<PAGE> 1
(LOGO) $46,000,000
NUVEEN SENIOR INCOME FUND
1,840 SHARES, SERIES TH
TAXABLE AUCTIONED PREFERRED SHARES ("TAPS")
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.
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>
Public Offering Price(1) Sales Load(2) Proceeds to Fund(3)
----------- -------- -----------
<S> <C> <C> <C>
Per Share................................ $ 25,000 $ 250 $ 24,750
Total.................................... $46,000,000 $460,000 $45,540,000
</TABLE>
- ---------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and the Adviser have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933. See "Underwriting."
(3) Before deducting costs payable by the Fund, estimated to be approximately
$160,000.
The dividend rate for the initial Dividend Period for the TAPS issued
pursuant to the Offering will be 6.30% per annum. For each Dividend Period
following the initial Dividend Period, the dividend rate on the 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, if applicable, 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 June 30, 2000. The initial Dividend Period for the shares
of TAPS will be 31 days. Dividend Periods after the initial Dividend Period for
the TAPS shall be either Standard Rate Periods (28 days) 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 June 29, 2000.
The Fund is offering 1,840 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.
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 May 24, 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 53 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
DEUTSCHE BANC ALEX. BROWN
A.G. EDWARDS & SONS, INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
------------------------
THE DATE OF THIS PROSPECTUS IS MAY 24, 2000.
<PAGE> 2
(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 TAPS subject to various conditions. It is
expected that the TAPS will be delivered to the Underwriters through the
facilities of The Depository Trust Company on or about May 30, 2000.
------------------------
THE TAPS ARE NOT BANK DEPOSITS. AN INVESTMENT IN TAPS IS NOT GUARANTEED,
ENDORSED OR INSURED BY ANY BANK, FINANCIAL INSTITUTION OR GOVERNMENT ENTITY,
SUCH AS THE FEDERAL DEPOSIT INSURANCE CORPORATION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Financial Highlights........................................ 7
The Fund.................................................... 8
Use of Proceeds............................................. 8
Capitalization and Information Regarding Senior
Securities................................................ 9
Portfolio Composition....................................... 10
The Fund's Investments...................................... 10
Risk Factors................................................ 21
Management of the Fund...................................... 27
Description of TAPS......................................... 29
Description of Credit Facility/Commercial Paper Program..... 42
The Auction................................................. 43
Description of Common Shares................................ 45
Certain Provisions in the Declaration of Trust.............. 45
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.............................................. 52
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.
ii
<PAGE> 3
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 April 30, 2000, the Fund had
29,610,619 Common Shares outstanding and net assets
of $281,899,277.
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 OBJECTIVE 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 a varied portfolio 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.
1
<PAGE> 4
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.
In addition, 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 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.
The Fund may also engage in lending of its
securities, repurchase agreements, reverse
repurchase agreements and, for hedging and risk
management purposes, certain derivative
transactions. See "Risk Factors -- General Risks of
Investing in the Fund."
For additional information on the Fund's objective
and policies, see "The Fund's Investments."
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
will it exceed 50%) of the Fund's total assets. In
addition to issuing TAPS, the Fund borrows money
through a commercial paper program. 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 Credit
Facility/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 May 23, 2000, the Fund
established a $150 million commercial paper program
and an associated $155 million liquidity facility.
However, there can be no assurance that the
commercial paper or notes will remain outstanding,
or that the Fund will continue such borrowing. See
"Description of Credit Facility/Commercial Paper
Program."
THE OFFERING............... The Fund is offering 1,840 TAPS Series TH, 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 a
group of underwriters (the "Underwriters") led by
PaineWebber Incorporated, Deutsche Bank Securities
Inc., A.G. Edwards & Sons, Inc., Goldman, Sachs &
Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
2
<PAGE> 5
Prudential Securities and Salomon Smith Barney Inc.
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 are:
- 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;
- 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;
- 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, 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, 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; and
- 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.
For additional general risks of investing in the
Fund, see "Risk Factors -- General Risks of
Investing in the Fund."
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 June
29, 2000, the business day before the dividend
payment date for the initial Dividend
3
<PAGE> 6
Period for the TAPS. The start date for subsequent
Dividend Periods normally will be the business day
following the auction date unless the then-current
Dividend 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 DIVIDEND
PERIODS.................... The table below shows the dividend rate for the
initial rate period on TAPS offered in this
Prospectus. For subsequent Dividend Periods, TAPS
will pay dividends based on a rate set at auctions,
normally held every 28 days. In most instances
dividends are also payable every 28 days, on the
day following the end of the rate period. The
Applicable Rate that results from an Auction will
not be 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. The Applicable Rate that results from
an Auction with respect to a Dividend Period of 28
days or fewer will not be lower than 70% of the
applicable AA Composite Commercial Paper Rate (the
"Minimum Rate"). There is no Minimum Rate with
respect to Dividend Periods longer than 28 days.
See "Description of TAPS -- Dividends and Dividend
Periods -- Determination of Dividend Rate" and "The
Auction."
The table below also shows the date from which
dividends on the TAPS will accumulate at the
initial rate and the dividend payment date for the
initial Dividend Period. If the day on which
dividends otherwise would be paid is not a business
day, then dividends will be paid on the first
business day that falls after that day.
Finally, the table below shows the number of days
of the initial Dividend Period for TAPS. Subsequent
rate periods generally will be 28 days. The
dividend payment date for Special Rate Periods of
more than 28 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 NUMBER OF
INITIAL ACCUMULATION DATE FOR DAYS OF
DIVIDEND AT INITIAL INITIAL DIVIDEND INITIAL
RATE DIVIDEND RATE* PERIOD* DIVIDEND PERIOD
-------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
6.30% May 30 June 30 31
--------
* All dates are 2000.
</TABLE>
RATINGS.................... It is a condition of the Underwriters' 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
4
<PAGE> 7
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 and/or commercial paper program, is at
least 200%. In addition, the Fund is not permitted
to declare any distribution on or purchase or
redeem any 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 any credit facility and/or
commercial paper program, 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 any credit
facility and/or commercial paper program has
occurred and is continuing. See "Description of
TAPS -- Restrictions on Dividend, Redemption and
Other Payments" and "Description of Credit
Facility/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 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 April 30,
2000, after giving effect to the issuance of the
TAPS ($46,000,000) and the deduction of sales loads
and estimated offering expenses for such shares
($620,288) and giving effect to the commercial
paper program, will be 252%.
In addition to the 1940 Act TAPS Asset Coverage and
the TAPS Basic Maintenance Amount, under the
commercial paper program, the Fund may not permit
the Fund's asset coverage ratio (as defined
separately by agreement) to fall below 300% for
more than four consecutive business days or below
275% at any time without occurring an event of
default under the applicable agreement. See
"Description of Credit Facility/Commercial Paper
Program."
REDEMPTION................. Although the Fund ordinarily does not expect to
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.
5
<PAGE> 8
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 Common Shares 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. 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
regardless of the holders' respective holding
periods for their TAPS. 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 made with respect to TAPS as capital
gain distributions in proportion to the TAPS share
of total dividends paid during the year. 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> 9
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 October 29, 1999 through January 31, 2000.
<TABLE>
<S> <C>
Per Share Operating Performance:
Net Asset Value, Beginning of Period...................... $ 9.55
--------
Net Investment Income.................................. .23
Net Gains or Losses on Securities (Both Realized and
Unrealized)........................................... (.03)
--------
Total From Investment Operations.................. .20
--------
Distributions from Net Investment Income.................. (.15)
--------
Organizational and Offering Costs......................... (.01)
--------
Net Asset Value, End of Period............................ $ 9.59
========
Per Share Market Value, End of Period..................... $ 9.5625
========
Total Return on Net Asset Value........................... 2.02%
Total Return on Market Value.............................. (2.85)%
Ratios/Supplemental Data:
Net Assets, End of Period (In Thousands).................. $284,067
Ratio of Operating Expenses to Average Net Assets Before
Expense Reimbursement.................................. 2.03%*
Ratio of Net Investment Income to Average Net Assets
Before Expense Reimbursement........................... 8.92%*
Ratio of Operating Expenses to Average Net Assets After
Expense
Reimbursement.......................................... 1.54%*
Ratio of Net Investment Income to Average Net Assets After
Expense Reimbursement.................................. 9.41%*
Portfolio Turnover Rate................................... 14%
</TABLE>
- ---------------
* Annualized.
7
<PAGE> 10
THE FUND
The Fund is a 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 1-800-257-8787. 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 provided the Fund with access to a $150 million revolving credit
facility. On May 23, 2000, the Fund replaced the revolving credit facility by
establishing a $150 million commercial paper program and an associated $155
million liquidity facility. However, there can be no assurance that the
commercial paper or notes will remain outstanding, or that such borrowing will
be continued. See "Description of Credit Facility/Commercial Paper Program."
The following table provides information about the Fund's outstanding
shares as of January 31, 2000.
<TABLE>
<CAPTION>
AMOUNT AMOUNT HELD BY THE AMOUNT
TITLE OF CLASS AUTHORIZED FUND OR FOR ITS ACCOUNT OUTSTANDING
- -------------- ---------- ----------------------- -----------
<S> <C> <C> <C>
Common Shares............................. Unlimited -0- 29,610,619
TAPS Series TH............................ Unlimited -0- -0-
</TABLE>
USE OF PROCEEDS
The estimated net proceeds of this offering will be $45,379,712 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 investments, it is anticipated that the proceeds
will be invested in high quality, short-term debt securities.
8
<PAGE> 11
CAPITALIZATION AND INFORMATION REGARDING SENIOR SECURITIES
(UNAUDITED)
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of January
31, 2000, 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, $.01 par value per share (no shares
issued; 1,840 shares issued, as adjusted, at $25,000
per share liquidation preference)...................... $ -- $ 46,000,000
Common Shares, $.01 par value per share; unlimited shares
authorized, 29,610,619 shares outstanding*............. 296,106 296,106
Paid-in surplus........................................... 282,189,181 281,568,893
Balance of undistributed net investment income............ 2,186,481 2,186,481
Accumulated net realized gain from investment
transactions........................................... 151,759 151,759
Net unrealized appreciation (depreciation) of
investments............................................ (756,840) (756,840)
------------ ------------
Net assets................................................ $284,066,687 $329,446,399
============ ============
</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 January 31, 2000. The Fund borrowed $127
million in aggregate principal amount of bank debt. On May 24, 2000, the Fund
paid its bank debt with proceeds of the issuance of commercial paper or notes
with an aggregate principal amount of $105 million.
<TABLE>
<S> <C>
Total amount outstanding:
Short-term loan..................................... $127,000,000
Commercial Paper/Notes.............................. N/A
Asset coverage:
Per $1,000 of short-term loan(1).................... $ 3,237
Per $1,000 of Commercial Paper/Notes(1)............. N/A
Approximate market value:
Per $1,000 of short-term loan....................... $ 1,000
Per $1,000 of Commercial Paper/Notes................ N/A
</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> 12
PORTFOLIO COMPOSITION
(BASED ON SENIOR LOAN HOLDINGS AS OF JANUARY 31, 2000)
<TABLE>
<S> <C>
MOODY'S RATINGS
Ba3......................................................... 24.3%
Ba2......................................................... 3.1
Ba1......................................................... 1.1
B3.......................................................... 1.4
B2.......................................................... 7.6
B1.......................................................... 31.4
NR.......................................................... 31.1
S&P RATINGS
BBB......................................................... 1.1%
BB+......................................................... 1.4
BB.......................................................... 13.5
BB-......................................................... 14.6
B+.......................................................... 30.0
B........................................................... 3.8
B-.......................................................... 2.8
NR.......................................................... 32.8
</TABLE>
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 Policies and
Techniques" 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 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.
10
<PAGE> 13
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 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 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
11
<PAGE> 14
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 a 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, 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
12
<PAGE> 15
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 "Risk Factors -- 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 a varied portfolio 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 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 "Risk Factors."
13
<PAGE> 16
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 forgo 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.
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
14
<PAGE> 17
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, 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 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
15
<PAGE> 18
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 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."
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<PAGE> 19
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 Credit Facility/Commercial Paper
Program." 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.
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.
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- 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 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.
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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.
The Fund will make commitments to purchase interests or securities on such
basis only with the intention of actually acquiring those 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.
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<PAGE> 22
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 Policies and Techniques."
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.
RISKS OF INVESTING IN TAPS
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 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."
