As filed with the Securities and Exchange Commission on June 23, 2003
1933 Act File No. 333-104915
1940 Act File No. 811-21311
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
[_] Post-Effective Amendment No.
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 7
PIMCO High Income Fund
(Exact Name of Registrant as Specified in Declaration of Trust)
c/o PIMCO Advisors Fund Management LLC
1345 Avenue of the Americas
New York, New York 10105
(Address of Principal Executive Offices)
(Number, Street, City, State, Zip Code)
(212) 739-3369
(Registrant's Telephone Number, including Area Code)
Newton B. Schott, Jr.
c/o PIMCO Advisors Distributors LLC
2187 Atlantic Street
Stamford, Connecticut 06902
(Name and Address (Number, Street, City, State, Zip Code) of Agent for Service)
Copies of Communications to:
Joseph B. Kittredge, Jr., Esq. Cynthia G. Cobden, Esq.
Ropes & Gray LLP Simpson Thacher & Bartlett LLP
One International Place 425 Lexington Avenue
Boston, Massachusetts 02110 New York, New York 10017
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Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
If any of the securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. [_]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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Proposed Maximum Proposed Maximum
Amount Being Offering Price Per Aggregate Amount of
Title of Securities Being Registered Registered Unit Offering Price/1/ Registration Fee/2/
------------------------------------ ------------ ------------------ ---------------- ---------------------
Preferred Shares, par value $0.00001 36,000 Shares $25,000 $900,000,000 $72,810
-------------------------------------------------------------------------------------------------------------------------
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/1/ Estimated solely for the purpose of calculating the registration fee.
/2/ $20.23 of which has been previously paid.
PROSPECTUS
[LOGO] PIMCO ADVISORS
$900,000,000
PIMCO High Income Fund
Auction Rate Cumulative Preferred Shares 7,200 Shares, Series M 7,200 Shares, Series T 7,200 Shares, Series W 7,200 Shares, Series TH 7,200 Shares, Series F Liquidation Preference $25,000 per Share
PIMCO High Income Fund, or the Fund, is offering 7,200 Series M, 7,200 Series T, 7,200 Series W, 7,200 Series TH and 7,200 Series F Auction Rate Cumulative Preferred Shares (collectively, "Preferred Shares"). The Fund is a recently organized, diversified, closed-end management investment company.
Investment Objectives. The Fund's primary investment objective is to seek high current income. Capital appreciation is a secondary objective.
Investing in Preferred Shares involves risks. You should read the discussion of the material risks of investing in the Fund in "Risks" beginning on page 32. Certain of these risks are summarized in "Special Risk Considerations," beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Per Share Total
--------- ------------
Public Offering Price $25,000 $900,000,000
Sales Load $ 250 $ 9,000,000
Proceeds to the Fund/1/ $24,750 $891,000,000
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The public offering price per share will be increased by the amount of dividends, if any, that have accumulated from the date the Preferred Shares are first issued.
The Underwriters are offering the Preferred Shares subject to the condition that the Preferred Shares be rated "Aaa" by Moody's and "AAA" by Fitch Ratings as of the time of delivery of the Preferred Shares to the broker-dealers and subject to certain other conditions. The Underwriters expect to deliver the Preferred Shares to an investor's broker-dealer, in book-entry form through The Depository Trust Company, on or about June 26, 2003.
UBS Investment Bank
June 23, 2003
(continued from previous page)
below investment grade credit spectrum may vary over time, the portfolio manager believes that under current market conditions certain securities in the upper tier of the below investment grade credit spectrum offer opportunities for attractive yield relative to associated risk. Accordingly, the Fund will, under current market conditions, tend to focus on securities that are rated BB/Ba or B by one or more rating agencies or unrated but judged by the portfolio manager to be of comparable quality. The Fund will not invest more than 10% of its total assets in securities that are, at the time of purchase, rated CCC/Caa or lower by each agency rating the security or unrated but judged by the portfolio manager to be of comparable quality.
Portfolio Contents. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings, or below a comparable rating by Dominion) or unrated but judged by the portfolio manager to be of comparable quality. Within this area of the credit spectrum, the Fund will invest in a diversified portfolio of U.S. dollar-denominated debt obligations of varying maturities and other income-producing securities. These may include bonds, debentures, notes and similar types of debt instruments, including mortgage- and asset-backed securities. The rate of interest on an income-producing security may be fixed, floating or variable. While the Fund emphasizes below investment grade debt securities, it may also invest in investment grade debt securities, including U.S. Government securities. The Fund may make use of credit default swaps and other derivative instruments. The Fund cannot assure you that it will achieve its investment objectives.
It is expected that the Fund normally will have an intermediate average portfolio duration (i.e., within a four-to-eight-year time frame), although it may be shorter or longer at any time or from time to time, depending on market conditions. The portfolio manager believes that this duration range offers the opportunity for above-average returns while limiting exposure to interest rate risk.
Certain capitalized terms used in this prospectus are defined in the Glossary that appears at the end of this prospectus.
Investors in Preferred Shares will be entitled to receive cash dividends at an annual rate that may vary for the successive dividend periods for such shares. The dividend rate on the Series M Preferred Shares for the initial period from and including the date of issue through July 7, 2003, will be % per year. The dividend rate on the Series T Preferred Shares for the initial period from and including the date of issue through July 8, 2003, will be % per year. The dividend rate on the Series W Preferred Shares for the initial period from and including the date of issue through July 9, 2003, will be % per year. The dividend rate on the Series TH Preferred Shares for the initial period from and including the date of issue through July 10, 2003, will be % per year. The dividend rate on the Series F Preferred Shares for the initial period from and including the date of issue through July 11, 2003, will be % per year. For each subsequent period, the auction agent will determine the dividend rate for a particular period by an auction conducted in accordance with the procedures described in this prospectus and, in further detail, in Appendix A to the Statement of Additional Information (each an "Auction").
The Preferred Shares, which have no history of public trading, will not be listed on an exchange or automated quotation system. Broker-Dealers may maintain a secondary trading market in the Preferred Shares outside of Auctions; however, they have no obligation to do so, and there can be no assurance that a secondary market for the Preferred Shares will develop or, if it does develop, that it will provide holders with a liquid trading market (i.e., trading will depend on the presence of willing buyers and sellers and the trading price will be subject to variables to be determined at the time of the trade by such Broker-Dealers). A general increase in the level of interest rates may have an adverse effect on the secondary market price of the Preferred Shares, and a selling shareholder that sells Preferred Shares between Auctions may receive a price per share of less than $25,000. The Fund may redeem Preferred Shares as described under "Description of Preferred Shares--Redemption."
The Preferred Shares will be senior in liquidation and distribution rights to the Fund's outstanding common shares. The Fund's common shares are traded on the New York Stock Exchange under the symbol "PHK." This offering is conditioned upon the Preferred Shares' receiving a rating of "Aaa" from Moody's and "AAA" from Fitch Ratings.
You should read this prospectus, which contains important information about the Fund, before deciding whether to invest and retain it for future reference. A Statement of Additional Information, dated June 23, 2003, containing additional information about the Fund, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this prospectus, which means that it is part of the prospectus for legal purposes. You can review the table of contents of the Statement of Additional Information on page 72 of this prospectus. You may request a free copy of the Statement of Additional Information by calling (877) 819-2224 or by writing to the Fund, or obtain a copy (and other information regarding the Fund) from the Securities and Exchange Commission Web site (http://www.sec.gov).
The Preferred Shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
You should rely only on the information contained or incorporated by reference in this prospectus. The Fund has not, and the Underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The Fund is not, and the Underwriters are not, making an offer of the Preferred Shares in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. The Fund's business, financial condition, results of operations and prospects may have changed since that date.
TABLE OF CONTENTS
Page
----
Summary....................................................... 1
Financial Highlights.......................................... 19
The Fund...................................................... 20
Use of Proceeds............................................... 20
Capitalization................................................ 20
The Fund's Investment Objectives and Strategies............... 21
Risks......................................................... 32
How the Fund Manages Risk..................................... 38
Rating Agency Guidelines...................................... 40
Description of Preferred Shares............................... 41
Management of the Fund........................................ 61
Net Asset Value............................................... 64
Tax Matters................................................... 64
Description of Capital Structure.............................. 67
Anti-Takeover and Other Provisions in the Declaration of Trust 68
Repurchase of Common Shares; Conversion to Open-End Fund...... 69
Underwriting.................................................. 70
Custodian and Transfer Agents................................. 71
Legal Matters................................................. 71
Table of Contents for the Statement of Additional Information. 72
Glossary...................................................... 73
Appendix A--Description of Securities Ratings................. A-1
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SUMMARY
This is only a summary. You should review the more detailed information contained in this prospectus and in the Statement of Additional Information. Certain capitalized terms used in this prospectus are defined in the Glossary that appears at the end of this prospectus.
The Fund.................... PIMCO High Income Fund (the "Fund") is a recently
organized, diversified, closed-end management
investment company. See "The Fund." The Fund's
Common Shares are traded on the New York Stock
Exchange under the symbol "PHK." See "Description
of Capital Structure." As of June 11, 2003, the
Fund had 113,906,981 Common Shares outstanding.
The Offering................ The Fund is offering an aggregate of 7,200 Series
M Preferred Shares, 7,200 Series T Preferred
Shares, 7,200 Series W Preferred Shares, 7,200
Series TH Preferred Shares and 7,200 Series F
Preferred Shares, each at a purchase price of
$25,000 per share plus accumulated dividends, if
any, from the Date of Original Issue. The
Preferred Shares are being offered through
Citigroup Global Markets Inc., Merrill Lynch,
Pierce, Fenner and Smith Incorporated and UBS
Securities LLC (together, the "Underwriters").
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See "Underwriting." It is a condition to their issuance that the Preferred Shares be issued with a credit quality rating of "Aaa" from Moody's and "AAA" from Fitch Ratings. The Fund will invest the net proceeds of the offering in accordance with the Fund's investment objectives and policies as stated under "The Fund's Investment Objectives and Policies." It is presently anticipated that the Fund will be able to invest substantially all of the net proceeds in U.S. dollar-denominated debt obligations and other investments that meet its investment objectives and policies within three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in high quality, short-term securities.
The Preferred Shares will entitle their holders to receive cash dividends at an annual rate that may vary for successive Dividend Periods. In general, except as described under "Description of Preferred Shares--Dividends," each Dividend Period will be seven days. The Auction Agent will determine the Applicable Rate for a particular period by an Auction conducted on the Business Day immediately prior to the start of that Dividend Period.
The Preferred Shares are not listed on an exchange. Instead, investors may buy or sell Preferred Shares at an auction that normally is held weekly, by submitting orders to Broker-Dealers that have entered into an agreement with the Auction Agent and the Fund or to certain other Broker-Dealers. Deutsche Bank Trust Company Americas, the Auction Agent, reviews orders from Broker-Dealers on behalf of Existing Holders that wish to sell, or hold at the auction rate, or hold only at a specified Applicable Rate, and on behalf of Potential Holders that wish to buy, Preferred Shares. The Auction Agent then determines the lowest Applicable Rate that will result in all of the
outstanding Preferred Shares' continuing to be held. The tables below show the dividend rate for, the beginning date of accumulation of and the number of days in the Initial Dividend Period, the first Auction Date for each series of Preferred Shares, the Initial Dividend Payment Date and the day on which each subsequent auction will generally be held for each series of Preferred Shares (unless the then current Dividend Period is a Long-Term Dividend Period, the day that normally would be the Auction Date is not a Business Day or unforeseen events preclude the holding of an Auction).
Beginning Date Days in
of Accumulation Initial
Series Initial Rate at Initial Rate* Period
------ ------------------- ---------------- ------------------
M June 26 12
T June 26 13
W June 26 14
TH June 26 15
F June 26 16
Initial Dividend
Series First Auction Date* Payment Date* Subsequent Auction
------ ------------------- ---------------- ------------------
M July 7 July 8 Monday
T July 8 July 9 Tuesday
W July 9 July 10 Wednesday
TH July 10 July 11 Thursday
F July 11 July 12 Friday
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*All dates 2003.
Each Subsequent Dividend Period will normally begin on the Business Day following an Auction Date.
Investment Objectives and
Strategies................ Investment Objectives. The Fund's primary
investment objective is to seek high current
income. Capital appreciation is a secondary
objective. The Fund attempts to achieve these
objectives by investing in a diversified
portfolio of U.S. dollar-denominated debt
obligations and other income-producing securities
that are primarily rated below investment grade
(or are unrated securities judged by the
portfolio manager to be of comparable quality) as
described under "--Portfolio Contents" below. The
Fund cannot assure you that it will achieve its
investment objectives.
Portfolio Management Strategies. In selecting
investments for the Fund, Pacific Investment
Management Company LLC ("PIMCO"), the Fund's
portfolio manager, attempts to identify, through
fundamental research, driven by independent
credit analysis and proprietary analytical tools,
debt obligations and other instruments that
provide high current income and/or opportunities
for capital appreciation. Investment decisions
are based primarily on PIMCO's assessment of the
issuer's credit characteristics and the position
of the security in the issuer's capital structure
in light of PIMCO's outlook for particular
industries, the economy and the bond market
generally. At the same time, PIMCO uses a variety
of techniques, such as credit default swaps,
designed to control risk and minimize the Fund's
exposure to issues that PIMCO believes are more
likely to default or otherwise depreciate in
value over time and detract from the Fund's
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overall return to investors. The Fund also
attempts to identify investments that may
appreciate in value based on PIMCO's assessment
of the issuer's credit characteristics, PIMCO's
forecast for interest rates and other economic
factors. Subject to the guidelines under
"--Credit Quality" below, the Fund also has the
flexibility to invest in debt obligations of any
credit quality based on its assessment of the
particular issuer.
Dynamic Asset Allocation Strategy. The Fund does
not invest its assets according to predetermined
weightings in particular issuers, industries or
sectors. Instead, PIMCO attempts to identify
quality investments in any industry or sector
through fundamental research, driven by
independent credit analysis and proprietary
analytical tools.
Credit Quality. Under normal market conditions,
the Fund seeks to achieve its investment
objectives by investing at least 80% of its net
assets (plus any borrowings for investment
purposes) in debt securities that are, at the
time of purchase, rated below investment grade
(below Baa by Moody's, below BBB by either S&P or
Fitch Ratings, or below a comparable rating by
Dominion) or unrated but judged by PIMCO to be of
comparable quality. While the Fund's relative
emphasis on different credit quality segments of
the below investment grade credit spectrum may
vary over time, PIMCO believes that under current
market conditions certain securities in the upper
tier of the below investment grade credit
spectrum offer opportunities for attractive yield
relative to associated risk. Accordingly, the
Fund will, under current market conditions, tend
to focus on securities that are rated BB/Ba or B
by one or more rating agencies or unrated but
judged by PIMCO to be of comparable quality. The
Fund will not invest more than 10% of its total
assets in securities that are, at the time of
purchase, rated CCC/Caa or lower by each agency
rating the security or unrated but judged by
PIMCO to be of comparable quality. Debt
securities of below investment grade quality are
regarded as having predominantly speculative
characteristics with respect to capacity to pay
interest and repay principal, and are commonly
referred to as "junk bonds." The Fund may, for
hedging or leveraging purposes, make use of
credit default swaps, which are contracts whereby
one party makes periodic payments to a
counterparty in exchange for the right to receive
from the counterparty a payment equal to the par
(or other agreed-upon) value of a referenced debt
obligation in the event of a default by the
issuer of the debt obligation. The Fund's use of
credit default swaps and certain other derivative
instruments will be limited by the Fund's
limitations on illiquid investments to the extent
they are determined to be illiquid. See "The
Fund's Investment Objectives and
Strategies--Portfolio Contents and Other
Information" for a description of how the Fund
treats certain investments for liquidity purposes.
Independent Credit Analysis. PIMCO relies
heavily on its own analysis of the credit quality
and risks associated with individual debt
obligations considered for the Fund, rather than
relying exclusively on rating agencies or
third-party research. The individuals managing
the Fund utilize this information in an attempt
to minimize credit risk and identify issuers,
industries or sectors that are undervalued or that
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offer attractive yields relative to PIMCO's
assessment of their credit characteristics. This
aspect of PIMCO's capabilities will be
particularly important because of the Fund's
emphasis on below investment grade debt
securities.
Duration Management. The average portfolio
duration of the Fund will normally be within an
intermediate range (i.e., a four-to-eight-year
time frame) based on PIMCO's forecast for
interest rates, although it may be shorter or
longer at any time or from time to time,
depending on market conditions. Duration is a
measure of the expected life of a debt security
that is used to determine the sensitivity of the
security's price to changes in interest rates.
PIMCO believes that maintaining duration at a
fairly stable level within this intermediate
range offers the opportunity for above-average
returns while limiting exposure to interest rate
volatility and related risk. The Fund may utilize
certain strategies, including investments in
structured notes or interest rate swap or cap
transactions, for the purpose of reducing the
interest rate sensitivity of the portfolio,
although there is no assurance that it will do so
or that such strategies will be successful.
Diversification. Subject to the availability of
suitable investment opportunities, PIMCO will
attempt to diversify the Fund's investments
broadly in an attempt to minimize the portfolio's
sensitivity to credit and other risks associated
with a particular issuer, industry or sector, or
to the impact of a single economic, political or
regulatory occurrence.
Portfolio Contents. Under normal market
conditions, the Fund seeks to achieve its
investment objectives by investing at least 80%
of its net assets (plus any borrowings for
investment purposes) in debt securities that are,
at the time of purchase, rated below investment
grade (below Baa by Moody's, below BBB by either
S&P or Fitch Ratings, or below a comparable
rating by Dominion) or unrated but judged by
PIMCO to be of comparable quality. Within this
area of the credit spectrum, the Fund will invest
in a diversified portfolio of U.S.
dollar-denominated debt obligations of varying
maturities and other income-producing securities.
These may include bonds, debentures, notes and
other similar types of debt instruments, such as
asset-backed securities, as well as preferred
shares, bank loans and loan participations,
commercial mortgage securities, payment-in-kind
securities, zero-coupon bonds, bank certificates
of deposit, fixed time deposits and bankers'
acceptances, structured notes and other hybrid
instruments, municipal securities,
mortgage-backed securities and other types of
asset-backed securities issued on a public or
private basis, and real estate investment trusts.
The Fund will not invest in interest-only or
principal-only securities or inverse floating
rate securities. Certain debt instruments, such
as convertible bonds, also may include the right
to participate in equity appreciation, and PIMCO
will generally evaluate those instruments based
primarily on their debt characteristics. The Fund
may invest in securities of companies with small
market capitalizations. The rate of interest on
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an income-producing security may be fixed,
floating or variable. U.S. dollar-denominated
debt securities may include those issued by
foreign corporations or supra-national government
agencies. The Fund may also invest in investment
grade debt securities, including U.S. Government
securities. The Fund may make use of credit
default swaps and other derivative instruments.
As a diversified fund, the Fund generally may
not, with respect to 75% of its total assets,
purchase the securities of any issuer, except
securities issued or guaranteed by the U.S.
Government or any of its agencies or
instrumentalities or securities of other
investment companies, if, as a result, (i) more
than 5% of the Fund's total assets would be
invested in the securities of that issuer, or
(ii) the Fund would hold more than 10% of the
outstanding voting securities of that issuer. The
Fund will not concentrate its investments in a
particular industry by investing more than 25% of
its total assets in that industry. The Fund's
industry concentration policy does not preclude
it from focusing investments in issuers in a
group of related industrial sectors (such as
different types of utilities).
Investment Manager.......... PIMCO Advisors Fund Management LLC (the
"Manager") serves as the investment manager of
the Fund. Subject to the supervision of the Board
of Trustees, the Manager is responsible for
managing, either directly or through others
selected by it, the investment activities of the
Fund and the Fund's business affairs and other
administrative matters. The Manager receives an
annual fee, payable monthly, in an amount equal
to 0.70% of the Fund's average daily net assets
(including assets attributable to any Preferred
Shares that may be outstanding). The Manager is
located at 1345 Avenue of the Americas, New York,
New York 10105. Organized in 2000 as a subsidiary
successor in the restructuring of a business
originally organized in 1987, the Manager
provides investment management and advisory
services to several closed-end and open-end
investment company clients. As of March 31, 2003,
the Manager had approximately $17.7 billion in
assets under management. Allianz Dresdner Asset
Management of America L.P. is the direct parent
company of PIMCO Advisors Retail Holdings LLC
(formerly PIMCO Advisory Services Holdings LLC),
of which the Manager is a wholly owned
subsidiary. As of March 31, 2003, Allianz
Dresdner Asset Management of America L.P. and its
subsidiary partnerships, including PIMCO, had
approximately $390 billion in assets under
management.
The Manager has retained its affiliate, PIMCO, as
a sub-adviser to manage the Fund's portfolio
investments. See "--Portfolio Manager" below.
Portfolio Manager........... PIMCO serves as the Fund's sub-adviser
responsible for managing the Fund's portfolio
investments, and is sometimes referred to herein
as the "portfolio manager." Subject to the
supervision of the Manager, PIMCO has full
investment discretion and makes all
determinations with respect to the investment of
the Fund's assets.
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PIMCO is located at 840 Newport Center Drive,
Newport Beach, California 92660. Organized in
1971, PIMCO provides investment management and
advisory services to private accounts of
institutional and individual clients and to
mutual funds. As of March 31, 2003, PIMCO had
approximately $323 billion in assets under
management.
The Manager (and not the Fund) will pay a portion
of the fees it receives to PIMCO in return for
PIMCO's services.
Leverage.................... After completion of the offering of Preferred
Shares, the Fund anticipates its total leverage
from the issuance of Preferred Shares will be
approximately 35%. Although the Fund may in the
future offer other preferred shares, the Fund
does not currently intend to offer preferred
shares other than Series M Preferred Shares,
Series T Preferred Shares, Series W Preferred
Shares, Series TH Preferred Shares and Series F
Preferred Shares. The Fund may also use a variety
of additional strategies to add leverage to the
portfolio, including the use of reverse
repurchase agreements, loans of portfolio
securities, credit default swap contracts and
other derivatives, as well as when-issued,
delayed delivery or forward commitment
transactions, each of which will amplify the
effects of leverage in the Fund's portfolio. The
Fund will segregate liquid assets against or
otherwise cover its future obligations under such
transactions to the extent that, immediately
after entering into such a transaction, the
Fund's future commitments that it has not
segregated liquid assets against or otherwise
covered, together with any outstanding Preferred
Shares, would exceed 38% of the Fund's total
assets.
The Fund generally will not utilize leverage if
it anticipates that it would result in a lower
return to Common Shareholders over time. Use of
financial leverage creates an opportunity for
increased income for Common Shareholders, but, at
the same time, creates the possibility for
greater loss (including the likelihood of greater
volatility of net asset value and market price of
the Common Shares and of dividends), and there
can be no assurance that a leveraging strategy
will be used or that it will be successful during
any period in which it is employed. Because the
fees received by the Manager are based on the
total net assets of the Fund, the fees will be
higher when leverage is utilized through the
issuance of Preferred Shares, giving the Manager
an incentive to utilize such leverage. See
"Risks--Leverage Risk."
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Special Risk Considerations. The following describes various principal risks of investing in the Fund. A more detailed description of these and other risks of investing in the Fund is included in the prospectus under the heading "Risks" and in the Statement of Additional Information under the heading "Investment Objectives and Policies."
Risks of investing in Preferred Shares include:
Auction Risk............ You may not be able to sell your Preferred Shares
at an Auction if the Auction fails; that is, if
there are more Preferred Shares offered for sale
than there are buyers for those shares. As a
result, your investment in Preferred Shares may
be illiquid. Neither the Broker-Dealers nor the
Fund is obligated to purchase Preferred Shares in
an Auction or otherwise, nor is the Fund required
to redeem Preferred Shares in the event of a
failed Auction.
Ratings and Asset Coverage
Risk................... A Rating Agency could downgrade the Preferred
Shares, which could affect their liquidity and
value. In addition, the Fund may be forced to
redeem your Preferred Shares to meet regulatory
or Rating Agency asset coverage requirements. The
Fund may also voluntarily redeem Preferred Shares
under certain circumstances. The Fund may not
redeem Preferred Shares if such a redemption
would cause the Fund to fail to meet regulatory
or Rating Agency asset coverage requirements, and
the Fund may not declare, pay or set apart for
payment any dividend or other distribution if
immediately thereafter the Fund would fail to
meet regulatory asset coverage requirements.
Secondary Market Risk... You could receive less than the price you paid
for your Preferred Shares if you sell them
outside of an Auction, especially when market
interest rates are rising. Although the
Broker-Dealers may maintain a secondary trading
market in the Preferred Shares outside of
Auctions, they are not obligated to do so, and no
secondary market may develop or exist at any time
for the Preferred Shares.
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General risks of investing in the Fund include:
Limited Operating History The Fund is a recently organized, diversified,
closed-end management investment company which
has been operational for less than two months.
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Credit Risk/High Yield Risk Credit risk is the risk that one or more debt obligations in the Fund's portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the obligation experiences an actual or perceived decline in its financial status. The Fund normally invests at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings, or below a comparable rating by Dominion) or unrated but judged by PIMCO to be of comparable quality, including debt securities that are in default or the issuers of which are in bankruptcy. Debt obligations of below investment grade quality (commonly referred to as "junk bonds") are predominantly speculative with respect to the issuer's capacity to pay interest and repay principal when due, and therefore involve a greater risk of default. The prices of these lower grade obligations are generally
more volatile and sensitive to actual or
perceived negative developments, such as a
decline in the issuer's revenues or a general
economic downturn, than are the prices of higher
grade securities. Because of the Fund's emphasis
on below investment grade debt securities,
PIMCO's capabilities in this area will be
particularly important. See "The Fund's
Investment Objectives and Strategies--High Yield
Securities ("Junk Bonds")" and "Risks--High Yield
Risk" for additional information. Because of the
risks involved in investing in junk bonds, an
investment in the Fund should be considered
speculative.
Interest Rate Risk...... Generally, when market interest rates fall, the
prices of debt obligations rise, and vice versa.
Interest rate risk is the risk that the debt
obligations in the Fund's portfolio will decline
in value because of increases in market interest
rates. Because market interest rates are
currently near their lowest levels in many years,
there is a great risk that the Fund's portfolio
will decline in value. The prices of long-term
debt obligations generally fluctuate more than
prices of short-term debt obligations as interest
rates change. Because the Fund will normally have
an intermediate portfolio duration (i.e., a
four-to -eight-year time frame), the Fund's net
asset value will tend to fluctuate more in
response to changes in market interest rates than
if the Fund invested mainly in short-term debt
securities. The Fund may utilize certain
strategies, including investments in structured
notes or interest rate swap or cap transactions,
for the purpose of reducing the interest rate
sensitivity of the portfolio and decreasing the
Fund's exposure to interest rate risk, although
there is no assurance that it will do so or that
such strategies will be successful. If long-term
rates rise, the value of the Fund's investment
may decline, reducing asset coverage on the
Preferred Shares. The Fund's use of leverage, as
described below, will tend to increase interest
rate risk. See "Risks--Interest Rate Risk" for
additional information.
Leverage Risk........... The Fund utilizes financial leverage for
investment purposes. Leverage risk includes the
risk associated with the issuance of Preferred
Shares to leverage the Fund's Common Shares. The
Fund may also invest in reverse repurchase
agreements, loans of portfolio securities, credit
default swap contracts and other derivatives, as
well as when-issued, delayed delivery or forward
commitment transactions, which will amplify the
effects of leverage. If the dividend rate on the
Preferred Shares exceeds the net rate of return
on the Fund's portfolio, the leverage will result
in a lower net asset value than if the Fund were
not leveraged, and the Fund's ability to pay
dividends and to meet its asset coverage
requirements on the Preferred Shares would be
reduced. In addition, to the extent that any
forms of leverage utilized by the Fund are senior
to the Preferred Shares, payments to holders of
Preferred Shares in liquidation or otherwise will
be subject to the prior payment of obligations
relating to such other forms of leverage.
Because the fees received by the Manager are
based on the total net assets of the Fund, the
fees will be higher when leverage is utilized
8
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through the issuance of Preferred Shares, giving
the Manager an incentive to utilize such leverage.
Issuer Risk............. The value of income-producing securities may
decline for a number of reasons which directly
relate to the issuer, such as management
performance, financial leverage and reduced
demand for the issuer's goods and services.
Management Risk......... The Fund is subject to management risk because it
is an actively managed portfolio. PIMCO and the
individual portfolio managers will apply
investment techniques and risk analyses in making
investment decisions for the Fund, but there can
be no guarantee that these will produce the
desired results.
|
Foreign
(Non-U.S.) Investment Risk The Fund's investments in foreign issuers and in
securities denominated in foreign currencies
involve special risks. For example, the value of
these investments may decline in response to
unfavorable political and legal developments,
unreliable or untimely information, or economic
and financial instability. The value of
securities denominated in foreign currencies may
fluctuate based on changes in the value of those
currencies relative to the U.S. dollar, and a
decline in applicable foreign exchange rates
could reduce the value of such securities held by
the Fund. Foreign settlement procedures also may
involve additional risks.
Emerging Markets Risk... Foreign investment risk may be particularly high
to the extent that the Fund invests in securities
of issuers based in or securities denominated in
the currencies of developing or "emerging market"
countries. Investing in securities of issuers
based in underdeveloped emerging markets entails
all of the risks of investing in securities of
foreign issuers to a heightened degree. These
heightened risks include: (i) greater risks of
expropriation, confiscatory taxation,
nationalization, and less social, political and
economic stability; (ii) the smaller size of the
market for such securities and a lower volume of
trading, resulting in lack of liquidity and in
price volatility; and (iii) certain national
policies which may restrict the Fund's investment
opportunities, including restrictions on
investing in issuers or industries deemed
sensitive to relevant national interests.
Derivatives Risk........ The Fund may utilize a variety of derivative
instruments for hedging or risk management
purposes or as part of its leveraging or
investment strategies, such as options contracts
(including options on futures contracts), futures
contracts, swap agreements (including credit
default swaps) and short sales. Derivatives are
subject to a number of risks described elsewhere
in this prospectus, such as liquidity risk,
interest rate risk, credit risk, leveraging risk
and management risk. They also involve the risk
of mispricing or improper valuation, the risk of
ambiguous documentation, and the risk that
changes in the value of a derivative may not
correlate perfectly with an underlying asset,
interest rate or index. Suitable derivative
transactions may not be available in all
circumstances, and
9
|
there can be no assurance that the Fund will
engage in these transactions to reduce exposure
to other risks when that would be beneficial.
Counterparty Risk....... The Fund will be subject to credit risk with
respect to the counterparties to the derivative
contracts purchased by the Fund. If a
counterparty becomes bankrupt or otherwise fails
to perform its obligations under a derivative
contract because of financial difficulties, the
Fund may experience significant delays in
obtaining any recovery under the derivative
contract in a bankruptcy or other reorganization
proceeding. The Fund may obtain only a limited
recovery or may obtain no recovery in such
circumstances.
Mortgage-Related Risk... The Fund may invest in a variety of
mortgage-related securities, including commercial
mortgage securities and other mortgage-backed
instruments. Rising interest rates tend to extend
the duration of mortgage-related securities,
making them more sensitive to changes in interest
rates, and may reduce the market value of the
securities. In addition, mortgage-related
securities are subject to prepayment risk--the
risk that borrowers may pay off their mortgages
sooner than expected, particularly when interest
rates decline. This can reduce the Fund's returns
because the Fund may have to reinvest that money
at lower prevailing interest rates. The Fund's
investments in other asset-backed securities are
subject to risks similar to those associated with
mortgage-backed securities, as well as additional
risks associated with the nature of the assets
and the servicing of those assets.
Smaller Company Risk.... The general risks associated with
income-producing securities are particularly
pronounced for securities issued by companies
with smaller market capitalizations. These
companies may have limited product lines, markets
or financial resources or may depend on a few key
employees. As a result, they may be subject to
greater levels of credit, market and issuer risk.
Reinvestment Risk....... Income from the Fund's portfolio will decline if
and when the Fund invests the proceeds from
matured, traded or called debt obligations at
market interest rates that are below the
portfolio's current earnings rate.
Inflation Risk.......... Inflation risk is the risk that the value of
assets or income from the Fund's investments will
be worth less in the future as inflation
decreases the value of money. As inflation
increases, the real, or inflation-adjusted, value
of the Preferred Shares and distributions can
decline. However, during any periods of rising
inflation, dividend payments on Preferred Shares
may increase, which would tend to offset this
risk.
Liquidity Risk.......... The Fund may invest up to 15% of its total assets
in illiquid securities (i.e., securities that
cannot be disposed of within seven days in the
ordinary course of business at approximately the
value at which the Fund has valued the
securities). For these purposes, bank loans that
are part of an issue of at least $250 million in
par value will not be
10
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considered illiquid, although the Fund's
investments in such bank loans, together with its
investments in illiquid securities, will not
exceed 20% of its total assets. Illiquid
securities may trade at a discount from
comparable, more liquid investments, and may be
subject to wide fluctuations in market value.
Also, the Fund may not be able to dispose of
illiquid securities when that would be beneficial
at a favorable time or price. Below investment
grade debt securities tend to be less liquid than
higher-rated securities.
Market Disruption and
Geopolitical Risk...... The war with Iraq, its aftermath and the
continuing occupation of Iraq are likely to have
a substantial impact on the U.S. and world
economies and securities markets. The nature,
scope and duration of the war and occupation
cannot be predicted with any certainty. Terrorist
attacks on the World Trade Center and the
Pentagon on September 11, 2001 closed some of the
U.S. securities markets for a four-day period,
and similar events cannot be ruled out. The war
and occupation, terrorism and related
geopolitical risks have led, and may in the
future lead to, increased short-term market
volatility and may have adverse long-term effects
on U.S. and world economies and markets
generally. Those events could also have an acute
effect on individual issuers or related groups of
issuers. These risks could also adversely affect
individual issuers and securities markets,
interest rates, auctions, secondary trading,
ratings, credit risk, inflation and other factors
relating to the Preferred Shares.
Anti-Takeover Provisions The Fund's Amended and Restated Agreement and
Declaration of Trust dated February 18, 2003 (the
"Declaration") includes provisions that could
limit the ability of other entities or persons to
acquire control of the Fund or convert the Fund
to open-end status. See "Anti-Takeover and Other
Provisions in the Declaration of Trust."
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Dividends on Preferred Shares The Preferred Shares will entitle their holders to receive cash dividends at a rate per annum that may vary for the successive Dividend Periods for such shares. In general, except as described below, each Dividend Period for each series of Preferred Shares subsequent to the Initial Dividend Period will be seven days in length. The Applicable Rate for a particular Dividend Period will be determined by an Auction conducted on the Business Day next preceding the start of such Dividend Period.
Through their Broker-Dealers, Beneficial Owners and Potential Beneficial Owners of Preferred Shares may participate in Auctions, although, except in the case of Special Dividend Periods of longer than 28 days, Beneficial Owners desiring to continue to hold all of their Preferred Shares regardless of the Applicable Rate resulting from Auctions need not participate. For an explanation of Auctions and the method of determining the Applicable Rate, see "Description of Preferred Shares--The Auction."
Except as described herein, investors in Preferred Shares will not receive certificates representing ownership of their shares. Ownership
of Preferred Shares will be maintained in book-entry form by the Securities Depository or its nominee for the account of the investor's Agent Member. The investor's Agent Member, in turn, will maintain records of such investor's beneficial ownership of Preferred Shares. Accordingly, references herein to an investor's investment in or purchase, sale or ownership of Preferred Shares are to purchases, sales or ownership of those shares by Beneficial Owners.
After the Initial Dividend Period, each Subsequent Dividend Period for each series of Preferred Shares will generally consist of seven days (a "7-Day Dividend Period"); provided, however, that prior to any Auction, the Fund may elect, subject to certain limitations described herein, upon giving notice to holders thereof, a Special Dividend Period for any or all series. A "Special Dividend Period" is a Dividend Period consisting of a specified number of days, evenly divisible by seven and not fewer than fourteen nor more than 364 (a "Short Term Dividend Period"), or a Dividend Period consisting of a specified period of one whole year or more but not greater than five years (a "Long Term Dividend Period"). Dividends on the Preferred Shares offered hereby are cumulative from the Date of Original Issue and are payable when, as and if declared by the Board of Trustees, out of funds legally available therefor, commencing on the Initial Dividend Payment Date. In the case of Dividend Periods that are not Special Dividend Periods, dividends will be payable generally on each succeeding Tuesday for Series M Preferred Shares, on each succeeding Wednesday for Series T Preferred Shares, on each succeeding Thursday for Series W Preferred Shares, on each succeeding Friday for Series TH Preferred Shares and on each succeeding Monday for Series F Preferred Shares, subject to certain exceptions.
Dividends for the Preferred Shares will be paid through the Securities Depository on each Dividend Payment Date. The Securities Depository's normal 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 person for whom they are acting as agent in accordance with the instructions of such person. See "Description of Preferred Shares--Dividends."
For each Subsequent Dividend Period, the cash dividend rate on each series of Preferred Shares will be the Applicable Rate that the Auction Agent advises the Fund has resulted from an Auction. See "Description of Preferred Shares--Dividends." The first Auction for each series of the Preferred Shares is scheduled to be held on the ending date for the Initial Dividend Period as set forth in "--The Offering" above.
The Amended Bylaws provide that, until the Fund gives a Request for Special Dividend Period and the related Notice of Special Dividend Period, only 7-Day Dividend Periods will be applicable to each series of Preferred Shares. While the Fund does not currently intend to give a Request for Special Dividend Period with respect to any series of
Preferred Shares, it may so elect in the future, subject to, and on, the conditions discussed under "Description of Preferred Shares--Dividends--Notification of Dividend Period."
A Special Dividend Period will not be effective for a series of Preferred Shares unless Sufficient Clearing Bids exist at the Auction in respect of such Special Dividend Period. If Sufficient Clearing Bids do not exist at such Auction, the Dividend Period commencing on the Business Day succeeding such Auction will be a 7-Day Dividend Period, and the holders of the Preferred Shares outstanding immediately prior to such Auction will be required to continue to hold some or all of such shares for such Dividend Period. In addition, the Fund may not give a Notice of Special Dividend Period with respect to the Preferred Shares, or if the Fund has given a Notice of Special Dividend Period for the Preferred Shares, the Fund will be required to give a Notice of Revocation in respect thereof, if either (i) the 1940 Act Preferred Shares Asset Coverage is not satisfied or the Fund fails to maintain Moody's Eligible Assets and Fitch Eligible Assets each with an aggregate Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount, in each case on each of the two Valuation Dates immediately preceding the Business Day prior to the related Auction Date for the Preferred Shares, or (ii) sufficient funds for the payment of dividends payable on the immediately succeeding Dividend Payment Date have not been irrevocably deposited with the Auction Agent by the close of business on the third Business Day preceding the related Auction Date. In either of such events, the next succeeding Dividend Period will be a 7-Day Dividend Period.
Determination of Maximum
Applicable Rates.......... Except during a Non-Payment Period, the
Applicable Rate for any Dividend Period for
Preferred Shares will not be more than the
Maximum Applicable Rate applicable to such
shares. The Maximum Applicable Rate for each
series of Preferred Shares will depend on the
credit rating assigned to such shares and on the
duration of the Dividend Period. The Maximum
Applicable Rate will be the Applicable Percentage
of the Reference Rate. The Reference Rate is the
applicable "AA" Financial 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). The
Applicable Percentage will be determined based on
the lower of the credit ratings assigned on such
date to the Preferred Shares by Moody's and Fitch
Ratings, such Applicable Percentage as so
determined further subject to upward but not
downward adjustment in the discretion of the
Board of Trustees after consultation with the
Broker-Dealers, as follows:
Fitch Ratings Credit
Moody's Credit Rating Rating Applicable Percentage
------------------------ ------------------------ ------------------------
Aa3 or above AA- or above 150%
A3 to A1 A- to A+ 160%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
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There is no minimum Applicable Rate in respect of
any Dividend Period. The Applicable Rate for any
Dividend Period commencing during any Non-Payment
Period, and the rate used to calculate the late
charge described under "Description of Preferred
Shares--Dividends--Non-Payment Period; Late
Charge," initially will be 300% of the Reference
Rate.
Auction Procedures.......... Separate Auctions will be conducted for each
series of Preferred Shares. Unless otherwise
permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners of Preferred Shares
may participate in Auctions only through their
Broker-Dealers. Broker-Dealers will submit the
Orders of their respective customers who are
Beneficial Owners and Potential Beneficial Owners
to the Auction Agent, designating themselves 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. On or prior
to each Auction Date for the Preferred Shares
(usually the Business Day next preceding the
first day of each Dividend Period), each
Beneficial Owner may submit Orders to its
Broker-Dealer as follows:
. Hold Order--indicating its desire to hold
the Preferred Shares without regard to the
Applicable Rate for the next Dividend Period
for such shares.
. Bid--indicating its desire to hold the
Preferred Shares, provided that the
Applicable Rate for the next Dividend Period
for such shares is not less than the rate
per annum specified in such Bid.
. Sell Order--indicating its desire to sell
the Preferred Shares without regard to the
Applicable Rate for the next Dividend Period
for such shares.
A Beneficial Owner may submit different types of
Orders to its Broker-Dealer with respect to the
Preferred Shares then held by such Beneficial
Owner, provided that the total number of
Preferred Shares covered by such Orders does not
exceed the number of Preferred Shares held by
such Beneficial Owner. If, however, a Beneficial
Owner offers through its Broker-Dealer to
purchase additional Preferred Shares in such
Auction, such Beneficial Owner, for purposes of
such offer to purchase additional shares, will be
treated as a Potential Beneficial Owner as
described below. Bids by Beneficial Owners
through their Broker-Dealers with rates per annum
higher than the Maximum Applicable Rate will be
treated as Sell Orders. A Hold Order (in the case
of an Auction relating to a Dividend Period of 28
days or less) or a Sell Order (in the case of an
Auction relating to a Special Dividend Period of
longer than 28 days) shall be deemed to have been
submitted on behalf of a Beneficial Owner if an
Order with respect to the Preferred Shares then
held by such Beneficial Owner is not submitted on
behalf of such Beneficial Owner for any reason,
including the failure of a Broker-Dealer to
submit such Beneficial Owner's Order to the
Auction Agent.
14
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Potential Beneficial Owners of Preferred Shares
may submit Bids through their Broker-Dealers in
which they offer to purchase Preferred Shares if
the Applicable Rate for the next Dividend Period
for such shares is not less than the rate per
annum specified in such Bid. A Bid by a Potential
Beneficial Owner with a rate per annum higher
than the Maximum Applicable Rate will not be
considered.
Neither the Fund nor the Auction Agent will be
responsible for a Broker-Dealer's failure to act
in accordance with the instructions of Beneficial
Owners or Potential Beneficial Owners or failure
to comply with any of the foregoing.
A Broker-Dealer also may hold Preferred Shares
for its own account as a Beneficial Owner. A
Broker-Dealer thus may submit Orders to the
Auction Agent as a Beneficial Owner or a
Potential Beneficial Owner and therefore
participate in an Auction as an Existing Holder
or Potential Holder on behalf of both itself and
its customers. Any Order placed with the Auction
Agent by a Broker-Dealer as or on behalf of a
Beneficial Owner or a Potential Beneficial Owner
will be treated in the same manner as an Order
placed with a Broker-Dealer by a Beneficial Owner
or a Potential Beneficial Owner. Similarly, any
failure by a Broker-Dealer to submit to the
Auction Agent an Order in respect of any
Preferred Shares held by it or its customers who
are Beneficial Owners will be treated in the same
manner as a Beneficial Owner's failure to submit
to its Broker-Dealer an Order in respect of
Preferred Shares held by it, as described above.
Inasmuch as a Broker-Dealer participates in an
Auction as an Existing Holder or a Potential
Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner,
whether it be a customer or itself, all
discussion herein relating to the consequences of
an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial
ownership interests represented thereby.
If Sufficient Clearing Bids exist in an Auction
for a series of Preferred Shares (that is, in
general, the number of Preferred Shares subject
to Bids by Potential Holders with rates equal to
or lower than the Maximum Applicable Rate is at
least equal to the number of Preferred Shares
subject to Sell Orders by Existing Holders), the
Applicable Rate will be the lowest rate per annum
specified in the Submitted Bids which, taking
into account such rate per annum and all lower
rates per annum bid by Existing Holders and
Potential Holders, would result in Existing
Holders, and Potential Holders, owning all of the
Preferred Shares available for purchase in the
Auction. If Sufficient Clearing Bids do not
exist, the Dividend Period next following the
Auction automatically will be a 7-Day Dividend
Period and the Applicable Rate will be the
Maximum Applicable Rate, and in such event,
Existing Holders that have submitted Sell Orders
will not be able to sell in the Auction all, and
may not be able to sell any, Preferred Shares
subject to such Sell Orders. Thus, in certain
circumstances, Existing Holders and, thus, the
Beneficial Owners they represent may not have
liquidity of investment. If all Existing Holders
submit (or are deemed to have submitted) Hold
15
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Orders in an Auction, the Dividend Period next
following the Auction automatically shall be the
same length as the immediately preceding Dividend
Period, and the Applicable Rate will be 80% of
the Reference Rate.
The Auction Procedures include a pro rata
allocation of shares for purchase and sale, which
may result in an Existing Holder selling or
holding, or a Potential Holder purchasing, a
number of Preferred Shares that is less than the
number of Preferred Shares specified in its
Order. To the extent the allocation has this
result, a Broker-Dealer will be required to make
appropriate pro rata allocations among its
customers and itself.
A Sell Order by an Existing Holder will
constitute an irrevocable offer to sell the
Preferred Shares subject thereto, and a Bid
placed by an Existing Holder also will constitute
an irrevocable offer to sell the Preferred Shares
subject thereto if the rate per annum specified
in the Bid is higher than the Applicable Rate
determined in the Auction, in each case at a
price per share equal to $25,000. A Bid placed by
a Potential Holder will constitute an irrevocable
offer to purchase the Preferred Shares subject
thereto at a price per share equal to $25,000 if
the rate per annum specified in such Bid is less
than or equal to the Applicable Rate determined
in the Auction. 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 by book-entry to their Agent
Members. The Securities Depository will make
payment to the sellers' Agent Members in
accordance with the Securities Depository's
normal procedures, which provide for payment in
same-day funds. See "Description of Preferred
Shares--The Auction."
Asset Maintenance........... Under the Amended Bylaws, the Fund must maintain
(i) Moody's Eligible Assets and Fitch Eligible
Assets each having in the aggregate a Discounted
Value at least equal to the Preferred Shares
Basic Maintenance Amount and (ii) 1940 Act
Preferred Shares Asset Coverage of at least 200%.
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See "Description of Preferred Shares--Asset Maintenance."
The Fund estimates that, based on the composition of its portfolio at June 11, 2003, 1940 Act Preferred Shares Asset Coverage would be approximately 286% immediately after the issuance of the Preferred Shares offered hereby in an amount representing approximately 35% of the Fund's capital (including the capital attributable to the Preferred Shares).
The Discount Factors and guidelines for calculating the Discounted Value of the Fund's portfolio for purposes of determining whether the Preferred Shares Basic Maintenance Amount has been satisfied have been established by Moody's and Fitch Ratings in connection with the Fund's receipt of a rating of "Aaa" and "AAA," respectively, on
the Preferred Shares on their Date of Original
Issue. See "Rating Agency Guidelines."
Mandatory Redemption........ If the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage
is not maintained or restored as specified
herein, the Preferred Shares will be subject to
mandatory redemption, out of funds legally
available therefor, at the Mandatory Redemption
Price of $25,000 per share plus an amount equal
to dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date
fixed for redemption. Any such redemption will be
limited to the minimum number of Preferred Shares
necessary to restore the Preferred Shares Basic
Maintenance Amount or the 1940 Act Preferred
Shares Asset Coverage, as the case may be. The
Fund's ability to make such a mandatory
redemption may be restricted by the provisions of
the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder (the
"1940 Act"). See "Description of Preferred
Shares--Redemption--Mandatory Redemption."
Optional Redemption......... The Preferred Shares are redeemable at the option
of the Fund, as a whole or in part, on any
Dividend Payment Date (except during the Initial
Dividend Period or a Non-Call Period) at the
Optional Redemption Price of $25,000 per share,
plus an amount equal to dividends thereon
(whether or not earned or declared) accumulated
but unpaid to the date fixed for redemption plus
the premium, if any, resulting from the
designation of a Premium Call Period. See
"Description of Preferred
Shares--Redemption--Optional Redemption."
Liquidation Preference...... The liquidation preference of the Preferred
Shares will be $25,000 per share, plus an amount
equal to accumulated but unpaid dividends
(whether or not earned or declared). See
"Description of Preferred Shares--Liquidation
Rights."
Rating...................... It is a condition to their issuance that the
Preferred Shares be issued with a credit quality
rating of "Aaa" from Moody's and "AAA" from Fitch
Ratings. The Fund may at some future time seek to
have the Preferred Shares rated by a Substitute
Rating Agency. See "Rating Agency Guidelines."
Voting Rights............... The 1940 Act requires that the holders of
Preferred Shares and any other preferred shares,
voting as a class, have the right to elect at
least two trustees at all times and to elect a
majority of the trustees at any time when two
years' dividends on the Preferred Shares or any
other preferred shares are unpaid. The holders of
Preferred Shares and any other preferred shares
will vote as a separate class (and, in certain
circumstances, the holders of each series of
Preferred Shares will vote as a separate class)
on certain other matters as required under the
Declaration and Amended Bylaws and under the 1940
Act. See "Description of Preferred Shares--Voting
Rights," "Description of Capital Structure" and
"Anti-Takeover and Other Provisions in the
Declaration of Trust."
17
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Federal Income Taxation..... The distributions with respect to Preferred
Shares (other than distributions in redemption of
Preferred Shares subject to Section 302(b) of the
Internal Revenue Code of 1986, as amended (the
"Code")) will constitute dividends to the extent
of the Fund's current or accumulated earnings and
profits, as calculated for federal income tax
purposes. Such dividends generally will be
taxable as ordinary income to holders. For
taxable years beginning on or before December 31,
2008, provided holding period and other
requirements are met, the Fund may designate
distributions of investment income derived from
dividends of U.S. corporations and some foreign
corporations as "qualified dividend income."
Qualified dividend income will be taxed in the
hands of individuals at the rates applicable to
long-term capital gain, provided these same
holding period and other requirements are met by
the shareholder. The Fund does not expect a
significant portion of Fund distributions to be
derived from qualified dividend income.
Distributions of net capital gain that are
designated by the Fund as capital gain dividends
will be treated as long-term capital gains in the
hands of holders receiving such distributions.
The Internal Revenue Service ("IRS") currently
requires that a regulated investment company that
has two or more classes of stock allocate to each
such class proportionate amounts of each type of
its income (such as ordinary income and capital
gains) based upon the percentage of total
dividends distributed to each class for the tax
year. Accordingly, the Fund intends each year to
allocate capital gain dividends between and among
its Common Shares, Series M Preferred Shares,
Series T Preferred Shares, Series W Preferred
Shares, Series TH Preferred Shares and Series F
Preferred Shares in proportion to the total
dividends paid to each class during or with
respect to such year. Dividends qualifying and
not qualifying for (a) treatment as qualified
dividend income and (b) the dividends received
deduction, if any, will similarly be allocated
between and among any such classes. See "Tax
Matters."
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FINANCIAL HIGHLIGHTS (UNAUDITED)
The financial highlights table set forth below is intended to help you understand the Fund's recent financial performance. 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 investment operations on April 30, 2003 through June 1, 2003. Because the Fund is recently organized and commenced investment operations on April 30, 2003, the table covers approximately five weeks of operations, during which a substantial portion of the Fund's portfolio was held in temporary investments pending investment in securities that meet the Fund's investment objectives and policies. Accordingly, the information presented may not provide a meaningful picture of the Fund's operating performance.
For the Period
from April 30, 2003*
through June 1, 2003
--------------------
(Unaudited)
Per Share Operating Performance
Net Asset Value, Beginning of Period...................................... $ 14.33**
Income from Investment Operations:
Net Investment Income.................................................. 0.06
Net Realized and Unrealized Gain on Investments........................ 0.06
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Net Increase in Net Assets from Investment Operations.............. 0.12
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Common Stock Offering Expenses Charged to Paid-in-Capital in Excess of Par (0.02)
----------
Net Asset Value, End of Period............................................ $ 14.43
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Market Price, End of Period............................................... $ 15.01
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Total Investment Return................................................... 0.1%(1)
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Ratios/Supplemental Data:
Net Assets, End of Period (in thousands)............................... $1,616,164
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Ratio of Expenses to Average Net Assets................................ 0.74%(2)
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Ratio of Net Investment Income to Average Net Assets................... 4.75%(2)
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Portfolio Turnover..................................................... 6%
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THE FUND
The Fund is a recently organized, diversified, closed-end management investment company registered under the 1940 Act. The Fund was organized as a Massachusetts business trust on February 18, 2003, pursuant to the Declaration, which is governed by the laws of The Commonwealth of Massachusetts. The Fund's principal office is located at 1345 Avenue of the Americas, New York, New York 10105, and its telephone number is (800) 331-1710.
The Fund commenced operations on April 30, 2003, upon the closing of an initial public offering of 105,000,000 of its Common Shares. The proceeds of such offering were approximately $1,502,550,000 after the payment of organizational and offering expenses. In connection with the initial public offering of the Fund's Common Shares, the underwriters of those shares were granted an option to purchase up to an additional 10,000,000 Common Shares to cover over-allotments. On May 19, 2003, May 30, 2003, and June 11, 2003, respectively, the underwriters purchased, at a price of $15.00 per Common Share (less an underwriting discount of $0.675 per share), an additional 5,000,000, 2,000,000, and 1,900,000 Common Shares of the Fund, pursuant to the over-allotment option.
USE OF PROCEEDS
The net proceeds of the offering of Preferred Shares will be approximately $890,400,000 after payment of the estimated offering costs (not expected to exceed $600,000). The Fund will invest the net proceeds of the offering in accordance with the Fund's investment objectives and policies as stated below. It is presently anticipated that the Fund will be able to invest substantially all of the net proceeds in U.S. dollar-denominated debt obligations and other investments that meet its investment objectives and policies within three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in high quality, short-term securities.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as of June 11, 2003, and as adjusted to give effect to the issuance of the Preferred Shares offered hereby (including estimated offering expenses and sales load of $9,600,000).
As of June 11, 2003
------------------------------
Actual As Adjusted
-------------- --------------
Auction Rate Cumulative Preferred Shares, par value $0.00001 per share (no
shares issued; 36,000 shares issued, as adjusted, at $25,000 per share
liquidation preference)................................................. $ 0 $ 900,000,000
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Common Shares, par value $0.00001 per share, 113,906,981 shares
outstanding............................................................. $1,630,142,503 $1,620,542,503
Undistributed net investment income....................................... $ 9,665,913 $ 9,665,913
Net realized loss on investments.......................................... $ (668,381) $ (668,381)
Net unrealized appreciation of investments................................ $ 42,994,605 $ 42,994,605
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Net assets applicable to Common Shares.................................... $1,682,134,640 $1,672,534,640
============== ==============
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THE FUND'S INVESTMENT OBJECTIVES AND STRATEGIES
Investment Objectives
The Fund's primary investment objective is to seek high current income. Capital appreciation is a secondary objective. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings, or below a comparable rating by Dominion) or unrated but judged by PIMCO to be of comparable quality. Within this area of the credit spectrum, the Fund will invest in a diversified portfolio of U.S. dollar-denominated debt obligations of varying maturities and other income-producing securities described under "--Portfolio Contents and Other Information" below. The Fund cannot assure you that it will achieve its investment objectives.
Portfolio Management Strategies
In selecting investments for the Fund, PIMCO attempts to identify, through fundamental research, driven by independent credit analysis and proprietary analytical tools, debt obligations and other instruments that provide high current income and/or opportunities for capital appreciation. Investment decisions are based primarily on PIMCO's assessment of the issuer's credit characteristics and the position of the particular security in the issuer's capital structure, in light of PIMCO's outlook for particular industries, the economy and the bond market generally. At the same time, PIMCO uses a variety of techniques, such as credit default swaps, designed to control risk and minimize the Fund's exposure to issues that PIMCO believes are more likely to default or otherwise depreciate in value over time and detract from the Fund's overall return to investors. The Fund cannot assure you that such securities will ultimately continue to pay current income or be paid in full at maturity.
Credit Quality. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings, or below a comparable rating by Dominion) or unrated but judged by PIMCO to be of comparable quality. While the Fund's relative emphasis on different credit quality segments of the below investment grade credit spectrum may vary over time, PIMCO believes that under current market conditions certain securities in the upper tier of the below investment grade credit spectrum offer opportunities for attractive yield relative to associated risk. Accordingly, the Fund will, under current market conditions, tend to focus on securities that are rated BB/Ba or B by one or more rating agencies or unrated but judged by PIMCO to be of comparable quality. The Fund will not invest more than 10% of its total assets in securities that are, at the time of purchase, rated CCC/Caa or lower by each agency rating the security or unrated but judged by PIMCO to be of comparable quality. The Fund may invest in issuers of any credit quality (including bonds in the lowest ratings categories) if PIMCO determines that the particular obligation is undervalued or offers an attractive yield relative to its risk profile. As described under "--High Yield Securities ("Junk Bonds")" below, debt securities of below investment grade quality are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal, and are commonly referred to as "junk bonds." The Fund's credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security in the event that a rating agency or PIMCO downgrades its assessment of the credit characteristics of a particular issue.
The Fund may make use of credit default swaps, although the use of credit default swaps may be limited by the Fund's limitations on illiquid investments. In using a credit default swap contract to hedge exposure to specific issuers, the Fund would pay to a counterparty a periodic stream of payments over the term of the contract, provided that no event of default on a referenced debt obligation of such an issuer, such as a U.S. or foreign issuer, has occurred, and in return, upon any event of default on such debt obligation, the Fund would receive from the counterparty a payment equal to the par (or other agreed-upon) value of such debt obligation.
Independent Credit Analysis. PIMCO relies heavily on its own analysis of the credit quality and risks associated with individual debt obligations considered for the Fund, rather than relying exclusively on rating agencies or third-party research. PIMCO has a devoted team of professionals that conducts fundamental credit research and analyses of individual issuers, industries and sectors and uses proprietary analytical tools (such as computer databases and Web-based applications) to assess and monitor credit risk. The individuals managing the Fund utilize this information in an attempt to minimize credit risk and identify issuers, industries or sectors that are undervalued or that offer attractive yields relative to PIMCO's assessment of their credit characteristics. This aspect of PIMCO's capabilities will be particularly important because of the Fund's emphasis on below investment grade securities.
Duration Management. The average portfolio duration of the Fund will normally be within an intermediate range (i.e., a four- to-eight-year time frame) based on PIMCO's forecast for interest rates, although it may be shorter or longer at any time or from time to time depending on market conditions. PIMCO believes that maintaining duration at a fairly stable level within this intermediate range offers the opportunity for above-average returns while limiting exposure to interest rate volatility and related risk.
Duration is a measure of the expected life of a debt security that is used to determine the sensitivity of the security's price to changes in interest rates. The longer a security's duration, the more sensitive it will be to changes in interest rates. For example, the market price of a bond with a duration of two years would be expected to decline 2% if interest rates were to rise 1%. Conversely, the market price of the same bond would be expected to increase 2% if interest rates were to fall 1%. The market price of a bond with a duration of four years would be expected to increase or decline twice as much as the market price of a bond with a two-year duration. The maturity of a security, another commonly used measure of price sensitivity, measures only the time until final payment is due, whereas duration takes into account the pattern of all payments of interest and principal on a security over time, including how these payments are affected by prepayments and by changes in interest rates. The Fund may utilize certain strategies, including investments in structured notes or interest rate swap or cap transactions, for the purpose of reducing the interest rate sensitivity of the portfolio, although there is no assurance that it will do so or that such strategies will be successful.
Portfolio Contents and Other Information
Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings, or below a comparable rating by Dominion) or unrated but judged by PIMCO to be of comparable quality. Within this area of the credit spectrum, the Fund will invest in a diversified portfolio of U.S. dollar-denominated debt obligations of varying maturities and other income-producing securities. These may include bonds, debentures, notes and other similar types of debt instruments, such as asset-backed securities, as well as preferred shares, bank loans and loan participations, commercial mortgage securities, payment-in-kind securities, zero-coupon bonds, bank certificates of deposit, fixed time deposits and bankers' acceptances, structured notes and other hybrid instruments, municipal securities, mortgage-backed securities and other types of asset-backed securities issued on a public or private basis, and real estate investment trusts. The Fund will not invest in interest-only or principal-only securities or inverse floating rate securities. Certain debt instruments, such as convertible bonds, also may include the right to participate in equity appreciation, and PIMCO will generally evaluate those instruments based primarily on their debt characteristics. The Fund may invest in securities of companies with small market capitalizations. The rate of interest on an income-producing security may be fixed, floating or variable. U.S. dollar-denominated debt securities may include those issued by foreign corporations or supra-national government agencies. The principal and/or interest rate on some debt instruments may be determined by reference to the performance of a benchmark asset or market, such as an index of securities, or the differential performance of two assets or markets, such as the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
The Fund may also invest in investment grade debt securities, including U.S. Government securities. The Fund may invest up to 15% of its total assets in debt instruments denominated in foreign currencies (of both developed and "emerging market" countries), including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises. The Fund may invest without limit in U.S. dollar-denominated securities of issuers located in developed countries, and may invest up to 7.5% of its total assets in securities (regardless of the currency in which such securities are denominated) of issuers located in "emerging market" countries. The Fund also may utilize a variety of derivative instruments for hedging, investment and risk management purposes, such as options contracts (including options on futures contracts), futures contracts, swap agreements (including credit default swaps) and short sales, and may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sales contracts. The Fund may invest up to 15% of its total assets in illiquid securities (i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). For these purposes, bank loans that are part of an issue of at least $250 million in par value will not be considered illiquid, although the Fund's investments in such bank loans, together with its investments in illiquid securities, will not exceed 20% of its total assets. Given the current structure of the markets for Rule 144A securities, the Fund expects to treat these securities as illiquid, although they may be deemed liquid by PIMCO. Although structured notes are not necessarily illiquid, the Manager believes that currently most structured notes are illiquid. The Manager currently considers credit default swaps to be illiquid and treats the market value of the contract as illiquid for purposes of determining compliance with the Fund's limitations on illiquid investments.
The Fund cannot change its investment objectives without the approval of the holders of a "majority of the outstanding" Common Shares and any Preferred Shares voting together as a single class, and of the holders of a "majority of the outstanding" Preferred Shares voting as a separate class. A "majority of the outstanding" shares (whether voting together as a single class or voting as a separate class) means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of those shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less. See "Description of Preferred Shares--Voting Rights" for additional information with respect to the voting rights of holders of Preferred Shares.
In addition to the issuance of Preferred Shares, the Fund may use a variety of additional strategies to add leverage to the portfolio. These include the use of reverse repurchase agreements, loans of portfolio securities, credit default swap contracts and other derivatives, as well as when-issued, delayed delivery or forward commitment transactions. The Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions to the extent that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, would exceed 38% of the Fund's total assets. The Fund's use of these transactions may also be limited by the Fund's limitations on illiquid investments to the extent they are determined to be illiquid. See "--Derivatives."
Upon PIMCO's recommendation, for temporary defensive purposes and in order to keep the Fund's cash fully invested, including during the period in which the net proceeds of this offering are being invested, the Fund may deviate from its investment objectives and policies and invest some or all of its total assets in investment grade debt securities, including high quality, short-term debt securities. The Fund may not achieve its investment objectives when it does so.
The following provides additional information regarding the types of securities and other instruments in which the Fund will ordinarily invest. A more detailed discussion of these and other instruments and investment techniques that may be used by the Fund is provided under "Investment Objectives and Policies" in the Statement of Additional Information. The ability of the Fund to use some of the strategies discussed below and in the Statement of Additional Information, such as derivatives, is limited by the Rating Agency guidelines. See "Rating Agency Guidelines."
High Yield Securities ("Junk Bonds")
As noted above, the Fund normally invests at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings, or below a comparable rating by Dominion) or unrated but judged by PIMCO to be of comparable quality. These securities are sometimes referred to as "high yield" securities or "junk bonds." Investing in high yield securities involves greater risks (in particular, greater risk of default) and special risks in addition to the risks associated with investments in investment grade debt obligations. While offering a greater potential opportunity for capital appreciation and higher yields, high yield securities typically entail greater potential price volatility and may be less liquid than higher-rated securities. High yield securities may be regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. They also may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-rated securities. Debt securities in the lowest investment grade category also may be considered to possess some speculative characteristics.
The market values of high yield securities tend to reflect individual developments of the issuer to a greater extent than do higher-quality securities, which tend to react mainly to fluctuations in the general level of interest rates. In addition, lower-quality debt securities tend to be more sensitive to economic conditions. Certain "emerging market" governments that issue high yield securities are among the largest debtors to commercial banks, foreign governments and supra-national organizations such as the World Bank, and may not be able or willing to make principal and/or interest payments as they come due.
Credit Ratings and Unrated Securities. Rating agencies are private services that provide ratings of the credit quality of debt obligations, including convertible securities. Appendix A to this prospectus describes the various ratings assigned to debt obligations by Moody's, S&P and Fitch Ratings. Ratings assigned by a rating agency are not absolute standards of credit quality and do not evaluate market risks. Rating agencies may fail to make timely changes in credit ratings, and an issuer's current financial condition may be better or worse than a rating indicates. The Fund will not necessarily sell a security when its rating is reduced below its rating at the time of purchase. As described above under "--Portfolio Management Strategies--Independent Credit Analysis," PIMCO does not rely solely on credit ratings, and develops its own analysis of issuer credit quality. The ratings of a debt security may change over time. Moody's, Fitch Ratings, S&P and Dominion monitor and evaluate the ratings assigned to securities on an ongoing basis. As a result, debt instruments held by the Fund could receive a higher rating (which would tend to increase their value) or a lower rating (which would tend to decrease their value) during the period in which they are held.
The Fund may purchase unrated securities (which are not rated by a rating agency) if PIMCO determines that the securities are of comparable quality to rated securities that the Fund may purchase. Unrated securities may be less liquid than comparable rated securities and involve the risk that PIMCO may not accurately evaluate the security's comparative credit rating. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher-quality debt obligations. The Fund's success in achieving its investment objectives may depend more heavily on PIMCO's credit analysis than if the Fund invested primarily in higher-quality and rated securities.
Corporate Bonds
The Fund expects to invest in a wide variety of bonds of varying maturities issued by U.S. and foreign corporations and other business entities. Bonds are fixed or variable rate debt obligations, including bills, notes, debentures, money market instruments and similar instruments and securities. Bonds generally are used by corporations as well as governments and other issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are "perpetual" in that they have no maturity date.
Credit Default Swaps
The Fund may enter into credit default swap contracts for hedging purposes or to add leverage to the portfolio. When used for hedging purposes, the Fund would be the buyer of a credit default swap contract. In that case, the Fund would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation from the counterparty to the contract in the event of a default by a third party, such as a U.S. or foreign issuer, on the debt obligation. In return, the Fund would pay to the counterparty a periodic stream of payments over the term of the contract, provided that no event of default has occurred. If no default occurs, the Fund would have spent the stream of payments and received no benefit from the contract. When the Fund is the seller of a credit default swap contract, it receives the stream of payments but is obligated to pay upon default of the referenced debt obligation. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total assets, the Fund would be subject to investment exposure on the notional amount of the swap. The Manager currently considers credit default swaps to be illiquid and treats the market value of the contract as illiquid for purposes of determining compliance with the Fund's limitations on illiquid investments.
Commercial Paper
Commercial paper represents short-term unsecured promissory notes issued in bearer form by corporations such as banks or bank holding companies and finance companies. The rate of return on commercial paper may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
Preferred Stocks
Preferred stock represents an equity interest in a company that generally entitles the holder to receive, in preference to the holders of other stocks such as common stocks, dividends and a fixed share of the proceeds resulting from liquidation of the company. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of a company's common stock, and thus also represent an ownership interest in the company. Some preferred stocks offer a fixed rate of return with no maturity date. Because they never mature, these preferred stocks act like long-term bonds, can be more volatile than other types of preferred stocks and may have heightened sensitivity to changes in interest rates. Other preferred stocks have a variable dividend, generally determined on a quarterly or other periodic basis, either according to a formula based upon a specified premium or discount to the yield on particular U.S. Treasury securities or based on an auction process, involving bids submitted by holders and prospective purchasers of such stocks. Because preferred stocks represent an equity ownership interest in a company, their value usually will react more strongly than bonds and other debt instruments to actual or perceived changes in a company's financial condition or prospects, or to fluctuations in the equity markets.
Convertible Securities and Synthetic Convertible Securities
The Fund may invest in convertible securities, which are debt securities that may be converted at either a stated price or a stated rate into underlying shares of common stock. Convertible securities have general characteristics similar to both debt securities and equity securities. PIMCO will generally evaluate these instruments based primarily on their debt characteristics. Although to a lesser extent than with debt obligations, the market value of convertible securities tends to decline as interest rates increase and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value of convertible securities tends to vary with fluctuations in the market value of the underlying common stocks and, therefore, also will react to variations in the general market for equity securities.
Convertible securities are investments that provide for a stable stream of income with generally higher yields than common stocks. There can be no assurance of current income because the issuers of the convertible securities may default on their obligations. Convertible securities, however, generally offer lower interest or dividend yields than non-convertible securities of similar credit quality because of the potential for capital
appreciation. A convertible security, in addition to providing current income, offers the potential for capital appreciation through the conversion feature, which enables the holder to benefit from increases in the market price of the underlying common stock.
Synthetic convertible securities differ from convertible securities in certain respects. Unlike a true convertible security, which is a single security having a unitary market value, a synthetic convertible comprises two or more separate securities, each with its own market value. Therefore, the "market value" of a synthetic convertible security is the sum of the values of its debt component and its convertibility component. For this reason, the values of a synthetic convertible and a true convertible security may respond differently to market fluctuations.
Bank Obligations
The Fund may invest in certain bank obligations, including certificates of deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation.
Loan Participations and Assignments
The Fund may invest in fixed- and floating-rate loans issued by banks and other corporations, which investments generally will be in the form of loan participations and assignments of portions of such loans. Participations and assignments involve credit risk, interest rate risk, liquidity risk, and the risks of being a lender. If the Fund purchases a participation, it may only be able to enforce its rights through the lender, and may assume the credit risk of both the lender and the borrower. Given the current structure of the markets for loan participations and assignments, the Fund expects to treat these securities as illiquid.
Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities
Zero-coupon bonds pay interest only at maturity rather than at intervals during the life of the security. Like zero-coupon bonds, "step up" bonds pay no interest initially but eventually begin to pay a coupon rate prior to maturity, which rate may increase at stated intervals during the life of the security. Payment-in-kind securities ("PIKs") are debt obligations that pay "interest" in the form of other debt obligations, instead of in cash. Each of these instruments is normally issued and traded at a deep discount from face value. Zero-coupon bonds, step-ups and PIKs allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater credit risk than bonds that pay interest currently or in cash. The Fund would be required to distribute the income on these instruments as it accrues, even though the Fund will not receive the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its shareholders.
Foreign (Non-U.S.) Investments and Currencies
The Fund may invest some or all of its assets in U.S. dollar-denominated debt obligations of foreign issuers and of supra-national government entities. Supra-national entities include international organizations that are organized or supported by one or more government entities to promote economic reconstruction or development and by international banking institutions and related governmental agencies. The Fund also may invest up to 15% of its total assets in debt instruments denominated in foreign currencies (of both developed and "emerging
market" countries), including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises. The Fund may invest up to 7.5% of its total assets in securities (regardless of the currency in which such securities are denominated) of issuers located in "emerging market" countries. Investing in foreign securities involves special risks and considerations not typically associated with investing in U.S. securities. See "Risks--Foreign (Non-U.S.) Investment Risk."
The U.S. dollar-denominated foreign securities in which the Fund may invest include Eurodollar obligations and "Yankee Dollar" obligations. Eurodollar obligations are U.S. dollar-denominated certificates of deposit and time deposits issued outside the U.S. capital markets by foreign branches of U.S. banks and by foreign banks. Yankee Dollar obligations are U.S. dollar-denominated obligations issued in the U.S. capital markets by foreign banks. Eurodollar and Yankee Dollar obligations are generally subject to the same risks that apply to domestic debt issues, notably credit risk, market risk and liquidity risk. Additionally, Eurodollar (and to a limited extent, Yankee Dollar) obligations are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of U.S. dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulation of financial markets and institutions; the imposition of foreign withholding taxes; and the expropriation or nationalization of foreign issuers.
The Fund also may invest in sovereign debt issued by foreign governments, their agencies or instrumentalities, or other government-related entities, including debt of developing or "emerging market" issuers. As a holder of sovereign debt, the Fund may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In addition, there are generally no bankruptcy proceedings similar to those in the United States by which defaulted sovereign debt may be collected. The Fund also may invest in Brady Bonds, which are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with a debt restructuring. Investments in Brady Bonds may be viewed as speculative. Brady Bonds acquired by the Fund may be subject to restructuring arrangements or to requests for new credit, which may cause the Fund to realize a loss of interest or principal on any of its portfolio holdings.
Foreign Currencies and Related Transactions. The Fund's investments in securities that trade in, or receive revenues in, foreign currencies will be subject to currency risk, which is the risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect any investment. The Fund may engage in a variety of transactions involving foreign currencies in order to hedge against foreign currency risk, to increase exposure to a foreign currency, or to shift exposure to foreign currency fluctuations from one currency to another. For instance, the Fund may purchase foreign currencies on a spot (cash) basis and enter into forward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currencies and futures. The Fund normally will seek to hedge at least 75% of its exposure to foreign currencies in order to reduce the risk of loss due to fluctuations in currency exchange rates. Suitable hedging transactions may not be available in all circumstances, and there can be no assurance that the Fund will engage in such transactions at any given time or from time to time. Also, these transactions may not be successful and may eliminate any chance for the Fund to benefit from favorable fluctuations in relevant foreign currencies.
Please see "Investment Objectives and Policies--Foreign (Non-U.S.) Securities," "Investment Objectives and Policies--Foreign Currency Transactions" and "Investment Objectives and Policies--Foreign Currency Exchange-Related Securities" in the Statement of Additional Information for a more detailed description of the types of foreign investments and foreign currency transactions in which the Fund may invest and their related risks.
Derivatives
The Fund may, but is not required to, use a variety of derivative instruments for hedging or risk management purposes or as part of its investment strategies. The Fund may invest in derivatives without limit for
hedging purposes, and may invest up to 25% (10% within 90 days of the date of the prospectus for the Common Shares, which was April 24, 2003) of its total assets in derivatives for non-hedging purposes. For these purposes, "hedging purposes" include the use of a derivative instrument to cause the Fund to more closely resemble the Merrill Lynch U.S. High Yield BB-B Rated Index with respect to credit quality, average portfolio duration, and/or average portfolio yield-to-maturity. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate or index, and may relate to individual debt instruments, interest rates, currencies or currency exchange rates, commodities, and related indexes. Examples of derivative instruments that the Fund may use include options contracts, futures contracts, options on futures contracts and swap agreements. The Fund's use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investment directly in securities and other more traditional investments. See "Risks--Derivatives Risk." Certain types of derivative instruments that the Fund may utilize with some frequency are described elsewhere in this section, including those described under "--Certain Interest Rate Transactions," "--Structured Notes and Related Instruments" and "--Credit Default Swaps." Please see "Investment Objectives and Policies--Derivative Instruments" in the Statement of Additional Information for additional information about these and other derivative instruments that the Fund may use and the risks associated with such instruments. There is no assurance that these derivative strategies will be available at any time or that PIMCO will determine to use them for the Fund or, if used, that the strategies will be successful. In addition, the Fund may be subject to certain restrictions on its use of derivative strategies imposed by guidelines of one or more rating agencies that may issue ratings for Preferred Shares issued by the Fund.
Commercial and Other Mortgage-Related and Asset-Backed Securities
Mortgage-related securities are debt instruments which provide periodic payments consisting of interest and/or principal that are derived from or related to payments of interest and/or principal on underlying mortgages. Additional payments on mortgage-related securities may be made out of unscheduled prepayments of principal resulting from the sale of the underlying property or from refinancing or foreclosure, net of fees or costs that may be incurred.
The Fund may invest significantly in commercial mortgage-related securities issued by corporations. These are securities that represent an interest in, or are secured by, mortgage loans secured by commercial property, such as industrial and warehouse properties, office buildings, retail space and shopping malls, multifamily properties and cooperative apartments, hotels and motels, nursing homes, hospitals, and senior living centers. They may pay fixed or adjustable rates of interest. The commercial mortgage loans that underlie commercial mortgage-related securities have certain distinct risk characteristics. Commercial mortgage loans generally lack standardized terms, which may complicate their structure. Commercial properties themselves tend to be unique and difficult to value. Commercial mortgage loans tend to have shorter maturities than residential mortgage loans, and may not be fully amortizing, meaning that they may have a significant principal balance, or "balloon" payment, due on maturity. In addition, commercial properties, particularly industrial and warehouse properties, are subject to environmental risks and the burdens and costs of compliance with environmental laws and regulations.
Other mortgage-related securities in which the Fund may invest include mortgage pass-through securities, collateralized mortgage obligations ("CMOs"), mortgage dollar rolls and other securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property.
The Fund may invest in other types of asset-backed securities that are offered in the marketplace, including Enhanced Equipment Trust Certificates ("EETCs") and collateralized debt obligations ("CDOs"). Although any entity may issue EETCs, to date, U.S. airlines are the primary issuers. An airline EETC is an obligation secured directly by aircraft or aircraft engines as collateral. EETCs tend to be less liquid than bonds. CDOs include collateralized bond obligations ("CBOs"), collateralized loan obligations ("CLOs") and other similarly structured securities. A CBO is a trust typically backed by a diversified pool of high-risk, below investment grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others,
domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. While the trusts that issue CDOs may themselves be leveraged and may invest in credits that are lower than what the Fund can invest in directly, the Fund will generally purchase only senior CDOs, will not purchase residual CDOs and will only purchase CDOs that meet the Fund's credit policies.
Other asset-backed securities may be collateralized by the fees earned by service providers. The value of asset-backed securities may be substantially dependent on the servicing of the underlying asset pools and are therefore subject to risks associated with the negligence of, or defalcation by, their servicers. In certain circumstances, the mishandling of related documentation may also affect the rights of the security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in added costs and delays in addition to losses associated with a decline in the value of the underlying assets. The issuers of certain asset-backed securities bear various expenses, including, without limitation, servicing and advisory fees.
Please see "Investment Objectives and Policies--Mortgage-Related and Other Asset-Backed Securities" in the Statement of Additional Information and "Risks--Mortgage-Related Risk" in this prospectus for a more detailed description of the types of mortgage-related and other asset-backed securities in which the Fund may invest and their related risks.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The Fund may invest in floating rate debt instruments ("floaters") and engage in credit spread trades. While floaters provide a certain degree of protection against rising interest rates, the Fund will participate in any decline in interest rates as well. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities, where the value of the investment position is determined by changes in the difference between such prices or interest rates, as the case may be, of the respective securities.
Delayed Funding Loans and Revolving Credit Facilities
The Fund may enter into, or acquire participations in, delayed funding loans and revolving credit facilities, in which a lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. These commitments may have the effect of requiring the Fund to increase its investment in a company at a time when it might not be desirable to do so (including at a time when the company's financial condition makes it unlikely that such amounts will be repaid). Delayed funding loans and revolving credit facilities are subject to credit, interest rate and liquidity risk and the risks of being a lender.
Certain Interest Rate Transactions
In order to reduce the interest rate risk inherent in the Fund's underlying investments and capital structure, the Fund may enter into interest rate swap or cap transactions. Interest rate swaps involve the Fund's agreement with the swap counterparty to pay a fixed rate payment in exchange for the counterparty's paying the Fund a variable rate payment that is intended to approximate the Fund's variable rate payment obligation on Preferred Shares. The payment obligation would be based on the notional amount of the swap. The Fund may use an interest rate cap, which would require the Fund to pay a premium to the cap counterparty and would entitle the Fund, to the extent that a specified variable rate index exceeds a predetermined fixed rate, to receive from the counterparty payment of the difference based on the notional amount. The Fund may use interest rate swaps or caps with the intent to reduce or eliminate the risk that an increase in short-term interest rates could pose for the performance of the Common Shares as a result of leverage, and also may use these instruments for other hedging or investment purposes. The Fund may choose or be required to redeem some or all of the Preferred Shares. This redemption would likely result in the Fund's seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in a termination payment by or to the Fund. Any termination of a cap could result in a termination payment to the Fund.
Structured Notes and Related Instruments
The Fund may invest in "structured" notes and other related instruments, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate (an "embedded index"), such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets, such as indexes reflecting bonds. Structured instruments may be issued by corporations, including banks, as well as by governmental agencies. Structured instruments frequently are assembled in the form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but ordinarily not below zero) to reflect changes in the embedded index while the structured instruments are outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded index on principal and/or interest payments. The rate of return on structured notes may be determined by the application of a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss.
PIMCO may utilize structured instruments for investment purposes and also for risk management purposes, such as to reduce the duration and interest rate sensitivity of the Fund's portfolio. While structured instruments may offer the potential for a favorable rate of return from time to time, they also entail certain risks. Structured instruments may be less liquid than other debt securities, and the price of structured instruments may be more volatile. In some cases, depending on the terms of the embedded index, a structured instrument may provide that the principal and/or interest payments may be adjusted below zero. Structured instruments also may involve significant credit risk and risk of default by the counterparty. Although structured instruments are not necessarily illiquid, the Manager believes that currently most structured instruments are illiquid. Like other sophisticated strategies, the Fund's use of structured instruments may not work as intended. If the value of the embedded index changes in a manner other than that expected by PIMCO, principal and/or interest payments received on the structured instrument may be substantially less than expected. Also, if PIMCO uses structured instruments to reduce the duration of the Fund's portfolio, this may limit the Fund's return when having a longer duration would be beneficial (for instance, when interest rates decline).
Reverse Repurchase Agreements
The Fund may utilize reverse repurchase agreements in order to add leverage to the portfolio. In a reverse repurchase agreement, the Fund sells securities to a bank or broker-dealer and agrees to repurchase the securities at a mutually agreed date and price. Generally, the effect of such a transaction is that the Fund can recover and reinvest all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement and still be entitled to the returns associated with those portfolio securities. Such transactions are advantageous if the interest cost to the Fund of the reverse repurchase transaction is less than the returns it obtains on investments purchased with the cash.
Unless the Fund covers its positions in reverse repurchase agreements (by segregating liquid assets at least equal in amount to the forward purchase commitment), its obligations under the agreements will be subject to the Fund's limitations on borrowings. Reverse repurchase agreements involve leverage risk and also the risk that the market value of the securities that the Fund is obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund's obligation to repurchase the securities.
Repurchase Agreements
The Fund may enter into repurchase agreements, in which the Fund purchases a security from a bank or broker-dealer and the bank or broker-dealer agrees to repurchase the security at the Fund's cost plus interest within a specified time. If the party agreeing to repurchase should default, the Fund will seek to sell the securities which it holds. This could involve transaction costs or delays in addition to a loss on the securities if their value should fall below their repurchase price. Repurchase agreements maturing in more than seven days are considered to be illiquid securities.
U.S. Government Securities
The Fund may invest in U.S. Government securities, which are obligations of, or guaranteed by, the U.S. Government, its agencies or government-sponsored enterprises. U.S. Government securities include a variety of securities that differ in their interest rates, maturities and dates of issue. Securities issued or guaranteed by agencies or instrumentalities of the U.S. Government may or may not be supported by the full faith and credit of the United States or by the right of the issuer to borrow from the U.S. Treasury.
Municipal Bonds
Municipal bonds are generally issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies or authorities. Like other debt obligations, municipal bonds are subject to interest rate, credit and market risk. The ability of a municipal issuer to make payments could be affected by litigation, legislation or other political events or the bankruptcy of the issuer. The types of municipal bonds in which the Fund may invest include municipal lease obligations. The Fund also may invest in securities issued by entities whose underlying assets are municipal bonds.
When Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase securities which it is eligible to purchase on a when-issued basis, may purchase and sell such securities for delayed delivery and may make contracts to purchase such securities for a fixed price at a future date beyond normal settlement time (forward commitments). When-issued transactions, delayed delivery purchases and forward commitments involve a risk of loss if the value of the securities declines prior to the settlement date. This risk is in addition to the risk that the Fund's other assets will decline in value. Therefore, these transactions may result in a form of leverage and increase the Fund's overall investment exposure. Typically, no income accrues on securities the Fund has committed to purchase prior to the time delivery of the securities is made, although the Fund may earn income on securities it has segregated to cover these positions.
