
that the Fund fails to pay any dividends on the shares of TAPS Series __, the
exclusive remedy of the holders shall be the right to vote for trustees pursuant
to the provisions of this Section 6.
(k) The foregoing voting provisions will not apply with
respect to TAPS Series __ if, at or prior to the time when a vote is required,
such shares have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
7. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, the holders of TAPS
Series __ then Outstanding, together with holders of shares of any class of
stock ranking on a parity with TAPS Series __ upon dissolution, liquidation or
winding up, shall be entitled to receive and to be paid out of the assets of the
Fund (or the proceeds thereof) available for distribution to its shareholders
after satisfaction of claims of creditors of the Fund an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for shares of TAPS Series __ shall be $25,000 per share, plus an amount equal to
all accumulated dividends thereon (whether or not earned or declared but without
interest) to the date payment of such distribution is made in full or a sum
sufficient for the payment thereof is set apart with the Paying Agent. No
redemption premium shall be paid upon any liquidation even if such redemption
premium would be paid upon optional or mandatory redemption of the relevant
shares.
(b) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, until payment in full
is made to the holders of TAPS Series __ of the liquidation distribution to
which they are entitled, no dividend or other distribution shall be made to the
holders of shares of Common Shares or any other class of stock of the Fund
ranking junior to TAPS Series __ upon dissolution, liquidation or winding up and
no purchase, redemption or other acquisition for any consideration by the Fund
shall be made in respect of the shares of Common Shares or any other class of
stock of the Fund ranking junior to TAPS Series __ upon dissolution, liquidation
or winding up.
(c) A consolidation or merger of the Fund with or into
any other company or companies, or a sale, lease or exchange of all or
substantially all of the assets of the Fund in consideration for the issuance of
equity securities of another company shall not be deemed to be a liquidation,
dissolution or winding up, whether voluntary or involuntary, for the purposes of
this Section 7; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any designation, right,
preference or limitation of TAPS Series __ or any shares issuable in exchange
for shares of TAPS Series __ in any such consolidation or merger.
(d) After the payment to the Holders of TAPS Series __ of
the full preferential amounts provided for in this Section 7, the holders of
TAPS Series __ as such shall have no right or claim to any of the remaining
assets of the Fund.
(e) In the event the assets of the Fund or proceeds
thereof available for distribution to the Holders of TAPS Series __, upon any
dissolution, liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such holders are entitled pursuant to paragraph (a) of this Section 7, no
such distribution shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with TAPS Series __ with respect
to the distribution of assets upon such dissolution, liquidation or winding up
unless proportionate distributive amounts shall be paid on account of the shares
of TAPS Series __, ratably, in proportion to the full distributable amounts to
which holders of all such parity shares are entitled upon such dissolution,
liquidation or winding up.
(f) Subject to the rights of the holders of shares of any
series or class or classes of stock ranking on a parity with TAPS Series __ with
respect to the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund, after payment shall have been made in full to the
holders of the shares of TAPS Series __ as
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<PAGE> 95
provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class or classes of stock ranking junior to TAPS Series __ with
respect to the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund shall, subject to any respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the holders of the shares of TAPS
Series __ shall not be entitled to share therein.
8. Auction Agent. For so long as any shares of TAPS Series __ are
Outstanding, the Auction Agent, duly appointed by the Fund to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Fund and its Affiliates (which, however, may engage or have
engaged in business transactions with the Fund or its Affiliates) and at no time
shall the Fund or any of its Affiliates act as the Auction Agent in connection
with the Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any shares of TAPS Series __
are Outstanding, the Fund shall use its best efforts promptly thereafter to
appoint another qualified commercial bank, trust company or financial
institution to act as the Auction Agent.
9. 1940 Act TAPS Asset Coverage. The Fund shall maintain, as of
each Valuation Date on which any shares of the TAPS are Outstanding, asset
coverage with respect to the TAPS which is equal to or greater than the 1940 Act
TAPS Asset Coverage; provided, however, that Section 3(a)(ii) shall be the sole
remedy in the event the Fund fails to do so.
10. TAPS Basic Maintenance Amount. So long as shares of the TAPS
are Outstanding and Moody's or any Other Rating Agency which so requires is then
rating the shares of the TAPS, the Fund shall maintain, as of each Valuation
Date, Moody's Eligible Assets (if Moody's is then rating the TAPS) and (if
applicable) Other Rating Agency Eligible Assets having an aggregate Discounted
Value equal to or greater than the TAPS Basic Maintenance Amount; provided,
however, that Section 3(a)(ii) shall be the sole remedy in the event the Fund
fails to do so.
11. [Reserved]
12. Certain Other Restrictions. For so long as any shares of TAPS
Series __ are Outstanding and Moody's or any Other Rating Agency which so
requires is then rating such shares, the Fund will not, unless it has received
written confirmation from Moody's (if Moody's is then rating TAPS Series __) and
(if applicable) such Other Rating Agency that any such action would not impair
the rating then assigned by such rating agency to TAPS Series __, engage in any
one or more of the following transactions:
(a) purchase or sell futures contracts or options thereon
with respect to portfolio securities or write unsecured put or uncovered call
options on portfolio securities, engage in options transactions involving
cross-hedging, or enter into any swap transaction;
(b) except in connection with a refinancing of the TAPS
(including the TAPS Series __), issue any class or series of stock ranking prior
to or on a parity with TAPS Series __ with respect to the payment of dividends
or the distribution of assets upon dissolution, liquidation or winding up of the
Fund, or reissue any shares of TAPS Series __ previously purchased or redeemed
by the Fund;
(c) engage in any short sales of securities;
(d) lend portfolio securities; or
(e) merge or consolidate into or with any other
corporation.
For purposes of valuation of Moody's Eligible Assets: (A) if the Fund
writes a call option, the underlying asset will be valued as follows: (1) if the
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of TAPS Series __, at the lower of the
Discounted Value of the underlying security of the option and the exercise price
of the option or (2) otherwise, it has no value; (B) if the Fund writes a put
option, the underlying asset will be valued as follows: the lesser of (1)
exercise price and (2) the Discounted Value of the underlying security; and (C)
call or put option contracts which the Fund buys have no value. For so long as
TAPS
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<PAGE> 96
Series __ is rated by Moody's: (A) the Fund will not engage in options
transactions for leveraging or speculative purposes; (B) the Fund will not write
or sell any anticipatory contracts pursuant to which the Fund hedges the
anticipated purchase of an asset prior to completion of such purchase; (C) the
Fund will not enter into an option transaction with respect to portfolio
securities unless, after giving effect thereto, the Fund would continue to have
Eligible Assets with an aggregate Discounted Value equal to or greater than the
TAPS Basic Maintenance Amount; (D) the Fund will not enter into an option
transaction with respect to portfolio securities unless after giving effect to
such transaction the Fund would continue to be in compliance with the provisions
relating to the TAPS Basic Maintenance Amount; (E) for purposes of the TAPS
Basic Maintenance Amount assets in margin accounts are not Eligible Assets; (F)
the Fund shall write only exchange-traded options on exchanges approved by
Moody's; (G) where delivery may be made to the Fund with any of a class of
securities, the Fund shall assume for purposes of the TAPS Basic Maintenance
Amount that it takes delivery of that security which yields it the least value;
(H) the Fund will not engage in forward contracts; and (I) there shall be a
quarterly audit made of the Fund's options transactions by the Fund's
independent accountants to confirm that the Fund is in compliance with these
standards.