Auction Risk. You may not be able to sell your TAPS at an auction if the
auction fails; that is, if there are more TAPS offered for sale than there are
buyers for those shares. Also, if you place hold orders (orders to retain TAPS)
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. 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. Broker-Dealers and other broker-dealers that have
entered into a separate agreement with a Broker-Dealer may maintain a secondary
trading market in TAPS outside of auctions, but may discontinue this activity
any time. You may transfer TAPS outside of auctions only to or through a
Broker-Dealer or such other broker-dealers. If you try to sell your TAPS 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 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
are not registered on a stock exchange or the NASDAQ stock market. If you sell
your TAPS to a Broker-Dealer between auctions, you may receive less than the
price you paid for them, especially when market interest rates have risen since
the last auction and especially during a Special Rate Period of more than 28
days. 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
the TAPS, the ratings do not eliminate or necessarily mitigate the risks of
investing in TAPS. A rating agency could downgrade TAPS, which may make your
share less liquid at an auction or in the secondary market. If a rating agency
downgrades TAPS, the Fund will seek to alter its portfolio or will be required
to redeem TAPS. See "Description of TAPS -- Redemption -- Mandatory Redemption."
The Fund may also voluntarily redeem TAPS in 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 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.
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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.
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.
The Fund has received an investment grade rating from one or more
nationally recognized statistical rating organizations in connection with its
commercial paper program. The Fund is subject to asset coverage or portfolio
composition provisions in addition to and more stringent than those required by
the 1940 Act 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. See "Description of Credit
Facility/Commercial Paper Program."
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 dividends and distributions 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 Credit Facility/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
other assets of the Fund) 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.
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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 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.
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, and could result in the redemption of some or all of
the TAPS. 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
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<PAGE> 26
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 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. 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.
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
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<PAGE> 27
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 Borrower or take other
action detrimental to Lenders. 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.
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> 28
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.
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 invest more than 10% of the value of its assets in Senior Loans of a
single Borrower. If the Fund invests a
26
<PAGE> 29
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 are
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
eighteen 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
eighteen 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 1.0%
$1 billion to $2 billion............................. .8375 of 1.0
$2 billion to $5 billion............................. .8250 of 1.0
$5 billion to $10 billion............................ .8000 of 1.0
$10 billion and over................................. .7750 of 1.0
</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, including the TAPS, 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, including the TAPS).
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<PAGE> 30
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 the 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.
28
<PAGE> 31
DESCRIPTION OF TAPS
The following is a brief description of the terms of the 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 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 1,840
TAPS Series TH. The 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 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." 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
described under "-- Determination of Dividend Rate," payable on the respective
dates set forth below. Dividends so declared and payable shall be paid to the
extent permitted under the Code, and to the extent available and in preference
to and priority over any dividend declared and payable on the Common Shares.
On the Business Day next preceding each Dividend Payment Date, the Fund is
required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Fund does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid by the Paying Agent to the 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.
29
<PAGE> 32
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." No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"-- Default Period."
The amount of dividends per outstanding share payable (if declared) on each
Dividend Payment Date of each Dividend Period 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
(or in respect of dividends on another date in connection with a redemption
during such Dividend Period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year consisting of
twelve 30-day months.
Determination of Dividend Rate. The dividend rate for the initial Dividend
Period (i.e. the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date are set forth
on the inside cover page of the Prospectus. For each subsequent Dividend Period,
subject to certain exceptions, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Fund has resulted from an Auction.
The initial Dividend Period for the TAPS shall be 31 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 Bids
exist at the Auction in respect of such Special Rate Period (that is, in
general, the number of shares subject to Bids by Potential Beneficial Owners is
at least equal to the number of shares subject to Sell Orders by Existing
Holders). If Sufficient Clearing Bids do not exist at any Auction in respect of
a Special Rate Period, the Dividend Period commencing on the Business Day
succeeding such Auction will be the Standard Rate Period, and the holders of the
shares of the affected series will be required to continue to hold such shares
for such Standard Rate Period.
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. For
Dividend Periods greater than 30 days, 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 an Auction for a Standard Rate Period or less will not be less
than the Minimum Rate, which is equal to 70% of the applicable AA Composite
Commercial Paper Rate. For all other Rate Periods, the Applicable Rate resulting
from an 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 the Maximum
Rate is subject to upward but not downward adjustment in the discretion of the
Board of Trustees after consultation with the Broker-Dealers, provided that
immediately following any such increase the Fund would be in compliance with the
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 Bids have not been made
(other than because all shares of TAPS were
30
<PAGE> 33
subject to Submitted Hold Orders) or following the failure to hold an Auction
for any reason on the Auction Date scheduled to occur (except for circumstances
in which the Dividend Rate is the Default Rate, as described below). The All
Hold Rate will apply automatically following an Auction in which all of the
Outstanding Shares of TAPS Series TH are subject (or are deemed to be subject)
to Hold Orders.
Prior to each Auction, Broker-Dealers will notify holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each auction, on the
Auction Date, Broker-Dealers will notify holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Notification of Dividend Period. The Fund will designate the duration of
Dividend Periods of the TAPS; provided, however, that no such designation is
necessary for a Standard Rate Period and that any designation of a Special Rate
Period shall be effective only if (i) notice thereof shall have been given as
provided herein, (ii) any failure to pay in the timely manner to the Auction
Agent the full amount of any dividend on, or the redemption price of, the TAPS
shall have been cured as set forth under "-- Default Period," (iii) Sufficient
Clearing Bids shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period, (iv)
if the Fund shall have mailed a notice of redemption with respect to any shares,
as described under "-- Redemption," the Redemption Price with respect to such
shares shall have been deposited with the Paying Agent, and (v) the Fund has
confirmed that, as of the Auction Date next preceding the first day of such
Special Rate Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the 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 consisting of not
fewer than 7 nor more than 30 Business Days prior to the first day of such
Special Rate Period (or two Business Days in the event the duration of the
Special Rate Period is fewer than 8 days), notice shall be (i) made by press
release and (ii) communicated by the Fund by telephonic or other means to the
Auction Agent and confirmed in writing promptly thereafter. Each such notice
shall state (A) that the Fund proposes to exercise its option to designate a
succeeding Special Rate Period, specifying the first and last days thereof and
(B) that the Fund will, by 3:00 p.m. New York City time, on the second Business
Day next preceding the first day of such Special Rate Period, notify the Auction
Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Special Rate
Period, in which case the Fund may specify the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Rate
Period in which latter event the succeeding Dividend Period shall be a Standard
Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Fund shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as a Special Rate Period, specifying the
first and last days thereof and (B) the terms of the Specific Redemption
Provisions, if any; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period, the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Dividend Period to the effect set forth in
clause (ii) above, thereby resulting in a Standard Rate Period.
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<PAGE> 34
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 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 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 are 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 Standard 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 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
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<PAGE> 35
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 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 Credit Facility/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 unless there is no event of
default under indebtedness senior to the TAPS, if any, and 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 indebtedness senior to the TAPS, if any. See "Description of Credit
Facility/Commercial Paper Program -- Restrictive Covenants."
Upon failure to pay dividends for two years or more, the holders of TAPS
will acquire certain additional voting rights. See "-- Voting Rights." 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 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 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
33
<PAGE> 36
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
(see "-- Asset Maintenance"); (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 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 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. 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 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 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 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
34
<PAGE> 37
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.
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 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 TAPS on the earliest practicable date on which the Fund will have such
funds available, upon notice to record owners 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 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 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 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. 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
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
35
<PAGE> 38
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 TAPS called for redemption on such date and (ii) such
other amounts, if any, to which holders 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 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 TAPS may
be redeemed unless all dividends in arrears on the outstanding 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 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 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 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.
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
36
<PAGE> 39
related Asset Coverage Cure Date, the Fund will be required in certain
circumstances to redeem certain of the TAPS. See "-- Redemption -- Mandatory
Redemption."
The "TAPS Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to:
(1) the sum of (A) the products resulting from multiplying the number
of outstanding 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 (1.89) 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, any indebtedness senior to the TAPS and indebtedness
due within one year and any redemption premium due with respect to 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)
(value for purposes of this clause (2) shall mean the Moody's Advance
Amount 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-2 by Moody's and A-2 by S&P, 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 Moody's Advance Amount) 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 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."
37
<PAGE> 40
The advance rates, 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 Moody's
Advance Amount of any asset of the Fund exceed its unpaid principal balance or
face amount as of the date of calculation. The Moody's Advance Rate relating to
any asset of the Fund, the TAPS Basic Maintenance Amount, the assets eligible
for inclusion in the calculation of the Moody's Advance Amount 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."
A rating agency's guidelines will apply to TAPS only so long as such rating
agency is rating such shares. The Fund will pay certain fees to Moody's for
rating TAPS. The ratings assigned to TAPS are not recommendations to buy, sell
or hold 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
April 30, 2000, after giving effect to the issuance of the TAPS ($46,000,000)
and the deduction of sales loads and estimated offering expenses for such shares
($620,288), 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 $466,278,989
- -------------------------------------------------------------------------- =
252%
Senior securities representing indebtedness plus aggregate
liquidation preference of the TAPS $185,000,000
</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 (iii) a letter provided 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
38
<PAGE> 41
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 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 TAPS are entitled, such assets or the proceeds thereof will
be distributed ratably among the owners of the TAPS and any other shares ranking
on a parity with TAPS until payment in full is made to the owners of the 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 trust or
company or a sale, lease or exchange of all or substantially all of the assets
of the Fund in consideration for the issuance of equity securities of another
trust or company, shall not be deemed to be a liquidation, dissolution or
winding up of the Fund.
To the extent other TAPS are issued by the Fund, such shares will
participate 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 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, 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
39
<PAGE> 42
vote with the TAPS as a single class on the matters described above, and the
issuance of any other 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 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 a parity with the
TAPS or reclassify any authorized shares of capital stock of the Fund into any
shares ranking senior to or on a 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, other series of 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, and may authorize, reclassify and/or issue any additional
TAPS Series TH, including shares previously purchased or redeemed by the Fund,
subject to continuing compliance by the Fund with the 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 senior to the
TAPS, see "Description of Credit Facility/Commercial Paper Program;" (D) liens,
pledges, charges, security interests, security agreements or other encumbrances
arising in connection with any indebtedness permitted under clause (vi) below
and (E) liens to secure payment for services rendered including, without
limitation, services rendered by the Fund's custodian and the Auction Agent, or
(vi) create, authorize, issue, incur or suffer to exist any indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness, except
the Fund may borrow as may be permitted by the Fund's investment restrictions;
provided, however, that transfers of assets by the Fund subject to an obligation
to repurchase shall not be deemed to be indebtedness for purposes of this
provision to the extent that after any such transaction the Fund 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.
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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 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
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, in the case of a transfer between persons holding
TAPS through different Broker-Dealers, advises the Auction Agent of such
transfer.
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DESCRIPTION OF CREDIT FACILITY/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, including the TAPS. As such, 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 be
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.
On December 14, 1999, the Fund established an interim credit facility
pending the finalization of the terms of a commercial paper program (the "Credit
Facility"). On May 23, 2000, the Fund replaced the Credit Facility by
establishing a commercial paper program and related liquidity facility (the "CP
Program"). Any subsequent senior indebtedness issued by the Fund may have terms
that differ substantially from the terms of the CP Program and Credit 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, will be senior to the rights of
holders of Preferred Shares, including the TAPS, with respect to the payment of
dividends or upon liquidation. Notes issued by the Fund in connection with the
CP Program are secured by a first priority perfected security interest on the
portfolio of Senior Loans held by the Fund.
Credit Facility. On December 14, 1999, the Fund entered into a credit
agreement pursuant to which one or more commercial banks provided the Fund with
access to a $150 million revolving credit facility. On May 24, 2000, the Fund
paid the amounts outstanding under the Credit Facility with proceeds of the
issuance of commercial paper under the CP Program with an aggregate principal
amount of $105 million.
CP Program. On May 23, 2000, the Fund established a $150 million commercial
paper program and an associated $155 million liquidity facility (the "Liquidity
Facility"). Pursuant to the CP Program, a special purpose bankruptcy-remote
Delaware entity (the "CP Issuer") was 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 is
evidenced by a note issued in favor of the CP Issuer (the "Senior Note"). The
Senior Note bears 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 mature at the date which is two years, subject to extension,
following the closing date of the CP Program or upon acceleration following an
event of default. The Fund used the initial issuance of commercial paper to pay
down the outstanding balance of borrowings made under the Credit Facility. The
Fund expects to use the issuance of commercial paper 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 .62%. The Senior Note is 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 is able to borrow under the Liquidity Facility. Loans made under
the Liquidity Facility mature at the date which is two years, subject to
extension, following the closing date of the CP Program or upon acceleration
following an event of default. Loans made under the Liquidity Facility 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 is subject to a commitment fee that is approximately .125% per annum.