Short Sales
A short sale is a transaction in which the Fund sells an instrument that it does not own in anticipation that the market price will decline. The Fund may use short sales for investment and risk management purposes. When the Fund engages in a short sale, it must borrow the security sold short and deliver it to the counterparty. The Fund may have to pay a fee to borrow particular securities and would often be obligated to pay over any payments received on such borrowed securities. The Fund's obligation to replace the borrowed security will be secured by collateral deposited with the lender, which is usually a broker-dealer, and/or with the Fund's custodian. The Fund may not receive any payments (including interest) on its collateral. Short sales expose the Fund to the risk that it will be required to cover its short position at a time when the securities have appreciated in value, thus resulting in a loss to the Fund. The Fund may engage in so-called "naked" short sales where it does not own or have the immediate right to acquire the security sold short at no additional cost, in which case the Fund's losses could theoretically be unlimited, provided that the Fund will not engage in such naked short sales in excess of 5% of the Fund's total assets and that the Fund will not engage in any such naked short sales within 90 days from the date of the prospectus for the Common Shares, which was April 24, 2003.
Please see "Investment Objectives and Policies" in the Statement of Additional Information for additional information regarding the investments of the Fund and their related risks.
RISKS
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 purchasing Preferred Shares, you should consider carefully the following risks that you assume when you invest in the Fund.
Risks of Investing in Preferred Shares
Auction Risk
You may not be able to sell your Preferred Shares at an Auction if the Auction fails; that is, if there are more Preferred Shares offered for sale than there are buyers for those shares. If Sufficient Clearing Bids do not exist in an Auction, the Applicable Rate will be the Maximum Applicable Rate, and in such event, owners of Preferred Shares wishing to sell will not be able to sell all, and may not be able to sell any, of such shares in the Auction. As a result, your investment in Preferred Shares may be illiquid. Neither the Broker-Dealers nor the Fund is obligated to purchase Preferred Shares in an Auction or otherwise, nor is the Fund required to redeem Preferred Shares in the event of a failed Auction. Also, if you place bid orders (orders to retain Preferred Shares) at an Auction only at a specified rate, and that bid rate exceeds the Applicable Rate set at the Auction, you will not retain your Preferred Shares. Finally, if you elect to retain Preferred Shares without specifying a rate below which you would not wish to continue to hold those Preferred Shares, and the Auction sets a below-market rate, you may receive a lower rate of return on your Preferred Shares than the market rate. See "Description of Preferred Shares--The Auction" and "Description of Preferred Shares--Auction Procedures."
Ratings and Asset Coverage Risk
While Moody's is expected to assign a rating of "Aaa" to the Preferred Shares and Fitch Ratings is expected to assign a rating of "AAA" to the Preferred Shares, the ratings will not eliminate or necessarily mitigate the risks of investing in the Preferred Shares. A Rating Agency could downgrade the Preferred Shares, which may make your shares less liquid at an Auction or in the secondary market. In addition, the Fund may be forced to redeem your Preferred Shares to meet regulatory or Rating Agency requirements. The Fund may also voluntarily redeem Preferred Shares under certain circumstances. See "Description of Preferred Shares--Redemption." The Fund may not redeem Preferred Shares if such a redemption would cause the Fund to fail to meet regulatory or Rating Agency asset coverage requirements, and the Fund may not declare, pay or set apart for payment any dividend or other distribution if immediately thereafter the Fund would fail to meet regulatory asset coverage requirements. A material decline in the Fund's net asset value may impair the Fund's ability to maintain its required levels of asset coverage on the Preferred Shares, or, in an extreme case, to pay dividends on Preferred Shares. In addition, as a condition to its receipt of "Aaa" and "AAA" ratings on the Preferred Shares, the Fund has agreed to certain investment limitations, which may restrict the Fund from making investments that PIMCO believes would benefit the Fund. See "Rating Agency Guidelines" for descriptions of the significance and limitations of the ratings on the Preferred Shares and of the asset maintenance and other tests the Fund must meet.
Secondary Market Risk
The Broker-Dealers may maintain a secondary trading market in the Preferred Shares outside of Auctions; however, they have no obligation to do so, and there can be no assurance that a secondary market for the Preferred Shares will develop or, if it does develop, that it will provide holders with a liquid trading market (i.e., trading will depend on the presence of willing buyers and sellers, and the trading price is subject to variables to
be determined at the time of the trade by the Broker-Dealers). The Preferred Shares will not be registered on any stock exchange or on any automated quotation system. If you try to sell your Preferred Shares between Auctions, you may not be able to sell any or all of your shares, or you may receive a purchase price of less than $25,000 per share. An increase in the level of interest rates, particularly during any Long Term Dividend Period, likely will have an adverse effect on the secondary market price of the Preferred Shares.
General Risks of Investing in the Fund
Limited Operating History
The Fund is a recently organized, diversified, closed-end management investment company which has been operational for less than two months.
High Yield Risk
In general, lower rated debt securities carry a greater degree of risk that the issuer will lose its ability to make interest and principal payments, which could have a negative impact on the Fund's net asset value or dividends. Under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (plus any borrowings for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings or below a comparable rating by Dominion) or unrated but judged by PIMCO to be of comparable quality, including debt securities that are in default or the issuers of which are in bankruptcy. Debt securities rated below investment grade quality are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal, and are commonly referred to as "junk bonds." The prices of these lower grade bonds are generally more volatile and sensitive to actual or perceived negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. In addition, the secondary market on which high yield securities are traded may be less liquid than the market for investment grade securities, meaning these securities are subject to greater liquidity risk than investment grade securities. Bonds in the lowest investment grade category also may be considered by certain rating agencies to possess some speculative characteristics. Because of the Fund's emphasis on below investment grade debt obligations, PIMCO's capabilities in this area will be particularly important.
High yield securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield security prices because the advent of a recession could lessen the ability of an issuer to make principal and interest payments on its debt obligations. If an issuer of high yield securities defaults, in addition to risking non-payment of all or a portion of interest and principal, the Fund may incur additional expenses to seek recovery. The market prices of high yield securities structured as zero-coupon, step-up or payment-in-kind securities will normally be affected to a greater extent by interest rate changes, and therefore tend to be more volatile than the prices of securities that pay interest currently and in cash. PIMCO seeks to reduce these risks through diversification, credit analyses and attention to current developments and trends in both the economy and financial markets.
The Fund's credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security in the event that a rating agency or PIMCO downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell such a security, PIMCO may consider such factors as PIMCO's assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any, assigned to such security by other rating agencies. Analysis of creditworthiness may be more complex for issuers of high yield securities than for issuers of higher quality debt securities.
Credit Risk
The Fund could lose money if the issuer of a debt obligation, or the counterparty to a derivatives contract, repurchase agreement, loan of portfolio securities or other obligation, is, or is perceived to be, unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. The downgrade of a security may further decrease its value.
Interest Rate Risk
Interest rate risk is the risk that debt obligations (and the Fund's total assets) will decline in value because of changes in interest rates. Generally, debt securities will decrease in value when interest rates rise and increase in value when interest rates decline. This means that the Fund's net asset value will fluctuate with interest rate changes and the corresponding changes in the value of the Fund's holdings. Because market interest rates are currently near their lowest levels in many years, there is a great risk that the Fund's portfolio will decline in value. The prices of long-term debt obligations generally fluctuate more than prices of short-term debt obligations as interest rates change. Because the Fund will normally have an intermediate portfolio duration (i.e., a four- to -eight-year time frame), the Fund's net asset value will tend to fluctuate more in response to changes in market interest rates than if the Fund invested mainly in short-term debt securities. The Fund may utilize certain strategies, including investments in structured notes and interest rate swaps and caps, for the purpose of reducing the interest rate sensitivity of the portfolio and decreasing the Fund's exposure to interest rate risk, although there is no assurance that it will do so or that such strategies will be successful. The Fund's use of leverage, as described below, will tend to increase interest rate risk. If long-term rates rise, the value of the Fund's investment portfolio may decline, reducing asset coverage on the Preferred Shares. See "How the Fund Manages Risk--Hedging and Related Strategies."
Leverage Risk
The Fund utilizes leverage on an ongoing basis for investment purposes. Leverage risk includes the risk associated with the issuance of the Preferred Shares or the use of reverse repurchase agreements, loans of portfolio securities, credit default swap contracts and other derivatives, as well as when-issued, delayed delivery or forward commitment transactions, in order to leverage the Common Shares. If the dividend rate on the Preferred Shares exceeds the net rate of return on the Fund's portfolio, the leverage will result in a lower net asset value than if the Fund were not leveraged, and the Fund's ability to pay dividends and meet its asset coverage requirements on the Preferred Shares would be reduced. Because the longer-term bonds included in the Fund's portfolio will typically pay fixed rates of interest while the dividend rate on the Preferred Shares will be adjusted periodically, this could occur even when both long-term and short-term interest rates rise. Similarly, any decline in the net asset value of the Fund's investments could result in the Fund being in danger of failing to meet its asset coverage requirements or of losing its expected "Aaa" and "AAA" ratings on the Preferred Shares or, in an extreme case, the Fund's current investment income might not be sufficient to meet the dividend requirements on the Preferred Shares. In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption of some or all of the Preferred Shares. In addition, to the extent that any forms of leverage utilized by the Fund are senior to the Preferred Shares, payments to holders of Preferred Shares in liquidation or otherwise will be subject to the prior payment of obligations relating to such other forms of leverage.
While the Fund may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and net asset value associated with leverage, there can be no assurance that the Fund will actually reduce leverage in the future or that any reduction, if undertaken, will be effective. Changes in the future direction of interest rates are very difficult to predict accurately. If the Fund were to reduce leverage based on a prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in leverage would likely operate to reduce the Fund's net asset value relative to the circumstance where the Fund had not reduced leverage. The
Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and net asset value if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.
Because the fees received by the Manager are based on the total net assets of the Fund, the fees will be higher when leverage is utilized through the issuance of Preferred Shares, giving the Manager and PIMCO an incentive to utilize such leverage.
Issuer Risk
The value of income-producing securities may decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods and services.
Management Risk
The Fund is subject to management risk because it is an actively managed investment portfolio. PIMCO and the individual portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
Foreign (Non-U.S.) Investment Risk
The Fund may invest some or all of its assets in U.S. dollar-denominated debt obligations of foreign issuers or supra-national government agencies. The Fund also may invest up to 15% of its total assets in debt instruments denominated in foreign currencies (of both developed and "emerging market" countries), including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises. The Fund may invest up to 7.5% of its total assets in securities (regardless of the currency in which such securities are denominated) of issuers located in "emerging market" countries. The Fund's investments in foreign issuers and in securities denominated in foreign currencies involve special risks. There may be less information publicly available about a foreign issuer than about a U.S. issuer, and foreign issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage costs, custodial expenses and other fees are also generally higher than for securities traded in the United States. With respect to certain foreign countries, there is also a possibility of expropriation of assets, confiscatory taxation, political or financial instability and diplomatic developments which could affect the value of investments in those countries. In addition, income received by the Fund from sources within foreign countries may be reduced by withholding and other taxes imposed by such countries.
The value of securities denominated in foreign currencies may fluctuate based on changes in the value of those currencies relative to the U.S. dollar, and a decline in applicable foreign exchange rates could reduce the value of such securities held by the Fund. The values of foreign investments and the investment income derived from them also may be affected unfavorably by changes in currency exchange control regulations. In addition, although a portion of the Fund's investment income may be received or realized in foreign currencies, the Fund will be required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for any such currency declines after the Fund's income has been earned and translated into U.S. dollars but before payment, the Fund could be required to liquidate portfolio securities to make such distributions.
Emerging Markets Risk
The Fund may invest up to 7.5% of its total assets in securities (regardless of the currency in which such securities are denominated) of issuers located in "emerging market" countries. Investing in securities of issuers based in underdeveloped emerging markets entails all of the risks of investing in securities of foreign issuers to a
heightened degree. These heightened risks include: (i) greater risks of expropriation, confiscatory taxation, nationalization, and less social, political and economic stability; (ii) the smaller size of the market for such securities and a lower volume of trading, resulting in lack of liquidity and in price volatility; and (iii) certain national policies which may restrict the Fund's investment opportunities, including restrictions on investing in issuers or industries deemed sensitive to relevant national interests.
Derivatives Risk
The Fund may use a variety of derivative instruments for hedging or risk management purposes or as part of its leveraging or investment strategies. The Fund may invest in derivatives without limit for hedging purposes, and may invest up to 25% (10% within 90 days of the date of the prospectus for the Common Shares, which was April 24, 2003) of its total assets in derivatives for non-hedging purposes. For these purposes, "hedging purposes" include the use of a derivative instrument to cause the Fund to more closely resemble the Merrill Lynch U.S. High Yield BB-B Rated Index with respect to credit quality, average portfolio duration, and/or average portfolio yield-to-maturity. Derivatives are financial contracts whose value depends on, or is derived from, the value of an underlying asset, reference rate or index (or relationship between two indexes). The Fund may invest in a variety of derivative instruments, for hedging or risk management purposes or as part of its investment strategies, such as options contracts (including options on futures contracts), futures contracts, swap agreements (including credit default swaps) and short sales. The Fund may use derivatives as a substitute for taking a position in an underlying debt instrument or other asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate or currency risk. The Fund also may use derivatives to add leverage to the portfolio. The Fund's use of derivative instruments involves risks different from, and possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks described elsewhere in this prospectus, such as liquidity risk, interest rate risk, credit risk, leveraging risk and management risk. They also involve the risk of mispricing or improper valuation, the risk of ambiguous documentation and the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. If the Fund invests in a derivative instrument, it could lose more than the principal amount invested. Also, suitable derivative transactions may not be available in all circumstances, and there can be no assurance that the Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial. In addition, the Fund may be subject to certain restrictions on its use of derivative strategies imposed by guidelines of one or more Rating Agencies. The use of derivatives also may increase the amount of taxes payable by shareholders. In addition to the risks applicable to derivatives generally, credit default swaps involve special risks because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
Counterparty Risk
The Fund will be subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Fund. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract because of financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.
Mortgage-Related Risk
The Fund may invest in a variety of mortgage-related securities, including commercial mortgage securities and other mortgage-backed instruments. Rising interest rates tend to extend the duration of mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, mortgage-related securities held by the Fund may exhibit additional volatility. This is known as extension risk. In addition, mortgage-related securities are subject to prepayment risk--the risk that borrowers may pay off their
mortgages sooner than expected, particularly when interest rates decline. This can reduce the Fund's returns because the Fund may have to reinvest that money at lower prevailing interest rates. The Fund's investments in other asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and the servicing of those assets.
Smaller Company Risk
Although under current market conditions the Fund does not at present intend to invest a significant portion of its assets in smaller companies, as market conditions change over time, the Fund may invest more of its assets in such companies. The general risks associated with income-producing securities are particularly pronounced for securities issued by companies with smaller market capitalizations. These companies may have limited product lines, markets or financial resources or may depend on a few key employees. As a result, they may be subject to greater levels of credit, market and issuer risk. Securities of smaller companies may trade less frequently and in lesser volume than more widely held securities, and their values may fluctuate more sharply than those of other securities. Companies with medium-sized market capitalizations may have risks similar to those of smaller companies.
Reinvestment Risk
Reinvestment risk is the risk that income from the Fund's portfolio will decline if and when the Fund invests the proceeds from matured, traded or called debt obligations at market interest rates that are below the portfolio's current earnings rate.
Inflation Risk
Inflation risk is the risk that the value of assets or income from the Fund's investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real, or inflation-adjusted, value of the Preferred Shares and distributions can decline. However, during any periods of rising inflation, dividend payments on Preferred Shares may increase, which would tend to offset this risk.
Liquidity Risk
The Fund may invest up to 15% of its total assets in illiquid securities
(i.e., securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the value at which the Fund has valued the
securities). For these purposes, bank loans that are part of an issue of at
least $250 million in par value will not be considered illiquid, although the
Fund's investments in such bank loans, together with its investments in
illiquid securities, will not exceed 20% of its total assets. Illiquid
securities may be subject to wide fluctuations in market value. The Fund may be
subject to significant delays in disposing of illiquid securities. Accordingly,
the Fund may be forced to sell these securities at less than fair market value
or may not be able to sell them when PIMCO believes it is desirable to do so.
Illiquid securities also may entail registration expenses and other transaction
costs that are higher than those for liquid securities. Restricted securities,
i.e., securities subject to legal or contractual restrictions on resale, may
also be illiquid. However, some restricted securities (such as securities
issued pursuant to Rule 144A under the Securities Act of 1933 and certain
commercial paper) may be treated as liquid for these purposes. In addition,
below investment grade debt securities tend to be less liquid than higher-rated
securities.
Market Disruption and Geopolitical Risk
The war with Iraq, its aftermath and the continuing occupation of Iraq are likely to have a substantial impact on the U.S. and world economies and securities markets. The nature, scope and duration of the war and occupation cannot be predicted with any certainty. Terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 closed some of the U.S. securities markets for a four-day period, and similar events
cannot be ruled out. The war and occupation, terrorism and related geopolitical risks have led, and may in the future lead, to increased short-term market volatility and may have adverse long-term effects on U.S. and world economies and markets generally. Those events could also have an acute effect on individual issuers or related groups of issuers. These risks could also adversely affect individual issuers and securities markets, interest rates, auctions, secondary trading, ratings, credit risk, inflation and other factors relating to the Preferred Shares.
Anti-Takeover Provisions
The Declaration and Amended Bylaws include provisions that could limit the ability of other entities or persons to acquire control of the Fund, convert the Fund to open-end status or change the composition of the Board of Trustees. See "Anti-Takeover and Other Provisions in the Declaration of Trust."
Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of the Fund, the Manager and/or PIMCO because of their possible affiliations with Allianz AG, the ultimate parent of the Manager and PIMCO. Absent an exemption from the Securities and Exchange Commission or other regulatory relief, the Fund is generally precluded from effecting certain principal transactions with affiliated brokers, and its ability to purchase securities being underwritten by an affiliated broker or a syndicate including an affiliated broker, or to utilize affiliated brokers for agency transactions, is subject to restrictions. This could limit the Fund's ability to engage in securities transactions and take advantage of market opportunities. In addition, unless and until the underwriting syndicate is broken in connection with the offering of the Preferred Shares, the Fund will be precluded from effecting principal transactions with brokers who are members of the syndicate.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These limitations (two of which are listed below) are fundamental and may not be changed without the approval of the holders of a majority of the outstanding Common Shares and any preferred shares (including the Preferred Shares) voting together as a single class, and the approval of the holders of a majority of any preferred shares (including the Preferred Shares) voting as a separate class. The Fund may not:
. Concentrate its investments in a particular "industry," as that term is used in the 1940 Act and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time; and
. With respect to 75% of the Fund's total assets, purchase the securities of any issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities or securities of other investment companies, if as a result, (i) more than 5% of the Fund's total assets would be invested in the securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer. For the purpose of this restriction, each state and each separate political subdivision, agency, authority or instrumentality of such state, each multi-state agency or authority, and each obligor, if any, is treated as a separate issuer of municipal bonds.
The Fund would be deemed to "concentrate" its investments in a particular industry if it invested more than 25% of its total assets in that industry. The Fund's industry concentration policy does not preclude it from focusing investments in issuers in a group of related industrial sectors (such as different types of utilities).
The Fund is subject to guidelines which are more limiting than the investment restrictions set forth above and to other restrictions set forth in the Statement of Additional Information in order to obtain and maintain
ratings on the Preferred Shares of "Aaa" from Moody's and "AAA" from Fitch Ratings, and may become subject to additional guidelines in the future. See "Rating Agency Guidelines." The Fund does not anticipate that such guidelines will have a material adverse effect on the Fund's ability to achieve its investment objectives. See "Rating Agency Guidelines," "Investment Objectives and Policies" and "Investment Restrictions" in the Statement of Additional Information for information about these guidelines and a complete list of the fundamental investment policies of the Fund.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund anticipates such an increase or change) and the Fund's leverage begins (or is expected) to adversely affect Common Shareholders. In order to attempt to offset such a negative impact of leverage on Common Shareholders, the Fund may shorten the average maturity or duration of its investment portfolio (by investing in short-term, high quality securities or implementing certain hedging strategies) or may extend the maturity of outstanding preferred shares (including the Preferred Shares). The Fund also may attempt to reduce leverage by redeeming or otherwise purchasing Preferred Shares (subject to any restrictions discussed under "Description of Preferred Shares--Redemption") or by reducing any holdings in other instruments that create leverage. The success of any such attempt to limit leverage risk depends on PIMCO's ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Fund may not be successful in managing its interest rate exposure in the manner described above.
If market conditions suggest that additional leverage would be beneficial, the Fund may issue additional preferred shares or sell Preferred Shares that the Fund issues but later repurchases, or utilize other forms of leverage, such as credit default swaps and other derivative instruments. In addition, the Fund's use of credit default swaps and certain other derivative instruments may be limited by the Fund's limitations on illiquid investments to the extent they are determined to be illiquid. See "The Fund's Investment Objectives and Strategies--Portfolio Contents and Other Information" and "Risks--Liquidity Risk."
Hedging and Related Strategies
Subject to the restrictions described under "Rating Agency Guidelines"
below, the Fund may use various investment strategies designed to limit the
risk of price fluctuations of its portfolio securities and to preserve capital.
For instance, the Fund may purchase credit default swap contracts for the
purpose of hedging the Fund's exposure to certain issuers and, thereby,
decreasing its exposure to credit risk, and it may invest in structured notes
or interest rate swap or cap transactions for the purpose of reducing the
interest rate sensitivity of the Fund's portfolio and, thereby, decreasing the
Fund's exposure to interest rate risk. See "The Fund's Investment Objectives
and Strategies--Credit Default Swaps," "The Fund's Investment Objectives and
Strategies--Structured Notes and Related Instruments" and "The Fund's
Investment Objectives and Strategies--Certain Interest Rate Transactions" in
this prospectus. Other hedging strategies that the Fund may use include:
financial futures contracts; short sales; other types of swap agreements or
options thereon; options on financial futures; and options based on either an
index or individual debt securities whose prices PIMCO believes correlate with
the prices of the Fund's investments. Income earned by the Fund from many
hedging activities will be treated as capital gain and, if not offset by net
realized capital loss, will be distributed to shareholders in taxable
distributions. If effectively used, hedging strategies will offset in varying
percentages losses incurred on the Fund's investments due to adverse interest
rate changes. There is no assurance that these hedging strategies will be
available at any time or that PIMCO will determine to use them for the Fund or,
if used, that the strategies will be successful. In addition, in accordance
with the Rating Agency guidelines described below, the Fund's use of hedging
transactions is limited to the types of transactions listed under the
definitions of "Fitch Hedging Transactions" and "Moody's Hedging Transactions"
in the Glossary.
RATING AGENCY GUIDELINES
The Fund is required under Rating Agency guidelines to maintain Moody's Eligible Assets and Fitch Eligible Assets each having in the aggregate a Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount. Moody's and Fitch Ratings have each established separate guidelines for determining Discounted Value. To the extent any particular portfolio holding of the Fund does not satisfy a Rating Agency's guidelines, all or a portion of such holding's value will not be included in the calculation of Discounted Value for purposes of that Rating Agency. The amount of such assets included in the Fund's portfolio at any time may vary depending upon the rating, diversification and other characteristics of the eligible assets included in the portfolio. The Rating Agency guidelines also impose limitations on the Fund's investments.
The Fund is also required under the 1940 Act and Rating Agency guidelines to maintain, with respect to Preferred Shares, asset coverage of at least 200% with respect to senior securities that are stock (as that term is used in the 1940 Act), including the Preferred Shares (or such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities that are stock (as used in the 1940 Act) of a closed-end investment company as a condition of declaring dividends on its common shares) ("1940 Act Preferred Shares Asset Coverage").
In the event the Fund does not timely cure a failure to maintain (a) a Discounted Value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance with the requirements of the Rating Agency or Agencies then rating the Preferred Shares, the Fund will be required by the Amended Bylaws to redeem Preferred Shares as described under "Description of Preferred Shares--Redemption--Mandatory Redemption."
The Rating Agency guidelines restrict the Fund's use of some types of investment strategies. For example, the guidelines limit the Fund's use of futures, options and other derivative transactions for hedging or investment purposes, prevent the Fund from entering into hedging transactions other than Fitch Hedging Transactions and Moody's Hedging Transactions, restrict the use of forward commitments and similar transactions, and limit the percentage of the Fund's assets that may be invested in any one issuer or type or class of issuer.
The Rating Agency guidelines also prohibit the Fund from taking some types of actions unless it has received written confirmation from the Rating Agencies that such actions would not impair the ratings then assigned to the Preferred Shares. These include restrictions on borrowing money, engaging in short sales, lending portfolio securities, issuing any class or series of shares ranking prior to or on a parity with the Preferred Shares with respect to the payment of dividends or the distribution of assets upon dissolution, liquidation or winding up of the Fund or merging or consolidating into or with any other entity.
The restrictions in the Rating Agency guidelines may limit the Fund's ability to make investments that PIMCO believes would benefit the Fund. The descriptions of the Rating Agency guidelines in this section and in "Description of Preferred Shares--Asset Maintenance" are summaries only and are not complete. The Rating Agency guidelines are set forth in their entirety in the Amended Bylaws, the form of which has been filed as an exhibit to the Registration Statement of which this prospectus is a part.
The Fund may, but is not required to, adopt any modifications to the guidelines that may hereafter be established by any Rating Agency. Failure to adopt any such modifications, however, may result in a change in the ratings described above or a withdrawal of ratings altogether. In addition, any Rating Agency may, at any time, change or withdraw any such rating. The Board may, without shareholder approval, amend, alter or repeal certain of the definitions and related provisions which have been adopted by the Fund pursuant to the Rating Agency guidelines only in the event the Fund receives written confirmation from the Rating Agency or Agencies that any such amendment, alteration or repeal would not impair the ratings then assigned to the Preferred Shares.
As described by Moody's and Fitch Ratings, a preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock obligations. The ratings on the Preferred Shares are not recommendations to purchase, hold or sell those shares, inasmuch as the ratings do not comment as to market price or suitability for a particular investor. The Rating Agency guidelines described above also do not address the likelihood that an owner of Preferred Shares will be able to sell such shares in an Auction or otherwise. The ratings are based on current information furnished to Moody's and Fitch Ratings by the Fund and/or the Manager and its affiliates and information obtained from other sources. The ratings may be changed, suspended or withdrawn as a result of changes in, or the unavailability of, such information. The Common Shares have not been rated by any rating agency.
A Rating Agency's guidelines will apply to the Preferred Shares only so long as such Rating Agency is rating such shares. The Fund will pay certain fees to Moody's and Fitch Ratings for rating the Preferred Shares. The Fund may at some future time seek to have the Preferred Shares rated by an additional or Substitute Rating Agency.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares. This description does not purport to be complete and is subject to and qualified in its entirety by reference to the Declaration and Amended Bylaws, including the provisions thereof establishing the Preferred Shares. The Declaration and the form of Amended Bylaws establishing the terms of the Preferred Shares have been filed as exhibits to the Registration Statement of which this prospectus is a part.
Each series of Preferred Shares will be preferred shares of beneficial interest of the Fund that entitle their holders to receive dividends when, as and if declared by the Board of Trustees, out of funds legally available therefor, at a rate per annum that may vary for the successive Dividend Periods for each such series. After the Initial Dividend Period, each Subsequent Dividend Period for each series of Preferred Shares generally will be a 7-Day Dividend Period; provided, however, that prior to any Auction, the Fund may elect to request, subject to certain limitations described herein, upon giving notice to holders thereof, a Special Dividend Period. The Applicable Rate for a particular Dividend Period for a series of Preferred Shares will be determined by an Auction conducted on the Business Day before the start of such Dividend Period. Beneficial Owners and Potential Beneficial Owners of Preferred Shares may participate in Auctions therefor, although, except in the case of Special Dividend Periods of longer than 28 days, Beneficial Owners desiring to continue to hold all of their Preferred Shares regardless of the Applicable Rate resulting from Auctions need not participate. For an explanation of Auctions and the method of determining the Applicable Rate, see "--The Auction."
The nominee of the Securities Depository is expected to be the sole holder of record of each series of Preferred Shares. Accordingly, each purchaser of Preferred Shares must rely on (i) the procedures of the Securities Depository and, if such purchaser is not a member of the Securities Depository, such purchaser's Agent Member, to receive dividends, distributions and notices and to exercise voting rights (if and when applicable) and (ii) the records of the Securities Depository and, if such purchaser is not a member of the Securities Depository, such purchaser's Agent Member, to evidence its beneficial ownership of the Preferred Shares.
When issued and sold, the Preferred Shares of each series will have a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) and will be fully paid and, except as discussed under "Anti-Takeover and Other Provisions in the Declaration of Trust" below, non-assessable. See "--Liquidation Rights." The Preferred Shares will not be convertible into Common Shares or other shares of beneficial interest of the Fund, and the holders thereof will have no preemptive rights. The Preferred Shares will not be subject to any sinking fund but will be subject to redemption at the option of the Fund at the Optional Redemption Price on any Dividend Payment Date for such series (except during the Initial
Dividend Period and during a Non-Call Period) and, in certain circumstances, will be subject to mandatory redemption by the Fund at the Mandatory Redemption Price stated herein. See "--Redemption."
In addition to serving as the Auction Agent in connection with the Auction Procedures described below, Deutsche Bank Trust Company Americas will be the transfer agent, registrar, dividend paying agent and redemption agent for each series of Preferred Shares. The Auction Agent, however, will serve merely as the agent of the Fund, acting in accordance with the Fund's instructions, and will not be responsible for any evaluation or verification of any matters certified to it.
Except in an Auction, the Fund will have the right (to the extent permitted by applicable law) to purchase or otherwise acquire any Preferred Shares so long as the Fund is current in the payment of dividends on Preferred Shares and on any other shares of beneficial interest of the Fund ranking on a parity with the Preferred Shares with respect to the payment of dividends or upon liquidation.
The Auction
General
Holders of the Preferred Shares of each series will be entitled to receive cumulative cash dividends on their shares when, as and if declared by the Board of Trustees, out of the funds legally available therefor, on the Initial Dividend Payment Date with respect to the Initial Dividend Period for each series and, thereafter, on each Dividend Payment Date with respect to a Subsequent Dividend Period for each series (generally a period of seven days, subject to certain exceptions set forth under "--Dividends--General") at the rate per annum equal to the Applicable Rate for each such Dividend Period.
The provisions of the Amended Bylaws establishing the terms of the Preferred Shares offered hereby will provide that the Applicable Rate for each Dividend Period after the Initial Dividend Period for each series will be equal to the rate per annum that the Auction Agent advises has resulted on the Business Day preceding the first day of such Dividend Period due to implementation of the Auction Procedures set forth in the Amended Bylaws in which persons determine to hold or offer to purchase or sell the Preferred Shares. The Auction Procedures are attached as Appendix A to the Statement of Additional Information. Each periodic operation of such procedures with respect to the Preferred Shares is referred to herein as an "Auction." If, however, the Fund should fail to pay or duly provide for the full amount of any dividend on the Preferred Shares or the redemption price of any Preferred Shares called for redemption, the Applicable Rate for the Preferred Shares will be determined as set forth under "--Dividends--Non-Payment Period; Late Charge."
Auction Agency Agreement
The Fund will enter into the Auction Agency Agreement with the Auction Agent, which provides, among other things, that the Auction Agent will follow the Auction Procedures for the purpose of determining the Applicable Rate for each series of Preferred Shares. The Fund will pay the Auction Agent compensation for its services under the Auction Agency Agreement.
The Auction Agent will act 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 shall have been negligent in ascertaining the pertinent facts. Pursuant to the Auction Agency Agreement, the Fund is required to indemnify the Auction Agent for certain losses and liabilities incurred by the Auction Agent without negligence or bad faith on its part in connection with the performance of its duties under such agreement.
The Auction Agent may terminate the Auction Agency Agreement upon notice to the Fund, which termination may be no earlier than 60 days following delivery of such notice. If the Auction Agent resigns, 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 terminate the Auction Agency Agreement, provided that prior to such termination the Fund shall have entered into such an agreement with respect thereto with a successor Auction Agent.
Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers. The Auction Agent will enter into agreements (collectively, the "Broker-Dealer Agreements") with one or more broker-dealers, or other entities permitted by law to perform the functions required of a Broker-Dealer in the Auction Procedures (collectively, the "Broker-Dealers"), selected by the Fund, which provide for the participation of such Broker-Dealers in Auctions and pursuant to which such Broker-Dealers agree to follow the Auction Procedures. A Broker-Dealer Agreement may be terminated by the Auction Agent or a Broker-Dealer on five days' notice to the other party, provided that the Broker-Dealer Agreement with Citigroup Global Markets Inc. may be terminated only on 60 days' notice to the other party and the Fund.
Securities Depository
The Depository Trust Company initially will act as the Securities Depository for the Agent Members with respect to the Preferred Shares. All of the shares of each series of Preferred Shares initially will be registered in the name of Cede & Co., as nominee of the Securities Depository. Such shares will be subject to the provisions restricting transfers of the Preferred Shares contained in the Amended Bylaws. Cede & Co. initially will be the holder of record of all Preferred Shares, and Beneficial Owners will not be entitled to receive certificates representing their ownership interest in such shares. See Appendix A (Auction Procedures) to the Statement of Additional Information. The Securities Depository will maintain lists of its participants and will maintain the positions (ownership interests) of the Preferred Shares held by each Agent Member, whether as the Beneficial Owner thereof for its own account or as nominee for the Beneficial Owner thereof. Payments made by the Fund to holders of Preferred Shares will be duly made by making payments to the nominee of the Securities Depository.
Auction Procedures
The following is a brief summary of the procedures to be used in conducting Auctions. This summary is qualified in its entirety by reference to the Auction Procedures set forth in Appendix A to the Statement of Additional Information. The Settlement Procedures to be used with respect to Auctions are set forth in Appendix B to the Statement of Additional Information.
Auction Date
An Auction to determine the Applicable Rate for the Preferred Shares offered hereby for each Dividend Period for such shares (other than the Initial Dividend Period therefor) generally will be held on the last Business Day preceding the first day of such Dividend Period, which first day is also the Dividend Payment Date for the preceding Dividend Period (the date of each Auction being referred to herein as an "Auction Date"). The initial Auction Date will be July 7, 2003, for Series M Preferred Shares, July 8, 2003, for Series T Preferred Shares, July 9, 2003, for Series W Preferred Shares, July 10, 2003, for Series TH Preferred Shares and July 11, 2003, for Series F Preferred Shares. Auctions for the Preferred Shares for Dividend Periods after the Initial Dividend Period normally will be held every Monday for Series M Preferred Shares, every Tuesday for Series T Preferred Shares, every Wednesday for Series W Preferred Shares, every Thursday for Series TH Preferred Shares and every Friday for Series F Preferred Shares; and each subsequent Dividend Period normally will begin on the following Tuesday for Series M Preferred Shares, on the following Wednesday for Series T Preferred Shares, on
the following Thursday for Series W Preferred Shares, on the following Friday for Series TH Preferred Shares and on the following Monday for Series F Preferred Shares (each also being a Dividend Payment Date). The Auction Date and the first day of the related Dividend Period for a series of Preferred Shares (both of which must be Business Days) need not be consecutive calendar days. See "--Dividends" for information concerning the circumstances under which a Dividend Payment Date may fall on a date other than the days specified above, which may affect the Auction Date.
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders
On or prior to the Submission Deadline on each Auction Date for a series of Preferred Shares:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) "Hold Order"--indicating the number of outstanding Preferred Shares, if any, such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period for such shares;
(ii) "Bid"--indicating the number of outstanding Preferred Shares, if any, that Beneficial Owner desires to continue to hold, provided that the Applicable Rate for the next succeeding Dividend Period for such shares is not less than the rate per annum then specified by such Beneficial Owner; and/or
(iii) "Sell Order"--indicating the number of outstanding Preferred Shares, if any, that such Beneficial Owner offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential Beneficial Owners of Preferred Shares to determine whether such Potential Beneficial Owners desire to submit Bids indicating the number of Preferred Shares which they offer to purchase if the Applicable Rate for the next succeeding Dividend Period is not less than the rates per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a Broker-Dealer and the communication by a Broker-Dealer, whether or not acting for its own account, to the Auction Agent of the foregoing information is hereinafter referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a Potential Beneficial Owner placing an Order, including a Broker-Dealer acting in such capacity for its own account, is hereinafter referred to as a "Bidder" and collectively as "Bidders." 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.
In an Auction, a Beneficial Owner may submit different types of Orders with respect to Preferred Shares then held by such Beneficial Owner, as well as Bids for additional Preferred Shares. If, however, a Beneficial Owner offers through its Broker-Dealer to purchase additional Preferred Shares in such Auction, such Beneficial Owner, for purposes of such offer to purchase additional shares, will be treated as a Potential Beneficial Owner as described below. For information concerning the priority given to different types of Orders placed by Beneficial Owners, see "--Submission of Orders by Broker-Dealers to Auction Agent" below.
The "Maximum Applicable Rate," on any date on which the Applicable Rate is determined for a series of Preferred Shares, will be the Applicable Percentage of the 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 Preferred Shares Basic Maintenance Amount. The Auction Agent will round each applicable Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent per annum, with any such number ending in five ten-thousandths of one percent being rounded upwards to the nearest one-thousandth (0.001) of one percent. The Auction Agent will not round the applicable Reference Rate as part of its calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for a series of Preferred Shares will depend on the credit rating assigned to such series. The "Applicable Percentage" will be determined based on the lower of the credit ratings assigned on such date to such shares by Moody's and Fitch Ratings, such Applicable Percentage as so determined further subject to adjustment by the Board of Trustees as described in the preceding paragraph, as follows:
Moody's Fitch Ratings Applicable
Credit Rating Credit Rating Percentage
------------- ------------- ----------
Aa3 or above AA- or above 150%
A3 to A1 A- to A+ 160%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
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There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable Moody's and Fitch Ratings to provide ratings for each series of Preferred Shares. If such ratings are not made available by Moody's and/or Fitch Ratings, the Underwriters or their affiliates and successors, after consultation with the Fund, will select one or more other rating agencies to act as Substitute Rating Agencies.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a Potential Beneficial Owner specifying a rate per annum higher than the Maximum Applicable Rate will not be considered. See "--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and "--Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares."
A Broker-Dealer also may hold Preferred Shares in its own account as a Beneficial Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore participate in an Auction as an Existing Holder or Potential Holder on behalf of both itself and its customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated in the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an Order in respect of any Preferred Shares held by it or its customers who are Beneficial Owners will be treated in the same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect of Preferred Shares held by it, as described in the next paragraph. If a Broker-Dealer participates in an Auction as an Existing Holder or a Potential Holder only to represent the interests of a Beneficial Owner or Potential Beneficial Owner, whether it be its customers or itself, all discussion herein relating to the consequences of an Auction for Existing Holders and Potential Holders also applies to the underlying beneficial ownership interests represented thereby. For information concerning the priority given to different types of Orders placed by Existing Holders, see "--Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or sale in an Auction will be settled on the Business Day next succeeding the Auction Date at a price per share equal to $25,000. See "--Notification of Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding Preferred Shares held by a Beneficial Owner are not submitted to the Auction Agent prior to the Submission Deadline, either because a Broker-Dealer failed to contact such Beneficial Owner or otherwise, the Auction Agent will deem a Hold Order (in the case of an Auction relating to a 7-Day Dividend Period or a Special Dividend Period of 28 days or less) or a Sell Order (in the case of an Auction relating to a Special Dividend Period of longer than 28 days) to have been submitted on behalf of such Beneficial Owner covering the number of outstanding Preferred Shares held by such Beneficial Owner and not subject to Orders submitted to the Auction Agent.
If all of the outstanding Preferred Shares are subject to Submitted Hold Orders, the Dividend Period next succeeding the Auction automatically will be the same length as the immediately preceding Dividend Period, and
the Applicable Rate for the next Dividend Period for all of the Preferred Shares will be 80% of the Reference Rate on the date of the applicable Auction.
For the purposes of an Auction, the Preferred Shares for which the Fund shall have given notice of redemption and deposited moneys therefor with the Auction Agent in trust or segregated in an account at the Fund's custodian bank for the benefit of the Auction Agent, as set forth under "--Redemption," will not be considered outstanding and will not be included in such Auction. The Fund may not submit an Order in any Auction.
Neither the Fund nor the Auction Agent will be responsible for a Broker-Dealer's failure to act in accordance with the instructions of Beneficial Owners or Potential Beneficial Owners or failure to comply with the foregoing.
Submission of Orders by Broker-Dealers to Auction Agent
Prior to 1:00 p.m., New York City time, on each Auction Date, or such other time on the Auction Date as may be specified by the Auction Agent (the "Submission Deadline"), each Broker-Dealer will submit to the Auction Agent in writing or through the Auction Agent's auction processing system all Orders obtained by it for the Auction for a series of Preferred Shares to be conducted on such Auction Date, designating itself (unless otherwise permitted by the Fund) the Existing Holder or Potential Holder in respect of the Preferred Shares subject to such Orders. Any Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline for any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent will round such rate per annum up to the next highest one-thousandth (0.001) of one percent. If one or more Orders of an Existing Holder are submitted to the Auction Agent and such Orders cover in the aggregate more than the number of outstanding Preferred Shares held by such Existing Holder, such Orders will be considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the number of outstanding Preferred Shares held by such Existing Holder, provided that if more than one Hold Order is submitted by such Existing Holder and the number of Preferred Shares subject to such Hold Orders exceeds the number of outstanding Preferred Shares held by such Existing Holder, the number of Preferred Shares subject to each of such Hold Orders will be reduced pro rata so that such Hold Orders, in the aggregate, will cover exactly the number of outstanding Preferred Shares held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their
respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding Preferred Shares held by such Existing Holder over the
number of outstanding Preferred Shares subject to any Hold Order
referred to in clause (i) above (and if more than one Bid submitted by
such Existing Holder specifies the same rate per annum and together they
cover more than the remaining number of shares that can be the subject
of valid Bids after application of clause (i) above and of the foregoing
portion of this clause (ii) to any Bid or Bids specifying a lower rate
or rates per annum, the number of shares subject to each of such Bids
will be reduced pro rata so that such Bids, in the aggregate, cover
exactly such remaining number of outstanding shares); and the number of
outstanding shares, if any, subject to Bids not valid under this clause
(ii) shall be treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the excess of the number of outstanding Preferred Shares held by such Existing Holder over the sum of the number of Preferred Shares subject to Hold Orders referred to in clause (i) above and the number of Preferred Shares subject to valid Bids by such Existing Holder referred to in clause (ii) above; provided that, if more than one Sell Order is
submitted by any Existing Holder and the number of Preferred Shares subject to such Sell Orders is greater than such excess, the number of Preferred Shares subject to each of such Sell Orders will be reduced pro rata so that such Sell Orders, in the aggregate, will cover exactly the number of Preferred Shares equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction, each Bid submitted in such Auction will be considered a separate Bid with the rate per annum and number of Preferred Shares therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline for each Auction, the Auction Agent will assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or deemed submitted by a Broker-Dealer hereinafter being referred to as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order") and will determine the excess of the number of outstanding Preferred Shares over the number of outstanding Preferred Shares subject to Submitted Hold Orders (such excess being referred to as the "Available Preferred Shares") and whether Sufficient Clearing Bids have been made in such Auction. Sufficient Clearing Bids will have been made if the number of outstanding Preferred Shares that are the subject of Submitted Bids of Potential Holders with rates per annum not higher than the Maximum Applicable Rate equals or exceeds the number of outstanding shares that are the subject of Submitted Sell Orders (including the number of shares subject to Bids of Existing Holders specifying rates per annum higher than the Maximum Applicable Rate). If Sufficient Clearing Bids have been made, the Auction Agent will determine the lowest rate per annum specified in the Submitted Bids (the "Winning Bid Rate") which would result in the number of shares subject to Submitted Bids specifying such rate per annum or a lower rate per annum being at least equal to the Available Preferred Shares. If Sufficient Clearing Bids have been made, the Winning Bid Rate will be the Applicable Rate for the next Dividend Period for the Preferred Shares then outstanding. If Sufficient Clearing Bids have not been made (other than because all outstanding Preferred Shares are the subject of Submitted Hold Orders), the Dividend Period next following the Auction automatically will be a 7-Day Dividend Period, and the Applicable Rate for such Dividend Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that have Submitted Sell Orders will not be able to sell in the Auction all, and may not be able to sell any, of their Preferred Shares subject to such Submitted Sell Orders. See "--Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares." Thus, under some circumstances, Beneficial Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares
Based on the determinations described under "--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and subject to the discretion of the Auction Agent to round as described below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in the order of priority set forth in the Auction Procedures with the result that Existing Holders and Potential Holders of a series of Preferred Shares will sell, continue to hold and/or purchase Preferred Shares as set forth below. Existing Holders that submit or are deemed to have submitted Hold Orders will continue to hold the Preferred Shares subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate per annum higher than the Winning Bid Rate or a Submitted Sell Order will sell the outstanding Preferred Shares subject to such Submitted Bid or Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate per annum lower than the Winning Bid Rate will continue to hold the outstanding Preferred Shares subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a rate per annum lower than the Winning Bid Rate will purchase the number of Preferred Shares subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate per annum equal to the Winning Bid Rate will continue to hold the outstanding Preferred Shares subject to such Submitted Bids, unless the number of outstanding Preferred Shares subject to all such Submitted Bids of Existing Holders is greater than the excess of the Available Preferred Shares over the number of Preferred Shares accounted for in clauses (b) and (c) above, in which event each Existing Holder with such a Submitted Bid will sell a number of outstanding Preferred Shares determined on a pro rata basis based on the number of outstanding Preferred Shares subject to all such Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate per annum equal to the Winning Bid Rate will purchase any Available Preferred Shares not accounted for in clause (b), (c) or (d) above on a pro rata basis based on the Preferred Shares subject to all such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all outstanding Preferred Shares are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate per annum equal to or lower than the Maximum Applicable Rate will continue to hold the outstanding Preferred Shares subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a rate per annum equal to or lower than the Maximum Applicable Rate will purchase the number of Preferred Shares subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate per annum higher than the Maximum Applicable Rate or a Submitted Sell Order will sell a number of outstanding Preferred Shares determined on a pro rata basis based on the outstanding Preferred Shares subject to all such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a Preferred Share, the Auction Agent, in such manner as, in its sole discretion, it shall determine, will round up or down the number of Preferred Shares being sold or purchased on such Auction Date so that each share sold or purchased by each Existing Holder or Potential Holder will be a whole Preferred Share. If any Potential Holder would be entitled or required to purchase less than a whole Preferred Share, the Auction Agent, in such manner as, in its sole discretion, it shall determine, will allocate Preferred Shares for purchase among Potential Holders so that only whole Preferred Shares are purchased by any such Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing any Preferred Shares.
Notification of Results; Settlement
The Auction Agent will advise each Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid or Sell Order was accepted or rejected in whole or in part and of the Applicable Rate for the next Dividend Period for the related Preferred Shares by telephone or through the Auction Agent's auction processing system at approximately 3:00 p.m., New York City time, on the Auction Date for such Auction. Each such Broker-Dealer that submitted an Order for the account of a customer then will advise such customer whether such Bid or Sell Order was accepted or rejected, will confirm purchases and sales with each customer purchasing or selling Preferred Shares as a result of the Auction and will advise each customer purchasing or
selling Preferred Shares to give instructions to its Agent Member of the Securities Depository to pay the purchase price against delivery of such shares or to deliver such shares against payment therefor as appropriate. If a customer selling Preferred Shares as a result of an Auction fails to instruct its Agent Member to deliver such shares, the Broker-Dealer that submitted such customer's Bid or Sell Order will instruct such Agent Member to deliver such shares against payment therefor. Each Broker-Dealer that submitted a Hold Order in an Auction on behalf of a customer also will advise such customer of the Applicable Rate for the next Dividend Period for the Preferred Shares. The Auction Agent will record each transfer of Preferred Shares on the record book of Existing Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day after each Auction Date, the transactions described above will be executed through the Securities Depository, and the accounts of the respective Agent Members at the Securities Depository will be debited and credited as necessary to effect the purchases and sales of Preferred Shares as determined in such Auction. Purchasers will make payment through their Agent Members in same-day funds to the Securities Depository against delivery through their Agent Members; the Securities Depository will make payment in accordance with its normal procedures, which now provide for payment in same-day funds. If the procedures of the Securities Depository applicable to Preferred Shares shall be changed to provide for payment in next-day funds, then purchasers may be required to make payment in next-day funds. If the certificates for the Preferred Shares are not held by the Securities Depository or its nominee, payment will be made in same-day funds to the Auction Agent against delivery of such certificates.
If any Existing Holder selling Preferred Shares in an Auction fails to deliver such shares, the Broker-Dealer of any person that was to have purchased Preferred Shares in such Auction may deliver to such person a number of whole Preferred Shares that is less than the number of shares that otherwise was to be purchased by such person. In such event, the number of Preferred Shares to be so delivered will be determined by such Broker-Dealer. Delivery of such lesser number of shares will constitute good delivery. Each Broker-Dealer Agreement also will provide that neither the Fund nor the Auction Agent will have responsibility or liability with respect to the failure of a Beneficial Owner or Potential Beneficial Owner or their respective Agent Members to deliver Preferred Shares or to pay for Preferred Shares purchased or sold pursuant to an Auction or otherwise.
Broker-Dealers
General
The Auction Agent after each Auction will pay a service charge from funds provided by the Fund to each Broker-Dealer on the basis of the purchase price of Preferred Shares placed by such Broker-Dealer at such Auction. The service charge (i) for any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of the purchase price of the Preferred Shares placed by such Broker-Dealer in any such Auction and (ii) for any Special Dividend Period shall be determined by mutual consent of the Fund and any such Broker-Dealer or Broker-Dealers and shall be based upon a selling concession that would be applicable to an underwriting of fixed or variable rate preferred shares with a similar final maturity or variable rate dividend period, respectively, at the commencement of the Dividend Period with respect to such Auction. For the purposes of the preceding sentence, the Preferred Shares will be placed by a Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to have been made by Beneficial Owners that were acquired by such Beneficial Owners through such Broker-Dealer or (ii) the subject of any of the following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted in such Beneficial Owner's continuing to hold such shares as a result of the Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in such Potential Beneficial Owner's purchasing such shares as a result of the Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders in Auctions for its own account, unless the Fund notifies all Broker-Dealers that they no longer may do so; provided that Broker-Dealers may continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for its own account in any Auction of Preferred Shares, it may have knowledge of Orders placed through it in that Auction and
therefore have an advantage over other Bidders, but such Broker-Dealer would not have knowledge of Orders submitted by other Broker-Dealers in that Auction.
Secondary Market Trading and Transfers of Preferred Shares
The Broker-Dealers may maintain a secondary trading market in the Preferred Shares outside of Auctions; however, they have no obligation to do so, and may discontinue such activity at any time. There can be no assurance that a secondary market for the Preferred Shares will develop or, if it does develop, that it will provide holders with a liquid trading market (i.e., trading will depend on the presence of willing buyers and sellers, and the trading price is subject to variables to be determined at the time of the trade by the Broker-Dealers). The Preferred Shares will not be registered on any stock exchange or on any automated quotation system. An increase in the level of interest rates, particularly during any Long Term Dividend Period for a series of Preferred Shares, likely will have an adverse effect on the secondary market price of such Preferred Shares, and a selling shareholder may sell Preferred Shares between Auctions at a price per share of less than $25,000.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose of Preferred Shares only in whole shares and only (1) pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with the Auction Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be permitted by the Fund; provided, however, that (a) a sale, transfer or other disposition of Preferred Shares from a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer as the holder of such shares to that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer or other disposition for purposes of the foregoing if such Broker-Dealer remains the Existing Holder of the shares so sold, transferred or disposed of immediately after such sale, transfer or disposition and (b) in the case of all transfers other than pursuant to Auctions, such Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of such transfer.
Dividends
General
The holders of Preferred Shares of each series will be entitled to receive, when, as and if declared by the Board of Trustees, out of funds legally available therefor, cumulative cash dividends on their shares, at the Applicable Rate determined as set forth below under "--Determination of Dividend Rate," payable on the dates set forth below. Dividends on the Preferred Shares so declared and payable will be paid in preference to and in priority over any dividends so declared and payable on the Common Shares.
Dividends on each series of Preferred Shares will accumulate from the date on which the Fund originally issues the Preferred Shares (the "Date of Original Issue") and will be payable on the Preferred Shares on the dates described below. Dividends on a series of Preferred Shares with respect to the Initial Dividend Period shall be payable on the Initial Dividend Payment Date for that series. Following the Initial Dividend Payment Date, dividends on each series of Preferred Shares will be payable, at the option of the Fund, either (i) with respect to any 7-Day Dividend Period and any Short Term Dividend Period of 35 or fewer days, on the day next succeeding the last day thereof or (ii) with respect to any Short Term Dividend Period of more than 35 days and with respect to any Long Term Dividend Period, monthly on the first Business Day of each calendar month during such Short Term Dividend Period or Long Term Dividend Period and on the day next succeeding the last day thereof (each such date referred to in clause (i) or (ii) being referred to herein as a "Normal Dividend Payment Date"), except that if such Normal Dividend Payment Date is not a Business Day, the Dividend Payment Date will be the first Business Day next succeeding such Normal Dividend Payment Date. Although any particular Dividend Payment Date may not occur on the originally scheduled date because of the exceptions discussed above, the next succeeding Dividend Payment Date, subject to such exceptions, will nonetheless occur on the next following originally scheduled date. If for any reason a Dividend Period for a series of Preferred Shares is scheduled to begin on the same day and end on the same day as a Dividend Period for another series of Preferred Shares, then
the last day of the Dividend Period for such other series of Preferred Shares shall be the second Business Day next succeeding such scheduled day unless the Fund obtains the opinion of tax counsel referred to below. Subject to the limitation in the next sentence, if for any reason a Dividend Payment Date cannot be fixed as described above, then the Board of Trustees will fix the Dividend Payment Date. However, no Dividend Period of any series of Preferred Shares shall be co-extensive with any Dividend Period of any other series of Preferred Shares unless the Fund has received an opinion of tax counsel that having such co-extensive periods will not affect the deductibility, for federal income tax purposes, of dividends paid on the different series of Preferred Shares. The Board of Trustees before authorization of a dividend may change a Dividend Payment Date if such change does not adversely affect the contract rights of the holders of Preferred Shares set forth in the Declaration or Amended Bylaws. The Initial Dividend Period, 7-Day Dividend Periods and Special Dividend Periods with respect to a series of Preferred Shares are hereinafter sometimes referred to as "Dividend Periods." Each dividend payment date determined as provided above is hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with the Auction 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 to the record holder of the Preferred Shares on the Dividend Payment Date, which holder is expected to be the nominee of the Securities Depository. See "--The Auction--Securities Depository." The Securities Depository will credit the accounts of the Agent Members of the Existing Holders in accordance with the Securities Depository's normal procedures, which provide for payment in same-day funds. The Agent Member of an Existing Holder will be responsible for holding or disbursing such payments on the applicable Dividend Payment Date to such Existing Holder in accordance with the instructions of such Existing Holder. 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 made on the Preferred Shares first shall be credited against the earliest declared but unpaid dividends accumulated with respect to such shares.
Holders of the Preferred Shares will not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends except as described under "--Non-Payment Period; Late Charge" below. No interest will be payable in respect of any dividend payment or payments on the Preferred Shares which may be in arrears.
The amount of cash dividends per Preferred Share of each series payable (if declared) on the Initial Dividend Payment Date, each Dividend Payment Date of each 7-Day Dividend Period and each Dividend Payment Date of each Short Term Dividend Period will be computed by multiplying the Applicable Rate for such Dividend Period by a fraction the numerator of which will be the number of days in such Dividend Period or part thereof that such share was outstanding and for which dividends are payable on such Dividend Payment Date 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 Long Term Dividend Period, the amount of cash dividends per Preferred Share payable (if declared) on any Dividend Payment Date will be computed by multiplying the Applicable Rate for such Dividend Period by a fraction the numerator of which will be such number of days in such part of such Dividend Period that such share was outstanding and for which dividends are payable on such Dividend Payment Date and the denominator of which will be 360, multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the nearest cent.
The Fund intends to qualify each year for taxation as a regulated investment company eligible for treatment under the provisions of Subchapter M of the Code. If the Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends or capital gain distributions. See "Tax Matters."
Notification of Dividend Period
The Fund, at its sole option and to the extent permitted by law, by
telephonic and written notice (a "Request for Special Dividend Period") to the
Auction Agent and to each Broker-Dealer, may request that the next succeeding
Dividend Period for a series of Preferred Shares will be a number of days
(other than seven), evenly divisible by seven, and not fewer than fourteen nor
more than 364 in the case of a Short Term Dividend Period or one whole year or
more but not greater than five years in the case of a Long Term Dividend
Period, specified in such notice, provided that the Fund may not give a Request
for Special Dividend Period for a Dividend Period of greater than 28 days (and
any such request will be null and void) unless, for any Auction occurring after
the initial Auction, Sufficient Clearing Bids were made in the last occurring
Auction and unless full cumulative dividends and any amounts due with respect
to redemptions payable prior to such date have been paid in full. Such Request
for Special Dividend Period, in the case of a Short Term Dividend Period, shall
be given on or prior to the second Business Day but not more than seven
Business Days prior to an Auction Date for the Preferred Shares of that series
and, in the case of a Long Term Dividend Period, shall be given on or prior to
the second Business Day but not more than 28 days prior to an Auction Date for
the Preferred Shares of that series. Upon receiving such Request for Special
Dividend Period, the Broker-Dealers jointly shall determine the Optional
Redemption Price of the Preferred Shares of that series during such Special
Dividend Period and the Specific Redemption Provisions and shall give the Fund
and the Auction Agent written notice (a "Response") of such determination by no
later than the second Business Day prior to such Auction Date. In making such
determination, the Broker-Dealers will consider (i) existing short-term and
long-term market rates and indices of such short-term and long-term rates, (ii)
existing market supply and demand for short-term and long-term securities,
(iii) existing yield curves for short-term and long-term securities comparable
to the Preferred Shares, (iv) industry and financial conditions which may
affect the Preferred Shares of that series, (v) the investment objectives of
the Fund and (vi) the Dividend Periods and dividend rates at which current and
potential beneficial holders of the Preferred Shares would remain or become
beneficial holders.
After providing the Request for Special Dividend Period to the Auction Agent and each Broker-Dealer as set forth above, the Fund, by no later than the second Business Day prior to such Auction Date, may give a notice (a "Notice of Special Dividend Period") to the Auction Agent, the Securities Depository and each Broker-Dealer, which notice will specify (i) the duration of the Special Dividend Period, (ii) the Optional Redemption Price, if any, as specified in the related Response and (iii) the Specific Redemption Provisions, if any, as specified in the related Response. The Fund has agreed to provide a copy of such Notice of Special Dividend Period to Moody's and Fitch Ratings (and will provide such notice to any Substitute Rating Agency then rating the Preferred Shares). The Fund will not give a Notice of Special Dividend Period, and, if such Notice of Special Dividend Period has been given already, will give telephonic and written notice of its revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the Securities Depository on or prior to the Business Day prior to the relevant Auction Date if (x) either the 1940 Act Preferred Shares Asset Coverage is not satisfied or the Fund fails to maintain Moody's Eligible Assets and Fitch Eligible Assets with an aggregate Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount, on each of the two Valuation Dates immediately preceding the Business Day prior to the relevant Auction Date on an actual basis and on a pro forma basis giving effect to the proposed Special Dividend Period (using as a pro forma dividend rate with respect to such Special Dividend Period the dividend rate which the Broker-Dealers shall advise the Fund is an approximately equal rate for securities similar to the Preferred Shares with an equal dividend period) or (y) sufficient funds for the payment of dividends payable on the immediately succeeding Dividend Payment Date have not been irrevocably deposited with the Auction Agent by the close of business on the third Business Day preceding the Auction Date immediately preceding such Dividend Payment Date. The Fund also shall provide a copy of such Notice of Revocation to Moody's and Fitch Ratings (or any Substitute Rating Agency then rating the Preferred Shares). If the Fund is prohibited from giving a Notice of Special Dividend Period as a result of the factors enumerated in clause (x) or (y) above or if the Fund gives a Notice of Revocation with respect to a Notice of Special Dividend Period, the next succeeding Dividend Period for that series will be a 7-Day Dividend Period. In addition, in the event Sufficient Clearing Bids are not made in an Auction, or if an Auction is not held for any reason, the next succeeding Dividend Period will be a 7-Day Dividend Period, and the Fund may not again give a
Notice of Special Dividend Period (and any such attempted notice will be null and void) until Sufficient Clearing Bids have been made in an Auction with respect to a 7-Day Dividend Period. If an Auction is not held because an unforeseen event or unforeseen events cause a day that otherwise would have been a Dividend Payment Date or an Auction Date not to be a Business Day, then the length of the Dividend Period relating to such Dividend Payment Date shall be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events) (an "Extension Period"), the Applicable Rate for such Extension Period shall be the Applicable Rate for the Dividend Period so extended and the Dividend Payment Date for such Dividend Period shall be the first Business Day next succeeding the end of such Extension Period. Solely for purposes of (1) the foregoing sentence, (2) the proviso in clause (i) of the definition of "Non-Payment Period" under "--Non-Payment Period; Late Charge" below and (3) the second parenthetical in the fifth sentence of the same paragraph in which "Non-Payment Period" is defined, any day on which banks in New York City generally are closed, for any reason, while the New York Stock Exchange remains open for trading and any day which otherwise would be a Business Day as defined in the Amended Bylaws on which the Auction Agent is closed for business, for any reason, shall be considered a day which is not a Business Day.
Determination of Dividend Rate
The dividend rate on a series of Preferred Shares during the period from and including the Date of Original Issue for the Preferred Shares to but excluding the Initial Dividend Payment Date for that series of Preferred Shares (the "Initial Dividend Period") will be the rate per annum set forth on the inside of the front cover page hereof. Commencing on the Initial Dividend Payment Date for a series of Preferred Shares, the Applicable Rate on that series of Preferred Shares for each Subsequent Dividend Period, which Subsequent Dividend Period shall be a period commencing on and including a Dividend Payment Date and ending on and including the calendar day prior to the next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period if there is more than one Dividend Payment Date), shall be equal to the rate per annum that results from the Auction with respect to such Subsequent Dividend Period. Cash dividends shall be calculated as set forth above under "Dividends--General."
Non-Payment Period; Late Charge
A "Non-Payment Period" for a series of Preferred Shares will commence 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 (to the extent permitted as described below) within three 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, the full amount of any dividend on the Preferred Shares payable on such Dividend Payment Date, provided, however, that if the Fund is not able to make such declaration in compliance with the foregoing because an unforeseen event or unforeseen events causes or cause a day that otherwise would have been a Business Day not to be a Business Day, then the Fund may make such declaration on the Business Day immediately preceding the Dividend Payment Date, if possible, or, if not possible, on the Dividend Payment Date, and in such case the Fund shall not be deemed to have failed to declare a dividend otherwise required to be declared, or (ii) deposit, irrevocably in trust, in same-day funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such Dividend Payment Date the full amount of any cash dividend on such shares payable (if declared) on such Dividend Payment Date or (B) on any redemption date for any Preferred Shares called for redemption, the Mandatory Redemption Price per share of such Preferred Shares or, in the case of an optional redemption, the Optional Redemption Price per share. Such Non-Payment Period 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 cash dividends and unpaid redemption prices shall have been so deposited or otherwise shall have been made available to the applicable holders in same-day funds, provided that a Non-Payment Period for the Preferred Shares will not end unless the Fund shall have given at least five days' but no more than 30 days' written notice of such deposit or availability to the Auction Agent, the Securities Depository and all holders of the Preferred Shares of such series. Notwithstanding the foregoing, the failure by the Fund to deposit funds as provided for by
clause (ii) (A) or (ii) (B) above within three Business Days after any Dividend Payment Date or redemption date, as the case may be, in each case to the extent contemplated below, shall not constitute a "Non-Payment Period." The Applicable Rate for each Dividend Period for the Preferred Shares of any series, commencing during a Non-Payment Period, will be equal to the Non-Payment Period Rate; and each Dividend Period commencing after the first day of and during, but not after the end of, a Non-Payment Period shall be a 7-Day Dividend Period. Any dividend on the Preferred Shares due on any Dividend Payment Date for such shares (if, prior to the close of business on the second Business Day preceding such Dividend Payment Date, the Fund has declared such dividend payable on 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 be paid to such persons in the same form of funds by 12:00 noon, New York City time, on any of the first three Business Days after such Dividend Payment Date or due date, as the case may be, provided that such amount is accompanied by a late charge calculated for such period of non-payment at the Non-Payment Period Rate applied to the amount of such non-payment based on the actual number of days comprising such period (excluding any days that would have been Business Days but for the occurrence of any unforeseen event or unforeseen events that caused such days not to be Business Days) divided by 365, and in such case such period shall not constitute a Non-Payment Period; provided, however, that the Fund shall not be required to pay any late charge if it declares a dividend on the Dividend Payment Date or the Business Day immediately preceding such Dividend Payment Date in accordance with clause (i) of the definition of "Non-Payment Period" and deposits payment for such dividend as contemplated by clause (ii)(A) of the definition of "Non-Payment Period" on or before the second Business Day succeeding the day on which the dividend was declared. In the case of a willful failure of the Fund to pay a dividend on a Dividend Payment Date or to redeem any Preferred Shares on the date set for such redemption, the preceding sentence shall not apply, and the Applicable Rate for the Dividend Period commencing during the Non-Payment Period resulting from such failure shall be the Non-Payment Period Rate. For the purposes of the foregoing, payment to a person in same-day funds on any Business Day at any time will be considered equivalent to payment to that person in New York Clearing House (next-day) funds at the same time on the preceding Business Day, and any payment made after 12:00 noon, New York City time, on any Business Day shall be considered to have been made instead in the same form of funds and to the same person before 12:00 noon, New York City time, on the next Business Day. The "Non-Payment Period Rate" initially will be 300% of the applicable Reference Rate, provided that the Board of Trustees shall have the authority to adjust, modify, alter or change from time to time the initial Non-Payment Period Rate if the Board of Trustees determines and each of Moody's and Fitch Ratings (or any Substitute Rating Agency) advise the Fund in writing that such adjustment, modification, alteration or change will not adversely affect its then current rating on the Preferred Shares.
Restrictions on Dividends and Other Payments
Under the 1940 Act, the Fund may not declare dividends or make other distributions on Common Shares or purchase any such shares if, at the time of the declaration, distribution or purchase, as applicable (and after giving effect thereto), asset coverage (as defined in the 1940 Act) with respect to all senior securities, including the outstanding Preferred Shares would be less than 200% (or such other percentage as in the future may be required by law). The foregoing limitations on dividends, other distributions and purchases in certain circumstances may impair the Fund's ability to maintain its qualification as a regulated investment company under the Code. See "Tax Matters." Upon any failure to pay dividends on the Preferred Shares for two years or more, the holders of the Preferred Shares will acquire certain additional voting rights. See "--Voting Rights" below.
For so long as any Preferred Shares are outstanding, 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 Preferred Shares as to dividends or upon liquidation) in respect of Common Shares or any other shares of the Fund ranking junior to or on a parity with the Preferred Shares as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of beneficial interest of the Fund ranking junior to Preferred Shares as to dividends and upon liquidation) or any such parity shares (except by conversion into or exchange for shares of beneficial interest of the Fund ranking junior to or on a parity with Preferred Shares as to dividends and upon liquidation), unless and only if (A) immediately after such transaction, the Fund would have Moody's Eligible Assets and Fitch Eligible Assets each with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount, and the 1940 Act Preferred Shares Asset Coverage (see "--Asset Maintenance" and "--Redemption" below) would be satisfied, (B) full cumulative dividends on the Preferred Shares due on or prior to the date of the transaction have been declared and paid or shall have been declared and sufficient funds for the payment thereof deposited with the Auction Agent and (C) the Fund has redeemed the full number of Preferred Shares required to be redeemed by any provision for mandatory redemption contained in the Amended Bylaws.
Asset Maintenance
The Fund will be required to satisfy two separate asset maintenance requirements under the terms of the Amended Bylaws. These requirements are summarized below.
1940 Act Preferred Shares Asset Coverage
The Fund will be required under the Amended Bylaws to maintain, with respect to the Preferred Shares, as of the last Business Day of each month in which any Preferred Shares are outstanding, the 1940 Act Preferred Shares Asset Coverage. If the Fund fails to maintain the 1940 Act Preferred Shares Asset Coverage and such failure is not cured as of the last Business Day of the following month (the "1940 Act Cure Date"), the Fund will be required under certain circumstances to redeem certain of the Preferred Shares. See "--Redemption" below.
The 1940 Act Preferred Shares Asset Coverage immediately following the issuance of Preferred Shares offered hereby (after giving effect to the deduction of the sales load and offering expenses for the Preferred Shares), computed using the Fund's net assets as of June 11, 2003, and assuming the Preferred Shares had been issued as of such date, will be as follows:
Value of the Fund's total assets less all liabilities
and indebtedness not represented by senior securities $2,572,534,640
------------------------------------------- = ----------- = 286%
Senior securities representing indebtedness plus $ 900,000,000
liquidation value of the Preferred Shares
|
Preferred Shares Basic Maintenance Amount
So long as the Preferred Shares are outstanding and any Rating Agency so requires, the Fund will be required under the Amended Bylaws to maintain as of the last Business Day of each week, or such other date as the Fund and the Rating Agencies may agree to for purposes of determining the Preferred Shares Basic Maintenance Amount (a "Valuation Date"), Moody's Eligible Assets and Fitch Eligible Assets each having in the aggregate a Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount. If the Fund fails to meet such requirement as of any Valuation Date and such failure is not cured on or before the sixth Business Day after such Valuation Date (the "Preferred Shares Basic Maintenance Cure Date"), the Fund will be required in certain circumstances to redeem certain of the Preferred Shares. Upon any failure to maintain the required Discounted Value, the Fund will use its best efforts to alter the composition of its portfolio to retain a Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount on or prior to the Preferred Shares Basic Maintenance Cure Date. See "--Redemption."
The "Preferred Shares Basic Maintenance Amount" as of any Valuation Date is defined as the dollar amount equal to the sum of (i)(A) the product of the number of Preferred Shares outstanding on such date multiplied by $25,000, plus any redemption premium applicable to Preferred Shares then subject to redemption; (B) the
aggregate amount of dividends that will have accumulated at the respective
Applicable Rates (whether or not earned or declared) to (but not including) the
first respective Dividend Payment Dates for each series of Preferred Shares
outstanding that follow such Valuation Date; (C) the aggregate amount of
dividends that would accumulate on shares of each series of Preferred Shares
outstanding from such first respective Dividend Payment Date therefor through
the 49th day after such Valuation Date, at the Maximum Applicable Rate
(calculated as if such Valuation Date were the Auction Date for the Dividend
Period commencing on such Dividend Payment Date) for a 7-Day Dividend Period of
shares of such series to commence on such Dividend Payment Date, multiplied by
the Volatility Factor (except that (1) if such Valuation Date occurs during a
Non-Payment Period, the dividend for purposes of calculation would accumulate
at the current Non-Payment Period Rate and (2) for those days during the period
described in this clause (C) in respect of which the Applicable Rate in effect
immediately prior to such Dividend Payment Date will remain in effect, the
dividend for purposes of calculation would accumulate at such Applicable Rate
in respect of those days); (D) the amount of anticipated expenses of the Fund
for the 90 days subsequent to such Valuation Date; and (E) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(D) (including, without limitation, any payables for
securities purchased as of such Valuation Date and any liabilities incurred for
the purpose of clearing securities transactions) less (ii) the value (i.e., the
face value of cash, short-term securities rated MIG-1, VMIG-1 or P-1 by
Moody's, and short-term securities that are the direct obligation of the U.S.
Government, provided in each case that such securities mature on or prior to
the date upon which any of (i)(A) through (i)(E) becomes payable, otherwise the
Discounted Value) of any of the Fund's assets irrevocably deposited by the Fund
for the payment of any of (i)(A) through (i)(E).
For purposes of determining whether the Fund has Fitch Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of Fitch Eligible Assets that the Fund is obligated to deliver or receive pursuant to an outstanding futures contract or option shall be as follows: (i) assets subject to call options written by the Fund either that are exchange-traded and "readily reversible" or that expire within 49 days after the date as of which such valuation is made shall be valued at the lesser of (A) Discounted Value and (B) the exercise price of the call option written by the Fund; (ii) assets subject to call options written by the Fund not meeting the requirements of clause (i) of this sentence shall have no value; (iii) assets subject to put options written by the Fund shall be valued at the lesser of (A) the exercise price and (B) the Discounted Value of the assets subject to the option; and (iv) where delivery may be made to the Fund with any security of a class of securities, the Fund shall assume that it will take delivery of the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the Fund is obligated to deliver or receive pursuant to an outstanding futures contract or option shall be as follows: (i) assets subject to call options written by the Fund either that are exchange-traded and "readily reversible" or that expire within 49 days after the date as of which such valuation is made shall be valued at the lesser of (A) Discounted Value and (B) the exercise price of the call option written by the Fund; (ii) assets subject to call options written by the Fund not meeting the requirements of clause (i) of this sentence shall have no value; (iii) assets subject to put options written by the Fund shall be valued at the lesser of (A) the exercise price and (B) the Discounted Value of the assets subject to the option; (iv) futures contracts shall be valued at the lesser of (A) the settlement price and (B) the Discounted Value of the assets subject to the futures contract, provided that, if a contract matures within 49 days after the date as of which such valuation is made, where the Fund is the seller the contract may be valued at the settlement price and where the Fund is the buyer the contract may be valued at the Discounted Value of the assets subject to the futures contract; and (v) where delivery may be made to the Fund with any security of a class of securities, the Fund shall assume that it will take delivery of the security with the lowest Discounted Value.
In addition, for purposes of determining whether the Fund has Moody's Eligible Assets and Fitch Eligible Assets each with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the following amounts shall be subtracted from the aggregate Discounted Value of the Moody's
Eligible Assets and Fitch Eligible Assets held by the Fund to the extent the relevant asset is a Moody's Eligible Asset or Fitch Eligible Asset, as applicable: (i) 10% of the exercise price of a written call option; (ii) the exercise price of any written put option; (iii) where the Fund is the seller under a financial futures contract, 10% of the settlement price of the financial futures contract; (iv) where the Fund is the purchaser under a financial futures contract, any amounts payable by the Fund under such financial futures contract; (v) the settlement price of the underlying financial futures contract if the Fund writes put options on a financial futures contract; and (vi) 105% of the Market Value of the underlying financial futures contracts if the Fund writes call options on a financial futures contract and does not own the underlying contract. The Discounted Value of all forward commitments to which the Fund is a party and of all securities deliverable to the Fund pursuant to such forward commitments shall be zero.
The Discount Factors and guidelines for determining the market value of the Fund's portfolio holdings have been based on criteria established in connection with rating the Preferred Shares. These factors include, but are not limited to, the sensitivity of the market value of the relevant asset to changes in interest rates, the liquidity and depth of the market for the relevant asset, the credit quality of the relevant asset (for example, the lower the rating of a debt obligation, the higher the related Discount Factor) and the frequency with which the relevant asset is marked to market. In no event shall the Discounted Value of any asset of the Fund exceed its unpaid principal balance or face amount as of the date of calculation. The Discount Factor relating to any asset of the Fund and the Preferred Shares Basic Maintenance Amount, the assets eligible for inclusion in the calculation of the Discounted Value of the Fund's portfolio and certain definitions and methods of calculation relating thereto may be changed from time to time by the Fund, without shareholder approval, but only in the event the Fund receives written confirmation from Moody's and Fitch Ratings, or any Substitute Rating Agency, that any such changes would not impair the ratings then assigned to the Preferred Shares by Moody's and Fitch Ratings or any such Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the Fund fails to maintain Moody's Eligible Assets or Fitch Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount, the Fund is required to deliver to the Auction Agent and, as applicable, Moody's or Fitch Ratings a report with respect to the calculation of the Preferred Shares Basic Maintenance Amount and the value of its portfolio holdings (a "Preferred Shares Basic Maintenance Report") as of the date of such failure. Additionally, on or before the third Business Day after the first day of a Special Dividend Period, the Fund will deliver a Preferred Shares Basic Maintenance Report to the Auction Agent and each Rating Agency. The Fund also will deliver a Preferred Shares Basic Maintenance Report as of the last Business Day of the last month of each fiscal quarter of the Fund on or before the third Business Day after such day, although the Fund may agree at a later date to provide such a report to one or more of the Rating Agencies as of the last Business Day of each month, rather than on a quarterly basis. Within ten Business Days after delivery of the report relating to the last Business Day of the last fiscal quarter of each fiscal year of the Fund, the Fund will deliver a letter prepared by the Fund's independent accountants regarding the accuracy of the calculations made by the Fund in its most recent Preferred Shares Basic Maintenance Report (and in another Preferred Shares Basic Maintenance Report, randomly selected by the Fund's independent accountants, that was delivered during such fiscal quarter). Also, on or before 5:00 p.m., New York City time, on the first Business Day after any Common Shares are repurchased by the Fund, the Fund will complete and deliver to the Auction Agent and each Rating Agency a Preferred Shares Basic Maintenance Report as of the close of business on such date that Common Shares are repurchased. If any such letter prepared by the Fund's independent accountants shows that an error was made in the most recent Preferred Shares Basic Maintenance Report, the calculation or determination made by the Fund's independent accountants will be conclusive and binding on the Fund.
Redemption
Optional Redemption
To the extent permitted under the 1940 Act and under Massachusetts law, upon giving a notice of redemption, as provided below, the Fund, at its option, may redeem the Preferred Shares, in whole or in part, out
of funds legally available therefor, at the Optional Redemption Price per share on any Dividend Payment Date upon not less than 17 days' and not more than 30 days' prior notice; provided that no Preferred Shares may be redeemed at the option of the Fund during (a) the Initial Dividend Period with respect to the Preferred Shares or (b) a Non-Call Period to which such share is subject. "Optional Redemption Price" means $25,000 per Preferred Share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) to the date fixed for redemption plus any applicable redemption premium, if any, attributable to the designation of a Premium Call Period. The Fund has the authority to redeem the Preferred Shares for any reason and may redeem all or part of the outstanding Preferred Shares if it anticipates that the Fund's leveraged capital structure will result in a lower rate of return to holders of Common Shares for any significant period of time than that obtainable if the Common Shares were unleveraged.
Mandatory Redemption
Under the Amended Bylaws, the Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share, some
or all of the Preferred Shares to the extent permitted under the 1940 Act and
Massachusetts law, on a date fixed by the Board of Trustees, if the Fund fails
to maintain Eligible Assets with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount or to satisfy the
1940 Act Preferred Shares Asset Coverage and such failure is not cured on or
before the Preferred Shares Basic Maintenance Cure Date or the 1940 Act Cure
Date (herein collectively referred to as a "Cure Date"), as the case may be.
"Mandatory Redemption Price" for each series of Preferred Shares means $25,000
per share plus an amount equal to accumulated but unpaid dividends (whether or
not earned or declared) to (but not including) the date fixed for redemption.
The number of Preferred Shares to be redeemed will be equal to the lesser of
(a) the minimum number of Preferred Shares the redemption of which, if deemed
to have occurred immediately prior to the opening of business on the Cure Date,
together with all other preferred shares of beneficial interest of the Fund
subject to redemption or retirement, would result in the Fund having Moody's
Eligible Assets and Fitch Eligible Assets each with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance Amount or
satisfaction of the 1940 Act Preferred Shares Asset Coverage, as the case may
be, on such Cure Date (provided that, if there is no such minimum number of
shares the redemption of which would have such result, all Preferred Shares
then outstanding will be redeemed), and (b) the maximum number of Preferred
Shares, together with all other preferred shares subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor on such redemption date. In determining the number of Preferred Shares
required to be redeemed in accordance with the foregoing, the Fund shall
allocate the number required to be redeemed which would result in the Fund
having Moody's Eligible Assets and Fitch Eligible Assets each with an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount or satisfaction of the 1940 Act Preferred Shares Asset
Coverage, as the case may be, pro rata among Preferred Shares and other
preferred shares of beneficial interest of the Fund subject to redemption
pursuant to provisions similar to those set forth below; provided that
Preferred Shares that may not be redeemed at the option of the Fund because of
the designation of a Non-Call Period applicable to such shares (A) will be
subject to mandatory redemption only to the extent that other shares are not
available to satisfy the number of shares required to be redeemed and (B) will
be selected for redemption in an ascending order of outstanding number of days
in the Non-Call Period (with shares with the lowest number of days to be
redeemed first) and by lot in the event of shares' having an equal number of
days in such Non-Call Period. The Fund is required to effect such a mandatory
redemption not later than 35 days after such Cure Date, except that if the Fund
does not have funds legally available for the redemption of all of the required
number of Preferred Shares which are subject to mandatory redemption or the
Fund otherwise is unable to effect such redemption on or prior to 35 days after
such Cure Date, the Fund will redeem those Preferred Shares which it was unable
to redeem on the earliest practicable date on which it is able to effect such
redemption out of funds legally available therefor.
General
If the Preferred Shares are to be redeemed, a notice of redemption will be mailed to each record holder of such Preferred Shares (initially Cede & Co. as nominee of the Securities Depository) and to the Auction Agent
not less than 17 nor more than 30 days prior to the date fixed for the redemption thereof. Each notice of redemption will include a statement setting forth: (i) the redemption date, (ii) the aggregate number of Preferred Shares to be redeemed, (iii) the redemption price, (iv) the place or places where Preferred Shares are to be surrendered for payment of the redemption price, (v) a statement that dividends on the shares to be redeemed will cease to accumulate on such redemption date and (vi) the provision of the Amended Bylaws pursuant to which such shares are being redeemed. No defect in the notice of redemption or in the mailing or publication thereof will affect the validity of the redemption proceedings, except as required by applicable law.
If fewer than all of the outstanding Preferred Shares are to be redeemed, the shares to be redeemed will, unless otherwise required by the Fund's Amended Bylaws, be selected by lot or such other method as the Fund deems fair and equitable, and the results thereof will be communicated to the Auction Agent. The Auction Agent will give notice to the Securities Depository, whose nominee will be the record holder of all Preferred Shares, and the Securities Depository will determine the number of shares to be redeemed from the account of the Agent Member of each Existing Holder. Each Agent Member will determine the number of shares to be redeemed from the account of each Existing Holder for which it acts as agent. An Agent Member may select for redemption shares from the accounts of some Existing Holders without selecting for redemption any shares from the accounts of other Existing Holders. Notwithstanding the foregoing, if neither the Securities Depository nor its nominee is the record holder of any series of Preferred Shares to be redeemed, the particular shares in such series to be redeemed shall be selected by the Fund by lot or by such other method as the Fund deems fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter deposits in trust with the Auction Agent, or segregates in an account at the Fund's custodian bank for the benefit of the Auction Agent, Deposit Securities (with a right of substitution) having an aggregate Discounted Value equal to the redemption payment for the Preferred Shares as to which notice of redemption has been given, with irrevocable instructions and authority to pay the redemption price to the record holders thereof, then upon the date of such deposit or, if no such deposit is made, upon such date fixed for redemption (unless the Fund defaults in making payment of the redemption price), all rights of the holders of such shares called for redemption will cease and terminate, except the right of such holders to receive the redemption price thereof, but without interest, and such shares no longer will be deemed to be outstanding. The Fund will be entitled to receive, from time to time, the interest, if any, earned on such Deposit Securities deposited with the Auction Agent, and the holders of any shares so redeemed will have no claim to any such interest. Any funds so deposited which are unclaimed at the end of one year from such redemption date will be repaid, upon demand, to the Fund, after which the holders of the Preferred Shares of such series so called for redemption may look only to the Fund for payment thereof.
So long as any Preferred Shares are held of record by the nominee of the Securities Depository (initially Cede & Co.), 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 now 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 Preferred Shares shall be subject to optional redemption unless (i) all dividends in arrears on the outstanding Preferred Shares, and all shares of beneficial interest of the Fund ranking on a parity with the Preferred Shares with respect to the payment of dividends or upon liquidation, have been or are being contemporaneously paid or declared and set aside for payment and (ii) redemption thereof would not result in the Fund's failure to maintain Moody's Eligible Assets and Fitch Eligible Assets each with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
Liquidation Rights
Upon any liquidation, dissolution or winding up of the Fund, whether voluntary or involuntary, the holders of Preferred Shares of each series will be entitled to receive, out of the assets of the Fund available for
distribution to shareholders, before any distribution or payment is made upon any Common Shares or any other shares of beneficial interest of the Fund ranking junior in right of payment upon liquidation of Preferred Shares, $25,000 per share together with the amount of any dividends accumulated but unpaid (whether or not earned or declared) thereon to the date of distribution, and after such payment the holders of Preferred Shares will be entitled to no other payments. If such assets of the Fund are insufficient to make the full liquidation payment on outstanding Preferred Shares and liquidation payments on any other outstanding class or series of preferred shares of the Fund ranking on a parity with the Preferred Shares as to payment upon liquidation, then such assets will be distributed among the holders of Preferred Shares and the holders of shares of such other class or series ratably in proportion to the respective preferential amounts to which they are entitled. After payment of the full amount of the liquidation distribution to which they are entitled, the holders of Preferred Shares will not be entitled to any further participation in any distribution of assets by the Fund. A consolidation, merger or share exchange of the Fund with or into any other entity or entities or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the Fund shall not be deemed or construed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights
Except as otherwise indicated in this prospectus and except as otherwise required by the Declaration, the Amended Bylaws or applicable law, holders of Preferred Shares will be entitled to one vote per share on each matter submitted to a vote of shareholders and will vote together with holders of Common Shares and other preferred shares of beneficial interest of the Fund as a single class.