13. Compliance Procedures for Asset Maintenance Tests. For so long
as any shares of TAPS Series __ are Outstanding and Moody's or any Other Rating
Agency which so requires is then rating such shares:
(a) As of each Valuation Date, the Fund shall determine
in accordance with the procedures specified herein (i) the Market Value of each
Eligible Asset owned by the Fund on that date, (ii) the Discounted Value of each
such Eligible Asset using the Discount Factors, (iii) whether the TAPS Basic
Maintenance Amount is met as of that date, (iv) the value of the total assets of
the Fund, less all liabilities, and (v) whether the 1940 Act TAPS Asset Coverage
is met as of that date.
(b) Upon any failure to maintain the required TAPS Basic
Maintenance Amount or 1940 Act TAPS Asset Coverage on any Valuation Date, the
Fund may use reasonable commercial efforts (including, without limitation,
altering the composition of its portfolio, purchasing shares of the TAPS outside
of an Auction or in the event of a failure to file a certificate on a timely
basis, submitting the requisite certificate), subject to the fiduciary
obligations of the Board of Trustees, to reattain (or certify in the case of a
failure to file on a timely basis, as the case may be) the required TAPS Basic
Maintenance Amount or 1940 Act TAPS Asset Coverage on or prior to the Asset
Coverage Cure Date.
(c) Compliance with the TAPS Basic Maintenance Amount and
1940 Act TAPS Asset Coverage tests shall) be determined with reference to those
shares of the TAPS which are deemed to be Outstanding hereunder.
(d) The Fund shall deliver a certificate which sets forth
a determination of items (i)-(iii) of paragraph (a) of this Section 13 (an "TAPS
Basic Maintenance Certificate") (i) to the Auction Agent, Moody's (if Moody's is
then rating TAPS Series __) and any Other Rating Agency which is then rating
TAPS Series __ and which so requires as of (A) the Business Day preceding the
Date of Original Issue and (B) any Valuation Date on which the Fund fails to
have Eligible Assets with an aggregate Discounted Value at least equal to 125%
of the TAPS Basic Maintenance Amount, (ii) to the Auction Agent, Moody's (if
Moody's is then rating TAPS Series ____) and any Other Rating Agency which is
then rating TAPS Series __ and which so requires (A) as of every fourth
Valuation Date after the Date of Original Issue for the first year following the
Date of Original Issue, (B) if the Fund fails to have Eligible Assets with an
aggregate Discounted Value at least equal to TAPS Basic Maintenance Amount, and
(C) on request by Moody's or such Other Rating Agency, as applicable, (iii) to
the Auction Agent, Moody's (if Moody's is then rating TAPS Series __) and any
Other Rating Agency which is then rating TAPS Series __ and which so requires as
of (A) the Valuation Date next following the date of redemption by the Fund of
shares of Common Shares which, together with all other shares of Common Shares
purchased during the six months preceding such date, equal in excess of
1,000,000 shares of Common Shares, and (B) the last Valuation Date of each
fiscal quarter and a Valuation Date during such fiscal quarter randomly selected
by the Fund's independent accountants as provided in Section 10(g), and (iv) to
the Auction Agent, Moody's (if Moody's is then rating TAPS Series __) and any
Other Rating Agency which is then rating TAPS Series __ and which so requires as
of a Business Day on or before any Asset Coverage Cure Date relating to the
Fund's cure of a failure to have Eligible Assets with an aggregate Discounted
Value at least equal to the TAPS Basic Maintenance Amount. Such TAPS Basic
Maintenance Certificate shall be delivered in the case of clause (i)(A) on the
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<PAGE> 97
Date of Original Issue and in the case of clauses (i)(B), (ii), (iii) and (iv)
above on or before the third Business Day after the relevant Valuation Date or
Asset Coverage Cure Date.
(e) The Fund shall deliver to the Auction Agent, Moody's
(if Moody's is then rating TAPS Series __) and any Other Rating Agency which is
then rating TAPS Series __ and which so requires a certificate with respect to
the calculation of the 1940 Act TAPS Asset Coverage and the value of the
portfolio holdings of the Fund (a "1940 Act TAPS Asset Coverage Certificate")
(i) as of the Business Day preceding the Date of Original Issue, and (ii) as of
(A) the last Valuation Date of each quarter thereafter, and (B) as of the
Business Day on or before the Asset Coverage Cure Date relating to the failure
to satisfy the 1940 Act TAPS Asset Coverage. Such 1940 Act TAPS Asset Coverage
Certificate shall be delivered in the case of clause (i) on the Date of Original
Issue and in the case of clause (ii) on or before the third Business Day after
the relevant Valuation Date or the Asset Coverage Cure Date.
(f) Reserved
(g) On the Date of Original Issue, the Fund shall deliver
to the Auction Agent, Moody's (if Moody's is then rating TAPS Series __) and any
Other Rating Agency which is then rating TAPS Series __ and which so requires a
letter prepared by the Fund's independent accountants (an "Accountant's
Certificate") regarding the accuracy of the calculations made by the Fund in the
TAPS Basic Maintenance Certificate and the 1940 Act TAPS Asset Coverage
Certificate required to be delivered by the Fund as of the Date of Original
Issue. Within eight Business Days after the last Valuation Date of each fiscal
quarter of the Fund on which an TAPS Basic Maintenance Certificate is required
to be delivered, the Fund (x) will deliver to the Auction Agent, Moody's (if
Moody's is then rating TAPS Series __) and any Other Rating Agency which is then
rating TAPS Series __ and which so requires an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund in such TAPS Basic
Maintenance Certificate and in any other TAPS Basic Maintenance Certificate
randomly selected by the Fund's independent accountants during such fiscal
quarter. Within eight Business Days after the last Valuation Date of each fiscal
quarter of the Fund on which a 1940 Act TAPS Asset Coverage Certificate is
required to be delivered, the Fund will deliver to the Auction Agent, Moody's
(if Moody's is then rating TAPS Series __) and any Other Rating Agency which is
then rating TAPS Series __ and which so requires an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund in such 1940 Act
TAPS Asset Coverage Certificate. In addition, the Fund will deliver to the
relevant persons specified in the preceding sentence an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund on each TAPS Basic
Maintenance Certificate and 1940 Act TAPS Asset Coverage Certificate delivered
pursuant to clause (iv) of paragraph (d) or clause (ii)(B) of paragraph (e) of
this Section 13, as the case may be, within five days after the relevant Asset
Coverage Cure Date. If an Accountant's Certificate delivered with respect to an
Asset Coverage Cure Date shows an error was made in the Fund's report with
respect to such Asset Coverage Cure Date, the calculation or determination made
by the Fund's independent accountants will be conclusive and binding on the Fund
with respect to such reports. If any other Accountant's Certificate shows that
an error was made in any such report, the calculation or determination made by
the Fund's independent accountants will be conclusive and binding on the Fund;
provided, however, any errors shown in the Accountant's Certificate filed on a
quarterly basis shall not be deemed to be a failure to maintain the TAPS Basic
Maintenance Amount on any prior Valuation Dates.