The Liquidity Facility is secured by a first priority perfected
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security interest in the CP Issuer's right, title and interest in and to (i) the
Senior Note; (ii) the collateral securing the Senior Note; and (iii) the credit
agreement pursuant to which the Senior Note is issued.
Restrictive Covenants and 1940 Restrictions. The credit agreement governing
the CP Program (the "Credit Agreement") includes 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
Agreement does not permit the Fund's asset coverage ratio (as defined in the
Credit Agreement) 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 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 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 Credit Agreement for the CP Program 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 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 omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent after each Auction for 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 TAPS placed by such Broker-Dealer at
such Auction. For the purposes of the preceding sentence, 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
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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 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 28 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 TAPS subject thereto. A Beneficial Owner that
offers to become the Beneficial Owner of additional 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 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.
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 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.
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If Sufficient Clearing Bids for 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 for all Rate Periods and higher than or
equal to the Minimum Rate for Standard Rate Periods or less 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 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 a series of TAPS, the Applicable Rate for shares of such series for
the next succeeding Rate Period thereof will be the All Hold Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of 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.
DESCRIPTION OF COMMON SHARES
In addition to the 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 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
remote.
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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
(including the TAPS), 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, 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 (including the TAPS) 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
or 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., New York City 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 independent third-party pricing services
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,
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fair and appropriate method of valuing Senior Loans. The Adviser has entered
into one or more agreements with pricing service providers to provide pricing
services for the Fund. There can be no assurance that the pricing service
providers 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 a
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 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
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 services 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 providers 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 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.
48
<PAGE> 51
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
believes that TAPS will constitute stock of the Fund, and thus distributions
with respect to TAPS (other than distributions in redemption of TAPS subject to
taxable exchange treatment under Section 302(b) of the Code) will constitute
dividends to the extent of the Fund's current or accumulated earnings and
profits, as calculated for federal income tax purposes. Such dividends generally
will be taxable as ordinary income to holders and generally 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 regardless of the
holders' respective holding periods for their TAPS. The Service currently
requires that a regulated investment company that has two or more classes of
stock allocate to each such class proportionate amounts of each type of its
income (such as ordinary income and capital gains). Accordingly, the Fund
intends to designate distributions 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.
49
<PAGE> 52
SALE OF SHARES
The sale of TAPS will be a taxable transaction for federal income tax
purposes. Selling holders 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 capital gains dividends 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 if the appropriate information is provided to the Internal Revenue
Service.
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> 53
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 Deutsche Bank Securities Inc., A.G. Edwards & Sons,
Inc., Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Prudential Securities Incorporated and Salomon Smith Barney Inc. 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 their respective
names. The Underwriters are committed to purchase all of such TAPS if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS TAPS
- ------------ ---------
<S> <C>
PaineWebber Incorporated................................. 268
Deutsche Bank Securities Inc............................. 262
A.G. Edwards & Sons, Inc................................. 262
Goldman, Sachs & Co...................................... 262
Merrill Lynch, Pierce, Fenner & Smith Incorporated....... 262
Prudential Securities Incorporated....................... 262
Salomon Smith Barney Inc................................. 262
------
Total.......................................... 1,840
======
</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 $150 per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $100 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 May 30, 2000.
The Underwriters will act in Auctions as Broker-Dealers as set forth under
"The Auction" and will be entitled to fees for services as Broker-Dealers as set
forth under "The Auction--Broker-Dealer Agreements." 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 TAPS and acts as
transfer agent, registrar, dividend disbursing agent, and redemption agent with
respect to such shares.
51
<PAGE> 54
LEGAL OPINIONS
Certain legal matters in connection with the 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.
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 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> 55
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> 56
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NUVEEN SENIOR INCOME FUND
1,840 SHARES
TAXABLE AUCTIONED PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
[NUVEEN LOGO]
-------------------
PROSPECTUS
-------------------
PAINEWEBBER INCORPORATED
DEUTSCHE BANC ALEX. BROWN
A.G. EDWARDS & SONS, INC.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
------------------------
MAY 24, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 57
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 May 24, 2000 (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 MAY 24, 2000.
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> 58
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.
- ---------
* The Fund borrows money as described in the Prospectus under "Description of
Credit Facility/Commercial Paper Program."
S-1
<PAGE> 59
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> 60
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 or 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
S-3
<PAGE> 61
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> 62
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> 63
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> 64
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> 65
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> 66
<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 Senior Vice President (since May 1999) formerly
333 West Wacker Drive Assistant Secretary Vice President (since May 1998), Secretary
Chicago, IL 60606 (since may 1998) and General Counsel (since
September 1997) of The John Nuveen Co.
Incorporated and the John Nuveen Company;
Senior Vice President (since May 1999),
formerly Vice President (since Sept. 1997) and
Secretary of Nuveen Advisory Corp., Nuveen
Institutional Advisory Corp. and Nuveen Asset
Management, Inc. Senior Vice President and
Secretary (since Sept. 1999) of the Adviser;
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 and
Chicago, IL 60606 Treasurer of the Adviser (September 1999);
prior thereto, Assistant Vice President
(January 1997); formerly, Associate of John
Nuveen & Co. Incorporated; Vice President and
Treasurer of the Adviser (since Sept. 1999);
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; Vice President of the Adviser
Chicago, IL 60606 (since Sept. 1999); Certified Public
Accountant.
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).
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).
</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>
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 & Co.
Chicago, IL 60606 Incorporated; Vice President and Assistant
Secretary of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.; Assistant
Secretary, The John Nuveen Company; Vice
President and Assistant Secretary of the
Adviser (since Sept. 1999); Chartered Financial
Analyst.
</TABLE>
Jeffrey W. Maillet is the portfolio manager of the Fund. Mr. Maillet
has more than eighteen 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.
William L. Kissick 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 106 Nuveen
open-end and closed-end funds advised by Nuveen Advisory Corp., Nuveen
Institutional Advisory Corp. and Nuveen Senior Loan Asset Management Inc. (the
Adviser)
The other Trustees of the Fund are directors or Trustees, as the case
may be, of 8 Nuveen open-end funds and 5 Nuveen closed-end funds advised by
Nuveen Institutional Advisory Corp.; and one additional fund advised by the
Adviser.
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> 68
<TABLE>
<CAPTION>
Estimated Aggregate Total Compensation Deferred
Compensation from Trust and Fund Compensation Payable
Name of Trustee from the Trust (1) Complex Paid to Trustees (2) from the Trust (3)
- ----------------- -------------------- ----------------------------- ---------------------
<S> <C> <C> <C>
James E. Bacon.................... $ 5,903 $ 44,000 $ 2,426
Jack B. Evans..................... $ 5,903 $ 44,000 $ 2,436
William L. Kissick................ $ 5,903 $ 44,000 $ 2,183
Thomas E. Leafstrand.............. $ 6,641 $ 45,600 $ 2,933
Sheila W. Wellington.............. $ 5,903 $ 44,000 $ 4,873
</TABLE>
(1) The estimated compensation paid to the independent trustees
for the fiscal year ended July 31, 2000 for services to the
Fund.
(2) Based on the compensation paid to the independent trustees for
the fiscal year ended July 31, 2000 for services to the eleven
open-end and closed-end funds advised by NIAC and the Adviser.
(3) Pursuant to a deferred compensation agreement with the Trust,
deferred amounts are treated as though an equivalent dollar
amount has been invested in shares of one or more eligible
Nuveen Funds. The amounts provided are the total deferred
fees (including the return from the assumed investment in the
eligible Nuveen Funds) payable from the Trust.
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. Incorporated ("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 60 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> 69
<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
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<PAGE> 70
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 one or
more agreements with pricing service providers to provide pricing services for
the Fund.
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There can be no assurance that the pricing service providers 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 a 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 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
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
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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 115% 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 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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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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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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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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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
S-20
<PAGE> 78
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 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.
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 at least 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.
S-21
<PAGE> 79
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 (which
advice relies in part 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), the Fund believes that the 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 gain 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"
S-22
<PAGE> 80
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 dividends 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.
Individual shareholders who are Non-U.S. Persons (as defined below) and who
certify as to their status as Non-U.S. Persons, certain 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
provided the appropriate information is provided to the Internal Revenue
Service.
A holder of TAPS that is not a "United States person" within the
meaning of the Code (a "Non-U.S. Person") generally will be subject to a
withholding tax of 30% (or lower applicable treaty rate) on dividends from the
Fund (other than dividends designated as capital gain distributions) that are
not "effectively connected with a United States trade or business carried on by
such holder of TAPS. Non-effectively connected capital gain dividends and gains
realized from the sales of TAPS will not be subject to United States federal
income tax in the case of a holder of TAPS that is (i) a Non-U.S. Person that is
a corporation or (ii) an individual Non-U.S. Person that is not present in the
United States for more than 182 days during the taxable year (assuming that
certain other conditions are met). Prospective investors that are Non-U.S.
Persons should consult their United States tax advisors concerning the tax
consequences to them of an investment in TAPS. 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 May 18, 2000, no person was known by the Fund to own beneficially or to
hold of record 5% or more of the outstanding common shares of the Fund, except
as set forth below:
Prudential Securities 4,246,153 shares or 14.34%; AG Edwards 2,389,143 shares
or 8.07%; PaineWebber 4,435,648 shares or 14.98%; FiServ Securities 3,328,496
shares or 11.24% and Merrill Lynch 1,535,867 shares or 5.19%.
S-23
<PAGE> 81
EXPERTS
The Statement of Net Assets of the Fund as of October 14, 1999
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.
S-24
<PAGE> 82
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholder
Nuveen Senior Income Fund:
We have audited the accompanying statement of net assets of Nuveen Senior Income
Fund (the "Fund"), as of October 14, 1999. This financial statement is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit of this financial statement provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Fund as of October 14,
1999, in conformity with generally accepted accounting principles.
KPMG LLP
Chicago, Illinois
October 14, 1999
<PAGE> 83
FINANCIAL STATEMENTS
Nuveen Senior Income Fund
Statements of Net Assets
October 14, 1999
Assets:
Cash .............................................................. $100,084
--------
Total assets .................................................... 100,084
--------
Net assets .......................................................... $100,084
========
Net Assets Represent:
Cumulative preferred shares, $25,000 liquidation value; unlimited
number of shares authorized, no shares outstanding .............. $ --
Common shares, $.01 par value; unlimited number of shares
authorized, 10,480 shares outstanding ........................... 105
Paid-in surplus ................................................... 99,979
--------
$100,084
========
Net asset value per Common share outstanding ($100,084
divided by 10,480 Common Shares outstanding) .................... $ 9.55
========
The Fund was organized as a Massachusetts business trust on August 13, 1999, and
has been inactive since that date except for matters relating to its
organization and registration as a closed-end management investment company
under the Investment Company Act of 1940, as amended, and the Securities Act of
1933, as amended, and the sale of 10,480 Common Shares to Nuveen Senior Loan
Asset Management Inc., the Fund's investment adviser (the "Adviser"), a wholly
owned subsidiary of The John Nuveen Company. John Nuveen & Co. Incorporated,
also a wholly owned subsidiary of The John Nuveen Company, has agreed to pay all
organizational expenses (approximately $10,000) and all offering costs (other
than the sales load) that exceed $.01 per common shares.
The Fund is authorized by its Declaration of trust to issue an unlimited number
of preferred shares having a liquidation value of $25,000 per share in one or
more classes or series, with dividend, liquidation preference and other rights
as determined by the Fund's Board of Trustees, by action of the Board of
Trustees without the approval of the Common Shareholders.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
Actual results may differ from those estimates.