In connection with the election of the Fund's trustees, holders of the Preferred Shares and any other preferred shares, voting as a separate class, shall be entitled at all times to elect two of the Fund's trustees, and the remaining trustees will be elected by holders of Common Shares and Preferred Shares and any other preferred shares, voting together as a single class. In addition, if at any time dividends on outstanding Preferred Shares are unpaid in an amount equal to at least two full years' dividends thereon and sufficient cash or securities shall not have been deposited with the Auction Agent for the payment of such accumulated dividends, or if at any time holders of any preferred shares are entitled, together with the holders of Preferred Shares, to elect a majority of the trustees of the Fund under the 1940 Act, then the number of trustees constituting the Board of Trustees automatically shall be increased by the smallest number that, when added to the two trustees elected exclusively by the holders of Preferred Shares and any other preferred shares as described above, would constitute a majority of the Board of Trustees 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 until all dividends in arrears have been paid or otherwise provided for, the holders of the Preferred Shares and any other preferred shares, voting as a separate class, will be entitled to elect the smallest number of additional trustees that, together with the two trustees which such holders in any event will be 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, unless otherwise terminated pursuant to the Declaration or the Amended Bylaws. If the Fund thereafter shall pay, or declare and set apart for payment in full, all dividends payable on all outstanding Preferred Shares and any other preferred shares for all past Dividend Periods, the additional voting rights of the holders of Preferred Shares and any other preferred shares as described above shall cease, and the terms of office of all of the additional trustees, if any, elected by the holders of Preferred Shares and any other preferred shares (but not of the trustees with respect to whose election the holders of Common Shares were entitled to vote or the two trustees the holders of Preferred Shares and any other preferred shares have the right to elect in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by holders of outstanding Preferred Shares and any other preferred shares, voting together as one class, will be required to (i) authorize, create or issue any class or series of shares of beneficial interest ranking prior to the Preferred Shares or any other series of preferred shares with respect to the payment of dividends or the distribution of assets on liquidation; provided, however, that no vote is required to authorize the issuance of another series of Preferred Shares or another class of
preferred shares which are substantially identical in all respects to the Preferred Shares or (ii) amend, alter or repeal the provisions of the Declaration or the Amended Bylaws, whether by merger, consolidation or otherwise, so as to adversely affect any of the contract rights expressly set forth in the Declaration or the Amended Bylaws of holders of Preferred Shares or any other preferred shares. To the extent permitted under the 1940 Act, in the event shares of more than one series of Preferred Shares are outstanding, the Fund shall not approve any of the actions set forth in clause (i) or (ii) which adversely affects the contract rights expressly set forth in the Declaration or the Amended Bylaws of a holder of shares of a series of Preferred Shares differently from those of a holder of shares of any other series of Preferred Shares without the affirmative vote of at least a majority of votes entitled to be cast by holders of the Preferred Shares of each series adversely affected and outstanding at such time (each such adversely affected series voting separately as a class). The Board of Trustees, however, without shareholder approval, may amend, alter or repeal any or all of the various Rating Agency guidelines described herein in the event the Fund receives confirmation from Moody's and Fitch Ratings (or any applicable Substitute Rating Agency) that any such amendment, alteration or repeal would not impair the rating then assigned to the Preferred Shares by such Rating Agency. Unless a higher percentage is provided for under the Declaration or the Amended Bylaws, the affirmative vote of a majority of the votes entitled to be cast by holders of outstanding Preferred Shares and any other preferred shares, voting as a separate class, will be required to approve any plan of reorganization (including bankruptcy proceedings) adversely affecting such shares or any action requiring a vote of security holders under Section 13(a) of the 1940 Act including, among other things, changes in the investment restrictions described as fundamental policies under "Investment Restrictions" in the Statement of Additional Information. To the extent permitted under the 1940 Act, in the event shares of more than one series of Preferred Shares are outstanding, with respect to any action requiring shareholder approval pursuant to the operation of Section 2 or Section 3 of Article V of the Declaration, the affirmative vote of at least seventy-five percent of the Preferred Shares of each series outstanding at such time (each such series voting separately as a class) shall also be required. The class (and, where applicable, series) vote of holders of Preferred Shares and any other preferred shares described above in each case will be in addition to a separate vote of the requisite percentage of Common Shares and Preferred Shares and any other preferred shares, voting together as a single class, necessary to authorize the action in question. See "Anti-Takeover and Other Provisions in the Declaration of Trust."
The foregoing voting provisions will not apply to the Preferred Shares if, at or prior to the time when the act with respect to which such vote otherwise would be required shall be effected, such shares shall have been (i) redeemed or (ii) called for redemption and sufficient funds shall have been deposited in trust to effect such redemption.
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 Manager and PIMCO. There are currently three Trustees of the Fund, none of whom is currently treated by the Fund as an "interested person" (as defined in the 1940 Act). 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 Manager
The Manager serves as the investment manager of the Fund. Subject to the supervision of the Board of Trustees, the Manager is responsible for managing, either directly or through others selected by it, the investment activities of the Fund and the Fund's business affairs and other administrative matters. The Manager is located at 1345 Avenue of the Americas, New York, New York 10105.
Organized in 2000 as a subsidiary successor in the restructuring of a business originally organized in 1987, the Manager provides investment management and advisory services to several closed-end and open-end investment company clients. As of March 31, 2003, the Manager had approximately $17.7 billion in assets under management. Allianz Dresdner Asset Management of America L.P. is the direct parent company of PIMCO Advisors Retail Holdings LLC, of which the Manager is a wholly-owned subsidiary. As of March 31, 2003, Allianz Dresdner Asset Management of America L.P. and its subsidiary partnerships, including PIMCO, had approximately $390 billion in assets under management.
The Manager has retained its affiliate, PIMCO, to manage the Fund's investments. See "--Portfolio Manager" below. The Manager and PIMCO are each majority-owned indirect subsidiaries of Allianz AG, a publicly traded German insurance and financial services company.
Portfolio Manager
PIMCO serves as the portfolio manager for the Fund. Subject to the supervision of the Manager, PIMCO has full investment discretion and makes all determinations with respect to the investment of the Fund's assets.
PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660. Organized in 1971, PIMCO provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds. As of March 31, 2003, PIMCO had approximately $323 billion in assets under management.
The Manager (and not the Fund) will pay a portion of the fees it receives to PIMCO in return for PIMCO's services, at the annual rate of 0.3575% of the Fund's average daily net assets (including assets attributable to any Preferred Shares that may be outstanding) for the period from the commencement of Fund operations through April 31, 2008 (i.e., roughly the first five years of Fund operations) (the "Initial Period") and at the annual rate of 0.50% of such average daily net assets thereafter while the Investment Management Agreement remains in effect (the "Remaining Period"). PIMCO has also agreed to reimburse the Manager for 65% of the fees that the Manager pays to certain underwriters in connection with the offering of the Common Shares.
Bill Gross, a founder of PIMCO, serves as Managing Director and Chief Investment Officer of PIMCO. In his role as Chief Investment Officer, he serves as the head of the Investment Committee, which oversees setting investment policy decisions, including duration positioning, yield curve management, sector rotation, credit quality and overall portfolio composition, for all PIMCO portfolios and strategies, including the Fund. The following individuals at PIMCO share primary responsibility for the day-to-day portfolio management of the Fund:
Name Since Recent Professional Experience
---- ----- ------------------------------
Raymond G. Kennedy, CFA 2003 Mr. Kennedy is a Managing Director, portfolio manager and
(Inception) senior member of PIMCO's investment strategy group. He
also manages high yield funds and oversees bank loan trading
and collateralized debt obligations. Mr. Kennedy joined
PIMCO in 1996, having previously been associated with the
Prudential Insurance Company of America as a private
placement asset manager, where he was responsible for
investing and managing a portfolio of investment grade and
high yield privately placed fixed income securities. Prior to
that, he was a consultant for Arthur Andersen in Los Angeles
and London. He has 16 years of investment management
experience and holds a bachelor's degree from Stanford
University and an MBA from the Anderson Graduate School
of Management at the University of California, Los Angeles.
Mr. Kennedy is also a member of LSTA.
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Name Since Recent Professional Experience
---- ----- ------------------------------
David C. Hinman, CFA 2003 Mr. Hinman is an Executive Vice President and portfolio
(Inception) manager at PIMCO. He focuses on high yield corporate bonds
and co-manages high yield funds and structured-credit
products at PIMCO. He joined PIMCO in 1995, having been
previously associated with Merrill Lynch & Co. in New York,
where he underwrote high yield corporate bonds. Prior to that,
he was a credit analyst with First Union Corporation. Mr.
Hinman has 11 years of investment management experience
and holds a bachelor's degree in Finance from the University
of Alabama and an MBA in Finance and Accounting from
The Wharton School at the University of Pennsylvania.
Charles Wyman....... 2003 Mr. Wyman is an Executive Vice President and the director of
(Inception) credit research. Mr. Wyman joined the firm in 2001 from
Morgan Stanley, where he was a principal and the senior
telecom analyst in high yield. He previously covered the
energy sector in high yield at Morgan Stanley and was ranked
second in Institutional Investor's annual poll for 1999 and
2000. Prior to Morgan Stanley, Mr. Wyman spent 10 years at
Lehman Brothers in mergers and acquisitions, corporate
finance, and equity capital markets, and as an analyst for oil
exploration and production companies. He has 18 years of
investment experience and holds a bachelor's degree from
Harvard University and an MBA from Harvard Business
School.
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Mr. Kennedy oversees Messrs. Hinman and Wyman regarding the management of the Fund.
Investment Management Agreement
Pursuant to an investment management agreement between the Manager and the Fund (the "Investment Management Agreement"), the Fund has agreed to pay the Manager an annual management fee payable on a monthly basis at the annual rate of 0.70% of the Fund's average daily net assets (including net assets attributable to Preferred Shares) for the services and facilities it provides.
In addition to the fees of the Manager, the Fund pays all other costs and expenses of its operations, including compensation of its Trustees (other than those affiliated with the Manager), custodial expenses, shareholder servicing expenses, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any Preferred Shares, expenses of preparing, printing and distributing prospectuses, shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.
Because the fees received by the Manager are based on the total net assets of the Fund (including assets attributable to Preferred Shares and any leverage created thereby), the Manager has a financial incentive for the Fund to issue Preferred Shares, which may create a conflict of interest between the Manager and the holders of the Common Shares.
NET ASSET VALUE
The net asset value ("NAV") of the Fund equals the total value of the Fund's portfolio investments and other assets, less any liabilities. For purposes of calculating NAV, portfolio securities and other assets for which market quotes are available are stated at market value. Market value is generally determined on the basis of the last reported sales price (or the NASDAQ Official Closing Price for NASDAQ-reported securities) or, if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or pricing services. Certain securities or investments for which market quotations are not readily available may be valued, pursuant to guidelines established by the Board of Trustees, with reference to other securities or indexes. For instance, a pricing service may recommend a fair market value based on prices of comparable securities. Short-term investments having a maturity of 60 days or less are generally valued at amortized cost. Exchange traded options, futures and options on futures are valued at the settlement price determined by the exchange. Other securities for which market quotes are not readily available are valued at fair value as determined in good faith by the Board of Trustees or persons acting at their direction.
The NAV of the Fund will be determined as of the close of regular trading on the New York Stock Exchange (normally 4:00 p.m., Eastern time) (the "NYSE Close") on each day the New York Stock Exchange is open. Domestic debt securities and foreign securities are normally priced using data reflecting the earlier closing of the principal markets for those securities. Information that becomes known to the Fund or its agent after the Fund's NAV has been calculated on a particular day will not be used to retroactively adjust the price of a security or the Fund's NAV determined earlier that day.
Investments initially valued in currencies other than the U.S. dollar are converted to U.S. dollars using exchange rates obtained from pricing services. As a result, the NAV of the Fund's shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The value of securities traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be affected significantly on a day that the New York Stock Exchange is closed.
In unusual circumstances, instead of valuing securities in the usual manner, the Fund may value securities at fair value as determined in good faith by the Board of Trustees, generally based upon recommendations provided by PIMCO. Fair valuation also may be required because of material events that occur after the close of the relevant market but prior to the NYSE Close.
TAX MATTERS
Federal Income Tax Matters
The following federal income tax discussion is based on the advice of Ropes & Gray LLP, counsel to the Fund, and reflects provisions of the Code, existing Treasury regulations, rulings published by the IRS, and other applicable authority, as of the date of this prospectus. These authorities are subject to change by legislative or administrative action, possibly with retroactive effect. The following discussion is only a summary of some of the important tax considerations generally applicable to investments in the Fund. For more detailed information regarding tax considerations, see the Statement of Additional Information. There may be other tax considerations applicable to particular investors. In addition, income earned through an investment in the Fund may be subject to state, local and foreign taxes.
The Fund intends to qualify each year for taxation as a regulated investment company eligible for treatment under the provisions of Subchapter M of the Code. If the Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends or capital gain distributions.
In order for any portion of any distributions to holders of Preferred Shares to be eligible to be treated as capital gain dividends, the Preferred Shares must be treated as equity for federal income tax purposes. Based in part on certain representations made by the Fund to Ropes & Gray LLP relating to the lack of any present intention to redeem or purchase Preferred Shares at any time in the future, it is the opinion of Ropes & Gray LLP that the Preferred Shares will constitute equity for federal income tax purposes. This opinion relies in part on a published ruling of the IRS stating that certain auction rate preferred stock similar in many material respects to the Preferred Shares represents equity. The opinion of Ropes & Gray LLP represents only its best legal judgment and is not binding on the IRS or the courts. If the IRS were to assert successfully that variable rate preferred stock such as the Preferred Shares should be treated as debt for federal income tax purposes, distributions on Preferred Shares (including distributions designated by the Fund as capital gain dividends) would be taxable as ordinary income (as opposed to capital gains). Ropes & Gray LLP has advised the Fund that, should the IRS pursue in court the position that the Preferred Shares should be treated as debt for federal income tax purposes, the IRS would be unlikely to prevail.
The IRS currently requires that a regulated investment company that has two or more classes of stock allocate to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains) based upon the percentage of total dividends distributed to each class for the tax year. Accordingly, the Fund intends each year to allocate capital gain dividends between and among its Common Shares and any series of its Preferred Shares in proportion to the total dividends paid to each class with respect to such tax year. Dividends qualifying and not qualifying for (a) treatment as qualified dividend income and (b) the dividends received deduction, if any, will similarly be allocated between and among any such classes.
Existing authorities do not specifically address whether dividends that are paid following the close of a taxable year, but that are treated for tax purposes as derived from the income of such prior taxable year, are treated as dividends paid during such prior taxable year for purposes of determining each class's proportionate share of a particular type of income. The Fund currently intends to treat such dividends as having been paid in the prior taxable year for purposes of determining each class's proportionate share of a particular type of income with respect to such prior taxable year. Existing authorities also do not specifically address the allocation of taxable income among the dividends paid to holders of a class of shares during or with respect to a taxable year. It is possible that the IRS could disagree with the Fund's position concerning the treatment of dividends paid after the close of a taxable year or with the Fund's method of allocation, in which case the IRS could attempt to recharacterize a portion of the dividends paid to the holders of Preferred Shares. If the IRS were to prevail with respect to any such attempted recharacterization, holders of Preferred Shares could be subject to additional tax on amounts so recharacterized and the Fund could be subject to federal income and excise tax.
To satisfy the distribution requirement applicable to regulated investment companies, amounts paid as dividends by the Fund to its shareholders, including holders of Preferred Shares, must qualify for the dividends-paid deduction. In certain circumstances, the IRS could take the position that dividends paid on the Preferred Shares constitute preferential dividends under Section 562(c) of the Code, and thus do not qualify for the dividends-paid deduction. The Fund believes this position, if asserted, would be unlikely to prevail.
If at any time when Preferred Shares are outstanding the Fund does not meet applicable asset coverage requirements, it will be required to suspend distributions to Common Shareholders until the requisite asset coverage is restored. Any such suspension may cause the Fund to pay a 4% federal excise tax (imposed on regulated investment companies that fail to distribute for a given calendar year, generally, at least 98% of their net investment income and capital gain net income) and income tax on undistributed income or gains, and may, in certain circumstances, prevent the Fund from qualifying for treatment as a regulated investment company. The Fund may redeem Preferred Shares in an effort to comply with the distribution requirement applicable to regulated investment companies and to avoid income and excise taxes. The Fund may have to dispose of portfolio securities to generate cash for such redemptions, which may result in transaction expenses and gain at the Fund level and in further distributions.
The Fund's investments in certain debt obligations may cause the Fund to recognize taxable income in excess of the cash generated by such obligations. Thus, the Fund could be required at times to liquidate other investments in order to satisfy its distribution requirements.
For federal income tax purposes, distributions of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the Fund owned the investments that generated them, rather than how long a shareholder has owned his or her shares. Distributions of net capital gains from the sale of investments that the Fund owned for more than one year and that are properly designated by the Fund as capital gain dividends will be taxable as long-term capital gains. Distributions of gains from the sale of investments that the Fund owned for one year or less will be taxable as ordinary income. For taxable years beginning on or before December 31, 2008, distributions of investment income designated by the Fund as derived from qualified dividend income will be taxed in the hands of individuals at the rates applicable to long-term capital gain provided holding period and other requirements are met at both the shareholder and Fund levels. The Fund does not expect a significant portion of Fund distributions to be derived from qualified dividend income.
Distributions are taxable to shareholders even if they are paid from income or gains earned by the Fund before a shareholder's investment (and thus were included in the price the shareholder paid). Any gain resulting from the sale or exchange of Fund shares generally will be taxable as capital gains.
Long-term capital gain rates applicable to individuals have been temporarily reduced--in general, to 15% with lower rates applying to taxpayers in the 10% and 15% rate brackets--for taxable years beginning on or before December 31, 2008.
The Fund's investments in foreign securities may be subject to foreign withholding taxes. In that case, the Fund's yield on those securities would be decreased. Shareholders generally will not be entitled to claim a credit or deduction with respect to foreign taxes. In addition, the Fund's investments in foreign securities or foreign currencies may increase or accelerate the Fund's recognition of ordinary income and may affect the timing or amount of the Fund's distributions.
Under current law, the backup withholding tax rate is 28% for amounts paid through 2010 and will be 31% for amounts paid after December 31, 2010. The Fund may be required to apply backup withholding to taxable distributions or redemption proceeds payable to a shareholder. Please see "Tax Matters" in the Statement of Additional Information for additional information about backup withholding tax rates.
If, in connection with the designation of a Special Dividend Period, (i) the Fund provides in a Notice of Special Dividend Period that the Fund may redeem all or part of a series of Preferred Shares and that upon such redemption the holders of that series of Preferred Shares may receive a premium in addition to receipt of a redemption price per share equal to the sum of $25,000 plus an amount equal to the accumulated but unpaid dividends thereon during the whole or any part of the Special Dividend Period, (ii) based on all the facts and circumstances at the time of the designation of the Special Dividend Period the Fund is more likely than not to redeem such series of Preferred Shares during the Special Dividend Period, and (iii) the premium to be paid upon redemption during such Special Dividend Period exceeds a specified de minimis amount, it is possible that the holders of such series will be required to accrue the premium as a dividend (to the extent of the Fund's earnings and profits).
This section relates only to federal income tax consequences of investing in the Fund; the consequences under other tax laws may differ. You should consult your tax adviser as to the possible application of foreign, state and local income tax laws to Fund distributions. Please see "Tax Matters" in the Statement of Additional Information for additional information regarding the tax aspects of investing in the Fund.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the laws of The Commonwealth of Massachusetts by the Declaration. The Declaration provides that the Board of Trustees of the Fund may authorize separate classes of shares of beneficial interest. The Board of Trustees has authorized an unlimited number of common shares of beneficial interest and preferred shares of beneficial interest. Preferred shares (such as the Preferred Shares) may be issued in one or more series, with such par value and with such rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders. For a description of the Preferred Shares, see "Description of Preferred Shares." The following table shows the amount of (i) shares authorized and (ii) shares outstanding, for each class of authorized securities of the Fund as of June 11, 2003.
Amount Amount
Title of Class Authorized Outstanding
-------------- ---------- -----------
Common Shares... Unlimited 113,906,981
Preferred Shares
Series M..... 7,200* 0
Series T..... 7,200* 0
Series W..... 7,200* 0
Series TH.... 7,200* 0
Series F..... 7,200* 0
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Holders of Common Shares are entitled to share equally in dividends declared by the Board of Trustees payable to holders of Common Shares and in the net assets of the Fund available for distribution to holders of Common Shares after payment of the preferential amounts payable to holders of any outstanding preferred shares of beneficial interest. Neither holders of Common Shares nor holders of preferred shares have pre-emptive or conversion rights or give shareholders the right to cause the Fund to redeem their shares. Upon liquidation of the Fund, after paying or adequately providing for the payment of all liabilities of the Fund and the liquidation preference with respect to any outstanding preferred shares, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining assets of the Fund among the holders of the Common Shares.
Pursuant to the Fund's Dividend Reinvestment Plan, all Common Shareholders whose shares are registered in their own names will have all dividends, including any capital gain dividends, reinvested automatically in additional Common Shares by PFPC Inc., as agent for the Common Shareholders, unless the shareholder elects to receive cash. The Fund and PFPC Inc. reserve the right to amend or terminate the Dividend Reinvestment Plan.
Holders of Common Shares are entitled to one vote for each share held and will vote with the holders of any outstanding Preferred Shares or other preferred shares on each matter submitted to a vote of holders of Common Shares, except as described under "Description of Preferred Shares--Voting Rights" and except as otherwise required by the Declaration, the Amended Bylaws or applicable law.
Preferred shareholders are entitled to one vote for each share held. Except as provided under "Description of Preferred Shares--Voting Rights" and except as otherwise required by the Declaration, the Amended Bylaws or applicable law, holders of Preferred Shares are (voting as a separate class) entitled to elect two trustees, and the remaining trustees shall be elected by holders of Common Shares and Preferred Shares, voting as a single class.
So long as any Preferred Shares or any other preferred shares are outstanding, holders of Common Shares will not be entitled to receive any dividends of or other distributions from the Fund, unless at the time of such declaration, (1) all accrued dividends on Preferred Shares or accrued interest on borrowings has been paid and (2)
the value of the Fund's total assets (determined after deducting the amount of such dividend or other distribution), less all liabilities and indebtedness of the Fund not represented by senior securities, is at least 300% of the aggregate amount of senior securities representing indebtedness and at least 200% of the aggregate amount of senior securities representing indebtedness plus the aggregate liquidation value of the outstanding preferred shares (expected to equal the aggregate original purchase price of the outstanding preferred shares plus the redemption premium, if any, together with any accrued and unpaid dividends thereon, whether or not earned or declared and on a cumulative basis). In addition to the requirements of the 1940 Act, the Fund is required to comply with other asset coverage requirements as a condition of the Fund obtaining a rating of the Preferred Shares from a Rating Agency. These requirements include an asset coverage test more stringent than under the 1940 Act. See "Description of Preferred Shares--Dividends--Restrictions on Dividends and Other Payments."
The Fund will send unaudited reports at least semi-annually and audited financial statements annually to all of its shareholders.
Common Shares of the Fund commenced trading on the New York Stock Exchange on April 25, 2003. At June 11, 2003, the net asset value per share of Common Shares was $14.77, and the closing price per share of Common Shares on the New York Stock Exchange was $15.11. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Other Issues Relating to Preferred Shares
Under the 1940 Act, the Fund is permitted to have outstanding more than one series of preferred shares of beneficial interest as long as no single series has priority over another series as to the distribution of assets of the Fund or the payment of dividends. Neither holders of Common Shares nor holders of preferred shares have pre-emptive rights to purchase any Preferred Shares or any other preferred shares that might be issued. It is anticipated that the net asset value per Preferred Share will equal its original purchase price per share plus accumulated dividends per share.
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST
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. The Fund's Trustees are divided into three classes. At each annual meeting of shareholders, the term of one class will expire and each Trustee elected to that class will hold office for a term of three years. The classification of the Board of Trustees in this manner could delay for an additional year the replacement of a majority of the Board of Trustees. In addition, the Declaration provides that a Trustee may be removed only for cause and only (i) by action of at least seventy-five percent (75%) of the outstanding shares of the classes or series of shares entitled to vote for the election of such Trustee, or (ii) by at least seventy-five percent (75%) of the remaining Trustees.
As described below, the Declaration grants special approval rights with respect to certain matters to members of the Board who qualify as "Continuing Trustees," which term means a Trustee who either (i) has been a member of the Board for a period of at least thirty-six months (or since the commencement of the Fund's operations, if less than thirty-six months) or (ii) was nominated to serve as a member of the Board of Trustees by a majority of the Continuing Trustees then members of the Board.
The Declaration requires the affirmative vote or consent of at least seventy-five percent (75%) of the Board of Trustees and holders of at least seventy-five percent (75%) of the Fund's shares (including Common and Preferred Shares) to authorize certain Fund transactions not in the ordinary course of business, including a merger or consolidation, issuance or transfer by the Fund of the Fund's shares (except as may be pursuant to a public offering or the Fund's dividend reinvestment plan or upon exercise of any stock subscription rights), a
sale, transfer or other disposition of Fund assets, or any shareholder proposal regarding specific investment decisions, unless the transaction is authorized by both a majority of the Trustees and seventy-five percent (75%) of the Continuing Trustees (in which case no shareholder authorization would be required by the Declaration, but might be required in certain cases under the 1940 Act). The Declaration also requires the affirmative vote or consent of holders of at least seventy-five percent (75%) of each class of the Fund's shares entitled to vote on the matter to authorize a conversion of the Fund from a closed-end to an open-end investment company, unless the conversion is authorized by both a majority of the Trustees and seventy-five percent (75%) of the Continuing Trustees (in which case shareholders would have only the minimum voting rights required by the 1940 Act with respect to the conversion). Also, the Declaration provides that the Fund may be terminated at any time by vote or consent of at least seventy-five percent (75%) of the Fund's shares or, alternatively, by vote or consent of both a majority of the Trustees and seventy-five percent (75%) of the Continuing Trustees. See "Anti-Takeover and Other Provisions in the Declaration of Trust" in the Statement of Additional Information for a more detailed summary of these provisions.
The Trustees may from time to time grant other voting rights to shareholders with respect to these and other matters in the Amended Bylaws, certain of which are required by the 1940 Act. For example, the Amended Bylaws grant holders of Preferred Shares and any other preferred shares special voting rights with respect to certain matters described in the preceding paragraph. See "Description of Preferred Shares--Voting Rights."
The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control of the Fund by a third party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objectives and policies. The provisions of the Declaration described above could have the effect of discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund.
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Declaration and the Amended Bylaws, both of which are on file with the Securities and Exchange Commission.
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.
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. Shares of a closed-end investment company may frequently trade at prices lower than net asset value. The Board of Trustees regularly monitors the relationship between the market price and net asset value of the Common Shares. If the Common Shares were to trade at a substantial discount to net asset value for an extended period of time, the Board may consider the repurchase of its Common Shares on the open market or in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company. The Fund cannot assure you that the Board of Trustees will decide to take or propose any of these actions.
If the Fund were to convert to an open-end company, it would be required to redeem all preferred shares (including the Preferred Shares) then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Common Shares would no longer be listed on the New York Stock Exchange. In contrast to shareholders of 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 their net asset value, less any redemption charge that is in effect at the time of redemption.
Before deciding whether to take any action to convert the Fund to an open-end investment company, the Board of Trustees would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken. See the Statement of Additional Information under "Repurchase of Common Shares; Conversion to Open-End Fund" for a further discussion of possible action to reduce or eliminate such discount to net asset value.
UNDERWRITING
Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and UBS Securities LLC are acting as the Underwriters. Subject to the terms and conditions stated in the Fund's underwriting agreement dated June 23, 2003, each Underwriter named below has severally agreed to purchase, and the Fund has agreed to sell to such Underwriter, the number of Preferred Shares set forth opposite the name of such Underwriter.
Number of Preferred Shares
---------------------------------------------
Underwriters Series M Series T Series W Series TH Series F
------------ -------- -------- -------- --------- --------
Citigroup Global Markets Inc......... 3,600 3,600 3,600 3,600 3,600
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............. 1,800 1,800 1,800 1,800 1,800
UBS Securities LLC................... 1,800 1,800 1,800 1,800 1,800
----- ----- ----- ----- -----
Total......................... 7,200 7,200 7,200 7,200 7,200
===== ===== ===== ===== =====
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The underwriting agreement provides that the obligations of the Underwriters to purchase the Preferred Shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The Underwriters are obligated to purchase all the Preferred Shares if they purchase any of the Preferred Shares.
The Underwriters propose to offer some of the Preferred Shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the Preferred Shares to dealers at the public offering price less a concession not to exceed $137.50 per Preferred Share. The sales load the Fund will pay of $250 per share is equal to 1.0% of the initial offering price. The Underwriters may allow, and such dealers may reallow, a concession not to exceed $37.50 per Preferred Share on sales to certain other dealers. After the initial public offering, the Underwriters may change the public offering price and the other selling terms. Investors must pay for any Preferred Shares purchased on or before June 26, 2003.
The Fund and the Manager have each agreed to indemnify the several Underwriters or contribute to losses arising out of certain liabilities, including liabilities under the Securities Act.
In addition, the Fund has agreed to reimburse the Underwriters for certain expenses incurred by the Underwriters in the offering.
The Fund anticipates that the Underwriters may from time to time act as brokers or dealers in connection with the execution of the Fund's portfolio transactions after they have ceased to be Underwriters. The Fund
anticipates that the Underwriters or their respective affiliates may from time to time act in auctions as Broker-Dealers and receive fees as described under "Description of Preferred Shares." The Underwriters are active underwriters of, and dealers in, securities and act as market makers in a number of such securities, and therefore, subject to certain restrictions, can be expected to engage in portfolio transactions with, and perform services for, the Fund.
The principal business address of Citigroup Global Markets Inc. is 388 Greenwich Street, New York, New York 10013.
CUSTODIAN AND TRANSFER AGENTS
The custodian of the assets of the Fund is State Street Bank and Trust Co., 801 Pennsylvania, Kansas City, Missouri 64105. The Custodian performs custodial and fund accounting services.
Deutsche Bank Trust Company Americas, 60 Wall Street, 27th Floor, New York, New York 10005, serves as Auction Agent, transfer agent, registrar, dividend paying agent and redemption agent for the Preferred Shares. PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as the transfer agent, registrar, dividend disbursement agent and shareholder servicing agent for the Common Shares, as well as agent for the Fund's Dividend Reinvestment Plan for Common Shares.
LEGAL MATTERS
Certain legal matters in connection with the Preferred Shares will be passed upon for the Fund by Ropes & Gray LLP, Boston, Massachusetts, and for the Underwriters by Simpson Thacher & Bartlett LLP, New York, New York. Simpson Thacher & Bartlett LLP may rely as to certain matters of Massachusetts law on the opinion of Ropes & Gray LLP.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds.................................................. 3 Investment Objectives and Policies............................... 3 Investment Restrictions.......................................... 44 Management of the Fund........................................... 46 Investment Manager and Portfolio Manager......................... 56 Portfolio Transactions........................................... 61 Distributions.................................................... 63 Description of Shares............................................ 63 Anti-Takeover and Other Provisions in the Declaration of Trust... 64 Repurchase of Common Shares; Conversion to Open-End Fund......... 66 Tax Matters...................................................... 68 Performance Related and Comparative Information.................. 76 Custodian, Transfer Agents and Dividend Disbursement Agents...... 77 Independent Accountants.......................................... 77 Counsel.......................................................... 77 Registration Statement........................................... 77 Financial Statements............................................. 79 Appendix A--Auction Procedures................................... A-1 Appendix B--Settlement Procedures................................ B-1 |
GLOSSARY
"'AA' Financial Composite Commercial Paper Rate" on any date means (i) (A)
the Interest Equivalent of the 7-day rate (in the case of a Dividend Period
which is a 7-Day Dividend Period or shorter), the 30-day rate (for Dividend
Periods of greater than 7 days but fewer than or equal to 31 days), the 60-day
rate (for Dividend Periods greater than 31 days but fewer than or equal to 61
days) and the 90-day rate (for Dividend Periods greater than 61 days but fewer
than or equal to 91 days) on commercial paper on behalf of issuers whose
corporate bonds are rated AA by S&P, or the equivalent of such rating by
another NRSRO, as announced by the Federal Reserve Bank of New York for the
close of business on the Business Day immediately preceding such date; and (B)
for Dividend Periods greater than 91 days but fewer than 184 days, the rate
described in clause (ii) below; or (ii) if the Federal Reserve Bank of New York
does not make available such a rate, or with respect to Dividend Periods
greater than 91 days but fewer than 184 days, 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 one-thousandth
(0.001) of 1%). If any Commercial Paper Dealer does not quote a rate required
to determine the "AA" Financial 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 each of (1) Citigroup
Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated; (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 (0.001) 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.
"ADR" has the meaning set forth in paragraph (iii) of the definition of "Fitch Eligible Assets."
"Agent Member" means a member of the Securities Depository that will act on behalf of a Beneficial Owner of one or more Preferred Shares or on behalf of a Potential Beneficial Owner.
"Amended Bylaws" means the Bylaws of the Fund as amended and restated June 20, 2003, specifying, in part, the powers, preferences and rights of the Preferred Shares.
"Applicable Percentage" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in this prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are payable on Preferred Shares for any Dividend Period.
"Approved Foreign Nations" has the meaning set forth in paragraph (iii) of the definition of "Fitch Eligible Assets."
"Approved Price" means the "fair value" as determined by the Fund in accordance with the valuation procedures adopted from time to time by the Board of Trustees and for which the Fund receives a mark-to-market price (which, for the purpose of clarity, shall not mean Market Value) from an independent source at least semi-annually.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agency Agreement" means the agreement entered into between the Fund and the Auction Agent which provides, among other things, that the Auction Agent will follow the Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and until another commercial bank, trust company or other financial institution appointed by a resolution of the Board of Trustees or a duly authorized committee thereof enters into an agreement with the Fund to follow the Auction Procedures for the purpose of determining the Applicable Rate and to act as transfer agent, registrar, dividend paying agent and redemption agent for the Preferred Shares.
"Auction Date" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Auction Date" in this prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth in Appendix A to the Statement of Additional Information.
"Available Preferred Shares" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" in this prospectus.
"Bank Loans" means direct purchases of, assignments of, participations in and other interests in (a) any bank loan or (b) any loan made by an investment bank, investment fund or other financial institution, provided that such loan under this clause (b) is similar to those typically made, syndicated, purchased or participated by a commercial bank or institutional loan investor in the ordinary course of business.
"Beneficial Owner" 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 Preferred Shares or a Broker-Dealer that holds Preferred Shares for its own account.
"Bid" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in this prospectus.
"Bidder" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in this prospectus.
"Board of Trustees" or "Board" means the board of trustees of the Fund.
"Broker-Dealer" has the meaning specified under "Description of Preferred Shares--The Auction--Broker-Dealer Agreements" in this prospectus.
"Broker-Dealer Agreement" has the meaning specified under "Description of Preferred Shares--The Auction--Broker-Dealer Agreements" in this prospectus.
"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 New York City are authorized or obligated by law to close.
"Canadian Bonds" has the meaning set forth in paragraph (vi) of the definition of "Fitch Eligible Assets."
"Closing Transactions" has the meaning set forth in the definition of "Fitch Hedging Transactions."
"Code" has the meaning specified under "Summary--Federal Income Taxation" in this prospectus.
"Commercial Paper Dealers" has the meaning set forth in the definition of "'AA' Financial Composite Commercial Paper Rate."
"Common Shareholders" means the holders of Common Shares.
"Common Shares" means the common shares of beneficial interest, par value $0.00001 per share, of the Fund.
"Cure Date" has the meaning specified under "Description of Preferred Shares--Redemption--Mandatory Redemption" in this prospectus.
"Date of Original Issue" means, with respect to any Preferred Share, the date on which the Fund first issues such share.
"Debt Securities" has the meaning set forth in paragraph (vi) of the definition of "Fitch Eligible Assets."
"Declaration" has the meaning specified under "Summary--Special Risk Considerations--Anti-Takeover Provisions" in this prospectus.
"Deposit Securities" means cash and portfolio securities rated at least A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Moody's Discount Factor or a Fitch Discount Factor, as applicable.
"Discounted Value" of any asset of the Fund means the quotient of the Market Value of an Eligible Asset divided by the applicable Discount Factor, provided that with respect to an Eligible Asset that is currently callable, the Discounted Value will be equal to the quotient as calculated above or the call price, whichever is lower, and that with respect to an Eligible Asset that is prepayable, Discounted Value will be equal to the quotient as calculated above or the par value, whichever is lower.
"Dividend Payment Date" has the meaning specified under "Description of Preferred Shares--Dividends--General" in this prospectus.
"Dividend Period" has the meaning specified under "Description of Preferred Shares--Dividends--General" in this prospectus.
"Eligible Asset" means a Fitch Eligible Asset (if Fitch Ratings is then rating the Preferred Shares), a Moody's Eligible Asset (if Moody's is then rating the Preferred Shares) and/or any asset included in the calculations used by any Rating Agency then rating the Preferred Shares for purposes of determining such Rating Agency's rating on the Preferred Shares, as applicable.
"Existing Holder" means a Broker-Dealer or any such other person as may be permitted by the Fund that is listed as the holder of record of Preferred Shares in the records of the Auction Agent.
"Extension Period" has the meaning specified under "Description of Preferred Shares--Dividends--Notification of Dividend Period" in this prospectus.
"FHLB, FNMA and FFCB Debentures" has the meaning set forth in paragraph
(viii) of the definition of "Moody's Eligible Assets."
"Fitch Discount Factor" means, for purposes of determining the Discounted Value of any Fitch Eligible Asset, the percentage determined as follows. The Fitch Discount Factor for any Fitch Eligible Asset other than the securities set forth below will be the percentage provided in writing by Fitch Ratings.
(i) Debt Securities: The percentage determined by reference to the rating of the Debt Security with reference to the remaining term to maturity of the Debt Security, in accordance with the table set forth below.
Fitch Rating Category
----------------------------------------------------
Not rated
Term to Maturity of Debt Security AAA AA A BBB BB or below BB/1/
--------------------------------- ------ ------ ------ ------ ------ -------------
3 years or less (but longer than 1 year)... 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
5 years or less (but longer than 3 years).. 111.11 112.99 114.94 116.96 134.24 151.52
7 years or less (but longer than 5 years).. 113.64 115.61 117.65 119.76 135.66 151.52
10 years or less (but longer than 7 years). 115.61 117.65 119.76 121.95 136.74 151.52
15 years or less (but longer than 10 years) 119.76 121.95 124.22 126.58 139.05 151.52
More than 15 years......................... 124.22 126.58 129.03 131.58 144.55 151.52
|
The Fitch Discount Factors presented in the immediately preceding table apply to Debt Securities that are Performing and have a Market Value determined by a Pricing Service or an Approved Price. The Fitch Discount Factor noted in the table above for a Debt Security not rated or rated below BB by Fitch Ratings shall apply to any non-Performing Debt Security with a price equal to or greater than $0.20. If a Debt Security does not have a Market Value determined by a Pricing Service or an Approved Price, a rating one rating category below the actual rating on the Debt Security will be used (e.g., where the actual rating is A-, the rating for Debt Securities rated BBB- will be used). The Fitch Discount Factor for a Debt Security issued by a limited partnership that is not a Rule 144A Security shall be the Discount Factor determined in accordance with the table set forth above multiplied by 105%.
The Fitch Discount Factors presented in the immediately preceding table will also apply to (i) interest rate swaps and caps, whereby the rating of the counterparty to the swap or cap will be the rating used to determine the Fitch Discount Factor in the table; and (ii) TRACERs and TRAINs, whereby the ratings in the table will be applied to the underlying securities and the Market Value of each underlying security will be its proportionate amount of the Market Value of the TRACER or TRAIN. The Fitch Discount Factors presented in the immediately preceding table will also apply to corporate obligations backed by a guaranty, a letter of credit or insurance issued by a third party. If the third-party credit rating is the basis for the rating on the obligation, then the rating on the third party will be used to determine the Fitch Discount Factor in the table. The Fitch Discount Factors presented in the immediately preceding table will also apply to preferred trust certificates, the rating on which will be determined by the underlying debt instruments in the trust, unless such preferred trust certificates are determined by Fitch Ratings to qualify for a traditional equity discount factor, in which case the Fitch Discount Factor shall be 370%.
(ii) Preferred shares:
Preferred Shares Discount Factor ---------------- --------------- AAA Taxable Preferred............................ 130% AA Taxable Preferred............................. 133% A Taxable Preferred.............................. 135% BBB Taxable Preferred............................ 139% BB Taxable Preferred............................. 154% Not rated or below BB Taxable Preferred.......... 161% Investment Grade DRD Preferred................... 164% Not rated or below Investment Grade DRD Preferred 200%/1/ |
(iii) Short-term instruments: The Fitch Discount Factor applied to short-term portfolio securities, including without limitation Debt Securities with terms to maturity of one year or less, Short Term Money Market Instruments and municipal debt obligations with terms to maturity within the Fitch Exposure Period, will be (A) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Fitch Exposure Period; (B) 115%, so long as such portfolio securities neither mature nor have a demand feature exercisable at par within the Fitch Exposure Period; and (C) 125%, so long as such portfolio securities neither mature within the Fitch Exposure Period nor have a demand feature at par. A Fitch Discount Factor of 100% will be applied to cash.
(iv) U.S. Government Securities and U.S. Treasury Strips:
Discount
Time Remaining to Maturity Factor
-------------------------- --------
1 year or less............................ 101.5%
2 years or less (but longer than 1 year).. 103
3 years or less (but longer than 2 years). 105
4 years or less (but longer than 3 years). 107
5 years or less (but longer than 4 years). 109
7 years or less (but longer than 5 years). 112
10 years or less (but longer than 7 years) 114
Greater than 10 years..................... 122
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(v) Convertible Debt Securities: The Fitch Discount Factor applied to convertible debt securities will be (a) 200% for investment grade convertibles and (b) 222% for below investment grade convertibles so long as such convertible debt securities have neither (x) a conversion premium greater than 100% nor (y) a yield to maturity or yield to worst of greater than 15.00% above the corresponding Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have conversion premiums of greater than 100% will be (a) 152% for investment grade convertibles and (b) 179% for below investment grade convertibles so long as such convertible debt securities do not have a yield to maturity or yield to worst of greater than 15.00% above the corresponding Treasury curve.
The Fitch Discount Factor applied to convertible debt securities which have a yield to maturity or yield to worst of greater than 15.00% above the corresponding Treasury curve will be 370%.
If a security is not rated by Fitch Ratings but is rated by two other rating agencies, then the lower of the ratings on the security from the two other rating agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a rating by Fitch Ratings of BBB+ will be used). If a security is not rated by Fitch Ratings but is rated by only one other rating agency, then the rating on the security from the other rating agency will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a rating by Fitch Ratings of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a rating by Fitch Ratings of BB- will be used). If a security is not rated by any rating agency, the Fund will treat the security as if it were below investment grade.
(vi) Rule 144A Securities: The Fitch Discount Factor applied to Rule 144A Securities will be 110% of the Fitch Discount Factor which would apply were the securities registered under the Securities Act.
(vii) Asset-backed and mortgage-backed securities: The percentage determined by reference to the asset type in accordance with the table set forth below.
Asset Type (with time remaining to maturity, if applicable) Discount Factor ----------------------------------------------------------- --------------- U.S. Treasury/agency securities (10 years or less)........................... 118% U.S. Treasury/agency securities (greater than 10 years)...................... 127% U.S. agency sequentials (10 years or less)................................... 128% U.S. agency sequentials (greater than 10 years).............................. 142% U.S. agency principal only securities........................................ 236% U.S. agency interest only securities (with Market Value greater than $0.40)..................................................................... 696% U.S. agency interest only securities (with Market Value less than or equal to $0.40)..................................................................... 214% AAA LockOut securities, interest only........................................ 236% U.S. agency planned amortization class bonds (10 years or less).............. 115% U.S. agency planned amortization class bonds (greater than 10 years)......... 136% AAA sequentials (10 years or less)........................................... 118% AAA sequentials (greater than 10 years)...................................... 135% AAA planned amortization class bonds (10 years or less)...................... 115% AAA planned amortization class bonds (greater than 10 years)................. 140% Jumbo mortgages rated AAA/1/................................................. 123% Jumbo mortgages rated AA/1/.................................................. 130% Jumbo mortgages rated A/1/................................................... 136% Jumbo mortgages rated BBB/1/................................................. 159% Commercial mortgage-backed securities rated AAA.............................. 131% Commercial mortgage-backed securities rated AA............................... 139% Commercial mortgage-backed securities rated A................................ 148% Commercial mortgage-backed securities rated BBB.............................. 177% Commercial mortgage-backed securities rated BB............................... 283% Commercial mortgage-backed securities rated B................................ 379% Commercial mortgage-backed securities rated CCC or not rated................. 950% |
(viii) Bank Loans: The percentage determined by reference to the Fitch Loan Category in accordance with the table set forth below.
Fitch Loan Category Discount Factor
------------------- ---------------
A......... 126%
B......... 157
C......... 184
D......... 433
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(ix) REITs:
(a) Common stock and preferred stock of REITs and other real estate companies:
Discount Factor
---------------
REIT or other real estate company preferred stock 154%
REIT or other real estate company common stock... 196%
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(b) Corporate debt securities of REITs:
Fitch Rating Category/1/
- ----------------------------------
Term to Maturity AAA AA A BBB BB B CCC
---------------- ---- ---- ---- ---- ---- ---- ----
1 year....... 111% 114% 117% 120% 121% 127% 227%
2 year....... 116% 125% 125% 127% 132% 137% 137%
3 year....... 121% 123% 127% 131% 133% 140% 225%
4 year....... 126% 126% 129% 132% 136% 140% 164%
5 year....... 131% 132% 135% 139% 144% 149% 185%
7 year....... 140% 143% 146% 152% 159% 167% 228%
10 year...... 141% 143% 147% 153% 160% 168% 232%
12 year...... 144% 144% 150% 157% 165% 174% 249%
15 year...... 148% 151% 155% 163% 172% 182% 274%
20-30 year... 152% 156% 160% 169% 180% 191% 306%
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(x) Municipal debt obligations: The Fitch Discount Factor applied to municipal debt obligations will be the percentage determined by reference to the table set forth below:
Fitch Rating Category
---------------------------------
Fitch Exposure Period AAA AA A BBB F/1/ Unrated/2/
--------------------- --- --- --- --- --- ---------
7 weeks................................. 151% 159% 166% 173% 136% 225%
8 weeks or less but greater than 7 weeks 154 161 168 176 137 231
9 weeks or less but greater than 8 weeks 158 163 170 177 138 240
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/2/ If a security is not rated by Fitch Ratings but is rated by two other NRSROs, then the lower of the ratings on the security from the two other NRSROs will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a rating by Fitch Ratings of BBB+ will be used). If a security is not rated by Fitch Ratings but is rated by only one other NRSRO, then the rating on the security from the other NRSRO will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA-, a rating by Fitch Ratings of AAA- will be used, and where the only rating on a security is a Moody's rating of Ba3, a rating by Fitch Ratings of BB- will be used). If a security is not rated by any NRSRO, the Fund will use the percentage set forth under "Unrated" in this table.
(xi) Foreign Bonds: The Fitch Discount Factor (A) for a Foreign Bond the principal of which (if not denominated in U.S. dollars) is subject to a currency hedging transaction will be the Fitch Discount Factor that would otherwise apply to such Foreign Bonds in accordance with this definition and (B) for (1) a Foreign Bond the principal of which (if not denominated in U.S. dollars) is not subject to a currency hedging transaction and (2) a bond issued in a currency other than U.S. dollars by a corporation, limited liability company or limited partnership domiciled in, or the government or any agency, instrumentality or political subdivision of, a nation other than an Approved Foreign Nation will be 370%.
(xii) Structured Notes: The Fitch Discount Factor applied to Structured Notes will be (A) in the case of a corporate issuer, the Fitch Discount Factor determined in accordance with paragraph (i) under this definition, whereby the rating on the issuer of the Structured Note will be the rating on the Structured Note for purposes of determining the Fitch Discount Factor in the table in paragraph (i); and (B) in the case of an issuer that is the U.S. Government or an agency or instrumentality thereof, the Fitch Discount Factor determined in accordance with paragraph (iii) under this definition.
"Fitch Eligible Assets" means
(i) cash (including interest and dividends due on assets rated (A) BBB or higher by Fitch Ratings or the equivalent by another NRSRO if the payment date is within five Business Days of the Valuation Date, (B) A or higher by Fitch Ratings or the equivalent by another NRSRO if the payment date is within thirty days of the Valuation Date, and (C) A+ or higher by Fitch Ratings or the equivalent by another NRSRO if the payment date is within the Fitch Exposure Period) and receivables for Fitch Eligible Assets sold if the receivable is due within five Business Days of the Valuation Date, and if the trades which generated such receivables are (A) settled through clearing house firms with respect to which the Fund has received prior written authorization from Fitch Ratings or (B) (1) with counterparties having a long-term debt rating of at least BBB- from Fitch Ratings or the equivalent from another NRSRO or (2) with counterparties having a Short Term Money Market Instrument rating of at least F1+ by Fitch Ratings or the equivalent by another NRSRO;
(ii) preferred shares if (A) dividends on such preferred shares are cumulative, (B) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive, common stock or its equivalent at any time over the respective lives of such securities, (C) the issuer of such preferred shares has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (D) the issuer of such preferred shares has a senior debt rating or preferred stock rating from Fitch of BBB- or higher or the equivalent rating by another Rating Agency, and (E) the preferred shares are part of an issue that is at least $50 million;
(iii) (A) common stocks (1) which are traded on the New York Stock
Exchange or the American Stock Exchange or in the over-the-counter market,
(2) which, if cash dividend paying, pay cash dividends in U.S. dollars, and
(3) which may be sold without restriction by the Fund; provided, however,
that (a) common stock which, while a Fitch Eligible Asset owned by the Fund,
ceases paying any regular cash dividend will no longer be considered a Fitch
Eligible Asset until 60 calendar days after the date of the announcement of
such cessation, unless the issuer of the common stock has senior debt
securities rated at least A- by Fitch,
and (b) the aggregate Market Value of the Fund's holdings of the common stock of any issuer in excess of 5% per U.S. issuer of the number of outstanding shares of such issuer times the Market Value of such common stock shall not be a Fitch Eligible Asset; and (B) common stocks or their equivalent denominated in any currency other than the U.S. dollar and common stocks or their equivalent of issuers formed under the laws of jurisdictions other than the United States, its states and the District of Columbia for which there are dollar-denominated American Depository Receipts ("ADRs") which are traded in the United States on exchanges or over-the-counter and are issued by banks formed under the laws of the United States, its states or the District of Columbia; provided, however, that the aggregate Market Value of the Fund's holdings of securities denominated in currencies other than the U.S. dollar and ADRs in excess of 3% of the aggregate Market Value of the outstanding shares of common stock or its equivalent of such issuer or in excess of 10% of the Market Value of the Fund's Fitch Eligible Assets with respect to issuers formed under the laws of any single such non-U.S. jurisdiction other than Argentina, Australia, Brazil, Chile, France, Germany, Italy, Japan, Korea, Mexico, Spain or the United Kingdom (each an "Approved Foreign Nation," and collectively the "Approved Foreign Nations") or Canada shall not be a Fitch Eligible Asset;
(iv) Short Term Money Market Instruments so long as (A) such securities are rated at least F1+ by Fitch Ratings or the equivalent by another NRSRO, (B) in the case of demand deposits, time deposits and overnight funds, the supporting entity is rated at least A by Fitch Ratings or the equivalent by another NRSRO, or (C) in all other cases, the supporting entity (1) is rated at least A by Fitch Ratings or the equivalent by another NRSRO and the security matures within one month, (2) is rated at least A by Fitch Ratings or the equivalent by another NRSRO and the security matures within three months or (3) is rated at least AA by Fitch Ratings or the equivalent by another NRSRO and the security matures within six months;
(v) U.S. Government Securities and U.S. Treasury Strips;
(vi) debt securities if (A) such securities do not provide for conversion
or exchange into equity capital at any time over their lives; (B) 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
investment manager or portfolio manager acting pursuant to procedures
approved by the Board of Trustees; and (C) such securities are issued by (1)
a U.S. corporation, limited liability company or limited partnership, (2) a
corporation, limited liability company or limited partnership domiciled in
an Approved Foreign Nation, (3) the government of any Approved Foreign
Nation or any of its agencies, instrumentalities or political subdivisions
(the debt securities of Approved Foreign Nation issuers being referred to
collectively as "Foreign Bonds"), (4) a corporation, limited liability
company or limited partnership domiciled in Canada or (5) the Canadian
government or any of its agencies, instrumentalities or political
subdivisions (the debt securities of Canadian issuers being referred to
collectively as "Canadian Bonds"). Foreign Bonds held by the Fund will
qualify as Fitch Eligible Assets only up to a maximum of 20% of the
aggregate Market Value of all assets constituting Fitch Eligible Assets.
Similarly, Canadian Bonds held by the Fund will qualify as Fitch Eligible
Assets only up to a maximum of 20% of the aggregate Market Value of all
assets constituting Fitch Eligible Assets. Notwithstanding the limitations
in the two preceding sentences, Foreign Bonds and Canadian Bonds held by the
Fund will qualify as Fitch Eligible Assets only up to a maximum of 30% of
the aggregate Market Value of all assets constituting Fitch Eligible Assets.
In addition, bonds which are issued in connection with a reorganization
under U.S. federal bankruptcy law ("Reorganization Bonds") will be
considered debt securities constituting Fitch Eligible Assets if (a) they
provide for periodic payment of interest in cash in U.S. dollars or euros;
(b) they do not provide for conversion or exchange into equity capital at
any time over their lives; (c) they have been registered under the
Securities Act or are restricted as to resale under federal securities laws
but are eligible for trading under Rule 144A promulgated pursuant to the
Securities Act as determined by the Fund's investment manager or portfolio
manager acting pursuant to procedures approved by the Board of Trustees; (d)
they were issued by a U.S. corporation, limited liability company or limited
partnership; and (e) at the time of purchase at least one year had elapsed
since the issuer's reorganization. Reorganization Bonds may also be
considered debt securities constituting Fitch Eligible Assets if they have
been approved by Fitch Ratings, which approval shall not be unreasonably
withheld. All debt securities satisfying the foregoing requirements and
restrictions of this paragraph (vi) are herein referred to as "Debt
Securities."
(vii) asset-backed and mortgage-backed securities;
(viii) Rule 144A Securities;
(ix) Bank Loans;
(x) municipal debt obligations;
(xi) TRACERs, TRAINs and Structured Notes;
(xii) interest rate swaps entered into according to International Swap Dealers Association standards if (A) the counterparty to the swap transaction has a short-term rating of not less than F1 from Fitch Ratings or the equivalent from another NRSRO, or, if the swap counterparty does not have a short-term rating, the counterparty has a senior unsecured long-term debt rating of AA or higher from Fitch Ratings or the equivalent from another NRSRO and (B) the original aggregate notional amount of the interest rate swap transaction or transactions is not greater than the liquidation preference of the Preferred Shares originally issued;
(xiii) common stock, preferred stock or any debt security of REITs or real estate companies; and
(xiv) unrated debt securities issued by an issuer which (A) has not filed for bankruptcy in the past three years; (B) is current on all interest and principal on its fixed income obligations; and (C) is current on all preferred stock dividends.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this definition may be included in Fitch Eligible Assets, but, with respect to any financial contract, only upon receipt by the Fund of a writing from Fitch Ratings specifying any conditions on including such financial contract in Fitch Eligible Assets and assuring the Fund that including such financial contract in the manner so specified would not affect the credit rating assigned by Fitch Ratings to the Preferred Shares.
In addition, portfolio holdings as described below must be within the following diversification and issue size requirements in order to be included in Fitch's Eligible Assets:
Maximum Single Maximum Single Minimum Issue Size
Security Rated At Least Issuer/1/ Industry/1,2/ ($ in million)/3/
----------------------- --------- ------------- -----------------
AAA 100% 100% $100
AA- 20 75 100
A- 10 50 100
BBB- 6 25 100
BB- 4 16 50
B- 3 12 50
CCC 2 8 50
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Where the Fund sells an asset and agrees to repurchase such asset in the future, the Discounted Value of such asset will constitute a Fitch Eligible Asset, and the amount the Fund is required to pay upon repurchase of such asset will count as a liability for the purposes of the Preferred Shares Basic Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a third party in the future, cash receivable by the Fund thereby will constitute a Fitch Eligible Asset if the long-term debt of such other party is rated at least A by Fitch Ratings or the equivalent by another NRSRO and if such agreement has a term of 30 days or less; otherwise the Discounted Value of such purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch Eligible Asset to the extent that it has been irrevocably deposited for the payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic Maintenance Amount or to the extent it is subject to any Liens, except for (A) Liens which are being contested in good faith by appropriate proceedings and which Fitch Ratings has indicated to the Fund will not affect the status of such asset as a Fitch Eligible Asset, (B) Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (C) Liens to secure payment for services rendered or cash advanced to the Fund by its investment manager or portfolio manager, the Fund's custodian, transfer agent or registrar or the Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
"Fitch Exposure Period" means the period commencing on (and including) a given Valuation Date and ending 49 days thereafter.
"Fitch Hedging Transactions" means purchases or sales of exchange-traded financial futures contracts based on any index approved by Fitch Ratings or Treasury Bonds, and purchases, writings or sales of exchange-traded put options on such financial futures contracts, any index approved by Fitch Ratings or Treasury Bonds, and purchases, writings or sales of exchange-traded call options on such financial futures contracts, any index approved by Fitch Ratings or Treasury Bonds, subject to the following limitations:
(i) the Fund will not engage in any Fitch Hedging Transaction based on any index approved by Fitch Ratings (other than transactions that terminate a futures contract or option held by the Fund by the Fund's taking the opposite position thereto ("Closing Transactions")) that would cause the Fund at the time of such transaction to own or have sold outstanding financial futures contracts based on such index exceeding in number 10% of the average number of daily traded financial futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any Fitch Hedging Transaction based on Treasury Bonds (other than Closing Transactions) that would cause the Fund at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 20% of the aggregate Market Value of Fitch Eligible Assets owned by the Fund and rated at least AA by Fitch Ratings (or, if not rated by Fitch Ratings, rated at least Aa by Moody's or, if not rated by Moody's, rated AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 40% of the aggregate Market Value of all Fitch Eligible Assets owned by the Fund (other than Fitch Eligible Assets already subject to a Fitch Hedging Transaction) and rated at least A or BBB by Fitch Ratings (or, if not rated by Fitch Ratings, rated at least Baa by Moody's or, if not rated by Moody's, rated at least A or AA by S&P)
(for purposes of the foregoing clauses (i) and (ii), the Fund shall be deemed to own futures contracts that underlie any outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close out any outstanding financial futures contract based on any index approved by Fitch Ratings if the amount of open interest in such index as reported by The Wall Street Journal is less than an amount to be mutually determined by Fitch Ratings and the Fund; and
(iv) the Fund will not enter into an option or futures transaction unless, after giving effect thereto, the Fund would continue to have Fitch Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
"Fitch Industry Classification" means, for the purpose of determining Fitch Eligible Assets, each of the following industry classifications (or such other classifications as Fitch Ratings may from time to time approve for application to the Preferred Shares):
1. Aerospace & Defense 2. Automobiles 3. Banking, Finance & Real Estate 4. Broadcasting & Media 5. Building & Materials 6. Business Services 7. Cable 8. Chemicals 9. Computers & Electronics 10. Consumer Products 11. Energy 12. Environmental Services 13. Farming & Agriculture 14. Food, Beverage & Tobacco 15. Gaming, Lodging & Restaurants 16. Healthcare & Pharmaceuticals 17. Industrial/Manufacturing 18. Insurance 19. Leisure & Entertainment 20. Metals & Mining 21. Packaging and Containers 22. Paper & Forest Products 23. Retail 24. Sovereign 25. Structured Finance Obligations 26. Supermarkets & Drugstores 27. Telecommunications 28. Textiles & Furniture 29. Transportation 30. Utilities |
The Fund will use its discretion in determining which industry classification is applicable to a particular investment in consultation with its independent auditors and Fitch Ratings, to the extent the Fund considers necessary.
"Fitch Loan Category" means the following four categories (and, for purposes of this categorization, the Market Value of a Fitch Eligible Asset trading at par is equal to $1.00):
(i) "Fitch Loan Category A"-- means Performing Bank Loans which have a Market Value or an Approved Price greater than or equal to $0.90.
(ii) "Fitch Loan Category B"-- means: (A) Performing Bank Loans which have a Market Value or an Approved Price greater than or equal to $0.80 but less than $0.90; and (B) non-Performing Bank Loans which have a Market Value or an Approved Price greater than or equal to $0.85.
(iii) "Fitch Loan Category C"-- means: (A) Performing Bank Loans which
have a Market Value or an Approved Price greater than or equal to $0.70 but
less than $0.80; (B) non-Performing Bank Loans which have a Market Value or
an Approved Price greater than or equal to $0.75 but less than $0.85; and
(C) Performing Bank Loans without an Approved Price rated BB- or higher by
Fitch Ratings. If a security is
not rated by Fitch Ratings but is rated by two other NRSROs, then the lower of the ratings on the security from the two other NRSROs will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a rating by Fitch Ratings of BBB+ will be used). If a security is not rated by Fitch Ratings but is rated by only one other NRSRO, then the rating on the security from the other NRSRO will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA-, a rating by Fitch Ratings of AAA- will be used, and where the only rating on a security is a Moody's rating of Ba3, a rating by Fitch Ratings of BB- will be used).
(iv) "Fitch Loan Category D"-- means Bank Loans not described in any of the foregoing categories.
Notwithstanding any other provision contained above, for purposes of determining whether a Fitch Eligible Asset falls within a specific Fitch Loan Category, to the extent that any Fitch Eligible Asset would fall in more than one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed to fall into the Fitch Loan Category with the lowest applicable Fitch Discount Factor.
"Fitch Ratings" means Fitch, Inc., doing business as Fitch Ratings, or its successors.
"Foreign Bonds" has the meaning set forth in the definition of "Fitch Eligible Assets."
"Fund" means PIMCO High Income Fund, a Massachusetts business trust that is the issuer of the Preferred Shares.
"Hold Order" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in this prospectus.
"Initial Dividend Payment Date" means, with respect to a series of Preferred Shares, the initial dividend payment date with respect to the Initial Dividend Period as determined by the Board of Trustees or pursuant to its delegated authority with respect to such series.
"Initial Dividend Period" means, for each series of Preferred Shares, the period from and including the Date of Original Issue to but excluding the Initial Dividend Payment Date.
"Interest Equivalent" has the meaning set forth in the definition of "'AA' Financial Composite Commercial Paper Rate."
"IRS" has the meaning specified under "Summary--Federal Income Taxation" in this prospectus.
"Lien" means any material lien, mortgage, pledge, security interest or security agreement of any kind.
"Long Term Dividend Period" has the meaning specified under "Summary--Dividends on Preferred Shares" in this prospectus.
"Manager" has the meaning specified under "Summary--Investment Manager" in this prospectus.
"Mandatory Redemption Price" has the meaning specified under "Description of Preferred Shares--Redemption--Mandatory Redemption" in this prospectus.
"Market Value" of any asset of the Fund means the market value thereof determined by the Pricing Service. The Market Value of any asset shall include any interest accrued thereon. The Pricing Service shall value portfolio securities at the quoted bid prices or the mean between the quoted bid and asked prices or the yield equivalent when quotations are not readily available. Securities for which quotations are not readily available
shall be valued at fair value as determined by the Pricing Service, using methods which include consideration of: yields or prices of securities of comparable quality, type of issue, coupon, maturity and rating; indications as to value from dealers; and general market conditions. The Pricing Service may employ electronic data processing techniques and/or a matrix system to determine valuations. In the event the Pricing Service is unable to value a security, the security shall be valued at the lower of two bid quotations obtained by the Fund from dealers who are members of the National Association of Securities Dealers, Inc. and who make a market in the security, at least one of which shall be in writing. If two bid quotations are not readily available for any securities, such securities shall be valued in good faith at fair value pursuant to procedures approved by the Board of Trustees. Futures contracts and options are valued at the closing prices for such instruments established by the exchange or board of trade on which they are traded or, if market quotations are not readily available, are valued at fair value in good faith pursuant to procedures approved by the Board of Trustees. All other assets will be valued at fair value on a consistent basis using methods determined in good faith by the Board of Trustees.
"Maximum Applicable Rate" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in this prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined as follows. The Moody's Discount Factor for any Moody's Eligible Asset other than the securities set forth below will be the percentage provided in writing by Moody's.
(i) Corporate debt securities: The percentage determined by reference to the rating on such asset with reference to the remaining term to maturity of such asset, in accordance with the table set forth below.
Below B
Term to Maturity of and
Corporate Debt Security Aaa Aa A Baa Ba B Unrated/1/
----------------------- --- --- --- --- --- --- ---------
1 year or less............................. 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year)... 115 118 122 125 146 160 250
3 years or less (but longer than 2 years).. 120 123 127 131 153 168 250
4 years or less (but longer than 3 years).. 126 129 133 138 161 176 250
5 years or less (but longer than 4 years).. 132 135 139 144 168 185 250
7 years or less (but longer than 5 years).. 139 143 147 152 179 197 250
10 years or less (but longer than 7 years). 145 150 155 160 189 208 250
15 years or less (but longer than 10 years) 150 155 160 165 196 216 250
20 years or less (but longer than 15 years) 150 155 160 165 196 228 250
30 years or less (but longer than 20 years) 150 155 160 165 196 229 250
Greater than 30 years...................... 165 173 181 189 205 240 250
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The Moody's Discount Factors presented in the immediately preceding table will also apply to Moody's Eligible Assets that are FHLB, FNMA and FFCB Debentures and to rated TRACERs and TRAINs, whereby the ratings in the table will be applied to the underlying securities and the Market Value of each underlying security
will be its proportionate amount of the Market Value of the TRACER or TRAIN, provided that the Moody's Discount Factors determined from the table shall be multiplied by a factor of 120% for purposes of calculating the Discounted Value of TRAINs. The Moody's Discount Factors presented in the immediately preceding table will also apply to corporate debt securities that do not pay interest in U.S. dollars or euros, provided that the Moody's Discount Factor determined from the table shall be multiplied by a factor of 110% for purposes of calculating the Discounted Value of such securities.
(ii) Preferred stock: The Moody's Discount Factor for preferred stock shall be (A) for preferred stocks issued by a utility, 155%; (B) for preferred stocks of industrial and financial issuers, 209%; and (C) for auction rate preferred stocks, 350%.
(iii) Short-term instruments: The Moody's Discount Factor applied to short-term portfolio securities, including without limitation corporate debt securities, Short Term Money Market Instruments and municipal debt obligations, will be (A) 100%, so long as such portfolio securities mature within the Moody's Exposure Period or have a demand feature at par exercisable within the Moody's Exposure Period; (B) 115%, so long as such portfolio securities do not mature or have a demand feature at par not exercisable within the Moody's Exposure Period; and (C) 125%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable within the Moody's Exposure Period. A Moody's Discount Factor of 100% will be applied to cash.
(iv) U.S. Government Securities and U.S. Treasury Strips:
U.S. Government Securities U.S. Treasury Strips
Remaining Term to Maturity Discount Factor Discount Factor
-------------------------- -------------------------- --------------------
1 year or less............................. 107% 107%
2 years or less (but longer than 1 year)... 113 115
3 years or less (but longer than 2 years).. 118 121
4 years or less (but longer than 3 years).. 123 128
5 years or less (but longer than 4 years).. 128 135
7 years or less (but longer than 5 years).. 135 147
10 years or less (but longer than 7 years). 141 163
15 years or less (but longer than 10 years) 146 191
20 years or less (but longer than 15 years) 154 218
30 years or less (but longer than 20 years) 154 244
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(v) Rule 144A Securities: The Moody's Discount Factor applied to Rule 144A Securities for Rule 144A Securities whose terms include rights to registration under the Securities Act within one year and Rule 144A Securities which do not have registration rights within one year will be 120% and 130%, respectively, of the Moody's Discount Factor which would apply were the securities registered under the Securities Act.
(vi) Bank Loans: The Moody's Discount Factor applied to senior Bank Loans ("Senior Loans") shall be the percentage specified in the table below opposite such Moody's Loan Category:
Moody's Loan Category Discount Factor
--------------------- ---------------
A.......... 118%
B.......... 137
C.......... 161
D.......... 222
E.......... 222
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(vii) Asset-backed and mortgage-backed securities: The Moody's Discount Factor applied to asset-backed securities shall be 131%. The Moody's Discount Factor applied to collateralized mortgage obligations, planned amortization class bonds and targeted amortization class bonds shall be determined by
reference to the weighted average life of the security and whether cash flow is retained (i.e., controlled by a trustee) or excluded (i.e., not controlled by a trustee), in accordance with the table set forth below.
Remaining Term to Maturity Cash Flow Retained Cash Flow Excluded -------------------------- ------------------ ------------------ 3 years or less............................ 133% 141% 7 years or less (but longer than 3 years).. 142 151 10 years or less (but longer than 7 years). 158 168 20 years or less (but longer than 10 years) 174 185 |
The Moody's Discount Factor applied to residential mortgage pass-throughs (including private-placement mortgage pass-throughs) shall be determined by reference to the coupon paid by such security and whether cash flow is retained (i.e., controlled by a trustee) or excluded (i.e., not controlled by a trustee), in accordance with the table set forth below.
Coupon Cash Flow Retained Cash Flow Excluded ------ ------------------ ------------------ 5%........ 166% 173% 6%........ 162 169 7%........ 158 165 8%........ 154 161 9%........ 151 157 10%....... 148 154 11%....... 144 154 12%....... 142 151 13%....... 139 148 adjustable 165 172 |
The Moody's Discount Factor applied to fixed-rate pass-throughs that are not rated by Moody's and are serviced by a servicer approved by Moody's shall be determined by reference to the table in the following paragraph (relating to whole loans).
The Moody's Discount Factor applied to whole loans shall be determined by reference to the coupon paid by such security and whether cash flow is retained (i.e., controlled by a trustee) or excluded (i.e., not controlled by a trustee), in accordance with the table set forth below.
Coupon Cash Flow Retained Cash Flow Excluded ------ ------------------ ------------------ 5%........ 172% 179% 6%........ 167 174 7%........ 163 170 8%........ 159 165 9%........ 155 161 10%....... 151 158 11%....... 148 157 12%....... 145 154 13%....... 142 151 adjustable 170 177 |
(viii) Municipal debt obligations: The Moody's Discount Factor applied to municipal debt obligations shall be the percentage determined by reference to the rating on such asset and the shortest Exposure Period set forth opposite such rating that is the same length as or is longer than the Moody's Exposure Period, in accordance with the table set forth below (provided that, except as provided in the following table, any
municipal obligation (excluding any short-term municipal obligation) not rated by Moody's but rated by S&P shall be deemed to have a Moody's rating which is one full rating category lower than its S&P rating):
Exposure Period Aaa/1/ Aa/1/ A/1/ Baa/1/ Other/2/ (V)MIG-1/3/ SP-1+/4/ Unrated/5/ --------------- ----- ---- --- ----- ------- ---------- ------- --------- 7 weeks............................... 151% 159% 166% 173% 187% 136% 148% 225% 8 weeks or less but greater than seven weeks............................... 154 161 168 176 190 137 149 231 9 weeks or less but greater than eight weeks............................... 158 163 170 177 192 138 150 240 |
(ix) Structured Notes: The Moody's Discount Factor applied to Structured Notes will be (A) in the case of a corporate issuer, the Moody's Discount Factor determined in accordance with paragraph (i) under this definition, whereby the rating on the issuer of the Structured Note will be the rating on the Structured Note for purposes of determining the Moody's Discount Factor in the table in paragraph (i); and (B) in the case of an issuer that is the U.S. Government or an agency or instrumentality thereof, the Moody's Discount Factor determined in accordance with paragraph (iii) under this definition.
(x) REITs:
(a) Common stock and preferred stock of REITs and other real estate companies:
Discount Factor/1,2/
-------------------
Common stock of REITs............................................... 154%
Preferred stock of REITs
with senior implied or unsecured Moody's (or Fitch Ratings) rating 154%
without senior implied or unsecured Moody's (or Fitch Ratings)
rating............................................................ 208%
Preferred stock of other real estate companies
with senior implied or unsecured Moody's (or Fitch Ratings) rating 208%
Without senior implied or unsecured Moody's (or Fitch Ratings)
rating............................................................ 250%
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(b) Debt securities of REITs and other real estate companies:
Moody's Rating Category
---------------------------------------
Term to Maturity Aaa Aa A Baa Ba B Caa NR/1/
---------------- ---- ---- ---- ---- ---- ---- ---- ----
1 year...... 109% 112% 115% 118% 119% 125% 225% 250%
2 year...... 115% 118% 122% 125% 127% 133% 225% 250%
3 year...... 120% 123% 127% 131% 133% 140% 225% 250%
4 year...... 126% 129% 133% 138% 140% 147% 225% 250%
5 year...... 132% 135% 139% 144% 146% 154% 225% 250%
7 year...... 139% 143% 147% 152% 156% 164% 225% 250%
10 year..... 145% 150% 155% 160% 164% 173% 225% 250%
15 year..... 150% 155% 160% 165% 170% 180% 225% 250%
20 year..... 150% 155% 160% 165% 170% 190% 225% 250%
30 year..... 150% 155% 160% 165% 170% 191% 225% 250%
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"Moody's Eligible Assets" means
(i) cash (including 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 within five Business Days of the Valuation Date, and if the trades which generated such receivables are (A) settled through clearing house firms or (B) (1) with counterparties having a Moody's long-term debt rating of at least Baa3 or (2) with counterparties having a Moody's Short Term Money Market Instrument rating of at least P-1;
(ii) Short Term Money Market Instruments so long as (A) such securities are rated at least P-1, (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 A1 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;
(iii) U.S. Government Securities and U.S. Treasury Strips;
(iv) Rule 144A Securities;
(v) Senior Loans and other Bank Loans approved by Moody's;
(vi) Corporate debt securities if (A) such securities are rated Caa or higher by Moody's; (B) such securities provide for the periodic payment of interest in cash in U.S. dollars or euros, except that such securities that do not pay interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if they are rated by Moody's or S&P; (C) for securities which provide for conversion or exchange into equity capital at some time over their lives, the issuer must be rated at least B3 by Moody's and the discount factor will be 250%; (D) for debt securities rated Ba1 and below, no more than 10% of the original amount of such issue may constitute Moody's Eligible Assets; (E) 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 investment manager or portfolio manager acting pursuant to procedures approved by the Board of Trustees, except that such securities that are not subject to
U.S. federal securities laws shall be considered Moody's Eligible Assets if they are publicly traded; and (F) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (x) corporate debt securities not rated at least Caa by Moody's or not rated by Moody's shall be considered to be Moody's Eligible Assets only to the extent the Market Value of such corporate debt securities does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; provided, however, that if the Market Value of such corporate debt securities exceeds 10% of the aggregate Market Value of all Moody's Eligible Assets, a portion of such corporate debt securities (selected by the Fund) shall not be considered Moody's Eligible Assets, so that the Market Value of such corporate debt securities (excluding such portion) does not exceed 10% of the aggregate Market Value of Moody's Eligible Assets; and (y) corporate debt securities rated by neither Moody's nor S&P shall be considered to be Moody's Eligible Assets only to the extent such securities are issued by entities which (i) have not filed for bankruptcy within the past three years, (ii) are current on all principal and interest in their fixed income obligations, (iii) are current on all preferred stock dividends, and (iv) possess a current, unqualified auditor's report without qualified, explanatory language;
(vii) Preferred stocks if (A) dividends on such preferred stock are cumulative, (B) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive, common stock or its equivalent at any time over the respective lives of such securities, (C) the issuer of such preferred stock has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (D) the issuer of such preferred stock has a senior debt rating from Moody's of Baa1 or higher or a preferred stock rating from Moody's of Baa3 or higher and (E) such preferred stock has paid consistent cash dividends in U.S. dollars or euros over the last three years or has a minimum rating of A1 (if the issuer of such preferred stock has other preferred issues outstanding that have been paying dividends consistently for the last three years, then preferred stock without such a dividend history would also be eligible). In addition, the preferred stocks must have the following diversification requirements: (X) the preferred stock issue must be greater than $50 million and (Y) the minimum holding by the Fund of each issue of preferred stock is $500,000, and the maximum holding of preferred stock of each issue is $5 million. In addition, preferred stocks issued by transportation companies will not be considered Moody's Eligible Assets;
(viii) Asset-backed and mortgage-backed securities:
(A) Asset-backed securities if (1) such securities are rated at least
Aa3 by Moody's or at least AA by S&P, (2) the securities are part of an
issue that is $250 million or greater, or the issuer of such securities
has a total of $500 million or greater of asset-backed securities
outstanding at the time of purchase of the securities by the Trust, and
(3) the expected average life of the securities is not greater than 4
years;
(B) Collateralized mortgage obligations ("CMOs"), including CMOs with interest rates that float at a multiple of the change in the underlying index according to a pre-set formula, provided that any CMO held by the Trust (1) has been rated Aaa by Moody's or AAA by S&P, (2) does not have a coupon which floats inversely, (3) is not portioned as an interest-only or principal-only strip and (4) is part of an issuance that had an original issue size of at least $100 million;
(C) Planned amortization class bonds ("PACs") and targeted
amortization class bonds ("TACs"), provided that such PACs or TACs are
(1) backed by certificates of either the Federal National Mortgage
Association ("FNMA"), the Government National Mortgage Association
("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
representing ownership in single-family first lien mortgage loans with
original terms of 30 years, (2) part of an issuance that had an original
issue size of at least $10 million, (3) part of PAC or TAC classes that
have payment priority over other PAC or TAC classes, (4) if TACs, TACs
that do not support PAC classes, and (5) if TACs, not considered reverse
TACs (i.e., do not protect against extension risk);
(D) Consolidated senior debt obligations of Federal Home Loan Banks ("FHLBs"), senior long-term debt of the FNMA, and consolidated systemwide bonds and FCS Financial Assistance
Corporation Bonds of Federal Farm Credit Banks ("FFCBs") (collectively,
"FHLB, FNMA and FFCB Debentures"), provided that such FHLB, FNMA and
FFCB Debentures are (1) direct issuance corporate debt rated Aaa by
Moody's, (2) senior debt obligations backed by the FHLBs, FFCBs or FNMA,
(3) part of an issue entirely denominated in U.S. dollars and (4) not
callable or exchangeable debt issues;
(E) Mortgage pass-throughs rated at least Aa by Moody's and pass-throughs issued prior to 1987 (if rated AA by S&P and based on fixed-rate mortgage loans) by Travelers Mortgage Services, Citicorp Homeowners, Citibank, N.A., Sears Mortgage Security or RFC - Salomon Brothers Mortgage Securities, Inc., provided that (1) certificates must evidence a proportional undivided interest in specified pools of fixed or adjustable rate mortgage loans, secured by a valid first lien, on one-to-four-family residential properties and (2) the securities are publicly registered (not issued by FNMA, GNMA or FHLMC);
(F) Private-placement mortgage pass-throughs, provided that (1)
certificates represent a proportional undivided interest in specified
pools of fixed-rate mortgage loans, secured by a valid first lien, on
one- to four-family residential properties, (2) documentation is held by
a trustee or independent custodian, (3) pools of mortgage loans are
serviced by servicers that have been approved by FNMA or FHLMC and that
funds shall be advanced to meet deficiencies to the extent provided in
the pooling and servicing agreements creating such certificates, and (4)
pools have been rated Aa or better by Moody's; and
(G) Whole loans (e.g., direct investments in mortgages), provided
that (1) at least 65% of such loans (a) have seasoning of no less than 6
months, (b) are secured by single-family detached residences, (c) are
owner-occupied primary residences, (d) are secured by a first-lien,
fully documented mortgage, (e) are neither currently delinquent (30 days
or more) nor delinquent during the preceding year, (f) have
loan-to-value ratios of 80% or below, (g) carry normal hazard insurance
and title insurance, as well as special hazard insurance, if applicable,
(h) have original terms to maturity not greater than 30 years, with at
least one year remaining to maturity, (i) have a minimum of $10,000
remaining principal balance, (j) for loans underwritten after January 1,
1978, FNMA and/or FHLMC forms are used for fixed-rate loans, and (k) are
whole loans and not participations; (2) for loans that do not satisfy
the requirements set forth in the foregoing clause (1), (a) non-owner
occupied properties represent no greater than 15% of the aggregate of
either the adjustable-rate pool or the fixed-rate pool, (b) multi-family
properties (those with five or more units) represent no greater than 15%
of the aggregate of either the adjustable-rate pool or the fixed-rate
pool, (c) condominiums represent no greater than 10% of the aggregate of
either the adjustable-rate pool or the fixed-rate pool, and any
condominium project must be 80% occupied at the time the loan is
originated, (d) properties with loan-to-value ratios exceeding 80%
represent no greater than 25% of the aggregate of either the
adjustable-rate or the fixed-rate pool and that the portion of the
mortgage on any such property that exceeds a loan-to-value ratio of 80%
is insured with Primary Mortgage Insurance from an insurer rated at
least Baa3 by Moody's and (e) loan balances in excess of the current
FHLMC limit plus $75,000 represent no greater than 25% of the aggregate
of either the adjustable-rate pool or the fixed-rate pool, loan balances
in excess of $350,000 represent no greater than 10% of the aggregate of
either the adjustable-rate pool or the fixed-rate pool, and loan
balances in excess of $1,000,000 represent no greater than 5% of the
aggregate of either the adjustable-rate pool or the fixed-rate pool; (3)
no greater than 5% of the pool of loans is concentrated in any one zip
code; (4) the pool of loans contains at least 100 loans or $2 million in
loans per servicer; (5) for adjustable-rate mortgages ("ARMs"), (a) any
ARM is indexed to the National Cost of Funds index, the 11th District
Cost of Funds index, the 1-year Treasury or the 6-month Treasury, (b)
the margin over the given index is between 0.15% and 0.25% for either
cost-of-funds index and between 0.175% and 0.325% for Treasuries, (c)
the maximum yearly interest rate increase is 2%, (d) the maximum
life-time interest rate increase is 6.25% and (e) ARMs may include
Federal Housing Administration and Department of Veterans Affairs loans;
and (6) for "teaser" loans, (a) the initial discount from the current
ARM market rate is no greater than 2%, (b) the loan is
underwritten at the market rate for ARMs, not the "teaser" rate, and (c) the loan is seasoned six months beyond the "teaser" period;
(ix) Any municipal debt obligation that (A) pays interest in cash, (B) does not have a Moody's rating, as applicable, suspended by Moody's, and (C) is part of an issue of municipal debt obligations of at least $5,000,000, except for municipal debt obligations rated below A by Moody's, in which case the minimum issue size is $10,000,000;
(x) Structured Notes, rated TRACERs and TRAINs;
(xi) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this definition but only upon receipt by the Fund of a letter from Moody's specifying any conditions on including such financial contract in Moody's Eligible Assets and assuring the Fund that including such financial contract in the manner so specified would not affect the credit rating assigned by Moody's to the Preferred Shares; and
(xii) common stock, preferred stock or any debt security of REITs or real estate companies.
In addition, portfolio holdings as described below must be within the following diversification and issue size requirements in order to be included in Moody's Eligible Assets:
Maximum Single Maximum Single Minimum Issue Size
Ratings/1/ Issuer/2,3/ Industry/3,4/ ($ in millions)/5/
--------- -------------- -------------- ------------------
Aaa........ 100% 100% $ 100
Aa......... 20 60 100
A.......... 10 40 100
Baa........ 6 20 100
Ba......... 4 12 50/6/
B1-B2...... 3 8 50/6/
B3 or below 2 5 50/6/
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Where the Fund sells an asset and agrees to repurchase such asset in the future, the Discounted Value of such asset will constitute a Moody's Eligible Asset, and the amount the Fund is required to pay upon repurchase of such asset will count as a liability for the purposes of the Preferred Shares Basic Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a third party in the future, cash receivable by the Fund thereby will constitute a Moody's Eligible Asset if the long-term debt of such other party is rated at least A2 by Moody's and if such agreement has a term of 30 days or less; otherwise the Discounted Value of such purchased asset will constitute a Moody's Eligible Asset. For the purposes of calculation of Moody's Eligible Assets, portfolio securities which have been called for redemption by the issuer thereof shall be valued at the lower of Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a Moody's Eligible Asset to the extent that it has been irrevocably deposited for the payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic Maintenance Amount or is subject to any Liens, except for (A) Liens which are being contested in good faith by appropriate proceedings and which Moody's has indicated to the Fund will not affect the status of such asset as a Moody's Eligible Asset, (B) Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (C) Liens to secure payment for services rendered or cash advanced to the Fund by its
investment manager or portfolio manager, the Fund's custodian, transfer agent or registrar or the Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
"Moody's Exposure Period" means the period commencing on a given Valuation Date and ending 49 days thereafter.