(h) The Accountant's Certificates referred to in
paragraph (g) will confirm, based upon the independent accountant's review, (i)
the mathematical accuracy of the calculations reflected in the related TAPS
Basic Maintenance Amount and 1940 Act TAPS Asset Coverage Certificates, as the
case may be, and (ii) that the Fund determined whether the Fund had, at such
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Basic Maintenance Amount in accordance with the Declaration.
(i) In the event that an TAPS Basic Maintenance
Certificate or 1940 Act TAPS Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified in
this Section 13, the Fund shall be deemed to have failed to maintain the TAPS
Basic Maintenance Amount or the 1940 Act TAPS Asset Coverage, as the case may
be, on such Valuation Date for purposes of Section 13(b). In the event that an
TAPS Basic Maintenance Certificate or 1940 Act TAPS Asset Coverage Certificate
or the applicable Accountant's Certificates with respect to an applicable Asset
Coverage Cure Date are not delivered within the time periods specified herein,
the Fund shall be deemed to have failed to have Eligible Assets with an
aggregate Discounted Value at least equal to the TAPS Basic Maintenance Amount
or the 1940 TAPS Asset Coverage, as the case may be, as of the related
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<PAGE> 98
Valuation Date, and such failure shall be deemed not to have been cured as of
such Asset Coverage Cure Date for purposes of the mandatory redemption
provisions.
14. Reserved
15. Notice. All notices or communications hereunder, unless
otherwise specified in this Statement, shall be sufficiently given if in writing
and delivered in person, by telecopier or mailed by first-class mail, postage
prepaid. Notices delivered pursuant to this Section 15 shall be deemed given on
the earlier of the date received or the date five days after which such notice
is mailed.
16. Waiver. Holders of at least two-thirds of the Outstanding
shares of TAPS, acting collectively, or the TAPS Series __, acting as a separate
series, may waive any provision hereof intended for their respective benefit in
accordance with such procedures as may from time to time be established by the
Board of Trustees.
17. Termination. In the event that no shares of TAPS Series __ are
Outstanding, all rights and preferences of such shares established and
designated hereunder shall cease and terminate, and all obligations of the Fund
under this Statement, shall terminate.
18. Definitions. As used in Part I and Part II of this Statement,
the following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
(a) ""aaa" Credit Rating" means a credit rating in the
highest category of a nationally recognized statistical rating organization (as
used in the rules and regulations under the Securities Exchange Act of 1934)
which shall be Moody's.
(b) "AA Composite Commercial Paper Rate" on any date
means (i) the interest equivalent of the 30-day rate, in the case of a Dividend
Period which is a Minimum Rate Period or shorter, or the 180-day rate, in the
case of all other Dividend Periods, on commercial paper on behalf of issuers
whose corporate bonds are rated AA by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the AA Composite
Commercial Paper Rate, such rate shall be determined on the basis of the
quotations (or quotation) furnished by the remaining Commercial Paper Dealers
(or Dealer), if any, or, if there are no such Commercial Paper Dealers, by the
Auction Agent. For purposes of this definition, (A) "Commercial Paper Dealers"
shall mean (1) Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Goldman Sachs & Co.; (2) in lieu of any thereof, its respective
Affiliate or successor; and (3) in the event that any of the foregoing shall
cease to quote rates for commercial paper of issuers of the sort described
above, in substitution therefor, a nationally recognized dealer in commercial
paper of such issuers then making such quotations selected by the Fund, and (B)
"interest equivalent" of a rate stated on a discount basis for commercial paper
of a given number of days' maturity shall mean a number equal to the quotient
(rounded upward to the next higher one- thousandth of 1%) of (1) such rate
expressed as a decimal, divided by (2) the difference between (x) 1.00 and (y) a
fraction, the numerator of which shall be the product of such rate expressed as
a decimal, multiplied by the number of days in which such commercial paper shall
mature and the denominator of which shall be 360.
(c) "Accountant's Certificate" has the meaning set forth
in Section 13(g) of this Part I.
(d) "Affiliate" means any person controlled by, in
control of or under common control with the Fund; provided that no Broker-Dealer
controlled by, in control of or under common control with the Fund shall be
deemed to be an Affiliate nor shall any corporation or any person controlled by,
in control of or under common control
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with such corporation one of the trustees, directors or executive officers of
which is also a trustee of the Fund be deemed to be an Affiliate solely because
such trustee, director or executive officer is also a trustee of the Fund.
(e) "Agent Member" means a member of or participant in
the Securities Depository that will act on behalf of a Bidder.
(f) "Applicable Rate" means, with respect to TAPS Series
____ for each Dividend Period (i) if Sufficient Clearing Orders exist for the
Auction in respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing
Orders do not exist for the Auction in respect thereof, the Maximum Applicable
Rate and (iii) in the case of any Dividend Period of 28 days or fewer if all the
shares of TAPS Series ____ are the subject of Submitted Hold Orders for the
Auction in respect thereof, the Minimum Rate.
(g) "Asset Coverage Cure Date" has the meaning set forth
in Section 3(a)(ii).
(h) "Auction" means each periodic operation of the
procedures set forth under "Auction Procedures."
(i) "Auction Agent" means Bankers Trust Company unless
and until another commercial bank, trust company, or other financial institution
appointed by a resolution of the Board of Trustees enters into an agreement with
the Fund to follow the Auction Procedures for the purpose of determining the
Applicable Rate.
(j) "Auction Date" means the first Business Day next
preceding the first day of a Dividend Period for TAPS Series ____.
(k) "Auction Procedures" means the procedures for
conducting Auctions set forth in Part II hereof.
(l) "Board of Trustees" means the Board of Trustees of
the Fund or any duly authorized committee thereof as permitted by applicable
law.
(m) "Beneficial Owner," with respect to shares of a
series of TAPS Series _____, means a customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of such series.
(n) "Bid" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(o) "Bidder" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement; provided, however, that
neither the Fund nor any affiliate thereof shall be permitted to be a Bidder in
an Auction, except that any Broker-Dealer that is an affiliate of the Fund may
be a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer
are not for its own account.
(p) "Broker-Dealer" means any broker-dealer or
broker-dealers, or other entity permitted by law to perform the functions
required of a Broker-Dealer by the Auction Procedures, that has been selected by
the Fund and has entered into a Broker-Dealer Agreement that remains effective.
(q) "Broker-Dealer Agreement" means an agreement among
the Auction Agent and a Broker-Dealer, pursuant to which such Broker-Dealer
agrees to follow the Auction Procedures.
(r) "Business Day" means a day on which the New York
Stock Exchange is open for trading and which is not a Saturday, Sunday or other
day on which banks in the City of New York, New York are authorized or obligated
by law to close.
(s) "Code" means the Internal Revenue Code of 1986, as
amended.