<PAGE> 84
Portfolio of Investments
NUVEEN SENIOR INCOME FUND (NSL)
January 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Ratings*
Principal ----------------- Stated Market
Amount (000) Description Moody's S&P Maturity** Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE SENIOR LOAN INTERESTS*** - 124.8%
Aerospace/Defense - 5.2%
$ 14,961 Fairchild Corp., Term Loan B Ba3 BB- 04/03/06 $14,680,522
- -----------------------------------------------------------------------------------------------------------------------------------
Automotive - 3.5%
9,967 MetalForming Technologies, Inc., Term Loan B NR NR 06/30/06 9,891,917
- -----------------------------------------------------------------------------------------------------------------------------------
Beverage, Food & Tobacco - 6.8%
9,476 American Bottling Company, Inc., Term Loan B NR NR 10/07/07 9,505,863
6,179 Eagle Family Foods Inc., Term Loan B1 B 12/31/05 5,972,619
1,145 Triarc Consumer Products Group, LLP, Term Loan B B1 B+ 03/01/06 1,152,034
2,795 Triarc Consumer Products Group, LLP, Term Loan C B1 B+ 03/01/07 2,810,963
- -----------------------------------------------------------------------------------------------------------------------------------
19,441,479
- -----------------------------------------------------------------------------------------------------------------------------------
Chemicals, Plastics & Rubber - 8.8%
7,500 Huntsman ICI Chemicals LLC, Term Loan B Ba3 BB 06/30/07 7,550,000
7,500 Huntsman ICI Chemicals LLC, Term Loan C Ba3 BB 06/30/08 7,550,000
9,975 Lyondell Chemical Co., Term Loan E Ba3 NR 03/31/06 10,220,090
- -----------------------------------------------------------------------------------------------------------------------------------
25,320,090
- -----------------------------------------------------------------------------------------------------------------------------------
Containers, Packaging & Glass - 1.7%
2,639 Graham Packaging Co., Term Loan B B1 B+ 01/31/06 2,641,629
2,187 Graham Packaging Co., Term Loan C B1 B+ 01/31/07 2,188,778
- -----------------------------------------------------------------------------------------------------------------------------------
4,830,407
- -----------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacturing - 2.4%
6,965 Western Industries Holding Inc., Term Loan B NR NR 06/23/06 6,951,941
- -----------------------------------------------------------------------------------------------------------------------------------
Ecological - 3.8%
4,545 Allied Waste North America, Inc., Term Loan B Ba3 BB 07/21/06 4,406,250
5,455 Allied Waste North America, Inc., Term Loan C Ba3 BB 07/21/07 5,287,500
1,000 Stericycle Inc., Term Loan B B1 BB- 11/10/06 1,003,438
- -----------------------------------------------------------------------------------------------------------------------------------
10,697,188
- -----------------------------------------------------------------------------------------------------------------------------------
Electronic Services - 6.6%
4,815 Semiconductor Components Industries, LLC, Term Loan B NR BB- 08/04/06 4,865,972
5,185 Semiconductor Components Industries, LLC, Term Loan C NR BB- 08/04/07 5,240,278
8,771 Via Systems, Inc., Term Loan B1 B+ 03/31/04 8,536,954
- -----------------------------------------------------------------------------------------------------------------------------------
18,643,204
- -----------------------------------------------------------------------------------------------------------------------------------
Farming & Agricultural - 1.8%
2,496 Scotts Company, Term Loan B Ba3 BB 06/30/06 2,512,676
2,495 Scotts Company, Term Loan C Ba3 BB 06/30/07 2,511,921
- -----------------------------------------------------------------------------------------------------------------------------------
5,024,597
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 85
Portfolio of Investments (continued)
NUVEEN SENIOR INCOME FUND (NSL)
January 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Ratings*
Principal ----------------- Stated Market
Amount (000) Description Moody's S&P Maturity** Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Finance - 7.2%
$ 4,975 Bridge Information Systems, Inc., Term Loan B NR NR 07/07/05 $ 4,688,938
4,987 Bridge Information Systems, Inc., Term Loan B NR NR 07/07/05 4,700,689
4,987 Bridge Information Systems, Inc., Term Loan B NR NR 03/05/06 4,700,689
6,500 Sovereign Bancorp, Inc., Term Loan B Ba2 NR 11/14/03 6,524,375
- -----------------------------------------------------------------------------------------------------------------------------------
20,614,691
- -----------------------------------------------------------------------------------------------------------------------------------
Healthcare - 6.8%
5,000 Lifepoint Hospitals Holdings, Inc., Term Loan B B1 B+ 11/11/05 4,978,125
7,437 Quest Diagnostics, Inc., Term Loan B Ba3 BB 08/16/06 7,476,719
6,865 Quest Diagnostics, Inc., Term Loan C Ba3 BB 08/16/07 6,901,587
- -----------------------------------------------------------------------------------------------------------------------------------
19,356,431
- -----------------------------------------------------------------------------------------------------------------------------------
Home & Office Furnishings/Housewares - 3.3%
10,000 World Kitchen Inc., Term Loan C B1 BB- 04/09/07 9,500,000
- -----------------------------------------------------------------------------------------------------------------------------------
Hotels, Motels, Inns & Gaming - 3.4%
10,000 Wyndham International, Inc., Term Loan B NR NR 06/30/06 9,741,667
- -----------------------------------------------------------------------------------------------------------------------------------
Insurance - 3.5%
5,000 GAB Robins North America, Inc., Term Loan B NR NR 12/01/05 4,981,250
4,950 USI Holdings Corp., Term Loan NR B+ 09/17/04 4,931,438
- -----------------------------------------------------------------------------------------------------------------------------------
9,912,688
- -----------------------------------------------------------------------------------------------------------------------------------
Leisure & Entertainment - 6.7%
4,000 Bally Total Fitness Holding Corp., Term Loan B1 B+ 11/10/04 3,994,167
3,447 Fitness Holdings Worldwide, Inc., Term Loan B NR B+ 11/02/06 3,448,756
6,553 Fitness Holdings Worldwide, Inc., Term Loan C NR B+ 11/02/07 6,557,494
5,000 Six Flags Theme Parks Inc., Term Loan B Ba3 B+ 09/30/05 5,017,188
- -----------------------------------------------------------------------------------------------------------------------------------
19,017,605
- -----------------------------------------------------------------------------------------------------------------------------------
Mining, Steel, Iron & Non-Precious Metals - 1.3%
3,580 ASARCO Inc., Term Loan B1 BB 06/21/01 3,573,459
- -----------------------------------------------------------------------------------------------------------------------------------
Non-Durable Consumer Products - 3.5%
5,283 Norwood Promotional Products, Inc., Term Loan B NR NR 05/31/06 5,302,899
4,706 Norwood Promotional Products, Inc., Term Loan C NR NR 11/30/06 4,723,530
- -----------------------------------------------------------------------------------------------------------------------------------
10,026,429
- -----------------------------------------------------------------------------------------------------------------------------------
Personal & Miscellaneous Services - 1.5%
4,300 Weight Watchers International, Inc.,
Transferable Loan Certificate Ba2 B+ 09/30/06 4,308,063
- -----------------------------------------------------------------------------------------------------------------------------------
Printing & Publishing - 3.0%
7,000 American Media Operations, Inc., Term Loan B-1 Ba3 B+ 04/01/07 7,018,958
1,496 Merrill Corp., Term Loan B B1 BB- 11/23/07 1,504,199
- -----------------------------------------------------------------------------------------------------------------------------------
8,523,157
- -----------------------------------------------------------------------------------------------------------------------------------
Restaurants & Food Service - 3.5%
4,975 Domino's Inc., Term Loan B B1 B+ 12/21/06 4,999,689
4,980 Domino's Inc., Term Loan C B1 B+ 12/21/07 5,004,900
- -----------------------------------------------------------------------------------------------------------------------------------
10,004,589
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
Ratings*
Principal ----------------- Stated Market
Amount (000) Description Moody's S&P Maturity** Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Retail/Catalog - 1.8%
$ 5,000 Micro Warehouse, Inc., Term Loan B B1 BB- 01/31/07 $ 4,981,250
- -----------------------------------------------------------------------------------------------------------------------------------
Retail/Stores - 3.5%
5,920 HMV Media Group PLC, Term Loan C B1 BB- 03/28/06 5,838,600
4,080 HMV Media Group PLC, Term Loan D B1 BB- 08/28/06 4,023,900
- -----------------------------------------------------------------------------------------------------------------------------------
9,862,500
- -----------------------------------------------------------------------------------------------------------------------------------
Telecommunications/Cellular/PCS - 12.0%
2,108 American Cellular Corp., Term Loan B B2 NR 06/25/07 2,108,129
2,108 American Cellular Corp., Term Loan C B2 NR 12/25/07 2,108,129
10,000 BCP Telecomunicacoes, Term Loan A NR NR 03/31/00 10,025,000
10,000 Centennial Cellular Operating Co. LLC, Term Loan A B1 B+ 11/30/06 10,020,833
5,000 Omnipoint Communications Inc., Term Loan A B2 NR 03/31/08 4,996,875
4,992 Omnipoint Communications Inc., Term Loan C B2 NR 02/17/06 5,013,046
- -----------------------------------------------------------------------------------------------------------------------------------
34,272,012
- -----------------------------------------------------------------------------------------------------------------------------------
Telecommunications/CLEC - 7.1%
10,000 Level 3 Communications, LLC, Term Loan B B1 B+ 01/15/08 10,064,583
5,000 RCN Corp., Term Loan B B1 B+ 06/03/06 5,030,208
5,000 Teligent Inc., Term Loan B3 B- 06/30/06 4,965,625
- -----------------------------------------------------------------------------------------------------------------------------------
20,060,416
- -----------------------------------------------------------------------------------------------------------------------------------
Telecommunications/Hybrid - 1.8%
5,000 Nextel Partners Operating Co., Term Loan B B2 B- 01/29/08 5,065,625
- -----------------------------------------------------------------------------------------------------------------------------------
Telecommunications/Satellite - 1.7%
5,000 Satelites Mexicanos, S.A. de C.V., Bond B1 B+ 06/30/04 4,700,000
- -----------------------------------------------------------------------------------------------------------------------------------
Telecommunications/Wireless Messaging - 2.7%
8,106 Arch Paging, Inc., Term Loan C B2 B 06/30/06 7,558,495
- -----------------------------------------------------------------------------------------------------------------------------------
Textiles & Leather - 3.5%
9,875 Norcross Safety Products LLC, Term Loan NR NR 09/30/05 9,800,938
- -----------------------------------------------------------------------------------------------------------------------------------
Transportation/Cargo - 3.2%
9,000 North American Van Lines, Inc., Term Loan B B1 B+ 11/18/07 8,983,125
- -----------------------------------------------------------------------------------------------------------------------------------
Transportation/Personal - 1.8%
2,500 Avis Rent A Car, Inc., Term Loan B Ba3 BB+ 06/30/06 2,516,667
2,500 Avis Rent A Car, Inc., Term Loan C Ba3 BB+ 06/30/07 2,516,667
- -----------------------------------------------------------------------------------------------------------------------------------
5,033,334
- -----------------------------------------------------------------------------------------------------------------------------------
Transportation/Rail Manufacturing - 1.4%
4,000 Kansas City Southern Railway Co., Term Loan B Ba1 BBB 12/29/06 4,027,499
- -----------------------------------------------------------------------------------------------------------------------------------
Total Variable Rate Senior Loan Interests (cost $355,162,158) 354,405,318
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 87
Portfolio of Investments (continued)
NUVEEN SENIOR INCOME FUND (NSL)
January 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Principal Stated Market
Amount (000) Description Maturity** Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS - 19.7%
Commercial Paper:
$ 9,995 Cargill Inc. 02/04/00 $ 9,995,458
6,070 Centex Corp. 02/01/00 6,070,000
9,997 Central & South West Corp. 02/03/00 9,996,806
10,000 Maytag Corp. 02/01/00 10,000,000
9,997 Nabisco, Inc. 02/03/00 9,996,844
10,000 Texas Utilities Co. 02/01/00 10,000,000
- ------------------------------------------------------------------------------------------------------
Total Short-Term Investments (cost $56,059,108) 56,059,108
- ------------------------------------------------------------------------------------------------------
Total Investments (cost $411,221,266) - 144.5% 410,464,426
- ------------------------------------------------------------------------------------------------------
Bank Borrowings Payable - (44.7)%+ (127,000,000)
- ------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities -0.2% 602,261
- ------------------------------------------------------------------------------------------------------
Net Assets - 100% $284,066,687
======================================================================================================
</TABLE>
NR Not rated.
* Bank loans rated below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below investment grade.
** Senior Loans in the Fund's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment
conditions and because there may be significant economic incentives for a
Borrower to prepay, prepayments of Senior Loans in the Fund's portfolio may
occur. As a result, the actual remaining maturity of Senior Loans held in
the Fund's portfolio may be substantially less than the stated maturities
shown. The Fund estimates that the actual average maturity of the Senior
Loans held in its portfolio will be approximately 18-24 months.
*** Senior Loans in which the Fund invests generally pay interest at rates
which are periodically redetermined by reference to a base lending rate
plus a premium. These base lending rates are generally (i) the prime rate
offered by one or more major United States banks, (ii) the lending rate
offered by one or more major European banks, such as the London Inter-Bank
Offered Rate ("LIBOR") and (iii) the certificate of deposit rate. Senior
loans are generally considered to be restricted in that the Fund ordinarily
is contractually obligated to receive approval from the Agent Bank and/or
borrower prior to the disposition of a Senior Loan.