"Moody's Hedging Transactions" means purchases or sales of exchange-traded financial futures contracts based on any index approved by Moody's or Treasury Bonds, and purchases, writings or sales of exchange-traded put options on such financial futures contracts, any index approved by Moody's or Treasury Bonds, and purchases, writings or sales of exchange-traded call options on such financial futures contracts, any index approved by Moody's or Treasury Bonds, subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction based on any index approved by Moody's (other than Closing Transactions) that would cause the Fund at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on such index exceeding in number 10% of the average number of daily traded financial futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal; or
(B) outstanding financial futures contracts based on any index approved by Moody's having a Market Value exceeding 50% of the Market Value of all portfolio securities of the Fund constituting Moody's Eligible Assets owned by the Fund (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction based on Treasury Bonds (other than Closing Transactions) that would cause the Fund at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 80% of the aggregate Market Value of all portfolio securities of the Fund constituting Moody's Eligible Assets owned by the Fund (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's but rated by S&P, rated A or AA by S&P)
(for purposes of the foregoing clauses (i) and (ii), the Fund shall be deemed to own the number of financial futures contracts that underlie any outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close out any outstanding financial futures contract based on any index approved by Moody's if the amount of open interest in such index as reported by The Wall Street Journal is less than an amount to be mutually determined by Moody's and the Fund;
(iv) the Fund will engage in a Closing Transaction to close out any outstanding financial futures contract by no later than the fifth Business Day of the month in which such contract expires and will engage in a Closing Transaction to close out any outstanding option on a financial futures contract by no later than the first Business Day of the month in which such option expires;
(v) the Fund will engage in Moody's Hedging Transactions only with respect to financial futures contracts or options thereon having the next settlement date or the settlement date immediately thereafter;
(vi) the Fund (A) will not engage in options and futures transactions for leveraging or speculative purposes, except that an option or futures transaction shall not for these purposes be considered a leveraged position or speculative so long as the combination of the Fund's non-derivative positions, together with the relevant option or futures transaction, produces a synthetic investment position, or the same economic
result, that could be achieved by an investment, consistent with the Fund's investment objectives and policies, in a security that is not an option or futures transaction, and (B) will not write any call options or sell any financial futures contracts for the purpose of hedging the anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Fund will not enter into an option or futures transaction unless, after giving effect thereto, the Fund would continue to have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
"Moody's Industry Classification" means, for the purposes of determining Moody's Eligible Assets, each of the following industry classifications (or such other classifications as Moody's may from time to time approve for application to the Preferred Shares):
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, 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
6. Chemicals, Plastics and Rubber: Chemicals (non-agricultural), Industrial Gases, Sulfur, 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):
Soaps, 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
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, Motion Pictures, Entertainment: Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment (camping), Tourism, Resorts, Games, Toy Manufacturing, Motion Picture Production Theaters, Motion Picture Distribution
22. Machinery (non-agricultural, 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 of the foregoing
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
25. Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, TV, Cable Broadcasting Equipment
26. Cargo Transport: Rail, Shipping, Railroads, Railcar Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
27. Retail Stores: Apparel, Toy, Variety, Drug, Department, Mail Order Catalog, Showroom
28. Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Satellite, Equipment, Research, Cellular
29. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes
30. Personal Transportation: Air, Bus, Rail, Car Rental
31. Utilities: Electric, Water, Hydro Power, Gas
32. Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national Agencies
The Fund will use its discretion in determining which industry classification is applicable to a particular investment in consultation with its independent auditors and Moody's, to the extent the Fund considers necessary.
"Moody's Loan Category" means the following five categories (and, for purposes of this categorization, the Market Value of a Moody's Eligible Asset trading at par is equal to $1.00):
(i) "Moody's Loan Category A" means Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.90.
(ii) "Moody's Loan Category B" means: (A) Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.80 but less than $0.90; and (B) non-Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.85.
(iii) "Moody's Loan Category C" means: (A) Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.70 but less than $0.80; and (B) non-Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.75 but less than $0.85.
(iv) "Moody's Loan Category D" means Senior Loans which have a Market Value or an Approved Price less than $0.75.
(v) "Moody's Loan Category E" means non-Senior Loans which have a Market Value or an Approved Price.
Notwithstanding any other provision contained above, for purposes of determining whether a Moody's Eligible Asset falls within a specific Moody's Loan Category, to the extent that any Moody's Eligible Asset would fall in more than one of the Moody's Loan Categories, such Moody's Eligible Asset shall be deemed to fall into the Moody's Loan Category with the lowest applicable Moody's Discount Factor.
"NAV" has the meaning specified under "Net Asset Value" in this prospectus.
"1940 Act" means the Investment Company Act of 1940, and the rules and regulations thereunder, each as amended from time to time.
"1940 Act Cure Date" has the meaning specified under "Description of Preferred Shares--Asset Maintenance--1940 Act Preferred Shares Asset Coverage" in this prospectus.
"1940 Act Preferred Shares Asset Coverage" has the meaning specified under "Rating Agency Guidelines" in this prospectus.
"Non-Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions."
"Non-Payment Period" has the meaning specified under "Description of Preferred Shares--Dividends--Non-Payment Period; Late Charge" in this prospectus.
"Non-Payment Period Rate" has the meaning specified under "Description of Preferred Shares--Dividends--Non-Payment Period; Late Charge" in this prospectus.
"Normal Dividend Payment Date" has the meaning specified under "Description of Preferred Shares--Dividends--General" in this prospectus.
"Notice of Revocation" has the meaning specified under "Description of Preferred Shares--Dividends--Notification of Dividend Period" in this prospectus.
"Notice of Special Dividend Period" has the meaning specified under "Description of Preferred Shares--Dividends--Notification of Dividend Period" in this prospectus.
"NRSRO" means a nationally recognized statistical rating organization.
"Optional Redemption Price" has the meaning specified under "Description of Preferred Shares--Redemption--Optional Redemption" in this prospectus.
"Order" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in this prospectus.
"Performing" means, with respect to the issuer of any asset that is a Bank Loan or other debt, the issuer of such investment is not in default of any payment obligations in respect thereof.
"PIMCO" means Pacific Investment Management Company LLC.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a Broker-Dealer that is not a Beneficial Owner of Preferred Shares but that wishes to purchase such shares, or that is a Beneficial Owner that wishes to purchase additional Preferred Shares.
"Potential Holder" means any Broker-Dealer or any such other person as may be permitted by the Fund, including any Existing Holder, who may be interested in acquiring Preferred Shares (or, in the case of an Existing Holder, additional Preferred Shares).
"Preferred Shares" means the Auction Rate Cumulative Preferred Shares issued pursuant to this prospectus, with a par value of $0.00001 per share and a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared), of the Fund.
"Preferred Shares Basic Maintenance Amount" has the meaning specified under "Description of Preferred Shares--Asset Maintenance--Preferred Shares Basic Maintenance Amount" in this prospectus.
"Preferred Shares Basic Maintenance Cure Date" has the meaning specified under "Description of Preferred Shares--Asset Maintenance--Preferred Shares Basic Maintenance Amount" in this prospectus.
"Preferred Shares Basic Maintenance Report" has the meaning specified under "Description of Preferred Shares--Asset Maintenance--Preferred Shares Basic Maintenance Amount" in this prospectus.
"Premium Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions" below.
"Pricing Service" means any pricing service designated by the Board of Trustees and approved by Fitch Ratings, Moody's or any Substitute Rating Agency, as applicable, for purposes of determining whether the Fund has Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount.
"Rating Agency" means Moody's or Fitch Ratings, as long as such rating agency is then rating the Preferred Shares, and any Substitute Rating Agency.
"Reference Rate" means the applicable "AA" Financial 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).
"REITs" means real estate investment trusts.
"Reorganization Bonds" has the meaning set forth in paragraph (vi) of the definition of "Fitch Eligible Assets."
"Request for Special Dividend Period" has the meaning specified under "Description of Preferred Shares--Dividends--Notification of Dividend Period" in this prospectus.
"Response" has the meaning specified under "Description of Preferred Shares--Dividends--Notification of Dividend Period" in this prospectus.
"Rule 144A Securities" means securities which are restricted as to resale under federal securities laws but are eligible for resale pursuant to Rule 144A under the Securities Act as determined by the Fund's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Trustees.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., or its successors.
"Securities Act" means the Securities Act of 1933, and the rules and regulations thereunder, each as amended from time to time.
"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 Preferred Shares.
"Sell Order" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in this prospectus.
"Senior Loans" has the meaning set forth under the definition of "Moody's Discount Factor."
"7-Day Dividend Period" means a Subsequent Dividend Period that (a) consists of seven days or (b) would consist of seven days but for the fact that the Dividend Payment Date which immediately follows, or the Dividend Payment Date which falls within, such Subsequent Dividend Period is not a Business Day.
"Short Term Dividend Period" has the meaning specified under "Summary--Dividends on Preferred Shares" in this prospectus.
"Short Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Fund, the remaining term to maturity thereof is not in excess of 180 days (or 270 days for instruments rated at least Aaa for purposes of determining Moody's Eligible Assets):
(i) commercial paper rated either F1 by Fitch Ratings or A-1 by S&P if such commercial paper matures in 30 days or P-1 by Moody's and either F1+ by Fitch Ratings or A-1+ by S&P if such commercial paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and 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);
(iii) overnight funds;
(iv) U.S. Government Securities; and
(v) 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 if 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-1 from Moody's and either F1+ from Fitch Ratings or A-1+ 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 Ratings 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 Ratings 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-1 by Moody's, F1+ by Fitch Ratings or A-1+ 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); and provided further that the interest receivable by the Fund shall not be subject to any withholding or similar taxes.
"Special Dividend Period" has the meaning specified under "Prospectus Summary--Dividends on Preferred Shares" in this prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend Period, either or both of (i) a period (a "Non-Call Period") determined by the Board of Trustees, after consultation with the Auction Agent and the Broker-Dealers, during which the Preferred Shares subject to such Special Dividend Period shall not be subject to redemption at the option of the Fund and (ii) a period (a "Premium Call Period"), consisting of a number of whole years and determined by the Board of Trustees after consultation with the Auction Agent and the Broker-Dealers, during each year of which the Preferred Shares subject to such Special Dividend Period shall be redeemable at the Fund's option at a price per share equal to $25,000 plus accumulated but unpaid dividends (whether or not earned or declared) to (but not including) the date fixed for redemption, plus a premium expressed as a percentage or percentages of $25,000, as determined by the Board of Trustees after consultation with the Auction Agent and the Broker-Dealers.
"Structured Notes," for purposes of the definitions of Fitch Discount Factor, Fitch Eligible Assets, Moody's Discount Factor and Moody's Eligible Assets, means privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset or market (an "embedded index"), such as selected securities or an index of securities, or the differential performance of two assets or markets, such as indices reflecting bonds.
"Submission Deadline" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Submission of Orders by Broker-Dealers to Auction Agent" in this prospectus.
"Submitted Bid" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" in this prospectus.
"Submitted Hold Order" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" in this prospectus.
"Submitted Order" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" in this prospectus.
"Submitted Sell Order" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" in this prospectus.
"Subsequent Dividend Period" means each Dividend Period after the Initial Dividend Period.
"Substitute Rating Agency" means an NRSRO selected by Citigroup Global Markets Inc., or its affiliates and successors, after consultation with the Fund, to act as a substitute rating agency to determine the credit ratings of the Preferred Shares.
"Sufficient Clearing Bids" has the meaning specified in Subsection 11.10(d)(i) of the Auction Procedures.
"TRACERs" means traded custody receipts representing direct ownership in a portfolio of underlying securities.
"TRAINs" means Targeted Return Index Securities, which are trust certificates comprised of bonds that are chosen to track a particular index.
"Treasury Bill" means a direct obligation of the U.S. Government having a maturity at the time of issuance of 364 days or less.
"Treasury Bonds" means United States Treasury Bonds or Notes.
"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.
"Underwriters" has the meaning specified under "Summary--The Offering" in this prospectus.
"U.S. Government Securities," for purposes of the definitions of Fitch Discount Factor, Fitch Eligible Assets, Moody's Discount Factor, Moody's Eligible Assets and Short Term Money Market Instruments, means direct obligations of the United States or of its agencies or instrumentalities that are entitled to the full faith and credit of the United States and that, other than Treasury Bills, provide for the periodic payment of interest and the full payment of principal at maturity or call for redemption.
"U.S. Treasury Securities" means direct obligations of the United States Treasury that are entitled to the full faith and credit of the United States.
"U.S. Treasury Strips" means securities based on U.S. Treasury Securities created through the Separate Trading of Registered Interest and Principal of Securities program.
"Valuation Date" has the meaning specified under "Description of Preferred Shares--Asset Maintenance--Preferred Shares Basic Maintenance Amount" in this prospectus.
"Volatility Factor" means 1.89.
"Winning Bid Rate" has the meaning specified under "Description of Preferred Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" in this prospectus.
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
The Fund's investments may range in quality from securities rated in the lowest category to securities rated in the highest category (as rated by Moody's or S&P or, if unrated, determined by PIMCO to be of comparable quality). The percentage of the Fund's assets invested in securities in a particular rating category will vary. The following terms are generally used to describe the credit quality of debt securities:
High Quality Debt Securities are those rated in one of the two highest rating categories (the highest category for commercial paper) or, if unrated, deemed comparable by PIMCO.
Investment Grade Debt Securities are those rated in one of the four highest rating categories or, if unrated, deemed comparable by PIMCO.
Below Investment Grade, High Yield Securities ("Junk Bonds") are those rated lower than Baa by Moody's or BBB by S&P and comparable securities. They are deemed predominantly speculative with respect to the issuer's ability to repay principal and interest.
Following is a description of the rating categories of Moody's, S&P and Fitch Ratings applicable to debt securities.
Moody's Investors Service, Inc.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than with Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are to be considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts, senior bank obligations and insurance company senior policyholder and claims obligations with an original maturity in excess of one year. Obligations relying upon support mechanisms such as letter-of-credit and bonds of indemnity are excluded unless explicitly rated. Obligations of a branch of a bank are considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior obligations extends only to branches located in countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for the country in which the branch is located. When the currency in which an obligation is denominated is not the same as the currency of the country in which the obligation is domiciled, Moody's ratings do not incorporate an opinion as to whether payment of the obligation will be affected by the actions of the government controlling the currency of denomination. In addition, risk associated with bilateral conflicts between an investor's home country and either the issuer's home country or the country where an issuer branch is located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company obligations are exempt from registration under the U.S. Securities Act of 1933 or issued in conformity with any other applicable law or regulation. Nor does Moody's represent any specific bank or insurance company obligation is legally enforceable or a valid senior obligation of a rated issuer.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating classified from Aa through Caa in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return
on funds employed; conservative capitalization structure with moderate reliance
on debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established
access to a range of financial markets and assured sources of alternate
liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market compositions may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating categories.
Short-Term Loans
MIG 1/VMIG 1: This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable
liquidity support, or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2: This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding
group.
MIG 3/VMIG 3: This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established.
SG: This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of
protection.
Standard & Poor's Ratings Services
Issue Credit Rating Definitions
A Standard & Poor's issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings are generally assigned to those obligations considered short term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days--including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on the following considerations: likelihood of payment--capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation; nature of and provisions of the obligation; protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation applies when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.) Accordingly, in the case of junior debt, the rating may not conform exactly with the category definition.
Corporate and Municipal Bond Ratings
Investment Grade
AAA: An obligation rated AAA has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
Speculative Grade
Obligations rated BB, B, CCC, CC, and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated C is currently highly vulnerable to nonpayment. The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A C also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
CI: The rating CI is reserved for income bonds on which no interest is being paid.
D: An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The absence of an "r" symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.
N.R.: This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties.
Commercial Paper Rating Definitions
A Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from A for the highest quality obligations to D for the lowest. These categories are as follows:
A-1: A short-term obligation rated A-1 is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B: A short-term obligation rated B is regarded as having significant speculative characteristics. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase, sell or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information.
Fitch Ratings
AAA
Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA
Very high credit quality. 'AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB
Good credit quality. 'BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
BB
Speculative. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B Highly speculative. 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that default of some kind appears probable. 'C' ratings signal imminent default.
DDD, DD, D
Default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. 'DDD' obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates potential recoveries in the range of 50%-90% and 'D' the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated 'DDD' have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated 'DD' and 'D' are generally undergoing a formal reorganization or liquidation process; those rated 'DD' are likely to satisfy a higher portion of their outstanding obligations, while entities rated 'D' have a poor prospect of repaying all obligations.
Short-Term Ratings
The following ratings scale applies to foreign currency and local currency ratings. A short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added "+" to denote any exceptionally strong credit feature.
Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.
Fair credit quality. The capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
$900,000,000
[LOGO] PIMCO ADVISORS
PIMCO High Income Fund
Auction Rate Cumulative Preferred Shares 7,200 Shares, Series M 7,200 Shares, Series T 7,200 Shares, Series W 7,200 Shares, Series TH 7,200 Shares, Series F
PROSPECTUS
June 23, 2003
Citigroup Merrill Lynch & Co.
UBS Investment Bank
PIMCO HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
June 23, 2003
PIMCO High Income Fund (the "Fund") is a recently organized, diversified closed-end management investment company.
This Statement of Additional Information relating to auction rate cumulative preferred shares of the Fund ("Preferred Shares") is not a prospectus, and should be read in conjunction with the Fund's prospectus relating thereto dated June 23, 2003 (the "Prospectus"). This Statement of Additional Information does not include all information that a prospective investor should consider before purchasing Preferred Shares, 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 (877) 819-2224. You may also obtain a copy of the Prospectus on the web site (http://www.sec.gov) of the Securities and Exchange Commission ("SEC"). Capitalized terms used but not defined in this Statement of Additional Information have the meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
USE OF PROCEEDS ........................................................... 3 INVESTMENT OBJECTIVES AND POLICIES ........................................ 3 INVESTMENT RESTRICTIONS ................................................... 44 MANAGEMENT OF THE FUND .................................................... 46 INVESTMENT MANAGER AND PORTFOLIO MANAGER .................................. 56 PORTFOLIO TRANSACTIONS .................................................... 61 DISTRIBUTIONS ............................................................. 63 DESCRIPTION OF SHARES ..................................................... 63 ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST ............ 64 REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND .................. 66 TAX MATTERS ............................................................... 68 PERFORMANCE RELATED AND COMPARATIVE INFORMATION ........................... 76 CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSMENT AGENT .................. 77 INDEPENDENT ACCOUNTANTS ................................................... 77 COUNSEL ................................................................... 77 REGISTRATION STATEMENT .................................................... 77 FINANCIAL STATEMENTS ...................................................... 79 APPENDIX A - Auction Procedures ........................................... A-1 APPENDIX B - Settlement Procedures ........................................ B-1 |
This Statement of Additional Information is dated June 23, 2003.
USE OF PROCEEDS
The net proceeds of the offering of Preferred Shares of the Fund will be approximately $890,400,000 after payment of offering costs and the sales load.
Pending investment in U.S. dollar-denominated debt obligations and other securities that meet the Fund's investment objectives and policies, it is anticipated that the net proceeds of the offering will be invested in high quality, short-term securities.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and general investment policies of the Fund are described in the Prospectus. Additional information concerning the characteristics of certain of the Fund's investments is set forth below.
High Yield Securities ("Junk Bonds")
As described under "The Fund's Investment Objectives and Strategies" in the Prospectus, under normal market conditions, the Fund seeks to achieve its investment objectives by investing at least 80% of its net assets (plus any borrowing for investment purposes) in debt securities that are, at the time of purchase, rated below investment grade (below Baa by Moody's Investors Service, Inc. ("Moody's"), below BBB by either Standard and Poor's ("S&P") or Fitch, Inc. ("Fitch Ratings"), or below a comparable rating by Dominion Bond Rating Service Limited ("Dominion")) or unrated but judged by Pacific Investment Management Company LLC ("PIMCO"), the Fund's portfolio manager, to be of comparable quality. These securities are sometimes referred to as "high yield" securities or "junk bonds." The Fund will not invest more than 10% of its total assets in securities that are, at the time of purchase, rated CCC/Caa (or a comparable rating by Dominion) or lower by each agency rating the security or unrated but judged by PIMCO to be of comparable quality.
Investments in high yield securities generally provide greater income and increased opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility and principal and income risk, including the possibility of issuer default and bankruptcy. High yield securities are regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Debt securities in the lowest investment grade category also may be considered to possess some speculative characteristics by certain rating agencies. In addition, analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher quality securities.
High yield securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield security prices because the advent of a recession could lessen the ability of an issuer to make principal and interest payments on its debt obligations. If an issuer of high yield securities defaults, in addition to risking non-payment of all or a portion of interest and principal, the Fund may incur additional expenses to seek recovery. The market prices of high yield securities
structured as zero-coupon, step-up or payment-in-kind securities will normally be affected to a greater extent by interest rate changes, and therefore tend to be more volatile than the prices of securities that pay interest currently and in cash. PIMCO seeks to reduce these risks through diversification, credit analysis and attention to current developments and trends in both the economy and financial markets.
The secondary market on which high yield securities are traded may be less liquid than the market for investment grade securities. Less liquidity in the secondary trading market could adversely affect the price at which the Fund could sell a high yield security, and could adversely affect the net asset value of the shares. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield securities, especially in a thinly-traded market. When secondary markets for high yield securities are less liquid than the market for investment grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and the Fund may have greater difficulty selling its portfolio securities. The Fund will be more dependent on PIMCO's research and analysis when investing in high yield securities. PIMCO seeks to minimize the risks of investing through in-depth credit analysis and attention to current developments in interest rates and market conditions.
A general description of the ratings of securities by Moody's, S&P, Fitch Ratings and Dominion is set forth in Appendix A to the Prospectus. The ratings of Moody's, S&P, Fitch Ratings and Dominion represent their opinions as to the quality of the securities they rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, debt obligations with the same maturity, coupon and rating may have different yields while obligations with the same maturity and coupon with different ratings may have the same yield. For these reasons, the use of credit ratings as the sole method of evaluating high yield securities can involve certain risks. For example, credit ratings evaluate the safety of principal and interest payments, not the market value risk of high yield securities. Also, credit rating agencies may fail to change credit ratings in a timely fashion to reflect events since the security was last rated. PIMCO does not rely solely on credit ratings when selecting securities for the Fund, and develops its own independent analysis of issuer credit quality.
The Fund's credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security in the event that a rating agency or PIMCO downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell such a security, PIMCO may consider such factors as PIMCO's assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any, assigned to such security by other rating agencies. However, analysis of creditworthiness may be more complex for issuers of high yield securities than for issuers of higher quality debt securities.
Corporate Bonds
The Fund may invest in a wide variety of bonds and related debt obligations of varying maturities issued by U.S. and foreign corporations and other business entities. Bonds are fixed
or variable rate debt obligations, including bills, notes, debentures, money market instruments and similar instruments and securities. Bonds generally are used by corporations and other issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are "perpetual" in that they have no maturity date.
The Fund's investments in corporate bonds are subject to a number of risks described in the Prospectus and elaborated upon elsewhere in this section of the Statement of Additional Information, including interest rate risk, credit risk, high yield risk, issuer risk, foreign (non-U.S.) investment risk, inflation risk, liquidity risk, smaller company risk and management risk.
Credit Default Swaps
The Fund may enter into credit default swap contracts for hedging purposes or to add leverage to the portfolio. As the seller in a credit default swap contract, the Fund would be required to pay the par (or other agreed-upon) value of a referenced debt obligation to the counterparty in the event of a default by a third party, such as a U.S. or foreign issuer, on the debt obligation. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments and would have no payment obligations. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap.
The Fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the Fund would function as the counterparty referenced in the preceding paragraph. This would involve the risk that the investment may expire worthless and would generate income only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial instability). It would also involve credit risk - that the seller may fail to satisfy its payment obligations to the Fund in the event of a default.
PIMCO currently considers credit default swaps to be illiquid and treats the market value of the contract as illiquid for purposes of determining compliance with the Fund's limitations on on illiquid investments.
Commercial Paper
Commercial paper represents short-term unsecured promissory notes issued in bearer form by corporations such as banks or bank holding companies and finance companies. The Fund may invest in commercial paper of any credit quality consistent with the Fund's investment objectives and policies, including unrated commercial paper for which PIMCO has made a credit quality assessment. See Appendix A to the Prospectus for a description of the ratings assigned by Moody's, S&P, Fitch Ratings and Dominion to commercial paper. The rate of return on commercial paper may be linked or indexed to the level of exchange rates between the U.S. dollar and a foreign currency or currencies.
Preferred Stock
Preferred stock represents an equity interest in a company that generally entitles the holder to receive, in preference to the holders of other stocks such as common stocks, dividends and a fixed share of the proceeds resulting from a liquidation of the company. Some preferred stocks also entitle their holders to receive additional liquidation proceeds on the same basis as holders of a company's common stock, and thus also represent an ownership interest in that company. As described below, the Fund may invest in preferred stocks that pay fixed or adjustable rates of return. The value of a company's preferred stock may fall as a result of factors relating directly to that company's products or services. A preferred stock's value may also fall because of factors affecting not just the company, but companies in the same industry or in a number of different industries, such as increases in production costs. The value of preferred stock may also be affected by changes in financial markets that are relatively unrelated to the company or its industry, such as changes in interest rates or currency exchange rates. In addition, a company's preferred stock generally pays dividends only after the company makes required payments to holders of its bonds and other debt. For this reason, the value of the preferred stock will usually react more strongly than bonds and other debt to actual or perceived changes in the company's financial condition or prospects. Preferred stocks of smaller companies may be more vulnerable to adverse developments than those of larger companies.
Fixed Rate Preferred Stocks. Some fixed rate preferred stocks in which the Fund may invest, known as perpetual preferred stocks, offer a fixed return with no maturity date. Because they never mature, perpetual preferred stocks act like long-term bonds, can be more volatile than other types of preferred stocks that have a maturity date and may have heightened sensitivity to changes in interest rates. The Fund may also invest in sinking fund preferred stocks. These preferred stocks also offer a fixed return, but have a maturity date and are retired or redeemed on a predetermined schedule. The shorter duration of sinking fund preferred stocks makes them perform somewhat like intermediate-term bonds and they typically have lower yields than perpetual preferred stocks.
Adjustable Rate and Auction Preferred Stocks. Typically, the dividend rate on an adjustable rate preferred stock is determined prospectively each quarter by applying an adjustment formula established at the time of issuance of the stock. Although adjustment formulas vary among issues, they typically involve a fixed premium or discount relative to rates on specified debt securities issued by the U.S. Treasury. Typically, an adjustment formula will provide for a fixed premium or discount adjustment relative to the highest base yield of three specified U.S. Treasury securities: the 90-day Treasury bill, the 10-year Treasury note and the 20-year Treasury bond. The premium or discount adjustment to be added to or subtracted from this highest U.S. Treasury base rate yield is fixed at the time of issue and cannot be changed without the approval of the holders of the stock. The dividend rate on other preferred stocks in which the Fund may invest, commonly known as auction preferred stocks, is adjusted at intervals that may be more frequent than quarterly, such as every 49 days, based on bids submitted by holders and prospective purchasers of such stocks and may be subject to stated maximum and minimum dividend rates. The issues of most adjustable rate and auction preferred stocks currently outstanding are perpetual, but are redeemable after a specified date at the option of the issuer. Certain issues supported by the credit of a high-rated financial institution provide for mandatory redemption prior to expiration of the credit arrangement. No redemption can occur if
full cumulative dividends are not paid. Although the dividend rates on adjustable and auction preferred stocks are generally adjusted or reset frequently, the market values of these preferred stocks may still fluctuate in response to changes in interest rates. Market values of adjustable preferred stocks also may substantially fluctuate if interest rates increase or decrease once the maximum or minimum dividend rate for a particular stock is approached.
Convertible Securities and Synthetic Convertible Securities
The Fund may invest in convertible securities, which are bonds, debentures, notes or other securities that entitle the holder to acquire common stock or other equity securities of the same or a different issuer. Convertible securities have general characteristics similar to both debt and equity securities. PIMCO will generally evaluate these instruments based on their debt characteristics.
A convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to non-convertible debt obligations. Convertible securities rank senior to common stock in a corporation's capital structure and, therefore, generally entail less risk than the corporation's common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a debt obligation.
Because of the conversion feature, the price of the convertible security will normally fluctuate in some proportion to changes in the price of the underlying asset, and will therefore be subject to risks relating to the activities of the issuer and/or general market and economic conditions. The income component of convertible securities may tend to cushion the securities against declines in the price of the underlying asset. However, the income component of convertible securities will typically cause fluctuations based upon changes in interest rates and the credit quality of the issuer. In addition, convertible securities are often lower-rated securities. See "--High Yield Securities ("Junk Bonds") above.
A convertible security may be subject to redemption at the option of the issuer at a predetermined price. If a convertible security held by the Fund is called for redemption, the Fund would be required to permit the issuer to redeem the security and convert it to underlying common stock, or would sell the convertible security to a third party, which may have an adverse effect on the Fund's ability to achieve its investment objectives.
The Fund may invest in so-called "synthetic convertible securities," which are composed of two or more different securities whose investment characteristics, taken together, resemble those of convertible securities. For example, the Fund may purchase a non-convertible debt security and a warrant or option. The synthetic convertible security differs from the true convertible security in several respects. Unlike a true convertible security, which is a single security having a unitary market value, a synthetic convertible security comprises two or more separate securities, each with its own market value. Therefore, the "market value" of a synthetic convertible security is the sum of the values of its debt component and its convertible component. For this reason, the values of a synthetic convertible security and a true convertible security may respond differently to market fluctuations.
Bank Obligations
Bank obligations in which the Fund may invest include certificates of deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit are negotiable certificates that are issued against funds deposited in a commercial bank for a definite period of time and that earn a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. There are generally no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits. The Fund may also hold funds on deposit with its custodian bank in an interest-bearing account for temporary purposes.
Subject to the Fund's limitation on concentration of no more than 25% of its total assets in the securities of issuers in a particular industry, the Fund may invest without limit in U.S. dollar-denominated obligations of foreign banks and up to 15% of its total assets in foreign bank obligations denominated in foreign currencies (of both developed and "emerging market" countries). Obligations of foreign banks involve certain risks associated with investing in foreign securities described under "--Foreign (Non-U.S.) Securities" below, including the possibilities that their liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable than comparable obligations of U.S. banks, that a foreign jurisdiction might impose withholding taxes on interest income payable on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange controls may be adopted which might adversely affect the payment of principal and interest on those obligations and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to U.S. banks. Foreign banks are not generally subject to examination by any U.S. Government agency or instrumentality.
Loan Participations and Assignments
The Fund may purchase participations in commercial loans. Such indebtedness may be secured or unsecured. Loan participations typically represent direct participations in a loan to a corporate borrower, and generally are offered by banks or other financial institutions or lending syndicates. The Fund may participate in such syndications, or can buy part of a loan, becoming a part lender. When purchasing loan participations, the Fund assumes the credit risk associated with the corporate borrower and may assume the credit risk associated with an interposed bank or other financial intermediary. The participation interests in which the Fund intends to invest may not be rated by any nationally recognized rating service. Given the current structure of the markets for loan participations and assignments, the Fund expects to treat these securities as illiquid. Bank loans purchased by the Fund will typically be part of an issue of at least $250 million in par value, which PIMCO believes are generally more liquid than bank loans that are part of smaller issues.
A loan is often administered by an agent bank acting as agent for all holders. The agent bank administers the terms of the loan, as specified in the loan agreement. In addition, the agent bank is normally responsible for the collection of principal and interest payments from the corporate borrower and the apportionment of these payments to the credit of all institutions which are parties to the loan agreement. Unless, under the terms of the loan or other indebtedness, the Fund has direct recourse against the corporate borrower, the Fund may have to rely on the agent bank or other financial intermediary to apply appropriate credit remedies against a corporate borrower.
A financial institution's employment as agent bank might be terminated in the event that it fails to observe a requisite standard of care or becomes insolvent. A successor agent bank would generally be appointed to replace the terminated agent bank, and assets held by the agent bank under the loan agreement should remain available to holders of such indebtedness. However, if assets held by the agent bank for the benefit of the Fund were determined to be subject to the claims of the agent bank's general creditors, the Fund might incur certain costs and delays in realizing payment on a loan or loan participation and could suffer a loss of principal and/or interest. In situations involving other interposed financial institutions (e.g., an insurance company or government agency) similar risks may arise.
Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the corporate borrower for payment of principal and interest. If the Fund does not receive scheduled interest or principal payments on such indebtedness, the Fund's share price and yield could be adversely affected. Loans that are fully secured offer the Fund more protection than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the liquidation of collateral from a secured loan would satisfy the corporate borrower's obligation, or that the collateral can be liquidated.
The Fund may invest in loan participations with credit quality comparable to that of issuers of its securities investments. Indebtedness of companies whose creditworthiness is poor involves substantially greater risks, and may be highly speculative. Some companies may never pay off their indebtedness, or may pay only a small fraction of the amount owed. Consequently, when investing in indebtedness of companies with poor credit, the Fund bears a substantial risk of losing the entire amount invested.
The Fund limits the amount of its total assets that it will invest in any one issuer or in issuers within the same industry (see "Investment Restrictions"). For purposes of these limits, the Fund generally will treat the corporate borrower as the "issuer" of indebtedness held by the Fund. In the case of loan participations where a bank or other lending institution serves as a financial intermediary between the Fund and the corporate borrower, if the participation does not shift to the Fund the direct debtor-creditor relationship with the corporate borrower, SEC interpretations require the Fund to treat both the lending bank or other lending institution and the corporate borrower as "issuers" for the purposes of determining whether the Fund has invested more than 5% of its total assets in a single issuer. Treating a financial intermediary as an issuer of indebtedness may restrict the Fund's ability to invest in indebtedness related to a single financial intermediary, or a group of intermediaries engaged in the same industry, even if the underlying borrowers represent many different companies and industries.
Loans and other types of direct indebtedness may not be readily marketable and may be subject to restrictions on resale. In some cases, negotiations involved in disposing of indebtedness may require weeks to complete. Consequently, some indebtedness may be difficult or impossible to dispose of readily at what PIMCO believes to be a fair price. In addition, valuation of illiquid indebtedness involves a greater degree of judgment in determining the Fund's net asset value than if that value were based on available market quotations, and could result in significant variations in the Fund's daily share price. At the same time, some loan interests are traded among certain financial institutions and accordingly may be deemed liquid. As the market for different types of indebtedness develops, the liquidity of these instruments is expected to improve. In addition, the Fund currently intends to treat indebtedness for which there is no readily available market as illiquid for purposes of the Fund's limitation on illiquid investments. Investments in loan participations are considered to be debt obligations for purposes of the Fund's investment restriction relating to the lending of funds or assets.
Investments in loans through a direct assignment of the financial institution's interests with respect to the loan may involve additional risks to the Fund. For example, if a loan is foreclosed, the Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral. In addition, it is conceivable that, under emerging legal theories of lender liability, the Fund could be held liable as co-lender. It is unclear whether loans and other forms of direct indebtedness offer securities law protections against fraud and misrepresentation. In the absence of definitive regulatory guidance, the Fund relies on PIMCO's research in an attempt to avoid situations where fraud or misrepresentations could adversely affect the Fund.
Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities
Zero-coupon securities are debt obligations that do not entitle the holder to any periodic payments of interest either for the entire life of the obligation or for an initial period after the issuance of the obligations. Like zero-coupon bonds, "step-up" bonds pay no interest initially but eventually begin to pay a coupon rate prior to maturity, which rate may increase at stated intervals during the life of the security. Payment-in-kind securities (PIKs) pay dividends or interest in the form of additional securities of the issuer, rather than in cash. Each of these instruments is typically issued and traded at a deep discount from its face amount. The amount of the discount varies depending on such factors as the time remaining until maturity of the securities, prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. The market prices of zero-coupon bonds, step-ups and PIKs generally are more volatile than the market prices of debt instruments that pay interest currently and in cash and are likely to respond to changes in interest rates to a greater degree than do other types of securities having similar maturities and credit quality. In order to satisfy a requirement for qualification as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), an investment company, such as the Fund, must distribute each year at least 90% of its net investment income, including the original issue discount accrued on zero-coupon bonds, step-ups and PIKs. Because the Fund will not, on a current basis, receive cash payments from the issuer of these securities in respect of any accrued original issue discount, in some years the Fund may have to distribute cash obtained from selling other portfolio holdings of the Fund. In some circumstances, such sales might be necessary in order to satisfy cash distribution requirements even though investment considerations might otherwise make it undesirable for the
Fund to sell securities at such time. Under many market conditions, investments in zero-coupon bonds, step-ups and PIKs may be illiquid, making it difficult for the Fund to dispose of them or determine their current value.
Foreign (Non-U.S.) Securities
The Fund may invest some or all of its total assets in U.S. dollar-denominated debt obligations of foreign issuers, including foreign issuers, such as foreign banks (see "--Bank Obligations" above), and obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies and supra-national government entities. The Fund may also invest up to 15% of its total assets in debt instruments denominated in foreign currencies (of both developed and "emerging market" countries), including obligations of non-U.S. governments and their respective sub-divisions, agencies and government-sponsored enterprises. The Fund may invest without limit in U.S. dollar-denominated securities of issues located in developed countries, and may invest up to 7.5% of its total assets in securities (regardless of the currency in which such investments are denominated) of issues located in "emerging market" countries.
The U.S. dollar-denominated foreign securities in which the Fund may invest include Eurodollar obligations and "Yankee Dollar" obligations. Eurodollar obligations are U.S. dollar-denominated certificates of deposit and time deposits issued outside the U.S. capital markets by foreign branches of U.S. banks and by foreign banks. Yankee Dollar obligations are U.S. dollar-denominated obligations issued in the U.S. capital markets by foreign banks. Eurodollar and Yankee Dollar obligations are generally subject to the same risks that apply to domestic debt issues, notably credit risk, market risk and liquidity risk. Additionally, Eurodollar (and to a limited extent, Yankee Dollar) obligations are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of U.S. dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulation of financial markets and institutions; the imposition of foreign withholding taxes; and the expropriation or nationalization of foreign issuers.
The Fund may also invest in American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or Global Depository Receipts ("GDRs"). ADRs are U.S. dollar-denominated receipts issued generally by domestic banks and represent the deposit with the bank of a security of a foreign issuer. EDRs are foreign currency-denominated receipts similar to ADRs and are issued and traded in Europe, and are publicly traded on exchanges or over-the-counter in the United States. GDRs may be offered privately in the United States and also trade in public or private markets in other countries. ADRs, EDRs and GDRs may be issued as sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs, EDRs or GDRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program.
The Fund also may invest in Brady Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in
connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings have been implemented in a number of countries, including: Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines, Poland, Uruguay, and Venezuela.
Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market. Brady Bonds are not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one year's interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to "value recovery payments" in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at maturity (the uncollateralized amounts constitute the "residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at final maturity fully collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and interest coupon payments collateralized on an 18-month rolling-forward basis by funds held in escrow by an agent for the bondholders. A significant portion of the Venezuelan Brady Bonds and the Argentine Brady Bonds issued to date have repayments at final maturity collateralized by U.S. Treasury zero-coupon bonds (or comparable collateral denominated in other currencies) and/or interest coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for Argentina) rolling-forward basis by securities held by the Federal Reserve Bank of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and the history of defaults with respect to commercial bank loans by public and private entities of countries issuing Brady Bonds. There can be no assurance that Brady Bonds in which the Fund may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Fund to suffer a loss of interest or principal on any of its holdings.
Investing in the securities of foreign issuers involves special risks and considerations not typically associated with investing in U.S. companies. These include: differences in accounting; auditing and financial reporting standards; generally higher commission rates on foreign portfolio transactions; the possibility of expropriation or confiscatory taxation; adverse changes in investment or exchange control regulations (which may include suspension of the ability to transfer currency from a country); political instability which can affect U.S. investments in foreign countries and potential restrictions on the flow of international capital. In addition, foreign securities and dividends and interest payable on those securities may be subject to
foreign taxes, including taxes withheld from payments on those securities. Foreign securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. Changes in foreign exchange rates will affect the value of those securities which are denominated or quoted in currencies other than the U.S. dollar.
Emerging Market Securities. The risks of investing in foreign securities are particularly high when securities of issuers based in or denominated in currencies of developing (or "emerging market") countries are involved. Investing in emerging market countries involves certain risks not typically associated with investing in U.S. securities, and imposes risks greater than, or in addition to, risks of investing in foreign, developed countries. These risks include: greater risks of nationalization or expropriation of assets or confiscatory taxation; currency devaluations and other currency exchange rate fluctuations; greater social, economic and political uncertainty and instability (including the risk of war); more substantial government involvement in the economy; less government supervision and regulation of the securities markets and participants in those markets; controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; unavailability of currency hedging techniques in certain emerging market countries; the fact that companies in emerging market countries may be smaller, less seasoned and newly organized; the difference in, or lack of, auditing and financial reporting standards, which may result in unavailability of material information about issuers; the risk that it may be more difficult to obtain and/or enforce a judgment in a court outside the United States; and greater price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets. In addition, a number of emerging market countries restrict, to various degrees, foreign investment in securities, and high rates of inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Also, any change in the leadership or politics of emerging market countries, or the countries that exercise a significant influence over those countries, may halt the expansion of or reverse the liberalization of foreign investment policies now occurring and adversely affect existing investment opportunities.
Sovereign Debt. Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of the debt. A governmental entity's willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy toward the International Monetary Fund, and the political constraints to which a governmental entity may be subject. Governmental entities may also depend on expected disbursements from foreign governments, multilateral agencies and others to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to service its debts in a timely manner. Consequently, governmental entities may
default on their sovereign debt. Holders of sovereign debt (including the Fund) may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. There is no bankruptcy proceeding by which sovereign debt on which governmental entities have defaulted may be collected in whole or in part.
The Fund's investments in foreign currency-denominated debt obligations and hedging activities will likely produce a difference between its book income and its taxable income. This difference may cause a portion of the Fund's income distributions to constitute returns of capital for tax purposes or require the Fund to make distributions exceeding book income to qualify as a regulated investment company for federal income tax purposes.
Foreign Currency Transactions
The Fund also may purchase and sell foreign currency options and foreign currency futures contracts and related options (see "--Derivative Instruments" below), and may engage in foreign currency transactions either on a spot (cash) basis at the rate prevailing in the currency exchange market at the time or through forward foreign currency exchange contracts ("forwards") with terms generally of less than one year. The Fund may engage in these transactions in order to protect against uncertainty in the level of future foreign exchange rates in the purchase and sale of securities. The Fund may also use foreign currency options and foreign currency forward contracts to increase exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another. The Fund normally will seek to hedge at least 75% of its exposure to foreign currencies in order to reduce the risk of loss due to fluctuations in currency exchange rates. Suitable currency hedging transactions may not be available in all circumstances and PIMCO may decide not to use hedging transactions that are available.
A forward involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts may be bought or sold to protect the Fund against a possible loss resulting from an adverse change in the relationship between foreign currencies and the U.S. dollar or to increase exposure to a particular foreign currency. Open positions in forwards used for non-hedging purposes will be covered by the segregation with the Fund's custodian of assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, and are marked to market daily. Although forwards are intended to minimize the risk of loss due to a decline in the value of the hedged currencies, at the same time, they tend to limit any potential gain which might result should the value of such currencies increase. Forwards will be used primarily to adjust the foreign exchange exposure of the Fund with a view to protecting the outlook, and the Fund might be expected to enter into such contracts under the following circumstances:
Lock In. When PIMCO desires to lock in the U.S. dollar price on the purchase or sale of a security denominated in a foreign currency.
Cross Hedge. If a particular currency is expected to decrease against another currency, the Fund may sell the currency expected to decrease and purchase a currency that is expected to
increase against the currency sold in an amount approximately equal to some or all of the Fund's portfolio holdings denominated in the currency sold.
Direct Hedge. If PIMCO wants to eliminate substantially all of the risk of owning a particular currency, and/or if PIMCO believes that the Fund can benefit from price appreciation in a given country's debt obligations but does not want to hold the currency, it may employ a direct hedge back into the U.S. dollar. In either case, the Fund would enter into a forward contract to sell the currency in which a portfolio security is denominated and purchase U.S. dollars at an exchange rate established at the time it initiated a contract. The cost of the direct hedge transaction may offset most, if not all, of the yield advantage offered by the foreign security, but the Fund would hope to benefit from an increase (if any) in the value of the debt obligation.
Proxy Hedge. PIMCO might choose to use a proxy hedge, which may be less costly than a direct hedge. In this case, the Fund, having purchased a security, will sell a currency whose value is believed to be closely linked to the currency in which the security is denominated. Interest rates prevailing in the country whose currency was sold would be expected to be close to those in the United States and lower than those of securities denominated in the currency of the original holding. This type of hedging entails greater risk than a direct hedge because it is dependent on a stable relationship between the two currencies paired as proxies and the relationships can be very unstable at times.
Costs of Hedging. When the Fund purchases a foreign bond with a higher interest rate than is available on U.S. bonds of a similar maturity, the additional yield on the foreign bond could be substantially reduced or lost if the Fund were to enter into a direct hedge by selling the foreign currency and purchasing the U.S. dollar. This is what is known as the "cost" of hedging. Proxy hedging attempts to reduce this cost through an indirect hedge back to the U.S. dollar.
It is important to note that hedging costs are treated as capital transactions and are not, therefore, deducted from the Fund's dividend distribution and are not reflected in its yield.
Tax Consequences of Hedging. Under applicable tax law, the Fund's hedging activities may result in the application of the mark-to-market and straddle provisions of the Code. Those provisions could result in an increase (or decrease) in the amount of taxable dividends paid by the Fund and could affect whether dividends paid by the Fund are classified as capital gains or ordinary income.
Foreign Currency Exchange-Related Securities
Foreign Currency Warrants. Foreign currency warrants, such as Currency Exchange Warrants(SM) ("CEWs(SM)"), are warrants that entitle their holders to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. dollars) that is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency and the U.S. dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specific date and time. Foreign currency warrants have been issued in connection with U.S. dollar-denominated debt offerings by major issuers in an attempt to reduce the foreign currency
exchange risk that, from the point of view of the prospective purchasers of the securities, is inherent in the international debt obligation marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplement payment in the event that the U.S. dollar depreciates against the value of a major foreign currency such as the Japanese yen. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction (e.g., unless the U.S. dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining "time values" of the warrants (i.e., the difference between the current market value and the exercise value of the warrants), and, if the warrants were "out-of-the-money," in a total loss of the purchase price of the warrants. Warrants are generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation ("OCC"). Unlike foreign currency options issued by the OCC, the terms of foreign exchange warrants generally will not be amended in the event of government or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate linked securities ("PERLs(SM)") are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. dollar and a particular foreign currency at or about that time. The return on "standard" principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. dollar, and is adversely affected by increases in the foreign exchange value of the U.S. dollar; "reverse" principal exchange rate linked securities are like "standard" securities, except that their return is enhanced by increases in the value of the U.S. dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. dollars at rates that reflect the degree of foreign currency risk assumed or given up by the purchaser of the notes (i.e., at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not
without the consent of the holders of the securities), which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper ("PIPs(SM)") is U.S. dollar-denominated commercial paper the yield of which is linked to certain foreign exchange rate movements. The yield to the investor on performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. dollar and a designated currency as of or about that time (generally, the index maturity two days prior to maturity). The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on U.S. dollar-denominated commercial paper, with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.
Derivative Instruments
In pursuing its investment objectives, the Fund may purchase and sell
(write) both put options and call options on securities, swap agreements, and
securities indexes, and enter into interest rate and index futures contracts and
purchase and sell options on such futures contracts ("futures options") for
hedging or risk management purposes or as part of its overall investment
strategy. The Fund also may enter into swap agreements with respect to interest
rates, currencies, securities indexes and other assets and measures of risk or
return. If other types of financial instruments, including other types of
options, futures contracts or futures options are traded in the future, the Fund
may also use those instruments, provided that the Trustees determine that their
use is consistent with the Fund's investment objectives. The Fund may invest in
derivatives without limit for hedging purposes, and may invest up to 25% (10%
within 90 days of the date of the Prospectus) of its total assets in derivatives
for non-hedging purposes. For these purposes, "hedging purposes" shall include
the use of a derivative instrument to cause the Fund to more closely resemble
the Merrill Lynch U.S. High Yield BB-B Rated Index with respect to credit
quality, average portfolio duration, and/or average portfolio yield-to-maturity.
The value of some derivative instruments in which the Fund may invest may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Fund, the ability of the Fund to successfully utilize these instruments may depend in part upon the ability of PIMCO to forecast interest rates and other economic factors correctly. If PIMCO incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Fund could be exposed to the risk of loss.
The Fund might not employ any of the strategies described below, and no assurance can be given that any strategy used will succeed. If PIMCO incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy for the Fund, the Fund might have been in a better position if it had not entered into the transaction at all. Also, suitable derivative transactions may not be available in all circumstances. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative instruments and price movements of related investments. While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements
in related investments or otherwise, due to the possible inability of the Fund to purchase or sell a portfolio security at a time that otherwise would be favorable or the possible need to sell a portfolio security at a disadvantageous time because the Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of the Fund to close out or to liquidate its derivatives positions. Income earned by the Fund from many derivative strategies will be treated as capital gain and, if not offset by net realized capital loss, will be distributed to shareholders in taxable distributions.
Options on Securities, Swap Agreements and Indexes. The Fund may purchase and sell both put and call options on securities, swap agreements or indexes in standardized contracts traded on domestic or other securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on an over-the-counter market, and agreements, sometimes called cash puts, which may accompany the purchase of a new issue of debt obligations from a dealer.
An option on a security (or an index) is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect features of a particular securities market, a specific group of financial instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they are "covered." In the case of a call option on a debt obligation or other security, the option is "covered" if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or other assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in such amount are segregated by its custodian) upon conversion or exchange of other securities held by the Fund. For a call option on an index, the option is covered if the Fund maintains with its custodian assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in an amount equal to the contract value of the index. A call option is also covered if the Fund holds a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees. A put option on a security or an index is "covered" if the Fund segregates assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees equal to the exercise price. A put option is also covered if the Fund holds a put on the same security or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees.
If an option written by the Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium the Fund received at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires.
The Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series. The Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an asset of the Fund. The premium received for an option written by the Fund is recorded as a deferred credit. The value of an option purchased or written is marked to market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices.
The Fund may write covered straddles consisting of a combination of a call and a put written on the same underlying security. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is "in the money."
Risks Associated with Options on Securities and Indexes. There are several risks associated with transactions in options on securities and on indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
During the option period, the covered call writer has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying security above the exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security remains equal to or greater than the exercise price (in the case of a put), or remains less than or equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security.
There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. If the Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If the Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without exercise. As the writer of a covered call option, the Fund forgoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding.
Foreign Currency Options. The Fund may buy or sell put and call options on foreign currencies for investment purposes or as a hedge against changes in the value of the U.S. dollar (or another currency) in relation to a foreign currency in which the Fund's securities may be denominated. The Fund may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Fund to reduce foreign currency risk using such options.
Futures Contracts and Options on Futures Contracts. The Fund may invest in interest rate futures contracts and options thereon ("futures options"). The Fund may also purchase and sell futures contracts on debt obligations (to the extent they are available) and U.S. Government and agency securities, as well as purchase put and call options on such futures contracts.
A futures contract provides for the future sale by one party and purchase by another party of a specified quantity of the security or other financial instrument at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Although the value of an index might be a function of the value of certain
specified securities, physical delivery of these securities is not always made. A public market exists in futures contracts covering a number of indexes as well as financial instruments, including, without limitation: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day commercial paper; bank certificates of deposit; Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar; the British pound; the Japanese yen; the Swiss franc; the Mexican peso; and certain multinational currencies, such as the euro. It is expected that other futures contracts will be developed and traded in the future.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission under which the Fund avoids being deemed a "commodity pool" or a "commodity pool operator," the Fund intends generally to limit its use of futures contracts and futures options to "bona fide hedging" transactions, as such term is defined in applicable regulations, interpretations and practice. For example, the Fund might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Fund's debt obligations or the price of the debt obligations that the Fund intends to purchase. The Fund's hedging activities may include sales of futures contracts as an offset against the effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options.
The Fund may enter into futures contracts and futures options that are standardized and traded on a U.S. or other exchange, board of trade, or similar entity, or quoted on an automated quotation system, and the Fund may also enter into OTC options on futures contracts.
When a purchase or sale of a futures contract is made by the Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract that is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. The Fund expects to earn taxable interest income on its initial margin deposits. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, the Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (involving the same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations.
The Fund may write covered straddles consisting of a call and a put written on the same underlying futures contract. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is "in the money."
Limitations on Use of Futures and Futures Options. As noted above, the Fund generally intends to enter into positions in futures contracts and related options only for "bona fide hedging" purposes. With respect to positions in futures and related options that do not constitute bona fide hedging positions, the Fund will not enter into a futures contract or futures option contract if, immediately thereafter, the aggregate initial margin deposits relating to such positions plus premiums paid by it for open futures option positions, less the amount by which any such options are "in the money," would exceed 5% of the Fund's liquidation value, after taking into account unrealized profits and unrealized losses on any such contracts into which the Fund has entered. A call option is "in the money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in the money" if the exercise price exceeds the value of the futures contract that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, the Fund may "cover" its position by purchasing a put option on the same futures contract with a strike price as high as or higher than the price of the contract held by the Fund.
When selling a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning the
instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Fund's custodian).
When selling a call option on a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the Fund may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Fund to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain with its custodian (and mark to market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, the Fund may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same as or higher than the strike price of the put option sold by the Fund.
To the extent that securities with maturities greater than one year are used to segregate assets to cover the Fund's obligations under futures contracts and related options, such use will not eliminate the leverage risk arising from such use, which may tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Fund's portfolio, and may require liquidation of portfolio positions when it is not advantageous to do so.
The requirements for qualification as a regulated investment company also may limit the extent to which the Fund may enter into futures, futures options or forward contracts. See "Tax Matters."
Risks Associated with Futures and Futures Options. There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the Fund securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for futures and futures options on securities, including technical influences in futures trading and futures options, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. A decision as to whether, when and how
to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends.
Futures contracts on U.S. Government securities historically have reacted to an increase or decrease in interest rates in a manner similar to that in which the underlying U.S. Government securities reacted. To the extent, however, that the Fund enters into such futures contracts, the value of such futures will not vary in direct proportion to the value of the Fund's holdings of debt obligations. Thus, the anticipated spread between the price of the futures contract and the hedged security may be distorted due to differences in the nature of the markets. The spread also may be distorted by differences in initial and variation margin requirements, the liquidity of such markets and the participation of speculators in such markets.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the Fund seeks to close out a futures contract or a futures option position, and the Fund would remain obligated to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts and Forward Currency Exchange Contracts and Options thereon.
Options on securities, futures contracts, options on futures contracts, and
options on currencies may be traded on foreign exchanges. Such transactions may
not be regulated as effectively as similar transactions in the United States,
may not involve a clearing mechanism and related guarantees, and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities. Some foreign exchanges may be principal markets so that no common
clearing facility exists and a trader may look only to the broker for
performance of the contract. The value of such positions also could be adversely
affected by (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (v) lesser
trading volume. In addition, unless the Fund hedges against fluctuations in the
exchange rate between the U.S. dollar and the currencies in which trading is
done on foreign exchanges, any profits that the Fund might realize in trading
could be eliminated by adverse changes in the exchange rate, or the Fund could
incur losses as a result of those changes. The Fund's use of such instruments
may cause the Fund to realize higher amounts of short-term
capital gains (generally taxed to shareholders at ordinary income tax rates) than if the Fund had not used such instruments.
Swap Agreements. The Fund may enter into swap agreements with respect to
interest rates, currencies, indexes of securities and other assets or measures
of risk or return. The Fund may also enter into options on swap agreements
("swaptions"). These transactions are entered into in an attempt to obtain a
particular return when it is considered desirable to do so, possibly at a lower
cost to the Fund than if the Fund had invested directly in an instrument that
yielded that desired return. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted for
an interest factor. The gross returns to be exchanged or "swapped" between the
parties are generally calculated with respect to a "notional amount," i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index. Forms of swap agreements include interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap"; interest
rate floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates fall below a specified
rate, or "floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels. The Fund may use
interest rate caps, floors and collars to a substantial degree in connection
with its leveraging strategies. See "--Certain Interest Rate Transactions" below
and "The Fund's Investment Objectives and Strategies--Certain Interest Rate
Transactions" in the Prospectus. A swaption is a contract that gives a
counterparty the right (but not the obligation) to enter into a new swap
agreement or to shorten, extend, cancel or otherwise modify an existing swap
agreement, at some designated future time on specified terms. The Fund may write
(sell) and purchase put and call swaptions.
Most swap agreements entered into by the Fund would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owed to the Fund). The Fund may use swap agreements to add leverage to the portfolio. The Fund, except with regard to credit default swaps, as described below, may (but is not required to) cover any accrued but unpaid net amounts owed to a swap counterparty through the segregation of assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of the Fund's investment restriction concerning senior securities and borrowings.
Whether the Fund's use of swap agreements or swaptions will be successful in furthering its investment objectives will depend on PIMCO's ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Fund will enter into swap agreements only with counterparties that meet certain standards of creditworthiness. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect the Fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Depending on the terms of the particular option agreement, the Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When the Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when the Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.
Certain swap agreements are exempt from most provisions of the Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity option transactions under the CEA.
Certain Interest Rate Transactions. As described above, the Fund may enter into interest rate swaps and caps. Interest rate swaps involve the Fund's agreement with the swap counterparty to pay a fixed rate payment in exchange for the counterparty paying the Fund a variable rate payment that may be structured so as to approximate the Fund's variable rate payment obligation on any preferred shares of beneficial interest that the Fund may issue (the "Preferred Shares") or any variable rate borrowing. The payment obligation would be based on the notional amount of the swap. The Fund may use an interest rate cap, which would require the Fund to pay a premium to the cap counterparty and would entitle the Fund, to the extent that a specified variable rate index exceeds a predetermined fixed rate, to receive from the counterparty payment of the difference based on the notional amount. The Fund may use interest rate swaps or caps with the intent to reduce or eliminate the risk that an increase in short-term interest rates could have on the performance of the Common Shares as a result of the Fund's investments and capital structure, and may also use these instruments for other hedging purposes.
Mortgage-Related and Other Asset-Backed Securities
The Fund may invest in mortgage-related securities, and in other asset-backed securities (unrelated to mortgage loans) that are offered to investors currently or in the future. Mortgage-related securities are interests in pools of residential or commercial mortgage loans, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations. The value of some mortgage-related or asset-backed securities in which the Fund may invest may be particularly sensitive to changes in prevailing interest rates, and, like other debt obligations, the ability of the Fund to successfully utilize these instruments may depend in part upon the ability of PIMCO to forecast interest rates and other economic factors correctly. See "--Mortgage Pass-Through Securities" below. Certain debt obligations are also secured with collateral consisting of mortgage-related securities. See "--Collateralized Mortgage Obligations ("CMOs")" below.
Commercial Mortgage-Backed Securities. Commercial mortgage-backed securities include securities that reflect an interest in, and are secured by, mortgage loans on commercial real property. The market for commercial mortgage-backed securities developed more recently and in terms of total outstanding principal amount of issues is relatively small compared to the market for residential single-family mortgage-backed securities. Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. Commercial mortgage-backed securities may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities.
Mortgage Pass-Through Securities. Mortgage pass-through securities are securities representing interests in "pools" of mortgage loans secured by residential or commercial real property. Interests in pools of mortgage-related securities differ from other forms of debt obligations, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments are a "pass-through" of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities (such as securities issued by the Government National Mortgage Association (the "GNMA")) are described as "modified pass-through." These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of purchase. Early repayment of principal on some mortgage-related securities (arising from prepayments of principal due to the sale of the underlying property, refinancing, or foreclosure, net of fees and costs which may be incurred) may expose the Fund to a lower rate of return upon reinvestment of principal. Also, if a security subject to prepayment has been purchased at a premium, the value of the premium would be lost in the event of prepayment. Like other debt obligations, when interest rates rise, the value of a mortgage-related security generally will decline; however, when interest rates are declining, the value of mortgage-related securities with prepayment features may not increase as much as other debt obligations. To the extent that unanticipated rates of prepayment on underlying mortgages increase the effective maturity of a mortgage-related security, the volatility of such security can be expected to increase.
Payment of principal and interest on some mortgage pass-through securities (but not the market value of the securities themselves) may be guaranteed by the full faith and credit of the U.S. Government (in the case of securities guaranteed by the GNMA) or guaranteed by agencies or instrumentalities of the U.S. Government (in the case of securities guaranteed by the Federal National Mortgage Association (the "FNMA") or the Federal Home Loan Mortgage Corporation (the "FHLMC"). The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured by the Federal Housing Administration (the "FHA"), or guaranteed by the Department of Veterans Affairs (the "VA").
Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include the FNMA and the FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved sellers/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks, and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the U.S. Government. Instead, they are supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation Certificates ("PCs") which represent interests in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Government. Instead, they are supported only by the discretionary authority of the U.S. Government to purchase the agency's obligations.
Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may, in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in such pools. However, timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private insurers and the mortgage poolers. There can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Fund's use of these transactions will be limited by the Fund's limitations on illiquid investments to the extent they are deemed illiquid.
Mortgage-related securities that are issued or guaranteed by the U.S. Government, its agencies or instrumentalities, are not subject to the Fund's industry concentration restriction (see "Investment Restrictions") by virtue of the exclusion from that restriction available to all U.S.
Government securities. In the case of privately issued mortgage-related securities, the Fund takes the position that mortgage-related securities do not represent interests in any particular "industry" or group of industries. The assets underlying such securities may be represented by a portfolio of first lien residential mortgages (including both whole mortgage loans and mortgage participation interests) or portfolios of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a mortgage-related security may in turn be insured or guaranteed by the FHA or the VA. In the case of private issue mortgage-related securities whose underlying assets are neither U.S. Government securities nor U.S. Government-insured mortgages, to the extent that real properties securing such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately, the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through security. Similar to a bond, interest and prepaid principal is paid, in most cases, semi-annually. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated maturity. Actual maturity and average life will depend upon the prepayment experience of the collateral. CMOs provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes receive principal only after the first class has been retired. An investor is partially guarded against a sooner than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple series (e.g., A, B, C, Z) of CMO bonds (the "Bonds"). Proceeds of the Bond offering are used to purchase mortgages or mortgage pass-through certificates (the "Collateral"). The Collateral is pledged to a third party trustee as security for the Bonds. Principal and interest payments from the Collateral are used to pay principal on the Bonds in the order A, B, C, Z. The Series A, B and C Bonds all bear current interest. Interest on the Series Z Bond is accrued and added to principal and a like amount is paid as principal on the Series A, B or C Bond currently being paid off. When the Series A, B and C Bonds are paid in full, interest and principal on the Series Z Bond begin to be paid currently. With some CMOs, the issuer serves as a conduit to allow loan originators (primarily builders or savings and loan associations) to borrow against their loan portfolios.
CMOs that are issued or guaranteed by the U.S. Government or by any of its agencies or instrumentalities will be considered U.S. Government securities by the Fund, while other CMOs, even if collateralized by U.S. Government securities, will have the same status as other privately issued securities for purposes of applying the Fund's diversification tests.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having different maturity dates which are secured by the pledge of a pool of conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are made semi-annually, as opposed to monthly. The amount of principal payable on each semi-annual payment date is determined in accordance with FHLMC's mandatory sinking fund schedule, which in turn, is equal to approximately 100% of FHA prepayment experience applied to the mortgage collateral pool. All sinking fund payments in the CMOs are allocated to the retirement of the individual classes of bonds in the order of their stated maturities. Payments of principal on the mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum sinking fund obligation for any payment date are paid to the holders of the CMOs as additional sinking fund payments. Because of the "pass-through" nature of all principal payments received on the collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate at which principal of the CMOs is actually repaid is likely to be such that each class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans during any semi-annual payment period is not sufficient to meet FHLMC's minimum sinking fund obligation on the next sinking fund payment date, FHLMC agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Other mortgage-related securities include securities other than those described above that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property. Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities of the U.S. Government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing.
Other Asset-Backed Securities. Similarly, PIMCO expects that other asset-backed securities (unrelated to mortgage loans) will be offered to investors in the future and may be purchased by the Fund. Several types of asset-backed securities have already been offered to investors, including Enhanced Equipment Trust Certificates ("EETCs"), Certificates for Automobile Receivables(SM) ("CARS(SM)") and Collateralized Debt Obligations ("CDOs").
Although any entity may issue EETCs, to date, U.S. airlines are the primary issuers. An airline EETC is an obligation secured directly by aircraft or aircraft engines as collateral. Airline EETCs generally have credit enhancement in the form of overcollateralization and cross-subordination (i.e., multiple tranches and multiple aircraft as collateral). They also generally have a dedicated liquidity facility provided by a third-party insurer to insure that coupon payments are made on a timely basis until collateral is liquidated in the event of a default by the lessor of the collateral. Aircraft EETCs issued by registered U.S. carriers also benefit from a special section of the U.S. Bankruptcy Code, which allows the aircraft to be sold by the trust holding the collateral to repay note holders without participating in bankruptcy proceedings. EETCs tend to be less liquid than bonds.
CARS(SM) represent undivided fractional interests in a trust whose assets consist of a pool of motor vehicle retail installment sales contracts and security interests in the vehicles securing the contracts. Payments of principal and interest on CARS(SM) are passed through monthly to certificate holders, and are guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution unaffiliated with the trustee or originator of the trust. An investor's return on CARS(SM) may be affected by early prepayment of principal on the underlying vehicle sales contracts. If the letter of credit is exhausted, the trust may be prevented from realizing the full amount due on a sales contract because of state law requirements and restrictions relating to foreclosure sales of vehicles and the obtaining of deficiency judgments following such sales or because of depreciation, damage or loss of a vehicle, the application of
federal and state bankruptcy and insolvency laws, or other factors. As a result, certificate holders may experience delays in payments or losses if the letter of credit is exhausted.
The Fund may invest in CDOs, which includes collateralized bond obligations ("CBOs"), collateralized loan obligations ("CLOs") and other similarly structured securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust which is backed by a diversified pool of high risk, below investment grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans.
For both CBOs and CLOs, the cashflows from the trust are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the residual or "equity" tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior tranches from default in all but the most severe circumstances. Since it is partially protected from defaults, a senior tranche from a CBO trust or CLO trust typically have higher ratings and lower yields than their underlying securities, and can be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults, as well as aversion to CBO or CLO securities as a class.
The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which the Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be characterized by the Fund as illiquid securities; however, an active dealer market may exist for CDOs allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities discussed elsewhere in this Statement of Additional Information and the Prospectus (e.g., interest rate risk and default risk), CDOs carry additional risks including, but not limited to, (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments, (ii) the quality of the collateral may decline in value or default, (iii) the Fund may invest in CDOs that are subordinate to other classes, and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.
Consistent with the Fund's investment objectives and policies, PIMCO also may invest in other types of asset-backed securities. Other asset-backed securities may be collateralized by the fees earned by service providers. The value of asset-backed securities may be substantially dependent on the servicing of the underlying asset pools and are therefore subject to risks associated with the negligence by, or defalcation of, their servicers. In certain circumstances, the mishandling of related documentation may also affect the rights of the security holders in and to the underlying collateral. The insolvency of entities that generate receivables or that utilize the assets may result in added costs and delays in addition to losses associated with a decline in the value of the underlying assets.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters") and engage in credit spread trades. The interest rate on a floater is a variable rate that is tied to another interest rate, such as a bond index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset feature, floaters provide the Fund with a certain degree of protection against rising interest rates, the Fund will participate in any declines in interest rates. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities, where the value of the investment position is determined by movements in the difference between the prices or interest rates, as the case may be, of the respective securities or currencies.
Inflation-Indexed Bonds
The Fund may invest in inflation-indexed bonds, which are debt obligations whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index accruals as part of a semiannual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation-adjusted principal amount. For example, if the Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and the rate of inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole year's inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed and will fluctuate. The Fund may also invest in other inflation-related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal amount.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
For federal income tax purposes, any increase in the principal amount of an inflation-indexed bond will be original issue discount which is taxable as ordinary income in the year accrued, even though investors do not receive their principal, including any increases thereto, until maturity. See "Tax Matters-- Discount Obligations and Payment-in-Kind Securities" below.
Event-Linked Bonds
The Fund may invest in "event-linked bonds." Event-linked bonds, which are sometimes referred to as "catastrophe bonds," are debt obligations for which the return of principal and payment of interest is contingent on the non-occurrence of a specific "trigger" event, such as a hurricane or an earthquake. They may be issued by government agencies, insurance companies, reinsurers, special purpose corporations or other on-shore or off-shore entities. If a trigger event causes losses exceeding a specific amount in the geographic region and time period specified in a bond, the Fund may lose a portion or all of its principal invested in the bond. If no trigger event occurs, the Fund will recover its principal plus interest. For some event-linked bonds, the trigger event or losses may be based on company-wide losses, index-portfolio losses, industry indexes or readings of scientific instruments rather than specified actual losses. Often event-linked bonds provide for extensions of maturity that are mandatory, or optional at the discretion of the issuer, in order to process and audit loss claims in those cases when a trigger event has, or possibly has, occurred. In addition to the specified trigger events, event-linked bonds may also expose the Fund to certain unanticipated risks including but not limited to issuer (credit) default, adverse regulatory or jurisdictional interpretations and adverse tax consequences.
Event-linked bonds are a relatively new type of financial instrument. As such, there is no significant trading history of these securities, and there can be no assurance that a liquid market in these instruments will develop. Lack of a liquid market may impose the risk of higher
transaction costs and the possibility that the Fund may be forced to liquidate positions when it would not be advantageous to do so. Event-linked bonds are typically rated.
Delayed Funding Loans and Revolving Credit Facilities
The Fund may also enter into, or acquire participations in, delayed funding loans and revolving credit facilities. Delayed funding loans and revolving credit facilities are borrowing arrangements in which the lender agrees to make loans up to a maximum amount upon demand by the borrower during a specified term. A revolving credit facility differs from a delayed funding loan in that as the borrower repays the loan, an amount equal to the repayment may be borrowed again during the term of the revolving credit facility. Delayed funding loans and revolving credit facilities usually provide for floating or variable rates of interest. These commitments may have the effect of requiring the Fund to increase its investment in a company at a time when it might not otherwise be desirable to do so (including a time when the company's financial condition makes it unlikely that such amounts will be repaid). To the extent that the Fund is committed to advance additional funds, it will at all times segregate assets, determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in an amount sufficient to meet such commitments.
The Fund may invest in delayed funding loans and revolving credit facilities with credit quality comparable to that of issuers of its securities investments. Delayed funding loans and revolving credit facilities may be subject to restrictions on transfer, and only limited opportunities may exist to resell such instruments. As a result, the Fund may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. The Fund currently intends to treat delayed funding loans and revolving credit facilities for which there is no readily available market as illiquid for purposes of the Fund's limitation on illiquid investments. For a further discussion of the risks involved in investing in loan participations and other forms of direct indebtedness see "--Loan Participations and Assignments." Participation interests in revolving credit facilities will be subject to the limitations discussed in "--Loan Participations and Assignments." Delayed funding loans and revolving credit facilities are considered to be debt obligations for the purposes of the Fund's investment restriction relating to the lending of funds or assets by the Fund.
Structured Notes and Other Hybrid Instruments
The Fund may invest in "structured" notes, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or interest rate, such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets, such as indexes reflecting bonds. Depending on the terms of the note, the Fund may forgo all or part of the interest and principal that would be payable on a comparable conventional note. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage which will serve to magnify the potential for gain and the risk of loss. The Fund may use structured notes to add leverage to the portfolio and for investment as well as risk management purposes, such as to reduce the interest rate sensitivity of the Fund's portfolio (and thereby decrease the Fund's exposure to interest rate risk). Like other sophisticated strategies,
the Fund's use of structured notes may not work as intended; for example, by reducing the duration of the Fund's portfolio, structured notes may limit the Fund's return when having a longer duration would be beneficial (for instance, when interest rates decline). Although structured instruments are not necessarily illiquid, PIMCO believes that currently most structured instruments are illiquid.
The Fund may invest in other types of "hybrid" instruments which combine the characteristics of securities, futures, and options. For example, the principal amount or interest rate of a hybrid could be tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate (each a "benchmark"). The interest rate or (unlike most debt obligations) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. Hybrids can be used as an efficient means of pursuing a variety of investment goals, including duration management and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events that cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the net asset value of the Fund.
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). As a result, the Fund's investments in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements and economically similar transactions in order to add leverage to the portfolio or for hedging or cash management purposes. A reverse repurchase agreement involves the sale of a portfolio-eligible security by the Fund, coupled with its agreement to repurchase the instrument at a specified time and price. Under a reverse repurchase agreement, the Fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve leverage risk and the risk that the market value of securities retained by the Fund may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. The Fund may (but is not required to) segregate assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, equal (on a daily mark-to-market basis) to its obligations under reverse repurchase agreements. To the extent that positions in reverse repurchase agreements are not so covered, such transactions would be subject to the Fund's limitations on borrowings, which would, among other things, restrict the aggregate of such transactions (plus any other borrowings) to one-third of the Fund's total assets.
The Fund also may effect simultaneous purchase and sale transactions that are known as "sale-buybacks." A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of the Fund's repurchase of the underlying security.
Repurchase Agreements
For the purposes of maintaining liquidity and achieving income, the Fund may enter into repurchase agreements with domestic commercial banks or registered broker/dealers. A repurchase agreement is a contract under which the Fund would acquire a security for a relatively short period (usually not more than one week) subject to the obligation of the seller to repurchase and the Fund to resell such security at a fixed time and price (representing the Fund's cost plus interest). In the case of repurchase agreements with broker-dealers, the value of the underlying securities (or collateral) will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. The Fund bears a risk of loss in the event that the other party to a repurchase agreement defaults on its obligations and the Fund is delayed or prevented from exercising its rights to dispose of the collateral securities. This risk includes the risk of procedural costs or delays in addition to a loss on the securities if their value should fall below their repurchase price. PIMCO will monitor the creditworthiness of the counter parties.
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the U.S. Government, its agencies or instrumentalities. The U.S. Government does not guarantee the net asset value of the Fund's shares. Some U.S. Government securities, such as Treasury bills, notes and bonds, and securities guaranteed by the GNMA, are supported by the full faith and credit of the United States; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the FNMA, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. U.S. Government securities include securities that have no coupons, or have been stripped of their unmatured interest coupons, individual interest coupons from such securities that trade separately, and evidences of receipt of such securities. Such securities may pay no cash income, and are purchased at a deep discount from their value at maturity. See "--Zero-Coupon Bonds, Step-Ups and Payment-In-Kind Securities." Custodial receipts issued in connection with so-called trademark zero-coupon securities, such as CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S. Government securities, although the underlying bond represented by such receipt is a debt obligation of the U.S. Treasury. Other zero-coupon Treasury securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S. Government.
Municipal Bonds
The Fund may invest in municipal bonds which pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by PIMCO to be reliable), is
exempt from federal income taxes ("municipal bonds"), although dividends that the Fund pays that are attributable to such interest will not be tax-exempt to shareholders of the Fund.
Municipal bonds share the attributes of debt obligations in general, but are generally issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies or authorities. The municipal bonds that the Fund may purchase include general obligation bonds and limited obligation bonds (or revenue bonds), including industrial development bonds issued pursuant to former federal tax law. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable from such issuer's general revenues and not from any particular source. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Tax-exempt private activity bonds and industrial development bonds generally are also revenue bonds and thus are not payable from the issuer's general revenues. The credit and quality of private activity bonds and industrial development bonds are usually related to the credit of the user of the facilities. Payment of interest on and repayment of principal of such bonds is the responsibility of the user (and/or any guarantor).
Municipal bonds are subject to credit and market risk. Generally, prices of higher quality issues tend to fluctuate less with changes in market interest rates than prices of lower quality issues and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues. Prices and yields on municipal bonds are dependent on a variety of factors, including general money-market conditions, the financial condition of the issuer, general conditions of the municipal bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. A number of these factors, including the ratings of particular issues, are subject to change from time to time. Information about the financial condition of an issuer of municipal bonds may not be as extensive as that which is made available by corporations whose securities are publicly traded. Obligations of issuers of municipal bonds are subject to the provisions of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors. Congress or state legislatures may seek to extend the time for payment of principal or interest, or both, or to impose other constraints upon enforcement of such obligations. There is also the possibility that as a result of litigation or other conditions, the power or ability of issuers to meet their obligations for the payment of interest and principal on their municipal bonds may be materially affected or their obligations may be found to be invalid or unenforceable.
When-Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. When such purchases are outstanding, the Fund will segregate until the settlement date assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in an amount sufficient to meet the purchase price. Typically, no income accrues on securities the Fund has committed to purchase prior to the time delivery of the securities is made, although the Fund may earn income on securities it has segregated.
When purchasing a security on a when-issued, delayed delivery, or forward commitment basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. Because the Fund is not required to pay for the security until the delivery date, these risks are in addition to the risks associated with the Fund's other investments. If the Fund remains substantially fully invested at a time when when-issued, delayed delivery, or forward commitment purchases are outstanding, the purchases may result in a form of leverage.
When the Fund has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Fund does not participate in future gains or losses with respect to the security. If the other party to a transaction fails to deliver or pay for the securities, the Fund could miss a favorable price or yield opportunity or could suffer a loss. The Fund may dispose of or renegotiate a transaction after it is entered into, and may sell when-issued, delayed delivery or forward commitment securities before they are delivered, which may result in a capital gain or loss. There is no percentage limitation on the extent to which the Fund may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis.
Borrowing
The Fund may borrow money to the extent permitted under the 1940 Act as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time. The Fund may from time to time borrow money to add leverage to the portfolio. The Fund may also borrow money for temporary administrative purposes.
Under the 1940 Act, the Fund generally is not permitted to engage in borrowings unless immediately after a borrowing the value of the Fund's total assets less liabilities (other than the borrowing) is at least 300% of the principal amount of such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's total assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on Common Shares unless, at the time of such declaration, the value of the Fund's total assets, less liabilities other than borrowing, is at least 300% of such principal amount. If the Fund borrows it intends, to the extent possible, to prepay all or a portion of the principal amount of the borrowing to the extent necessary in order to maintain the required asset coverage. Failure to maintain certain asset coverage requirements could result in an event of default and entitle the holders of Preferred Shares ("Preferred Shareholders") and holders of any other senior securities of the Fund to elect a majority of the Trustees of the Fund.
As described in the Prospectus, the Fund may also enter into transactions that may give rise to a form of leverage. Such transactions may include, among others, reverse repurchase agreements, loans of portfolio securities, credit default swap contracts and other derivatives, as well as when-issued, delayed delivery or forward commitment transactions. To mitigate leverage risk from such transactions, the Fund will segregate liquid assets against or otherwise cover its future obligations under such transactions, to the extent that, immediately after entering into such a transaction, the Fund's future commitments that it has not segregated liquid assets against or otherwise covered, together with any outstanding Preferred Shares, would exceed 38% of the Fund's total assets. The Fund's use of these transactions may also be limited by the Fund's limitations on illiquid investments to the extent they are determined to be illiquid. See
"The Fund's Investment Objectives and Strategies--Portfolio Contents and Other Information," "Risks--Liquidity Risk" and "Preferred Shares and Related Leverage" in the Prospectus.
As described above, the Fund will, under certain circumstances, cover its commitment under these instruments by the segregation of assets determined to be liquid by PIMCO in accordance with procedures adopted by the Trustees, equal in value to the amount of the Fund's commitment, or by entering into offsetting transactions or owning positions covering its obligations. In such cases, the instruments will not be considered "senior securities" under the 1940 Act for purposes of the asset coverage requirements otherwise applicable to borrowings by the Fund or the Fund's issuance of Preferred Shares. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. The Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
Mortgage Dollar Rolls
A "mortgage dollar roll" is similar to a reverse repurchase agreement in certain respects. In a "dollar roll" transaction, the Fund sells a mortgage-related security, such as a security issued by GNMA, to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the future at a pre-determined price. A "dollar roll" can be viewed, like a reverse repurchase agreement, as a collateralized borrowing in which the Fund pledges a mortgage-related security to a dealer to obtain cash. However, unlike reverse repurchase agreements, the dealer with which the Fund enters into a dollar roll transaction is not obligated to return the same securities as those originally sold by the Fund, but only securities which are "substantially identical." To be considered "substantially identical," the securities returned to the Fund generally must: (1) be collateralized by the same types of underlying mortgages; (2) be issued by the same agency and be part of the same program; (3) have a similar original stated maturity; (4) have identical net coupon rates; (5) have similar market yields (and therefore price); and (6) satisfy "good delivery" requirements, meaning that the aggregate principal amounts of the securities delivered and received back must be within 2.5% of the initial amount delivered.
As with reverse repurchase agreements, to the extent that positions in dollar roll agreements are not covered by segregated liquid assets at least equal to the amount of any forward purchase commitment, such transactions would be subject to the Fund's restrictions on borrowings. Furthermore, because dollar roll transactions may be for terms ranging between one and six months, dollar roll transactions may be deemed "illiquid" and subject to the Fund's overall limitations on investments in illiquid securities.
Short Sales
The Fund may make short sales of securities as part of its overall portfolio management strategy and to offset potential declines in long positions in securities in the Fund's portfolio. A short sale is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline.
When the Fund makes a short sale on a security, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any accrued interest and dividends on such borrowed securities.
If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
To the extent that the Fund engages in short sales, it will provide collateral to the broker-dealer. A short sale is "against the box" to the extent that the Fund contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short. The Fund may engage in so-called "naked" short sales where it does not own or have the immediate right to acquire the security sold short at no additional cost, in which case the Fund's losses could theoretically be unlimited, provided that the Fund will not engage in such naked short sales in excess of 5% of the Fund's total assets and that the Fund will not engage in any such naked short sales within 90 days from the date of the Prospectus.
Illiquid Securities
The Fund may invest up to 15% of its total assets in illiquid securities (i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). For these purposes, bank loans that are part of an issue of at least $250 million in par value will not be considered illiquid, although the Fund's investments in such bank loans, together with its investments in illiquid securities, will not exceed 20% of its total assets. Illiquid securities are considered to include, among other things, written over-the-counter options, securities or other liquid assets being used as cover for such options, repurchase agreements with maturities in excess of seven days, certain loan participation interests, fixed time deposits which are not subject to prepayment or provide for withdrawal penalties upon prepayment (other than overnight deposits), and other securities whose disposition is restricted under the federal securities laws (other than securities issued pursuant to Rule 144A under the 1933 Act and certain commercial paper that PIMCO has determined to be liquid under procedures approved by the Board of Trustees).
Illiquid securities may include privately placed securities, which are sold directly to a small number of investors, usually institutions. Unlike public offerings, such securities are not registered under the federal securities laws. Although certain of these securities may be readily sold, others may be illiquid, and their sale may involve substantial delays and additional costs.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment objectives of the Fund in relation to actual and anticipated movements in interest rates. In addition, a security may be
sold and another of comparable quality purchased at approximately the same time to take advantage of what PIMCO believes to be a temporary price disparity between the two securities. Temporary price disparities between two comparable securities may result from supply and demand imbalances where, for example, a temporary oversupply of certain bonds may cause a temporarily low price for such bonds, as compared with other bonds of like quality and characteristics. The Fund may also engage in short-term trading consistent with its investment objectives. Securities may be sold in anticipation of a market decline (a rise in interest rates) or purchased in anticipation of a market rise (a decline in interest rates) and later sold, or to recognize a gain.
A change in the securities held by the Fund is known as "portfolio turnover." PIMCO manages the Fund without regard generally to restrictions on portfolio turnover. The use of certain derivative instruments with relatively short maturities may tend to exaggerate the portfolio turnover rate for the Fund. Trading in debt obligations does not generally involve the payment of brokerage commissions, but does involve indirect transaction costs. The use of futures contracts may involve the payment of commissions to futures commission merchants. High portfolio turnover (e.g., greater than 100%) involves correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. The higher the rate of portfolio turnover of the Fund, the higher these transaction costs borne by the Fund generally will be. Transactions in the Fund's portfolio securities may result in realization of taxable capital gains (including short-term capital gains which are generally taxed to shareholders at ordinary income tax rates). The trading costs and tax effects associated with portfolio turnover may adversely affect the Fund's performance.
The portfolio turnover rate of the Fund is calculated by dividing (a) the lesser of purchases or sales of portfolio securities for the particular fiscal year by (b) the monthly average of the value of the portfolio securities owned by the Fund during the particular fiscal year. In calculating the rate of portfolio turnover, there is excluded from both (a) and (b) all securities, including options, whose maturities or expiration dates at the time of acquisition were one year or less.