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(t) "Commercial Paper Dealers" has the meaning set forth
in the definition of AA Composite Commercial Paper Rate.
(u) "Commission" means the Securities and Exchange
Commission.
(v) "Common Share" means the shares of beneficial
interest, par value $.01 per share, of the Fund.
(w) "Date of Original Issue" means the date on which TAPS
Series ____ is originally issued by the Fund.
(x) "Default Period" has the meaning set forth in Section
2(c)(ii) of this Part I.
(y) "Default Rate" means the Reference Rate multiplied by
three (3).
(z) "Deposit Securities" means cash and any obligations
or securities, including Short Term Money Market Instruments that are Eligible
Assets, rated at least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of
section 3(a)(i) of this Part I, such obligations or securities shall be
considered "Deposit Securities" only if they are also rated at least P-1 by
Moody's.
(aa) "Discount Factor" means the Moody's Discount Factor
(if Moody's is then rating the TAPS), or the discount factor established by any
Other Rating Agency which is then rating the TAPS and which so requires,
whichever is applicable.
(bb) "Discounted Value" means the quotient of the Market
Value of an Eligible Asset divided by the applicable Discount Factor provided
that with respect to an Eligible Asset that is currently callable, Discounted
Value shall be equal to the quotient as calculated above or the call price,
whichever is lower, and that with respect to an Eligible Asset that is
prepayable, Discounted Value shall be equal to the quotient as calculated above
or the par value, whichever is lower.
(cc) "Dividend Payment Date" for TAPS Series ____, means
(i) with respect to any Dividend Period of one year or less, the Business Day
next succeeding the last day thereof and, if any, the 91st, 181st and 271st days
thereof, and (ii) with respect to any Dividend Period of more than one year, on
a quarterly basis on each January 1, April 1, July 1 and October 1 and on the
Business Day following the last day of such Dividend Period.
(dd) "Dividend Default" has the meaning set forth in
Section 2(c)(iii) of this Part I.
(ee) "Dividend Period" means, with respect to TAPS Series
____, the period commencing on the Date of Original Issue thereof and ending on
the date specified for such series on the Date of Original Issue thereof and
thereafter, as to such series, the period commencing on the day following each
Dividend Period for such series and ending on the day established for such
series by the Fund.
(ff) "Eligible Assets" means Moody's Eligible Assets (if
Moody's is then rating the TAPS) and/or Other Rating Agency Eligible Assets if
any Other Rating Agency is then rating the TAPS, whichever is applicable.
(gg) "Existing Holder," with respect to shares of a series
of TAPS, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Fund) that is listed on the records of the Auction Agent as a
holder of shares of such series.
(hh) "Exposure Period" means the period commencing on (and
including) a given Valuation Date and ending 41 days thereafter.
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(ii) "Holder" means, with respect to TAPS Series ____, the
registered holder of shares of TAPS Series ____ as the same appears on the share
ledger or share records of the Fund.
(jj) "Hold Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
(kk) "Mandatory Redemption Date" has the meaning set forth
in Section 3(a)(iv) of this Part I.
(ll) "Mandatory Redemption Price" has the meaning set
forth in Section 3(a)(iv) of this Part I.
(mm) "Market Value" of any asset of the Fund shall mean
the market value thereof determined by the pricing service designated from time
to time by the Board of Trustees. In determining net asset value, the Fund will
utilize the valuations of senior loans furnished by an independent third-party
pricing service approved by the Board of Trustees. The pricing service typically
values senior loans at the mean of the highest bona fide bid and lowest bona
fide ask prices when current quotations are readily available. Senior loans for
which current quotations are not readily available are valued at a fair value as
determined by the pricing service using pricing matrices and other information
and analysis, including credit considerations considered relevant by such
pricing services to determine valuations. If the Fund's adviser believes that a
value provided by the pricing service does not represent a fair value as a
result of information, specific to that senior loan or borrower or its
affiliates, which the adviser believes that the pricing agent may not be aware,
the adviser may in its discretion value the senior loan and the Fund will
utilize that price instead of the price as determined by the pricing service. If
the pricing services does not provide a value for a senior loan, a value will be
determined by the adviser.
Other portfolio securities (other than short-term obligations, but
including listed issues) may be valued on the basis of prices furnished by one
or more pricing services which 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 such 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 which mature in 60 days or less will be valued
at amortized cost, if their original term to maturity when acquired by the Fund
was 60 days or less, or will be 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 will be valued at a fair value as determined in good faith by
or on behalf of the Trustees.
(nn) "Maximum Rate" means, on any date on which the
Applicable Rate is determined, the rate equal to 150% of the applicable
Reference Rate, subject to upward but not downward adjustment in the discretion
of the Board of Trustees after consultation with the Broker-Dealers, provided
that immediately following any such increase the Fund would be in compliance
with the TAPS Basic Maintenance Amount.
(oo) "Minimum Rate" means, on any Auction Date with
respect to a Dividend Period of 93 days or fewer, 80% of the AA Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding such Auction Date. There shall be no Minimum Rate on any Auction Date
with respect to a Dividend Period of more than 93 days.
(pp) "Moody's" means Moody's Investors Service, Inc. and
its successors at law.
(qq) "Moody's Discount Factor" means
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(rr) "Moody's Eligible Assets" means
(ss) "Moody's Industry Classification" means
(tt) "1940 Act TAPS Asset Coverage" means asset coverage,
as determined in accordance with Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Fund which are stock,
including all Outstanding TAPS (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset coverage for
senior securities which are stock of a closed-end investment company as a
condition of declaring dividends on its common shares), determined on the basis
of values calculated as of a time within 48 hours next preceding the time of
such determination.
(uu) "1940 Act" means the Investment Company Act of 1940,
as amended from time to time.
(vv) "1940 Act TAPS Asset Coverage Certificate" means the
certificate required to be delivered by the Fund pursuant to Section 13(e) of
this Part I.
(ww) "Notice of Redemption" means any notice with respect
to the redemption of shares of TAPS pursuant to Section 3.
(xx) "Order" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(yy) "Other Rating Agency" means any rating agency other
than Moody's then providing a rating for the TAPS pursuant to the request of the
Fund.
(zz) "Other Rating Agency Eligible Assets" means assets of
the Fund designated by any Other Rating Agency as eligible for inclusion in
calculating the discounted value of the Fund's assets in connection with such
Other Rating Agency's rating of TAPS Series ____.
(aaa) "Outstanding" or "outstanding" means, as of any date,
shares of TAPS theretofore issued by the Fund except, without duplication, (i)
any shares of TAPS theretofore canceled, redeemed or repurchased by the Fund, or
delivered to the Auction Agent for cancellation or with respect to which the
Fund has given notice of redemption and irrevocably deposited with the Paying
Agent sufficient funds to redeem such shares of TAPS and (ii) any shares of TAPS
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Fund. Notwithstanding the foregoing, (A) for
purposes of voting rights (including the determination of the number of shares
required to constitute a quorum), any shares of the TAPS to which the Fund or
any Affiliate of the Fund shall be the Existing Holder shall be disregarded and
not deemed Outstanding; (B) in connection with any Auction, any shares of the
TAPS Series ____ as to which the Fund or any person known to the Auction Agent
to be an Affiliate of the Fund shall be the Existing Holder thereof shall be
disregarded and deemed not to be Outstanding; and (C) for purposes of
determining the TAPS Basic Maintenance Amount, shares of TAPS held by the Fund
shall be disregarded and not deemed Outstanding but shares held by any Affiliate
of the Fund shall be deemed Outstanding.