+ Bank borrowings payable based on total assets equals (30.7)%.
See accompanying notes to financial statements.
<PAGE> 88
STATEMENT OF NET ASSETS
January 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at market value (cost $411,221,266) $410,464,426
Cash 587,451
Interest receivable 3,123,236
Other assets 176,537
- -----------------------------------------------------------------------------
Total assets 414,351,650
- -----------------------------------------------------------------------------
LIABILITIES
Bank borrowings payable 127,000,000
Accrued expenses:
Management fees 119,111
Other 915,445
Common share dividends payable 2,250,407
- -----------------------------------------------------------------------------
Total liabilities 130,284,963
- -----------------------------------------------------------------------------
Net assets $284,066,687
=============================================================================
Common shares outstanding 29,610,617
=============================================================================
Net asset value per Common share outstanding (net assets
divided by Common shares outstanding) $ 9.59
=============================================================================
<CAPTION>
STATEMENT OF OPERATIONS
For the Period October 29, 1999 (commencement of operations) through
January 31, 2000 (Unaudited)
- -----------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest $7,732,135
Fees 48,109
- -----------------------------------------------------------------------------
Total investment income 7,780,244
- -----------------------------------------------------------------------------
EXPENSES
Management fees 662,026
Interest expense 524,305
Custodian's fees and expenses 94,169
Shareholders' servicing agent fees and expenses 68,082
Professional fees 41,378
Shareholders' reports - printing and mailing expenses 6,296
Trustees' fees and expenses 5,218
Other expenses 41,970
- -----------------------------------------------------------------------------
Total expenses before expense reimbursement 1,443,444
Expense reimbursement (350,484)
- -----------------------------------------------------------------------------
Net expenses 1,092,960
- -----------------------------------------------------------------------------
Net investment income 6,687,284
- -----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain from investment transactions 151,759
Change in net unrealized appreciation (depreciation) of
investments (756,840)
- -----------------------------------------------------------------------------
Net gain (loss) from investments (605,081)
- -----------------------------------------------------------------------------
Net increase in net assets from operations $6,082,203
=============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 89
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the Period October 29, 1999 (commencement of operations)
through January 31, 2000 (Unaudited)
- ------------------------------------------------------------------------------
<S> <C>
OPERATIONS
Net investment income $6,687,284
Net realized gain from investment transactions 151,759
Net change in unrealized appreciation (depreciation)
of investments (756,840)
- ------------------------------------------------------------------------------
Net increase in net assets from operations 6,082,203
- ------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From undistributed net investment income (4,500,803)
From accumulated net realized gains from investment
transactions --
- ------------------------------------------------------------------------------
Decrease in net assets from distributions to Common shareholders (4,500,803)
- ------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares 282,383,896
Net proceeds from Common shares issued to shareholders due to
reinvestment of distributions 1,307
- ------------------------------------------------------------------------------
Net increase in net assets 283,966,603
Net assets at the beginning of period 100,084
- ------------------------------------------------------------------------------
Net assets at the end of period $284,066,687
==============================================================================
Balance of undistributed net investment income at the
end of period $ 2,186,481
==============================================================================
<CAPTION>
STATEMENT OF CASH FLOWS
For the Period October 29, 1999 (commencement of operations)
through January 31, 2000 (Unaudited)
- ------------------------------------------------------------------------------
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS $ 6,082,203
- ------------------------------------------------------------------------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash used for Operating Activities:
Increase in investments at value (410,464,426)
Increase in interest receivable (3,123,236)
Increase in other assets (176,537)
Increase in management fees 119,111
Increase in other liabilities 915,445
Increase in Common shares dividends payable 2,250,407
- ------------------------------------------------------------------------------
Total adjustments (410,479,236)
- ------------------------------------------------------------------------------
NET CASH USED FOR OPERATING ACTIVITIES (404,397,033)
- ------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings 127,000,000
Proceeds from shares sold 282,383,896
Proceeds from shares reinvested 1,307
Distributions to shareholders (4,500,803)
- ------------------------------------------------------------------------------
Net cash provided by financing activities 404,884,400
- ------------------------------------------------------------------------------
NET INCREASE IN CASH 487,367
Cash at the beginning of period 100,084
- ------------------------------------------------------------------------------
CASH AT THE END OF PERIOD $ 587,451
==============================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Nuveen Senior Income Fund (the "Fund") is a non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended. The Fund is listed on the New York Stock Exchange and trades
under the ticker symbol "NSL". The Fund was organized as a Massachusetts
business Trust on August 13, 1999. The Fund commenced operations on October 29,
1999.
The Fund seeks to provide a high level of current income, consistent with
preservation of capital by investing primarily in senior secured loans whose
interest rates float or adjust periodically based on a benchmark interest rate
index. The Fund seeks to increase the income available for distribution to
Common shareholders by utilizing financial leverage.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with generally
accepted accounting principles.
Investment Valuation
The prices of senior loans in the Fund's investment portfolio are provided by
pricing services approved by the Fund's Board of Trustees. The pricing service
providers typically 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 are not readily available are valued
at a fair value using a wide range of market data and other information and
analysis, including credit considerations considered relevant by such pricing
service providers to determine valuations. Short-term investments which mature
within 60 days are valued at amortized cost, which approximates market value.
Investment Transactions
Investment transactions are recorded on a trade date basis.
Investment Income
Interest income is determined on the basis of interest accrued, adjusted for
amortization of premiums and accretion of discounts when required for federal
income tax purposes. Facilities fees on senior loans purchased are treated as
market discounts. Market premiums and discounts are amortized over the expected
life of each respective borrowing.
Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
investment income, in addition to any significant amounts of net realized
capital gains from investment transactions. The Fund currently considers
significant net realized capital gains as amounts in excess of $.01 per share.
Net realized capital gain distributions are subject to federal taxation.
Dividends and Distributions to Shareholders
The Fund intends to declare and pay monthly distributions to Common
shareholders. Generally payment is made or reinvestment is credited to
shareholder accounts on the first business day after month-end. Net realized
capital gains from investment transactions, if any, are distributed to
shareholders not less frequently than annually. Furthermore, capital gains are
distributed only to the extent they exceed available capital loss carryforwards.
Distributions to shareholders of net investment income, and net realized capital
gains are recorded on the ex-dividend date. The amount and timing of
distributions are determined in accordance with federal income tax regulations,
which may differ from generally accepted accounting principles. Accordingly,
temporary over-distributions as a result of these differences may occur and will
be classified as either distributions in excess of net investment income and/or
distributions in excess of net realized gains from investment transactions,
where applicable.
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
Derivative Financial Instruments
The Fund may invest in certain derivative financial instruments including
futures, forward, swap and option contracts, and other financial instruments
with similar characteristics. Although the Fund is authorized to invest in such
financial instruments, and may do so in the future, it did not make any such
investments during the period October 29, 1999 (commencement of
operations)through January 31, 2000.
Custodian Fee Credit
The Fund has an arrangement with the custodian bank whereby the custodian fees
and expenses are reduced by credits earned on the Fund's cash on deposit with
the bank. Such deposit arrangements are an alternative to overnight investments.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of increases and decreases in net
assets from operations during the reporting period. Actual results may differ
from those estimates.
2. FUND SHARES
During the period October 29, 1999 (commencement of operations)through January
31, 2000, 29,600,000 shares were sold and 137 shares were issued to shareholders
due to reinvestment of distributions.
3. DISTRIBUTIONS TO SHAREHOLDERS
The Fund declared a dividend distribution of $.0785 per share from its net
investment income which was paid on March 1, 2000, to shareholders of record on
February 15, 2000.
4. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments) during
period October 29, 1999 (commencement of operations)through January 31, 2000,
aggregated $395,103,671 and $40,339,803, respectively.
At January 31, 2000, the identified cost of investments owned for federal income
tax purposes was $411,221,266.
5. UNREALIZED APPRECIATION (DEPRECIATION)
At January 31, 2000, net unrealized depreciation of investments for federal
income tax purposes aggregated $756,840 of which $1,568,082 related to
appreciated securities and $2,324,922 related to depreciated securities.
6. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Fund's investment management agreement with Nuveen Senior Loan Asset
Management Inc. (the "Adviser"), a wholly owned subsidiary of The John Nuveen
Company, the Fund pays an annual management fee, payable monthly, of .8500 of
1%, reduced on managed assets of $1 billion or more, which is based upon the
average daily managed assets of the Fund. "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).
The Adviser has agreed to waive part of its management fees or reimburse certain
expenses of the Fund in an amount equal to .45% of the average daily managed
assets for the period October 29, 1999 (commencement of operations) through
October 31, 2004, .35% of the average daily managed assets for the year ended
October 31, 2005, .25% of the average daily managed assets for the year ended
October 31, 2006, .15% of the average daily managed assets for the year ended
October 31, 2007, .10% of the average daily managed assets for the year ended
October 31, 2008, and .05% of the average daily managed assets for the year
ended October 31, 2009. The Adviser has not agreed to reimburse the Fund for any
portion of its fees and expenses beyond October 31, 2009.
The fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Fund pays no
compensation directly to those of its Trustees who are affiliated with the
Adviser or to their officers, all of whom receive remuneration for their
services to the Fund from the Adviser.
<PAGE> 92
7. COMPOSITION OF NET ASSETS
At January 31, 2000, net assets consisted of:
- -------------------------------------------------------------------------------
Common shares, $.01 par value per share $ 296,106
Paid-in surplus 282,189,181
Balance of undistributed net investment income 2,186,481
Accumulated net realized gain from investment transactions 151,759
Net unrealized appreciation (depreciation) of investments (756,840)
- -------------------------------------------------------------------------------
Net assets $284,066,687
===============================================================================
Authorized shares:
Common Unlimited
Preferred Unlimited
===============================================================================
8. COMMITMENTS
Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Fund may have unfunded loan commitments. There were no such unfunded loan
commitments as of January 31, 2000. The Fund generally will maintain with its
custodian short-term investments and/or cash having an aggregate value at least
equal to the amount of unfunded loan commitments.
9. SENIOR LOAN PARTICIPATION COMMITMENTS
The Fund invests primarily in assignments, participations or acts as a party to
the primary lending syndicate of a Variable Rate Senior Loan interest to United
States and foreign corporations, partnerships, and other entities. If the Fund
purchases a participation of a Senior Loan Interest, the Fund would typically
enter into a contractual agreement with the lender or other third party selling
the participation, but not with the borrower directly. As such, the Fund assumes
the credit risk of the Borrower, Selling Participant or other persons
interpositioned between the Fund and the Borrower. There were no such
participation commitments as of January 31, 2000.
10. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
for investment purposes in an amount up to 331/3% of the Fund's total assets
immediately after such borrowing or issuance.
The Trust has entered into a $150,000,000 revolving credit agreement with
Deutsche Bank AG which expires December 19, 2000. The Trust paid $200,000 in
fees in connection with obtaining the agreement. These Prepaid fees are being
amortized into expense over the term of the agreement. Interest is charged at a
rate of either the Fed Funds rate plus .50%, LIBOR plus .50% or the Prime Rate.
An unused commitment fee of .125% is charged on the unused portion of the
facility.
The average daily balance of bank borrowings for the period October 29, 1999
(commencement of operations) through January 31, 2000, was approximately
$29,958,000 with an average interest rate of 6.72%.
<PAGE> 93
FINANCIAL HIGHLIGHTS
(Unaudited)
Selected data for a share outstanding throughout the period October 29, 1999
(commencement of operations) through January 31, 2000:
<TABLE>
<CAPTION>
Investment Operations Less Distributions
--------------------------------- ------------------------------
Net
Realized/
Beginning Net Unrealized Net
Net Asset Investment Investment Investment Capital
Value Income Gain (Loss) Total Income Gains Total
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended 7/31:
2000 (a) $9.55 $.23 $(.03) $.20 $(.15) $-- $(.15)
<CAPTION>
Total Returns
------------------------------
Organization
and Ending Ending Based on
Offering Net Asset Market Based on Net Asset
Costs Value Value Market Value+ Value+
<S> <C> <C> <C> <C> <C>
Year Ended 7/31:
2000 (a) $(.01) $9.59 $9.5625 (2.85)% 2.02%
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------------------------------
Before Reimbursement After Reimbursement**
---------------------------- ----------------------------------
Ratio of Ratio of Net Ratio of Ratio of Net
Operating Investment Operating Investment
Ending Expenses to Income to Expenses to Income to Portfolio
Net Assets Average Average Average Average Turnover
(000) Net Assets++ Net Assets++ Net Assets++ Net Assets++ Rate
<S> <C> <C> <C> <C> <C> <C>
Year Ended 7/31:
2000 (a) $284,067 2.03%* 8.92%* 1.54%* 9.41%* 14%
</TABLE>
* Annualized.