Warrants to Purchase Securities
The Fund may invest in warrants to purchase debt securities. Debt obligations with warrants attached to purchase equity securities have many characteristics of convertible bonds and their prices may, to some degree, reflect the performance of the underlying stock. Debt obligations also may be issued with warrants attached to purchase additional debt securities at the same coupon rate. A decline in interest rates would permit the Fund to buy additional bonds at the favorable rate or to sell the warrants at a profit. If interest rates rise, the warrants would generally expire with no value.
Securities Loans
Subject to the Fund's "Investment Restrictions" listed below, the Fund may make secured loans of its portfolio securities to brokers, dealers and other financial institutions amounting to no more than one-third of its total assets. The risks in lending portfolio securities, as with other
extensions of credit, consist of possible delay in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. However, such loans will be made only to broker-dealers that are believed by PIMCO to be of relatively high credit standing. Securities loans are made to broker-dealers pursuant to agreements requiring that loans be continuously secured by collateral consisting of U.S. Government securities, cash or cash equivalents (negotiable certificates of deposit, bankers' acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount at least equal at all times to the market value of the securities lent. The borrower pays to the Fund, as the lender, an amount equal to any dividends or interest received on the securities lent. The Fund may invest only the cash collateral received in interest-bearing, short-term securities or receive a fee from the borrower. In the case of cash collateral, the Fund typically pays a rebate to the lender. Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, the Fund, as the lender, retains the right to call the loans and obtain the return of the securities loaned at any time on reasonable notice, and it will do so in order that the securities may be voted by the Fund if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. The Fund may also call such loans in order to sell the securities involved. When engaged in securities lending, the Fund's performance will continue to reflect changes in the value of the securities loaned and will also reflect the receipt of either interest, through investment of cash collateral by the Fund in permissible investments, or a fee, if the collateral is U.S. Government securities.
Participation on Creditors Committees
The Fund may from time to time participate on committees formed by creditors to negotiate with the management of financially troubled issuers of securities held by the Fund. Such participation may subject the Fund to expenses such as legal fees and may make the Fund an "insider" of the issuer for purposes of the federal securities laws, and therefore may restrict the Fund's ability to trade in or acquire additional positions in a particular security when it might otherwise desire to do so. Participation by the Fund on such committees also may expose the Fund to potential liabilities under the federal bankruptcy laws or other laws governing the rights of creditors and debtors. The Fund would participate on such committees only when PIMCO believes that such participation is necessary or desirable to enforce the Fund's rights as a creditor or to protect the value of securities held by the Fund.
Short-Term Investments / Temporary Defensive Strategies
Upon PIMCO's recommendation, for temporary defensive purposes and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of the offering are being invested, the Fund may invest up to 100% of its net assets in investment grade debt securities, including high quality, short-term debt instruments. Such investments may prevent the Fund from achieving its investment objectives.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Except as described below, the Fund, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding Common Shares and any outstanding preferred shares of beneficial interest of the Fund (including Preferred Shares) voting together as a single class, and of the holders of a majority of any outstanding preferred shares of beneficial interest of the Fund (including the Preferred Shares) voting as a separate class:
(1) Concentrate its investments in a particular "industry," as that term is used in the Investment Company Act of 1940, as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.
(2) With respect to 75% of the Fund's total assets, purchase the securities of any issuer, except securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities or securities issued by other investment companies, if, as a result, (i) more than 5% of the Fund's total assets would be invested in the securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer. For the purpose of this restriction, each state and each separate political subdivision, agency, authority or instrumentality of such state, each multi-state agency or authority, and each obligor, if any, is treated as a separate issuer of municipal bonds.
(3) Purchase or sell real estate, although it may purchase securities secured by real estate or interests therein, or securities issued by companies which invest in real estate, or interests therein.
(4) Purchase or sell commodities or commodities contracts or oil, gas or mineral programs. This restriction shall not prohibit the Fund, subject to restrictions described in the Prospectus and elsewhere in this Statement of Additional Information, from purchasing, selling or entering into futures contracts, options on futures contracts, forward contracts, or any interest rate, securities-related or other hedging instrument, including swap agreements and other derivative instruments, subject to compliance with any applicable provisions of the federal securities or commodities laws.
(5) Borrow money or issue any senior security, except to the extent permitted under the Investment Company Act of 1940, as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.
(6) Make loans, except to the extent permitted under the Investment Company Act of 1940, as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.
(7) Act as an underwriter of securities of other issuers, except to the extent that in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under the federal securities laws.
Currently, under the 1940 Act, the Fund generally is not permitted to engage in borrowings unless immediately after a borrowing the value of the Fund's total assets less liabilities (other than the borrowing) is at least 300% of the principal amount of such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's total assets). In addition, the Fund is not permitted to declare any cash dividend or other distribution on Common Shares unless, at the time of such declaration, the value of the Fund's total assets, less liabilities other than the borrowing, is at least 300% of such principal amount.
Currently, under the 1940 Act, the Fund may generally not lend money or property to any person, directly or indirectly, if such person controls or is under common control with the Fund, except for a loan from the Fund to a company which owns all of the outstanding securities of the Fund, except directors' and qualifying shares.
For purposes of the foregoing and "Description of Shares--Preferred Shares--Voting Rights" below, "majority of the outstanding," when used with respect to particular shares of the Fund (whether voting together as a single class or voting as separate classes), means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of such shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less.
Unless otherwise indicated, all limitations applicable to the Fund's investments (as stated above and elsewhere in this Statement of Additional Information) apply only at the time a transaction is entered into. Any subsequent change in a rating assigned by any rating service to a security (or, if unrated, deemed by PIMCO to be of comparable quality), or change in the percentage of the Fund's total assets invested in certain securities or other instruments, or change in the average maturity or duration of the Fund's investment portfolio, resulting from market fluctuations or other changes in the Fund's total assets, will not require the Fund to dispose of an investment until PIMCO determines that it is practicable to sell or close out the investment without undue market or tax consequences to the Fund. In the event that rating agencies assign different ratings to the same security, PIMCO will determine which rating it believes best reflects the security's quality and risk at that time, which may be the higher of the several assigned ratings.
Under the 1940 Act, a "senior security" does not include any promissory note or evidence of indebtedness where such loan is for temporary purposes only and in an amount not exceeding 5% of the value of the total assets of the issuer at the time the loan is made. A loan is presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.
The Fund would be deemed to "concentrate" in a particular industry if it invested 25% or more of its total assets in that industry. The Fund's industry concentration policy does not preclude it from focusing investments in issuers in a group of related industrial sectors (such as different types of utilities).
The Fund may not change its policy to invest at least 80% of its net assets (plus any borrowing for investment purposes) in debt securities that are rated below investment grade (below Baa by Moody's, below BBB by either S&P or Fitch Ratings, or below a comparable rating by Dominion) or unrated but judged by PIMCO to be of comparable quality, unless it provides shareholders with at least 60 days' written notice of such change.
To the extent the Fund covers its commitment under a reverse repurchase agreement, credit default swap or other derivative instrument by the segregation of assets determined by PIMCO to be liquid in accordance with procedures adopted by the Trustees, equal in value to the amount of the Fund's commitment, such instrument will not be considered a "senior security" for purposes of the asset coverage requirements otherwise applicable to borrowings by the Fund or the Fund's issuance of Preferred Shares.
The Fund interprets its policies with respect to borrowing and lending to permit such activities as may be lawful for the Fund, to the full extent permitted by the 1940 Act or by exemption from the provisions therefrom pursuant to exemptive order of the SEC.
It is a condition of the issuance of the Preferred Shares that they be issued with a credit quality rating of "Aaa" from Moody's and "AAA" from Fitch Ratings. In order to obtain and maintain the required ratings, the Fund will be required to comply with investment quality, diversification and other guidelines established by Moody's and Fitch Ratings. Such guidelines will likely be more restrictive than the restrictions set forth above. The Fund does not anticipate that such guidelines would have a material adverse effect on holders of the Common Shares ("Common Shareholders") or its ability to achieve its investment objectives. Moody's and Fitch Ratings receive fees in connection with their ratings issuances.
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Fund is managed under the direction of the Fund's Board of Trustees. Subject to the provisions of the Fund's Amended and Restated Agreement and Declaration of Trust (the "Declaration"), its Bylaws and Massachusetts law, the Trustees have all powers necessary and convenient to carry out this responsibility, including the election and removal of the Fund's officers.
The Trustees and officers of the Fund, their ages, the position they hold with the Fund, their term of office and length of time served, a description of their principal occupations during the past five years, the number of portfolios in the fund complex (as defined in SEC regulations) that the Trustee oversees and any other directorships held by the Trustee are listed in the two tables immediately following. Except as shown, each Trustee's and officer's principal occupation and business experience for the last five years have been with the employer(s) indicated, although in some cases the Trustee may have held different positions with such employer(s). Unless otherwise indicated, the business address of the persons listed below is c/o PIMCO Advisors Fund Management LLC, 1345 Avenue of the Americas, New York, New York 10105.
Independent Trustees*
Number of
Portfolios
Term of in Fund
Position(s) Office and Complex Other
Held with Length of Principal Occupation(s) Overseen by Directorships
Name, Address and Age Fund Time Served During the Past 5 Years Trustee Held by Trustee
Robert E. Connor* Trustee Since Trustee, Fixed Income 16 None.
Age 68 inception SHares, Nicholas-Applegate
(February Convertible & Income Fund,
2003). PIMCO Corporate Opportunity
Fund, PIMCO Corporate Income
Fund,PIMCO Municipal
Income Fund, PIMCO
California Municipal
Income Fund, PIMCO New
York Municipal Income
Fund,
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Number of
Portfolios
Term of in Fund
Position(s) Office and Complex Other
Held with Length of Principal Occupation(s) Overseen by Directorships
Name, Address and Age Fund Time Served During the Past 5 Years Trustee Held by Trustee
PIMCO Municipal Income
Fund II, PIMCO California
Municipal Income Fund II,
PIMCO New York Municipal
Income Fund II, PIMCO
Municipal Income Fund III,
PIMCO California Municipal
Income Fund III and PIMCO
New York Municipal Income
Fund III; Director,
Municipal Advantage Fund,
Inc.; Corporate Affairs
Consultant. Formerly,
Senior Vice President,
Corporate Office, Salomon
Smith Barney Inc.
(predecessor to Citigroup
Global Markets Inc.)
John J. Dalessandro II** Trustee Since President and Director, J.J. 13 None.
Age 65 inception Dalessandro II Ltd.,
(February registered broker-dealer and
2003). member of the New York Stock
Exchange; Trustee,
Nicholas-Applegate
Convertible & Income
Fund, PIMCO Corporate
Opportunity Fund,
PIMCO Corporate Income
Fund, PIMCO Municipal
Income Fund, PIMCO
California Municipal
Income Fund, PIMCO New
York Municipal Income
Fund, PIMCO Municipal
Income Fund II, PIMCO
California Municipal
Income Fund II, PIMCO
New York Municipal
Income Fund II, PIMCO
Municipal Income Fund
III, PIMCO California
Municipal Income Fund
III and PIMCO New York
Municipal Income Fund
III.
Hans W. Kertess Trustee Since President, H. Kertess & 8 None
Age 63 June Co.; Trustee, PIMCO
2003 Corporate Fund, PIMCO
Municipal Income
Fund, PIMCO California
Municipal Income Fund,
PIMCO New York Municipal
Income Fund, PIMCO
Municipal Income Fund II,
PIMCO California Municipal
Income Fund II and PIMCO
New York Municipal Income
Fund II. Formerly, Managing
Director, Royal Bank of
Canada Capital Markets.
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* In addition to the positions noted, Mr. Connor previously provided occasional editorial consulting services as an independent contractor to an administrative unit of Smith Barney, an affiliate of Citigroup Inc., the parent company of Citigroup Global Markets Inc.
** Mr. Dalessandro is treated by the Fund as not being an "interested person" (as defined in Section 2(a)(19) of the 1940 Act) of the Fund, the Manager, PIMCO or the Underwriters, despite his affiliation with J.J. Dalessandro II Ltd., a member of the New York Stock Exchange, Inc. (the "Exchange") that operates as a floor broker and does not effect portfolio transactions for entities other than other members of the Exchange.
Interested Trustees
Currently no Trustees are treated as "interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the Fund.
In accordance with the Fund's staggered board (see "Anti-Takeover and Other Provisions in the Declaration of Trust"), the Common Shareholders of the Fund will elect Trustees to fill the vacancies of Trustees whose terms expire at each annual meeting of Common Shareholders, unless any preferred shares of beneficial interest are outstanding, in which event the holders of the preferred shares, voting as a separate class, will elect two Trustees and the remaining Trustee shall be elected by Common Shareholders and the Preferred Shareholders, voting together as a single class. The holders of preferred shares will be entitled to elect a majority of the Fund's Trustees under certain circumstances.
Officers
Position(s) Term of Office
Held with and Length of
Name, Address and Age Fund Time Served Principal Occupation(s) During the Past 5 Years
Stephen J. Treadway Chairman Since Member, Board of Management, Allianz Dresdner Asset
2187 Atlantic Street inception Management GmbH; Managing Director, Allianz Dresdner
Stamford, CT 06902 (February Asset Management of America L.P.; Managing Director
Age 55 2003). and Chief Executive Officer, PIMCO Advisors Fund
Management LLC; Managing Director and Chief
Executive Officer, PIMCO Advisors Distributors LLC
("PAD"); Trustee and Chairman, PIMCO Funds:
Multi-Manager Series; Chairman, Fixed Income SHares;
Trustee, Chairman and President, OCC Accumulation Trust;
Trustee and Chairman, PIMCO Corporate Income Fund,
PIMCO Municipal Income Fund, PIMCO California Municipal
Income Fund, PIMCO New York Municipal Income Fund,
PIMCO Municipal Income Fund II, PIMCO California
Municipal Income Fund II, PIMCO New York Municipal Income
Fund II and Municipal Advantage Fund, Inc.; Chairman,
Nicholas-Applegate Convertible & Income Fund, PIMCO
Corporate Opportunity Fund, PIMCO Municipal Income Fund III,
PIMCO California Municipal Income Fund III and
PIMCO New York Municipal Income Fund III.
Brian S. Shlissel President Since Senior Vice President, PIMCO Advisors Fund
Age 38 and Chief inception Management LLC; Executive Vice President and
Executive (February Treasurer, OCC Accumulation Trust; President and
Officer 2003). Chief Executive Officer, Fixed Income SHares,
Nicholas-Applegate Convertible & Income Fund,
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Position(s) Term of Office
Held with and Length of
Name, Address and Age Fund Time Served Principal Occupation(s) During the Past 5 Years
PIMCO Corporate Opportunity Fund, PIMCO Corporate
Income Fund, PIMCO Municipal Income Fund, PIMCO
California Municipal Income Fund, PIMCO New York
Municipal Income Fund, PIMCO Municipal Income Fund II,
PIMCO California Municipal Income Fund II, PIMCO
New York Municipal Income Fund II, PIMCO Municipal
Income Fund III, PIMCO California Municipal Income
Fund III, PIMCO New York Municipal Income Fund III and
Municipal Advantage Fund, Inc.; Formerly, Vice President,
Mitchell Hutchins Asset Management Inc.
Lawrence G. Altadonna Treasurer; Since Vice President, PIMCO Advisors Fund Management LLC;
Age 36 Principal inception Treasurer and Principal Financial and Accounting
Financial (February Officer, Nicholas-Applegate Convertible & Income
and 2003). Fund, PIMCO Corporate Opportunity Fund, PIMCO
Accounting Corporate Income Fund, PIMCO Municipal Income Fund,
Officer PIMCO California Municipal Income Fund, PIMCO New
York Municipal Income Fund, PIMCO Municipal Income
Fund II, PIMCO California Municipal Income Fund II,
PIMCO New York Municipal Income Fund II,
PIMCO Municipal Income Fund III, PIMCO California
Municipal Income Fund III, PIMCO New York Municipal
Income Fund III and Municipal Advantage Fund,
Inc.; Treasurer, Fixed Income SHares; Assistant
Treasurer, OCC Accumulation Trust. Formerly,
Director of Fund Administration, Prudential Investments.
Newton B. Schott, Jr. Vice Since Managing Director, Chief Administrative Officer,
2187 Atlantic Street President, inception Secretary and General Counsel, PAD; Managing
Stamford, CT 06902 Secretary (February Director, Chief Legal Officer and Secretary, PIMCO
Age 60 2003). Advisors Fund Management LLC; President, Chief
Executive Officer and Secretary, PIMCO Funds:
Multi-Manager Series; Vice President and
Secretary, Nicholas-Applegate Convertible &
Income Fund, PIMCO Corporate Opportunity Fund,
PIMCO Corporate Income Fund, PIMCO Municipal Income
Fund, PIMCO California Municipal Income Fund, PIMCO
New York Municipal Income Fund, PIMCO Municipal Income
Fund II, PIMCO California Municipal Income Fund II,
PIMCO New York Municipal Income Fund II, PIMCO Municipal
Income Fund III, PIMCO California Municipal Income
Fund III, PIMCO New York Municipal Income Fund III
and Municipal Advantage Fund, Inc.; Secretary,
Fixed Income SHares.
Raymond G. Kennedy Vice Since Managing Director, PIMCO; co-portfolio manager of
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Term of
Position(s) Office and
Held with Length of
Name, Address and Age Fund Time Served Principal Occupational(s) During the Past 5 Years
840 Newport Center Drive President inception the Fund and other investment vehicles managed by
Newport Beach, CA 92660 (February PIMCO; joined PIMCO in 1996.
Age 41 2003).
David C. Hinman Vice Since Executive Vice President, PIMCO; co-portfolio
840 Newport Center Drive President inception manager of the Fund and other investment vehicles
Newport Beach, CA 92660 (February managed by PIMCO; joined PIMCO in 1995.
Age 35 2003).
Charles Wyman Vice Since Executive Vice President, PIMCO; co-portfolio
840 Newport Center Drive President inception manager of the Fund and other investment vehicles
Newport Beach, CA 92660 (February managed by PIMCO; joined PIMCO in 2001.
Age 50 2003).
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For interested Trustees and officers, positions held with affiliated persons or principal underwriters of the Fund are listed in the following table:
Positions Held with Affiliated Persons or
Name Principal Underwriters of the Fund
Stephen J. Treadway See above.
Brian S. Shlissel See above.
Lawrence Altadonna See above.
Newton B. Schott, Jr. See above.
Raymond G. Kennedy See above.
David C. Hinman See above.
Charles Wyman See above.
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Committees of the Board of Trustees
Audit Oversight Committee
Provides oversight with respect to the internal and external accounting and auditing procedures of the Fund and, among other things, considers the selection of independent public accountants for the Fund and the scope of the audit, approves all significant services proposed to be performed by those accountants on behalf of the Fund, and considers other services provided by those accountants to the Fund, the Manager and PIMCO and the possible effect of those services on the independence of those accountants. Messrs. Kertess and Connor, each of whom is an Independent Trustee, serve on this committee.
Nominating Committee
Responsible for reviewing and recommending qualified candidates to the Board in the event that a position is vacated or created. The Nominating Committee will review and consider nominees recommended by shareholders to serve as Trustee, provided any such recommendation is submitted in writing to the Fund, c/o Newton B. Schott, Jr., Secretary, at the address of the principal executive offices of the Fund. The Nominating Committee has full discretion to reject nominees recommended by shareholders, and there is no assurance that any such person so recommended and considered by a committee will be nominated for election to the Board. Messrs. Kertess and Connor, each of whom is an Independent Trustee, serve on this committee.
Valuation Committee
Reviews procedures for the valuation of securities and periodically reviews information from the Manager and PIMCO regarding fair value and liquidity determination made pursuant to the Board-approved procedures, and makes related recommendations to the full Board and assists the full Board in resolving particular valuation matters. Messrs. Kertess and Connor, each of whom is an Independent Trustee, serve on this committee.
Compensation Committee
The Compensation Committee periodically reviews and sets compensation payable to the Trustees of the Fund who are not directors, officers, partners or employees of the Manager, PIMCO or any entity controlling, controlled by or under common control with the Manager or PIMCO. Messrs. Kertess and Connor, each of whom is an Independent Trustee, serve on this committee.
Securities Ownership
For each Trustee, the following table discloses the dollar range of equity securities beneficially owned by the Trustee in the Fund and, on an aggregate basis, in any registered investment companies overseen by the Trustee within the Fund's family of investment companies as of December 31, 2002:
Aggregate Dollar Range of Equity Securities in All
Dollar Range of Equity Registered Investment Companies Overseen by Trustee
Name of Trustee Securities in the Fund in Family of Investment Companies
Robert E. Connor None. None.
John J. Dalessandro II None. None.
Hans W. Kertess None None
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For independent Trustees and their immediate family members, the following table provides information regarding each class of securities owned beneficially in an investment
adviser or principal underwriter of the Fund, or a person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser or principal underwriter of the Fund as of December 31, 2002:
Name of Owners and Percent of
Relationships to Trustee Value of Class
Name of Trustee Trustee Company Title of Class Securities
Robert E. Connor None.
John J. Dalessandro II None.
Hans W. Kertess None.
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As of June 5, 2003, the Fund's officers and Trustees as a group owned less than 1% of the outstanding Common Shares.
As of June 5, 2003, the following persons owned of record the number of Common Shares noted below, representing the indicated percentage of the Fund's outstanding shares as of such date.
Percentage of the Fund's
Number of Common outstanding shares as of
Shareholder Shares June 5, 2003
----------- ------ ------------
A.G. Edwards & Sons 6,580,831 5.88%
#2 North Jefferson
St. Louis, MO 63166
Citigroup Global Markets Inc. 22,260,047 19.87%
3333 West 34/th/ Street, 4/th/ Floor
New York, NY 10001
First Clearing, LLC 8,673,369 7.74%
10700 Wheat First Drive
Glen Allen, VA 23060
Merrill Lynch 26,595,821 23.74%
101 Hudson St.
Jersey City, NJ 07302
Prudential Securities Inc. 8,089,745 7.22%
c/o ADP Proxy Services
51 Mercedes Way
Edgewood, NY 11717
UBS Painewebber Inc. 13,551,974 12.10%
1000 Harbor Blvd.
Weekhawken, NJ 07087
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Compensation
Messrs. Connor and Dalessandro also serve as Trustees of PIMCO Municipal Income Fund, PIMCO California Municipal Income Fund, PIMCO New York Municipal Income Fund, PIMCO Municipal Income Fund II, PIMCO California Municipal Income Fund II, PIMCO New York Municipal Income Fund II, PIMCO Municipal Income Fund III, PIMCO California Municipal Income Fund III and PIMCO New York Municipal Income Fund III (together, the "Municipal Funds"), Nicholas-Applegate Convertible & Income Fund, PIMCO Corporate Opportunity Fund and PIMCO Corporate Income Fund, twelve closed-end funds for which the Manager serves as investment manager and PIMCO or Nicholas-Applegate Capital Management LLC, each an affiliate of the Manager, serves as portfolio manager. Mr. Kertess also serves as Trustee of PIMCO Municipal Income Fund, PIMCO California Municipal Income Fund, PIMCO New York Municipal Income Fund, PIMCO Municipal Income Fund II, PIMCO California Municipal Income Fund II, PIMCO New York Municipal Income Fund II and PIMCO Corporate Income Fund. In addition to the Fund, the Municipal Funds, Nicholas-Applegate Convertible & Income Fund, PIMCO Corporate Opportunity Fund, and PIMCO Corporate Income Fund, Mr. Connor is a director or trustee, as the case may be, of one open-end investment company (comprising two separate investment
portfolios) and one closed-end investment company advised by the Manager. As indicated above, certain of the officers and Trustees of the Fund are affiliated with the Manager and/or PIMCO.
The Municipal Funds, Nicholas-Applegate Convertible & Income Fund, PIMCO Corporate Opportunity Fund, PIMCO Corporate Income Fund and the Fund (together, the "PIMCO Closed-End Funds") are expected to hold joint meetings of their Boards of Trustees whenever possible. Each Trustee, other than any Trustee who is a director, officer, partner or employee of the Manager, PIMCO or any entity controlling, controlled by or under common control with the Manager or PIMCO, receives $24,000 for each joint meeting for the first four joint meetings in each year and $12,000 for each additional joint meeting in such year if the meetings are attended in person. Trustees receive $6,000 per joint meeting if the meetings are attended telephonically. Members of the Audit Oversight Committee will receive $500 per joint meeting of the PIMCO Closed-End Funds' Audit Oversight Committees if the meeting takes place on a day other than the day of a regularly scheduled Board meeting. Trustees will also be reimbursed for meeting-related expenses.
The PIMCO Closed-End Funds will allocate the Trustees' compensation and other costs of their joint meetings pro rata based on each PIMCO Closed-End Fund's net assets, including assets attributable to any Preferred Shares.
It is estimated that the Trustees will receive the amounts set forth in the following table from the Fund for its initial fiscal year ending March 31, 2004. For the calendar year ended December 31, 2002, the Trustees received the compensation set forth in the following table for serving as trustees of other funds in the "Fund Complex." Each officer and Trustee who is a director, officer, partner or employee of the Manager, PIMCO or any entity controlling, controlled by or under common control with the Manager or PIMCO serves without any compensation from the Fund.
Total Compensation
Estimated Compensation from the Fund Complex Paid
from the Fund for the to the Trustees for the
Fiscal Year Ending Calendar Year Ending
Name of Trustee March 31, 2004* December 31, 2002**
--------------- --------------- -----------------
Robert E. Connor $17,500 $ 87,170
John J. Dalessandro II $17,500 $ 76,400
Hans W. Kertess $17,500 $ 60,000
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* Since the Fund has not completed its first full fiscal year, compensation is estimated based upon future payments to be made by the Fund during the current fiscal year and upon estimated relative net assets of the PIMCO Closed-End Funds.
** In addition to the PIMCO Closed-End Funds, during the year ended December 31, 2002, Mr. Connor served as a director or trustee of one open-end investment company (comprising two separate investment portfolios) and one closed-end investment company advised by the Manager. These investment companies are considered to be in the same "Fund Complex" as the Fund.
The Fund has no employees. Its officers are compensated by the Manager and/or PIMCO.
Codes of Ethics
The Fund, the Manager and PIMCO have each adopted a separate code of ethics governing personal trading activities of, as applicable, all Trustees and officers of the Fund, and directors, officers and employees of the Manager and PIMCO, who, in connection with their regular functions, play a role in the recommendation of any purchase or sale of a security by the Fund or obtain information pertaining to such purchase or sale or who have the power to influence the management or policies of the Fund, the Manager or PIMCO, as applicable. Such persons are prohibited from effecting certain transactions, allowed to effect certain exempt transactions (including with respect to securities that may be purchased or held by the Fund), and are required to preclear certain security transactions with the applicable compliance officer or his designee and to report certain transactions on a regular basis. The Fund, the Manager and PIMCO have each developed procedures for administration of their respective codes. Text-only versions of the codes of ethics can be viewed online or downloaded from the EDGAR Database on the SEC's internet web site at www.sec.gov. You may also review and copy those documents by visiting the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 202-942-8090. In addition, copies of the codes of ethics may be obtained, after mailing the appropriate duplicating fee, by writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at publicinfo@sec.gov.
INVESTMENT MANAGER AND PORTFOLIO MANAGER
Investment Manager
The Manager serves as investment manager to the Fund pursuant to an investment management agreement (the "Investment Management Agreement") between it and the Fund. The Manager, a Delaware limited liability company organized in 2000, is wholly-owned by PIMCO Advisors Retail Holdings LLC, a wholly-owned subsidiary of Allianz Dresdner Asset Management of America L.P. ("ADAM of America," formerly PIMCO Advisors L.P.). ADAM of America was organized as a limited partnership under Delaware law in 1987. ADAM of America's sole general partner is Allianz-Paclife Partners LLC. Allianz-Paclife Partners LLC is a Delaware limited liability company with three members, ADAM U.S. Holding LLC, a Delaware limited liability company, Pacific Asset Management LLC, a Delaware limited liability company, and Pacific Life Insurance Company ("Pacific Life"), a California stock life insurance company. Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific
Life, which is a wholly-owned subsidiary of Pacific Mutual Holding Company. Pacific Life owns an indirect minority equity interest in ADAM of America. The sole member of ADAM U.S. Holding LLC is Allianz Dresdner Asset Management of America LLC. Allianz Dresdner Asset Management of America LLC has two members, Allianz of America, Inc. ("Allianz of America"), a Delaware corporation which owns a 99.9% non-managing interest, and Allianz Dresdner Asset Management of America Holding Inc., a Delaware corporation which owns a 0.01% managing interest. Allianz of America is a wholly-owned subsidiary of Allianz Aktiengesellschaft ("Allianz AG"). Allianz Dresdner Asset Management of America Holding Inc. is a wholly-owned subsidiary of ADAM GmbH, which is a wholly-owned subsidiary of Allianz AG. Allianz AG indirectly holds a controlling interest in ADAM of America. Allianz AG is a European-based, multinational insurance and financial services holding company. Allianz AG's address is Koeniginstrasse 28, D-80802, Munich, Germany. Pacific Life's address is 700 Newport Center Drive, Newport Beach, California 92660. ADAM of America's address is 888 San Clemente Drive, Suite 100, Newport Beach, California 92660.
The general partner of ADAM of America has substantially delegated its management and control of ADAM of America to an Executive Committee. The Executive Committee of ADAM of America is comprised of William S. Thompson, Jr. and David C. Flattum.
The Manager is located at 1345 Avenue of the Americas, New York, New York 10105. As of March 31, 2003, the Manager had approximately $17.7 billion in assets under management. As of March 31, 2003, ADAM of America and its subsidiary partnerships had approximately $390 billion in assets under management.
Allianz of America has entered into a put/call arrangement for the possible disposition of Pacific Life's indirect interest in ADAM of America. The put option held by Pacific Life will allow it to require Allianz of America, on the last business day of each calendar quarter following May 5, 2000, to purchase at a formula-based price all ADAM of America's units owned directly or indirectly by Pacific Life. The call option held by Allianz of America will allow it, beginning January 31, 2003 or upon a change in control of Pacific Life, to require Pacific Life to sell or cause to be sold to Allianz of America, at the same formula-based price, all of ADAM of America's units owned directly or indirectly by Pacific Life.
As of the date of this Statement of Additional Information, significant institutional shareholders of Allianz AG currently include Munchener Ruckversicherungs-Gesellschaft AG ("Munich Re") and HypoVereinsbank. Allianz AG in turn owns more than 95% of Dresdner Bank AG. Credit Lyonnais, Munich Re and HypoVereinsbank, as well as certain broker-dealers that might be controlled by or affiliated with these entities or Dresdner Bank AG, such as Dresdner Klienwort Wasserstein, Dresdner Kleinwort Benson and Grantchester Securities, Inc., may be considered to be affiliated persons of the Manager and PIMCO. (Broker-dealer affiliates of such significant institutional shareholders are sometimes referred to herein as "Affiliated Brokers.") Absent an SEC exemption or other relief, the Fund generally is precluded from effecting principal transactions with the Affiliated Brokers, and its ability to purchase securities being underwritten by an Affiliated Broker or a syndicate including an Affiliated Broker is subject to restrictions. Similarly, the Fund's ability to utilize the Affiliated Brokers for agency transactions is subject to the restrictions of Rule 17e-1 under the 1940 Act. PIMCO does not believe that the restrictions on transactions with the Affiliated Brokers described above will
materially adversely affect its ability to provide services to the Fund, the Fund's ability to take advantage of market opportunities, or the Fund's overall performance.
The Manager, subject to the supervision of the Board of Trustees, is responsible for managing, either directly or through others selected by the Manager, the investments of the Fund. The Manager also furnishes to the Board of Trustees periodic reports on the investment performance of the Fund. As more fully discussed below, the Manager has retained PIMCO to serve as the Fund's portfolio manager.
Under the terms of the Investment Management Agreement, subject to such policies as the Trustees may determine, the Manager, at its expense, furnishes continuously an investment program for the Fund and makes investment decisions on behalf of the Fund and places all orders for the purchase and sale of portfolio securities subject always to the Fund's investment objectives, policies and restrictions; provided that, so long as PIMCO serves as the portfolio manager for the Fund, the Manager's obligation under the Investment Management Agreement with respect to the Fund is, subject always to the control of the Trustees, to determine and review with PIMCO the investment policies of the Fund.
Subject to the control of the Trustees, the Manager also manages, supervises and conducts the other affairs and business of the Fund, furnishes office space and equipment, provides bookkeeping and certain clerical services (excluding determination of the net asset value of the Fund, shareholder accounting services and the accounting services for the Fund) and pays all salaries, fees and expenses of officers and Trustees of the Fund who are affiliated with the Manager. As indicated under "Portfolio Transactions--Brokerage and Research Services," the Fund's portfolio transactions may be placed with broker-dealers which furnish the Manager and PIMCO, without cost, certain research, statistical and quotation services of value to them or their respective affiliates in advising the Fund or their other clients. In so doing, the Fund may incur greater brokerage commissions and other transactions costs than it might otherwise pay.
Pursuant to the Investment Management Agreement, the Fund has agreed to pay the Manager an annual management fee, payable on a monthly basis, at the annual rate of 0.70% of the Fund's average daily net assets (including net assets attributable to Preferred Shares) for the services and facilities it provides. All fees and expenses are accrued daily and deducted before payment of dividends to investors.
Except as otherwise described in the Prospectus, the Fund pays, in addition to the investment management fee described above, all expenses not assumed by the Manager, including, without limitation, fees and expenses of Trustees who are not "interested persons" of the Manager or the Fund, interest charges, taxes, brokerage commissions, expenses of issue of shares, fees and expenses of registering and qualifying the Fund and its classes of shares for distribution under federal and state laws and regulations, charges of custodians, auditing and legal expenses, expenses of determining net asset value of the Fund, reports to shareholders, expenses of meetings of shareholders, expenses of printing and mailing prospectuses, proxy statements and proxies to existing shareholders, and its proportionate share of insurance premiums and professional association dues or assessments. The Fund is also responsible for such nonrecurring expenses as may arise, including litigation in which the Fund may be a party,
and other expenses as determined by the Trustees. The Fund may have an obligation to indemnify its officers and Trustees with respect to such litigation
Portfolio Manager
PIMCO serves as portfolio manager for the Fund pursuant to a portfolio management agreement (the "Portfolio Management Agreement") between PIMCO and the Manager. Under the Portfolio Management Agreement, subject always to the control of the Trustees and the supervision of the Manager, PIMCO's obligation is to furnish continuously an investment program for the Fund, to make investment decisions on behalf of the Fund and to place all orders for the purchase and sale of portfolio securities and all other investments for the Fund.
Under the Portfolio Management Agreement, the Manager (and not the Fund) pays a portion of the fees it receives from the Fund to PIMCO in return for PIMCO's services, at the annual rate of 0.3575% of the Fund's average daily net assets (including assets attributable to any Preferred Shares that may be outstanding) for the period from the commencement of Fund operations through April 30, 2008 (i.e., roughly the first five years of Fund operations) (the "Initial Period") and at the rate of 0.50% of such average daily net assets thereafter while the Investment Management Agreement remains in effect (the "Remaining Period").
Originally organized in 1971, reorganized as a Delaware general partnership in 1994 and reorganized as a Delaware limited liability company in 2000, PIMCO provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds. The membership interests of PIMCO as of December 1, 2002, were held 91% by ADAM of America and 9% by the managing directors of PIMCO. As of March 31, 2003, PIMCO had approximately $323 billion in assets under management. PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660.
Certain Terms of the Investment Management and Portfolio Management Agreements
The Investment Management Agreement and the Portfolio Management Agreement were each approved by the Trustees of the Fund (including all of the Trustees who are not "interested persons" of the Manager or PIMCO). The Investment Management Agreement and Portfolio Management Agreement will each continue in force with respect to the Fund for two years from their respective dates, and from year to year thereafter, but only so long as their continuance is approved at least annually by (i) vote, cast in person at a meeting called for that purpose, of a majority of those Trustees who are not "interested persons" of the Manager, PIMCO or the Fund, and (ii) the majority vote of either the full Board of Trustees or the vote of a majority of the outstanding shares of all classes of the Fund. Each of the Investment Management Agreement and Portfolio Management Agreement automatically terminates on assignment. The Investment Management Agreement may be terminated on not less than 60 days' notice by the Manager to the Fund or by the Fund to the Manager. The Portfolio Management Agreement may be terminated on not less than 60 days' notice by the Manager to PIMCO or by PIMCO to the Manager, or by the Fund at any time by notice to the Manager and PIMCO.
The Investment Management Agreement and the Portfolio Management Agreement each provide that the Manager or PIMCO, as applicable, shall not be subject to any liability in
connection with the performance of its services thereunder in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties.
Basis for Approval of the Investment Management and Portfolio Management Agreements
In determining to approve the Investment Management Agreement and the Portfolio Management Agreement, the Trustees met with the relevant investment advisory personnel from the Manager and PIMCO and considered information relating to the education, experience and number of investment professionals and other personnel who would provide services under the applicable agreement. See "Management of the Fund" in the Prospectus and this Statement of Additional Information. The Trustees also took into account the time and attention to be devoted by senior management to the Fund and the other funds in the complex. The Trustees evaluated the level of skill required to manage the Fund and concluded that the human resources to be available at the Manager and PIMCO were appropriate to fulfill effectively the duties of the Manager and PIMCO on behalf of the Fund under the applicable agreement. The Trustees also considered the business reputation of the Manager and PIMCO, their financial resources and professional liability insurance coverage and concluded that they would be able to meet any reasonably foreseeable obligations under the applicable agreement.
The Trustees received information concerning the investment philosophy and investment process to be applied by PIMCO in managing the Fund. In this connection, the Trustees considered PIMCO's in-house research capabilities as well as other resources available to PIMCO's personnel, including research services available to PIMCO as a result of securities transactions effected for the Fund and other investment advisory clients. The Trustees concluded that PIMCO's investment process, research capabilities and philosophy were well suited to the Fund, given the Fund's investment objectives and policies.
The Trustees considered the scope of the services provided by the Manager and PIMCO to the Fund under the Investment Management Agreement and Portfolio Management Agreement, respectively, relative to services provided by third parties to other mutual funds. The Trustees noted that the Manager's and PIMCO's standard of care was comparable to that found in most investment company advisory agreements. See "--Certain Terms of the Investment Management and Portfolio Management Agreements" above. The Trustees concluded that the scope of the Manager's and PIMCO's services to be provided to the Fund was consistent with the Fund's operational requirements, including, in addition to its investment objectives, compliance with the Fund's investment restrictions, tax and reporting requirements and related shareholder services.
The Trustees considered the quality of the services to be provided by the Manager and PIMCO to the Fund. The Trustees also evaluated the procedures of the Manager and PIMCO designed to fulfill the their fiduciary duty to the Fund with respect to possible conflicts of interest, including their codes of ethics (regulating the personal trading of their officers and employees) (see "Management of the Fund--Code of Ethics" above), the procedures by which PIMCO allocates trades among its various investment advisory clients, the integrity of the systems in place to ensure compliance with the foregoing and the record of PIMCO in these matters. The Trustees also received information concerning standards of the Manager and
PIMCO with respect to the execution of portfolio transactions. See "Portfolio Transactions" below.
In approving the agreements, the Trustees also gave substantial consideration to the fees payable under the agreements. The Trustees reviewed information concerning fees paid to investment advisers of similar bond funds. The Trustees also considered the fees of the Fund as a percentage of assets at different asset levels and possible economies of scale to the Manager. The Trustees evaluated the Manager's profitability with respect to the Fund, concluding that such profitability was not inconsistent with levels of profitability that had been determined by courts not to be "excessive." In evaluating the Fund's advisory fees, the Trustees also took into account the complexity of investment management for the Fund relative to other types of funds.
PORTFOLIO TRANSACTIONS
Investment Decisions and Portfolio Transactions
Investment decisions for the Fund and for the other investment advisory clients of the Manager and PIMCO are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved (including the Fund). Some securities considered for investments by the Fund may also be appropriate for other clients served by the Manager and PIMCO. Thus, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. If a purchase or sale of securities consistent with the investment policies of the Fund and one or more of these clients served by the Manager or PIMCO is considered at or about the same time, transactions in such securities will be allocated among the Fund and clients in a manner deemed fair and reasonable by the Manager or PIMCO, as applicable. The Manager or PIMCO may aggregate orders for the Fund with simultaneous transactions entered into on behalf of its other clients so long as price and transaction expenses are averaged either for that transaction or for the day. Likewise, a particular security may be bought for one or more clients when one or more clients are selling the security. In some instances, one client may sell a particular security to another client. It also sometimes happens that two or more clients simultaneously purchase or sell the same security, in which event each day's transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which the Manager or PIMCO believes is equitable to each and in accordance with the amount being purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients.
Brokerage and Research Services
There is generally no stated commission in the case of debt securities, which are traded in the over-the-counter markets, but the price paid by the Fund usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Fund includes a disclosed, fixed commission or discount retained by the underwriter or dealer. Transactions on U.S. stock exchanges and other agency transactions involve the payment by the Fund of negotiated brokerage commissions. Such commissions vary among different brokers. Also, a
particular broker may charge different commissions according to such factors as the difficulty and size of the transaction.
Subject to the supervision of the Manager, PIMCO places all orders for the purchase and sale of portfolio securities, options, futures contracts and other instruments for the Fund and buys and sells such securities, options, futures contracts and other instruments for the Fund through a substantial number of brokers and dealers. In so doing, PIMCO uses its best efforts to obtain for the Fund the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions as described below. In seeking the most favorable price and execution, PIMCO, having in mind the Fund's best interests, considers all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker-dealer involved and the quality of service rendered by the broker-dealer in other transactions.
Subject to the supervision of the Manager, PIMCO places orders for the purchase and sale of portfolio investments for the Fund's account with brokers or dealers selected by it in its discretion. In effecting purchases and sales of portfolio securities for the account of the Fund, PIMCO will seek the best price and execution of the Fund's orders. In doing so, the Fund may pay higher commission rates than the lowest available when PIMCO believes it is reasonable to do so in light of the value of the brokerage and research services provided by the broker effecting the transaction, as discussed below.
It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive research services from broker-dealers which execute portfolio transactions for the clients of such advisers. Consistent with this practice, PIMCO may receive research services from many broker-dealers with which PIMCO places the Fund's portfolio transactions. PIMCO may also receive research or research credits from brokers which are generated from underwriting commissions when purchasing new issues of debt securities or other assets for the Fund. These services, which in some cases may also be purchased for cash, include such matters as general economic and security market reviews, industry and company reviews, evaluations of securities and recommendations as to the purchase and sale of securities. Some of these services are of value to PIMCO in advising various of its clients (including the Fund), although not all of these services are necessarily useful and of value in managing the Fund. Neither the management fee paid by the Fund to the Manager nor the portfolio management fee paid by the Manager to PIMCO is reduced because PIMCO and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, PIMCO may cause the Fund to pay a broker-dealer which provides "brokerage and research services" (as defined in such Act) to PIMCO an amount of disclosed commission for effecting a securities transaction for the Fund in excess of the commission which another broker-dealer would have charged for effecting that transaction.
The Fund may use broker-dealers that are affiliates (or affiliates of affiliates) of the Fund, the Manager and/or PIMCO, subject to certain restrictions discussed above under "Investment Manager and Portfolio Manager--Investment Manager."
References to PIMCO in this section would apply equally to the Manager if the Manager were to assume portfolio management responsibilities for the Fund and place orders for the purchase and sale of the Fund's portfolio investments.
DISTRIBUTIONS
See "Description of Preferred Shares--Dividends" and "Description of Capital Structure" in the prospectus for information relating to distributions to Fund shareholders.
For tax purposes, the Fund is currently required to allocate net capital gain and other taxable income, if any, among Common Shares, the Series M Preferred Shares, the Series T Preferred Shares, the Series W Preferred Shares, the Series TH Preferred Shares and the Series F Preferred Shares in proportion to total dividends paid to each class for the year in which such net capital gain or other taxable income is realized.
While any Preferred Shares are outstanding, the Fund may not declare any cash dividend or other distribution on its Common Shares unless at the time of such declaration (1) all accumulated dividends on the Preferred Shares have been paid and (2) the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of the liquidation value of any outstanding Preferred Shares. This latter limitation on the Fund's ability to make distributions on its Common Shares could cause the Fund to incur income and excise tax and, under certain circumstances, impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company. See "Tax Matters."
The Board of Trustees has declared a dividend of $0.121875 per Common Share payable on July 1, 2003.
DESCRIPTION OF SHARES
Common Shares
The Fund's Declaration authorizes the issuance of an unlimited number of Common Shares. The Common Shares currently outstanding have been issued with a par value of $0.00001 per share. All Common Shares of the Fund have equal rights as to the payment of dividends and the distribution of assets upon liquidation of the Fund. The Common Shares currently outstanding have been fully paid and, subject to matters discussed in "Anti-Takeover and Other Provisions in the Declaration of Trust--Shareholder Liability" below, are non-assessable, and have no pre-emptive or conversion rights or rights to cumulative voting. At any time when the Fund's Preferred Shares are outstanding, Common Shareholders will not be entitled to receive any distributions from the Fund unless all accrued dividends on Preferred Shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to Preferred Shares would be at least 200% after giving effect to such distributions. See "--
Preferred Shares" below. See "Description of Preferred Shares--Dividends--Restrictions on Dividends and Other Payments" and "Description of Capital Structure" in the prospectus.
The Common Shares are listed on the New York Stock Exchange. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Shares of closed-end investment companies may frequently trade at prices lower than net asset value. Shares of closed-end investment companies like the Fund that invest predominantly in below investment-grade debt obligations have during some periods traded at prices higher than net asset value and during other periods traded at prices lower than net asset value. There can be no assurance that Common Shares or shares of other similar funds will trade at a price higher than net asset value in the future. Net asset value will be reduced immediately following any offering of Preferred Shares by the costs of that offering paid by the Fund. Net asset value generally increases when interest rates decline, and decreases when interest rates rise, and these changes are likely to be greater in the case of a fund, such as the Fund, having a leveraged capital structure. Whether investors realize gains or losses upon the sale of Common Shares does not depend upon the Fund's net asset value but depends entirely upon whether the market price of the Common Shares at the time of sale is above or below the original purchase price for the shares. Since the market price of the Fund's Common Shares will be determined by factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below, or above net asset value or at, below or above the initial public offering price. Accordingly, the Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes. See "Repurchase of Common Shares; Conversion to Open End Fund."
Preferred Shares
See "Description of Preferred Shares" and "Description of Capital Structure" in the Prospectus.
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST
Shareholder Liability
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for acts or obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or the Trustees. The Declaration also provides for indemnification out of the Fund's property for all loss and expense of any shareholder held personally liable on account of being or having been a shareholder. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which such disclaimer is inoperative or the Fund is unable to meet its obligations, and thus should be considered remote.
Anti-Takeover Provisions
As described below, the Declaration includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of its Board of Trustees, and could have the effect of depriving shareholders of opportunities to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund.
The Fund's Trustees are divided into three classes (Class I, Class II and Class III), having initial terms of one, two and three years, respectively. At each annual meeting of shareholders, the term of one class will expire and each Trustee elected to that class will hold office for a term of three years. The classification of the Board of Trustees in this manner could delay for an additional year the replacement of a majority of the Board of Trustees. In addition, the Declaration provides that a Trustee may be removed only for cause and only (i) by action of at least seventy-five percent (75%) of the outstanding shares of the classes or series of shares entitled to vote for the election of such Trustee, or (ii) by at least seventy-five percent (75%) of the remaining Trustees.
Except as provided in the next paragraph, the affirmative vote or consent of at least seventy-five percent (75%) of the Board of Trustees and at least seventy-five percent (75%) of the shares of the Fund outstanding and entitled to vote thereon are required to authorize any of the following transactions (each a "Material Transaction"): (1) a merger, consolidation or share exchange of the Fund or any series or class of shares of the Fund with or into any other person or company, or of any such person or company with or into the Fund or any such series or class of shares; (2) the issuance or transfer by the Fund or any series or class of shares (in one or a series of transactions in any twelve-month period) of any securities of the Fund or such series or class to any other person or entity for cash, securities or other property (or combination thereof) having an aggregate fair market value of $1,000,000 or more, excluding sales of securities of the Fund or such series or class in connection with a public offering, issuances of securities of the Fund or such series or class pursuant to a dividend reinvestment plan adopted by the Fund and issuances of securities of the Fund or such series or class upon the exercise of any stock subscription rights distributed by the Fund; or (3) a sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Fund or any series or class of shares (in one or a series of transactions in any twelve-month period) to or with any person of any assets of the Fund or such series or class having an aggregate fair market value of $1,000,000 or more, except for transactions in securities effected by the Fund or such series or class in the ordinary course of its business. The same affirmative votes are required with respect to any shareholder proposal as to specific investment decisions made or to be made with respect to the Fund's assets or the assets of any series or class of shares of the Fund.
Notwithstanding the approval requirements specified in the preceding paragraph, the Declaration requires no vote or consent of the Fund's shareholders to authorize a Material Transaction if the transaction is approved by a vote of both a majority of the Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as defined below), so long as all other conditions and requirements, if any, provided for in the Fund's Bylaws and applicable law (including any shareholder voting rights under the 1940 Act) have been satisfied.
In addition, the Declaration provides that the Fund may be terminated at any time by vote or consent of at least seventy-five percent (75%) of the Fund's shares or, alternatively, by vote or consent of both a majority of the Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as defined below).
In certain circumstances, the Declaration also imposes shareholder voting requirements that are more demanding than those required under the 1940 Act in order to authorize a conversion of the Fund from a closed-end to an open-end investment company. See "Repurchase of Common Shares; Conversion to Open-End Fund" below.
As noted, the voting provisions described above could have the effect of depriving Common Shareholders of an opportunity to sell their Common Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. In the view of the Fund's Board of Trustees, however, these provisions offer several possible advantages, including: (1) requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid for the amount of Common Shares required to obtain control; (2) promoting continuity and stability; and (3) enhancing the Fund's ability to pursue long-term strategies that are consistent with its investment objectives and management policies. The Board of Trustees has determined that the voting requirements described above, which are generally greater than the minimum requirements under the 1940 Act, are in the best interests of the Fund's Common Shareholders generally.
A "Continuing Trustee," as used in the discussion above, is any member of the Fund's Board of Trustees who either (i) has been a member of the Board for a period of at least thirty-six months (or since the commencement of the Fund's operations, if less than thirty-six months) or (ii) was nominated to serve as a member of the Board of Trustees by a majority of the Continuing Trustees then members of the Board.
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Declaration and the Fund's Bylaws, both of which have been filed as exhibits to the Fund's registration statement on file with the SEC.
Liability of Trustees
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. Shares of a closed-end investment company may frequently trade at prices lower than net asset value. The Fund's Board of Trustees regularly monitors the relationship between the market price and net asset value of the Common Shares. If the Common Shares were to trade at a substantial discount to net asset value for an extended period of time, the Board may consider the repurchase of its Common Shares on the open market or in private transactions, or the making of a tender offer for such shares. There can be no assurance, however, that the Board of Trustees will decide to take or propose any of these actions, or that share repurchases or tender offers, if undertaken, will reduce market discount. The Fund has no present intention to repurchase its Common Shares and would do so only in the circumstances described in this section.
Notwithstanding the foregoing, at any time when the Fund's Preferred Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire any of its Common Shares unless (1) all accrued dividends on Preferred Shares 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 Preferred Shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon).
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.
The Fund's Board of Trustees may also from time to time consider submitting to the holders of the shares of beneficial interest of the Fund a proposal to convert the Fund to an open-end investment company. In determining whether to exercise its sole discretion to submit this issue to shareholders, the Board of Trustees would consider all factors then relevant, including the relationship of the market price of the Common Shares to net asset value, the extent to which the Fund's capital structure is leveraged and the possibility of re-leveraging, the spread, if any, between the yields on securities in the Fund's portfolio and interest and dividend charges on Preferred Shares issued by the Fund and general market and economic conditions.
The Declaration requires the affirmative vote or consent of holders of at least seventy-five percent (75%) of each class of the Fund's shares entitled to vote on the matter to authorize a conversion of the Fund from a closed-end to an open-end investment company, unless the conversion is authorized by both a majority of the Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as defined above under "Anti-Takeover and Other Provisions in the Declaration of Trust--Anti-Takeover Provisions"). This seventy-five percent (75%) shareholder approval requirement is higher than is required under the 1940 Act. In the event that a conversion is approved by the Trustees and the Continuing Trustees as described above, the minimum shareholder vote required under the 1940 Act would be necessary to authorize the conversion. Currently, the 1940 Act would require approval of the holders of a "majority of the outstanding" Common Shares and, if issued, Preferred Shares voting together as a single class,
and the holders of a "majority of the outstanding" Preferred Shares voting as a separate class, in order to authorize a conversion.
If the Fund converted to an open-end company, it would be required to redeem all Preferred Shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Fund's Common Shares likely would no longer be listed on the New York Stock Exchange. Shareholders of an open-end investment company may require the company to redeem their shares on any business day (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a continuous offering of their shares. Open-end companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management.
The 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. This 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 Preferred Shares are outstanding will increase the leverage applicable to the outstanding Common Shares then remaining. See the Prospectus under "Risks--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares trade below net asset value, the Board of Trustees would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken.
TAX MATTERS
Taxation of the Fund. The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Code. In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale of stock, securities or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code without regard to the deduction for dividends paid--generally taxable ordinary income and the excess, if any, of net short-term capital gains over net long-term capital losses) and net tax-exempt interest income, for such year; and
(c) diversify its holdings so that, at the end of each quarter of the Fund's taxable year, (i) at least 50% of the market value of the Fund's total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or businesses.
If the Fund qualifies as a regulated investment company that is accorded special tax treatment, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain Dividends, as defined below).
If the Fund failed to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Fund would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, generally would be taxable to shareholders as ordinary income. Such distributions generally would be eligible (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals, and (ii) for the dividends received deduction in the case of corporate shareholders. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a regulated investment company that is accorded special tax treatment.
The Fund intends to distribute at least annually to its shareholders all or substantially all of its investment company taxable income and any net tax-exempt interest, and may distribute its net capital gain. The Fund may also retain for investment its net capital gain. If the Fund does retain any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may designate the retained amount as undistributed capital gains in a notice to its shareholders who, if subject to federal income tax on long-term capital gains, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their shares of such undistributed amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal under current law to the difference between the amount of undistributed capital gains included in the shareholder's gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence.
Treasury regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain, to elect to treat all or part of any net capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year.
If the Fund fails to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary income for such year and 98% of its capital gain net income for the one-year period ending October 31 of such year, plus any retained amount from the prior year, the Fund will be subject to a nondeductible 4% excise tax on the undistributed amounts. For these purposes, the Fund will be treated as having distributed any amount for which it is subject to income tax. A dividend paid to shareholders in January of a year generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
Fund Distributions. Distributions from the Fund generally will be taxable to shareholders as ordinary income to the extent derived from investment income and net short-term capital gains. Distributions of net capital gains (that is, the excess of net gains from the sale of capital assets held more than one year over net losses from the sale of capital assets held for not more than one year) properly designated as capital gain dividends ("Capital Gain Dividends") will be taxable to shareholders as long-term capital gain, regardless of how long a shareholder has held the shares in the Fund. Long-term capital gain rates applicable to individuals have been temporarily reduced--in general, to 15% with lower rates applying to taxpayers in the 10% and 15% rate brackets--for taxable years beginning on or before December 31, 2008.
For taxable years beginning on or before December 31, 2008, provided holding period and other requirements are met, the Fund may designate distributions of investment income derived from dividends of U.S. corporations and some foreign corporations as "qualified dividend income." Qualified dividend income will be taxed in the hands of individuals at the rates applicable to long-term capital gain, provided these same holding period and other requirements are met by the shareholder. The Fund does not expect a significant portion of Fund distributions to be derived from qualified dividend income.
Dividends of net investment income received by corporate shareholders of the Fund will qualify for the 70% dividends received deduction generally available to corporations to the extent of the amount of qualifying dividends received by the Fund from domestic corporations for the taxable year. It is not expected that any significant percentage of the Fund's distributions will so qualify.
The Internal Revenue Service currently requires that a regulated investment company that has two or more classes of stock allocate to each such class proportionate amounts of each type of its income (such as ordinary income and capital gains) based upon the percentage of total dividends distributed to each class for the tax year. Accordingly, the Fund intends each year to allocate Capital Gain Dividends between and among its Common Shares, Series M Preferred Shares, Series T Preferred Shares, Series W Preferred Shares, Series TH Preferred Shares and Series F Preferred Shares in proportion to the total dividends paid to each class with respect to such tax year. Dividends qualifying and not qualifying for (a) treatment as qualified dividend income and (b) the dividends received deduction, if any, will similarly be allocated between and among any such classes.
Return of Capital Distributions. If the Fund makes a distribution to a shareholder in excess of the Fund's current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the extent of the shareholder's tax basis in his shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces a shareholder's tax basis in his shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by the shareholder of his shares. Where one or more such distributions occur in any taxable year of the Fund, the available earnings and profits will be allocated, first, to the distributions made to the holders of any outstanding preferred shares of beneficial interest of the Fund (including the Preferred Shares), and only thereafter to distributions made to Common Shareholders. As a result, the holders of any outstanding preferred shares of beneficial interest of the Fund (including the Preferred Shares) will receive a disproportionate share of the distributions treated as dividends, and the Common Shareholders will receive a disproportionate share of the distributions treated as a return of capital.
Dividends and distributions on the Fund's shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when the Fund's net asset value also reflects unrealized losses. Distributions are taxable to a shareholder even if they are paid from income or gains earned by the Fund prior to the shareholder's investment (and thus included in the price paid by the shareholders).
Capital Loss Carryover. Distributions from capital gains are generally made after applying any available capital loss carryovers.
Sale or Redemption of Shares. The sale, exchange or redemption of Fund shares may give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable disposition of Fund shares will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received (or deemed received) by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed if other substantially identical shares of the Fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
From time to time the Fund may make a tender offer for its Common Shares. It is expected that the terms of any such offer will require a tendering shareholder to tender all Common Shares and dispose of all Preferred Shares held, or considered under certain attribution rules of the Code to be held, by such shareholder. Shareholders who tender all Common Shares and dispose of all Preferred Shares held, or considered to be held, by them will be treated as having sold their shares and generally will realize a capital gain or loss. If a shareholder tenders fewer than all of its Common Shares, or retains a substantial portion of its Preferred Shares, such shareholder may be treated as having received a taxable dividend upon the tender of its Common
Shares. In such a case, there is a remote risk that non-tendering shareholders will be treated as having received taxable distributions from the Fund. Likewise, if the Fund redeems some but not all of the Preferred Shares held by a Preferred Shareholder and such shareholder is treated as having received a taxable dividend upon such redemption, there is a remote risk that Common Shareholders and non-redeeming Preferred Shareholders will be treated as having received taxable distributions from the Fund. To the extent that the Fund recognizes net gains on the liquidation of portfolio securities to meet such tenders of Common Shares, the Fund will be required to make additional distributions to its Common Shareholders.
Discount Obligations and Payment-in-Kind Securities. Some of the debt obligations (with a fixed maturity date of more than one year from the date of issuance) that may be acquired by the Fund may be (and all zero-coupon debt obligations acquired by the Fund will be) treated as debt obligations that are issued originally at a discount. Generally, the amount of the original issue discount ("OID") is treated as interest income and is included in taxable income (and required to be distributed) over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. In addition, payment-in-kind securities will give rise to income which is required to be distributed and is taxable even though the Fund holding the security receives no interest payment in cash on the security during the year.
Some of the debt obligations (with a fixed maturity date of more than one year from the date of issuance) that may be acquired by the Fund in the secondary market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the "accrued market discount" on such debt security. Market discount generally accrues in equal daily installments. The Fund may make one or more of the elections applicable to debt obligations having market discount, which could affect the character and timing of recognition of income.
Some debt obligations (with a fixed maturity date of one year or less from the date of issuance) that may be acquired by the Fund may be treated as having acquisition discount, or OID in the case of certain types of debt obligations. Generally, the Fund will be required to include the acquisition discount, or OID, in income over the term of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures. The Fund may make one or more of the elections applicable to debt obligations having acquisition discount, or OID, which could affect the character and timing of recognition of income.
If the Fund holds the foregoing kinds of securities, it may be required to pay out as an income distribution each year an amount which is greater than the total amount of cash interest the Fund actually received. Such distributions may be made from the cash assets of the Fund or by liquidation of portfolio securities, if necessary. The Fund may realize gains or losses from such liquidations. In the event the Fund realizes net capital gains from such transactions, its shareholders may receive a larger capital gain distribution than they would in the absence of such transactions.
Higher-Risk Securities. The Fund may invest to a significant extent in debt obligations that are in the lowest rating categories or are unrated, including debt obligations of issuers not currently paying interest or who are in default. Investments in debt obligations that are at risk of or in default present special tax issues for the Fund. Tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless securities and how payments received on obligations in default should be allocated between principal and income. These and other related issues will be addressed by the Fund when, as and if it invests in such securities, in order to seek to ensure that it distributes sufficient income to preserve its status as a regulated investment company and does not become subject to U.S. federal income or excise tax.
Issuer Deductibility of Interest. A portion of the interest paid or accrued on certain high yield discount obligations owned by the Fund may not (and interest paid on debt obligations, if any, that are considered for tax purposes to be payable in the equity of the issuer or a related party will not) be deductible to the issuer. This may affect the cash flow of the issuer. If a portion of the interest paid or accrued on certain high yield discount obligations is not deductible, that portion will be treated as a dividend for purposes of the corporate dividends received deduction. In such cases, if the issuer of the high yield discount obligations is a domestic corporation, dividend payments by the Fund may be eligible for the dividends received deduction to the extent of the deemed dividend portion of such accrued interest.
Options, Futures, Forward Contracts and Swap Agreements. The Fund's transactions in options, futures contracts, hedging transactions, forward contracts, swap agreements, straddles and foreign currencies will be subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale and short sale rules), the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments in the holding periods of the Fund's securities, convert long-term capital gains into short-term capital gains and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders. The Fund will monitor its transactions, will make appropriate tax elections and will make appropriate entries in its books and records in order to mitigate the effect of these rules.
Certain of the Fund's hedging activities (including its transactions, if any, in foreign currencies or foreign currency-denominated instruments) are likely to produce a difference between its book income and its taxable income. If the Fund's book income exceeds its taxable income, the distribution (if any) of such excess generally will be treated as (i) a dividend to the extent of the Fund's remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipient's basis in its shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If the Fund's book income is less than taxable income, the Fund could be required to make distributions exceeding book income to qualify as a regulated investment company that is accorded special tax treatment.
Foreign Currency Transactions. The Fund's transactions in foreign currencies, foreign currency-denominated debt obligations and certain foreign currency options, futures contracts and forward contracts (and similar instruments) may give rise to ordinary income or loss to the
extent such income or loss results from fluctuations in the value of the foreign currency concerned.
Foreign Taxation. Income received by the Fund from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax conventions between certain countries and the U.S. may reduce or eliminate such taxes. Shareholders generally will not be entitled to claim a credit or deduction with respect to foreign taxes.
Shares Purchased Through Tax-Qualified Plans. Special tax rules apply to investments through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisers to determine the suitability of shares of the Fund as an investment through such plans and the precise effect of an investment on their particular tax situation.
Non-U.S. Shareholders. Under U.S. federal tax law, dividends other than Capital Gain Dividends paid on shares beneficially held by a person who is not a U.S. person within the meaning of the Code (or a "foreign person"), are, in general, subject to withholding of U.S. federal income tax at a rate of 30% of the gross dividend, which rate may, in some cases, be reduced by an applicable tax treaty. Dividends are subject to withholding even if they are funded by income or gains (such as portfolio interest, short-term capital gains, or foreign-source dividend and interest income) that, if paid to a foreign person directly, would not be subject to withholding. However, Capital Gain Dividends will not be subject to withholding of U.S. federal income tax. If a beneficial holder who is a foreign person has a trade or business in the United States, and the dividends are effectively connected with the conduct by the beneficial holder of a trade or business in the United States, the dividend will be subject to U.S. federal net income taxation at regular income tax rates.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign person is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States or (ii) in the case of an individual holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or Capital Gain Dividend and certain other conditions are met.
If you are eligible for the benefits of a tax treaty, any effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by you in the United States.
A beneficial holder of shares who is a foreign person may be subject to state and local tax and to the U.S. federal estate tax in addition to the federal tax on income referred to above.
Backup Withholding. The Fund generally is required to withhold and remit to the U.S. Treasury a percentage of the taxable distributions and redemption proceeds paid to any individual shareholder who fails to properly furnish the Fund with a correct taxpayer identification number ("TIN"), who has under-reported dividend or interest income, or who fails to certify to the Fund that he or she is not subject to such withholding. The backup withholding tax rate is
28% for amounts paid through 2010. The backup withholding tax rate will be 31% for amounts paid after December 31, 2010.
In order for a foreign investor to qualify for exemption from the backup withholding tax rates under income tax treaties, the foreign investor must comply with special certification and filing requirements. Foreign investors in the Fund should consult their tax advisers in this regard. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder's U.S. federal income tax liability, provided the appropriate information is furnished to the Internal Revenue Service.
Recent Tax Shelter Reporting Regulations. Under recently promulgated Treasury regulations, if a shareholder recognizes a loss on disposition of the Fund's shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment companies. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
General. The federal income tax discussion set forth above is for general information only. Prospective investors should consult their tax advisers regarding the specific federal tax consequences of purchasing, holding, and disposing of shares of the Fund, as well as the effects of state, local and foreign tax law and any proposed tax law changes.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services. Comparison of the Fund to an alternative investment should be made with consideration of differences in features and expected performance. The Fund may obtain data from sources or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be generally accurate.
The Fund, in its advertisements, may refer to pending legislation from time to time and the possible impact of such legislation on investors, investment strategy and related matters. At any time in the future, yields and total return may be higher or lower than past yields and there can be no assurance that any historical results will continue.
For the period from April 30, 2003 (the commencement of the Fund's operations) through June 11, 2003, the Fund's net increase in net assets resulting from investment operations was $51,992,137.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSMENT AGENT
State Street Bank and Trust Co., 801 Pennsylvania, Kansas City, Missouri 64105, serves as custodian for assets of the Fund. The custodian performs custodial and fund accounting services.
PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as the transfer agent, registrar and dividend disbursement agent for the Common Shares, as well as agent for the Dividend Reinvestment Plan relating to the Common Shares.
Deutsche Bank Trust Company Americas, 60 Wall St, 27/th/ Floor, New York, New York, 10005, serves as auction agent, transfer agent, registrar, dividend paying agent and redemption agent for the Preferred Shares.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York 10036, serves as independent accountants for the Fund. PricewaterhouseCoopers LLP provides audit services, tax return preparation and assistance and consultation in connection with review of SEC filings to the Fund.
COUNSEL
Ropes & Gray LLP, One International Place, Boston, Massachusetts 02110, passes upon certain legal matters in connection with shares offered by the Fund, and also acts as counsel to the Fund.
REGISTRATION STATEMENT
A Registration Statement on Form N-2, including any amendments thereto (a "Registration Statement"), relating to the shares of the Fund offered hereby, has been filed by the Fund with the SEC, Washington, D.C. The Prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the shares offered or to be offered hereby, reference is made to the Fund's Registration Statement. Statements contained in the Prospectus and this Statement of Additional Information as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement may be inspected without charge at the SEC's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the SEC.
FINANCIAL STATEMENTS
The Statement of Net Assets of the Fund dated as of April 15, 2003, including the Notes thereto, and the report of PricewaterhouseCoopers LLP thereon dated April 16, 2003, as included in the Fund's Statement of Additional Information dated April 24, 2003 relating to the Common Shares, is hereby incorporated by reference into this Statement of Additional Information, which means that such Statement of Net Assets and the Notes thereto are considered to be a part of this Statement of Additional Information. The Statement of Additional Information for the Common Shares was filed electronically with the SEC on April 28, 2003 (Accession No. 0000927016-03-002117).
PIMCO HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
June 1, 2003
(unaudited)
Assets:
Investments, at value (cost - $1,598,515,277) ................. $ 1,606,002,159
Interest receivable ........................................... 31,632,477
Interest receivable from swaps ................................ 7,059
Prepaid expenses .............................................. 53,128
Total Assets .................................... 1,637,694,823
Liabilities:
Due to custodian .............................................. 2,729,090
Payable for investments purchased ............................. 16,424,708
Common stock offering costs payable ........................... 1,073,458
Investment management fee payable ............................. 972,212
Payable for premiums received on swaps ........................ 296,471
Accrued expenses .............................................. 34,437
Total Liabilities ............................... 21,530,376
Net Assets .............................. $ 1,616,164,447
Composition of Net Assets:
Par value ($0.00001 per share) ................................ $ 1,120
Paid-in-capital in excess of par .............................. 1,602,923,883
Undistributed net investment income ........................... 6,598,921
Net realized loss on investments .............................. 7,486,882
Net unrealized appreciation of investments .................... 7,486,882
Net assets ...................................... $ 1,616,164,447
Shares Outstanding ............................................ 112,006,981
Net Asset Value Per Share ..................................... $ 14.43
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See accompanying notes to financial statements.
PIMCO HIGH INCOME FUND
STATEMENT OF OPERATIONS
For the period April 30, 2003* through June 1, 2003
(unaudited)
Investment Income:
Interest ....................................................................... $ 7,633,071
Expenses:
Investment management fees ..................................................... 972,212
Custodian fees ................................................................. 20,295
Organizational expenses ........................................................ 15,000
Trustees' fees ................................................................. 4,650
Audit and tax service fees ..................................................... 4,650
Reports to shareholders ........................................................ 4,950
New York Stock Exchange listing fees ........................................... 4,236
Legal fees ..................................................................... 3,465
Transfer agent fees ............................................................ 2,970
Miscellaneous .................................................................. 1,722
Total expenses ............................................................ 1,034,150
Net investment income ............................................ 6,598, 921
Realized and Unrealized Gain (Loss):
Net realized loss on investments ............................................... (846,359)
Net unrealized appreciation of investments ..................................... 7,486,882
Net realized and unrealized gain on investments ........................... 6,640,523
Net increase in net assets resulting from investment operations ................ $ 13,239,444
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STATEMENT OF CHANGES IN NET ASSETS
For the period April 30, 2003* through June 1, 2003
(unaudited)
Investment Operations:
Net investment income .......................................................... $ 6,598,921
Net realized loss in investments ............................................... (846,359)
Net unrealized appreciation of investments ..................................... 7,486,882
Net increase in net assets resulting from investment operations ........... 13,239,444
Capital Share Transactions:
Net proceeds from the sale of common stock ..................................... 1,604,400,000
Common stock offering expenses charged to paid-in-capital in excess of par ..... (1,575,000)
Total capital share transactions .......................................... 1,602,825,000
Total increase in net assets .............................................. 1,616,064,444
Net Assets:
Beginning of period ............................................................ 100,003
End of period (including undistributed net investment income of $6,598,921) .... $ 1,616,064,444
Shares Issued:
Issued ......................................................................... 112,000,000
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*Commencement of operations
See accompanying notes to financial statements
PIMCO HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
(unaudited)
For a share of common stock outstanding for the period April 30, 2003* through June 1, 2003
Per Share Operating Performance
Net Asset Value, Beginning of Period ..................................................... $ 14.33**
Income from Investment Operations:
Net Investment Income ................................................................ 0.06
Net Realized and Unrealized Gain on Investments ...................................... 0.06
Net Increase in Net Assets from Investment Operations ............................ 0.12
Common Stock Offering Expenses Charged to Paid-in-Capital in Excess of Par ............... (0.02)
Net Asset Value, End of Period ........................................................... $ 14.43
Market Price, End of Period .............................................................. $ 15.01
Total Investment Return .................................................................. 0.1% (1)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) ............................................. $1,616,164
Ratio of Expenses to Average Net Assets .............................................. 0.74% (2)
Ratio of Net Investment Income to Average Net Assets ................................. 4.75% (2)
Portfolio Turnover ................................................................... 6%
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PIMCO HIGH INCOME FUND
NOTES TO FINANCIAL STATEMENTS
June 1, 2003
(unaudited)
1. Organization and Significant Accounting Policies
PIMCO High Income Fund (the "Fund") was organized as a Massachusetts business trust on February 18, 2003. Prior to commencing operations on April 30, 2003, the Fund had no operations other than matters relating to its organization and registration as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, and the sale and issuance of 6,981 shares of beneficial interest at an aggregate purchase price of $100,003 to Allianz Dresdner Asset Management of America, L.P. ("ADAM"). PIMCO Advisors Fund Management LLC (the "Investment Manager") serves as the Fund's investment manager and is an indirect wholly-owned subsidiary of ADAM which is an indirect, majority-owned subsidiary of Allianz AG, a publicly traded insurance and financial services company.
The Investment Manager agreed to reimburse the amount by which the aggregate of all the Fund's organizational expenses and offering costs (other than the sales load) exceeds $0.03 per share of the initial offering. There are an unlimited number of $0.00001 per share par value common stock authorized.
The Fund issued 105,000,000 common shares of beneficial interest in its initial public offering. An additional 7,000,000 shares were issued in connection with the underwriter's over-allotment option. These shares were all issued at $15.00 per share before an underwriting discount of $0.675 per share. Offering costs of $1,575,000 (representing $0.015 per share) were offset against the proceeds of the initial offering and have been charged to paid-in capital in excess of par.
The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates. In the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund expects the risk of loss to be remote.
The following is a summary of significant accounting policies followed by the Fund:
(a) Valuation of Investments
Portfolio securities and other assets for which market quotations are readily available are valued each day at market value. Market value is generally determined on the basis of the last reported sales price, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or independent pricing services approved by the Board of Trustees. Any security or other asset for which market quotations are not readily available is valued at fair value as determined in good faith under procedures established by the Board of
Trustees. The Fund invests substantially all of its assets in a diversified portfolio of corporate debt obligations of varying maturities and other corporate income-producing securities. Short-term debt securities having a remaining maturity of sixty days or less are valued at amortized cost or amortized value, which approximates market value.
(b) Investment Transactions and Investment Income
Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the identified cost basis. Interest income is recorded on an accrual basis. Discounts or premiums on debt securities purchased are accreted or amortized to interest income over the lives of the respective securities using the effective interest method. Market discount, if any, is accreted daily.
(c) Repurchase Agreements
The Fund may enter into transactions with its custodian bank or securities brokerage firms approved by the Board of Trustees whereby it purchases securities under agreements to resell at an agreed upon price and date ("repurchase agreements"). Such agreements are carried at the contract amount in the financial statements. Collateral pledged (the securities received), which consists primarily of U.S. government obligations and asset backed securities, are held by the custodian bank until maturity of the repurchase agreement. Provisions of the repurchase agreements and the procedures adopted by the Fund require that the value of the collateral, including accrued interest thereon, is sufficient in the event of default by the counterparty. If the counterparty defaults and the value of the collateral declines or if the counterparty enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited.
(d) Swaps
The Fund may invest in interest rate and credit default swaps contracts ("swaps") for investment purposes, to manage its interest rates and credit risks and to add leverage to the Portfolio.
As a seller in the credit default swap contract, the Fund would be required to pay the par or other agreed-upon value of a referenced debt obligation to the counterparty in the event of default by a third party, such a as a U.S. or foreign corporate issuer, on the referenced debt obligation. In return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default had occurred. If no default occurs, the Fund would keep the stream of payments and would have no payment obligations. Such periodic payments are accrued daily and recorded as interest income.
The Fund may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held in its portfolio, in which case the Fund would function as the counterparty referenced in the preceding paragraph. As a purchaser of a credit default swap contract, the Fund would receive the par or other agreed upon value of a referenced debt obligation from the counterparty in the event of default by a third party, such as a U.S. or foreign corporate issuer on the referenced debt obligation. In return, the Fund would make periodic payments to the counterparty over the term of the contract provided no event of default has occurred. Such periodic payments are accrued daily and charged to interest income by the Fund.
Interest rate swap agreements involve the exchange by the Fund with a counterparty of their respective commitments to pay or receive interest, e.g. an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal. Net payments of interest on interest rate swap agreements are recorded daily as part of interest income.
Swaps are marked to market daily by the Fund's Investment Manager based upon quotations from market makers and the change in value, if any, is recorded as unrealized appreciation or depreciation in the Statement of Operations by the Fund. Payments received or made, if any, upon termination or maturity of the interest rate swaps, net of any basis in the interest rate swaps, is recorded as a realized gain or loss in the Statement of Operations by the Fund. For a credit default swap sold by the Fund, payment of the agreed upon amount made by the Fund in the event of default of the referenced debt obligation is recorded as the cost of the referenced debt obligation purchased/received. For a credit default swap purchased by the Fund, the agreed upon amount received by the Fund in the event of default of the referenced debt obligation is recorded as proceeds from sale/delivery of the referenced debt obligation and the resulting gain or loss realized on the referenced debt obligation is recorded as such by the Fund.
Entering into swaps involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable changes in the interest rates.
Credit default swap contracts outstanding at June 1, 2003 were as follows:
--------------------------------------------------------------------------------
Notional Termination Fixed Unrealized
Swap Counterparty/ Amount Date Payments Appreciation/
Referenced Debt Payable received (Depreciation)
Obligation on Default by the
in (000) Fund
--------------------------------------------------------------------------------
J.P. Morgan Chase/ 13,235 6/26/08 3.20% $0
Hydromer, Inc.
3.15%, 11/15/07
--------------------------------------------------------------------------------
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(e) Loan Participation
The Fund may invest in loan participations. When the Fund purchases a loan participation, the Fund typically enters into a contractual relationship with the lender or third party selling such participations ("Selling Participant"), but not the borrower. As a result, the Fund assumes the credit risk of the borrower, the Selling Participant and any other persons interposed between the Fund and the borrower. The Fund may not directly benefit from the collateral supporting the senior loan in which it has purchased the loan participation.
2. Investment Manager and Sub-Adviser
The Fund has entered into an Investment Management Agreement (the "Agreement'), with the Investment Manager to serve as investment manager to the Fund. Pursuant to the Agreement, the Fund will pay the Investment Manager an annual management fee, payable monthly, at the annual rate of 0.70% of the Fund's average daily net assets (including assets attributable to any preferred shares that may be outstanding). The Investment Manager has retained its affiliate, Pacific Investment Management Company LLC ("PIMCO"), to manage the Fund's investments. For its services, the Investment Manager (not the Fund) will pay a portion of the fees it receives as investment manager to PIMCO at the annual rate of 0.3575% of the Fund's average daily net assets (including assets attributable to any preferred shares that may be outstanding) for the period from April 30, 2003 (commencement of operations) through April 30, 2008 and at the annual rate of 0.50% of average daily net assets (including assets attributable to any preferred shares that may be outstanding) thereafter.
3. Federal Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. In addition, by distributing substantially all of its ordinary income and long-term capital gains, if any, during each calendar year, the Fund intends not to be subject to U. S. federal excise tax.
4. Investment in Securities
For the period April 30, 2003 through June 1, 2003, purchases and sales of investments, other than short-term securities, aggregated $1,630,149,603 and $94,306,896, respectively.
5. Subsequent Event
On June 6, 2003 the underwriters purchased at a price of $15.00 per common share, an additional 1,900,000 common shares of the Fund pursuant to the over-allotment option. On June 10, 2003, a dividend of $0.121875 per share was declared to common shareholders payable July 1, 2003 to shareholder of record on June 20, 2003.
PIMCO HIGH INCOME FUND
SCHEDULE OF INVESTMENTS
June 1, 2003
(unaudited)
-------------------------------------------------------------------------------------------------
Principal
Amount
(000) Value*
-------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS - 96.5%
CORPORATE BONDS & NOTES - 85.5%
Advertising Services - 0.4%
RH Donnelley Finance Corp.,
$ 2,500 8.875%, 12/15/10 .......................................... $ 2,737,500
-------------
3,000 10.875%, 12/15/12 ......................................... 3,412,500
-------------
6,150,000
-------------
Airlines - 0.6%
Continental Airlines, Inc., pass thru certificates,
5,462 7.056%, 9/15/09, Ser. 99-2 ................................ 5,133,197
-------------
6,500 7.373%, 12/15/15, Ser. 01-1 ............................... 4,589,884
-------------
9,723,081
-------------
Automotive - 1.2%
10,051 Dura Operating Corp., 8.625%, 4/15/12, Ser. B ............. 10,101,255
-------------
9,100 TRW Automotive, Inc., 9.375%, 2/15/13 ..................... 9,532,250
-------------
19,633,505
-------------
Building/Construction - 1.4%
Building Materials Corp., 7.75%-8.625%, 7/15/05-12/15/06
23,000 Ser. B .................................................... 21,905,000
-------------
Chemicals - 3.1%
3,450 Arco Chemical Co., 9.375%, 12/15/05 ....................... 3,467,250
6,000 Avecia Group plc, 11.00%, 7/1/09 .......................... 5,310,000
5,000 Compass Minerals Group, Inc., 10.00%,8/15/11 .............. 5,550,000
5,000 Equistar Chemical L.P., 10.125%, 9/1/08 ................... 5,100,000
29,500 Lyondell Chemical Co., 9.50%-9.875%,5/1/07-12/15/08 ....... 28,818,750
-------------
1,000 Millennium America Inc., 9.25%, 6/15/08 ................... 1,085,000
-------------
49,331,000
-------------
Containers & Packing - 3.9%
20,000 Crown Euro Holdings SA, 9.50%, 3/1/11 ..................... 20,950,000
10,000 Jefferson Smurfit Corp., 7.50%, 6/1/13 .................... 10,075,000
Owens-Brockway Glass Containers
19,650 7.75%-8.75%, 5/15/11-11/15/12 ............................. 20,845,938
-------------
10,000 8.25%, 5/15/13 ............................................ 10,100,000
-------------
61,970,938
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---------------------------------------------------------------------------------------------
Principal
Amount
(000) Value*
---------------------------------------------------------------------------------------------
Diversified Manufacturing - 2.1%
34,710 Tyco International Group SA, 6.75%-6.875%, 2/15/11-1/15/29 .. 33,590,257
-------------
Financing - 16.2%
33,107 AES Ironwood LLC, 8.857%, 11/30/25 ........................... 33,479,387
8,884 AES Red Oak LLC, 8.54%, 11/30/19, Ser. A ..................... 8,961,780
7,000 Bluewater Finance Ltd., 10.25%, 2/15/12 ...................... 7,105,000
2,350 Fuji JGB Investment LLC, 9.87%, 6/30/08 ...................... 2,512,733
J.P. Morgan
35,000 8.00%, 6/20/08 ............................................... 35,306,250
89,000 9.00%, 6/20/08 ............................................... 91,225,000
73,000 Targeted Return Index Securities, 8.664%, 5/15/13 ............ 76,895,353
-------------
4,000 Tokai Pfd Capital Co., LLC, 9.98%, 6/30/08, VRN .............. 4,282,708
-------------
259,768,211
-------------
Financial Services - 1.8%
68,780 Finova Group, Inc., 7.50%, 11/15/09 .......................... 28,371,750
-------------
Food & Beverage - 0.5%
8,600 Ingles Markets, Inc., 8.875%, 12/1/11 ........................ 8,729,000
-------------
Healthcare & Hospitals - 1.2%
7,000 Beverly Enterprises, Inc., 9.625%, 4/15/09 ................... 6,265,000
-------------
12,840 Rotech Healthcare, Inc., 9.50%, 4/1/12 ....................... 12,775,800
-------------
19,040,800
-------------
Hotels/Gaming - 5.4%
Host Marriott Hotels LP, REIT,
6,249 9.25%, 10/1/07, Ser. G ....................................... 6,608,318
16,000 9.50%, 1/15/07, Ser. I ....................................... 17,040,000
Host Marriott Hotels Properties, Inc
1,185 7.875%, 8/1/05 ............................................... 1,214,625
7,000 8.45%, 12/1/08, Ser. C ....................................... 7,210,000
23,446 ITT Corp., 7.375%-7.75%, 11/15/15-11/15/25 ................... 23,055,600
Mandalay Resort Group,
11,500 9.375%, 2/15/10 .............................................. 12,707,500
2,000 9.50%, 8/1/08 ................................................ 2,250,000
1,000 MGM Mirage, Inc., 8.375%, 2/1/11 ............................. 1,107,500
Park Place Entertainment Corp.