(bbb) "Paying Agent" means Bankers Trust Company unless and
until another entity appointed by a resolution of the Board of Trustees enters
into an agreement with the Fund to serve as paying agent, which paying agent may
be the same as the Auction Agent.
(ccc) "Person" or "person" means and includes an
individual, a partnership, a Fund, a trust, an unincorporated association, a
joint venture or other entity or a government or any agency or political
subdivision thereof.
(ddd) "Potential Beneficial Owner," with respect to shares
of a series of TAPS, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
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(eee) "Preferred Share" means the preferred shares of
beneficial interest, par value $.01 per share, including the TAPS of the Fund
from time to time.
(fff) "Rating Default" has the meaning set forth in Section
2(c)(ii) of Part I of this Statement.
(ggg) "Rating Default Cure Date" has the meaning set forth
in Section 3(a)(iii) of this Part I.
(hhh) "Redemption Default" has the meaning set forth in
Section 2(c)(ii) of this Part I.
(iii) "Reference Rate" means, with respect to the
determination of the Maximum Rate, the applicable AA Composite Commercial Paper
Rate (for a Dividend Period of fewer than 184 days) or the applicable Treasury
Index Rate (for a Dividend Period of 184 days or more).
(jjj) "Rule 144A Securities" means securities which are
restricted as to resale under federal securities laws but are eligible for
resale pursuant to Rule 144A under the Securities Act as determined by the
Fund's adviser acting subject to the supervision of the Fund's Board of
Trustees.
(kkk) "S&P" means Standard & Poor's Fund and its successors
at law.
(lll) "Securities Act" means the Securities Act of 1933, as
amended from time to time.
(mmm) "Securities Depository" means The Depository Trust
Company and its successors and assigns or any successor securities depository
selected by the Fund that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of TAPS
Series ____.
(nnn) "Sell Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
(ooo) "Special Rate Period" means a Dividend Period that is
not a Standard Rate Period.
(ppp) "Specific Redemption Provisions" means, with respect
to any Special Rate Period of more than one year, either, or any combination of
(i) a period (a "Non-Call Period") determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the shares subject to such
Special Rate Period are not subject to redemption at the option of the Fund
pursuant to Section 3(a)(i) and/or Section 3(a)(ii) and/or 3(a)(iii) and (ii) a
period (a "Premium Call Period"), consisting of a number of whole years as
determined by the Board of Trustees after consultation with the Broker-Dealers,
during each year of which the shares subject to such Special Rate Period shall
be redeemable at the Fund's option pursuant to Section 3(a)(i) and/or in
connection with any mandatory redemption pursuant to Section 3(a)(ii) and/or
3(a)(iii) at a price per share equal to $25,000 plus accumulated but unpaid
dividends plus a premium expressed as a percentage or percentages of $25,000 or
expressed as a formula using specified variables as determined by the Board of
Trustees after consultation with the Broker- Dealers.
(qqq) "Standard Rate Period" means a Dividend Period of 28
days, unless such 28th day is not a Business Day, then the number of days ending
on the Business Day next preceding such 28th day.
(rrr) "Submission Deadline" means 1:30 P.M., New York City
time, on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time.
(sss) "Submitted Bid" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(ttt) "Submitted Hold Order" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
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(uuu) "Submitted Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(vvv) "Submitted Sell Order" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(www) "Sufficient Clearing Bids" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(xxx) "TAPS" means Taxable Auctioned Preferred Shares,
liquidation preference $25,000 per share, Series ___ of the Fund or any other
series of Preferred Shares heretofore or hereinafter designated "Taxable
Auctioned Preferred Shares" by a Statement.
(yyy) "TAPS Basic Maintenance Amount" as of any Valuation
Date means the dollar amount equal to the sum of
(i) (A) the sum of the products resulting from
multiplying the number of Outstanding shares of each series of TAPS on
such date by the liquidation preference per share of such series; (B)
the aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) to and including
the first following Dividend Payment Date for each share of TAPS
Outstanding that follows such Valuation Date (or to the 42nd day after
such Valuation Date, if such 42nd day occurs before the first following
Dividend Payment Date); (C) the aggregate amount of dividends that
would accumulate at the then current Maximum Rate for a Standard Rate
Period multiplied by the Volatility Factor on any shares of TAPS
Outstanding from the first day following the Dividend Payment Date
referred to in (B) above through the 42nd day after such Valuation
Date, only if such 42nd day occurs after the first day following the
Dividend Payment Date, except that if such Valuation Date occurs during
a Default Period, the dividend for purposes of the calculation would
accumulate at the Default Rate; (D) the amount of anticipated Fund
expenses for the 90 days subsequent to such Valuation Date; (E) any
current liabilities, including, without limitation, indebtedness due
within one year and any redemption premium due with respect to shares
of TAPS for which a Notice of Redemption has been given, as of such
Valuation Date to the extent not reflected in any of (i)(A) through
(i)(D); and (F) without duplication, 10% of the exercise price of any
call option written by the Fund and the exercise price of any put
option written by the Fund; less
(ii) the sum of any cash or the value of any Fund
assets irrevocably deposited by the Fund for the payment of any of
(i)(B) through (i)(F) ("value" for purposes of this clause (ii) shall
mean 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 P1 by Moody's and
A1+ by S&P, it will be valued at its face value).
(zzz) "TAPS Basic Maintenance Certificate" has the meaning
set forth in Section 13(d) of this Part I.
(aaaa) "TAPS Series ____" means the shares of Series ____ of
he TAPS or any other shares of Preferred Stock hereinafter designated as shares
of Series ____ of the TAPS.
(bbbb) "Treasury Index Rate" means the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities having the same number of 30-day periods to maturity as the length of
the applicable Dividend Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having the next shorter
and next longer number of 30-day periods to maturity treating all Dividend
Periods with a length greater than the longest maturity for such securities as
having a length equal to such longest maturity, in all cases based upon data set
forth in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations shall be
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based upon the average of comparable data as quoted to the Fund by at least
three recognized dealers in U.S. Government securities selected by the Fund.
(cccc) "Valuation Date" means every Friday, or, if such day
is not a Business Day, the next preceding Business Day; provided, however, that
the first Valuation Date may occur on any other date established by the Fund;
provided, further, however, that such date shall be not more than one week from
the date on which TAPS Series ____ initially is issued.
(dddd) "Volatility Factor" means 1.89.
(eeee) "Winning Bid Rate" has the meaning set forth in
Section 3(a)(iii) of Part II of this Statement.
19. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Orders
(a). Prior to the Submission Deadline on each Auction Date
for shares of a series of TAPS:
(i) each Beneficial Owner of shares of such
series may submit to its Broker-Dealer by telephone or otherwise
information as to:
(A) the number of Outstanding shares,
if any, of such series held by such Beneficial Owner which
such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for shares of such series for
the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares,
if any, of such series held by such Beneficial Owner which
such Beneficial Owner offers to sell if the Applicable Rate
for shares of such series for the next succeeding Rate Period
of shares of such series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares,
if any, of such series held by such Beneficial Owner which
such Beneficial Owner offers to sell without regard to the
Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of
Potential Beneficial Owners, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable manner,
contact Potential Beneficial Owners (by telephone or otherwise),
including Persons that are not Beneficial Owners, on such lists to
determine the number of shares, if any, of such series which each such
Potential Beneficial Owner offers to purchase if the Applicable Rate
for shares of such series for the next succeeding Rate Period of shares
of such series shall not be less than the rate per annum specified by
such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A) (i), (B), (i) (C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this
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paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids";
and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as
"Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing
Holder of shares of a series of TAPS subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of
such series specified in such Bid if the Applicable Rate for
shares of such series determined on such Auction Date shall be
less than the rate specified therein;
(B) such number or a lesser number of
Outstanding shares of such series to be determined as set
forth in clause (iv) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series
determined on such Auction Date shall be equal to the rate
specified therein; or
(C) the number of Outstanding shares of
such series specified in such Bid if the rate specified
therein shall be higher than the Maximum Rate for shares of
such series, or such number or a lesser number of Outstanding
shares of such series to be determined as set forth in clause
(iii) of paragraph (b) of Section 4 of this Part II if the
rate specified therein shall be higher than the Maximum Rate
for shares of such series and Sufficient Clearing Bids for
shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an
Existing Holder of shares of a series of TAPS subject to an Auction on
any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of
such series specified in such Sell Order; or
(B) such number or a lesser number of
Outstanding shares of such series as set forth in clause (iii)
of paragraph (b) of Section 4 of this Part II if Sufficient
Clearing Bids for shares of such series do not exist;
PROVIDED, HOWEVER, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of TAPS shall not be liable to any Person for failing to
sell such shares pursuant to a Sell Order described in the proviso to paragraph
(c) of Section 2 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the Fund)
with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker-Dealer's records, such Broker-Dealer believes it
is not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a
Potential Holder of shares of a series of TAPS subject to an Auction on
any Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of
such series specified in such Bid if the Applicable Rate for
shares of such series determined on such Auction Date shall be
higher than the rate specified therein; or
(B) such number or a lesser number of
Outstanding shares of such series as set forth in clause (v)
of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of shares of TAPS other than
whole shares shall be valid.
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2. Submission of Orders by Broker-Dealers to Auction Agent
(a) Each Broker-Dealer shall submit in writing to the
Auction Agent prior to the Submission Deadline on each Auction Date all Orders
for shares of TAPS of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order
(which shall be the Broker-Dealer unless otherwise permitted by the
Fund);
(ii) the aggregate number of shares of such
series that are the subject of such Order;
(iii) to the extent that such Bidder is an
Existing Holder of shares of such series:
(A) the number of shares, if any, of
such series subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of
such series subject to any Bid of such Existing Holder and the
rate specified in such Bid; and
(C) the number of shares, if any, of
such series subject to any Sell Order of such Existing Holder;
and
(iv) to the extent such Bidder is a Potential
Holder of shares of such series, the rate and number of shares of such
series specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall round
such rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
shares of TAPS of a series held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a
Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; PROVIDED,
HOWEVER, that if an Order or Orders covering all of the Outstanding shares of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is
submitted to the Auction Agent covering in the aggregate more than the number of
Outstanding shares of TAPS of a series subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for shares of such series
shall be considered valid, but only up to and including in the
aggregate the number of Outstanding shares of such series held by such
Existing Holder, and if the number of shares of such series subject to
such Hold Orders exceeds the number of Outstanding shares of such
series held by such Existing Holder, the number of shares subject to
each such Hold Order shall be reduced pro rata to cover the number of
Outstanding shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series
shall be considered valid up to and including the excess of the number
of Outstanding shares of such series held by such Existing Holder over
the number of shares of such series subject to any Hold Orders referred
to in clause (i) above;
A-25
<PAGE> 108
(B) subject to subclause (A), if more
than one Bid of an Existing Holder for shares of such series
is submitted to the Auction Agent with the same rate and the
number of Outstanding shares of such series subject to such
Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such
excess, and the number of shares of such series subject to
each Bid with the same rate shall be reduced pro rata to cover
the number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B),
if more than one Bid of an Existing Holder for shares of such
series is submitted to the Auction Agent with different rates,
such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if
any, of such Outstanding shares of such series subject to any
portion of Bids considered not valid in whole or in part under
this clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of such series
shall be considered valid up to and including the excess of the number
of Outstanding shares of such series held by such Existing Holder over
the sum of shares of such series subject to valid Hold Orders referred
to in clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a
series of TAPS is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the rate
and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a
Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate
(a) Not earlier than the Submission Deadline on each
Auction Date for shares of a series of TAPS, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding
shares of such series over the number of Outstanding shares of such
series subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available TAPS" of such series);
(ii) from the Submitted Orders for shares of such
series whether:
(A) the number of Outstanding shares of
such series subject to Submitted Bids of Potential Holders
specifying one or more rates equal to or lower than the
Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
A-26
<PAGE> 109
(B) the number of Outstanding shares of
such series subject to Submitted Bids of Existing Holders
specifying one or more rates higher than the Maximum Rate for
shares of such series; and
(C) the number of Outstanding shares of
such series subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of
such series exist, the lowest rate specified in such Submitted Bids
(the "Winning Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of
Existing Holders specifying such lowest rate and (II) all
other such Submitted Bids of Existing Holders specifying lower
rates were rejected, thus entitling such Existing Holders to
continue to hold the shares of such series that are subject to
such Submitted Bids; and
(B) (I) each such Submitted Bid of
Potential Holders specifying such lowest rate and (II) all
other such Submitted Bids of Potential Holders specifying
lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of Outstanding shares of such
series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available TAPS of such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 3, the Auction Agent
shall advise the Fund of the Maximum Rate for shares of the series of TAPS for
which an Auction is being held on the Auction Date and, based on such
determination, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of
such series exist, that the Applicable Rate for all shares of such
series for the next succeeding Rate Period thereof shall be equal to
the Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of
such series do not exist (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Maximum Rate for shares of
such series; or
(iii) if all of the Outstanding shares of such
series are subject to Submitted Hold Orders, that the Applicable Rate
for all shares of such series for the next succeeding Rate Period
thereof shall be _______.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares
Existing Holders shall continue to hold the shares of TAPS that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
A-27
<PAGE> 110
(a) If Sufficient Clearing Bids for shares of a series of
TAPS have been made, all Submitted Sell Orders with respect to shares of such
series shall be accepted and, subject to the provisions of paragraphs (d) and
(e) of this Section 4, Submitted Bids with respect to shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids with respect to shares of such series shall be
rejected:
(i) Existing Holders' Submitted Bids for shares
of such series specifying any rate that is higher than the Winning Bid
Rate for shares of such series shall be accepted, thus requiring each
such Existing Holder to sell the shares of TAPS subject to such
Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares
of such series specifying any rate that is lower than the Winning Bid
Rate for shares of such series shall be rejected, thus entitling each
such Existing Holder to continue to hold the shares of TAPS subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares
of such series specifying any rate that is lower than the Winning Bid
Rate for shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for
shares of such series specifying a rate that is equal to the Winning
Bid Rate for shares of such series shall be rejected, thus entitling
such Existing Holder to continue to hold the shares of TAPS subject to
such Submitted Bid, unless the number of Outstanding shares of TAPS
subject to all such Submitted Bids shall be greater than the number of
shares of TAPS ("remaining shares") in the excess of the Available TAPS
of such series over the number of shares of TAPS subject to Submitted
Bids described in clauses (ii) and (iii) of this paragraph (a), in
which event such Submitted Bid of such Existing Holder shall be
rejected in part, and such Existing Holder shall be entitled to
continue to hold shares of TAPS subject to such Submitted Bid, but only
in an amount equal to the number of shares of TAPS of such series
obtained by multiplying the number of remaining shares by a fraction,
the numerator of which shall be the number of Outstanding shares of
TAPS held by such Existing Holder subject to such Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding
shares of TAPS subject to such Submitted Bids made by all such Existing
Holders that specified a rate equal to the Winning Bid Rate for shares
of such series; and
(v) each Potential Holder's Submitted Bid for
shares of such series specifying a rate that is equal to the Winning
Bid Rate for shares of such series shall be accepted but only in an
amount equal to the number of shares of such series obtained by
multiplying the number of shares in the excess of the Available TAPS of
such series over the number of shares of TAPS subject to Submitted Bids
described in clauses (ii) through (iv) of this paragraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares of TAPS subject to such Submitted Bid and the denominator of
which shall be the aggregate number of Outstanding shares of TAPS
subject to such Submitted Bids made by all such Potential Holders that
specified a rate equal to the Winning Bid Rate for shares of such
series.