** After expense reimbursement, where applicable.
+ Total Return on Market Value is the combination of reinvested dividend
income, reinvested capital gain distributions, if any, and changes in stock
price per share. Total Return on Net Asset Value is the combination of
reinvested dividend income, reinvested capital gain distributions, if any,
and changes in net asset value per share. Total returns are not annualized.
++ Each Ratio of Operating Expenses to Average Net Assets and each Ratio of
Net Investment Income to Average Net Assets includes the effect of the
interest expense paid on bank borrowings of .74%.
(a) For the period October 29, 1999 (commencement of operations) through
January 31, 2000.
<PAGE> 94
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 Articles IV and 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 1,840 Preferred Shares, $.01 par value, liquidation preference
of $25,000 per share, classified as Series TH 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 TH: A series of 1,840 Preferred Shares, liquidation preference
$25,000 per share, is hereby designated "Series TH Taxable Auctioned Preferred
Shares" ("TAPS Series TH"). Each share of TAPS Series TH 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 TH shall have such other preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law or set
forth in the Declaration applicable to preferred shares of the Fund, as are set
forth in Part I and Part II of this Statement. The TAPS Series TH shall
constitute a separate series of Preferred Shares of the Fund.
Subject to the provisions of Section 12(b) of Part I hereof, the Board
of Trustees of the Fund may, in the future, classify additional authorized
shares of the Fund's Preferred Shares as TAPS Series TH, with the same
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and other terms of the
respective series herein described, except that the Applicable Rate for its
initial Dividend Period, its initial Dividend Payment Date and any other
changes in the terms herein set forth shall be as set forth in an amendment to
this Statement.
As used in Part I and Part II of this Statement, capitalized terms
shall have the meanings provided in Section 18 of Part I.
PART I: TAPS TERMS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting TAPS
Series TH is 1,840 shares. No fractional shares of TAPS Series TH shall be
issued.
(b) Any shares of TAPS Series TH 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 TH 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.
A-1
<PAGE> 95
(d) No holder of shares of TAPS Series TH 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 TH, 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 TH 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 TH
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 TH,
with respect to any Dividend Period greater than 30 days 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 TH, 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 TH 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
TH during the period from and after the Date of Original Issue to and
including the last day of the initial Dividend Period therefor
shall be equal to the rate per annum set forth under "Designation" above.
For each subsequent Dividend Period with respect to the shares of TAPS
Series TH Outstanding thereafter, the dividend rate shall be equal to the
rate per annum that results from an Auction for Outstanding shares of TAPS
Series TH 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 TH is not held for any reason or
if Sufficient Clearing Orders have
A-2
<PAGE> 96
not been made in an Auction (other than as a result of all shares of TAPS
Series TH being the subject of Submitted Hold Orders), then the dividend
rate on the shares of TAPS Series TH 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). The all Hold Rate will apply automatically
following an Auction in which all of the Outstanding shares of TAPS Series
TH 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 TH 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 TH 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 TH 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 TH 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 Standard Rate Period; provided,
however, that the commencement of a Default Period will not by itself cause
the commencement of a new Dividend Period. No Auction shall be held during
a Default Period. 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 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
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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 TH
shall first be credited against the earliest accumulated but unpaid dividends
due with respect to TAPS Series TH.
(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).
(f) The Fund will not declare, pay or set apart for payment
any dividend or other distribution in respect to the TAPS Series TH unless (i)
there is not an event of default under indebtedness senior to the TAPS Series
TH, if any, or (ii) immediately after such transaction, the Fund would have
eligible portfolio holdings with an aggregate discounted value at least equal to
the asset coverage requirements under the indebtedness senior to the TAPS Series
TH.
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 TH 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 ("Redemption Price"), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the
relevant Dividend Period by delivering a notice of redemption not less
than 15 days and not more than 40 days prior to the date fixed for
such redemption, at the Redemption Price, plus a redemption premium,
if any, determined by the Board of Trustees after consultation with
the Broker-Dealers and set forth in any applicable Specific Redemption
Provisions at the time of the designation of such Dividend Period as
set forth in Section 4 of this Statement; provided, however, that
during a Dividend Period of more than one year no shares of TAPS
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Series TH will be subject to optional redemption except in accordance with
any Specific Redemption Provisions approved by the Board of Trustees after
consultation with the Broker-Dealers at the time of the designation of such
Dividend Period. Notwithstanding the foregoing, the Fund shall not give a
notice of or effect any redemption pursuant to this Section 3(a)(i) unless,
on the date on which the Fund intends to give such notice and on the date
of redemption (a) the Fund has available certain Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to Holders of TAPS Series TH by reason of the
redemption of TAPS Series TH 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 the last Business Day of the following month 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 Business Day immediately preceding the
Mandatory Redemption Date. If fewer than all of the Outstanding
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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 the Redemption
Price plus (in the case of a Dividend Period of one year or more only) a
redemption premium, if any, determined by the Board of Trustees after
consultation with the Broker-Dealers and set forth in any applicable
Specific Redemption Provisions.
(b) In the event of a redemption pursuant to Section 3(a), the
Fund will file a notice of its intention to redeem with the Securities and
Exchange Commission so as to provide at least the minimum notice required under
Rule 23c-2 under the 1940 Act or any successor provision. In addition, the Fund
shall deliver a notice of redemption to the Auction Agent (the "Notice of
Redemption") containing the information set forth below (i) in the case of an
optional redemption pursuant to subparagraph (a)(i) above, one Business Day
prior to the giving of notice to the Holders, (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 TH 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 TH 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 TH 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 TH 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 TH called for redemption
on such date and (ii) such other amounts, if any, to which Holders of shares of
TAPS Series TH 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 TH so called for redemption may look only to the Fund
for payment of the redemption price and all other amounts, if any, to which they
may be entitled. The Fund shall be entitled to receive, from time to time after
the date fixed for redemption, any interest earned on the funds so deposited.
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(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 TH 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 TH for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of TAPS Series TH and shall include those shares of
TAPS Series TH 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 TH 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 TH 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 TH 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 TH 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 TH 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 TH 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 TH is as set
forth under "Designation" above. The Fund will designate the duration of
subsequent Dividend Periods of TAPS Series TH; provided, however, that no such
designation is necessary for a Standard 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
timely manner to the Auction Agent the full amount of any dividend on, or the
redemption price of, TAPS Series TH shall have been cured as provided above,
(iii) Sufficient Clearing Orders shall have existed in an Auction held on the
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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 7 (or two Business Days in the event the duration of the Dividend
Period prior to such Special Rate Period is fewer than 8 days) nor more than 30
Business Days prior to the first day of such Special Rate Period, notice shall
be (i) made by press release and (ii) communicated by the Fund by telephonic or
other means to the Auction Agent and confirmed in writing promptly thereafter.
Each such notice shall state (A) that the Fund proposes to exercise its option
to designate a succeeding Special Rate Period, specifying the first and last
days thereof and (B) that the Fund will by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such Special Rate Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to proceed with such
Special Rate Period, 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 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
any Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined not to
exercise its option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Rate Period to the Auction Agent or is unable to make
the confirmation 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 Standard Rate
Period.
5. Restrictions on Transfer. Shares of TAPS Series TH 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 TH through different
Broker-Dealers, advises the Auction Agent of such transfer. The certificates
representing the shares of TAPS Series TH issued to the Securities Depository
will bear legends with respect to the restrictions described above and
stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.
6. Voting Rights.
(a) Except as otherwise provided in the Declaration or as
otherwise required by applicable law, (i) each Holder of shares of TAPS Series
TH shall be entitled to one vote for each share of TAPS Series TH 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 TH, and shares of
Common Shares shall vote together as a single class; provided, however, that,
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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 TH, 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 TH, 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 TH, 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 TH, 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 TH, 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 TH, 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 TH, 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 TH, 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 TH, 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.
(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.
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(f) So long as any of the shares of Preferred Shares,
including TAPS Series TH, 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 either Section 3(j) or 12, as applicable, the Board of Trustees,
without the vote or consent of the holders of the Preferred Shares, may from
time to time authorize, create and classify, and the Fund may from time to time
issue, shares or series of Preferred Shares including other series of 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, and may authorize, reclassify and/or issue any additional
shares of the TAPS Series TH, including shares 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 senior to the
TAPS, (D) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness permitted under
clause (vi) below and (E) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's custodian and the
Auction Agent; or (vi) create, authorize, issue, incur or suffer to exist any
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Fund 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 TH, 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 TH) and any Other
Rating Agency which is then rating TAPS Series TH 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.
(h) The affirmative vote of the holders of a majority of the
Outstanding shares of TAPS Series TH, 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 TH 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;
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(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 TH
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 TH, 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 TH) (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 TH, 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 TH, 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 TH, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of TAPS Series TH 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:
Asset Coverage Cure Date Moody's Eligible Assets
Deposit Securities Moody's Industry Classification
Discounted Value 1940 Act Asset Coverage Cure Date
Exposure Period 1940 Act TAPS Asset Coverage
Market Value (including Short Term Money Market Instruments
certain provisions relevant to TAPS Basic Maintenance Amount
futures and options) TAPS Basic Maintenance Certificate
Maximum Rate Volatility Factor
Minimum Rate Last Paragraph of Section 12 (discussing
Moody's Discount Factor valuation of certain option provisions)
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 TH, 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.
(j) Unless otherwise required by law, holders of shares of
TAPS Series TH 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 TH shall have no rights to cumulative voting. In the event
that the Fund fails to pay any dividends on the shares of TAPS Series TH, 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 TH 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.
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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 TH then Outstanding, together with holders of shares of any class of
stock ranking on a parity with TAPS Series TH 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 TH 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 TH 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 TH 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 TH upon dissolution, liquidation
or winding up.
(c) A consolidation, reorganization or merger of the Fund with
or into any other trust or company, or a sale, lease or exchange of all or
substantially all of the assets of the Fund in consideration for the issuance of
equity securities of another trustor company shall not be deemed to be a
liquidation, dissolution or winding up, whether voluntary or involuntary, for
the purposes of this Section 7.
(d) After the payment to the Holders of TAPS Series TH of the
full preferential amounts provided for in this Section 7, the holders of TAPS
Series TH 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 TH, 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 TH 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 TH, 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 TH 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 TH as provided in paragraph (a) of this
Section 7, but not prior thereto, any other series or class or classes of stock
ranking junior to TAPS Series TH 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 TH shall not be entitled to share therein.
8. Auction Agent. For so long as any shares of TAPS Series TH 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
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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 TH 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 the
last Business Day of each month in 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 TH 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 TH) 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 TH, 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;
(b) issue additional shares of TAPS Series TH or any class or
series of shares ranking prior to or on a parity with TAPS Series TH 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 TH 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 TH, 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 Series TH 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
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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 TH 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 TH) and any Other Rating Agency which is then rating
TAPS Series TH 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 115%
of the TAPS Basic Maintenance Amount, (ii) to the Auction Agent, Moody's (if
Moody's is then rating TAPS Series TH) and any Other Rating Agency which is then
rating TAPS Series TH 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 TH) and any Other
Rating Agency which is then rating TAPS Series TH and which so requires as of
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 TH) and any Other Rating Agency which is then rating
TAPS Series TH 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.
(e) The Fund shall deliver to the Auction Agent, Moody's (if
Moody's is then rating TAPS Series TH) and any Other Rating Agency which is then
rating TAPS Series TH 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
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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 TH) and any
Other Rating Agency which is then rating TAPS Series TH 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 TH) and any Other Rating Agency which is then
rating TAPS Series TH 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 TH) and any Other Rating Agency which is
then rating TAPS Series TH 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 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.
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16. Waiver. Holders of at least two-thirds of the Outstanding shares
of TAPS, acting collectively, or the TAPS Series TH, 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 TH 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. Amendment. Subject to the provisions of Section 12 of this Part
I, the Board of Trustees may, by resolution duly adopted without shareholder
approval (except as otherwise provided by this Statement or required by
applicable law), amend this Statement to (1) reflect any amendments hereto which
the Board of Trustees is entitled to adopt pursuant to the terms of this
Statement without shareholder approval or (2) add additional shares of TAPS
Series TH (and terms relating thereto). All such additional shares shall be
governed by the terms of this Statement. To the extent permitted by applicable
law, the Board of Trustees may interpret, amend or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect.