4,400 8.875%, 9/15/08 .............................................. 4,785,000
-------------
9,753 9.375%, 2/15/07 .............................................. 10,630,770
-------------
86,609,313
-------------
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-----------------------------------------------------------------------------------------------
Principal
Amount
(000) Value*
Leisure - 1.9%
15,800 Royal Caribbean Cruises, Ltd., 8.00%, 5/15/10 ............... 15,879,000
---------------
15,000 Six Flags, Inc., 9.50%, 2/1/09 .............................. 15,037,500
---------------
30,916,500
---------------
Multimedia - 5.1%
7,000 Albritton Communications Co., 7.75%, 12/15/12 ............... 7,227,500
10,349 CF Cable TV, Inc., 9.125%, 7/15/07 .......................... 10,866,450
10,000 CSC Holdings Inc., 7.625%-8.125%, 7/15/09-4/1/11 ............ 10,305,000
28,085 EchoStar DBS Corp., 9.375%, 2/1/09 .......................... 30,226,481
7,000 Gray Television, Inc., 9.25%, 12/15/11 ...................... 7,682,500
Young Broadcasting, Inc
7,713 8.75%-9.00%, 1/15/06-6/15/07, Ser. B ........................ 7,778,725
---------------
7,314 10.00%, 3/1/11 .............................................. 7,679,700
---------------
81,766,356
---------------
Oil & Gas - 10.1%
22,000 Chesapeake Energy Corp., 9.00%, 8/15/12 ..................... 24,200,000
1,685 Clark Refining & Marketing, Inc., 8.625%, 8/15/08 ........... 1,727,125
25,000 Dynegy-Roseton Danskammer, 7.67%, 11/8/16, Ser. B ........... 20,265,625
16,000 El Paso Corp., 7.75%, 1/15/32 ............................... 12,520,000
El Paso Energy Corp.,
20,100 7.80%, 8/1/31 ............................................... 15,728,250
8,500 8.05%, 10/15/30 ............................................. 6,853,125
800 El Paso Partners Corp., 8.50%, 6/1/11, Ser. B ............... 856,000
15,000 El Paso Production Holding Co., 7.75%, 6/1/13 ............... 14,962,500
5,000 Leviathan Gas Pipeline Corp., 10.375%, 6/1/09, Ser. B ....... 5,475,000
1,700 Newpark Resources, Inc., 8.625%, 12/15/07, Ser. B ........... 1,717,000
5,000 Pemex Project Funding Master Trust, 8.625%, 2/1/22 .......... 5,825,000
Petro Mexicanos
7,500 8.625%-9.25%, 3/30/18-12/1/23 ............................... 8,968,750
2,000 Vintage Petroleum, Inc., 7.875%, 5/15/11 .................... 2,080,000
45,500 Williams Cos., Inc., 7.875%, 9/1/21 ......................... 40,722,500
---------------
161,900,875
---------------
Paper & Paper Products - 1.4%
Georgia-Pacific Corp
24,500 8.875%-9.875%, 11/1/21-5/15/31 .............................. 23,316,500
---------------
Publishing - 3.7%
9,036 American Media Operations, Inc., 10.25%, 5/1/09, Ser. B ..... 9,826,650
8,000 Canwest Media, Inc., 10.625%, 5/15/11 ....................... 9,080,000
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-------------------------------------------------------------------------------------------------
Principal
Amount
(000) Value*
-------------------------------------------------------------------------------------------------
Dex Media East LLC
11,000 9.875%, 11/15/09 ............................................ 12,485,000
7,000 12.125%, 11/15/12 ........................................... 8,225,000
-------------
19,000 Primedia, Inc., 8.00%, 5/15/13 .............................. 19,190,000
-------------
58,806,650
-------------
Retail - 0.8%
5,000 Amerigas Partners LP, 10.00%, 4/15/06, Ser. D ............... 5,437,500
-------------
8,315 JC Penney Co., Inc., 7.125%, 11/15/23 ....................... 7,525,075
-------------
12,962,575
-------------
Telecommunications - 14.2%
20,000 AT&T Corp., 8.00%, 11/15/31 ................................. 23,450,100
Crown Castle International Corp.,
19,500 9.375%-9.50%, 8/1/11 ........................................ 19,587,500
22,000 Insight Midwest LP, 10.50%, 11/1/10 ......................... 23,870,000
7,000 Panamsat Corp., 8.50%, 2/1/12 ............................... 7,525,000
Quest Capital Funding,
43,000 7.25%-7.90%, 8/15/10-2/15/31 ................................ 36,032,750
9,050 Qwest Services Corp., 13.00%, 12/15/07 ..................... 10,045,500
8,000 SpectraSite, Inc., 8.25%, 5/15/10 ........................... 8,100,000
40,000 Sprint Capital Corp. (FON Group), 8.75%, 3/15/32 ............ 47,301,720
Time Warner Telecom, LLC
14,700 9.75%-10.125%, 7/15/08-2/1/11 ............................... 13,009,500
7,500 Triton PCS, Inc., 8.50%, 6/01/13 ............................ 7,500,000
105,841 WorldCom, Inc., 7.375%-8.25%, 5/15/06-1/15/49*** ............ 31,487,697
-------------
227,909,767
-------------
Tobacco - 1.1%
10,000 Commonwealth Brands, Inc., 9.75%, 4/15/08 ................... 10,350,000
-------------
8,500 Dimon, Inc., 6.25%, 3/31/07 ................................. 7,921,575
-------------
18,271,575
-------------
Utilities - 7.8%
25,000 AES Corp., 8.75%, 5/15/13 ................................... 25,500,000
15,000 CMS Energy Corp., 8.375%, 7/1/13 VRN. ....................... 15,075,000
19,000 Legrand S.A., 8.50%, 2/15/25 ................................ 18,905,000
Midwest Generation LLC., pass thru certificates,
12,600 8.30%, 7/2/09 Ser. A ........................................ 12,348,000
17,250 8.56%, 1/2/16 Ser. B ........................................ 17,077,500
12,000 Pinnacle Partners LP, 8.83%, 8/15/04 ........................ 12,480,000
-------------
25,628 South Point Energy Center, 8.40%, 5/30/12 ................... 24,106,387
-------------
125,491,887
-------------
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------------------------------------------------------------------------------------------------
Principal
Amount
(000) Value*
Waste Management - 1.6%
Allied Waste North America, Ser. B
19,450 9.25%, 1/2/12, 144a ........................................ 20,957,375
5,000 10.00%, 8/1/09, Ser. B ..................................... 5,281,250
----------------
26,238,625
----------------
Total Corporate Bonds & Notes (cost-$1,336,139,885) ........ 1,372,404,165
----------------
SOVEREIGN DEBT OBLIGATIONS- 9.0%
Brazil - 2.2%
Federal Republic of Brazil,
14,400 2.125%, 10/15/03, Ser. EI-L, FRN ........................... 13,428,000
25,411 8.00%-11.00%, 1/11/12-8/17/40 .............................. 22,835,141
----------------
36,263,141
----------------
Colombia - 1.4%
Republic of Colombia,
20,000 10.375%-10.75%, 1/15/13-1/28/22 ............................ 23,206,250
----------------
Mexico - 2.4%
United Mexican States,
34,500 7.50%-8.30%, 8/15/31-4/8/33 ................................ 38,626,250
----------------
Panama - 1.4%
Republic of Panama,
17,889 5.00%, 7/17/14, VRN ........................................ 16,010,333
5,000 10.75%, 5/15/20 ............................................ 6,225,000
----------------
22,235,333
----------------
Peru - 1.6%
Republic of Peru,
4,800 5.00%, 3/7/17, VRN ......................................... 4,146,240
5,000 9.125%, 1/15/08 ............................................ 5,512,500
14,000 9.125%, 2/21/12 ............................................ 15,435,000
----------------
25,093,740
----------------
Total Sovereign Debt Obligations (cost-$144,088,332) ....... 145,424,714
----------------
LONG-TERM INVESTMENTS (concluded)
PREFERRED STOCK - 1.6%
Shares Medical Products - 1.6%
---------------
Fresenius Care Capital Trust II, 7.875%, 2/1/08
25,000 (cost-$26,327,063) 26,187,500
............................................................................ ----------------
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-------------------------------------------------------------------------------------------------------------
Principal
Amount
(000) Value*
-------------------------------------------------------------------------------------------------------------
LOAN PARTICIPATIONS** - 0.4%
Multimedia - 0.1%
$ 992 Charter Communications Holdings, LLC (Bank of America, N.A.) ......... 915,564
------------------
Oil & Gas - 0.3%
5,001 Aquila, Inc. (Credit Suisse First Boston) ............................ 5,031,250
------------------
Total Loan Participations (cost-$5,921,031) .......................... 5,946,814
------------------
Total Long-Term Investments (cost-$1,542,476,311) .................... 1,549,963,193
------------------
SHORT-TERM INVESTMENTS - 3.5%
Certificates of Deposit - 1.9%
Banks -1.9%
15,100 Bank of America N.A., 1.25%, 6/11/03 ................................. 15,100,000
------------------
15,100 Wells Fargo Bank N.A., 1.24%, 6/10/03 ................................ 15,099,966
------------------
Total Commercial Paper (cost-$30,199,966) ............................ 30,199,966
------------------
Repurchase Agreements - 1.6%
24,000 Citigroup Global Markets, Inc., dated 5/30/03, 1.18%, due 6/2/03
proceeds:$24,002,360; collateralized by U.S. Treasury Notes, 2/15/12
valued at $24,432,290 ................................................ 24,000,000
------------------
1,839 State Street Bank & Trust Co., dated 5/30/03, 1.05%, due 6/2/03
proceeds:$1,839,161; collateralized by Fannie Mae, 5/14/04, valued
at $1,876,643 ........................................................ 1,839.000
------------------
Total Repurchase Agreements (cost-$25,839,000) ....................... 25,839,000
------------------
Total Short-Term Investments (cost-$56,038,966) ..................... 56,038,966
------------------
Total Investments (cost-$1,598,515,277) - 100.0% .................... $1,606,002,159
--------------
----------------------------------------------------------------------------------------------------------
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* Long-term debt securities are valued by an independent pricing service
authorized by the Board of Trustees.
** Participation interests were acquired through the financial institution
indicated parenthetically.
*** Security in default.
Glossary:
FRN-Floating Rate Notes, maturity date shown is date of next rate change and the
interest rate disclosed reflects the rate in effect on June 1,2003.
FRN-Floating Rate Notes, maturity date shown is date of next rate change and the
interest rate disclosed reflects the rate in effect on June 1,2003.
VRN-Variable Rate Notes are instruments whose interest rates change on a
specified date (such as a coupon date or interest payment date) and or whose
interest rates vary with changes in a designated base rate (such as the prime
interest rate).
See accompanying notes to financial statements.
APPENDIX A
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the Bylaws relating to the Preferred Shares, and will be incorporated by reference in the Auction Agency Agreement and each Broker-Dealer Agreement. The terms not defined below are defined in the Prospectus, except that the term "Trust" means the Fund. Nothing contained in this Appendix A constitutes a representation by the Fund that in each Auction each party referred to herein actually will perform the procedures described herein to be performed by such party.
ARTICLE 11
* * *
11.10 Auction Procedures. (a) Certain Definitions. As used in this Section 11.10, the following terms shall have the following meanings, unless the context otherwise requires:
(i) "Auction Date" means the first Business Day preceding the first day of a Dividend Period.
(ii) "Available Preferred Shares" has the meaning specified in
Section 11.10(d)(i)(A) below.
(iii) "Bid" has the meaning specified in Section 11.10(b)(i)(B) below.
(iv) "Bidder" has the meaning specified in Section 11.10(b)(i)(B) below.
(v) "Hold Order" has the meaning specified in Section 11.10(b)(i)(B) below.
(vi) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Auction Agent will round
each applicable Maximum Applicable Rate to the nearest one-thousandth
(0.001) of one percent per annum, with any such number ending in five
ten-thousandths of one percent being rounded upwards to the nearest
one-thousandth (0.001) of one percent. The Auction Agent will not round the
applicable Reference Rate as part of its calculation of the Maximum
Applicable Rate. The "Applicable Percentage" shall be the percentage
determined based on the lower of the credit ratings assigned on such date
by Moody's and Fitch Ratings as follows:
Moody's Fitch Applicable
Credit Rating Credit Rating Percentage
------------- ----------
Aa3 or above AA- or above 150%
A3 to A1 A- to A+ 160%
Baa3 to Baa1 BBB- to BBB+ 250%
Below Baa3 Below BBB- 275%
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The Applicable Percentage as so determined shall be further subject to upward but not downward adjustment in the discretion of the Board of Trustees of the Trust after consultation with the Broker-Dealers, provided that the Board of Trustees has received assurance from Moody's and Fitch Ratings and from any other Rating Agency then rating the Preferred Shares that such increase will not impair such Rating Agency's rating thereof, and further provided that immediately following any such increase the Trust would be in compliance with the Preferred Shares Basic Maintenance Amount. The Trust shall take all reasonable action necessary to enable Moody's and Fitch Ratings to provide a rating for each series of Preferred Shares. If Moody's or Fitch Ratings shall not make such a rating available, Citigroup Global Markets Inc. or its affiliates and successors, after consultation with the Trust, shall select another Rating Agency to act as a Substitute Rating Agency.
(vii) "Order" has the meaning specified in Section 11.10(b)(i)(B) below.
(viii) "Preferred Shares" means the Preferred Shares being auctioned pursuant to this Section 11.10.
(ix) "Sell Order" has the meaning specified in Section 11.10(b)(i)(B) below.
(x) "Submission Deadline" means 1:00 p.m., New York City time, on any Auction Date or such other time on any Auction Date as may be specified by the Auction Agent from time to time as the time by which each Broker-Dealer must submit to the Auction Agent in writing all Orders obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in Section 11.10(d)(i) below.
(xii) "Submitted Hold Order" has the meaning specified in Section 11.10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in Section 11.10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in Section 11.10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in Section 11.10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in Section 11.10(d)(i)(c) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and Potential Beneficial Owners may only participate in Auctions through their Broker-Dealers. Broker-Dealers will submit the Orders of their respective customers who are Beneficial
Owners and Potential Beneficial Owners to the Auction Agent, designating themselves 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. A Broker-Dealer may also hold Preferred Shares in its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore participate in an Auction as an Existing Holder or Potential Holder on behalf of both itself and its customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as to:
(1) the number of Outstanding Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period for such shares;
(2) the number of Outstanding Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner desires to continue to hold, provided that the Applicable Rate for the next succeeding Dividend Period for such shares shall not be less than the rate per annum specified by such Beneficial Owner; and/or
(3) the number of Outstanding Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that shall be maintained in good faith for the purpose of conducting a competitive Auction, shall contact Potential Beneficial Owners, including Persons that are not Beneficial Owners, on such list to determine the number of Outstanding Preferred Shares, if any, which each such Potential Beneficial Owner offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period 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 the communication by a Broker-Dealer acting for its own account to the Auction Agent, of information referred to in clause (A) or (B) of this Section 11.10(b)(i) is hereinafter referred to as an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing an Order, including a Broker-Dealer acting in such capacity for its own account, is hereinafter referred to as a "Bidder"; an Order containing the information referred to in clause (A)(1) of this Section 11.10(b)(i) is hereinafter referred to as a "Hold Order"; an
Order containing the information referred to in clause (A)(2) or (B) of this Section 11.10(b)(i) is hereinafter referred to as a "Bid"; and an Order containing the information referred to in clause (A)(3) of this Section 11.10(b)(i) is hereinafter referred to as a "Sell Order." Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder or a Potential Holder only to represent the interests of a Beneficial Owner or Potential Beneficial Owner, whether it be its customers or itself, all discussion herein relating to the consequences of an Auction for Existing Holders and Potential Holders also applies to the underlying beneficial ownership interests represented.
(ii) (A) A Bid by a Beneficial Owner or an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding Preferred Shares specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(i)(D) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified therein; or
(3) a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(ii)(C) if such specified rate per annum shall be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by a Beneficial Owner or an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding Preferred Shares specified in such Sell Order; or
(2) such number or a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(ii)(C) if Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase:
(1) the number of Outstanding Preferred Shares specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(i)(E) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction Agent's auction processing system to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer, designating itself (unless otherwise permitted by the Trust) 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 specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding Preferred Shares that are the subject of such Order;
(C) to the extent that such Bidder is a Beneficial Owner or an Existing Holder:
(1) the number of Outstanding Preferred Shares, if any, subject to any Hold Order placed by such Beneficial Owner or Existing Holder;
(2) the number of Outstanding Preferred Shares, if any, subject to any Bid placed by such Beneficial Owner or Existing Holder and the rate per annum specified in such Bid; and
(3) the number of Outstanding Preferred Shares, if any, subject to any Sell Order placed by such Beneficial Owner or Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum 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%.
(iii) If an Order or Orders covering all of the Outstanding Preferred Shares held by an Existing Holder are not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of an Auction relating to a Special Dividend Period of 28 days or less) or a Sell Order (in the case of an Auction relating to a Special Dividend Period of longer than 28 days) to have been submitted on behalf of such Existing Holder covering the number of Outstanding Preferred Shares held by such Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the aggregate more than the number of Outstanding Preferred Shares held by such Existing Holder are submitted to the Auction Agent, such Order shall be considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be considered valid up to and including the number of Outstanding Preferred Shares held by such Existing Holder; provided that if more than one Hold Order is submitted on behalf of such Existing Holder and the number of Preferred Shares subject to such Hold Orders exceeds the number of Outstanding Preferred Shares held by such Existing Holder, the number of Preferred Shares subject to each of such Hold Orders shall be reduced pro rata so that such Hold Orders, in the aggregate, will cover exactly the number of Outstanding Preferred Shares held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be considered valid, in the ascending order of their respective rates per annum if more than one Bid is submitted on behalf of such Existing Holder, up to and including the excess of the number of Outstanding Preferred Shares held by such Existing Holder over the number of Preferred Shares subject to any Hold Order referred to in Section 11.10(c)(iv)(A) above (and if more than one Bid submitted on behalf of such Existing Holder specifies the same rate per annum and together they cover more than the remaining number of shares that can be the subject of valid Bids after application of Section 11.10(c)(iv)(A) above and of the foregoing portion of this Section 11.10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum, the number of shares subject to each of such Bids shall be reduced pro rata so that such Bids, in the aggregate, cover exactly such remaining number of shares); and the number of shares, if any, subject to Bids not valid under this Section 11.10(c)(iv)(B) shall be treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including
the excess of the number of Outstanding Preferred Shares held by such
Existing Holder over the number of Preferred Shares subject to Hold
Orders referred to in Section 11.10(c)(iv)(A) and Bids referred to in
Section 11.10(c)(iv)(B); provided that if more than one Sell Order is
submitted on behalf of any Existing Holder and the number of Preferred
Shares subject to such Sell Orders is greater than such excess, the
number of Preferred Shares subject to each of such Sell Orders shall
be reduced pro rata so that such Sell Orders, in the aggregate, cover
exactly the number of Preferred Shares equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate per annum and number of Preferred Shares therein specified.
(vi) Any Order submitted by a Beneficial Owner as 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.
(vii) The Trust shall not be responsible for a Broker-Dealer's failure to act in accordance with the instructions of Beneficial Owners or Potential Beneficial Owners or failure to comply with the provisions of this Section 11.10.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (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, more generally, as a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding Preferred Shares over the number of Outstanding Preferred Shares that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Preferred Shares");
(B) from the Submitted Orders whether the number of Outstanding Preferred Shares that are the subject of Submitted Bids by Potential Holders specifying one or more rates per annum equal to or lower than the Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding Preferred Shares that are the subject of Submitted Bids by Existing Holders specifying one or more rates per annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding Preferred Shares that are subject to Submitted Sell Orders (if such excess or such equality exists (other than because the number of Outstanding Preferred Shares in clause (1) above and this clause (2) are each zero because all of the Outstanding Preferred Shares are the subject of Submitted Hold Orders), such Submitted Bids by Potential Holders being hereinafter referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid Rate and all other Submitted Bids from Existing Holders specifying lower rates per annum were rejected, thus entitling such Existing Holders to continue to hold the Preferred Shares that are the subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning Bid Rate and all other Submitted Bids from Potential Holders specifying lower rates per annum were accepted, thus entitling the Potential Holders to purchase the Preferred Shares that are the subject of such Submitted Bids, would result in the number of shares subject to all Submitted Bids specifying the Winning Bid Rate or a lower rate per annum being at least equal to the Available Preferred Shares.
(ii) Promptly after the Auction Agent has made the determinations pursuant to Section 11.10(d)(i), the Auction Agent shall advise the Trust of the Maximum Applicable Rate and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding Preferred Shares are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding Preferred Shares are the subject of Submitted Hold Orders, that the Dividend Period next succeeding the Auction shall automatically be the same length as the immediately preceding Dividend Period and the Applicable Rate for the next succeeding Dividend Period shall be equal to 80% of the Reference Rate on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Existing Holders shall continue to hold the Preferred Shares that are subject to Submitted Hold Orders, and, based on the determinations made pursuant to Section 11.10(d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions of Section 11.10(e)(iii) and Section 11.10(e)(iv), Submitted Bids and Submitted Sell Orders shall be accepted or rejected in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate per annum that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Outstanding Preferred Shares that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding Preferred Shares that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders
specifying a rate per annum that is equal to the Winning Bid Rate
shall be rejected, thus entitling each such Existing Holder to
continue to hold the Outstanding Preferred Shares that are the
subject of such Submitted Bid, unless the number of Outstanding
Preferred Shares subject to all such Submitted Bids shall be
greater than the number of Outstanding Preferred Shares
("Remaining Shares") equal to the excess of the Available
Preferred Shares over the number of Outstanding Preferred Shares
subject to Submitted Bids described in Section 11.10(e)(i)(B) and
Section 11.10(e)(i)(C), in which event the Submitted Bids of each
such Existing Holder shall be accepted, and each such Existing
Holder shall be required to sell Outstanding Preferred Shares,
but only in an amount equal to the difference between (1) the
number of Outstanding Preferred Shares then held by such Existing
Holder subject to such Submitted Bid and (2) the number of
Preferred Shares obtained by multiplying (x) the number of
Remaining Shares by (y) a fraction the numerator of which shall
be the number of Outstanding Preferred Shares held by such
Existing Holder subject to such Submitted Bid and the denominator
of which shall be the sum of the number of Outstanding Preferred
Shares subject to such Submitted Bids made by all such Existing
Holders that specified a rate per annum equal to the Winning Bid
Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a rate per annum that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Outstanding Preferred Shares obtained by multiplying (x) the difference between the Available Preferred Shares and
the number of Outstanding Preferred Shares subject to Submitted Bids
described in Section 11.10(e)(i)(B), Section 11.10(e)(i)(C) and
Section 11.10(e)(i)(D) by (y) a fraction the numerator of which shall
be the number of Outstanding Preferred Shares subject to such
Submitted Bid and the denominator of which shall be the number of
Outstanding Preferred Shares subject to such Submitted Bids made by
all such Potential Holders that specified rates per annum equal to the
Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding Preferred Shares are subject to Submitted Hold Orders), subject to the provisions of Section 11.10(e)(iii), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Outstanding Preferred Shares that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus requiring such Potential Holder to purchase the Outstanding Preferred Shares that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any
rate per annum that is higher than the Maximum Applicable Rate shall
be accepted and the Submitted Sell Orders of each Existing Holder
shall be accepted, in both cases only in an amount equal to the
difference between (1) the number of Outstanding Preferred Shares then
held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (2) the number of Preferred Shares obtained
by multiplying (x) the difference between the Available Preferred
Shares and the aggregate number of Outstanding Preferred Shares
subject to Submitted Bids described in Section 11.10(e)(ii)(A) and
Section 11.10(e)(ii)(B) by (y) a fraction the numerator of which shall
be the number of Outstanding Preferred Shares held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the number of Outstanding Preferred
Shares subject to all such Submitted Bids and Submitted Sell Orders.
If all of the Outstanding shares of a series of Preferred Shares are subject to Submitted Hold Orders, all Submitted Bids for shares of such series shall be rejected.
(iii) If, as a result of the procedures described in Section 11.10(e), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a Preferred Share on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, round up or down the number of Preferred Shares to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that each Outstanding Preferred Share purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be a whole Preferred Share.
(iv) If, as a result of the procedures described in Section 11.10(e), any Potential Holder would be entitled or required to purchase less than a whole Preferred Share on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, allocate Preferred Shares for purchase among Potential Holders so that only whole Preferred Shares are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing any Preferred Shares on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders on behalf of Existing Holders or Potential Holders, the aggregate number of Outstanding Preferred Shares to be purchased and the aggregate number of the Outstanding Preferred Shares to be sold by such Potential Holders and Existing Holders and, to the extent that such aggregate number of Outstanding shares to be purchased and such aggregate number of Outstanding shares to be sold differ, the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, Outstanding Preferred Shares.
(f) Miscellaneous.
(i) To the extent permitted by applicable law, the Trust may in its sole discretion interpret the provisions of this Section 11.10 to resolve any inconsistency or ambiguity, remedy any formal defect or make any other change or modification that does not substantially adversely affect the rights of Beneficial Owners of Preferred Shares.
(ii) Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing Holder (A) may sell, transfer or otherwise dispose of Preferred Shares only pursuant to a Bid or Sell Order in accordance with the procedures described in this Section 11.10 or to or through a Broker-Dealer or to such other persons as may be permitted by the Trust, provided that in the case of all transfers other than pursuant to Auctions such Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of such transfer and (B) except as otherwise required by law, shall have the ownership of the Preferred Shares held by it maintained in book entry form by the Securities Depository in the account of its Agent
Member, which in turn will maintain records of such Beneficial Owner's beneficial ownership. The Trust may not submit an Order in any Auction.
(iii) All of the Outstanding Preferred Shares of a series shall be registered in the name of the nominee of the Securities Depository unless otherwise required by law or unless there is no Securities Depository. If there is no Securities Depository, at the Trust's option and upon its receipt of such documents as it deems appropriate, any Preferred Shares may be registered in the Stock Register in the name of the Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled to receive certificates therefor and required to deliver certificates therefor upon transfer or exchange thereof.
APPENDIX B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures expected to be followed in connection with the settlement of each Auction and will be incorporated by reference in the Auction Agency Agreement and each Broker-Dealer Agreement. Nothing contained in this Appendix B constitutes a representation by the Fund that in each Auction each party referred to herein actually will perform the procedures described herein to be performed by such party. Capitalized terms used herein shall have the respective meanings specified in the glossary of the Prospectus or Appendix A hereto, as the case may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or through the Auction Agent's auction processing system the Broker-Dealers that participated in the Auction held on such Auction Date and submitted an Order on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid or a Sell Order on behalf of a Beneficial Owner, the number of Preferred Shares, if any, to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on behalf of a Potential Beneficial Owner, the number of Preferred Shares, if any, to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of Preferred Shares to be sold by all Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order exceeds the aggregate number of Preferred Shares to be purchased by all Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more Buyer's Broker-Dealers (and the name of the Agent Member, if any, of each such Buyer's Broker-Dealer) acting for one or more purchasers of such excess number of Preferred Shares and the number of such shares to be purchased from one or more Beneficial Owners on whose behalf such Broker-Dealer acted by one or more Potential Beneficial Owners on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by all Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid exceeds the aggregate number of Preferred Shares to be sold by all Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name or names of one or more Seller's Broker-Dealers (and the name of the Agent Member, if any, of each such Seller's Broker-Dealer) acting for one or more sellers of such excess number of Preferred Shares and the number of such shares to be sold to one or more Potential Beneficial Owners on whose behalf such Broker-Dealer acted by one or more Beneficial Owners on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the Preferred Shares.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer, instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the number of Preferred Shares to be purchased pursuant to such Bid against receipt of such shares and advise such Potential Beneficial Owner of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer, instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted, in whole or in part, or a Bid that was accepted, in whole or in part, to instruct such Beneficial Owner's Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the number of Preferred Shares to be sold pursuant to such Order against payment therefor and advise any such Beneficial Owner that will continue to hold Preferred Shares of the Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer submitted a Hold Order of the Applicable Rate for the next succeeding Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Beneficial Owner or a Beneficial Owner shall, in such manner and at such time or
times as in its sole discretion it may determine, allocate any funds received by
it pursuant to (b)(i) above and any Preferred Shares received by it pursuant to
(b)(ii) above among the Potential Beneficial Owners, if any, on whose behalf
such Broker-Dealer submitted Bids, the Beneficial Owners, if any, on whose
behalf such Broker-Dealer submitted Bids that were accepted or Sell Orders, and
any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent
pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct its Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the Securities Depository shall instruct its Agent Member to (A) pay through the Securities Depository
to the Agent Member of the Beneficial Owner delivering shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to purchase such shares against receipt of such shares, and (B) deliver such shares through the Securities Depository to a Buyer's Broker-Dealer (or its Agent Member) identified to such Seller's Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the Securities Depository shall instruct its Agent Member to (A) pay through the Securities Depository to a Seller's Broker-Dealer (or its Agent Member) identified pursuant to (a)(vi) above the amount necessary to purchase the shares to be purchased pursuant to (b)(i) above against receipt of such shares, and (B) deliver such shares through the Securities Depository to the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described in
(b)(i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the Securities Depository to execute the transactions described in (d)(ii) above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the Securities Depository to execute the transactions described in (d)(iii) above, and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling Preferred Shares in an Auction fails to deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to the Potential Beneficial Owner on behalf of which it submitted a Bid that was accepted a number of whole Preferred Shares that is less than the number of shares that otherwise was to be purchased by such Potential Beneficial Owner. In such event, the number of Preferred Shares to be so delivered shall be determined solely by such Broker-Dealer. Delivery of such lesser number of shares shall constitute good delivery. Notwithstanding the foregoing terms of this paragraph (f), any delivery or non-delivery of shares which shall represent any departure from the results of an Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction Agent shall have been notified of such delivery or non-delivery in accordance with the provisions of the Auction Agency Agreement and the Broker-Dealer Agreements.
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Included in Part A: Unaudited Financial Highlights for the period April 30, 2003 through June 1, 2003.
Included in Part B: Unaudited Statement of Assets and Liabilities as of June 1, 2003.
Unaudited Statement of Operations for the period April 30, 2003 through June 1, 2003.
Unaudited Statement of Changes in Net Assets for the period April 30, 2003 through June 1, 2003.
Unaudited Financial Highlights for the period April 30, 2003 through June 1, 2003.
Unaudited Notes to Financial Statements as of June 1, 2003.
Unaudited Schedule of Investments as of June 1, 2003.
The Registrant's audited Statement of Net Assets dated as of April 15,
2003, including the Notes thereto, and the report of
PricewaterhouseCoopers LLP thereon dated April 16, 2003, is hereby
incorporated by reference into Part B from the Statement of Additional
Information dated April 24, 2003 for the offering of the Registrant's
common shares, which was filed with the SEC on April 28, 2003 (File No.
333-103389).
2. Exhibits:
a.1 Agreement and Declaration of Trust dated February 18, 2003. (1)
a.2 Amended and Restated Agreement and Declaration of Trust dated April 8,
2003.(2)
b.1 Bylaws of Registrant dated February 18, 2003. (1)
b.2 Amended and Restated Bylaws of Registrant dated April 8, 2003. (2)
b.3 Second Amended and Restated Bylaws of Registrant, filed herewith.
c. None.
d.1 Article III (Shares) and Article V (Shareholders' Voting Powers and
Meetings) of the Amended and Restated Agreement and Declaration of
Trust. (2)
d.2 Article 10 (Shareholders' Voting Powers and Meetings) and Sections 11.2
through 11.5 (inclusive) and 11.10(b) through 11.10(f) (inclusive) of
Article 11 of the Second Amended and Restated Bylaws of Registrant, filed
herewith.
d.3 Form of Share Certificate of the Common Shares. (2)
d.4 Specimen Certificate representing the Registrant's Auction Rate Cumulative
Preferred Shares of beneficial interest ("Preferred Shares"). (5)
e. Terms and Conditions of Dividend Reinvestment Plan. (2)
f. None.
g.1 Investment Management Agreement between Registrant and PIMCO Advisors Fund
Management LLC dated April 8, 2003. (2)
g.2 Portfolio Management Agreement between PIMCO Advisors Fund
Management LLC and Pacific Investment Management Company LLC dated
April 8, 2003. (3)
h.1 Form of Underwriting Agreement for the Common Shares. (2)
h.2 Form of Master Selected Dealer Agreement. (2)
h.3 Form of Master Agreement Among Underwriters. (2)
h.4 Form of Additional Compensation Agreement. (3)
h.5 Form of Prudential Additional Compensation Agreement. (3)
h.6 Form of Underwriting Agreement for the Preferred Shares, filed herewith.
h.7 Form of Master Agreement Among Underwriters, filed herewith.
i. None.
j. Form of Custodian Agreement between Registrant and State Street Bank &
Trust Co. (3)
k.1 Form of Transfer Agency Services Agreement between Registrant and
PFPC Inc. (2)
C-1
|
k.2 Organizational and Offering Expenses Reimbursement Agreement between
Registrant and PIMCO Advisors Fund Management LLC dated April 8,
2003. (2)
k.3 Form of Auction Agency Agreement between the Registrant and the Auction
Agent as to the Registrant's Preferred Shares. (5)
k.4 Form of Broker-Dealer Agreement as to the Registrant's Preferred Shares.
(5)
k.5 Form of Depository Trust Company Representations Letter as to the
Registrant's Preferred Shares. (5)
l. Opinion and consent of Ropes & Gray LLP, filed herewith.
m. None.
n. Consent of Registrant's independent accountants. (5)
o. None.
p. Subscription Agreement of Allianz Dresdner Asset Management of
America L.P. dated April 8, 2003. (2)
q. None.
r.1 Code of Ethics of Registrant dated April 8, 2003. (2)
r.2 Code of Ethics of PIMCO Advisors Fund Management LLC dated January 1,
2002. (2)
r.3 Code of Ethics of Pacific Investment Management Company LLC dated
December 31, 2001. (2)
s.1 Power of Attorney for Messrs. Shlissel, Belica, Connor, Dalessandro,
Altadonna, and Schott. (4)
s.2 Power of Attorney for Messrs. Shlissel, Belica, Connor, Dalessandro,
Kertess, Altadonna and Schott, filed herewith.
--------------------------
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(1) Incorporated by reference to the Registrant's Initial Registration Statement on Form N-2 relating to its common shares of beneficial interest, File Nos. 333-103389 and 811-21311, filed on February 21, 2003.
(2) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 3 to the Initial Registration Statement on Form N-2 relating to its common shares of beneficial interest, File Nos. 333-103389 and 811-21311, filed on April 17, 2003.
(3) Incorporated by reference to the Registrant's Pre-Effective Amendment No. 4 to the Initial Registration Statement on Form N-2 relating to its common shares of beneficial interest, File Nos. 333-103389 and 811-21311, filed on April 24, 2003.
(4) Incorporated by reference to the corresponding exhibit of the Registrant's Initial Registration Statement on Form N-2 relating to its Preferred Shares, File No. 333-104915, filed on May 1, 2003.
(5) Incorporated by reference to the corresponding exhibit of Registrant's Pre-Effective Amendment No. 1 to the Initial Registration Statement on Form N-2 relating to its Preferred Shares, File No. 333-104915, filed on June 16, 2003.
Item 25: Marketing Arrangements
See Sections 5(n), 6(w), 8 and 10 of Exhibit h.6 of Item 24 of this Registration Statement and Sections 3.2, 9.4, 9.5, and 10.12 Art's IV, V and XI of Exhibit h.7 of Item 24 of this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission Fees $ 72,810*
Printing and engraving expenses 100,000*
Legal fees 245,000*
Accounting expenses 10,500*
Trustee fees 6,000*
Rating Agency fees 165,000*
Miscellaneous expenses 690*
---------
Total 600,000*
* Estimated expense.
|
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At June 5, 2003
Number of
Title of Class Record Holders
-------------- --------------
Preferred Shares of beneficial interest, par value $0.00001 0
Common Shares, par value $0.00001 105
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Item 29: Indemnification
Reference is made to Article VIII, Sections 1 through 4, of the Registrant's Agreement and Declaration of Trust, which is incorporated by reference herein.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Trust's Agreement and Declaration of Trust, its Bylaws or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by trustees, officers or controlling persons of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustees, officers or controlling persons in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 30: Business and Other Connections of Investment Adviser
Descriptions of the business of PIMCO Advisors Fund Management LLC, the Registrant's investment manager, and Pacific Investment Management Company LLC, the Registrant's portfolio manager, are set forth under the captions "Investment Manager" and "Portfolio Manager" under "Management of the Fund" in both the prospectus and Statement of Additional Information forming part of this Registration Statement. The following sets forth business and other connections of each director and executive officer (and persons performing similar functions) of PIMCO Advisors Fund Management LLC and Pacific Investment Management Company LLC.
PIMCO Advisors Fund Management LLC 1345 Avenue of the Americas New York, NY 10105
Name Position with Advisor Other Connections
---------------- -------------------------- ------------------------------
Larry A. Altadonna Vice President Vice President, OpCap Advisors
LLC
Andrew Bocko Senior Vice President and Senior Vice President,
Director of IT PIMCO Advisors Fund Management
LLC, PIMCO Advisors Fund
Management LLC and Allianz
Dresdner Asset Management of
America L.P.
Tim Clark Managing Director
Cindy Columbo Vice President
Patrick Coyne Vice President
Derek Hayes Senior Vice President
Steve Jobe Senior Vice President
Alan Kwan Vice President
John C. Maney Chief Financial Officer Executive Vice President and
Chief Financial Officer,
Allianz Dresdner Asset
Management of America L.P.,
Chief Financial Officer, PIMCO
Advisors Fund Management
LLC, Allianz Dresdner Asset
Management U.S. Equities
LLC, Cadence Capital
Management LLC, NFJ
Investment Group L.P., OCC
Distributors LLC, OpCap
Advisors LLC, Oppenheimer
Capital LLC, Pacific
Investment Management
Company LLC, PIMCO Advisors
Managed Accounts LLC, PIMCO
Advisors CD Distributors
LLC, PIMCO Equity Advisors
LLC, PIMCO Equity Partners
LLC, PIMCO Advisors
Advertising Agency Inc.,
PIMCO Advisors Distributors
LLC, Allianz Private Client
Services LLC, and StocksPLUS
Management Inc.
Vinh T. Nguyen Vice President and Vice President and Controller,
Controller PIMCO Advisors Fund Management
LLC, Allianz Dresdner Asset
Management of America L.P.,
Allianz Dresdner Asset
Management U.S. Equities LLC,
Cadence Capital Management
LLC, NFJ Investment Group
L.P., OCC Distributors LLC,
OpCap Advisors LLC,
Oppenheimer Capital LLC,
Pacific Investment Management
Company LLC, PIMCO Advisors
Managed Accounts LLC, PIMCO
Advisors CD Distributors LLC,
PIMCO Equity Advisors LLC,
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PIMCO Equity Partners LLC,
PIMCO Advisors Advertising
Agency Inc., PIMCO Advisors
Distributors LLC, Allianz
Private Client Services LLC,
and StocksPLUS Management Inc.
Francis C. Poli Executive Vice President, Chief Legal and Compliance
Director of Compliance Officer, PIMCO Advisors Fund
and Assistant Secretary Management LLC, Allianz
Dresdner Asset Management of
America L.P., Allianz Dresdner
Asset Management U.S. Equities
LLC, Allianz Private Client
Services LLC, OCC Distributors
LLC, OpCap Advisors LLC,
Oppenheimer Capital LLC, PIMCO
Advisors Retail Holdings LLC,
PIMCO Advisors Managed
Accounts LLC, PIMCO Advisors
CD Distributors LLC and PIMCO
Equity Advisors LLC; Chief
Legal Officer and Director of
Compliance, Allianz Hedge Fund
Partners L.P., Cadence Capital
Management LLC, and NFJ
Investment Group L.P.
Bob Rokose Vice President and
Assistant Controller
Newton B. Schott, Jr. Managing Director Managing Director, PIMCO
and Secretary Advisors Managed Accounts LLC,
Executive Vice President,
PIMCO Advisors Advertising
Agency Inc.; Managing
Director, Executive Vice
President, General Counsel
and Secretary, PIMCO Advisors
Distributors LLC
Brian S. Shlissel Senior Vice President Senior Vice President and
Treasurer, OpCap Advisors LLC
Stewart A. Smith Vice President and Vice President and Assistant
Assistant Secretary Secretary, PIMCO Advisors
Fund Management LLC; Vice
President and Secretary,
Allianz Dresdner Asset
Management of America L.P.,
Allianz Dresdner Asset
Management U.S. Equities LLC,
Allianz Hedge Fund Partners
Holding L.P., Allianz Private
Client Services LLC; PIMCO
Advisors Retail Holdings LLC,
PIMCO Advisors Managed
Accounts LLC, PIMCO Advisors
CD Distributors LLC and PIMCO
Equity Advisors LLC;
Secretary, Cadence Capital
Management LLC, NFJ Investment
Group L.P.; Assistant
Secretary, Oppenheimer Capital
LLC, OpCap Advisors and OCC
Distributors LLC
Stephen J. Treadway Managing Director and Chairman, President and Chief
Chief Executive Officer Executive Officer, PIMCO
Advisors Advertising Agency
Inc.; Managing Director and
Chief Executive Officer,
PIMCO Advisors Distributors
LLC; Managing Director,
PIMCO Advisors Managed
Accounts LLC, Allianz
Private Client Services LLC
and Allianz Dresdner Asset
Management of America L.P.;
Member, Board of Management,
Allianz Dresdner Asset
Management GmbH
James G. Ward Executive Vice President Executive Vice President,
and Director of Human Allianz Asset Management of
Resources America L.P., Director of
Human Resources, Allianz Asset
Management U.S. Equities LLC,
PIMCO Advisors Distributors
LLC
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Pacific Investment Management Company LLC
("PIMCO")
840 Newport Center Drive, Suite 300
Newport Beach, CA 92660
Name Business and Other Connections
----------------------------- --------------------------------------------------
Arnold, Tammie J. Executive Vice President, PIMCO
Asay, Michael R. Executive Vice President, PIMCO
Baker, Brian P. Executive Vice President, PIMCO
Benz, William R. II Managing Director, Executive Committee Member,
PIMCO
Bhansali, Vineer Executive Vice President, PIMCO
Brynjolfsson, John B. Managing Director, PIMCO
Burns, R. Wesley President, PIMCO Funds; President and Trustee of
PIMCO Funds and PIMCO Variable Insurance Trust;
President and Director of PIMCO Commercial
Mortgage Securities Trust, Inc.; Director, PIMCO
Funds: Global Investors Series plc and PIMCO
Global Advisors (Ireland) Limited
Cupps, Wendy W. Executive Vice President, PIMCO
Dialynas, Chris P. Managing Director, PIMCO
El-Erian, Mohamed A. Managing Director, PIMCO
Gross, William H. Managing Director and Executive Committee Member,
PIMCO; Director and Vice President, StocksPLUS
Management, Inc.; Senior Vice President of PIMCO
Funds and PIMCO Variable Insurance Trust
Hague, John L. Managing Director, PIMCO
Hally, Gordon C. Executive Vice President, PIMCO
Hamalainen, Pasi M. Managing Director, PIMCO
Harris, Brent R. Managing Director and Executive Committee Member,
PIMCO; Director and Vice President, StocksPLUS
Management, Inc.; Trustee and Chairman of PIMCO
Funds and PIMCO Variable Insurance Trust; Director
and Chairman, PIMCO Commercial Mortgage Securities
Trust, Inc.; Managing Director, PIMCO Specialty
Markets LLC
Hinman, David C. Executive Vice President, PIMCO
Hodge, Douglas M. Executive Vice President, PIMCO; Director,
PIMCO JAPAN LTD
Holden, Brent L. Managing Director, PIMCO
Hollaway, Dwight F. Executive Vice President, PIMCO
Hudoff, Mark T. Executive Vice President, PIMCO
Isberg, Margaret E. Managing Director, PIMCO; Senior Vice President of
PIMCO Funds
Jacobs, Lew W. Executive Vice President, PIMCO
Keller, James M. Managing Director, PIMCO
Kennedy, Raymond G. Managing Director, PIMCO
Kiesel, Mark Executive Vice President, PIMCO
Loftus, John S. Managing Director, PIMCO; Senior Vice President of
PIMCO Funds; Vice President and Assistant
Secretary, StocksPLUS Management, Inc.
Lown, David C. Executive Vice President, PIMCO
Mariappa, Sudesh N. Managing Director, PIMCO
C-6
|
Mather, Scott A. Executive Vice President, PIMCO; Senior Vice
President, PIMCO Commercial Mortgage Securities
Trust, Inc.
McCray, Mark V. Executive Vice President, PIMCO
McCulley, Paul A. Managing Director, PIMCO
McDevitt, Joseph E. Executive Vice President, PIMCO; Director and
Chief Executive Officer, PIMCO Europe Ltd
Meiling, Dean S. Managing Director, PIMCO
Mewbourne, Chris A. Executive Vice President, PIMCO
Monson, Kristen S. Executive Vice President, PIMCO
Muzzy, James F. Managing Director, PIMCO; Director and Vice
President, StocksPLUS Management, Inc.; Senior
Vice President, PIMCO Variable Insurance Trust;
Vice President of PIMCO Funds; Director, PIMCO
Europe Ltd., PIMCO JAPAN LTD., PIMCO Asia Pte
Ltd., PIMCO Australia Pty Ltd.
Otterbein, Thomas J. Executive Vice President, PIMCO
Palghat, Kumar N. Executive Vice President, PIMCO
Paulson, Bradley W. Executive Vice President, PIMCO
Phansalkar, Mohan V. Executive Vice President, Secretary and Chief
Legal Officer, PIMCO; Vice President and
Secretary, StocksPLUS Management, Inc.
Phillipp, Elizabeth M. Executive Vice President, PIMCO
Podlich, William F. Managing Director, PIMCO
Powers, William C. Managing Director and Executive Committee Member,
PIMCO; Senior Vice President, PIMCO Commercial
Mortgage Securities Trust, Inc.
Ravano, Emanuele Executive Vice President, PIMCO
Ruthen, Seth R. Executive Vice President, PIMCO
Schmider, Ernest L. Managing Director, PIMCO
Simon, W. Scott Executive Vice President, PIMCO
Takano, Makoto Executive Vice President, PIMCO
Thomas, Lee R. Managing Director, PIMCO
Thompson, William S. Managing Director and Executive Committee Member,
PIMCO; Director and President, StocksPLUS
Management, Inc.; Senior Vice President of PIMCO
Variable Insurance Trust; Vice President of PIMCO
Funds and PIMCO Commercial Mortgage Securities
Trust, Inc.
Weil, Richard M. Managing Director, Chief Operating Officer and
Executive Committee Member, PIMCO
Wilson, John Executive Vice President, PIMCO
Wilson, Susan Executive Vice President, PIMCO
Wood, George H. Executive Vice President, PIMCO
Wyman, Charles C. Executive Vice President, PIMCO
Zhu, Changhang Executive Vice President, PIMCO
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Item 31: Location of Accounts and Records
The account books and other documents required to be maintained by the Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder will be maintained at the offices of State Street Bank & Trust Co., 225 Franklin Street, Boston, MA 02110 and/or PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it amends the prospectus filed herewith if (1) subsequent to the effective date of its registration statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the registration statement, or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective; and
b. For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information.
Notice
A copy of the Agreement and Declaration of Trust of PIMCO High Income Fund (the "Fund"), together with all amendments thereto, is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Fund by any officer of the Fund as an officer and not individually and that the obligations of or arising out of this instrument are not binding upon any of the Trustees of the Fund or shareholders of the Fund individually, but are binding only upon the assets and property of the Fund.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and the State of New York on the 23rd day of June, 2003.
PIMCO High Income Fund
/s/ Brian S. Shlissel
By: ---------------------------------
Brian S. Shlissel,
President and Chief Executive Officer
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Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/ Brian S. Shlissel President and Chief June 23, 2003
-------------------------- Executive Officer
Brian S. Shlissel
/s/ Hans W. Kertess* Trustee June 23, 2003
--------------------------
Hans W. Kertess
/s/ Robert E. Connor* Trustee June 23, 2003
--------------------------
Robert E. Connor
/s/ John J. Dalessandro* Trustee June 23, 2003
--------------------------
John J. Dalessandro
/s/ Lawrence Altadonna Treasurer, Principal June 23, 2003
-------------------------- Financial and Accounting
Lawrence Altadonna Officer
*By: /s/ Brian S. Shlissel
---------------------
Brian S. Shlissel
Attorney-In-Fact
Date: June 23, 2003
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INDEX TO EXHIBITS
Exhibit Exhibit Name
------- ------------
b.3 Second Amended and Restated Bylaws of Registrant.
h.6 Form of Underwriting Agreement for the Preferred Shares.
h.7 Form of Master Agreement Among Underwriters.
l. Opinion and consent of Ropes & Gray LLP as to the Registrant's
Preferred Shares.
s.2 Power of Attorney for Messrs. Shlissel, Belica, Connor,
Dalessandro, Kertess, Altadonna and Schott.
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EXHIBIT b.3
SECOND
AMENDED AND RESTATED
BYLAWS
of
PIMCO HIGH INCOME FUND
(Amended and Restated as of June 20, 2003)
ARTICLE 1
Agreement and Declaration of Trust and Principal Office
1.1 Principal Office of the Trust. A principal office of the Trust shall be located in New York, New York. The Trust may have other principal offices within or without Massachusetts as the Trustees may determine or as they may authorize.
1.2 Agreement and Declaration of Trust. These Second Amended and Restated Bylaws (the "Bylaws") shall be subject to the Agreement and Declaration of Trust, as amended or restated from time to time (the "Declaration of Trust"), of PIMCO High Income Fund, the Massachusetts business trust established by the Declaration of Trust (the "Trust"). Capitalized terms used in these Bylaws and not otherwise defined herein shall have the meanings given to such terms in the Declaration of Trust.
ARTICLE 2
Meetings of Trustees
2.1 Regular Meetings. Regular meetings of the Trustees may be held without call or notice at such places and at such times as the Trustees may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent Trustees. A regular meeting of the Trustees may be held without call or notice immediately after and at the same place as the annual meeting of the Shareholders (as defined in the Declaration of Trust).
2.2 Special Meetings. Special meetings of the Trustees may be held at any time and at any place designated in the call of the meeting when called by the Chairman, the President or the Treasurer or by two or more Trustees, sufficient notice thereof being given to each Trustee by the Secretary or an Assistant Secretary or by the officer or the Trustees calling the meeting.
2.3 Notice. It shall be sufficient notice to a Trustee of a special meeting to send notice by mail at least forty-eight hours or by telegram, telex or telecopy or other electronic facsimile transmission method at least twenty-four hours before the meeting addressed to the Trustee at his or her usual or last known business or residence address or to give notice to him or
her in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him or her, before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him or her. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting.
2.4 Quorum. At any meeting of the Trustees a majority of the Trustees then in office shall constitute a quorum. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice.
ARTICLE 3
Officers
3.1 Enumeration; Qualification. The officers of the Trust shall be a President, a Treasurer, a Secretary, and such other officers including a Chairman, if any, as the Trustees from time to time may in their discretion elect. The Trust may also have such agents as the Trustees from time to time may in their discretion appoint. Any officer may but need not be a Trustee or a Shareholder. Any two or more offices may be held by the same person.
3.2 Election. The President, the Treasurer, and the Secretary shall be elected annually by the Trustees. Other officers, if any, may be elected or appointed by the Trustees at the same meeting at which the President, Treasurer and Secretary are elected, or at any other time. Vacancies in any office may be filled at any time.
3.3 Tenure. The Chairman of the Trustees, if one is elected, the President, the Treasurer and the Secretary shall hold office until their respective successors are chosen and qualified, or in each case until he or she sooner dies, resigns, is removed with or without cause or becomes disqualified. Each other officer shall hold office and each agent of the Trust shall retain authority at the pleasure of the Trustees.
3.4 Powers. Subject to the other provisions of these Bylaws, each officer shall have, in addition to the duties and powers herein and in the Declaration of Trust set forth, such duties and powers as are commonly incident to the office occupied by him or her as if the Trust were organized as a Massachusetts business corporation and such other duties and powers as the Trustees may from time to time designate.
3.5 Chairman; President; Vice President. Unless the Trustees otherwise provide, the Chairman or, if there is none or in the absence of the Chairman, the President shall preside at all meetings of the Shareholders and of the Trustees. The President shall be the chief executive officer. Any Vice President shall have such duties and powers as may be designated from time to time by the Trustees or the President.
3.6 Treasurer; Assistant Treasurer. The Treasurer shall be the chief financial and accounting officer of the Trust, and shall, subject to the provisions of the Declaration of Trust and to any arrangement made by the Trustees with a custodian, investment adviser, sub-adviser or manager, or transfer, shareholder servicing or similar agent, be in charge of the valuable
papers, books of account and accounting records of the Trust, and shall have such other duties and powers as may be designated from time to time by the Trustees or by the President. Any Assistant Treasurer shall have such duties and powers as may be designated from time to time by the Trustees or the President.
3.7 Secretary; Assistant Secretary. The Secretary shall record all proceedings of the Shareholders and the Trustees in books to be kept therefor, which books or a copy thereof shall be kept at the principal office of the Trust. In the absence of the Secretary from any meeting of the Shareholders or Trustees, an Assistant Secretary, or if there be none or if he or she is absent, a temporary secretary chosen at such meeting shall record the proceedings thereof in the aforesaid books. Any Assistant Secretary shall have such duties and powers as may be designated from time to time by the Trustees or the President.
3.8 Resignations. Any officer may resign at any time by written instrument signed by him or her and delivered to the Chairman, if any, the President or the Secretary, or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Except to the extent expressly provided in a written agreement with the Trust, no officer resigning and no officer removed shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages on account of such removal.
ARTICLE 4
Committees
4.1 Quorum; Voting. Except as provided below or as otherwise specifically provided in the resolutions constituting a Committee of the Trustees and providing for the conduct of its meetings, a majority of the members of any Committee of the Trustees shall constitute a quorum for the transaction of business, and any action of such a Committee may be taken at a meeting by a vote of a majority of the members present (a quorum being present) or evidenced by one or more writings signed by such a majority. Members of a Committee may participate in a meeting of such Committee by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting.
With respect to a Valuation Committee of the Trustees, one or more of the Committee members shall constitute a quorum for the transaction of business.
Except as specifically provided in the resolutions constituting a Committee of the Trustees and providing for the conduct of its meetings, Article 2, Sections 2.2 and 2.3 of these Bylaws relating to special meetings shall govern the notice requirements for Committee meetings, except that it shall be sufficient notice to a Valuation Committee of the Trustees to send notice by telegram, telex or telecopy or other electronic means (including by telephone voice-message or e-mail) at least fifteen minutes before the meeting.
ARTICLE 5
Reports
5.1 General. The Trustees and officers shall render reports at the time and in the manner required by the Declaration of Trust or any applicable law. Officers and Committees shall render such additional reports as they may deem desirable or as may from time to time be required by the Trustees.
ARTICLE 6
Fiscal Year
6.1 General. Except as from time to time otherwise provided by the Trustees, the initial fiscal year of the Trust shall end on such date as is determined in advance or in arrears by the Treasurer, and the subsequent fiscal years shall end on such date in subsequent years.
ARTICLE 7
Seal
7.1 General. The seal of the Trust shall, subject to alteration by the Trustees, consist of a flat-faced die with the word "Massachusetts", together with the name of the Trust and the year of its organization cut or engraved thereon; provided, however, that unless otherwise required by the Trustees, the seal shall not be necessary to be placed on, and its absence shall not impair the validity of, any document, instrument or other paper executed and delivered by or on behalf of the Trust.
ARTICLE 8
Execution of Papers
8.1 General. Except as the Trustees may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the Trust shall be executed by the President, any Vice President, the Treasurer or by whomever else shall be designated for that purpose by vote of the Trustees, and need not bear the seal of the Trust.
ARTICLE 9
Issuance of Share Certificates
9.1 Share Certificates. Except as provided in Article 11 hereof, each Shareholder shall be entitled to a certificate stating the number of Shares (as defined in the Declaration of Trust) owned by him or her, in such form as shall be prescribed from time to time by the Trustees. Such certificates shall be signed by the President or any Vice President and by the Treasurer or any Assistant Treasurer. Such signatures may be by facsimile if the certificate is signed by a transfer agent, or by a registrar, other than a Trustee, officer or employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall cease to be such officer before such certificate is issued, it may be issued by the Trust with the same effect as if he or she were such officer at the time of its issuance.
Notwithstanding the foregoing, in lieu of issuing certificates for Shares, the Trustees or the transfer agent may either issue receipts therefor or may keep accounts upon the books of the Trust for the record holders of such Shares, who shall in either case be deemed, for all purposes hereunder, to be the holders of certificates for such Shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof.
9.2 Loss of Certificates. In case of the alleged loss or destruction or the mutilation of a share certificate, a duplicate certificate may be issued in place thereof, upon such terms as the Trustees shall prescribe.
9.3 Issuance of New Certificates to Pledgee. A pledgee of Shares transferred as collateral security shall be entitled to a new certificate if the instrument of transfer substantially describes the debt or duty that is intended to be secured thereby. Such new certificate shall express on its face that it is held as collateral security, and the name of pledgor shall be stated thereon, who alone shall be liable as a Shareholder and entitled to vote thereon.
9.4 Discontinuance of Issuance of Certificates. Notwithstanding anything to the contrary in this Article 9, the Trustees may at any time discontinue the issuance of share certificates and may, by written notice to each Shareholder, require the surrender of share certificates to the Trust for cancellation. Such surrender and cancellation shall not effect the ownership of Shares in the Trust.
ARTICLE 10
Shareholders' Voting Powers and Meetings
10.1 Voting Powers. The Shareholders shall have power to vote only (i) for
the election or removal of Trustees as provided in Article IV, Sections 1 and 3
of the Declaration of Trust and Article 11 hereto, (ii) with respect to any
Manager or sub-adviser as provided in Article IV, Section 8 of the Declaration
of Trust to the extent required by the 1940 Act, (iii) with respect to certain
transactions and other matters to the extent and as provided in Article V,
Sections 2 and 3 of the Declaration of Trust and Article 11 hereto, (iv) with
respect to any termination of this Trust to the extent and as provided in
Article IX, Section 4 of the Declaration of Trust and Article 11 hereto (for the
avoidance of any doubt, Shareholders shall have no separate right to vote with
respect to the termination of the Trust or a series or class of Shares if the
Trustees (including the Continuing Trustees) exercise their right to terminate
the Trust or such series or class pursuant to clauses (ii) or (y) of Article IX,
Section 4 of the Declaration of Trust), (v) with respect to any amendment of the
Declaration of Trust to the extent and as provided in Article IX, Section 7 of
the Declaration of Trust and Articles 11 and 12 hereto, (vi) to the same extent
as the stockholders of a Massachusetts business corporation as to whether or not
a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust or the
Shareholders, and (vii) with respect to such additional matters relating to the
Trust as may be required by law, the Declaration of Trust, these Bylaws or any
registration of the Trust with the Securities and Exchange Commission (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote, except as
otherwise provided in the Declaration of Trust, these Bylaws, or required by applicable law. Except as otherwise provided in the Declaration of Trust or in respect of the terms of a class of preferred shares of beneficial interest of the Trust as reflected in these Bylaws or required by applicable law, all Shares of the Trust then entitled to vote shall be voted in the aggregate as a single class without regard to classes or series of Shares. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. The placing of a Shareholder's name on a proxy pursuant to telephonic or electronically transmitted instructions obtained pursuant to procedures reasonably designed to verify that such instructions have been authorized by such Shareholder shall constitute execution of such proxy by or on behalf of such Shareholder. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Until Shares of a particular class or series are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, the Declaration of Trust or these Bylaws to be taken by Shareholders as to such class or series.
10.2 Voting Power and Meetings. Except as provided in the next sentence, regular meetings of the Shareholders for the election of Trustees and the transaction of such other business as may properly come before the meeting shall be held, so long as Common Shares are listed for trading on the New York Stock Exchange, on at least an annual basis, on such day and at such place as shall be designated by the Trustees. In the event that such a meeting is not held in any annual period if so required, whether the omission be by oversight or otherwise, a subsequent special meeting may be called by the Trustees and held in lieu of such meeting with the same effect as if held within such annual period. Special meetings of the Shareholders or any or all classes or series of Shares may also be called by the Trustees from time to time for such other purposes as may be prescribed by law, by the Declaration of Trust or by these Bylaws, or for the purpose of taking action upon any other matter deemed by a majority of the Trustees and a majority of the Continuing Trustees to be necessary or desirable. A special meeting of Shareholders may be held at any such time, day and place as is designated by the Trustees. Written notice of any meeting of Shareholders, stating the date, time, place and purpose of the meeting, shall be given or caused to be given by a majority of the Trustees and a majority of the Continuing Trustees at least seven days before such meeting to each Shareholder entitled to vote thereat by leaving such notice with the Shareholder at his or her residence or usual place of business or by mailing such notice, postage prepaid, to the Shareholder's address as it appears on the records of the Trust. Such notice may be given by the Secretary or an Assistant Secretary or by any other officer or agent designated for such purpose by the Trustees. Whenever notice of a meeting is required to be given to a Shareholder under the Declaration of Trust or these Bylaws, a written waiver thereof, executed before or after the meeting by such Shareholder or his or her attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. Notice of a meeting need not be given to any Shareholder who attends the meeting without protesting prior thereto or at its commencement the lack of notice to such Shareholder. No ballot shall be required for any election unless required by a Shareholder present or represented at the meeting and entitled to vote in such election. Notwithstanding anything to the contrary in this Section 10.2, no matter shall be properly before any annual or
special meeting of Shareholders and no business shall be transacted thereat unless in accordance with Section 10.6 of these Bylaws.
10.3 Quorum and Required Vote. Except when a larger quorum is required by any provision of law or the Declaration of Trust or these Bylaws, thirty percent (30%) of the Shares entitled to vote on a particular matter shall constitute a quorum for the transaction of business at a Shareholders' meeting, except that where any provision of law or the Declaration of Trust or these Bylaws permits or requires that holders of any class or series of Shares shall vote as an individual class or series, then thirty percent (30%) (unless a larger quorum is required as specified above) of Shares of that class or series entitled to vote shall be necessary to constitute a quorum for the transaction of business by that class or series. Any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. Except when a different vote is required by any provision of law or the Declaration of Trust or these Bylaws, a plurality of the quorum of Shares necessary for the transaction of business at a Shareholders' meeting shall decide any questions and a plurality of Shares voted shall elect a Trustee, provided that where any provision of law or of the Declaration of Trust or these Bylaws permits or requires that the holders of any class or series of Shares shall vote as an individual class or series, then a plurality of the quorum of Shares of that class or series necessary for the transaction of business by that class or series at a Shareholders' meeting shall decide that matter insofar as that class or series is concerned.
10.4 Action by Written Consent. Any action taken by Shareholders may be taken without a meeting if a majority of Shareholders entitled to vote on the matter (or such larger proportion thereof as shall be required by any express provision of law or the Declaration of Trust or these Bylaws) consent to the action in writing and such written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders.
10.5 Record Dates. For the purpose of determining the Shareholders who are entitled to vote or act at any meeting or any adjournment thereof, or who are entitled to receive payment of any dividend or of any other distribution, the Trustees may from time to time fix a time, which shall be not more than 90 days before the date of any meeting of Shareholders or the date for the payment of any dividend or of any other distribution, as the record date for determining the Shareholders having the right to notice of and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution, and in such case only Shareholders of record on such record date shall have the right notwithstanding any transfer of Shares on the books of the Trust after the record date; or without fixing such record date the Trustees may for any of such purposes close the register or transfer books for all or any part of such period.
10.6 Advance Notice of Shareholder Nominees for Trustees and Other Shareholder Proposals. (a) As used in this Section 10.6, the term "annual meeting" refers to any annual meeting of Shareholders as well as any special meeting held in lieu of an annual meeting as described in the first two sentences of Section 10.2 of these Bylaws, and the term "special meeting" refers to all meetings of Shareholders other than an annual meeting or a special meeting in lieu of an annual meeting.
(b) The matters to be considered and brought before any annual or special
meeting of Shareholders shall be limited to only such matters, including the
nomination and election of Trustees, as shall be brought properly before such
meeting in compliance with the procedures set forth in this Section 10.6. Only
persons who are nominated in accordance with the procedures set forth in this
Section 10.6 shall be eligible for election as Trustees, and no proposal to fix
the number of Trustees shall be brought before an annual or special meeting of
Shareholders or otherwise transacted unless in accordance with the procedures
set forth in this Section 10.6, except as may be otherwise provided in these
Bylaws with respect to the right of holders of preferred shares of beneficial
interest, if any, of the Trust to nominate and elect a specified number of
Trustees in certain circumstances.
(c) For any matter to be properly before any annual meeting, the matter
must be (i) specified in the notice of meeting given by or at the direction of a
majority of the Trustees and a majority of the Continuing Trustees pursuant to
Section 10.2 of these Bylaws, (ii) otherwise brought before the meeting by or at
the direction of a majority of the Continuing Trustees (or any duly authorized
committee thereof), or (iii) brought before the meeting in the manner specified
in this Section 10.6(c) by a Shareholder of record entitled to vote at the
meeting or by a Shareholder (a "Beneficial Owner") that holds Shares entitled to
vote at the meeting through a nominee or "street name" holder of record and that
can demonstrate to the Trust such indirect ownership and such Beneficial Owner's
entitlement to vote such Shares, provided that the Shareholder was the
Shareholder of record or the Beneficial Owner held such Shares at the time the
notice provided for in this Section 10.6(c) is delivered to the Secretary.
In addition to any other requirements under applicable law and the Declaration of Trust and these Bylaws, persons nominated by Shareholders for election as Trustees and any other proposals by Shareholders may be properly brought before an annual meeting only pursuant to timely notice (the "Shareholder Notice") in writing to the Secretary. To be timely, the Shareholder Notice must be delivered to or mailed and received at the principal executive offices of the Trust not less than forty-five (45) nor more than sixty (60) days prior to the first anniversary date of the date on which the Trust first mailed its proxy materials for the prior year's annual meeting; provided, however, with respect to the annual meeting to be held in the calendar year 2003, the Shareholder Notice must be so delivered or mailed and so received on or before May 1, 2003; provided further, however, if and only if the annual meeting is not scheduled to be held within a period that commences thirty (30) days before the first anniversary date of the annual meeting for the preceding year and ends thirty (30) days after such anniversary date (an annual meeting date outside such period being referred to herein as an "Other Annual Meeting Date"), such Shareholder Notice must be given in the manner provided herein by the later of the close of business on (i) the date forty-five (45) days prior to such Other Annual Meeting Date or (ii) the tenth (10/th/) business day following the date such Other Annual Meeting Date is first publicly announced or disclosed.
Any Shareholder desiring to nominate any person or persons (as the case may be) for election as a Trustee or Trustees of the Trust shall deliver, as part of such Shareholder Notice: (i) a statement in writing setting forth (A) the name, age, date of birth, business address,
residence address and nationality of the person or persons to be nominated; (B)
the class or series and number of all Shares of the Trust owned of record or
beneficially by each such person or persons, as reported to such Shareholder by
such nominee(s); (C) any other information regarding each such person required
by paragraphs (a), (d), (e) and (f) of Item 401 of Regulation S-K or paragraph
(b) of Item 22 of Rule 14a-101 (Schedule 14A) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), adopted by the Securities and Exchange
Commission (or the corresponding provisions of any regulation or rule
subsequently adopted by the Securities and Exchange Commission or any successor
agency applicable to the Trust); (D) any other information regarding the person
or persons to be nominated that would be required to be disclosed in a proxy
statement or other filings required to be made in connection with solicitation
of proxies for election of Trustees or directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder; and (E)
whether such Shareholder believes any nominee is or will be an "interested
person" of the Trust (as defined in the Investment Company Act of 1940, as
amended) and, if not an "interested person," information regarding each nominee
that will be sufficient for the Trust to make such determination; and (ii) the
written and signed consent of the person or persons to be nominated to be named
as nominees and to serve as Trustees if elected. In addition, the Trustees may
require any proposed nominee to furnish such other information as they may
reasonably require or deem necessary to determine the eligibility of such
proposed nominee to serve as a Trustee. Any Shareholder Notice required by this
Section 10.6(c) in respect of a proposal to fix the number of Trustees shall
also set forth a description of and the text of the proposal, which description
and text shall state a fixed number of Trustees that otherwise complies with
applicable law, these Bylaws and the Declaration of Trust.
Without limiting the foregoing, any Shareholder who gives a Shareholder
Notice of any matter proposed to be brought before a Shareholder meeting
(whether or not involving nominees for Trustees) shall deliver, as part of such
Shareholder Notice: (i) the description of and text of the proposal to be
presented; (ii) a brief written statement of the reasons why such Shareholder
favors the proposal; (iii) such Shareholder's name and address as they appear on
the Trust's books; (iv) any other information relating to the Shareholder that
would be required to be disclosed in a proxy statement or other filings required
to be made in connection with the solicitation of proxies with respect to the
matter(s) proposed pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder; (v) the class or series and number of all
Shares of the Trust owned beneficially and of record by such Shareholder; (vi)
any material interest of such Shareholder in the matter proposed (other than as
a Shareholder); (vii) a representation that the Shareholder intends to appear in
person or by proxy at the Shareholder meeting to act on the matter(s) proposed;
(viii) if the proposal involves nominee(s) for Trustees, a description of all
arrangements or understandings between the Shareholder and each proposed nominee
and any other person or persons (including their names) pursuant to which the
nomination(s) are to be made by the Shareholder; and (ix) in the case of a
Beneficial Owner, evidence establishing such Beneficial Owner's indirect
ownership of, and entitlement to vote, Shares at the meeting of Shareholders. As
used in this Section 10.6, Shares "beneficially owned" shall mean all Shares
which such person is deemed to beneficially own pursuant to Rules 13d-3 and
13d-5 under the Exchange Act.
(d) For any matter to be properly before any special meeting, the matter
must be specified in the notice of meeting given by or at the direction of a
majority of the Trustees and a majority of the Continuing Trustees pursuant to
Section 10.2 of these Bylaws. In the event the Trust calls a special meeting for
the purpose of electing one or more Trustees, any Shareholder may nominate a
person or persons (as the case may be) for election to such position(s) as
specified in the Trust's notice of meeting if and only if the Shareholder
provides a notice containing the information required in the Shareholder Notice
to the Secretary required with respect to annual meetings by Section 10.6(c)
hereof, and such notice is delivered to or mailed and received at the principal
executive office of the Trust not later than the close of business on the tenth
(10/th/) day following the day on which the date of the special meeting and of
the nominees proposed by the Trustees to be elected at such meeting are publicly
announced or disclosed.
(e) For purposes of this Section 10.6, a matter shall be deemed to have been "publicly announced or disclosed" if such matter is disclosed in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, in a document publicly filed by the Trust with the Securities and Exchange Commission, or in a Web site accessible to the public maintained by the Trust or by its investment adviser or an affiliate of such investment adviser with respect to the Trust.
(f) In no event shall an adjournment or postponement (or a public announcement thereof) of a meeting of Shareholders commence a new time period (or extend any time period) for the giving of notice as provided in this Section 10.6.
(g) The person presiding at any meeting of Shareholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall have the power and duty to (i) determine whether a nomination or proposal of other matters to be brought before a meeting and notice thereof have been duly made and given in the manner provided in this Section 10.6 and elsewhere in these Bylaws and the Declaration of Trust and (ii) if not so made or given, to direct and declare at the meeting that such nomination and/or such other matters shall be disregarded and shall not be considered. Any determination by the person presiding shall be binding on all parties absent manifest error.
(h) Notwithstanding anything to the contrary in this Section 10.6 or otherwise in these Bylaws, unless required by federal law, no matter shall be considered at or brought before any annual or special meeting unless such matter has been approved for these purposes by a majority of the Continuing Trustees and, in particular, no Beneficial Owner shall have any rights as a Shareholder except as may be required by federal law. Furthermore, nothing in this Section 10.6 shall be construed as creating any implication or presumption as to the requirements of federal law.
ARTICLE 11
Statement Creating Five Series of Auction Rate Cumulative Preferred Shares
Auction Rate Cumulative Preferred Shares, Series M: 7,200 preferred shares of beneficial interest, par value $0.00001 per share, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Rate Cumulative Preferred Shares, Series M." Each share of Auction Rate Cumulative Preferred Shares, Series M (sometimes referred to herein as "Series M Preferred Shares") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these Bylaws. The Series M Preferred Shares shall constitute a separate series of preferred shares of beneficial interest of the Trust, and each share of Series M Preferred Shares shall be identical.
Auction Rate Cumulative Preferred Shares, Series T: 7,200 preferred shares of beneficial interest, par value $0.00001 per share, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Rate Cumulative Preferred Shares, Series T." Each share of Auction Rate Cumulative Preferred Shares, Series T (sometimes referred to herein as "Series T Preferred Shares") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these Bylaws. The Series T Preferred Shares shall constitute a separate series of preferred shares of beneficial interest of the Trust, and each share of Series T Preferred Shares shall be identical.
Auction Rate Cumulative Preferred Shares, Series W: 7,200 preferred shares of beneficial interest, par value $0.00001 per share, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Rate Cumulative Preferred Shares, Series W." Each share of Auction Rate Cumulative Preferred Shares, Series W (sometimes referred to herein as "Series W Preferred Shares") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these Bylaws. The Series W Preferred Shares shall constitute a separate series of preferred shares of beneficial interest of the Trust, and each share of Series W Preferred Shares shall be identical.
Auction Rate Cumulative Preferred Shares, Series TH: 7,200 preferred shares of beneficial interest, par value $0.00001 per share, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Rate Cumulative Preferred Shares, Series TH." Each share of Auction Rate Cumulative Preferred Shares, Series TH (sometimes referred to herein as "Series TH Preferred Shares") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these Bylaws. The Series TH Preferred Shares shall constitute a separate series of preferred shares of beneficial interest of the Trust, and each share of Series TH Preferred Shares shall be identical.
Auction Rate Cumulative Preferred Shares, Series F: 7,200 preferred shares of beneficial interest, par value $0.00001 per share, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Rate Cumulative Preferred Shares, Series F." Each share of Auction Rate Cumulative Preferred Shares, Series F (sometimes referred to herein as "Series F Preferred Shares") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these Bylaws. The Series F Preferred Shares shall constitute a separate series of preferred shares of beneficial interest of the Trust, and each share of Series F Preferred Shares shall be identical.
11.1 Definitions. (a) Unless the context or use indicates another or different meaning or intent, in Article 11 of these Bylaws the following terms have the following meanings, whether used in the singular or plural:
"'AA' Financial Composite Commercial Paper Rate" on any date means (i) (A)
the Interest Equivalent of the 7-day rate (in the case of a Dividend Period
which is a 7-Day Dividend Period or shorter), the 30-day rate (for Dividend
Periods greater than 7 days but fewer than or equal to 31 days), the 60-day rate
(for Dividend Periods greater than 31 days but fewer than or equal to 61 days)
and the 90-day rate (for Dividend Periods greater than 61 days but fewer than or
equal to 91 days) on commercial paper on behalf of issuers whose corporate bonds
are rated AA by S&P, or the equivalent of such rating by another 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; and (B) for Dividend
Periods greater than 91 days but fewer than 184 days, the rate described in
clause (ii) below; or (ii) if the Federal Reserve Bank of New York does not make
available such a rate, or with respect to Dividend Periods greater than 91 days
but fewer than 184 days, 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 one-thousandth
(0.001) of 1%). If any Commercial Paper Dealer does not quote a rate required to
determine the "AA" Financial 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) Citigroup Global Markets Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated; (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
Trust, 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 (0.001) 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.
"Accountant's Confirmation" has the meaning set forth in Section 11.7(c) of these Bylaws.
"ADR" has the meaning set forth in paragraph (iii) of the definition of "Fitch Eligible Assets."
"Affiliate" means any Person known to the Auction Agent to be controlled by, in control of, or under common control with, the Trust.
"Agent Member" means a member of the Securities Depository that will act on behalf of a Beneficial Owner of one or more Preferred Shares or on behalf of a Potential Beneficial Owner.
"Applicable Percentage" has the meaning set forth in Section 11.10(a)(vi) of these Bylaws.
"Applicable Rate" means the rate per annum at which cash dividends are payable on the Preferred Shares for any Dividend Period.
"Approved Foreign Nations" has the meaning set forth in the definition of "Fitch Eligible Assets."
"Approved Price" means the "fair value" as determined by the Trust in accordance with the valuation procedures adopted from time to time by the Board of Trustees of the Trust and for which the Trust receives a mark-to-market price (which, for the purpose of clarity, shall not mean Market Value) from an independent source at least semi-annually.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Deutsche Bank Trust Company Americas unless and until another commercial bank, trust company or other financial institution appointed by a resolution of the Board of Trustees of the Trust or a duly authorized committee thereof enters into an agreement with the Trust to follow the Auction Procedures for the purpose of determining the Applicable Rate and to act as transfer agent, registrar, dividend disbursing agent and redemption agent for the Preferred Shares.
"Auction Date" has the meaning set forth in Section 11.10(a)(i) of these Bylaws.
"Auction Procedures" means the procedures for conducting Auctions set forth in Section 11.10 of these Bylaws.
"Bank Loans" means direct purchases of, assignments of, participations in and other interests in (a) any bank loan or (b) any loan made by an investment bank, investment fund or other financial institution, provided that such loan under this clause (b) is similar to those typically made, syndicated, purchased or participated by a commercial bank or institutional loan investor in the ordinary course of business.
"Beneficial Owner" 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 Preferred Shares or a Broker-Dealer that holds Preferred Shares for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer pursuant to Section 11.10 of these Bylaws, that has been selected by the Trust and has entered into a Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in Section 11.10 of these Bylaws.
"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 New York City are authorized or obligated by law to close.
"Canadian Bonds" has the meaning set forth in the definition of "Fitch Eligible Assets."
"Closing Transactions" has the meaning set forth in Section 11.8(a)(i) of these Bylaws.
"Commercial Paper Dealers" has the meaning set forth in the definition of "`AA' Financial Composite Commercial Paper Rate."
"Common Shares" means the shares of beneficial interest designated as common shares, par value $0.00001 per share, of the Trust.
"Cure Date" has the meaning set forth in Section 11.4(a)(ii) of these Bylaws.
"Date of Original Issue" means, with respect to any Preferred Share, the date on which the Trust first issues such share.
"Debt Securities" has the meaning set forth in paragraph (vI) of the definition of "Fitch Eligible Assets."
"Declaration of Trust" means the Amended and Restated Agreement and Declaration of Trust of the Trust dated April 8, 2003, as from time to time amended and supplemented.
"Deposit Securities" means cash and portfolio securities rated at least A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Fitch Discount Factor or a Moody's Discount Factor, as applicable.
"Discounted Value" of any asset of the Trust means the quotient of the Market Value of an Eligible Asset divided by the applicable Discount Factor, provided that with respect to an Eligible Asset that is currently callable, the Discounted Value will be equal to the quotient as calculated above or the call price, whichever is lower, and that with respect to an Eligible Asset that is prepayable, the Discounted Value will be equal to the quotient as calculated above or the par value, whichever is lower.
"Dividend Payment Date," with respect to Preferred Shares, has the meaning set forth in Section 11.2(b)(i) of these Bylaws.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend Period and any Special Dividend Period.
"Eligible Asset" means a Fitch Eligible Asset (if Fitch Ratings is then rating the Preferred Shares), a Moody's Eligible Asset (if Moody's is then rating the Preferred Shares) and/or any asset included in the calculations used by any Rating Agency then rating the Preferred Shares for purposes of determining such Rating Agency's rating on the Preferred Shares, as applicable.
"Existing Holder" means a Broker-Dealer, or any such other Person that may be permitted by the Trust, that is listed as the holder of record of Preferred Shares in the Share Books.
"Extension Period" has the meaning set forth in Section 11.2(c)(iii) of these Bylaws.
"FHLB, FNMA and FFCB Debentures" has the meaning set forth in paragraph
(viii) of the definition of "Moody's Eligible Assets."
"Fitch Discount Factor" means, for purposes of determining the Discounted Value of any Fitch Eligible Asset, the percentage determined as follows. The Fitch Discount Factor for any Fitch Eligible Asset other than the securities set forth below will be the percentage provided in writing by Fitch Ratings.
(i) Debt Securities: The percentage determined by reference to the rating of the Debt Security with reference to the remaining term to maturity of the Debt Security, in accordance with the table set forth below.
Fitch Rating Category
Term to Maturity of Not rated or
Debt Security AAA AA A BBB BB below BB/1/
------------- --- -- - --- -- -----------
3 years or less (but 106.38% 108.11% 109.89% 111.73% 129.87% 151.52%
longer than 1 year)
5 years or less (but 111.11 112.99 114.94 116.96 134.24 151.52
longer than 3 years)
7 years or less (but 113.64 115.61 117.65 119.76 135.66 151.52
longer than 5 years)
10 years or less (but 115.61 117.65 119.76 121.95 136.74 151.52
longer than 7 years)
15 years or less (but 119.76 121.95 124.22 126.58 139.05 151.52
longer than 10 years)
More than 15 years 124.22 126.58 129.03 131.58 144.55 151.52
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The Fitch Discount Factors presented in the immediately preceding table apply to Debt Securities that are Performing and have a Market Value determined by a Pricing Service or an Approved Price. The Fitch Discount Factor noted in the table above for a Debt Security not rated or rated below BB by Fitch Ratings shall apply to any non-Performing Debt Security with a price equal to or greater than $0.20. If a Debt Security does not have a Market Value determined by a Pricing Service or an Approved Price, a rating one rating category below the actual rating on the Debt Security will be used (e.g., where the actual rating is A-, the rating for Debt Securities rated BBB- will be used). The Fitch Discount Factor for a Debt Security issued by a limited partnership that is not a Rule 144A Security shall be the Discount Factor determined in accordance with the table set forth above multiplied by 105%.
The Fitch Discount Factors presented in the immediately preceding table will also apply to (i) interest rate swaps and caps, whereby the rating of the counterparty to the swap or cap will be the rating used to determine the Fitch Discount Factor in the table; and (ii) TRACERs, whereby the ratings in the table will be applied to the underlying
securities and the Market Value of each underlying security will be its proportionate amount of the Market Value of the TRACER. The Fitch Discount Factors presented in the immediately preceding table will also apply to corporate obligations backed by a guaranty, a letter of credit or insurance issued by a third party. If the third-party credit rating is the basis for the rating on the obligation, then the rating on the third party will be used to determine the Fitch Discount Factor in the table. The Fitch Discount Factors presented in the immediately preceding table will also apply to preferred trust certificates, the rating on which will be determined by the underlying debt instruments in the trust, unless such preferred trust certificates are determined by Fitch Ratings to qualify for a traditional equity discount factor, in which case the Fitch Discount Factor shall be 370%.
(ii)Preferred shares:
Preferred Shares Discount Factor
------------------------------------------------------------------- ---------------
AAA Taxable Preferred ............................................. 130%
AA Taxable Preferred .............................................. 133%
A Taxable Preferred ............................................... 135%
BBB Taxable Preferred ............................................. 139%
BB Taxable Preferred .............................................. 154%
Not rated or below BB Taxable Preferred ........................... 161%
Investment Grade DRD Preferred .................................... 164%
Not rated or below Investment Grade DRD Preferred ................. 200%/1/
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(iii) Short-term instruments: The Fitch Discount Factor applied to short-term portfolio securities, including without limitation Debt Securities with terms to maturity of one year or less, Short Term Money Market Instruments and municipal debt obligations with terms to maturity within the Fitch Exposure Period, will be (A) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Fitch Exposure Period; (B) 115%, so long as such portfolio securities neither mature nor have a demand feature exercisable at par within the Fitch Exposure Period; and (C) 125%, so long as such portfolio securities neither mature within the Fitch Exposure Period nor have a demand feature at par. A Fitch Discount factor of 100% will be applied to cash.
(iv) U.S. Government Securities and U.S. Treasury Strips:
Time Remaining to Maturity Discount Factor -------------------------- --------------- 1 year or less 101.5% 2 years or less (but longer than 1 year) 103 3 years or less (but longer than 2 years) 105 4 years or less (but longer than 3 years) 107 5 years or less (but longer than 4 years) 109 7 years or less (but longer than 5 years) 112 10 years or less (but longer than 7 years) 114 Greater than 10 years 122 |
(v) Convertible securities: The Fitch Discount Factor applied to convertible securities will be (a) 200% for investment grade convertible securities and (b) 222% for below investment grade convertible securities so long as such convertible securities have neither (x) a conversion premium greater than 100% nor (y) a yield to maturity or yield to worst of greater than 15.00% above the corresponding Treasury curve.
The Fitch Discount Factor applied to convertible securities which have conversion premiums of greater than 100% will be (a) 152% for investment grade convertible securities and (b) 179% for below investment grade convertible securities so long as such convertible securities do not have a yield to maturity or yield to worst of greater than 15.00% above the corresponding Treasury curve.
The Fitch Discount Factor applied to convertible securities which have a yield to maturity or yield to worst of greater than 15.00% above the corresponding Treasury curve will be 370%.
If a security is not rated by Fitch Ratings but is rated by two other Rating Agencies, then the lower of the ratings on the security from the two other Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a rating by Fitch Ratings of BBB+ will be used). If a security is not rated by Fitch Ratings but is rated by only one other Rating Agency, then the rating on the security from the other Rating Agency will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a rating by Fitch Ratings of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a rating by Fitch Ratings of BB- will be used). If a security is not rated by any Rating Agency, the Trust will treat the security as if it were below investment grade.
(vi) Rule 144A Securities: The Fitch Discount Factor applied to Rule 144A Securities will be 110% of the Fitch Discount Factor which would apply were the securities registered under the Securities Act.