(b) If Sufficient Clearing Bids for shares of a series of
TAPS have not been made (other than because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares
of such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be rejected, thus
entitling such Existing Holders to continue to hold the shares of TAPS
subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares
of such series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for
shares of such series specifying any rate that is higher than the
Maximum Rate for shares of such series and the Submitted Sell Orders
for shares of such series of each Existing Holder shall be accepted,
thus entitling each Existing Holder that submitted or on whose
A-28
<PAGE> 111
behalf was submitted any such Submitted Bid or Submitted Sell Order to
sell the shares of such series subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount equal to the
number of shares of such series obtained by multiplying the number of
shares of such series subject to Submitted Bids described in clause
(ii) of this paragraph (b) by a fraction, the numerator of which shall
be the number of Outstanding shares of such series held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order
and the denominator of which shall be the aggregate number of
Outstanding shares of such series subject to all such Submitted Bids
and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of TAPS
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.
(d) If, as a result of the procedures described in clause
(iv) or (v) of paragraph (a) or clause (iii) of paragraph (b) of this Section 4,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of a
series of TAPS on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, round up or down the number of shares
of TAPS of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of TAPS.
(e) If, as a result of the procedures described in clause
(v) of paragraph (a) of this Section 4, any Potential Holder would be entitled
or required to purchase less than a whole share of a series of TAPS on any
Auction Date, the Auction Agent shall, in such manner as it shall determine in
its sole discretion, allocate shares of TAPS of such series for purchase among
Potential Holders so that only whole shares of TAPS of such series are purchased
on such Auction Date as a result of such procedures by any Potential Holder,
even if such allocation results in one or more Potential Holders not purchasing
shares of TAPS of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a
series of TAPS, the Auction Agent shall determine the aggregate number of shares
of such series to be purchased and the aggregate number of shares of such series
to be sold by Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate number
of shares to be purchased and such aggregate number of shares to be sold differ,
determine to which other Potential Holder(s) or Existing Holder(s) they shall
deliver, or from which other Potential Holder(s) or Existing Holder(s) they
shall receive, as the case may be, shares of TAPS of such series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a series of TAPS with respect to whom a Broker-Dealer submitted a
Bid to the Auction Agent for such shares that was accepted in whole or in part,
or submitted or is deemed to have submitted a Sell Order for such shares that
was accepted in whole or in part, fails to instruct its Agent Member to deliver
such shares against payment therefor, partial deliveries of shares of TAPS that
have been made in respect of Potential Holders' or Potential Beneficial Owners'
Submitted Bids for shares of such series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any
affiliate of either shall have any responsibility or liability with respect to
the failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver shares of
TAPS of any series or to pay for shares of TAPS of any series sold or purchased
pursuant to the Auction Procedures or otherwise.
IN WITNESS WHEREOF, NUVEEN SENIOR INCOME FUND has caused these presents
to be signed in its name and on its behalf by its Vice-President, and its
corporate seal to be hereunto affixed and attested by its Assistant
A-29
<PAGE> 112
Secretary. The Fund's Declaration of Trust is on file with the Secretary of
State of the Commonwealth of Massachusetts, and the said officers of the Fund
have executed this Statement as officers and not individually, and the
obligations and rights set forth in this Statement are not binding upon any such
officers, or the Trustees or shareholders of the Fund, individually, but are
binding only upon the assets and property of the Fund.
NUVEEN SENIOR INCOME FUND
By:
-------------------------------------
Gifford R. Zimmerman, Vice President
ATTEST:
- ---------------------------------
Assistant Secretary
A-30
<PAGE> 113
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing, other
than in connection with its organization. Financial Statements indicating that
the Registrant has met the net worth requirements of Section 14(a) of the 1940
Act are filed herewith.
2. Exhibits:
a. Declaration of Trust dated August 13, 1999.(1)
b. By-Laws of Registrant.(1)
c. None.
d. Form of Share Certificate.(3)
e. Terms and Conditions of the Dividend Reinvestment Plan.(3)
f. None.
g. Form of Investment Management Agreement between Registrant and Nuveen
Senior Loan Asset Management Inc.(2)
h. Form of Underwriting Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.(3)
j. Form of Exchange Traded Fund Custody Agreement between Registrant and
Chase Bank of Texas.(4)
k.1 Form of Shareholder Transfer Agency Agreement between Registrant and
The Chase Manhattan Bank.(4)
k.2 Form of Expense Reimbursement Agreement between Registrant and Nuveen
Senior Loan Asset Management Inc.(2)
k.3 Form of Auction Agency Agreement between the Registrant and Bankers
Trust Company as to the Registrant's TAPS Shares.**
k.4 Form of Broker-Dealer Agreement as to the Registrant's TAPS Shares.**
k.5 Form of DTC Representations Letter as to the Registrant's TAPS
Shares.**
l.1 Opinion and consent of Vedder, Price, Kaufman & Kammholz.**
l.2 Opinion and consent of Bingham Dana LLP.**
m. None.
n. Consent of KPMG LLP.**
Part C-1
<PAGE> 114
o. None.
p. Subscription Agreement of Nuveen Senior Loan Asset Management Inc.
dated October 12, 1999.(3)
q. None.
r. None.
s.1 Power of Attorney of Timothy R. Schwertfeger.(1)
s.2 Powers of Attorney of Trustees (other than Timothy R. Schwertfeger).(2)
- ----------------------
(1) Incorporated herein by reference to the Registrant's initial
Registration Statement on Form N-2, File No. 333-86619, filed on
September 7, 1999.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-2, File No. 333-86619,
filed on September 24, 1999.