19. 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 Standard 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 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) "All Hold Rate" means for Rate Periods of 8 days or fewer,
the 7 day London Inter-Bank Offered Rate ("LIBOR"); for Rate Periods greater
than 8 days but less than or equal to 31 days, the 30-day LIBOR; for Rate
Periods greater than 31 days but less than or equal to 61 days, the 60-day
LIBOR; for Rate Periods greater than 61 days but less than or equal to 91 days,
the 90 day LIBOR; for Rate Periods greater than 91 days but less than or equal
to 120 days, the 120 day LIBOR; for Rate Periods greater than 121 days but less
than or equal to 151 days, the 150 day LIBOR; for Rate Periods greater than 151
days but less than or equal to 181 days, the 180 day LIBOR; for Rate Periods
greater than 181 days but less than or equal to 211 days, the 210 day LIBOR; for
Rate Periods greater than 211 days but less than or equal to 241 days, the 240
day LIBOR; for Rate Periods greater than 240 days but less than or equal to 271
days, the 270 day LIBOR; for Rate Periods greater than 271 days but less than or
equal to 301 days, the 300 day LIBOR; for Rate Periods greater than 301 days but
less than or equal to 331 days, the 330 day LIBOR; for Rate Periods greater than
331 days but less than or equal to 361 days, the 360 day LIBOR; for Rate Periods
greater than 360 days, the Treasury Index Rate.
(g) "Applicable Rate" means, with respect to TAPS Series TH
for each Dividend Period (i) if Sufficient Clearing Orders exist for the Auction
in respect thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do
not exist for the Auction in respect thereof, the Maximum Applicable Rate and
(iii) in the case where
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all the shares of TAPS Series TH are the subject of Hold Orders for the Auction
in respect thereof, the All Hold Rate.
(h) "Approved Dealer" means Bank of America, Bank of Montreal,
The Bank of New York, Bank of Nova Scotia, Bankers Trust Company, Canadian
Imperial Bank of Commerce, Chase Bank of Texas, The Chase Manhattan Bank, CIBC,
Citibank, Citicorp USA, Credit Lyonnais, Credit Suisse First Boston, Deutsche
Bank Securities, DLJ Capital Funding, Fleet National Bank, Goldman Sachs, Harris
Trust and Savings Bank, IBJ Whitehall Bank & Trust Company, JP Morgan, Lehman,
Merrill Lynch, Morgan Guaranty Trust Company of New York, Nationsbank, Summit
Bank, Toronto Dominion, U.S. Bank National Association, USB AG or any other
broker-dealer designated in writing by the Fund provided that Moody's has not
objected, in its reasonable discretion, in writing to the Fund within three
business days of receipt of the Fund's written notice.
(i) "Approved Exchange" means, with respect to any security,
any major securities or options exchange, the NASDAQ or any other exchange or
quotation system providing regularly published securities prices designated by
the Fund in writing provided that Moody's has not objected, in its reasonable
discretion, in writing to the Fund within three business days of receipt of the
Fund's written notice.
(j) "Approved Price" means the price of Unquoted Investments,
including prices determined by the Fund in accordance with procedures adopted by
the Board of Trustees; provided, however, that the price of an Unquoted
Investment will be considered an Approved Price only to the extent the total
value of such securities does not exceed 6% of the Fund's total assets.
(k) "Approved Pricing Service" means DLJ Capital Funding, Inc.,
Merrill Lynch, Chase Securities, Inc. and/or CIBC Oppenheimer or any other
quotation service designated in writing by the Fund provided that Moody's has
not objected, in its reasonable discretion, in writing to the Fund within three
business days of receipt of the Fund's written notice.
(l) "Approved Source" means any of (i) two Approved Dealers,
(ii) an Approved Exchange or (iii) an Approved Pricing Service.
(m) "Asset Coverage Cure Date" has the meaning set forth in
Section 3(a)(ii).
(n) "Auction" means each periodic operation of the procedures set
forth under "Auction Procedures."
(o) "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.
(p) "Auction Date" means the first Business Day next preceding
the first day of a Dividend Period for TAPS Series TH.
(q) "Auction Procedures" means the procedures for conducting
Auctions set forth in Part II hereof.
(r) "Board of Trustees" means the Board of Trustees of the
Fund or any duly authorized committee thereof as permitted by applicable law.
(s) "Beneficial Owner," with respect to shares of a series of
TAPS Series TH, 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.
(t) "Bid" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of this Statement.
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(u) "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.
(v) "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.
(w) "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.
(x) "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.
(y) "Code" means the Internal Revenue Code of 1986, as amended.
(z) "Commercial Paper Dealers" has the meaning set forth in the
definition of AA Composite Commercial Paper Rate.
(aa) "Commission" means the Securities and Exchange Commission.
(bb) "Common Share" means the shares of beneficial interest, par
value $.01 per share, of the Fund.
(cc) "Date of Original Issue" means the date on which TAPS Series
TH is originally issued by the Fund.
(dd) "Default Period" has the meaning set forth in Section 2(c)
(ii) of this Part I.
(ee) "Default Rate" means the Reference Rate multiplied by
three (3).
(ff) "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.
(gg) "Dividend Default" has the meaning set forth in Section
2(c)(iii) of this Part I.
(hh) "Dividend Period" means, with respect to TAPS Series TH,
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.
(ii) "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.
(jj) "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.
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<PAGE> 112
(kk) "Exposure Period" means the period commencing on (and
including) a given Valuation Date and ending 41 days thereafter.
(ll) "Holder" means, with respect to TAPS Series TH, the
registered holder of shares of TAPS Series TH as the same appears on the share
ledger or share records of the Fund.
(mm) "Hold Order" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(nn) "Mandatory Redemption Date" has the meaning set forth in
Section 3(a)(iv) of this Part I.
(oo) "Mandatory Redemption Price" has the meaning set forth in
Section 3(a)(iv) of this Part I.
(pp) "Market Value" means the product of (i) the Market Value
Price for each unit of such Moody's Eligible Asset on such date multiplied by
(ii) the number of units of such Moody's Eligible Asset held by the Fund.
(qq) "Market Value Price" means the price for each unit of
Moody's Eligible Asset at such date (a) obtained from an Approved Source,
including (i) in the case of an Approved Exchange, the closing price as of the
most recent Determination Date on such Approved Exchange, or if such Approved
Exchange is NASDAQ, the closing bid price at such date (or if such Approved
Exchange is closed for business at such date, then the most recent available
closing price or closing bid price, as the case may be), (ii) the average of the
bid prices at such date quoted by two Approved Dealers, or (iii) the price
obtained at such date from an Approved Pricing Service; (b) that constitutes an
Approved Price or (c) that constitutes a Non-Approved Price.
(rr) "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.
(ss) "Minimum Rate" means, on any Auction Date with respect to
a Dividend Period of 28 days or fewer, 70% 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 28 days.
(tt) "Moody's" means Moody's Investors Service, Inc. and its
successors at law.
(uu) "Moody's Advance Amount" means, as of any date of
determination under the TAPS Basic Maintenance Amount, an amount equal to the
sum of (1) the Market Value of each Moody's Eligible Asset multiplied by (2) the
Moody's Advance Rate applicable to such Moody's Eligible Asset under the TAPS
Basic Maintenance Amount.
(vv) "Moody's Advance Rate" means, for the purposes of
determining the TAPS Basic Maintenance Amount, the percentage determined below:
(i) Senior Loans: for each Moody's Asset Category, the
percentage specified in the table below opposite such Moody's Asset
Category.
Asset Category Advance Rate
-------------- ------------
A 84.5%
B 73%
C 62%
D 45%
E 45%
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For the purpose of determining the Advance Rate applicable to
Senior Loan Participations at any time during the 60-day time
period described below under Moody's Eligible Assets, the Advance
Rate will be 90% of the Advance Rate calculated for such Senior
Loan pursuant to the Advance Rate table above.
(ii) Corporate Debt Securities: the percentage determined
by reference to the rating on such asset (which percentage is based
upon the Exposure Period) with reference to the remaining term to
maturity of such assets, in accordance with the table set forth below:
Moody's Advance Rate -- Corporate Debt Securities Rating Category
Maturity
of Collateral Aaa Aa A Baa Ba B Caa Unrated*
- ------------- --- -- - --- -- - --- --------
1 year - 15 years 67% 65% 63% 61% 59% 55% 49% 38%
Above 15 years - 20
years 62% 59% 56% 54% 50% 47% 38% 38%
Above 20 years 62% 59% 56% 54% 50% 46% 38% 38%
- ---------------
* If a security is unrated by Moody's but is rated by S&P, a rating two
numeric ratings below the S&P rating will be used, e.g., where the S&P
rating is AAA, a Moody's rating of Aa2 will be used; where the S&P
rating is AA+ a Moody's rating of Aa3 will be used. If a security is
unrated by either Moody's or S&P, the Fund will use the percentage set
forth under "Unrated" in this table.
For purposes of determining the Advance Rate applicable to Rule 144A
Corporate Debt Securities, the Advance Rate will be 120% of the Advance Rate
calculated for such Corporate Debt Securities pursuant to the Advance Rate table
above.
(iii) Short Term Money Market Instruments: The Moody's
Advance Rate applied to short-term portfolio securities will be (A)
97%, so long as such portfolio securities mature or have a demand
feature at par exercisable within the Exposure Period, (B) 90%, so
long as such portfolio securities mature or have a demand feature at
par not exercisable within the Exposure Period, and (C) 83%, if such
securities are not rated by Moody's, so long as such portfolio
securities are rated at least A-2/AA or SP-2/AA by S&P and mature or
have a demand feature at par exercisable within the Exposure Period. A
Moody's Advance Rate of 100% will be applied to cash.
(iv) U.S. Government Securities: the Moody's Advance Rate
applied to U.S. Government Securities (a) with a maturity at the time
of acquisition by the Fund of two years or less will be 93%, (b) with
a maturity at the time of acquisition by the Fund of more than two
years (but not more than 10 years) will be 85% and (c) with a maturity
at the time of acquisition by the Fund of more than 10 years will be
83%.
(v) Structured Notes: the Moody's Advance Rate applied to
Structured Notes will be 45%.
(ww) "Moody's Asset Category" means, for the purposes of the
TAPS Basic Maintenance Amount, the category in which the Fund shall assign each
Senior Loan that is a Moody's Eligible Asset to one of the following five
categories commencing upon the initial acquisition thereof (and, for purposes of
this categorization, the Market Value Price of a Moody's Eligible Asset trading
at par is equal to $1.00).
(xx) "Moody's Asset Category A Investments" means Performing
Senior Loans priced by an Approved Source having a Market Value Price greater
than or equal to $.90 or at an Approved Price having a Market Value Price
greater than or equal to $.90.
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(yy) "Moody's Asset Category B Investments" means:
(i) Senior Loans which: (a) are Performing, (b) are priced
by an Approved Source or at an Approved Price and (c) have a Market
Value Price of greater than or equal to $.80 but less than $.90.
(ii) Senior Loans which: (a) are non-Performing, (b) are
priced by an Approved Source or at an Approved Price and (c) have a
Market Value Price greater than or equal to $.85.
(zz) "Moody's Asset Category C Investments" means:
(i) Senior Loans which: (a) are Performing, (b) are priced
by an Approved Source or at an Approved Price and (c) have a Market
Value Price greater than or equal to $.70 but less than $.80.
(ii) Senior Loans which: (a) are non-Performing, (b) are
priced by an Approved Source or at an Approved Price and (c) have a
Market Value Price greater than or equal to $.75 but less than $.85.
(aaa) "Moody's Asset Category D Investments" means Senior Loans
which are priced by an Approved Source or at an Approved Price but are not
described above; provided, however, that Senior Loans under Moody's Asset
Category D Investments will not exceed 20% of the Fund's total assets.
(bbb) "Moody's Asset Category E Investments" means Senior
Loans which are Unquoted Investments but are priced at a Non-Approved Price.
Notwithstanding any other provision contained above, for purposes of
determining whether a Moody's Eligible Asset falls within a specific Moody's
Asset Category, to the extent that any Moody's Eligible Asset would fall in more
than one of the five Moody's Asset Categories, such Moody's Eligible Asset shall
be deemed to fall into the Moody's Asset Category with the highest specified
Moody's Advance Rate.
(ccc) "Moody's Discount Factor" means
(ddd) "Moody's Eligible Assets" means:
(i) Senior Loans; provided, however, that Senior Loan
Participations held by the Fund for more than 60 consecutive days
during any period while any bank or other institution that sold such
participation has a long-term debt-rating of below "A-" by Fitch or S&P
or below "A3" by Moody's (unless the obligation of such bank or other
institution are guaranteed by an entity whose long-term debt
obligations are rated "A-" or better by Fitch or S&P or "A3" or better
by Moody's) will not qualify as Moody's Eligible Assets. Unquoted
Investments held by the Fund and valued at a Non-Approved Price will
qualify as Moody's Eligible Assets only up to a maximum of 20% of the
Fund's total assets.