(vii) Asset-backed and mortgage-backed securities: The percentage determined by reference to the asset type in accordance with the table set forth below.
Asset Type (with time remaining to maturity, if applicable) Discount Factor
---------- ---------------
U.S. Treasury/agency securities (10 years or less) ..................... 118%
U.S. Treasury/agency securities (greater than 10 years) ................ 127%
U.S. agency sequentials (10 years or less) ............................. 128%
U.S. agency sequentials (greater than 10 years) ........................ 142%
U.S. agency principal only securities .................................. 236%
U.S. agency interest only securities
(with Market Value greater than $0.40) ............................ 696%
U.S. agency interest only securities
(with Market Value less than or equal to $0.40) ................... 214%
AAA LockOut securities, interest only .................................. 236%
U.S. agency planned amortization class bonds (10 years or less) ........ 115%
U.S. agency planned amortization class bonds (greater than 10 years) ... 136%
AAA sequentials (10 years or less) ..................................... 118%
AAA sequentials (greater than 10 years) ................................ 135%
AAA planned amortization class bonds (10 years or less) ................ 115%
AAA planned amortization class bonds (greater than 10 years) ........... 140%
Jumbo mortgages rated AAA/1/ ........................................... 123%
Jumbo mortgages rated AA/1/ ............................................ 130%
Jumbo mortgages rated A/1/ ............................................. 136%
Jumbo mortgages rated BBB/1/ ........................................... 159%
Commercial mortgage-backed securities rated AAA ........................ 131%
Commercial mortgage-backed securities rated AA ......................... 139%
Commercial mortgage-backed securities rated A .......................... 148%
Commercial mortgage-backed securities rated BBB ........................ 177%
Commercial mortgage-backed securities rated BB ......................... 283%
Commercial mortgage-backed securities rated B .......................... 379%
Commercial mortgage-backed securities rated CCC or not rated ........... 950%
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(viii) Bank Loans: The percentage determined by reference to the Fitch Loan Category in accordance with the table set forth below.
Fitch Loan Category Discount Factor ------------------- --------------- A .................... 126% B .................... 157 C .................... 184 D .................... 433 |
(ix) REITs:
(a) Common stock and preferred stock of REITs and other real estate companies:
Discount Factor
---------------
REIT or other real estate company preferred stock ....... 154%
REIT or other real estate company common stock .......... 196%
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(b) Corporate debt securities of REITs:
Term to Maturity AAA AA A BBB BB B CCC ---------------- --- -- - --- -- - --- 1 year .......... 111% 114% 117% 120% 121% 127% 227% 2 year .......... 116% 125% 125% 127% 132% 137% 137% 3 year .......... 121% 123% 127% 131% 133% 140% 225% 4 year .......... 126% 126% 129% 132% 136% 140% 164% 5 year .......... 131% 132% 135% 139% 144% 149% 185% 7 year .......... 140% 143% 146% 152% 159% 167% 228% 10 year ......... 141% 143% 147% 153% 160% 168% 232% 12 year ......... 144% 144% 150% 157% 165% 174% 249% 15 year ......... 148% 151% 155% 163% 172% 182% 274% 20-30 year ...... 152% 156% 160% 169% 180% 191% 306% |
If a security is not rated by Fitch Ratings but is rated by two other Rating Agencies, then the lower of the ratings on the security from the two other Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a rating by Fitch Ratings of BBB+ will be used). If a security is not rated by Fitch Ratings but is rated by only one other Rating Agency, then the rating on the security from the other Rating Agency will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA, a rating by Fitch Ratings of AAA will be used, and where the only rating on a security is a Moody's rating of Ba3, a rating by Fitch Ratings of BB- will be used). If a security is not rated by any Rating Agency, the Trust will treat the security as if it were below investment grade.
(x) Municipal debt obligations: The Fitch Discount Factor applied to municipal debt obligations will be the percentage determined by reference to the table set forth below:
Fitch Rating Category
Fitch Exposure Period AAA AA A BBB F1/1/ Unrated/2/
--------------------- --- -- - --- ----- ----------
7 weeks ................ 151% 159% 166% 173% 136% 225%
8 weeks or less but
greater than 7 weeks ... 154 161 168 176 137 231
9 weeks or less but
greater than 8 weeks ... 158 163 170 177 138 240
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(xi) Foreign Bonds: The Fitch Discount Factor (A) for a Foreign Bond the principal of which (if not denominated in U.S. dollars) is subject to a currency hedging transaction will be the Fitch Discount Factor that would otherwise apply to such Foreign Bonds in accordance with this definition and (B) for (1) a Foreign Bond the principal of which (if not denominated in U.S. dollars) is not subject to a currency hedging transaction and (2) a bond issued in a currency other than U.S. dollars by a corporation, limited liability company or limited partnership domiciled in, or the government or any agency, instrumentality or political subdivision of, a nation other than an Approved Foreign Nation, will be 370%.
(xii) Structured Notes: The Fitch Discount Factor applied to Structured Notes will be (A) in the case of a corporate issuer, the Fitch Discount Factor determined in accordance with paragraph (i) under this definition, whereby the rating on the issuer of the Structured Note will be the rating on the Structured Note for purposes of determining the Fitch Discount Factor in the table in paragraph (i); and (B) in the case of an issuer that is the U.S. government or an agency or instrumentality thereof, the Fitch Discount Factor determined in accordance with paragraph (iii) under this definition.
"Fitch Eligible Assets" means
(i) cash (including interest and dividends due on assets rated (A) BBB or higher by Fitch Ratings or the equivalent by another Rating Agency if the payment date is within five Business Days of the Valuation Date, (B) A or higher by Fitch Ratings or the equivalent by another Rating Agency if the payment date is within thirty days of the Valuation Date, and (C) A+ or higher by Fitch Ratings or the equivalent by another Rating Agency if the payment date is within the Fitch Exposure Period) and receivables for Fitch Eligible Assets sold if the receivable is due within five Business Days of the Valuation Date, and if the trades which generated such receivables are (A) settled through clearing house firms with respect to which the Trust has received prior written authorization from Fitch Ratings or (B) (1) with counterparties having a long-term debt rating of at least BBB- from Fitch Ratings or the equivalent from another Rating Agency or (2) with counterparties having a Short Term Money Market Instrument rating of at least F1+ by Fitch Ratings or the equivalent by another Rating Agency;
(ii) preferred shares if (A) dividends on such preferred shares are cumulative, (B) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive common stock or its equivalent at any time over the respective lives of such securities, (C) the issuer of such a preferred shares has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (D) the issuer of such preferred shares has a senior debt rating or preferred stock rating from Fitch Ratings of BBB- or higher or the equivalent rating by another Rating Agency and (E) the preferred shares are part of an issue that is at least $50 million;
(iii) (A) common stocks (1) which are traded on the New York Stock
Exchange or the American Stock Exchange or in the over-the-counter market,
(2) which, if cash dividend paying, pay cash dividends in U.S. dollars, and
(3) which may be sold without restriction by the Trust; provided, however,
that (a) common stock which, while a Fitch Eligible Asset owned by the
Trust, ceases paying any regular cash dividend will no longer be considered
a Fitch Eligible Asset until 60 calendar days after the date of the
announcement of such cessation, unless the issuer of the common stock has
senior debt securities rated at least A- by Fitch and (b) the aggregate
Market Value of the Trust's holdings of the common stock of any issuer in
excess of 5% per U.S. issuer of the number of outstanding shares of such
issuer times the Market Value of such common stock shall not be a Fitch's
Eligible Asset; and (B) common stocks or their equivalent denominated in
any currency other than the U.S. dollar and common stocks or their
equivalent of issuers formed under the laws of jurisdictions other than the
United States, its states and the District of Columbia for which there are
dollar-denominated American Depository Receipts ("ADRs") which are traded
in the United States on exchanges or over-the-counter and are issued by
banks formed under the laws of the United States, its states or the
District of Columbia; provided, however, that the aggregate Market Value of
the Trust's holdings of securities denominated in currencies other than the
U.S. dollar and ADRs in excess of 3% of the aggregate Market Value of the
outstanding shares of common stock or its equivalent of such issuer or in
excess of 10% of the Market Value of the Trust's Fitch Eligible Assets with
respect to issuers formed under the laws of any single such non-U.S.
jurisdiction other than Argentina, Australia, Brazil, Chile, France,
Germany, Italy, Japan, Korea, Mexico, Spain or the United Kingdom (each an
"Approved Foreign Nation," and collectively the "Approved Foreign Nations")
or Canada shall not be a Fitch Eligible Asset;
(iv) Short Term Money Market Instruments so long as (A) such securities are rated at least F1+ by Fitch Ratings or the equivalent by another Rating Agency, (B) in the case of demand deposits, time deposits and overnight funds, the supporting entity is rated at least A by Fitch Ratings or the equivalent by another Rating Agency, or (C) in all other cases, the supporting entity (1) is rated at least A by Fitch Ratings or the equivalent by another Rating Agency and the security matures within one month, (2) is rated at least A by Fitch Ratings or the equivalent by another Rating Agency and the security matures within three months or (3) is rated at least AA by Fitch Ratings or the equivalent by another Rating Agency and the security matures within six months;
(v) U.S. Government Securities and U.S. Treasury Strips;
(vi) debt securities if (A) such securities do not provide for conversion or exchange into equity capital at any time over their lives; (B) 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 Trust's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Trustees of the Trust; and (C) such securities are issued by (1) a U.S. corporation, limited liability company or limited partnership, (2) a corporation, limited liability company or limited partnership domiciled in an Approved Foreign Nation, (3)
the government of any Approved Foreign Nation or any of its agencies,
instrumentalities or political subdivisions (the debt securities of
Approved Foreign Nation issuers being referred to collectively as "Foreign
Bonds"), (4) a corporation, limited liability company or limited
partnership domiciled in Canada or (5) the Canadian government or any of
its agencies, instrumentalities or political subdivisions (the debt
securities of Canadian issuers being referred to collectively as "Canadian
Bonds"). Foreign Bonds held by the Trust will qualify as Fitch Eligible
Assets only up to a maximum of 20% of the aggregate Market Value of all
assets constituting Fitch Eligible Assets. Similarly, Canadian Bonds held
by the Trust will qualify as Fitch Eligible Assets only up to a maximum of
20% of the aggregate Market Value of all assets constituting Fitch Eligible
Assets. Notwithstanding the limitations in the two preceding sentences,
Foreign Bonds and Canadian Bonds held by the Trust will qualify as Fitch
Eligible Assets only up to a maximum of 30% of the aggregate Market Value
of all assets constituting Fitch Eligible Assets. In addition, bonds which
are issued in connection with a reorganization under U.S. federal
bankruptcy law ("Reorganization Bonds") will be considered debt securities
constituting Fitch Eligible Assets if (a) they provide for periodic payment
of interest in cash in U.S. dollars or euros; (b) they do not provide for
conversion or exchange into equity capital at any time over their lives;
(c) they have been registered under the Securities Act or are restricted as
to resale under federal securities laws but are eligible for trading under
Rule 144A promulgated pursuant to the Securities Act as determined by the
Trust's investment manager or portfolio manager acting pursuant to
procedures approved by the Board of Trustees of the Trust; (d) they were
issued by a U.S. corporation, limited liability company or limited
partnership; and (e) at the time of purchase at least one year had elapsed
since the issuer's reorganization. Reorganization Bonds may also be
considered debt securities constituting Fitch Eligible Assets if they have
been approved by Fitch Ratings, which approval shall not be unreasonably
withheld. All debt securities satisfying the foregoing requirements and
restrictions of this paragraph (vi) are herein referred to as "Debt
Securities."
(vii) asset-backed and mortgage-backed securities;
(viii) Rule 144A Securities;
(ix) Bank Loans;
(x) municipal debt obligations;
(xi) TRACERs, TRAINs and Structured Notes;
(xii) interest rate swaps entered into according to International Swap Dealers Association standards if (A) the counterparty to the swap transaction has a short-term rating of not less than F1 from Fitch Ratings or the equivalent by another Rating Agency, or, if the swap counterparty does not have a short-term rating, the counterparty has a senior unsecured long-term debt rating of AA or higher from Fitch Ratings or the equivalent from another Rating Agency and (B) the original aggregate notional amount of
the interest rate swap transaction or transactions is not greater than the liquidation preference of the Preferred Shares originally issued;
(xiii) any common stock, preferred stock or any debt security of REITs or real estate companies; and
(xiv) unrated debt securities issued by an issuer which (A) has not filed for bankruptcy in the past three years; (B) is current on all interest and principal on its fixed income obligations; and (C) is current on all preferred stock dividends.
Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this definition may be included in Fitch Eligible Assets, but, with respect to any financial contract, only upon receipt by the Trust of a writing from Fitch Ratings specifying any conditions on including such financial contract in Fitch Eligible Assets and assuring the Trust that including such financial contract in the manner so specified would not affect the credit rating assigned by Fitch Ratings to the Preferred Shares.
In addition, portfolio holdings as described below must be within the following diversification and issue size requirements in order to be included in Fitch's Eligible Assets:
Security Rated At Maximum Single Maximum Single Minimum Issue Size
Least Issuer/1/ Industry/1,2/ ($ in million)/3/
AAA 100% 100% $100
AA- 20 75 100
A- 10 50 100
BBB- 6 25 100
BB- 4 16 50
B- 3 12 50
CCC 2 8 50
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Where the Trust sells an asset and agrees to repurchase such asset in the future, the Discounted Value of such asset will constitute a Fitch Eligible Asset and the amount the Trust is required to pay upon repurchase of such asset will count as a liability for the purposes of the Preferred Shares Basic Maintenance Amount. Where the Trust purchases an asset and agrees to sell it to a third party in the future, cash receivable by the Trust thereby will constitute a Fitch Eligible Asset if the long-term debt of such other party is rated at least A- by Fitch Ratings or the equivalent by another Rating Agency and such agreement has a term of 30 days or less; otherwise the Discounted Value of such purchased asset will constitute a Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch Eligible Asset to the extent that it has been irrevocably deposited for the payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic Maintenance Amount or to the extent it is subject to any Liens, except for (A) Liens which are being contested in good faith by appropriate proceedings
and which Fitch Ratings has indicated to the Trust will not affect the status of such asset as a Fitch Eligible Asset, (B) Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (C) Liens to secure payment for services rendered or cash advanced to the Trust by its investment manager or portfolio manager, the Trust's custodian, transfer agent or registrar or the Auction Agent and (D) Liens arising by virtue of any repurchase agreement.
"Fitch Exposure Period" means the period commencing on (and including) a given Valuation Date and ending 49 days thereafter.
"Fitch Hedging Transactions" has the meaning set forth in Section 11.8(f) of these Bylaws.
"Fitch Industry Classifications" means, for the purposes of determining Fitch Eligible Assets, each of the following industry classifications (or such other classifications as Fitch Ratings may from time to time approve for application to the Preferred Shares):
1. Aerospace & Defense
2. Automobiles
3. Banking, Finance & Real Estate
4. Broadcasting & Media
5. Building & Materials
6. Business Services
7. Cable
8. Chemicals
9. Computers & Electronics
10. Consumer Products
11. Energy
12. Environmental Services
13. Farming & Agriculture
14. Food, Beverage & Tobacco
15. Gaming, Lodging & Restaurants
16. Healthcare & Pharmaceuticals
17. Industrial/Manufacturing
18. Insurance
19. Leisure & Entertainment
20. Metals & Mining
21. Miscellaneous
22. Packaging and Containers
23. Paper & Forest Products
24. Retail
25. Sovereign
26. Structured Finance Obligations
27. Supermarkets & Drugstores
28. Telecommunications
29. Textiles & Furniture
30. Transportation
31. Utilities
The Trust shall use its discretion in determining which industry classification is applicable to a particular investment.
"Fitch Loan Category" means the following four categories (and, for purposes of this categorization, the Market Value of a Fitch Eligible Asset trading at par is equal to $1.00):
(i) "Fitch Loan Category A" means Performing Bank Loans which have a Market Value or an Approved Price greater than or equal to $0.90.
(ii) "Fitch Loan Category B" means: (A) Performing Bank Loans which have a Market Value or an Approved Price of greater than or equal to $0.80 but less than $0.90; and (B) non-Performing Bank Loans which have a Market Value or an Approved Price greater than or equal to $0.85.
(iii) "Fitch Loan Category C" means: (A) Performing Bank Loans which have a Market Value or an Approved Price of greater than or equal to $0.70 but less than $0.80; (B) non-Performing Bank Loans which have a Market Value or an Approved Price of greater than or equal to $0.75 but less than $0.85; and (C) Performing Bank Loans without an Approved Price rated BB- or higher by Fitch Ratings. If a security is not rated by Fitch Ratings but is rated by two other Rating Agencies, then the lower of the ratings on the security from the two other Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where the S&P rating is A- and the Moody's rating is Baa1, a rating by Fitch Ratings of BBB+ will be used). If a security is not rated by Fitch Ratings but is rated by only one other Rating Agency, then the rating on the security from the other Rating Agency will be used to determine the Fitch Discount Factor (e.g., where the only rating on a security is an S&P rating of AAA-, a rating by Fitch Ratings of AAA- will be used, and where the only rating on a security is a Moody's rating of Ba3, a rating by Fitch Ratings of BB- will be used).
(iv) "Fitch Loan Category D" means Bank Loans not described in any of the foregoing categories.
Notwithstanding any other provision contained above, for purposes of determining whether a Fitch Eligible Asset falls within a specific Fitch Loan Category, to the extent that any Fitch Eligible Asset would fall within more than one of the Fitch Loan Categories, such Fitch Eligible Asset shall be deemed to fall into the Fitch Loan Category with the lowest applicable Fitch Discount Factor.
"Fitch Ratings" means Fitch, Inc., doing business as Fitch Ratings, or its successors.
"Foreign Bonds" has the meaning set forth in the definition of "Fitch Eligible Assets."
"Forward Commitment" has the meaning set forth in Section 11.8(d) of these Bylaws.
"Holder" means a Person identified as a holder of record of Preferred Shares in the Share Register.
"Independent Accountant" means a nationally recognized accountant, or firm of accountants, that is, with respect to the Trust, an independent public accountant or firm of independent public accountants under the Securities Act and serving as such for the Trust.
"Initial Dividend Payment Date" means, with respect to a series of Preferred Shares, the initial dividend payment date with respect to the Initial Dividend Period as determined by the Board of Trustees of the Trust or pursuant to their delegated authority with respect to such series.
"Initial Dividend Period" has the meaning set forth in Section 11.2(c)(i) of these Bylaws.
"Initial Dividend Rate" means, with respect to a series of Preferred Shares, the rate per annum applicable to the Initial Dividend Period for such series of Preferred Shares.
"Interest Equivalent" has the meaning set forth in the definition of "`AA' Financial Composite Commercial Paper Rate."
"Lien" means any material lien, mortgage, pledge, security interest or security agreement of any kind.
"Long Term Dividend Period" means a Special Dividend Period consisting of a specified period of one whole year or more but not greater than five years.
"Mandatory Redemption Price" means $25,000 per Preferred Share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) to (but not including) the date fixed for redemption.
"Market Value" of any asset of the Trust shall be the market value thereof determined by a Pricing Service. The Market Value of any asset shall include any interest accrued thereon. A Pricing Service shall value portfolio securities at the quoted bid prices or the mean between the quoted bid and asked prices or the yield equivalent when quotations are not readily available. Securities for which quotations are not readily available shall be valued at fair value as determined by a Pricing Service using methods which include consideration of: yields or prices of securities of comparable quality, type of issue, coupon, maturity and rating; indications as to value from dealers; and general market conditions. A Pricing Service may employ electronic data processing techniques and/or a matrix system to determine valuations. In the event a Pricing Service is unable to value a security, the security shall be valued at the lower of two bid quotations obtained by the Trust from dealers who are members of the National Association of Securities Dealers, Inc. and who make a market in the security, at least one of which shall be in writing. If two bid quotations are not readily available for any securities, such securities shall be valued in good faith at fair value pursuant to procedures approved by the Board of Trustees of the Trust. Futures contracts and options are valued at the closing prices for such instruments established by the exchange or board of trade on which they are traded, or if market quotations are not readily available, are valued at fair value in good faith pursuant to procedures approved
by the Board of Trustees of the Trust. All other assets will be valued at fair value on a consistent basis using methods determined in good faith by the Board of Trustees of the Trust.
"Maximum Applicable Rate," with respect to Preferred Shares, has the meaning set forth in Section 11.10(a)(vi) of these Bylaws.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" means, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined as follows. The Moody's Discount Factor for any Moody's Eligible Asset other than the securities set forth below will be the percentage provided in writing by Moody's.
(i) Corporate debt securities: The percentage determined by reference to the rating on such asset with reference to the remaining term to maturity of such asset, in accordance with the table set forth below.
Below B and
Term to Maturity of -----------
Corporate Debt Security Aaa Aa A Baa Ba B Unrated/1/
----------------------- --- -- - --- -- - -------
1 year or less .................................. 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) ........ 115 118 122 125 146 160 250
3 years or less (but longer than 2 years) ....... 120 123 127 131 153 168 250
4 years or less (but longer than 3 years) ....... 126 129 133 138 161 176 250
5 years or less (but longer than 4 years) ....... 132 135 139 144 168 185 250
7 years or less (but longer than 5 years) ....... 139 143 147 152 179 197 250
10 years or less (but longer than 7 years) ...... 145 150 155 160 189 208 250
15 years or less (but longer than 10 years) ..... 150 155 160 165 196 216 250
20 years or less (but longer than 15 years) ..... 150 155 160 165 196 228 250
30 years or less (but longer than 20 years) ..... 150 155 160 165 196 229 250
Greater than 30 years ........................... 165 173 181 189 205 240 250
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The Moody's Discount Factors presented in the immediately preceding table will also apply to Moody's Eligible Assets that are FHLB, FNMA and FFCB Debentures and to rated TRACERs and TRAINs, whereby the ratings in the table will be applied to the underlying securities and the Market Value of each underlying security will be its proportionate amount of the Market Value of the TRACER or TRAIN, provided that the Moody's Discount Factors determined from the table shall be multiplied by a factor of 120% for purposes of calculating the Discounted Value of TRAINs. The Moody's
Discount Factors presented in the immediately preceding table will also apply to corporate debt securities that do not pay interest in U.S. dollars or euros, provided that the Moody's Discount Factor determined from the table shall be multiplied by a factor of 110% for purposes of calculating the Discounted Value of such securities.
(ii) Preferred stock: The Moody's Discount Factor for preferred stock shall be (A) for preferred stocks issued by a utility, 155%; (B) for preferred stocks of industrial and financial issuers, 209%; and (C) for auction rate preferred stocks, 350%.
(iii) Short-term instruments: The Moody's Discount Factor applied to short-term portfolio securities, including without limitation corporate debt securities, Short Term Money Market Instruments and municipal debt obligations, will be (A) 100%, so long as such portfolio securities mature or have a demand feature at par exercisable within the Moody's Exposure Period; (B) 115%, so long as such portfolio securities do not mature within the Moody's Exposure Period or have a demand feature at par not exercisable within the Moody's Exposure Period; and (C) 125%, if such securities are not rated by Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable within the Moody's Exposure Period. A Moody's Discount Factor of 100% will be applied to cash.
(iv) U.S. Government Securities and U.S. Treasury Strips:
U.S. Government Securities U.S. Treasury Strips
Remaining Term to Maturity Discount Factor Discount Factor
-------------------------- --------------- ---------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113 115
3 years or less (but longer than 2 years) 118 121
4 years or less (but longer than 3 years) 123 128
5 years or less (but longer than 4 years) 128 135
7 years or less (but longer than 5 years) 135 147
10 years or less (but longer than 7 years) 141 163
15 years or less (but longer than 10 years) 146 191
20 years or less (but longer than 15 years) 154 218
30 years or less (but longer than 20 years) 154 244
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(v) Rule 144A Securities: The Moody's Discount Factor applied to Rule 144A Securities for Rule 144A Securities whose terms include rights to registration under the Securities Act within one year and Rule 144A Securities which do not have registration rights within one year will be 120% and 130%, respectively, of the Moody's Discount Factor which would apply were the securities registered under the Securities Act.
(vi) Bank Loans: The Moody's Discount Factor applied to senior Bank Loans ("Senior Loans") shall be the percentage specified in the table below opposite such Moody's Loan Category:
Moody's Loan Category Discount Factor
--------------------- ---------------
A 118%
B 137%
C 161%
D 222%
E 222%
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(vii) Asset-backed and mortgage-backed securities: The Moody's Discount Factor applied to asset-backed securities shall be 131%. The Moody's Discount Factor applied to collateralized mortgage obligations, planned amortization class bonds and targeted amortization class bonds shall be determined by reference to the weighted average life of the security and whether cash flow is retained (i.e., controlled by a trustee) or excluded (i.e., not controlled by a trustee), in accordance with the table set forth below.
Remaining Term to Maturity Cash Flow Retained Cash Flow Excluded -------------------------- ------------------ ------------------ 3 years or less 133% 141% 7 years or less (but longer than 3 years) 142 151 10 years or less (but longer than 7 years) 158 168 20 years or less (but longer than 10 years) 174 185 |
The Moody's Discount Factor applied to residential mortgage pass-throughs (including private-placement mortgage pass-throughs) shall be determined by reference to the coupon paid by such security and whether cash flow is retained (i.e., controlled by a trustee) or excluded (i.e., not controlled by a trustee), in accordance with the table set forth below.
Coupon Cash Flow Retained Cash Flow Excluded ------ ------------------ ------------------ 5% 166% 173% 6% 162 169 7% 158 165 8% 154 161 9% 151 157 10% 148 154 11% 144 154 12% 142 151 13% 139 148 adjustable 165 172 |
The Moody's Discount Factor applied to fixed-rate pass-throughs that are not rated by Moody's and are serviced by a servicer approved by Moody's shall be determined by reference to the table in the following paragraph (relating to whole loans).
The Moody's Discount Factor applied to whole loans shall be determined by reference to the coupon paid by such security and whether cash flow is retained (i.e., controlled by a trustee) or excluded (i.e., not controlled by a trustee), in accordance with the table set forth below.
Coupon Cash Flow Retained Cash Flow Excluded ------ ------------------ ------------------ 5% 172% 179% 6% 167 174 7% 163 170 8% 159 165 9% 155 161 10% 151 158 11% 148 157 12% 145 154 13% 142 151 adjustable 170 177 |
(viii) Municipal debt obligations: The Moody's Discount Factor applied to municipal debt obligations shall be the percentage determined by reference to the rating on such asset and the shortest Exposure Period set forth opposite such rating that is the same length as or is longer than the Moody's Exposure Period, in accordance with the table set forth below (provided that, except as provided in the following table, any municipal obligation (excluding any short-term municipal obligation) not rated by Moody's but rated by S&P shall be deemed to have a Moody's rating which is one full rating category lower than its S&P rating):
Exposure Period Aaa/1/ Aa/1/ A/1/ Baa/1/ Other/2/ (V)MIG-1/3/ SP-1+/4/ Unrated/5/ --------------- --- -- --- --- ----- -------- ----- ------- 7 weeks 151% 159% 166% 173% 187% 136% 148% 225% 8 weeks or less but 154 161 168 176 190 137 149 231 greater than seven weeks 9 weeks or less but 158 163 170 177 192 138 150 240 greater than eight weeks |
(ix) Structured Notes: The Moody's Discount Factor applied to Structured Notes will be (A) in the case of a corporate issuer, the Moody's Discount Factor determined in accordance with paragraph (i) under this definition, whereby the rating on the issuer of the Structured Note will be the rating on the Structured Note for purposes of determining the Moody's Discount Factor in the table in paragraph (i); and (B) in the case of an issuer that is the U.S. government or an agency or instrumentality thereof, the Moody's Discount Factor determined in accordance with paragraph (iii) under this definition.
(x) REITs:
(a) Common stock and preferred stock of REITs and other real estate companies:
Discount Factor /1,2/
---------------
Common stock of REITs ............................................................ 154%
Preferred stock of REITs
with senior implied or unsecured Moody's (or Fitch Ratings) rating .......... 154%
without senior implied or unsecured Moody's (or Fitch Ratings) rating ....... 208%
Preferred stock of other real estate companies
with senior implied or unsecured Moody's (or Fitch Ratings) rating .......... 208%
Without senior implied or unsecured Moody's (or Fitch Ratings) rating ....... 250%
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(b) Debt securities of REITs and other real estate companies:
Moody's Rating Category
-----------------------
Term to Maturity AAA AA A BAA BA B CAA NR/1/
---------------- --- -- --- --- -- --- --- --
1 year ........... 109% 112% 115% 118% 119% 125% 225% 250%
2 year ........... 115% 118% 122% 125% 127% 133% 225% 250%
3 year ........... 120% 123% 127% 131% 133% 140% 225% 250%
4 year ........... 126% 129% 133% 138% 140% 147% 225% 250%
5 year ........... 132% 135% 139% 144% 146% 154% 225% 250%
7 year ........... 139% 143% 147% 152% 156% 164% 225% 250%
10 year .......... 145% 150% 155% 160% 164% 173% 225% 250%
15 year .......... 150% 155% 160% 165% 170% 180% 225% 250%
20 year .......... 150% 155% 160% 165% 170% 190% 225% 250%
30 year .......... 150% 155% 160% 165% 170% 191% 225% 250%
------------
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/1/ If a security is unrated by Moody's but is rated by Fitch Ratings, a rating two numeric ratings below the rating by Fitch Ratings will be used (e.g., where the rating is AAA, a Moody's rating of Aa2 will be used; where the rating by Fitch Ratings is AA+, a Moody's rating of Aa3 will be used). If a security is unrated by either Moody's or Fitch Ratings, the Trust will use the percentage set forth under "NR" in this table.
"Moody's Eligible Assets" means
(i) cash (including 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 within five Business Days of the Valuation Date, and if the trades which generated such receivables are (A) settled through clearing house firms or (B) (1) with counterparties having a Moody's long-term debt rating of at least Baa3 or (2) with counterparties having a Moody's Short Term Money Market Instrument rating of at least P-1;
(ii) Short Term Money Market Instruments so long as (A) such securities are rated at least P-1, (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 A1 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;
(iii) U.S. Government Securities and U.S. Treasury Strips;
(iv) Rule 144A Securities;
(v) Senior Loans and other Bank Loans approved by Moody's;
(vi) Corporate debt securities if (A) such securities are rated Caa or higher by Moody's; (B) such securities provide for the periodic payment of interest in cash in U.S. dollars or euros, except that such securities that do not pay interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if they are rated by Moody's or S&P; (C) for securities which provide for conversion or exchange into equity capital at some time over their lives, the issuer must be rated at least B3 by Moody's and the discount factor will be 250%; (D) for debt securities rated Ba1 and below, no more than 10% of the original amount of such issue may constitute Moody's Eligible Assets; (E) 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 Trust's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Trustees, except that such securities that are not subject to U.S. federal securities laws shall be considered Moody's Eligible Assets if they are publicly traded; and (F) such securities are not subject to extended settlement.
Notwithstanding the foregoing limitations, (x) corporate debt securities not rated at least Caa by Moody's or not rated by Moody's shall be considered to be Moody's Eligible Assets only to the extent the Market Value of such corporate debt securities does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; provided, however, that if the Market Value of such corporate debt securities exceeds 10% of the aggregate Market Value of all Moody's Eligible Assets, a portion of such corporate debt securities (selected by the Trust) shall not be considered Moody's Eligible Assets, so that the Market Value of such corporate debt securities (excluding such portion) does not exceed 10% of the aggregate Market Value of all Moody's Eligible Assets; and (y) corporate debt securities rated by neither Moody's nor S&P shall be considered to be Moody's Eligible Assets only to the extent such securities are issued by entities which (i) have not filed for bankruptcy within the past three years, (ii) are current on all principal and interest in their fixed income obligations, (iii) are current on all preferred stock dividends, and (iv) possess a current, unqualified auditor's report without qualified, explanatory language.
(vii) Preferred stocks if (A) dividends on such preferred stock are cumulative, (B) such securities provide for the periodic payment of dividends thereon in cash in U.S. dollars or euros and do not provide for conversion or exchange into, or have warrants attached entitling the holder to receive, common stock or its equivalent at any time over the respective lives of such securities, (C) the issuer of such a preferred stock has common stock listed on either the New York Stock Exchange or the American Stock Exchange, (D) the issuer of such a preferred stock has a senior debt rating from Moody's of Baa1 or higher or a preferred stock rating from Moody's of Baa3 or higher and (E) such preferred stock has paid consistent cash dividends in U.S. dollars or euros over the last three years or has a minimum rating of A1 (if the issuer of such preferred stock has other preferred issues outstanding that have been paying dividends consistently for the last three years, then a preferred stock without such a dividend history would also be eligible). In addition, the preferred stocks must have the following diversification requirements: (X) the preferred stock issue must be greater than $50 million and (Y) the minimum holding by the Trust of each issue of preferred stock is $500,000 and the maximum holding of preferred stock of each issue is $5 million. In addition, preferred stocks issued by transportation companies will not be considered Moody's Eligible Assets;
(viii) Asset-backed and mortgage-backed securities:
(A) Asset-backed securities if (1) such securities are rated at least Aa3 by Moody's or at least AA by S&P, (2) the securities are part of an issue that is $250 million or greater, or the issuer of such securities has a total of $500 million or greater of asset-backed securities outstanding at the time of purchase of the securities by the Trust and (3) the expected average life of the securities is not greater than 4 years;
(B) Collateralized mortgage obligations ("CMOs"), including CMOs with interest rates that float at a multiple of the change in the underlying index according to a pre-set formula, provided that any CMO held by the Trust (1) has been rated Aaa by Moody's or AAA by S&P, (2) does not have a coupon which floats inversely, (3) is not portioned as an interest-only or principal-only strip and (4) is part of an issuance that had an original issue size of at least $100 million;
(C) Planned amortization class bonds ("PACs") and targeted
amortization class bonds ("TACs") provided that such PACs or TACs are
(1) backed by certificates of either the Federal National Mortgage
Association ("FNMA"), the Government National Mortgage Association
("GNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC")
representing ownership in single-family first lien mortgage loans with
original terms of 30 years, (2) part of an issuance that had an
original issue size of at least $10 million, (3) part of PAC or TAC
classes that have payment priority over other PAC or TAC classes, (4)
if TACs, TACs that do not support PAC classes, and (5) if TACs, not
considered reverse TACs (i.e., do not protect against extension risk);
(D) Consolidated senior debt obligations of Federal Home Loan Banks ("FHLBs"), senior long-term debt of the FNMA, and consolidated systemwide bonds and FCS Financial Assistance Corporation Bonds of Federal Farm Credit Banks ("FFCBs") (collectively, "FHLB, FNMA and FFCB Debentures"), provided that such FHLB, FNMA and FFCB Debentures are (1) direct issuance corporate debt rated Aaa by Moody's, (2) senior debt obligations backed by the FHLBs, FFCBs or FNMA, (3) part of an issue entirely denominated in U.S. dollars and (4) not callable or exchangeable debt issues;
(E) Mortgage pass-throughs rated at least Aa by Moody's and pass-throughs issued prior to 1987 (if rated AA by S&P and based on fixed-rate mortgage loans) by Travelers Mortgage Services, Citicorp Homeowners, Citibank, N.A., Sears Mortgage Security or RFC - Salomon Brothers Mortgage Securities, Inc., provided that (1) certificates must evidence a proportional, undivided interest in specified pools of fixed or adjustable rate mortgage loans, secured by a valid first lien, on one- to four-family residential properties and (2) the securities are publicly registered (not issued by FNMA, GNMA or FHLMC);
(F) Private-placement mortgage pass-throughs provided that (1)
certificates represent a proportional undivided interest in specified
pools of fixed-rate mortgage loans, secured by a valid first lien, on
one- to four-family residential properties, (2) documentation is held
by a trustee or independent custodian, (3) pools of mortgage loans are
serviced by servicers that have been approved by FNMA or FHLMC and
funds shall be advanced to meet deficiencies to the extent provided in
the pooling and servicing agreements creating such certificates, and
(4) pools have been rated Aa or better by Moody's; and
(G) Whole loans (e.g., direct investments in mortgages)
provided that (1) at least 65% of such loans (a) have seasoning of no
less than 6 months, (b) are secured by single-family detached
residences, (c) are owner-occupied primary residences, (d) are secured
by a first-lien, fully-documented mortgage, (e) are neither currently
delinquent (30 days or more) nor delinquent during the preceding year,
(f) have loan-to-value ratios of 80% or below, (g) carry normal hazard
insurance and title insurance, as well as special hazard insurance, if
applicable, (h) have original terms to maturity not greater than 30
years, with at least one year remaining to maturity, (i) have a
minimum of $10,000 remaining principal balance, (j) for loans
underwritten after January 1, 1978, FNMA and/or FHLMC forms are used
for fixed-rate loans, and (k) are whole loans and not participations;
(2) for loans that do not satisfy the requirements set forth in the
foregoing clause (1), (a) non-owner occupied properties represent no
greater than 15% of the aggregate of either the adjustable-rate pool
or the fixed-rate pool, (b) multi-family properties (those with five
or more units) represent no greater than 15% of the aggregate of
either the adjustable-rate pool or the fixed-rate pool, (c)
condominiums represent no greater than 10% of the aggregate of either
the adjustable-rate pool or the fixed-rate pool, and any condominium
project must be 80% occupied at the time the loan is originated, (d)
properties with loan-to-value ratios exceeding 80% represent no
greater than 25% of the aggregate of either the
adjustable-rate pool or the fixed-rate pool and that the portion of the mortgage on any such property that exceeds a loan-to-value ratio of 80% is insured with Primary Mortgage Insurance from an insurer rated at least Baa3 by Moody's and (e) loan balances in excess of the current FHLMC limit plus $75,000 represent no greater than 25% of the aggregate of either the adjustable-rate pool or the fixed-rate pool, loan balances in excess of $350,000 represent no greater than 10% of the aggregate of either the adjustable-rate pool or the fixed-rate pool, and loan balances in excess of $1,000,000 represent no greater than 5% of the aggregate of either the adjustable-rate pool or the fixed-rate pool; (3) no greater than 5% of the pool of loans is concentrated in any one zip code; (4) the pool of loans contains at least 100 loans or $2 million in loans per servicer; (5) for adjustable-rate mortgages ("ARMs"), (a) any ARM is indexed to the National Cost of Funds index, the 11th District Cost of Funds index, the 1-year Treasury or the 6-month Treasury, (b) the margin over the given index is between 0.15% and 0.25% for either cost-of-funds index and between 0.175% and 0.325% for Treasuries, (c) the maximum yearly interest rate increase is 2%, (d) the maximum life-time interest rate increase is 6.25% and (e) ARMs may include Federal Housing Administration and Department of Veterans Affairs loans; and (6) for "teaser" loans, (a) the initial discount from the current ARM market rate is no greater than 2%, (b) the loan is underwritten at the market rate for ARMs, not the "teaser" rate, and (c) the loan is seasoned six months beyond the "teaser" period.
(ix) Any municipal debt obligation that (A) pays interest in cash, (B) does not have a Moody's rating, as applicable, suspended by Moody's, and (C) is part of an issue of municipal debt obligations of at least $5,000,000, except for municipal debt obligations rated below A by Moody's, in which case the minimum issue size is $10,000,000;
(x) Structured Notes, rated TRACERs and TRAINs;
(xi) Financial contracts, as such term is defined in Section 3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this definition but only upon receipt by the Trust of a letter from Moody's specifying any conditions on including such financial contract in Moody's Eligible Assets and assuring the Trust that including such financial contract in the manner so specified would not affect the credit rating assigned by Moody's to the Preferred Shares; and
(xii) common stock, preferred stock or any debt security of REITs or real estate companies.
In addition, portfolio holdings as described below must be within the following diversification and issue size requirements in order to be included in Moody's Eligible Assets:
Maximum Single Maximum Single Minimum Issue Size
Ratings /1/ Issuer /2,3/ Industry /3,4/ ($ in million) /5/
------- ------ -------- --------------
Aaa 100% 100% $100
Aa 20 60 100
A 10 40 100
Baa 6 20 100
Ba 4 12 50/6/
B1-B2 3 8 50/6/
B3 or below 2 5 50/6/
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/1/ Refers to the preferred stock and senior debt rating of the portfolio
holding.
/2/ Companies subject to common ownership of 25% or more are considered as
one issuer.
/3/ Percentages represent a portion of the aggregate Market Value of
corporate debt securities.
/4/ Industries are determined according to Moody's Industry
Classifications, as defined herein.
/5/ Except for preferred stock, which has a minimum issue size of $50
million.
/6/ Portfolio holdings from issues ranging from $50 million to $100 million
are limited to 20% of the Trust's total assets.
Where the Trust sells an asset and agrees to repurchase such asset in the future, the Discounted Value of such asset will constitute a Moody's Eligible Asset and the amount the Trust is required to pay upon repurchase of such asset will count as a liability for the purposes of the Preferred Shares Basic Maintenance Amount. Where the Trust purchases an asset and agrees to sell it to a third party in the future, cash receivable by the Trust thereby will constitute a Moody's Eligible Asset if the long-term debt of such other party is rated at least A2 by Moody's and such agreement has a term of 30 days or less; otherwise the Discounted Value of such purchased asset will constitute a Moody's Eligible Asset. For the purposes of calculation of Moody's Eligible Assets, portfolio securities which have been called for redemption by the issuer thereof shall be valued at the lower of Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a Moody's Eligible Asset to the extent that it (i) has been irrevocably deposited for the payment of (i)(A) through (i)(E) under the definition of Preferred Shares Basic Maintenance Amount or to the extent it is subject to any Liens, except for (A) Liens which are being contested in good faith by appropriate proceedings and which Moody's has indicated to the Trust will not affect the status of such asset as a Moody's Eligible Asset, (B) Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (C) Liens to secure payment for services rendered or cash advanced to the Trust by its investment manager or portfolio manager, the Trust's custodian, transfer agent or registrar or the Auction Agent and (D) Liens arising by virtue of any repurchase agreement, or (ii) has been segregated against obligations of the Trust in connection with an outstanding derivative transaction.
"Moody's Exposure Period" means the period commencing on a given Valuation Date and ending 49 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in Section 11.8(a) of these Bylaws.
"Moody's Industry Classification" means, for the purposes of determining Moody's Eligible Assets, each of the following industry classifications (or such other classifications as Moody's may from time to time approve for application to the Preferred Shares):
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, 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
6. Chemicals, Plastics and Rubber: Chemicals (non-agricultural), Industrial Gases, Sulfur, 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): Soaps, 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
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, Motion Pictures, Entertainment: Boating, Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment (camping), Tourism, Resorts, Games, Toy Manufacturing, Motion Picture Production Theaters, Motion Picture Distribution
22. Machinery (non-agricultural, 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 of the foregoing
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and Drilling
25. Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks, Radio, TV, Cable Broadcasting Equipment
26. Cargo Transport: Rail, Shipping, Railroads, Railcar Builders, Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
27. Retail Stores: Apparel, Toy, Variety, Drug, Department, Mail Order Catalog, Showroom
28. Telecommunications: Local, Long Distance, Independent, Telephone, Telegraph, Satellite, Equipment, Research, Cellular
29. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer, Leather Shoes
30. Personal Transportation: Air, Bus, Rail, Car Rental
31. Utilities: Electric, Water, Hydro Power, Gas
32. Diversified Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national Agencies
The Trust will use its discretion in determining which industry classification is applicable to a particular investment in consultation with the Independent Accountant and Moody's, to the extent the Trust considers necessary.
"Moody's Loan Category" means the following five categories (and, for purposes of this categorization, the Market Value of a Moody's Eligible Asset trading at par is equal to $1.00):
(i) "Moody's Loan Category A" means Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.90.
(ii) "Moody's Loan Category B" means: (A) Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.80 but less than $0.90; and (B) non-Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.85.
(iii) "Moody's Loan Category C" means: (A) Performing Senior Loans which have a Market Value or an Approved Price greater than or equal to $0.70 but less than $0.80; and (B) non-Performing Senior Loans which have a Market Value or an Approved Price of greater than or equal to $0.75 but less than $0.85.
(iv) "Moody's Loan Category D" means Senior Loans which have a Market Value or an Approved Price less than $0.75.
(v) "Moody's Loan Category E" means non-Senior Loans which have a Market Value or an Approved Price.
Notwithstanding any other provision contained above, for purposes of determining whether a Moody's Eligible Asset falls within a specific Moody's Loan Category, to the extent that any Moody's Eligible Asset would fall in more than one of the Moody's Loan Categories, such Moody's Eligible Asset shall be deemed to fall into the Moody's Loan Category with the lowest applicable Moody's Discount Factor.
"1940 Act" means the Investment Company Act of 1940, as amended from time to time.
"1940 Act Cure Date," with respect to the failure by the Trust to maintain the 1940 Act Preferred Shares Asset Coverage (as required by these Bylaws) as of the last Business Day of each month, means the last Business Day of the following month.
"1940 Act Preferred Shares Asset Coverage" means asset coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding senior securities of the Trust which are shares of beneficial interest, including Preferred Shares (or such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities which are shares of beneficial interest of a closed-end investment company as a condition of paying dividends on its common shares).
"Non-Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions."
"Non-Payment Period" means a period commencing on and including a Dividend Payment Date or redemption date for which the Trust shall fail to (i) declare, prior to the close of business on the second Business Day preceding such Dividend Payment Date, for payment (to the extent permitted by Section 11.2(c)(i) of these Bylaws) within three Business Days after such Dividend Payment Date to the Holders as of 12:00 noon, New York City time, on the Business Day preceding such Dividend Payment Date, the full amount of any dividend on Preferred Shares payable on such Dividend Payment Date, provided, however, that if the Trust is not able to make such declaration in compliance with the foregoing because an unforeseen event or unforeseen events causes or cause a day that otherwise would have been a Business Day not to be a Business Day, then the Trust may make such declaration on the Business Day immediately preceding the Dividend Payment Date, if possible, or, if not possible, on the Dividend Payment Date, and in such case the Trust shall not be deemed to have failed to declare a dividend otherwise required to be declared, or (ii) deposit, irrevocably in trust, in same-day funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such Dividend Payment Date the full amount of any cash dividend on such shares payable (if declared) on such Dividend Payment Date or (B) on any such redemption date for any Preferred Shares called for redemption, the Mandatory Redemption Price per share of such Preferred Shares or, in the case of an optional redemption, the Optional Redemption Price per share, and ending on and including the Business Day on which, by 12:00 noon, New York City time, all unpaid cash dividends and unpaid redemption prices shall have been so deposited or shall have otherwise been made available to Holders in same-day funds; provided that a Non-Payment Period shall not end unless the Trust shall have given at least five days' but no more than 30 days' written notice of such deposit or availability to the Auction Agent, all Existing Holders (at their addresses appearing in the Share Books) and the Securities Depository. Notwithstanding the foregoing, the failure by the Trust to deposit funds as provided for by clauses (ii)(A) or (ii)(B) above within three Business Days after any Dividend Payment Date or redemption date, as the case may be, in each case to the extent contemplated by Section 11.2(c)(i) of these Bylaws, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 300% of the applicable Reference Rate, provided that the Board of Trustees of the Trust shall have the authority to adjust, modify, alter or change from time to time the initial Non-Payment Period Rate if the Board of Trustees of the
Trust determines and each of Fitch Ratings and Moody's (and any Substitute Rating Agency in lieu of Fitch Ratings or Moody's in the event Fitch Ratings or Moody's shall not rate the Preferred Shares) advises the Trust in writing that such adjustment, modification, alteration or change will not adversely affect its then current ratings on the Preferred Shares.
"Normal Dividend Payment Date" has the meaning set forth in Section 11.2(b)(i) of these Bylaws.
"Notice of Redemption" means any notice with respect to the redemption of Preferred Shares pursuant to Section 11.4 of these Bylaws.
"Notice of Revocation" has the meaning set forth in Section 11.2(c)(iii) of these Bylaws.
"Notice of Special Dividend Period" has the meaning set forth in
Section 11.2(c)(iii) of these Bylaws.
"Optional Redemption Price" means $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 any applicable redemption premium attributable to the designation of a Premium Call Period.
"Outstanding" means, as of any date (i) with respect to Preferred Shares, Preferred Shares theretofore issued by the Trust except, without duplication, (A) any Preferred Shares theretofore canceled or delivered to the Auction Agent for cancellation, or redeemed by the Trust, or as to which a Notice of Redemption shall have been given and Deposit Securities shall have been deposited in trust or segregated by the Trust pursuant to Section 11.4(c) hereto and (B) any Preferred Shares as to which the Trust or any Affiliate (other than an Affiliate that is a Broker-Dealer) thereof shall be a Beneficial Owner, provided that Preferred Shares held by an Affiliate shall be deemed outstanding for purposes of calculating the Preferred Shares Basic Maintenance Amount and (ii) with respect to other preferred shares of beneficial interest of the Trust, the meaning equivalent to that for Preferred Shares as set forth in clause (i).
"Parity Shares" means the Preferred Shares and each other outstanding series of preferred shares of beneficial interest of the Trust the holders of which, together with the holders of the Preferred Shares, shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to the full respective preferential amounts to which they are entitled, without preference or priority one over the other.
"Performing" means with respect to the issuer of any asset that is a Bank Loan or other debt, the issuer of such investment is not in default of any payment obligations in respect thereof.
"Person" means and includes an individual, a corporation, a partnership, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a Broker-Dealer that is not a Beneficial Owner of Preferred Shares but that wishes to purchase such shares, or that is a Beneficial Owner that wishes to purchase additional Preferred Shares.
"Potential Holder" means any Broker-Dealer or any such other Person as may be permitted by the Trust, including any Existing Holder, who may be interested in acquiring Preferred Shares (or, in the case of an Existing Holder, additional Preferred Shares).
"Preferred Shares" means the Series M Preferred Shares, the Series T Preferred Shares, the Series W Preferred Shares, the Series TH Preferred Shares and the Series F Preferred Shares.
"Preferred Shares Basic Maintenance Amount," as of any Valuation Date,
means the dollar amount equal to the sum of (i)(A) the product of the number of
Preferred Shares Outstanding on such date multiplied by $25,000, plus any
redemption premium applicable to Preferred Shares then subject to redemption;
(B) the aggregate amount of dividends that will have accumulated at the
respective Applicable Rates (whether or not earned or declared) to (but not
including) the first respective Dividend Payment Dates for each series of
Preferred Shares Outstanding that follow such Valuation Date; (C) the aggregate
amount of dividends that would accumulate on shares of each series of Preferred
Shares Outstanding from such first respective Dividend Payment Date therefor
through the 49th day after such Valuation Date, at the Maximum Applicable Rate
(calculated as if such Valuation Date were the Auction Date for the Dividend
Period commencing on such Dividend Payment Date) for a 7-Day Dividend Period of
shares of such series to commence on such Dividend Payment Date, multiplied by
the Volatility Factor (except that (1) if such Valuation Date occurs during a
Non-Payment Period, the dividend for purposes of calculation would accumulate at
the then current Non-Payment Period Rate and (2) for those days during the
period described in this clause (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect,
the dividend for purposes of calculation would accumulate at such Applicable
Rate in respect of those days); (D) the amount of anticipated expenses of the
Trust for the 90 days subsequent to such Valuation Date; and (E) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(D) (including, without limitation, any payables for portfolio
securities of the Trust purchased as of such Valuation Date and any liabilities
incurred for the purpose of clearing securities transactions) less (ii) the
value (i.e., the face value of cash, short-term securities rated MIG-1, VMIG-1
or P-1, and short-term securities that are the direct obligation of the U.S.
government, provided in each case that such securities mature on or prior to the
date upon which any of (i)(A) through (i)(E) become payable, otherwise the
Discounted Value) of any of the Trust's assets irrevocably deposited by the
Trust for the payment of any of (i)(A) through (i)(E).
"Preferred Shares Basic Maintenance Cure Date," with respect to the failure by the Trust to satisfy the Preferred Shares Basic Maintenance Amount (as required by Section 11.7(a) of these Bylaws) as of a given Valuation Date, means the sixth Business Day following such Valuation Date.
"Preferred Shares Basic Maintenance Report" means a report signed by any of the President, Treasurer, any Senior Vice President or any Vice President of the Trust which sets
forth, as of the related Valuation Date, the assets of the Trust, the Market Value and the Discounted Value thereof (seriatim and in aggregate), and the Preferred Shares Basic Maintenance Amount.
"Premium Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions."
"Pricing Service" means any pricing service designated by the Board of Trustees of the Trust and approved by Fitch Ratings or Moody's, as applicable, for purposes of determining whether the Trust has Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount.
"Quarterly Valuation Date" means the last Business Day of the last month of each fiscal quarter of the Trust in each fiscal year of the Trust, commencing September 30, 2003.
"Rating Agency" means a nationally recognized statistical rating organization.
"Reference Rate" means the applicable "AA" Financial 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).
"REITs" means real estate investment trusts.
"Reorganization Bonds" has the meaning set forth under the definition of "Fitch Eligible Assets."
"Request for Special Dividend Period" has the meaning set forth in
Section 11.2(c)(iii) of these Bylaws.
"Response" has the meaning set forth in Section 11.2(c)(iii) of these Bylaws.
"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 Trust's investment manager or portfolio manager acting pursuant to procedures approved by the Board of Trustees of the Trust.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., or its successors.
"Securities Act" means the Securities Act of 1933, as amended from time to time.
"Securities Depository" means The Depository Trust Company and its successors and assigns or any successor securities depository selected by the Trust as securities depository for the Preferred Shares that agrees to follow the procedures required to be followed by such securities depository in connection with the Preferred Shares.
"Senior Loans" has the meaning set forth under the definition of "Moody's Discount Factor."
"Series M Preferred Shares" means the Auction Rate Cumulative Preferred Shares, Series M.
"Series T Preferred Shares" means the Auction Rate Cumulative Preferred Shares, Series T.
"Series W Preferred Shares" means the Auction Rate Cumulative Preferred Shares, Series W.
"Series TH Preferred Shares" means the Auction Rate Cumulative Preferred Shares, Series TH.
"Series F Preferred Shares" means the Auction Rate Cumulative Preferred Shares, Series F.
"7-Day Dividend Period" means a Subsequent Dividend Period that (a) consists of seven days or (b) would consist of seven days but for the fact that the Dividend Payment Date which immediately follows, or the Dividend Payment Date which falls within, such Subsequent Dividend Period is not a Business Day.
"Share Books" means the books maintained by the Auction Agent setting forth at all times a current list, as determined by the Auction Agent, of Existing Holders of the Preferred Shares.
"Share Register" means the register of Holders maintained on behalf of the Trust by the Auction Agent in its capacity as transfer agent and registrar for the Preferred Shares.
"Short Term Dividend Period" means a Special Dividend Period consisting of a specified number of days, evenly divisible by seven and not fewer than fourteen nor more than 364.
"Short Term Money Market Instruments" means the following types of instruments if, on the date of purchase or other acquisition thereof by the Trust, the remaining term to maturity thereof is not in excess of 180 days (or 270 days for instruments rated at least Aaa for purposes of determining Moody's Eligible Assets):
(i) commercial paper rated either F1 by Fitch Ratings or A-1 by S&P if such commercial paper matures in 30 days or P-1 by Moody's and either F1+ by Fitch Ratings or A-1+ by S&P if such commercial paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and 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);
(iii) overnight funds;
(iv) U.S. Government Securities; and
(v) 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 if 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-1 from Moody's and either F1+ from Fitch Ratings or A-1+ 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 Ratings 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 Trust, 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 Ratings 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-1 by Moody's, F1+ by Fitch Ratings or A-1+ 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 Trust); and provided further, that the interest receivable by the Trust shall not be subject to any withholding or similar taxes.
"Special Dividend Period" means a Short Term Dividend Period or a Long Term Dividend Period.
"Specific Redemption Provisions" means, with respect to a Special Dividend Period either, or both of, (i) a period (a "Non-Call Period") determined by the Board of Trustees of the Trust, after consultation with the Auction Agent and the Broker-Dealers, during which the Preferred Shares subject to such Special Dividend Period shall not be subject to redemption at the option of the Trust and (ii) a period (a "Premium Call Period"), consisting of a number of whole years and determined by the Board of Trustees of the Trust, after consultation with the Auction Agent and the Broker-Dealers, during each year of which the Preferred Shares subject to such Special Dividend Period shall be redeemable at the Trust's option at a price per share equal to $25,000 plus accumulated but unpaid dividends (whether or not earned or declared) to (but not including) the date fixed for redemption, plus a premium expressed as a percentage or
percentages of $25,000, as determined by the Board of Trustees of the Trust after consultation with the Auction Agent and the Broker-Dealers.
"Structured Notes" means privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset or market (an "embedded index"), such as selected securities or an index of securities, or the differential performance of two assets or markets, such as indices reflecting bonds.
"Subsequent Dividend Period" has the meaning set forth in Section 11.2(c)(i) of these Bylaws.
"Substitute Rating Agency" means a Rating Agency selected by Citigroup Global Markets Inc. or its affiliates and successors, after consultation with the Trust, to act as the substitute Rating Agency to determine the credit ratings of the Preferred Shares.
"Sufficient Clearing Bids" has the meaning set forth in Section 11.10(d)(i) of these Bylaws.
"TRACERs" means traded custody receipts representing direct ownership in a portfolio of underlying securities.
"TRAINs" means Targeted Return Index Securities, which are trust certificates comprised of bonds that are chosen to track a particular index.
"Treasury Bill" means a direct obligation of the U.S. government having a maturity at the time of issuance of 364 days or less.
"Treasury Bonds" means United States Treasury Bonds or Notes.
"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 Trust by at least three recognized dealers in U.S. government securities selected by the Trust.
"U.S. Government Securities" means direct obligations of the United States or of its agencies or instrumentalities that are entitled to the full faith and credit of the United States and that, other than Treasury Bills, provide for the periodic payment of interest and the full payment of principal at maturity or call for redemption.
"U.S. Treasury Securities" means direct obligations of the United States Treasury that are entitled to the full faith and credit of the United States.
"U.S. Treasury Strips" means securities based on U.S. Treasury Securities created through the Separate Trading of Registered Interest and Principal of Securities program.
"Valuation Date" means, for purposes of determining whether the Trust is maintaining the Preferred Shares Basic Maintenance Amount, the last Business Day of each week commencing with the Date of Original Issue.
"Volatility Factor" means 1.89.
"Voting Period" has the meaning set forth in Section 11.5(b) of these Bylaws.
(b) The foregoing definitions of Accountant's Confirmation, Closing Transactions, Debt Securities, Deposit Securities, Discounted Value, Fitch Discount Factor, Fitch Eligible Assets, Fitch Exposure Period, Fitch Hedging Transactions, Fitch Industry Classifications, Forward Commitment, Independent Accountant, Market Value, Maximum Applicable Rate, Moody's Advance Rate, Moody's Discount Factor, Moody's Eligible Assets, Moody's Exposure Period, Moody's Hedging Transactions, Moody's Industry Classification, Moody's Loan Category, 1940 Act Cure Date, 1940 Act Preferred Shares Asset Coverage, Preferred Shares Basic Maintenance Amount, Preferred Shares Basic Maintenance Cure Date, Preferred Shares Basic Maintenance Report, Short Term Money Market Instruments, Treasury Bonds, Valuation Date and Volatility Factor (and any terms defined within such definitions) have been determined by the Board of Trustees of the Trust in order to obtain a rating of "AAA" from Fitch Ratings and a rating of "Aaa" from Moody's on the Preferred Shares on their Date of Original Issue; and the Board of Trustees of the Trust shall have the authority, without shareholder approval, to amend, alter or repeal from time to time the foregoing definitions (and any terms defined within such definitions) and the restrictions and guidelines set forth thereunder if Fitch Ratings, Moody's or any Substitute Rating Agency advises the Trust in writing that such amendment, alteration or repeal will not adversely affect its then current rating on the Preferred Shares.
11.2 Dividends. (a) The Holders of a particular series of Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Trustees of the Trust, out of funds legally available therefor, cumulative dividends each consisting of cash at the Applicable Rate and no more, payable on the respective dates set forth below. Dividends on the shares of each series of Preferred Shares so declared and payable shall be paid in preference to and in priority over any dividends declared and payable on the Common Shares.
(b) (i) Cash dividends on shares of each series of Preferred Shares
shall accumulate from the Date of Original Issue and shall be payable, when, as
and if declared by the Board of Trustees of the Trust, out of funds legally
available therefor, commencing on the Initial Dividend Payment Date. Following
the Initial Dividend Payment Date for a series of Preferred Shares, dividends on
that series of Preferred Shares will be payable, at the option of the Trust,
either (i) with respect to any 7-Day Dividend Period and any Short Term Dividend
Period of 35 or fewer days, on the day next succeeding the last day thereof, or
(ii) with respect to any Short Term
Dividend Period of more than 35 days and with respect to any Long Term Dividend
Period, monthly on the first Business Day of each calendar month during such
Short Term Dividend Period or Long Term Dividend Period and on the day next
succeeding the last day thereof (each such date referred to in clause (i) or
(ii) being herein referred to as a "Normal Dividend Payment Date"), except that
if such Normal Dividend Payment Date is not a Business Day, then the Dividend
Payment Date shall be the first Business Day next succeeding such Normal
Dividend Payment Date. Although any particular Dividend Payment Date may not
occur on the originally scheduled date because of the exceptions discussed
above, the next succeeding Dividend Payment Date, subject to such exceptions,
will occur on the next following originally scheduled date. If for any reason a
Dividend Period for a series of Preferred Shares is scheduled to begin on the
same day and end on the same day as a Dividend Period for another series of
Preferred Shares, then the last day of such Dividend Period for such other
series of Preferred Shares shall be the second Business Day next succeeding such
scheduled day unless the Trust obtains the opinion of tax counsel referred to in
this paragraph. Subject to the limitation in the next sentence, if for any
reason a Dividend Payment Date cannot be fixed as described above, then the
Board of Trustees of the Trust shall fix the Dividend Payment Date. However, no
Dividend Period of any series of Preferred Shares shall be co-extensive with any
Dividend Period of any other series of Preferred Shares unless the Trust has
received an opinion of tax counsel that having such co-extensive periods will
not affect the deductibility, for federal income tax purposes, of dividends paid
on the different series of Preferred Shares. The Board of Trustees of the Trust
before authorizing a dividend may change a Dividend Payment Date if such change
does not adversely affect the contract rights of the Holders of Preferred Shares
set forth in the Declaration of Trust or the Bylaws. The Initial Dividend
Period, 7-Day Dividend Periods and Special Dividend Periods with respect to a
series of Preferred Shares are hereinafter sometimes referred to as "Dividend
Periods." Each dividend payment date determined as provided above is hereinafter
referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the Stock Register as of 12:00 noon, New York City time, on the Business Day preceding the 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 they appear on the Stock Register on a date, not exceeding 15 days prior to the payment date therefor, as may be fixed by the Board of Trustees of the Trust.
(c) (i) During the period from and including the Date of Original Issue to but excluding the Initial Dividend Payment Date for a series of Preferred Shares (the "Initial Dividend Period"), the Applicable Rate for such series of Preferred Shares shall be the Initial Dividend Rate. Commencing on the Initial Dividend Payment Date for a series of Preferred Shares, the Applicable Rate on that series for each subsequent dividend period (hereinafter referred to as a "Subsequent Dividend Period"), which Subsequent Dividend Period shall commence on and include a Dividend Payment Date and shall end on and include the calendar day prior to the next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period if there is more than one Dividend Payment Date), shall be equal to the rate per annum that results from implementation of the Auction Procedures.
For a series of Preferred Shares, the Applicable Rate for such series for each Dividend Period commencing during a Non-Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend Period, commencing after the first day of and during, but not after the end of, a Non-Payment Period shall be a 7-Day Dividend Period. Except in the case of the willful failure of the Trust to pay a dividend on a Dividend Payment Date or to redeem any Preferred Shares on the date set for such redemption, any amount of any dividend due on any Dividend Payment Date (if, prior to the close of business on the second Business Day preceding such Dividend Payment Date, the Trust has declared such dividend payable on such Dividend Payment Date to the Holders of such Preferred 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 any Preferred Shares not paid to such Holders when due may be paid to such Holders in the same form of funds by 12:00 noon, New York City time, on any of the first three Business Days after such Dividend Payment Date or due date, as the case may be, provided that such amount is accompanied by a late charge calculated for such period of non-payment at the Non-Payment Period Rate applied to the amount of such non-payment based on the actual number of days comprising such period (excluding any days that would have been Business Days but for the occurrence of any unforeseen event or unforeseen events that caused such days not to be Business Days) divided by 365, and in such case such period shall not constitute a Non-Payment Period; provided, however, that the Trust shall not be required to pay any late charge if it declares a dividend on the Dividend Payment Date or the Business Day immediately preceding such Dividend Payment Date in accordance with clause (i) of the definition of "Non-Payment Period" and deposits payment for such dividend as contemplated by clause (ii)(A) of the definition of "Non-Payment Period" on or before the second Business Day succeeding the day on which the dividend was declared. In the case of a willful failure of the Trust to pay a dividend on a Dividend Payment Date or to redeem any Preferred Shares on the date set for such redemption, the preceding sentence shall not apply and the Applicable Rate for the Dividend Period commencing during the Non-Payment Period resulting from such failure shall be the Non-Payment Period Rate. For the purposes of the foregoing, payment to a person in same-day funds on any Business Day at any time shall be considered equivalent to payment to such 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.
(ii) The amount of cash dividends per share of any series of Preferred Shares payable (if declared) on the Initial Dividend Payment Date, each Dividend Payment Date of any 7-Day Dividend Period and each Dividend Payment Date of each Short Term Dividend Period shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction, the numerator of which will be the number of days in such Dividend Period or part thereof that such share was outstanding 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 Long Term Dividend Period, the amount of cash dividends per share of a series of Preferred Shares payable (if declared) on any Dividend Payment Date shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction, the numerator of which will be such number of days in such part of such Dividend Period that such share was outstanding and for which dividends are payable on such Dividend Payment Date and the denominator of which will
be 360, multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the nearest cent.
(iii) The Trust may, at its sole option and to the extent permitted by law, by telephonic and written notice (a "Request for Special Dividend Period") to the Auction Agent and to each Broker-Dealer, request that the next succeeding Dividend Period for a series of Preferred Shares be a number of days (other than seven), evenly divisible by seven and not fewer than fourteen nor more than 364 in the case of a Short Term Dividend Period or one whole year or more but not greater than five years in the case of a Long Term Dividend Period, specified in such notice, provided that the Trust may not give a Request for Special Dividend Period for a Dividend Period of greater than 28 days (and any such request shall be null and void) unless, for any Auction occurring after the initial Auction, Sufficient Clearing Bids were made in the last occurring Auction and unless full cumulative dividends and any amounts due with respect to redemptions have been paid in full. Such Request for Special Dividend Period, in the case of a Short Term Dividend Period, shall be given on or prior to the second Business Day but not more than seven Business Days prior to an Auction Date for a series of Preferred Shares and, in the case of a Long Term Dividend Period, shall be given on or prior to the second Business Day but not more than 28 days prior to an Auction Date for a series of Preferred Shares. Upon receiving such Request for Special Dividend Period, the Broker-Dealer(s) shall jointly determine the Optional Redemption Price of the Preferred Shares during such Special Dividend Period and the Specific Redemption Provisions and shall give the Trust and the Auction Agent written notice (a "Response") of such determination by no later than the second Business Day prior to such Auction Date. In making such determination the Broker-Dealer(s) will consider (1) existing short-term and long-term market rates and indices of such short-term and long-term rates, (2) existing market supply and demand for short-term and long-term securities, (3) existing yield curves for short-term and long-term securities comparable to the Preferred Shares, (4) industry and financial conditions which may affect the Preferred Shares, (5) the investment objectives of the Trust, and (6) the Dividend Periods and dividend rates at which current and potential beneficial holders of the Preferred Shares would remain or become beneficial holders. After providing the Request for Special Dividend Period to the Auction Agent and each Broker-Dealer as set forth above, the Trust may by no later than the second Business Day prior to such Auction Date give a notice (a "Notice of Special Dividend Period") to the Auction Agent, the Securities Depository and each Broker-Dealer which notice will specify (i) the duration of the Special Dividend Period, (ii) the Optional Redemption Price as specified in the related Response and (iii) the Specific Redemption Provisions, if any, as specified in the related Response. The Trust also shall provide a copy of such Notice of Special Dividend Period to Fitch Ratings, Moody's and any Substitute Rating Agency. The Trust shall not give a Notice of Special Dividend Period and, if the Trust has given a Notice of Special Dividend Period, the Trust is required to give telephonic and written notice of its revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the Securities Depository on or prior to the Business Day prior to the relevant Auction Date if (x) either the 1940 Act Preferred Shares Asset Coverage is not satisfied or the Trust shall fail to maintain Fitch Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount, on each of the two Valuation Dates immediately preceding the Business Day prior to the relevant Auction Date on an actual basis and on a pro forma basis giving effect to the proposed Special Dividend Period (using as a pro forma dividend rate with respect to such Special Dividend
Period the dividend rate which the Broker-Dealers shall advise the Trust is an approximately equal rate for securities similar to the Preferred Shares with an equal dividend period) or (y) sufficient funds for the payment of dividends payable on the immediately succeeding Dividend Payment Date have not been irrevocably deposited with the Auction Agent by the close of business on the third Business Day preceding the Auction Date immediately preceding such Dividend Payment Date. The Trust also shall provide a copy of such Notice of Revocation to Fitch Ratings, Moody's and any Substitute Rating Agency. If the Trust is prohibited from giving a Notice of Special Dividend Period as a result of any of the factors enumerated in clause (x) or (y) above or if the Trust gives a Notice of Revocation with respect to a Notice of Special Dividend Period for any series of Preferred Shares, the next succeeding Dividend Period will be a 7-Day Dividend Period. In addition, in the event Sufficient Clearing Bids are not made in an Auction, or if an Auction is not held for any reason, such next succeeding Dividend Period will be a 7-Day Dividend Period and the Trust may not again give a Notice of Special Dividend Period for the Preferred Shares (and any such attempted notice shall be null and void) until Sufficient Clearing Bids have been made in an Auction with respect to a 7-Day Dividend Period. If an Auction is not held because an unforeseen event or unforeseen events cause a day that otherwise would have been a Dividend Payment Date or an Auction Date not to be a Business Day, then the length of the Dividend Period relating to such Dividend Payment Date shall be extended by seven days (or a multiple thereof if necessary because of such unforeseen event or events) (an "Extension Period"), the Applicable Rate for such Extension Period shall be the Applicable Rate for the Dividend Period so extended and the Dividend Payment Date for such Dividend Period shall be the first Business Day next succeeding the end of such Extension Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable in cash, property or Preferred Shares, in excess of full cumulative dividends as herein provided. Except for the late charge payable pursuant to Section 11.2(c)(i) hereof, no interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment on the Preferred Shares that may be in arrears.
(ii) For so long as any Preferred Share is Outstanding, the Trust shall not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase, Common Shares or other shares of beneficial interest, if any, ranking junior to the Preferred Shares as to dividends or upon liquidation) in respect of the Common Shares or any other shares of beneficial interest of the Trust ranking junior to or on a parity with the Preferred Shares as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares or any other such junior shares (except by conversion into or exchange for shares of the Trust ranking junior to the Preferred Shares as to dividends and upon liquidation) or any other such Parity Shares (except by conversion into or exchange for stock of the Trust ranking junior to or on a parity with the Preferred Shares as to dividends and upon liquidation), unless (A) immediately after such transaction, the Trust shall have Fitch Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount and the Trust shall maintain the 1940 Act Preferred Shares Asset Coverage, (B) full cumulative dividends on Preferred Shares due on or prior to the date of the transaction have been declared and paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent and (C) the Trust has redeemed the full number of Preferred Shares required to be redeemed by any provision for mandatory redemption contained herein.
(e) Each dividend shall consist of cash at the Applicable Rate.
(f) No fractional Preferred Shares shall be issued.
(g) Solely for purposes of the proviso in clause (i) under the definition
of "Non-Payment Period," the second parenthetical in the second sentence of the
second paragraph of Section 11.2(c)(i) of these Bylaws and the last sentence of
Section 11.2(c)(iii) of these Bylaws, any day on which banks in New York City
generally are closed, for any reason, while the New York Stock Exchange remains
open for trading and any day which otherwise would be a Business Day as defined
in these Bylaws on which the Auction Agent is closed for business, for any
reason, shall be considered a day which is not a Business Day.
11.3 Liquidation Rights. Upon any liquidation, dissolution or winding up of the Trust, whether voluntary or involuntary, the Holders shall be entitled to receive, out of the assets of the Trust available for distribution to shareholders, before any distribution or payment is made upon any Common Shares or any other shares of beneficial interest ranking junior in right of payment upon liquidation to the Preferred Shares, the sum of $25,000 per share plus accumulated but unpaid dividends (whether or not earned or declared) thereon to the date of distribution, and after such payment the Holders will be entitled to no other payments. If upon any liquidation, dissolution or winding up of the Trust, the amounts payable with respect to the Preferred Shares and any other Outstanding class or series of preferred shares of beneficial interest of the Trust ranking on a parity with the Preferred Shares as to payment upon liquidation are not paid in full, the Holders and the holders of such other class or series will share ratably in any such distribution of assets in proportion to the respective preferential amounts to which they are entitled. After payment of the full amount of the liquidating distribution to which they are entitled, the Holders will not be entitled to any further participation in any distribution of assets by the Trust. A consolidation, merger or statutory share exchange of the Trust with or into any other Trust or entity or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the Trust shall not be deemed or construed to be a liquidation, dissolution or winding up of the Trust.
11.4 Redemption. (a) Preferred Shares shall be redeemable by the Trust as provided below:
(i) To the extent permitted under the 1940 Act and Massachusetts law, upon giving a Notice of Redemption, the Trust at its option may redeem shares of any series of Preferred Shares, in whole or in part, out of funds legally available therefor, at the Optional Redemption Price per share, on any Dividend Payment Date; provided that no Preferred Share may be redeemed at the option of the Trust during (A) the Initial Dividend Period with respect to a series of shares or (B) a Non-Call Period to which such share is subject.
(ii) The Trust shall redeem, out of funds legally available therefor, at
the Mandatory Redemption Price per share, Preferred Shares to the extent
permitted under the 1940 Act and Massachusetts law, on a date fixed by the Board
of Trustees of the Trust, if the Trust fails to maintain Fitch Eligible Assets
and Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount as provided in
Section 11.7(a) or to satisfy the 1940 Act Preferred Shares Asset Coverage as
provided in Section 11.6 and such failure is not cured on or before the
Preferred Shares Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. The number of
Preferred Shares to be redeemed shall be equal to the lesser of (i) the minimum
number of Preferred Shares the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, together with all
other preferred shares of beneficial interest of the Trust subject to redemption
or retirement, would result in the Trust having Fitch Eligible Assets and
Moody's Eligible Assets each with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount or satisfaction of
the 1940 Act Preferred Shares Asset Coverage, as the case may be, on such Cure
Date (provided that, if there is no such minimum number of Preferred Shares and
other preferred shares of beneficial interest of the Trust the redemption of
which would have such result, all Preferred Shares and other preferred shares of
beneficial interest of the Trust then Outstanding shall be redeemed), and (ii)
the maximum number of Preferred Shares, together with all other preferred shares
of beneficial interest of the Trust subject to redemption or retirement, that
can be redeemed out of funds expected to be legally available therefor on such
redemption date. In determining the number of Preferred Shares required to be
redeemed in accordance with the foregoing, the Trust shall allocate the number
required to be redeemed which would result in the Trust having Fitch Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value equal
to or greater than the Preferred Shares Basic Maintenance Amount or satisfaction
of the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro rata
among Preferred Shares of all series and other preferred shares of beneficial
interest of the Trust subject to redemption pursuant to provisions similar to
those contained in this Section 11.4(a)(ii); provided that Preferred Shares
which may not be redeemed at the option of the Trust due to the designation of a
Non-Call Period applicable to such shares (A) will be subject to mandatory
redemption only to the extent that other shares are not available to satisfy the
number of shares required to be redeemed and (B) will be selected for redemption
in an ascending order of outstanding number of days remaining in the Non-Call
Period (with shares with the lowest number of days to be redeemed first) and by
lot in the event of shares having an equal number of days remaining in such
Non-Call Period. The Trust shall effect such redemption on a Business Day which
is not later than 35 days after such Cure Date, except that if the Trust does
not have funds legally available for the redemption of all of the required
number of Preferred Shares and other preferred shares of beneficial interest of
the Trust which are subject to mandatory redemption or the Trust otherwise is
unable to effect such redemption on or prior to 35 days after such Cure Date,
the Trust shall redeem those Preferred Shares which it is unable to redeem on
the earliest practicable date on which it is able to effect such redemption out
of funds legally available therefor.
(b) Notwithstanding any other provision of this Section 11.4, no Preferred Shares may be redeemed pursuant to Section 11.4(a)(i) of these Bylaws unless (i) all dividends in arrears on all remaining outstanding Parity Shares shall have been or are being contemporaneously paid or
declared and set apart for payment, and (ii) redemption thereof would result in the Trust's failure to maintain Fitch Eligible Assets or Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount. In the event that less than all the outstanding shares of a series of Preferred Shares are to be redeemed and there is more than one Holder, the shares of that series of Preferred Shares to be redeemed shall be selected by lot or such other method as the Trust shall deem fair and equitable.
(c) Whenever Preferred Shares are to be redeemed, the Trust, not less than 17 nor more than 30 days prior to the date fixed for redemption, shall mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each Holder of Preferred Shares to be redeemed and to the Auction Agent. The Notice of Redemption shall set forth (i) the redemption date, (ii) the amount of the redemption price, (iii) the aggregate number of Preferred Shares of such series to be redeemed, (iv) the place or places where Preferred Shares of such series are to be surrendered for payment of the redemption price, (v) a statement that dividends on the shares to be redeemed shall cease to accumulate on such redemption date and (vi) the provision of these Bylaws pursuant to which such shares are being redeemed. No defect in the Notice of Redemption or in the mailing or publication thereof shall affect the validity of the redemption proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and, concurrently or thereafter, the Trust shall have deposited in trust with the Auction Agent, or segregated in an account at the Trust's custodian bank for the benefit of the Auction Agent, Deposit Securities (with a right of substitution) having an aggregate Discounted Value equal to the redemption payment for the Preferred Shares as to which such Notice of Redemption has been given with irrevocable instructions and authority to pay the redemption price to the Holders of such shares, then upon the date of such deposit or, if no such deposit is made, then upon such date fixed for redemption (unless the Trust shall default in making the redemption payment), all rights (including without limitation voting rights) of the Holders of such shares as shareholders of the Trust by reason of the ownership of such shares will cease and terminate (except their right to receive the redemption price in respect thereof, but without interest), and such shares shall no longer be deemed Outstanding. The Trust shall be entitled to receive, from time to time, from the Auction Agent the interest, if any, on such Deposit Securities deposited with it and the Holders of any shares so redeemed shall have no claim to any of such interest. In case the Holder of any shares so called for redemption shall not claim the redemption payment for his shares within one year after the date of redemption, the Auction Agent shall, upon demand, pay over to the Trust such amount remaining on deposit and the Auction Agent shall thereupon be relieved of all responsibility to the Holder of such shares called for redemption and such Holder thereafter shall look only to the Trust for the redemption payment.
11.5 Voting Rights. (a) General. Except as otherwise provided in the Declaration of Trust or Bylaws or as otherwise required by applicable law, each Holder of Preferred Shares shall be entitled to one vote for each share held on each matter submitted to a vote of shareholders of the Trust, and the holders of Outstanding preferred shares of beneficial interest of the Trust, including Preferred Shares, and of Common Shares shall vote together as a single class; provided that, at any meeting of the shareholders of the Trust held for the election of trustees, the holders of Outstanding preferred shares of beneficial interest of the Trust, including
Preferred Shares, shall be entitled, as a class, to the exclusion of the holders of all other securities and classes of shares of beneficial interest of the Trust, to elect two trustees of the Trust. Subject to Section 11.5(b) hereof, the holders of shares of beneficial interest of the Trust, including the holders of preferred shares of beneficial interest of the Trust, including Preferred Shares, voting as a single class, shall elect the balance of the trustees.
(b) Right to Elect Majority of Board of Trustees. Except as otherwise required by law, 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 of the Trust shall be automatically increased by the smallest number that, when added to the two trustees elected exclusively by the holders of preferred shares of beneficial interest of the Trust, would constitute a majority of the Board of Trustees of the Trust as so increased by such smallest number; and the holders of preferred shares of beneficial interest of the Trust shall be entitled, voting separately as one class (to the exclusion of the holders of all other securities and classes of shares of beneficial interest of the Trust), 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 any time accumulated dividends (whether or not earned or declared, and whether or not funds are then legally available in an amount sufficient therefor) on the outstanding Preferred Shares equal to at least two full years' dividends shall be due and unpaid and sufficient cash or specified securities shall not have been deposited with the Auction Agent for the payment of such accumulated dividends; or
(ii) if at any time holders of any preferred shares of beneficial interest of the Trust, including the holders of Preferred Shares, are entitled to elect a majority of the trustees of the Trust under the 1940 Act.
Upon the termination of a Voting Period, the voting rights described in this Section 11.5(b) shall cease, subject always, however, to the revesting of such voting rights in the Holders upon the further occurrence of any of the events described in Section 11.5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any Preferred Shares are outstanding, the Trust shall not, without the affirmative vote of the holders of a majority of the Preferred Shares Outstanding at the time, voting separately as one class: (i) authorize, create or issue any class or series of shares of beneficial interest ranking prior to the Preferred Shares or any other series of preferred shares of beneficial interest of the Trust with respect to payment of dividends or the distribution of assets on liquidation; provided, however, that no vote is required to authorize the issuance of another series of Preferred Shares or another class of preferred shares of beneficial interest of the Trust that is substantially identical in all respects to the Preferred Shares, or (ii) amend, alter or repeal the provisions of the Declaration of Trust or Bylaws, whether by merger, consolidation or otherwise, so as to adversely affect any of the contract rights expressly set forth in the Declaration of Trust or Bylaws of holders of Preferred Shares or any other preferred shares of beneficial interest of the Trust. To the extent
permitted under the 1940 Act, in the event shares of more than one series of
Preferred Shares are outstanding, the Trust shall not approve any of the actions
set forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Declaration of Trust or Bylaws of a Holder of a
series of Preferred Shares differently than those of a Holder of any other
series of Preferred Shares without the affirmative vote of the holders of at
least a majority of the Preferred Shares of each series adversely affected and
Outstanding at such time (each such adversely affected series voting separately
as a class). Unless a higher percentage is provided for under the Declaration of
Trust or these Bylaws, the affirmative vote of the holders of a majority of the
outstanding preferred shares of beneficial interest of the Trust, including
Preferred Shares, voting together as a single class, will be required to approve
any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act. To the extent permitted under the 1940 Act, in
the event shares of more than one series of Preferred Shares are outstanding,
with respect to any action requiring Shareholder approval pursuant to the
operation of Section 2 or Section 3 of Article V of the Declaration of Trust,
the affirmative vote of at least seventy-five percent of the Preferred Shares of
each series Outstanding at such time (each such series voting separately as a
class) shall also be required. The class (and, where applicable, series) vote of
holders of preferred shares of beneficial interest of the Trust, including
Preferred Shares, described above will in each case be in addition to a separate
vote of the requisite percentage of Common Shares and preferred shares of
beneficial interest of the Trust, including Preferred Shares, voting together as
a single class necessary to authorize the action in question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the holders of preferred shares of beneficial interest of the Trust to elect additional trustees as described in Section 11.5(b) above, the Trust shall call a special meeting of such holders and instruct the Auction Agent and any other registrar for preferred shares of beneficial interest of the Trust other than Preferred Shares to mail a notice of such special meeting to such holders, such meeting to be held not less than 10 nor more than 20 days after the date of mailing of such notice. If the Trust fails to send such notice to the Auction Agent and any other applicable registrar, or if the Trust 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 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 shares of beneficial interest of the Trust), shall be entitled to elect the number of Trustees prescribed in Section 11.5(b) above. At any such meeting or adjournment thereof in the absence of a quorum, a majority of such holders present in person or by proxy shall have the power to adjourn the meeting without notice, other than by an announcement at the meeting, to a date not more than 120 days after the original record date.
(ii) Except as otherwise required by applicable law, for purposes of determining any rights of the Holders to vote on any matter or the number of shares required to constitute a quorum, whether such right is created by these Bylaws, by the other provisions of the
Declaration of Trust, by statute or otherwise, a Preferred Share which is not Outstanding shall not be counted.
(iii) The terms of office of all persons who are trustees of the Trust at the time of a special meeting of Holders and holders of other preferred shares of beneficial interest of the Trust 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 the Holders and such other holders, together with the two incumbent trustees elected by the Holders and such other holders of preferred shares of beneficial interest of the Trust and the remaining incumbent trustees elected by the holders of the Common Shares and preferred shares of beneficial interest of the Trust, shall constitute the duly elected trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms of office of the additional trustees elected by the Holders and holders of other preferred shares of beneficial interest of the Trust pursuant to Section 11.5(b) above shall terminate, the remaining trustees shall constitute the trustees of the Trust and the voting rights of the Holders and such other holders to elect additional trustees pursuant to Section 11.5(b) above shall cease, subject to the provisions of the last sentence of Section 11.5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders shall not have any rights or preferences other than those specifically set forth herein. The Holders shall have no preemptive rights or rights to cumulative voting. In the event that the Trust fails to pay any dividends on the Preferred Shares, the exclusive remedy of the Holders shall be the right to vote for trustees pursuant to the provisions of this Section 11.5.