(3) Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-2, File No. 333-86619,
filed on October 18, 1999.
(4) Incorporated herein by reference to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-2, File No. 333-86619,
filed on October 26, 1999.
* Filed herewith.
** To be filed by amendment.
Item 25: Marketing Arrangements
See Section _________ of the Underwriting Agreement filed as Exhibit ___ to
Registrant's Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees
Printing and engraving expenses
Legal Fees
Accounting expenses
Blue Sky filing fees and expenses
Miscellaneous expenses
Total
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At December 31, 1999
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
- -------------- ------------------------
<S> <C>
Common Shares, $.01 par value 10,535
</TABLE>
Part C-2
<PAGE> 115
Item 29: Indemnification
Section 4 of Article XII of the Registrant's Declaration of Trust
provides as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent
of the Trust, including persons who serve at the request of the Trust
as directors, trustees, officers, employees or agents of another
organization in which the Trust has an interest as a shareholder,
creditor or otherwise (hereinafter referred to as a "Covered Person"),
shall be indemnified by the Trust to the fullest extent permitted by
law against liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue of his
being or having been such a trustee, director, officer, employee or
agent and against amounts paid or incurred by him in settlement
thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body
before which the proceeding was brought that he engaged in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interests of
the Trust; or
(c) in the event of a settlement or other disposition not
involving a final adjudication (as provided in paragraph (a)
or (b)) and resulting in a payment by a Covered Person, unless
there has been either a determination that such Covered Person
did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the
settlement or other disposition or a reasonable determination,
based on a review of readily available facts (as opposed to a
full trial-type inquiry), that he did not engage in such
conduct:
(i) by a vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the
matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect
any other rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be such a
Covered Person and shall inure to the benefit of the heirs, executors
and administrators of such a person. Nothing contained herein shall
affect any rights to indemnification to which Trust personnel other
than Covered Persons may be entitled by contract or otherwise under
law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under
this Section 4 shall be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by or on behalf of
the recipient to repay such amount if it is ultimately determined that
he is not entitled to indemnification under this Section 4, provided
that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against
losses arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then
in office act on the matter) or independent legal counsel in a
written opinion shall determine, based upon a review of the
readily available facts (as opposed to a full trial-type
Part C-3
<PAGE> 116
inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is
not an Interested Person of the Trust (including, as such Disinterested
Trustee, anyone who has been exempted from being an Interested Person
by any rule, regulation or order of the Commission), and (y) against
whom none of such actions, suits or other proceedings or another
action, suit or other proceeding on the same or similar grounds is then
or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings
(civil, criminal, administrative or other, including appeals), actual
or threatened; and the words "liability" and "expenses" shall include
without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
The trustees and officers of the Registrant are covered by Investment
Trust Errors and Omission policies in the aggregate amount of
$40,000,000 (with a maximum deductible of $500,000) against liability
and expenses of claims of wrongful acts arising out of their position
with the Registrant, except for matters which involve willful acts, bad
faith, gross negligence and willful disregard of duty (i.e., where the
insured did not act in good faith for a purpose he or she reasonably
believed to be in the best interest of Registrant or where he or she
had reasonable cause to believe this conduct was unlawful).
Section 8 of the Underwriting Agreement filed as Exhibit h.1 to this
Registration Statement provides for each of the parties thereto,
including the Registrant and the Underwriters, to indemnify the others,
their trustees, directors, certain of their officers, trustees,
directors and persons who control them against certain liabilities in
connection with the offering described herein, including liabilities
under the federal securities laws.
Item 30: Business and Other Connections of Investment Adviser
As of the date hereof, Nuveen Senior Loan Asset Management Inc. acts as
investment adviser for the Nuveen Floating Rate Fund and the Nuveen Senior
Income Fund. For a description of other business, profession, vocation or
employment of a substantial nature in which any director or officer of the
investment adviser has engaged during the last two years for his account or in
the capacity of director, officer, employee, partner or trustee, see the
descriptions under "Management of the Fund" in Part A of this Registration
Statement.
Part C-4
<PAGE> 117
Item 31: Location of Accounts and Records
Nuveen Senior Loan Asset Management Inc., 333 West Wacker Drive,
Chicago, Illinois 60606, maintains the Declaration of Trust, By-Laws, minutes of
trustees and shareholders meetings and contracts of the Registrant and all
advisory material of the investment adviser at 333 West Wacker Drive, Chicago,
Illinois 60606 or 820 Jorie Blvd. Oakbrook, Illinois 60523.
Chase Bank of Texas, National Association, 600 Travis Street, Houston,
Texas 77002, is the Fund's custodian and will maintain all general and
subsidiary ledgers, journals, trial balances, records of all portfolio purchases
and sales, and all other required records not maintained by Nuveen Senior Loan
Asset Management Inc.
The Chase Manhattan Bank, 4 New York Plaza, New York, New York 10004
maintains all the required records in its capacity as transfer and dividend
paying agent for the Registrant.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if (1) subsequent to the
effective date of its Registration Statement, the net asset
value declines more than 10 percent from its net asset value
as of the effective date of the Registration Statement, or (2)
the net asset value increases to an amount greater than its
net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the
Securities Act of 1933, the information omitted from
the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the Securities Act
of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared
effective.
b. For the purpose of determining any liability under
the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to
the securities offered therein, and the offering of
the securities at that time shall be deemed to be the
initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery within two
business days of receipt of a written or oral request, any
Statement of Additional Information.
Part C-5
<PAGE> 118
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 26th day of
January, 2000.
NUVEEN SENIOR INCOME FUND
/s/ GIFFORD R. ZIMMERMAN
----------------------------
Gifford R. Zimmerman,
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ STEPHEN D. FOY Vice President and January 26, 2000
- ----------------------------- Controller (Principal
Stephen D. Foy Financial and
Accounting Officer)
/s/ TIMOTHY R. SCHWERTFEGER Chairman of the Board,
- ----------------------------- President and Trustee
Timothy R. Schwertfeger Principal Executive
Officer
James E. Bacon Trustee By:
/s/ GIFFORD R. ZIMMERMAN
Jack B. Evans Trustee -------------------------
Gifford R. Zimmerman
William L. Kissick Trustee Attorney-In-Fact
January 26, 2000
Thomas E. Leafstrand Trustee
Shiela W. Wellington Trustee
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Original powers of attorney authorizing Alan G. Berkshire and Gifford
R. Zimmerman, among others, to execute this Registration Statement, and
Amendments to this Registration Statement, for each trustee of Registrant on
whose behalf this Registration Statement is filed, have been executed and
previously filed as an exhibit.