(ii) Corporate Debt Securities will be included in
Moody's Eligible Assets if (a) such securities provide for the periodic
payment of interest in cash in U.S. dollars; (b) such securities do not
provide for conversion or exchange into equity capital at any time over
their lives; (c) for debt securities rated Ba1 and below, no more than
10% of the original amount of such issue may constitute Moody's
Eligible Assets; and (d) such securities have been registered under the
Securities Act or are restricted as to resale under federal securities
laws but are eligible for resale pursuant to Rule 144A under the
Securities Act as determined by the Fund's adviser acting subject to
the supervision of the Fund's Board of Trustees, provided that any such
Rule 144A securities are eligible to be registered within one year.
(iii) Cash (including, for this purpose, interest and
dividends due on assets rated (a) Baa3 or higher by Moody's if the
payment date is within five Business Days of the Valuation Date, (b)
A2 or higher if the payment date is within thirty days of the
Valuation Date, and (c) A1 or higher if the payment date is within the
Moody's Exposure Period) and receivables for Moody's Eligible Assets
sold if the receivable is due
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within five Business Days of the Valuation Date, and if the trades
which generated such receivables are (1) settled through clearing
house firms with respect to which the Fund has received prior written
authorization from Moody's or (2) (A) with counterparties having a
Moody's long-term debt rating of at least Baa3 or (B) with
counterparties having a Moody's Short-Term Money Market Instrument
rating of at least P-1.
(iv) Short-Term Money Market Instruments so long as
(a) such securities are rated at least P-2, (b) in the case of demand
deposits, time deposits and overnight funds, the supporting entity is
rated at least A2, or (c) in all other cases, the supporting entity (1)
is rated A2 and the security matures within one month, (2) is rated A2
and the security matures within three months or (3) is rated at least
Aa3 and the security matures within six months; provided, however, that
for purposes of this definition, such instruments (other than
commercial paper rated by S&P and not rated by Moody's) need not meet
any otherwise applicable S&P rating criteria.
(v) Structured Notes, provided that (a) payments of
interest and principal are not denominated in, nor determined by
reference to, a foreign currency, (b) the Structured Notes are rated by
Moody's or Standard & Poors, (c) such Structured Notes are not junior
to any other Structured Notes of such issuer and (d) all such
Structured Notes will not exceed 5% of the Fund's total assets.
(vi) In addition, portfolio holdings must be within
the following diversification requirements: (a) no more than 25% of the
Fund's total assets (taken at current value) can be invested in the
securities of borrowers and other issuers having their principal
business activities in the same Moody's Industry Classification (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
subsection (a), 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 and (b) no more that 10% of the Fund's total assets can
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 total
assets, the Fund may invest up to 25% of its total assets in the
securities of any one issuer. For purposes of this subsection (b), 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.
(eee) "Moody's Industry Classification" means, , for the
purposes of determining Moody's Eligible Assets, each of the following industry
classifications:
1. Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill
Sugar, Canned Foods, Corn Refiners, Dairy Products, Meat
Products, Poultry Products, Snacks, Packaged Foods, Distributors,
Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars, Leaf/Snuff,
Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real
Estate, Real Estate Development, REITs, Land Development
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<PAGE> 116
6. Chemicals, Plastics and Rubber: Chemicals (non-agriculture),
Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers
made of: Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non-Durable Consumer Products (Manufacturing Only):
Scaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution, Mining and Sales
12. Ecological: Pollution Control, Waste Removal, Waste Treatment
and Waste Disposal
13. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communicating Systems, Radios, TVS, Tape Machines, Speakers,
Printers, Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication, Securities
15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture
Chemicals, Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary
Drugs, Research, Health Care Centers, Nursing Homes, HMOs,
Hospitals, Hospital Supplies, Medical Equipment
18. Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
19. Hotels, Motels, Inns and Gaming
20. Insurance: Life, Property and Casualty, Broker, Agent, Surety
21. Leisure, Amusement, Entertainment: Boating, Bowling, Billiards,
Musical Instruments, Fishing, Photo Equipment, Records, Tapes,
Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing
22. Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
23. Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
25. Personal, Food and Miscellaneous
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26. Printing and Publishing: Graphic Arts, Paper, Paper Products,
Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks
27. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders,
Ship Builders, Containers, Container Builders, Parts, Overnight
Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air
Cargo, Transport
28. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail
Order Catalog, Showroom
29. Cellular
30. Data and Internet Services
31. Satellite
32. Telecommunications Equipment
33. Other Telecommunications
34. Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
35. Utilities: Electric, Water, Hydro Power, Gas, Diversified
36. Radio and TV Broadcasting
37. North American Cable
38. Foreign Cable, Foreign TV, Radio and Equipment
39. Other Broadcasting and Entertainment
The Fund will use its discretion in determining which industry
classification is applicable to a particular investment in consultation with the
independent auditor and the rating agencies, as necessary.
(fff) "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.
(ggg) "1940 Act" means the Investment Company Act of 1940, as
amended from time to time.
(hhh) "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.
(iii) "Non-Approved Price" means the price of Unquoted
Investments, including prices determined by the Fund in accordance with
procedures adopted by the Board of Trustees; provided, however, that the Fund
will receive a quotation from an Approved Source at least quarterly.
(jjj) "Notice of Redemption" means any notice with respect to
the redemption of shares of TAPS pursuant to Section 3.
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(kkk) "Order" shall have the meaning specified in paragraph (a)
of Section 1 of Part II of this Statement.
(lll) "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.
(mmm) "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 TH.
(nnn) "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 TH 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.
(ooo) "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.
(ppp) "Performing" means the issuer of such Senior Loans is
not in default of any payment obligation in respect thereof.
(qqq) "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.
(rrr) "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.
(sss) "Preferred Share" means the preferred shares of beneficial
interest, par value $.01 per share, including the TAPS of the Fund from time to
time.
(ttt) "Rating Default" has the meaning set forth in Section
2(c)(ii) of Part I of this Statement.
(uuu) "Rating Default Cure Date" has the meaning set forth in
Section 3(a)(iii) of this Part I.
(vvv) "Redemption Default" has the meaning set forth in
Section 2(c)(ii) of this Part I.
(www) "Redemption Price" has the meaning set forth in Section
3(a)(i) of this Part I.
(xxx) "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).
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(yyy) "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.
(zzz) "S&P" means Standard & Poor's Fund and its successors
at law.
(aaaa) "Securities Act" means the Securities Act of 1933, as
amended from time to time.
(bbbb) "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 TH.
(cccc) "Sell Order" shall have the meaning specified in paragraph
(a) of Section 1 of Part II of this Statement.
(dddd) "Senior Loan" means direct purchases of, assignments of,
participation in and other interests in adjustable rate, U.S. dollar-denominated
senior loans.
(eeee) "Senior Loan Participations" means participations by
the Fund in a lender's portion of Senior Loans where the Fund has a contractual
relationship with such lender and not the borrower.
(ffff) "Short-Term Money Market Instrument" means the following
types of instruments if, on the date of purchase or other acquisition thereof by
the Fund, the remaining terms to maturity thereof are not in excess of 180 days
for instruments rated at least Aa3 or 270 days for instruments rated at least
Aaa for purposes of determining Moody's Eligible Assets:
(i) commercial paper that is rated as of each Valuation
Date P-2 by Moody's and either F-2 by Fitch or A-2 by S&P,
respectively;
(ii) demand or time deposits in, certificates of
deposit of (A) a depository institution or trust company incorporated
under the laws of the United States of America or any state thereof or
the District of Columbia or (B) a United States branch office or agency
of a foreign depository institution (provided that such branch office
or agency is subject to banking regulation under the laws of the United
States, any state thereof or the District of Columbia) if, in each
case, the certificates of deposit, if any, and the long-term unsecured
debt obligations (other than such obligations the ratings of which are
based on the credit of a person or entity other than such depository
institution or trust company) of such depository institution or trust
company that have (1) credit ratings on each Valuation Date of at least
P-2 from Moody's and either F-2 from Fitch or A-2 from S&P, in the case
of commercial paper or certificates of deposit, and (2) credit ratings
on each Valuation Date of at least Aa3 from Moody's and either AA- from
Fitch or AA- from S&P, in the case of long-term unsecured debt
obligations; provided, however, that in the case of any such investment
that matures in no more than one Business Day from the date of purchase
or other acquisition by the Fund, all of the foregoing requirements
shall be applicable except that the required long-term unsecured debt
credit rating of such depository institution or trust company from
Moody's, Fitch and S&P shall be at least A2, A and A, respectively; and
provided further, however, that the foregoing credit rating
requirements shall be deemed to be met with respect to a depository
institution or trust company if (1) such depository institution or
trust company is the principal depository institution in a holding
company system, (2) the certificates of deposit, if any, of such
depository institution or trust company are not rated on any Valuation
Date below P-2 by Moody's, F-2 by Fitch or A-2 by S&P and there is no
long-term rating, and (3) the holding company shall meet all of the
foregoing credit rating requirements (including the preceding proviso
in the case of investments that mature in no more than one Business Day
from the date of purchase or other acquisition by the Fund);
(iii) next-day federal funds; and
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(iv) Eurodollar demand or time deposits in, or
certificates of deposit of, the head office or the London branch office
of a depository institution or trust company meeting the credit rating
requirements of commercial paper and long-term unsecured debt
obligations specified in clause (ii) above, provided that the interest
receivable by the Fund shall not be subject to any withholding or
similar taxes.
(gggg) "Special Rate Period" means a Dividend Period that
is not a Standard Rate Period.
(hhhh) "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.
(iiii) "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.
(jjjj) "Structured Notes" mean 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.
(kkkk) "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.
(llll) "Submitted Bid" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(mmmm) "Submitted Hold Order" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
(nnnn) "Submitted Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(oooo) "Submitted Sell Order" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
(pppp) "Sufficient Clearing Bids" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(qqqq) "TAPS" means Taxable Auctioned Preferred Shares,
liquidation preference $25,000 per share, Series TH of the Fund or any other
series of Preferred Shares heretofore or hereinafter designated "Taxable
Auctioned Preferred Shares" by a Statement.
(rrrr) "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
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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, any indebtedness service to
the TAPS and 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 Moody's Advance Amount for
Fund assets irrevocably deposited by the Fund for the payment of any
of (i)(B) through (i)(F) (except that if the security matures prior to
the relevant redemption payment date and is either fully guaranteed by
the U.S. Government or is rated P2 by Moody's and A2 by S&P, it will
be valued at its face value).
(ssss) "TAPS Basic Maintenance Certificate" has the meaning set
forth in Section 13(d) of this Part I.
(tttt) "TAPS Series TH" means the shares of Series TH of the
TAPS or any other shares of Preferred Stock hereinafter designated as shares of
Series TH of the TAPS.
(uuuu) "Treasury Index Rate" means the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities having the same number of 30-day periods to maturity as the length of
the applicable Dividend Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having the next shorter
and next longer number of 30-day periods to maturity treating all Dividend
Periods with a length greater than the longest maturity for such securities as
having a length equal to such longest maturity, in all cases based upon data set
forth in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations shall be based upon the average of comparable data as quoted to the
Fund by at least three recognized dealers in U.S. Government securities selected
by the Fund.
(vvvv) "Unquoted Investment" means Senior Loans for which the
Market Value Price has not been obtained from an Approved Source and which are
valued in accordance with the Fund's registration statement.
(wwww) "U.S. Government Securities" mean securities that are
direct obligations of, and obligations the timely payment of principal and
interest on which is fully guaranteed by, the United States of America or any
agency or instrumentality of the United States of America, the obligations of
which are backed by the full faith and credit of the United States of America
and in the form of conventional bills, bonds and notes.
(xxxx) "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 TH initially is issued.
(yyyy) "Volatility Factor" means [1.89].
(zzzz) "Winning Bid Rate" has the meaning set forth in Section
3(a)(iii) of Part II of this Statement.
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20. 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 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;
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(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.
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);
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(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;
(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
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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 between the Minimum Rate (for Standard Rate Periods or
less, only) and the Maximum Rate (for All Rate Periods) for
shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series
subject to Submitted Bids of Existing Holders specifying one or
more rates between the Minimum Rate (for Standard Rate Periods or
less, only) and the Maximum Rate (for all Rate Periods) 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
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(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 Minimum Rate and 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 All Hold Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares
Existing Holders shall continue to hold the 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) 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;
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(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 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
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<PAGE> 128
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 thesepresents
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
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
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