11.6 1940 Act Preferred Shares Asset Coverage. The Trust shall maintain, as of the last Business Day of each month in which any Preferred Shares are outstanding, the 1940 Act Preferred Shares Asset Coverage.
11.7 Preferred Shares Basic Maintenance Amount. (a) So long as any Preferred Shares are outstanding and any Rating Agency so requires, the Trust shall maintain, on each Valuation Date, and shall verify to its satisfaction that it is maintaining on such Valuation Date, Fitch Eligible Assets and Moody's Eligible Assets each having an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount. Upon any failure to maintain the required Discounted Value, the Trust will use its best efforts to alter the composition of its portfolio to retain a Discounted Value of both Fitch Eligible Assets and Moody's Eligible Assets at least equal to the Preferred Shares Basic Maintenance Amount on or prior to the Preferred Shares Basic Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the third Business Day after a Valuation Date on which the Trust fails to satisfy the Preferred Shares Basic Maintenance Amount, the Trust shall complete and deliver to (i) the Auction Agent and (ii) Fitch Ratings, Moody's and any other Rating Agency then rating the Preferred Shares the Discounted Value of whose Eligible Assets fails to satisfy the Preferred Shares Basic Maintenance Amount, as applicable, a complete Preferred Shares Basic Maintenance Report as of the date of such failure, which will be deemed to have been delivered to such recipient if the recipient receives a copy or
telecopy, telex or other electronic transcription thereof and on the same day the Trust mails to the recipient for delivery on the next Business Day the complete Preferred Shares Basic Maintenance Report. The Trust will deliver a Preferred Shares Basic Maintenance Report to each applicable Rating Agency on or before 5:00 p.m., New York City time, on the third Business Day after a Valuation Date on which the Trust cures its failure to maintain Eligible Assets of each applicable Rating Agency with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount or on which the Trust fails to maintain Eligible Assets of each applicable Rating Agency with an aggregate Discounted Value which exceeds the Preferred Shares Basic Maintenance Amount by 5% or more. The Trust will also deliver a Preferred Shares Basic Maintenance Report to the Auction Agent, Fitch Ratings and Moody's as of each Quarterly Valuation Date on or before the third Business Day after such date. Additionally, on or before 5:00 p.m., New York City time, on the third Business Day after the first day of a Special Dividend Period, the Trust will deliver a Preferred Shares Basic Maintenance Report to the Auction Agent, Fitch Ratings and Moody's. The Trust shall also provide Fitch Ratings or Moody's with a Preferred Shares Basic Maintenance Report when specifically requested by Fitch Ratings or Moody's, respectively.
(c) Within ten Business Days after the date of delivery of a Preferred Shares Basic Maintenance Report in accordance with Section 11.7(b) above relating to a Quarterly Valuation Date (except as described in the following sentence), the Independent Accountant will confirm in writing to the Auction Agent, Fitch Ratings and Moody's, (i) the mathematical accuracy of the calculations reflected in such Report (and in any other Preferred Shares Basic Maintenance Report, randomly selected by the Independent Accountant, that was delivered by the Trust during the quarter ending on such Quarterly Valuation Date), (ii) that, in such Report (and in such randomly selected Report), the Trust correctly determined the assets of the Trust which constitute Fitch Eligible Assets and Moody's Eligible Assets at such Quarterly Valuation Date in accordance with these Bylaws, (iii) that, in such Report (and in such randomly selected Report), the Trust determined whether the Trust had, at such Quarterly Valuation Date (and at the Valuation Date addressed in such randomly selected Report) in accordance with these Bylaws, Fitch Eligible Assets and Moody's Eligible Assets each with an aggregate Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount, (iv) with respect to the S&P ratings on portfolio securities of the Trust, the issuer name, issue size and coupon rate, if any, listed in such Report, that the Independent Accountant has requested that S&P verify such information and the Independent Accountant shall provide a listing in its letter of any differences, (v) with respect to the Fitch Ratings' ratings on portfolio securities of the Trust, the issuer name, issue size and coupon rate, if any, listed in such Report, that such information has been verified by Fitch Ratings (in the event such information is not verified by Fitch Ratings, the Independent Accountant will inquire of Fitch Ratings what such information is, and provide a listing in its letter of any differences), (vi) with respect to the Moody's ratings on portfolio securities of the Trust, the issuer name, issue size and coupon rate, if any, listed in such Report, that such information has been verified by Moody's (in the event such information is not verified by Moody's, the Independent Accountant will inquire of Moody's what such information is, and provide a listing in its letter of any differences) and (vii) with respect to the bid or mean price (or such alternative permissible factor used in calculating the Market Value) provided by the custodian of the Trust's assets to the Trust for purposes of valuing securities in the Trust's portfolio, the Independent Accountant has traced the price used in such Report to the bid or mean
price listed in such Report as provided to the Trust and verified that such
information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
(such confirmation is herein called the "Accountant's Confirmation").
Notwithstanding the foregoing sentence, the Independent Accountant will provide
the confirmation described in the foregoing sentence with respect to Preferred
Shares Basic Maintenance Reports delivered pursuant to the third sentence of
Section 11.7(b) above only for such Preferred Share Basic Maintenance Reports
relating to the last fiscal quarter of each fiscal year.
(d) Within ten Business Days after the date of delivery to the Auction Agent and any applicable Rating Agency of a Preferred Shares Basic Maintenance Report in accordance with Section 11.7(b) above relating to any Valuation Date on which the Trust failed to maintain Eligible Assets of such applicable Rating Agency with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares Basic Maintenance Cure Date with respect to such failure, the Trust shall cause the Independent Accountant to provide to the Auction Agent and each applicable Rating Agency an Accountant's Confirmation as to such Preferred Shares Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph (c) or (d) of this Section 11.7 shows that an error was made in the Preferred Shares Basic Maintenance Report for a particular Valuation Date for which such Accountant's Confirmation was required to be delivered, or shows that a lower aggregate Discounted Value for the aggregate of all Fitch Eligible Assets or Moody's Eligible Assets of the Trust was determined by the Independent Accountant, the calculation or determination made by such Independent Accountant shall be final and conclusive and shall be binding on the Trust, and the Trust shall accordingly amend and deliver the Preferred Shares Basic Maintenance Report to the Auction Agent and each applicable Rating Agency promptly following receipt by the Trust of such Accountant's Confirmation.
(f) Within five Business Day after the Date of Original Issue of the Preferred Shares, the Trust will complete and deliver to Moody's a Preferred Shares Basic Maintenance Report as of the close of business on such Date of Original Issue. Also, on or before 5:00 p.m., New York City time, on the first Business Day after Common Shares are repurchased by the Trust, the Trust will complete and deliver to Fitch Ratings and Moody's a Preferred Shares Basic Maintenance Report as of the close of business on such date that Common Shares are repurchased.
11.8 Certain Other Restrictions. (a) For so long as any Preferred Shares are rated by Moody's, the Trust will not buy or sell financial futures contracts, write, purchase or sell call options on financial futures contracts or purchase put options on financial futures contracts or write call options (except covered call options) on portfolio securities unless it receives written confirmation from Moody's that engaging in such transactions would not impair the ratings then assigned to the Preferred Shares by Moody's, except that the Trust may purchase or sell exchange-traded financial futures contracts based on any index approved by Moody's or Treasury Bonds, and purchase, write or sell exchange-traded put options on such financial futures contracts, any index approved by Moody's or Treasury Bonds, and purchase, write or sell exchange-traded call options on such financial futures contracts, any index approved by Moody's
or Treasury Bonds (collectively "Moody's Hedging Transactions"), subject to the following limitations:
(i) the Trust will not engage in any Moody's Hedging Transaction based on any index approved by Moody's (other than transactions that terminate a futures contract or option held by the Trust by the Trust's taking the opposite position thereto ("Closing Transactions")) that would cause the Trust at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on such index exceeding in number 10% of the average number of daily traded financial futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal; or
(B) outstanding financial futures contracts based on any index approved by Moody's having a Market Value exceeding 50% of the Market Value of all portfolio securities of the Trust constituting Moody's Eligible Assets owned by the Trust (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Trust will not engage in any Moody's Hedging Transaction based on Treasury Bonds (other than Closing Transactions) that would cause the Trust at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned by the Trust and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 80% of the aggregate Market Value of all portfolio securities of the Trust constituting Moody's Eligible Assets owned by the Trust (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's but rated by S&P, rated A or AA by S&P)
(for purposes of the foregoing clauses (i) and (ii), the Trust shall be deemed to own the number of financial futures contracts that underlie any outstanding options written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any outstanding financial futures contract based on any index approved by Moody's if the amount of open interest in such index as reported by The Wall Street Journal is less than an amount to be mutually determined by Moody's and the Trust;
(iv) the Trust will engage in a Closing Transaction to close out any outstanding financial futures contract by no later than the fifth Business Day of the month in which
such contract expires and will engage in a Closing Transaction to close out any outstanding option on a financial futures contract by no later than the first Business Day of the month in which such option expires;
(v) the Trust will engage in Moody's Hedging Transactions only with respect to financial futures contracts or options thereon having the next settlement date or the settlement date immediately thereafter;
(vi) the Trust (A) will not engage in options and futures transactions for leveraging or speculative purposes, except that an option or futures transaction shall not for these purposes be considered a leveraged position or speculative so long as the combination of the Trust's non-derivative positions, together with the relevant option or futures transaction, produces a synthetic investment position, or the same economic result, that could be achieved by an investment, consistent with the Trust's investment objectives and policies, in a security that is not an option or futures transaction, and (B) will not write any call options or sell any financial futures contracts for the purpose of hedging the anticipated purchase of an asset prior to completion of such purchase; and
(vii) while the Trust may use options and futures transactions for hedging and risk management purposes, it will not enter into an option or futures transaction unless, after giving effect thereto, the Trust would continue to have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
(b) For purposes of determining whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the Trust is obligated to deliver or receive pursuant to an outstanding futures contract or option shall be as follows:
(i) assets subject to call options written by the Trust that are either exchange-traded and "readily reversible" or that expire within 49 days after the date as of which such valuation is made shall be valued at the lesser of (A) Discounted Value and (B) the exercise price of the call option written by the Trust;
(ii) assets subject to call options written by the Trust not meeting the requirements of clause (i) of this sentence shall have no value;
(iii) assets subject to put options written by the Trust shall be valued at the lesser of (A) the exercise price and (B) the Discounted Value of the assets subject to the option;
(iv) futures contracts shall be valued at the lesser of (A) settlement price and (B) the Discounted Value of the assets subject to the futures contract, provided that, if a contract matures within 49 days after the date as of which such valuation is made, where the Trust is the seller the contract may be valued at the settlement price and where the Trust is the buyer the contract may be valued at the Discounted Value of the assets subject to the futures contract; and
(v) where delivery may be made to the Trust with any security of a class of securities, the Trust shall assume that it will take delivery of the security with the lowest Discounted Value.
(c) For purposes of determining whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the following amounts shall be subtracted from the aggregate Discounted Value of the Moody's Eligible Assets held by the Trust to the extent the relevant asset is a Moody's Eligible Asset:
(i) 10% of the exercise price of a written call option;
(ii) the exercise price of any written put option;
(iii) where the Trust is the seller under a financial futures contract, 10% of the settlement price of the financial futures contract;
(iv) where the Trust is the purchaser under a financial futures contract, any amounts payable by the Trust under such financial futures contract;
(v) the settlement price of the underlying financial futures contract if the Trust writes put options on a financial futures contract; and
(vi) 105% of the Market Value of the underlying financial futures contract if the Trust writes call options on a financial futures contract and does not own the underlying contract.
(d) For so long as any Preferred Shares are rated by Moody's, the Trust will not enter into any "Forward Commitment," herein defined as any contract to purchase securities for a fixed price at a future date beyond customary settlement time (other than such contracts that constitute Fitch Hedging Transactions or Moody's Hedging Transactions, as applicable), except that the Trust may enter into Forward Commitments subject to the following limitations:
(i) for each Forward Commitment, the Trust will maintain with its custodian (A) cash, cash equivalents or short-term, fixed-income securities rated P-1, MIG-1 or VMIG-1 by Moody's or A-1 by S&P and maturing in one year or less with a fair market value that equals or exceeds the amount by which the Trust's obligations under any Forward Commitments to which it is from time to time a party exceed obligations to the Trust arising from securities sales by the Trust that are scheduled to settle at a future date, or (B) long-term, fixed-income securities with a then current market value that equals or exceeds the amount by which the Trust's obligations under any Forward Commitments to which it is from time to time a party exceed obligations to the Trust arising from securities sales by the Trust that are scheduled to settle on a future date, or (C) a combination of assets described in (A) and (B) above that in the aggregate equals or exceeds the amount by which the Trust's obligations under any Forward Commitments to which it is from time to time a party exceed obligations to the Trust arising from securities sales by the Trust that are scheduled to settle on a future date; and
(ii) the Trust will not enter into a Forward Commitment unless, after giving effect thereto, the Trust would continue to have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of all Forward Commitments to which the Trust is a party and of all securities deliverable to the Trust pursuant to such Forward Commitments shall be zero.
(e) For so long as any Preferred Shares are Outstanding and Fitch Ratings or Moody's or both is rating such shares, the Trust, unless it has received written confirmation from Fitch Ratings or Moody's or both, as applicable, that such action would not impair the rating then assigned to the Preferred Shares by Fitch Ratings or Moody's or both, as applicable, will not:
(i) borrow money except for the purpose of clearing transactions in portfolio securities (which borrowings under any circumstances shall be limited to an amount equal to 5% of the Market Value of the Trust's assets at the time of such borrowings and which borrowings shall be repaid within 60 days and not be extended or renewed and shall not cause the aggregate Discounted Value of Fitch Eligible Assets or Moody's Eligible Assets, as applicable, to be less than the Preferred Shares Basic Maintenance Amount);
(ii) engage in short sales of securities;
(iii) lend any securities;
(iv) issue any class or series of shares of beneficial interest ranking prior to or on a parity with the Preferred Shares with respect to the payment of dividends or the distribution of assets upon dissolution, liquidation or winding up of the Trust;
(v) merge or consolidate into or with any other corporation or entity; and
(vi) change any Pricing Service of the Trust.
(f) For so long as any Preferred Shares are rated by Fitch Ratings, the Trust will not buy or sell financial futures contracts, write, purchase or sell call options on financial futures contracts or purchase put options on financial futures contracts or write call options (except covered call options) on portfolio securities unless it receives written confirmation from Fitch Ratings that engaging in such transactions would not impair the ratings then assigned to the Preferred Shares by Fitch Ratings, except that the Trust may purchase or sell exchange-traded financial futures contracts based on any index approved by Fitch Ratings or Treasury Bonds, and purchase, write or sell exchange-traded put options on such financial futures contracts, any index approved by Fitch Ratings or Treasury Bonds and purchase, write or sell exchange-traded call options on such financial futures contracts, any index approved by Fitch Ratings or Treasury Bonds (collectively "Fitch Hedging Transactions"), subject to the following limitations:
(i) the Trust will not engage in any Fitch Hedging Transaction based on any index approved by Fitch Ratings (other than Closing Transactions) that would cause the Trust at the time of such transaction to own or have sold outstanding financial futures contracts based on such index exceeding in number 10% of the average number of daily traded financial futures contracts based on such index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal;
(ii) the Trust will not engage in any Fitch Hedging Transaction based on Treasury Bonds (other than Closing Transactions) that would cause the Trust at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 20% of the aggregate Market Value of Fitch Eligible Assets owned by the Trust and rated at least AA by Fitch Ratings (or, if not rated by Fitch Ratings, rated at least Aa by Moody's; or, if not rated by Moody's, rated AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 40% of the aggregate Market Value of all Fitch Eligible Assets owned by the Trust (other than Fitch Eligible Assets already subject to a Fitch Hedging Transaction) and rated at least A or BBB by Fitch Ratings (or, if not rated by Fitch Ratings, rated at least Baa by Moody's; or, if not rated by Moody's, rated at least A or AA by S&P)
(for purposes of the foregoing clauses (i) and (ii), the Trust shall be deemed to own futures contracts that underlie any outstanding options written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any outstanding financial futures contract based on any index approved by Fitch Ratings if the amount of open interest in such index as reported by The Wall Street Journal is less than an amount to be mutually determined by Fitch Ratings and the Trust; and
(iv) the Trust will not enter into an option or futures transaction unless, after giving effect thereto, the Trust would continue to have Fitch Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
(g) For purposes of determining whether the Trust has Fitch Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of Fitch Eligible Assets that the Trust is obligated to deliver or receive pursuant to an outstanding futures contract or option shall be as follows:
(i) assets subject to call options written by the Trust that are either exchange-traded and "readily reversible" or that expire within 49 days after the date as of which such valuation is made shall be valued at the lesser of (A) Discounted Value and (B) the exercise price of the call option written by the Trust;
(ii) assets subject to call options written by the Trust not meeting the requirements of clause (i) of this sentence shall have no value;
(iii) assets subject to put options written by the Trust shall be valued at the lesser of (A) the exercise price and (B) the Discounted Value of the assets subject to the option;
(iv) futures contracts shall be valued at the lesser of (A) settlement price and (B) the Discounted Value of the assets subject to the futures contract, provided that, if a contract matures within 49 days after the date as of which such valuation is made, where the Trust is the seller the contract may be valued at the settlement price and where the Trust is the buyer the contract may be valued at the Discounted Value of the assets subject to the futures contract; and
(v) where delivery may be made to the Trust with any security of a class of securities, the Trust shall assume that it will take delivery of the security with the lowest Discounted Value.
(h) For purposes of determining whether the Trust has Fitch Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the following amounts shall be subtracted from the aggregate Discounted Value of the Fitch Eligible Assets held by the Trust to the extent the relevant asset is a Fitch Eligible Asset:
(i) 10% of the exercise price of a written call option;
(ii) the exercise price of any written put option;
(iii) where the Trust is the seller under a financial futures contract, 10% of the settlement price of the financial futures contract;
(iv) where the Trust is the purchaser under a financial futures contract, the settlement price of assets purchased under such financial futures contract;
(v) the settlement price of the underlying financial futures contract if the Trust writes put options on a financial futures contract and does not own the underlying contract; and
(vi) 105% of the Market Value of the underlying financial futures contracts if the Trust writes call options on a financial futures contract and does not own the underlying contract.
(i) For so long as any Preferred Shares are rated by Fitch Ratings, the Trust will not enter into any Forward Commitments, except that the Trust may enter into Forward Commitments subject to the following limitations:
(i) the Trust will maintain in a segregated account with its custodian cash, cash equivalents or short-term, fixed-income securities rated F1 or better by Fitch Ratings (or, if not rated by Fitch Ratings, rated P-1 by Moody's) and maturing prior to the date of the
Forward Commitment with a Market Value that equals or exceeds the amount of the Trust's obligations under any Forward Commitments to which it is from time to time a party or long-term fixed income securities with a Discounted Value that equals or exceeds the amount of the Trust's obligations under any Forward Commitment to which it is from time to time a party; and
(ii) the Trust will not enter into a Forward Commitment unless, after giving effect thereto, the Trust would continue to have Fitch Eligible Assets with an aggregate Discounted Value equal to or greater than the Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the Trust has Fitch Eligible Assets with an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance Amount, the Discounted Value of all Forward Commitments to which the Trust is a party and of all securities deliverable to the Trust pursuant to such Forward Commitments shall be zero.
11.9 Notice. All notices or communications, unless otherwise specified in these Bylaws, shall be sufficiently given if in writing and delivered in person or mailed by first-class mail, postage prepaid. Notice shall be deemed given on the earlier of the date received or the date seven days after which such notice is mailed.
11.10 Auction Procedures. (a) Certain Definitions. As used in this
Section 11.10, the following terms shall have the following meanings, unless the
context otherwise requires:
(i) "Auction Date" means the first Business Day preceding the first day of a Dividend Period.
(ii) "Available Preferred Shares" has the meaning specified in Section 11.10(d)(i)(A) below.
(iii) "Bid" has the meaning specified in Section 11.10(b)(i)(B) below.
(iv) "Bidder" has the meaning specified in Section 11.10(b)(i)(B) below.
(v) "Hold Order" has the meaning specified in Section 11.10(b)(i)(B) below.
(vi) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Auction Agent will round
each applicable Maximum Applicable Rate to the nearest one-thousandth
(0.001) of one percent per annum, with any such number ending in five
ten-thousandths of one percent being rounded upwards to the nearest
one-thousandth (0.001) of one percent. The Auction Agent will not round
the applicable Reference Rate as part of its calculation of the Maximum
Applicable Rate. The "Applicable Percentage" shall be the percentage
determined based on the lower of the credit ratings assigned on such date
by Moody's and Fitch Ratings as follows:
Moody's Fitch Applicable Credit Rating Credit Rating Percentage ------------- ------------- ---------- Aa3 or above AA- or above 150% A3 to A1 A- to A+ 160% Baa3 to Baa1 BBB- to BBB+ 250% Below Baa3 Below BBB- 275% |
The Applicable Percentage as so determined shall be further subject to upward but not downward adjustment in the discretion of the Board of Trustees of the Trust after consultation with the Broker-Dealers, provided that the Board of Trustees has received assurance from Moody's and Fitch Ratings and from any other Rating Agency then rating the Preferred Shares that such increase will not impair such Rating Agency's rating thereof, and further provided that immediately following any such increase the Trust would be in compliance with the Preferred Shares Basic Maintenance Amount. The Trust shall take all reasonable action necessary to enable Moody's and Fitch Ratings to provide a rating for each series of Preferred Shares. If Moody's or Fitch Ratings shall not make such a rating available, Citigroup Global Markets Inc. or its affiliates and successors, after consultation with the Trust, shall select another Rating Agency to act as a Substitute Rating Agency.
(vii) "Order" has the meaning specified in Section 11.10(b)(i)(B) below.
(viii) "Preferred Shares" means the Preferred Shares being auctioned pursuant to this Section 11.10.
(ix) "Sell Order" has the meaning specified in Section 11.10(b)(i)(B) below.
(x) "Submission Deadline" means 1:00 p.m., New York City time, on any Auction Date or such other time on any Auction Date as may be specified by the Auction Agent from time to time as the time by which each Broker-Dealer must submit to the Auction Agent in writing all Orders obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in Section 11.10(d)(i) below.
(xii) "Submitted Hold Order" has the meaning specified in Section 11.10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in Section 11.10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in Section 11.10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in Section 11.10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in Section 11.10(d)(i)(C) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and Potential Beneficial Owners may only participate in Auctions through their Broker-Dealers. Broker-Dealers will submit the Orders of their respective customers who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent, designating themselves 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. A Broker-Dealer may also hold Preferred Shares in its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore participate in an Auction as an Existing Holder or Potential Holder on behalf of both itself and its customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as to:
(1) the number of Outstanding Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period for such shares;
(2) the number of Outstanding Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner desires to continue to hold, provided that the Applicable Rate for the next succeeding Dividend Period for such shares shall not be less than the rate per annum specified by such Beneficial Owner; and/or
(3) the number of Outstanding Preferred Shares, if any, held by such Beneficial Owner which such Beneficial Owner offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that shall be maintained in good faith for the purpose of conducting a competitive Auction, shall contact Potential Beneficial Owners, including Persons that are not Beneficial Owners, on such list to determine the number of Outstanding Preferred Shares, if any, which each such Potential Beneficial Owner offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period 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 the
communication by a Broker-Dealer acting for its own account to the
Auction Agent, of information referred to in clause (A) or (B) of this
Section 11.10(b)(i) is hereinafter referred to as an "Order" and each
Beneficial Owner and each Potential Beneficial Owner placing an Order,
including a
Broker-Dealer acting in such capacity for its own account, is
hereinafter referred to as a "Bidder"; an Order containing the
information referred to in clause (A)(1) of this Section 11.10(b)(i)
is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this Section
11.10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this
Section 11.10(b)(i) is hereinafter referred to as a "Sell Order."
Inasmuch as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its
customers or itself, all discussion herein relating to the
consequences of an Auction for Existing Holders and Potential Holders
also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by a Beneficial Owner or an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding Preferred Shares specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(i)(D) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified therein; or
(3) a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(ii)(C) if such specified rate per annum shall be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by a Beneficial Owner or an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding Preferred Shares specified in such Sell Order; or
(2) such number or a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(ii)(C) if Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase:
(1) the number of Outstanding Preferred Shares specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding Preferred Shares to be determined as set forth in Section 11.10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction Agent's auction processing system to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer, designating itself (unless otherwise permitted by the Trust) 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 specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding Preferred Shares that are the subject of such Order;
(C) to the extent that such Bidder is a Beneficial Owner or an Existing Holder:
(1) the number of Outstanding Preferred Shares, if any, subject any Hold Order placed by such Beneficial Owner or Existing Holder;
(2) the number of Outstanding Preferred Shares, if any, subject to any Bid placed by such Beneficial Owner or Existing Holder and the rate per annum specified in such Bid; and
(3) the number of Outstanding Preferred Shares, if any, subject to any Sell Order placed by such Beneficial Owner or Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum 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%.
(iii) If an Order or Orders covering all of the Outstanding Preferred Shares held by an Existing Holder are not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of an Auction relating to a Special Dividend Period of 28 days or less) or a Sell Order (in the case of an Auction relating to a Special Dividend Period of longer than 28 days) to have been submitted on behalf of such Existing Holder covering the number of Outstanding Preferred Shares held by such Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the aggregate more than the number of Outstanding Preferred Shares held by such Existing Holder are submitted to the Auction Agent, such Order shall be considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be considered valid up to and including the number of Outstanding Preferred Shares held by such Existing Holder; provided that if more than one Hold Order is submitted on behalf of such Existing Holder and the number of Preferred Shares subject to such Hold Orders exceeds the number of Outstanding Preferred Shares held by such Existing Holder, the number of Preferred Shares subject to each of such Hold Orders shall be reduced pro rata so that such Hold Orders, in the aggregate, will cover exactly the number of Outstanding Preferred Shares held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be considered valid, in the ascending order of their respective rates per annum if more than one Bid is submitted on behalf of such Existing Holder, up to and including the excess of the number of Outstanding Preferred Shares held by such Existing Holder over the number of Preferred Shares subject to any Hold Order referred to in Section 11.10(c)(iv)(A) above (and if more than one Bid submitted on behalf of such Existing Holder specifies the same rate per annum and together they cover more than the remaining number of shares that can be the subject of valid Bids after application of Section 11.10(c)(iv)(A) above and of the foregoing portion of this Section 11.10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum, the number of shares subject to each of such Bids shall be reduced pro rata so that such Bids, in the aggregate, cover exactly such remaining number of shares); and the number of shares, if any, subject to Bids not valid under this Section 11.10(c)(iv)(B) shall be treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including
the excess of the number of Outstanding Preferred Shares held by such
Existing Holder over the number of Preferred Shares subject to Hold
Orders referred to in Section 11.10(c)(iv)(A) and Bids referred to in
Section 11.10(c)(iv)(B); provided that if more than one Sell Order is
submitted on behalf of any Existing Holder and the number of Preferred
Shares subject to such Sell Orders is greater than such excess, the
number of Preferred Shares subject to each of such Sell Orders shall
be reduced pro rata so that such Sell Orders, in the aggregate, cover
exactly the number of Preferred Shares equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate per annum and number of Preferred Shares therein specified.
(vi) Any Order submitted by a Beneficial Owner as 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.
(vii) The Trust shall not be responsible for a Broker-Dealer's failure to act in accordance with the instructions of Beneficial Owners or Potential Beneficial Owners or failure to comply with the provisions of this Section 11.10.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (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, more generally, as a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding Preferred Shares over the number of Outstanding Preferred Shares that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available Preferred Shares");
(B) from the Submitted Orders whether the number of Outstanding Preferred Shares that are the subject of Submitted Bids by Potential Holders specifying one or more rates per annum equal to or lower than the Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding Preferred Shares that are the subject of Submitted Bids by Existing Holders specifying one or more rates per annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding Preferred Shares that are subject to Submitted Sell Orders (if such excess or such equality exists (other than because the number of Outstanding Preferred Shares in clause (1) above and this clause (2) are each zero because all of the Outstanding Preferred Shares are the subject of Submitted Hold Orders), such Submitted Bids by Potential Holders being hereinafter referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid Rate and all other Submitted Bids from Existing Holders specifying lower rates per annum were rejected, thus entitling such Existing Holders to continue to hold the Preferred Shares that are the subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning Bid Rate and all other Submitted Bids from Potential Holders specifying lower rates per annum were accepted, thus entitling the Potential Holders to purchase the Preferred Shares that are the subject of such Submitted Bids, would result in the number of shares subject to all Submitted Bids specifying the Winning Bid Rate or a lower rate per annum being at least equal to the Available Preferred Shares.
(ii) Promptly after the Auction Agent has made the determinations pursuant to Section 11.10(d)(i), the Auction Agent shall advise the Trust of the Maximum Applicable Rate and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding Preferred Shares are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding Preferred Shares are the subject of Submitted Hold Orders, that the Dividend Period next succeeding the Auction shall automatically be the same length as the immediately preceding Dividend Period and the Applicable Rate for the next succeeding Dividend Period shall be equal to 80% of the Reference Rate on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Existing Holders shall continue to hold the Preferred Shares that are subject to Submitted Hold Orders, and, based on the determinations made pursuant to Section 11.10(d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions of Section 11.10(e)(iii) and Section 11.10(e)(iv), Submitted Bids and Submitted Sell Orders shall be accepted or rejected in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate per annum that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Outstanding Preferred Shares that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding Preferred Shares that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate per annum that is equal to the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding Preferred Shares that are the
subject of such Submitted Bid, unless the number of Outstanding
Preferred Shares subject to all such Submitted Bids shall be greater
than the number of Outstanding Preferred Shares ("Remaining Shares")
equal to the excess of the Available Preferred Shares over the number
of Outstanding Preferred Shares subject to Submitted Bids described in
Section 11.10(e)(i)(B) and Section 11.10(e)(i)(C), in which event the
Submitted Bids of each such Existing Holder shall be accepted, and each
such Existing Holder shall be required to sell Outstanding Preferred
Shares, but only in an amount equal to the difference between (1) the
number of Outstanding Preferred Shares then held by such Existing
Holder subject to such Submitted Bid and (2) the number of Preferred
Shares obtained by multiplying (x) the number of Remaining Shares by
(y) a fraction the numerator of which shall be the number of
Outstanding Preferred Shares held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall be the sum of the
number of Outstanding Preferred Shares subject to such Submitted Bids
made by all such Existing Holders that specified a rate per annum equal
to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a rate per annum that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Outstanding Preferred Shares obtained by multiplying (x) the difference between the Available Preferred Shares and the number of Outstanding Preferred Shares subject to Submitted Bids described in Section 11.10(e)(i)(B), Section 11.10(e)(i)(C) and Section 11.10(e)(i)(D) by (y) a fraction the numerator of which shall be the number of Outstanding Preferred Shares subject to such Submitted Bid and the denominator of which shall be the number of Outstanding Preferred Shares subject to such Submitted Bids made by all such Potential Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding Preferred Shares are subject to Submitted Hold Orders), subject to the provisions of Section 11.10(e)(iii), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Outstanding Preferred Shares that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus requiring such Potential Holder to purchase the Outstanding Preferred Shares that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per annum that is higher than the Maximum Applicable Rate shall be accepted and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (1) the number of Outstanding Preferred
Shares then held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and (2) the number of Preferred Shares obtained by multiplying (x) the difference between the Available Preferred Shares and the aggregate number of Outstanding Preferred Shares subject to Submitted Bids described in Section 11.10(e)(ii)(A) and Section 11.10(e)(ii)(B) by (y) a fraction the numerator of which shall be the number of Outstanding Preferred Shares held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the number of Outstanding Preferred Shares subject to all such Submitted Bids and Submitted Sell Orders.
If all of the Outstanding shares of a series of Preferred Shares are subject to Submitted Hold Orders, all Submitted Bids for shares of such series shall be rejected.
(iii) If, as a result of the procedures described in Section 11.10(e), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a Preferred Share on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, round up or down the number of Preferred Shares to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that each Outstanding Preferred Share purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be a whole Preferred Share.
(iv) If, as a result of the procedures described in Section 11.10(e), any Potential Holder would be entitled or required to purchase less than a whole Preferred Share on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, allocate Preferred Shares for purchase among Potential Holders so that only whole Preferred Shares are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing any Preferred Shares on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders on behalf of Existing Holders or Potential Holders, the aggregate number of Outstanding Preferred Shares to be purchased and the aggregate number of the Outstanding Preferred Shares to be sold by such Potential Holders and Existing Holders and, to the extent that such aggregate number of Outstanding shares to be purchased and such aggregate number of Outstanding shares to be sold differ, the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, Outstanding Preferred Shares.
(f) Miscellaneous.
(i) To the extent permitted by applicable law, the Trust may in its sole discretion interpret the provisions of this Section 11.10 to resolve any inconsistency or ambiguity,
remedy any formal defect or make any other change or modification that does not substantially adversely affect the rights of Beneficial Owners of Preferred Shares.
(ii) Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing Holder (A) may sell, transfer or otherwise dispose of Preferred Shares only pursuant to a Bid or Sell Order in accordance with the procedures described in this Section 11.10 or to or through a Broker-Dealer or to such other persons as may be permitted by the Trust, provided that in the case of all transfers other than pursuant to Auctions such Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of such transfer and (B) except as otherwise required by law, shall have the ownership of the Preferred Shares held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Beneficial Owner's beneficial ownership. The Trust may not submit an Order in any Auction.
(iii) All of the Outstanding Preferred Shares of a series shall be registered in the name of the nominee of the Securities Depository unless otherwise required by law or unless there is no Securities Depository. If there is no Securities Depository, at the Trust's option and upon its receipt of such documents as it deems appropriate, any Preferred Shares may be registered in the Stock Register in the name of the Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled to receive certificates therefor and required to deliver certificates therefor upon transfer or exchange thereof.
11.11 Securities Depository; Stock Certificates. (a) If there is a Securities Depository, all of the Preferred Shares of each series shall be issued to the Securities Depository and registered in the name of the Securities Depository or its nominee. Certificates may be issued as necessary to represent Preferred Shares. All such certificates shall bear a legend to the effect that such certificates are issued subject to the provisions restricting the transfer of Preferred Shares contained in these Bylaws. Unless the Trust shall have elected, during a Non-Payment Period, to waive this requirement, the Trust will also issue stop-transfer instructions to the Auction Agent for the Preferred Shares. Except as provided in paragraph (b) below, the Securities Depository or its nominee will be the Holder, and no Beneficial Owner shall receive certificates representing its ownership interest in such shares.
(b) If the Applicable Rate applicable to all Preferred Shares of a series shall be the Non-Payment Period Rate or there is no Securities Depository, the Trust may at its option issue one or more new certificates with respect to such shares (without the legend referred to in Section 11.11(a)) registered in the names of the Beneficial Owners or their nominees and rescind the stop-transfer instructions referred to in Section 11.11(a) with respect to such shares.
ARTICLE 12
Amendment to the Bylaws
12.1 General. Except to the extent that the Declaration of Trust or applicable law requires a vote or consent of Shareholders, these Bylaws may be amended, changed, altered or
repealed, in whole or part, only by resolution of a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such Trustees.
12.2 Article 11. Without limiting the provisions of Section 12.1, the Board of Trustees of the Trust may, by resolution duly adopted, without shareholder approval (except as otherwise required by Article 11 or required by applicable law), amend Article 11 to (a) reflect any amendments thereto which the Board of Trustees of the Trust is entitled to adopt pursuant to the terms of Article 11 without shareholder approval or (b) add additional series of Preferred Shares or additional shares of a series of Preferred Shares (and terms relating thereto) to the series and Preferred Shares described herein. Each such additional series and all such additional Preferred Shares shall be governed by the terms of Article 11.
EXHIBIT h.6
Auction Rate Cumulative Preferred Shares
PIMCO HIGH INCOME FUND
7,200 Shares, Series M
7,200 Shares, Series T
7,200 Shares, Series W
7,200 Shares, Series TH
7,200 Shares, Series F
Liquidation Preference $25,000 per Share
UNDERWRITING AGREEMENT
June __, 2003
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
c/o Citigroup Global Markets Inc.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
The undersigned, PIMCO High Income Fund, an unincorporated voluntary association with transferable shares organized and existing under and by virtue of the laws of The Commonwealth of Massachusetts (commonly referred to as a Massachusetts business trust) (the "Fund") and PIMCO Advisors Fund Management LLC, a Delaware limited liability company (the "Investment Adviser"), address you as the underwriters listed in Schedule I hereto (herein collectively called "Underwriters"). The Fund proposes to issue and sell an aggregate of 7,200 shares of its Auction Rate Cumulative Preferred Shares, Series M, 7,200 shares of its Auction Rate Cumulative Preferred Shares, Series T, 7,200 shares of its Auction Rate Cumulative Preferred Shares, Series W, 7,200 shares of its Auction Rate Cumulative Preferred Shares, Series TH and 7,200 shares of its Auction Rate Cumulative Preferred Shares, Series F, each $0.00001 par value per share, with a liquidation preference of $25,000 per share (collectively, the "Preferred Shares"), to the several Underwriters. The Preferred Shares will be authorized by, and subject to the terms and conditions of, the Second Amended and Restated By-Laws of the Fund adopted in connection with the issuance of the Preferred Shares and as amended through the date hereof (the "By-Laws") in the form filed as an exhibit to the Registration Statement referred to in Section 1 of this agreement. Unless otherwise stated, the term "you" as used herein means the Underwriters.
The Fund and the Investment Adviser wish to confirm as follows their agreements with you in connection with the several purchases of the Preferred Shares by the Underwriters.
The Fund has entered into an Investment Management Agreement with the Investment Adviser dated April 8, 2003, a Custodian Agreement with State Street Bank and Trust Company dated April 8, 2003, a Transfer Agency Services Agreement with PFPC Inc. dated April 14, 2003, and is entering into an Auction Agency Agreement with Deutsche Bank Trust Company Americas to be dated June __, 2003, and such agreements are herein referred to as the "Management Agreement", the "Custodian Agreement", the "Transfer Agency Agreement" and the "Auction Agency Agreement", respectively. The Investment Adviser has entered into a Portfolio Management Agreement with Pacific Investment Management Company LLC, a Delaware limited liability company (the "Subadviser," and together with the Investment Adviser, the "Advisers"), dated April 8, 2003 and such agreement is herein referred to as the "Portfolio Management Agreement". Collectively, the Management Agreement, the Portfolio Management Agreement, the Custodian Agreement, the Transfer Agency Agreement and the Auction Agency Agreement are herein referred to as the "Fund Agreements". This Underwriting Agreement is herein referred to as the "Agreement".
1. Registration Statement and Prospectus. The Fund has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations of the Commission under the 1933 Act (the "1933 Act Rules and Regulations") and the 1940 Act (the "1940 Act Rules and Regulations" and, together with the 1933 Act Rules and Regulations, the "Rules and Regulations") a registration statement on Form N-2 (File Nos. 333-____ and 811-____) under the 1933 Act and the 1940 Act and may pursuant to the Rules and Regulations prepare and file an additional registration statement relating to a portion of the Preferred Shares pursuant to Rule 462(b) of the 1933 Act Rules and Regulations (collectively, the "registration statement"), including a prospectus (including any statement of additional information) relating to the Preferred Shares and a notification of registration of the Fund as an investment company under the 1940 Act on Form N-8A (the "1940 Act Notification"). The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits), as amended at the time it becomes effective under the 1933 Act or, if the registration statement became effective under the 1933 Act prior to the execution of this Agreement, as amended or supplemented thereto, and includes any information deemed to be included by Rule 430A under the 1933 Act Rules and Regulations. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed under the 1933 Act and must be declared effective before the offering of the Preferred Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Prospectus" as used in this Agreement means the prospectus (including the statement of additional information) in the form included in the Registration Statement or, if the prospectus (including the statement of additional information) included in the Registration Statement omits information in reliance on Rule 430A and such information is included in a prospectus (including the statement of additional information) filed with the Commission pursuant to Rule 497(h) under the 1933 Act Rules and Regulations, the term "Prospectus" as used in this Agreement means the prospectus
(including the statement of additional information) in the form included in the Registration Statement as supplemented by the addition of the information contained in the prospectus (including the statement of additional information) filed with the Commission pursuant to Rule 497(h). The term "Prepricing Prospectus" as used in this Agreement means the prospectus (including the statement of additional information) subject to completion in the form included in the registration statement filed with the Commission on June ___, 2003 and as such prospectus (including the statement of additional information) shall have been amended from time to time prior to the date of the Prospectus, together with any other prospectus (including any other statement of additional information) relating to the Fund other than the Prospectus.
The Fund has furnished Citigroup Global Markets Inc., on behalf of the Underwriters, with copies of such registration statement, each amendment to such registration statement filed with the Commission and each Prepricing Prospectus.
2. Agreements to Sell, Purchase and Compensate. The Fund hereby agrees, subject to all the terms and conditions set forth herein, to issue and to sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Fund and the Investment Adviser herein contained and subject to all of the other terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Fund, at a purchase price of $24,750 per Preferred Share, the number of Preferred Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Preferred Shares increased as set forth in Section 10 hereof).
3. Terms of Public Offering. The Fund and the Investment Adviser have been advised by you that the Underwriters propose to make a public offering of their respective portions of the Preferred Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Preferred Shares upon the terms set forth in the Prospectus.
4. Delivery of Preferred Shares and Payments Therefor.
(a) Delivery to the Underwriters of and payment to the Fund for the Preferred Shares shall be made at the office of Citigroup Global Markets Inc., 388 Greenwich Street, New York, New York 10013 or through the facilities of the Depository Trust Company or another mutually agreeable facility, at 9:00 A.M., New York City time, on June __, 2003 (the "Closing Date"). The place of closing for the Preferred Shares and the Closing Date may be varied by agreement between you and the Fund.
(b) Certificates in definitive form, each representing one series of the Preferred Shares registered in the name of Cede & Co., as nominee for the Depository Trust Company, shall be delivered by or on behalf of the Fund to the Depository Trust Company for the account of the Underwriters on the Closing Date.
5. Agreements of the Parties. The Fund and the Investment Adviser, jointly and severally, agree with the several Underwriters, and the several Underwriters agree with the Fund and the Investment Adviser, as follows:
(a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective under the 1933 Act before the offering of the Preferred Shares may commence, the Fund will use its reasonable best efforts to cause the Registration Statement or such post-effective amendment to become effective under the 1933 Act as soon as possible. If the Registration Statement has become effective and the Prospectus contained therein omits certain information at the time of effectiveness pursuant to Rule 430A of the 1933 Act Rules and Regulations, the Fund will file a prospectus including such information pursuant to Rule 497(h) of the 1933 Act Rules and Regulations, as promptly as practicable, but no later than the second business day following the earlier of the date of the determination of the offering price of the Preferred Shares or the date the Prospectus is first used after the effective date of the Registration Statement. If the Registration Statement has become effective and the Prospectus contained therein does not so omit such information, the Fund will file a Prospectus pursuant to Rule 497(c) or a certification pursuant to Rule 497(j) of the 1933 Act Rules and Regulations as promptly as practicable, but no later than the fifth business day following the date of the later of the effective date of the Registration Statement or the commencement of the public offering of the Preferred Shares after the effective date of the Registration Statement. The Fund will advise you promptly and, if requested by you, will confirm such advice in writing (i) when the Registration Statement or such post-effective amendment has become effective and (ii) when the Prospectus has been timely filed pursuant to Rule 497(c) or Rule 497(h) of the 1933 Act Rules and Regulations or the certification permitted pursuant to Rule 497(j) of the 1933 Act Rules and Regulations has been timely filed, whichever is applicable.
(b) The Fund will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request made by the Commission, within three years after the date of this Agreement, for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus (or any amendment or supplement to any of the foregoing) or for additional information, (ii) of the issuance by the Commission, the National Association of Securities Dealers, Inc. (the "NASD"), any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official, within three years after the date of this Agreement, of any order suspending the effectiveness of the Registration Statement, prohibiting or suspending the use of the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined), of any notice pursuant to Section 8(e) of the 1940 Act, of the suspension of qualification of the Preferred Shares for offering or sale in any jurisdiction, or the initiation or contemplated initiation of any proceeding for any such purposes, (iii) of receipt by the Fund, the Investment Adviser or any representative or attorney of the Fund or the Investment Adviser, within three years after the date of this Agreement, of any other material communication from the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official relating to the Fund, the Registration Statement, the 1940 Act Notification, the Prospectus, any Prepricing Prospectus, any sales material (as hereinafter defined) (or any amendment or
supplement to any of the foregoing), this Agreement or any of the Fund Agreements and (iv) within the period of time referred to in paragraph (f) below, of any material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of the Fund or the Advisers or of the happening of any event which makes any statement of a material fact made in the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) untrue or which requires the making of any additions to or changes in the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales materials (as hereinafter defined) (or any amendment or supplement to any of the foregoing) in order to state a material fact required by the 1933 Act, the 1940 Act or the Rules and Regulations to be stated therein or necessary in order to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading or of the necessity to amend or supplement the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other law or order of any court or regulatory body. If at any time the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official shall issue any order suspending the effectiveness of the Registration Statement, prohibiting or suspending the use of the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) or suspending the qualification of the Preferred Shares for offering or sale in any jurisdiction, the Fund will use its reasonable best efforts to obtain the withdrawal of such order at the earliest possible time.
(c) If not delivered prior to the date hereof, the Fund will furnish to you, without charge, a copy of the registration statement and the 1940 Act Notification as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits thereto (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Agreement and (y) the date on which the distribution of the Preferred Shares is completed) and will also furnish to you, without charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Agreement and (y) the date on which the distribution of the Preferred Shares is completed), with or without exhibits, as you may reasonably request.
(d) Within three years after the date of this Agreement, the Fund will not (i) file any amendment to the registration statement or make any amendment or supplement to the Prospectus, any Prepricing Prospectus or any sales material (as hereinafter defined) (or any amendment or supplement to any of the foregoing) of which you shall not previously have been advised or to which you shall reasonably object within a reasonable time after being so advised or (ii) so long as, in the reasonable opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the
Securities Exchange Act of 1934, as amended (the "1934 Act"), without delivering a copy of such information, documents or reports to you prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Fund has delivered to you, without charge, in such quantities as you have reasonably requested, copies of each form of any Prepricing Prospectus. The Fund consents to the use, in accordance with the provisions of the 1933 Act and with the securities or Blue Sky laws of the jurisdictions in which the Preferred Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Fund.
(f) As soon after the execution and delivery of this Agreement as is practicable and thereafter from time to time, for such period as in the reasonable opinion of counsel for the Underwriters a prospectus is required by the 1933 Act to be delivered in connection with sales of Preferred Shares by any Underwriter or dealer, the Fund will deliver to each Underwriter, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may reasonably request. The Fund consents to the use of the Prospectus (and of any amendments or supplements thereto) in accordance with the provisions of the 1933 Act, with the securities or Blue Sky laws of the jurisdictions in which the Preferred Shares are offered by the several Underwriters and by all dealers to whom Preferred Shares may be sold and with other applicable laws and regulations, both in connection with the offering or sale of the Preferred Shares and for such period of time thereafter as the Prospectus is required by law to be delivered in connection with sales of Preferred Shares by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Fund or in the reasonable opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in light of the circumstances under which they were made, not misleading or if it is necessary to supplement or amend the Prospectus to comply with the 1933 Act, the 1940 Act, the Rules and Regulations or any other law, rule or regulation, the Fund will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate amendment or supplement thereto and will furnish to the Underwriters, without charge, such number of copies thereof as they shall reasonably request; provided, if the amendment or supplement is required as a result of a misstatement in or omission from the information provided to the Fund by the Underwriters in writing, the Fund may deliver such amendment or supplement to the Underwriters at cost. In the event that the Prospectus is to be amended or supplemented, the Fund, if reasonably requested by you, will promptly issue a press release announcing or disclosing any material matters to be covered by the proposed amendment or supplement.
(g) The Fund will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification, if necessary, of the Preferred Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents, if any, necessary or appropriate in the judgment of the
Fund in order to effect such registration or qualification; provided that in no event shall the Fund be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Preferred Shares, in any jurisdiction where it is not now so subject.
(h) The Fund will make generally available to its security holders an earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 of the 1933 Act Rules and Regulations.
(i) The Fund will comply with the undertaking set forth in paragraph 6 of Item 33 of Part C of the Registration Statement.
(j) During the period of five years after the date of this Agreement, the Fund will furnish to you (i) as soon as publicly available, a copy of each report of the Fund mailed to shareholders or filed with the Commission and (ii) from time to time such other information concerning the Fund as you may reasonably request.
(k) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Fund or the Investment Adviser to comply with the terms or fulfill any of the conditions (subject to any applicable qualifications contained in such terms or conditions) of this Agreement, the Fund and the Investment Adviser, jointly and severally, agree to reimburse the Underwriters for all out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) incurred by you in connection herewith, but the Fund and the Investment Adviser shall in no event be liable for any internal cost of the Underwriters or any loss of anticipated profits or speculative, consequential or similar damages for such termination.
(l) The Fund will direct the investment of the net proceeds of the offering of the Preferred Shares in such a manner as to comply with the investment objectives, policies and restrictions of the Fund as described in the Prospectus.
(m) Reserved.
(n) Except as provided in this Agreement, the Fund will not sell, contract to sell or otherwise dispose of, any senior securities (as defined in the 1940 Act) or grant any options or warrants to purchase senior securities of the Fund, for a period of 180 days after the date of the Prospectus, without the prior written consent of Citigroup Global Markets Inc.
(o) The Fund will use its reasonable best efforts to cause the Preferred Shares, prior to the Closing Date, to be assigned a rating of `Aaa' by Moody's Investors Service, Inc. ("Moody's") and `AAA' by Fitch, Inc. ("Fitch", and together with Moody's, the "Rating Agencies").
(p) No later than the Closing Date, the Underwriters will provide, and will cause any selling group member to whom they have sold Preferred Shares to provide, Deutsche Bank Trust Company Americas, as auction agent for the Preferred Shares, with a list of the record names of the persons to whom they have sold Preferred Shares, the number of Preferred Shares sold to each such person, and the number of Preferred Shares they are holding as of the Closing Date; provided that in lieu thereof, an Underwriter may provide Deutsche Bank Trust Company Americas with a list indicating itself as the sole holder of all the Preferred Shares sold by such Underwriter.
(q) The Fund will comply with all applicable securities and other applicable laws, rules and regulations, including, without limitation, the Sarbanes-Oxley Act of 2002, and will use its best efforts to cause the Fund's trustees and officers, in their capacities as such, to comply with such laws, rules and regulations, including, without limitation, the provisions of the Sarbanes-Oxley Act of 2002.
6. Representations and Warranties of the Fund and the Investment Adviser. The Fund and the Investment Adviser, jointly and severally, represent and warrant to each Underwriter that, as of the date hereof or at such other time or times identified below:
(a) Each Prepricing Prospectus complied in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations.
(b) The Registration Statement, in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus and any amendment or supplement thereto when filed with the Commission under Rule 497 of the 1933 Act Rules and Regulations and the 1940 Act Notification when originally filed with the Commission and any amendment or supplement thereto when filed with the Commission complied or will comply in all material respects with the provisions of the 1933 Act, the 1940 Act and the Rules and Regulations and the Registration Statement, in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective and the Prospectus did not or will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading; except that this representation and warranty does not apply to statements in or omissions from the Registration Statement or the Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with information relating to any Underwriter furnished to the Fund in writing by or on behalf of any Underwriter through you expressly for use therein.
(c) All the outstanding common shares of the Fund have been duly authorized and validly issued, are fully paid and, except as described in the registration statement relating to the common shares, nonassessable; the Preferred Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and, except as described in the Registration Statement, nonassessable and the capital stock of the Fund will conform to the description thereof in the Registration Statement and the Prospectus; the Preferred Shares conform to the description thereof in the Registration Statement and the Prospectus; and the common shares conform to the description thereof in the Registration Statement and the Prospectus. Except as contemplated in the Registration Statement or by this Agreement, no person is entitled to any preemptive or other similar rights with respect to the Preferred Shares.
(d) The Fund has been duly formed and is validly existing in good standing as an unincorporated voluntary association with transferable shares organized and existing under and by virtue of the laws of The Commonwealth of Massachusetts (commonly referred to as a Massachusetts business trust), with full power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and is duly registered and qualified to conduct business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or to qualify does not have a material, adverse effect on the condition (financial or other), business, properties, net assets or results of operations of the Fund. The Fund has no subsidiaries.
(e) There are no legal or governmental proceedings pending or, to the knowledge of the Fund, threatened, against the Fund or to which the Fund or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) but are not described as required and there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement to either of them) or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the 1933 Act, the 1940 Act or the Rules and Regulations.
(f) The Fund is not in violation in any material respects of its Amended and Restated Agreement and Declaration of Trust (the "Declaration of Trust") or By-Laws or in violation of any material law, ordinance, administrative or governmental rule or regulation applicable to the Fund, including, without limitation, the applicable provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith, or of any material decree of the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official having jurisdiction over the Fund or in breach or default in any material respect in the performance of any obligation, agreement or condition contained in any material bond, debenture, note or any other evidence of indebtedness or in any material agreement,
indenture, lease or other instrument to which the Fund is a party or by which it or any of its properties may be bound.
(g) Neither the issuance and sale of the Preferred Shares, the
execution, delivery or performance of this Agreement nor any of the Fund
Agreements by the Fund, nor the consummation by the Fund of the
transactions contemplated hereby or thereby (A) requires any consent,
approval, authorization or other order of or registration or filing with
the Commission, the NASD, any national securities exchange, any
arbitrator, any court or any other governmental, regulatory,
self-regulatory or administrative agency or any official (except such as
(i) have been obtained under the 1933 Act, the 1934 Act, the 1940 Act or
the Investment Advisers Act of 1940, as amended (the "Advisers Act"),
(ii) may be required under the securities or Blue Sky laws of various
jurisdictions which have been or will be effected in accordance with
this Agreement and (iii) may be required to comply with the filing
requirements of the NASD Division of Corporate Finance) or conflicts or
will conflict with or constitutes or will constitute a breach of the
Declaration of Trust or By-Laws of the Fund or (B) conflicts or will
conflict with or constitutes or will constitute a breach of or a default
under, any material agreement, indenture, lease or other instrument to
which the Fund is a party or by which it or any of its properties may be
bound or materially violates or will materially violate any material
statute, law, regulation (other than state securities or Blue Sky laws)
or filing or judgment, injunction, order or decree applicable to the
Fund or any of its properties or will result in the creation or
imposition of any material lien, charge or encumbrance upon any property
or assets of the Fund pursuant to the terms of any agreement or
instrument to which it is a party or by which it may be bound or to
which any of the property or assets of the Fund is subject, other than
the securities or Blue Sky laws of various jurisdictions which have been
or will be effected in accordance with this Agreement.
(h) Since the date as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of the Fund, whether or not arising in the ordinary course of business, (B) there have been no transactions entered into by the Fund which are material to the Fund other than those in the ordinary course of its business as described in the Prospectus (and any amendment or supplement thereto) or as contemplated by this Agreement, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Fund on any class of its shares of beneficial interest.
(i) To the knowledge of the Fund and the Investment Adviser, based on representations of said accountants, the accountants, PricewaterhouseCoopers LLP, who have audited or shall audit the Statement of Assets and Liabilities included or incorporated by reference in the Registration Statement and the Prospectus, are an independent public accounting firm as required by the 1933 Act, the 1940 Act and the Rules and Regulations.
(j) The financial statements, together with related schedules and notes, included or incorporated by reference in the Registration Statement or the Prospectus present fairly
in all material respects the financial position of the Fund on the basis stated in the Registration Statement and the Prospectus at the respective dates or for the respective periods to which they apply; and such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as disclosed therein.
(k) The Fund, subject to the Registration Statement having been declared effective and the filing of the Prospectus or a certification under Rule 497 under the Rules and Regulations, has taken all required action under the 1933 Act, the 1940 Act and the Rules and Regulations to make the public offering and consummate the sale of the Preferred Shares as contemplated by this Agreement (for the avoidance of any doubt, this provision does not apply to compliance with state securities or Blue Sky laws of any jurisdiction).
(l) The execution and delivery of, and the performance by the Fund of its obligations under, this Agreement and the Fund Agreements have been duly and validly authorized by the Fund and this Agreement and the Fund Agreements have been duly executed and delivered by the Fund and constitute the valid and legally binding agreements of the Fund, enforceable against the Fund in accordance with their terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and subject to the qualification that the enforceability of the Fund's obligations hereunder and thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles.
(m) Except as disclosed in the Registration Statement and the Prospectus, subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus, the Fund has not incurred any liability or obligation, direct or contingent or entered into any transaction, not in the ordinary course of business, that is material to the Fund and there has not been any change in the shares of beneficial interest of the Fund, other than through the issuance or purchase of common shares pursuant to any dividend reinvestment plan of the Fund relating thereto, or material increase in the short-term debt or long-term debt of the Fund or any material, adverse change or any development involving or which should reasonably be expected to involve a material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of the Fund.
(n) The Fund has not distributed to the public and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Preferred Shares, will not distribute to the public any offering material in connection with the offering and sale of the Preferred Shares other than the Registration Statement, the Prepricing Prospectus included in Pre-Effective Amendment No. 1 to the Registration Statement and the Prospectus.
(o) The Fund has such licenses, permits, and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its property and to conduct its business in the manner described in the Prospectus, except where such failure would not
reasonably be expected to have a material, adverse effect on the Fund; the Fund has fulfilled and performed all its material obligations with respect to such permits and, to the knowledge of the Fund, no event has occurred which allows or, after notice or lapse of time, would allow, revocation or termination thereof or results in any other material impairment of the rights of the Fund under any such permit, subject in each case to such qualification as may be set forth in the Prospectus (and any amendment or supplement thereto); and, except as described in the Prospectus (and any amendment or supplement thereto), none of such permits contains any restriction that is materially burdensome to the Fund.
(p) The Fund maintains and will maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization and with the investment policies and restrictions of the Fund and the applicable requirements of the 1940 Act, the 1940 Act Rules and Regulations and the provisions of the Internal Revenue Code of 1986, as amended (the "Code") applicable to a regulated investment company; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles, to calculate net asset value, to maintain accountability for assets and to maintain material compliance with the books and records requirements under the 1940 Act and the 1940 Act Rules and Regulations; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded account for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
(q) To the Fund's knowledge, neither the Fund nor any employee or agent of the Fund has made any payment of funds of the Fund or received or retained any funds, which payment, receipt or retention of such funds is of a character required to be disclosed in the Prospectus and that is not so disclosed.
(r) The Fund has filed all tax returns required to be filed and the Fund is not in material default in the payment of any taxes which were shown as payable on said returns or any assessments with respect thereto.
(s) The conduct by the Fund of its business (as described in the Prospectus) does not require it to be the owner, possessor or licensee of any patents, patent licenses, trademarks, service marks or trade names which it does not own, possess or license, except where the failure to so own, possess or license would not have a material, adverse effect on the Fund.
(t) The Fund is duly registered under the 1940 Act as a closed-end, diversified management investment company and the 1940 Act Notification has been duly filed with the Commission and, at the time of filing thereof and at the time of filing any amendment or supplement thereto, conformed in all material respects with all applicable provisions of the 1940 Act and the Rules and Regulations. The Fund has not received any notice from the Commission pursuant to Section 8(e) of the 1940 Act with respect to the 1940 Act
Notification or the Registration Statement (or any amendment or supplement to either of them).
(u) Any advertising, sales literature or other promotional material (including "prospectus wrappers", "broker kits", "road show slides" and "road show scripts"), whether in printed or electronic form, authorized in writing by or prepared by the Fund or the Advisers for use in connection with the offering and sale of the Preferred Shares (collectively, "sales material") complied and comply in all material respects with the applicable requirements of the 1933 Act, the 1933 Act Rules and Regulations and the rules and interpretations of the NASD and if required to be filed with the NASD under the NASD's conduct rules were provided to Simpson Thacher & Bartlett, counsel for the Underwriters, for filing. No sales material contained or contains an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(v) This Agreement and each of the Fund Agreements complies in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the rules and regulations adopted by the Commission under the Advisers Act (the "Advisers Act Rules and Regulations").
(w) No holder of any security of the Fund has any right to require registration of common shares, the Preferred Shares or any other security of the Fund because of the filing of the registration statement or consummation of the transactions contemplated by this Agreement.
(x) The Fund intends to direct the investment of the proceeds of the offering of the Preferred Shares in such a manner as to comply with the requirements of Subchapter M of the Code.
(y) Except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement to either of them), no trustee of the Fund is an "interested person" (as defined in the 1940 Act) of the Fund or an "affiliated person" (as defined in the 1940 Act) of any Underwriter listed in Schedule I hereto.
7. Representations and Warranties of the Investment Adviser. The Investment Adviser represents and warrants to each Underwriter that, as of the date hereof or at such other time or times identified below:
(a) Each of the Advisers is a duly formed limited liability company and is validly existing in good standing under the laws of the State of Delaware. Each Adviser has full power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and is duly registered and qualified to conduct business and is in good standing in each jurisdiction or place where the nature of its properties or conduct of its business requires such registration or qualification, except where the failure so to register or to qualify would not have a material, adverse effect on the Investment Adviser's or Subadviser's ability to provide
services on behalf of the Fund as contemplated by the Registration Statement and the Prospectus.
(b) Each of the Advisers is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the 1940 Act, the Advisers Act Rules and Regulations or the 1940 Act Rules and Regulations from acting for the Fund under the Fund Agreements to which it is or will be a party as contemplated by the Registration Statement and the Prospectus.
(c) Each of the Advisers has full power and authority to enter into this Agreement and the Fund Agreements to which it is or will be a party; the execution and delivery of, and the performance by each Adviser of its obligations under, this Agreement and the Fund Agreements to which it is or will be a party have been duly and validly authorized by each Adviser; and this Agreement and the Fund Agreements to which it is or will be a party have been duly executed and delivered by each Adviser and constitute the valid and legally binding agreements of such Adviser, enforceable against such Adviser in accordance with their terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and subject to the qualification that the enforceability of such Adviser's obligations hereunder and thereunder may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles.
(d) Each of the Advisers has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Registration Statement and the Prospectus and under this Agreement and the Fund Agreements to which it is or will be a party.
(e) The description of each Adviser and its business, and the statements attributable to each Adviser, in the Registration Statement and the Prospectus complied and comply in all material respects with the provisions of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and the Advisers Act Rules and Regulations and do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading.
(f) There are no legal or governmental proceedings pending or, to the knowledge of each Adviser, threatened against such Adviser or to which any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required or that reasonably should result in any material, adverse change in the condition (financial or other), business, properties, net assets or results of operations of such Adviser or that reasonably should have a material, adverse effect on the ability of such Adviser to fulfill its obligations hereunder or under the Fund Agreements to which it is or will be a party.
(g) Since the date as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material,
adverse change in the condition (financial or other), business, properties, net assets or results of operations of either Adviser, whether or not arising from the ordinary course of business and (B) there have been no transactions entered into by either Adviser which are material to such Adviser other than those in the ordinary course of its business as described in the Prospectus.
(h) Each of the Advisers has such licenses, permits and authorizations of governmental or regulatory authorities ("permits") as are necessary to own its property and to conduct its business in the manner described in the Prospectus; each of the Advisers has fulfilled and performed all its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of such Adviser under any such permit, other than impairments that would not reasonably be expected to have a material, adverse effect on the Investment Adviser or Subadviser, as applicable.
(i) This Agreement and each of the Management Agreement and the Portfolio Management Agreement comply in all material respects with all applicable provisions of the 1940 Act, the 1940 Act Rules and Regulations, the Advisers Act and the Advisers Act Rules and Regulations.
(j) Neither the execution, delivery or performance of this Agreement or the Fund Agreements by each Adviser which is or will be a party thereto, nor the consummation by each Adviser of the transactions contemplated hereby or thereby (A) requires any consent, approval, authorization or other order of or registration or filing with the Commission, the NASD, any state securities commission, any national securities exchange, any arbitrator, any court or any other governmental, regulatory, self-regulatory or administrative agency or any official (except, if applicable, compliance with the securities or Blue Sky laws of various jurisdictions which have been or will be effected in accordance with this Agreement and compliance with the filing requirements, if any, of the NASD Division of Corporate Finance) or conflicts or will conflict with or constitutes or will constitute a breach of or a default under, the limited liability company agreement or other organizational documents of such Adviser or (B) conflicts or will conflict with or constitutes or will constitute a breach of or a default under, any material agreement, indenture, lease or other instrument to which either Adviser is a party or by which it or any of its properties is bound or materially violates or will materially violate any material statute, law, regulation or filing or judgment, injunction, order or decree applicable to either Adviser or any of its properties or will result in the creation or imposition of any material lien, charge or encumbrance upon any property or assets of either Adviser pursuant to the terms of any agreement or instrument to which it is a party or by which it is bound or to which any of the property or assets of such Adviser is subject.
(k) In the event that the Fund or the Advisers makes available any promotional materials intended for use only by qualified broker-dealers and registered representatives thereof by means of a proprietary Internet web site administered by such party or similar electronic means, the Fund or the Advisers will install and maintain pre-qualification and
password-protection or similar procedures which are reasonably designed to restrict access to such promotional materials by persons other than qualified broker-dealers and representatives thereof.
8. Indemnification and Contribution.
(a) The Fund and the Investment Adviser, jointly and severally, agree to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all losses, claims, damages, liabilities and expenses, joint or several (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus, any Prepricing Prospectus, any sales material (or any amendment or supplement to any of the foregoing) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of a prospectus, in light of the circumstances under which they were made) not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriters furnished in writing to the Fund or the Investment Adviser by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the foregoing indemnity with respect to the Registration Statement, the Prospectus or any Prepricing Prospectuses (or any amendment or supplement to any of the foregoing) shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Preferred Shares, if it is shown that a copy of the Prospectus, as then amended or supplemented, which would have cured any defect giving rise to such loss, claim, damage, liability or expense was not sent or delivered to such person by or on behalf of such Underwriter, if required by law to be so delivered, at or prior to the confirmation of the sale of such Preferred Shares to such person and such Prospectus, amendments and supplements had been provided by the Fund to the Underwriters in the requisite quantity and on a timely basis to permit proper delivery. The foregoing indemnity agreement shall be in addition to any liability which the Fund or the Investment Adviser may otherwise have.
(b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Fund or the Investment Adviser, such Underwriter or such controlling person shall promptly notify the Fund or the Investment Adviser in writing of the institution of the action, suit or proceeding and the Fund or the Investment Adviser shall assume the defense thereof, including the employment of counsel and the payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or controlling person unless (i) the Fund or the Investment Adviser has
agreed in writing to the employment of such counsel and the payment of such fees and expenses in connection with the defense of such action, suit or proceeding, (ii) the Fund and the Investment Adviser have failed within a reasonable period of time in light of the circumstances known to the Fund or the Investment Adviser, as the case may be, to assume the defense and employ counsel or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Fund or the Investment Adviser and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and the Fund or the Investment Adviser by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Fund and the Investment Adviser shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Fund and the Investment Adviser shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel if there is any action, suit or proceeding in more than one jurisdiction) at any time for all such Underwriters and controlling persons, which firm shall be designated in writing by Citigroup Global Markets Inc. and that, subject to the requirements of 1940 Act Release No. 11330, all such fees and expenses shall be reimbursed promptly as they are incurred. The Fund and the Investment Adviser shall not be liable for any settlement of any such action, suit or proceeding effected without the written consent of the Fund or the Investment Adviser, but if settled with such written consent or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Fund and the Investment Adviser agree to indemnify and hold harmless any Underwriter, to the extent provided in the preceding paragraph, and any such controlling person from and against any loss, liability, damage or expense by reason by such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Fund and the Investment Adviser, and any of their respective trustees, directors, shareholders, partners, managers, members and officers (including any officers of the Fund who sign the Registration Statement) and any person who controls the Fund or the Investment Adviser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the successors and assigns of the foregoing, to the same extent as the foregoing indemnity from the Fund and the Investment Adviser to each Underwriter, but only with respect to information furnished in writing by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (or any amendment or supplement to any of the foregoing). If any action, suit or proceeding shall be brought against the Fund or the Investment Adviser, any of their trustees, directors, partners, managers, members, shareholders, officers or any such controlling person, based on the Registration Statement, the Prospectus, any Prepricing Prospectus or any sales material (or any amendment or supplement to any of the foregoing) and in respect of which indemnity
may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Fund and the Investment Adviser by paragraph (b) above (except that if the Fund or the Investment Adviser shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's expense) and the Fund and the Investment Adviser, their trustees, directors, partners, managers, members, shareholders, officers and any such controlling person shall have the rights and duties given to the Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have.
(d) If the indemnification provided for in this section 8 is unavailable to an indemnified party under paragraphs (a) or (c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Investment Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand (treated jointly for this purpose as one person) from the offering of the Preferred Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Investment Adviser on the one hand (treated jointly for this purpose as one person) and of the Underwriters on the other hand (treated jointly for this purpose as one person) in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Fund and the Investment Adviser on the one hand (treated jointly for this purpose as one person) and the Underwriters on the other hand (treated jointly for this purpose as one person) shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Fund as set forth in the table on the cover page of the Prospectus and the total payments received by the Underwriters with respect to the Preferred Shares as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Preferred Shares. The relative fault of the Fund and the Investment Adviser on the one hand (treated jointly for this purpose as one person) and of the Underwriters on the other hand (treated jointly for this purpose as one person) shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund and the Investment Adviser on the one hand (treated jointly for this purpose as one person) or by the Underwriters on the other hand (treated jointly for this purpose as one person) and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(e) The Fund, the Investment Adviser and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Preferred Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 8 are several in proportion to the respective number of Preferred Shares set forth opposite their names in Schedule I (or such numbers of Preferred Shares increased as set forth in Section 10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability from claimants on claims that are the subject matter of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or
contribution under this Section 8 shall be paid by the indemnifying
party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 8 and the representations and
warranties of the Fund and the Investment Adviser set forth in this
Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Fund, the
Investment Adviser or their shareholders, trustees, directors,
managers, members or officers or any person controlling the Fund or
the Investment Adviser (control to be determined within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act), (ii)
acceptance of any Preferred Shares and payment therefor hereunder and
(iii) any termination of this Agreement. A successor to any
Underwriter or to the Fund, the Investment Adviser or their
shareholders, trustees, directors, managers, members or officers or
any person controlling any Underwriter, the Fund or the Investment
Adviser shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
The Fund and the Investment Adviser and each Underwriter agree
promptly to notify each other of the commencement of any action, suit
or proceeding against it and, in the case of the Fund or the
Investment Adviser, against any of the Fund's or the Investment
Adviser's
shareholders, partners, trustees, managers, members or officers in connection with the issuance and sale of the Preferred Shares, or in connection with the Registration Statement or Prospectus.
Notwithstanding any other provision in this Section 8, no person shall be entitled to indemnification or contribution under this Agreement against any loss, claim, damage, liability or expense arising by reason of such person's willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of its duties and obligations hereunder.
9. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase any Preferred Shares hereunder are subject to the accuracy of and compliance with the representations, warranties and agreements of and by the Fund and the Investment Adviser contained herein on and as of the date hereof, the date on which the Registration Statement becomes or became effective, the date of the Prospectus (and of any amendment or supplement thereto), and the Closing Date; to the accuracy and completeness of all statements (subject to any applicable qualifications contained therein) made by the Fund, the Investment Adviser or any of their officers in any certificate delivered to the Underwriters or their counsel pursuant to this Agreement and to the following conditions:
(a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto to be declared effective before the offering of the Preferred Shares may commence, the Registration Statement or such post-effective amendment shall have become effective not later than 5:30 p.m., New York City time, on the date hereof or at such later date and time as shall be consented to in writing by you and all filings, if any, required by Rules 497 and 430A under the 1933 Act Rules and Regulations shall have been timely made; no order suspending the effectiveness of the Registration Statement shall have been issued and no proceeding for that purpose shall have been instituted or, to the knowledge of the Fund, the Investment Adviser or any Underwriter, threatened by the Commission and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to your reasonable satisfaction.
(b) You shall have received on the Closing Date two opinions of Ropes & Gray, counsel for the Fund, dated the Closing Date and addressed to you, substantially in the form of Exhibits A1 and A2 to this Agreement.
(c) You shall have received on the Closing Date an opinion of Newton B. Schott, Jr., Esq., internal counsel for the Investment Adviser, dated the Closing Date and addressed to you, substantially in the form of Exhibit B to this Agreement.
(d) You shall have received on the Closing Date an opinion of Newton B. Schott, Jr., Esq., internal counsel for the Investment Adviser, dated the Closing Date and addressed to you, regarding the Subadviser and substantially in the form of Exhibit C to this Agreement.
(e) You shall have received on the Closing Date an opinion of Simpson Thacher & Bartlett, counsel for the Underwriters, dated the Closing Date and addressed to you, with respect to such matters as the Underwriters may require and the Fund, the Investment Adviser and their respective counsels shall have furnished to such counsel such documents as they may request for the purpose of enabling them to pass upon such matters.
(f) You shall have received letters addressed to you and dated the date hereof and the Closing Date from PricewaterhouseCoopers LLP, independent certified public accountants, substantially in the forms heretofore approved by you.
(g) (i) No order suspending the effectiveness of the registration
statement or the Registration Statement or prohibiting or suspending
the use of the Prospectus (or any amendment or supplement thereto) or
any Prepricing Prospectus or any sales material shall have been issued
and no proceedings for such purpose or for the purpose of commencing
an enforcement action against the Fund, the Advisers or, with respect
to the transactions contemplated by the Prospectus (or any amendment
or supplement thereto) and this Agreement, any Underwriter, may be
pending before or, to the knowledge of the Fund, the Advisers or any
Underwriter, shall be threatened or contemplated by the Commission at
or prior to the Closing Date and that any request for additional
information on the part of the Commission (to be included in the
Registration Statement, the Prospectus or otherwise) be complied with
to the satisfaction of the Underwriters; (ii) since the date as of
which information is given in the Registration Statement and the
Prospectus, there shall not have been any change in the shares of
beneficial interest of the Fund, other than through the issuance or
purchase of common shares pursuant to any dividend reinvestment plan
of the Fund relating thereto, nor any material increase in debt of the
Fund from that set forth in the Prospectus and the Fund shall not have
sustained any material liabilities or obligations, direct or
contingent, other than those reflected in the Prospectus (and any
amendment or supplement thereto); (iii) since the date of the
Prospectus there shall not have been any material, adverse change in
the condition (financial or other), business, properties, net assets
or results of operations of the Fund or the Advisers; (iv) the Fund
and the Advisers must not have sustained any material loss or
interference with their business from any court or from legislative or
other governmental action, order or decree or from any other
occurrence not described in the Registration Statement and the
Prospectus (and any amendment or supplement to either of them); and
(v) all of the representations and warranties of the Fund and the
Investment Adviser contained in this Agreement shall be true and
correct (subject to any applicable qualifications contained therein)
on and as of the date hereof and as of the Closing Date as if made on
and as of the Closing Date.
(h) Subsequent to the effective date of this Agreement and prior
to the Closing Date, there shall not have occurred (i) any change or
any development involving a prospective change in or affecting the
condition (financial or other), business, properties, net assets or
results of operations of the Fund or the Advisers not contemplated by
the Prospectus (and any amendment or supplement thereto), which would
materially, adversely affect the market for the Preferred Shares or
(ii) any event or development
relating to or involving the Fund, the Advisers or any officer or trustee or director of the Fund or the Advisers which makes any statement of a material fact made in the Prospectus (or any amendment or supplement thereto) untrue or which requires the making of any addition to or change in the Prospectus (or any amendment or supplement thereto) in order to state a material fact required by the 1933 Act, the 1940 Act, the Rules and Regulations or any other law to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, if amending or supplementing the Prospectus (or any amendment or supplement thereto) to reflect such event or development would materially, adversely affect the market for the Preferred Shares.
(i) Neither the Fund nor the Investment Adviser shall have failed at or prior to the Closing Date to have performed or complied in all material respects with any of the agreements herein contained and required to be performed or complied with by them at or prior to the Closing Date.
(j) You shall have received on the Closing Date a certificate,
dated such date, of the managing director, president or any vice
president and of the chief financial officer, controller or treasurer
of each of the Fund and the Investment Adviser certifying that (i) the
signers have carefully examined the Registration Statement, the
Prospectus and this Agreement, (ii) the representations and warranties
of the Fund (with respect to the certificates from such Fund officers)
and the representations and warranties of the Investment Adviser (with
respect to the certificates from such officers of the Investment
Adviser) in this Agreement are true and correct on and as of the date
of the certificate as if made on such date, (iii) since the date of
the Prospectus there has not been any material, adverse change in the
condition (financial or other), business, properties, net assets or
results of operations of the Fund (with respect to the certificates
from such Fund officers) or the Advisers (with respect to the
certificates from such officers of the Investment Adviser), (iv) to
the knowledge of such officers after reasonable investigation, no
order suspending the effectiveness of the Registration Statement or
prohibiting the sale of any of the Preferred Shares or having a
material, adverse effect on the Fund (with respect to the certificates
from such Fund officers) or the Advisers (with respect to the
certificates from such officers of the Investment Adviser) has been
issued and no proceedings for any such purpose are pending before or
threatened by the Commission or any court or other regulatory body,
the NASD, any state securities commission, any national securities
exchange, any arbitrator, any court or any other governmental,
regulatory, self-regulatory or administrative agency or any official,
(v) each of the Fund (with respect to certificates from such Fund
officers) and the Investment Adviser (with respect to certificates
from such officers of the Investment Adviser) has performed and
complied with all agreements that this Agreement requires it to
perform by such Closing Date to the extent not waived by the
Underwriters, (vi) neither the Fund (with respect to the certificate
from such officers of the Fund) nor the Advisers (with respect to the
certificate from such officers of the Investment Adviser) has
sustained any material loss or interference with its business from any
court or from legislative or other governmental action, order or
decree or from any other occurrence not described in the Registration
Statement and the Prospectus and any amendment or supplement to either
of them and (vii) with respect to the certificate
from such officers of the Fund, there has not been any change in the shares of beneficial interest of the Fund, other than through the issuance or purchase of common shares pursuant to any dividend reinvestment plan of the Fund relating thereto, nor any material increase in the debt of the Fund from that set forth in the Prospectus and the Fund has not sustained any material liabilities or obligations, direct or contingent, other than those reflected in the Prospectus (and any amendment or supplement thereto).
(k) The Fund shall have furnished to you a report showing compliance with the asset coverage requirements of the 1940 Act and a Preferred Shares Basic Maintenance Report (as defined in the By-Laws), each dated the Closing Date and in form and substance satisfactory to you. Each such report shall assume the receipt of the net proceeds from the sale of the Preferred Shares and may use portfolio holdings and valuations as of the close of business of any day not more than six business days preceding the Closing Date, provided, however, that the Fund represents in such report that its total net assets as of the Closing Date have not declined by 5% or more from such valuation date.
(l) The Fund shall have delivered and the Underwriters shall have received evidence satisfactory to the Underwriters that each series of Preferred Shares is rated `Aaa' by Moody's and `AAA' by Fitch as of the Closing Date, and there shall not have been given any notice of any intended or potential downgrading, or of any review for a potential downgrading, in the rating accorded to the shares of each series of the Preferred Shares by either Rating Agency.
(m) The Fund, the Investment Adviser and the Subadviser shall have furnished to you such further certificates, documents and opinions of counsel as are listed in Schedule II hereto.
All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and your counsel acting in good faith.
Any certificate or document signed by any officer of the Fund or the Advisers and delivered to the Underwriters or to Underwriters' counsel shall be deemed a representation and warranty by the Fund or the Advisers, as applicable, to each Underwriter as to the statements made therein.
10. Effective Date of Agreement. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
Registration Statement or a post-effective amendment thereto to be declared
effective before the offering of the Preferred Shares may commence, when
notification of the effectiveness of the Registration Statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Fund by
notifying you or by you by notifying the Fund.
If any one or more of the Underwriters shall fail or refuse to purchase Preferred Shares which it or they have agreed to purchase hereunder and the aggregate number of Preferred Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Preferred Shares, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the aggregate number of Preferred Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Preferred Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with the Citigroup Global Markets Inc. Master Agreement Among Underwriters, to purchase Preferred Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase. If any Underwriter or Underwriters shall fail or refuse to purchase Preferred Shares and the aggregate number of Preferred Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Preferred Shares and arrangements satisfactory to you and the Fund for the purchase of such Preferred Shares by one or more non-defaulting Underwriters or other party or parties reasonably satisfactory to the Underwriters and the Fund are not made within 72 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Fund. In any such case which does not result in termination of this Agreement, either you or the Fund shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability to the Fund, the Investment Adviser or any non-defaulting Underwriter in respect to any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Fund, purchases Preferred Shares which a defaulting Underwriter agreed, but failed or refused, to purchase.
Any notice under this Section 10 may be made by telegram, telecopy or telephone but shall be subsequently confirmed by letter.
11. Termination of Agreement. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of the Underwriters to the Fund or the Investment Adviser, by notice given to the Fund or the Investment Adviser prior to delivery of and payment for the Preferred Shares, if at any time prior to such time (i) trading in the Fund's common shares shall have been suspended by the Commission or the New York Stock Exchange (the "NYSE") or trading in securities generally on the NYSE shall have been suspended or limited or minimum prices for trading in securities generally shall have been established on such Exchange, (ii) a commercial banking moratorium shall have been declared by either federal or New York state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war, or other calamity or crisis the effect of which on financial markets in the United States is such as to make it, in your sole judgment, impracticable or inadvisable to proceed with the offering or delivery of the Preferred Shares as contemplated by the Prospectus (exclusive of any supplement thereto). Notice of such termination may be given to the Fund or the Investment Adviser by telegram, telecopy or telephone and shall be subsequently confirmed by letter.
12. Expenses. If the transactions contemplated by this Agreement are consummated, the Fund agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by the Fund of its obligations hereunder: (a) the preparation, printing or reproduction, filing (including, without limitation, the filing fees prescribed by the 1933 Act, the 1940 Act and the Rules and Regulations) and distribution of the Registration Statement (including exhibits thereto), the Prospectus and each Prepricing Prospectus and all amendments or supplements to any of them, (b) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, the Prospectus, each Prepricing Prospectus, any sales material and all amendments or supplements to any of them as may be reasonably requested by the Underwriters for use in connection with the offering and sale of the Preferred Shares, (c) the preparation, printing, authentication, issuance and delivery of certificates for the Preferred Shares, including any stamp taxes and transfer agent and registrar fees payable in connection with the original issuance and sale of such Preferred Shares, (d) the registrations or qualifications, if necessary, of the Preferred Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters relating to the preparation, printing or reproduction and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification), (e) the fees and expenses of the Fund's independent accountants, counsel for the Fund and of the transfer agent and the auction agent, (f) the printing (or reproduction) and delivery of this Agreement, any dealer agreements, the preliminary and supplemental Blue Sky Memoranda and all other company-authorized agreements or other documents printed (or reproduced) and delivered in connection with the offering of the Preferred Shares, (g) the filing fees and the fees and expenses of counsel for the Underwriters, if any, in connection with any filings required to be made with the NASD and incurred with respect to the review of the offering of the Preferred Shares by the NASD, and (h) the fees paid to the Rating Agencies.
Notwithstanding the foregoing, in the event that the sale of the Preferred
Shares is not consummated pursuant to Section 2 hereof, (i) the Investment
Adviser will pay the costs and expenses of the Fund set forth above in this
Section 12 (a) through (h), (ii) reimbursements of Underwriter expenses in
connection with the offering shall be made in accordance with Section 5(k)
hereof and (iii) no party will be under any liability to any other person with
respect to the costs and expenses described in Section 5(k) hereof and this
Section 12 except as is described in (i) and (ii) above. (For the sake of
clarity, the foregoing sentence does not relieve any defaulting Underwriter from
liability to the Fund, the Investment Manager or any non-defaulting Underwriter
in respect of any such default to any Underwriter under this Agreement.)
13. Information Furnished by the Underwriters. The statements set forth in the [last sentence of the front cover page in the Prospectus, as well as, under the caption "Underwriting" in the Prospectus, the names of the underwriters and numbers of Preferred Shares listed opposite such names in the first paragraph, each sentence of the third paragraph (other than the second sentence) and the seventh paragraph] constitute the only information relating to any Underwriter furnished to the Fund in writing by or on behalf of the Underwriters through you as such information is referred to herein, expressly for use in the Prospectus. The Underwriters severally confirm that these statements are correct in all material respects.
14. Miscellaneous. Except as otherwise provided in Sections 5, 10 and 11 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (a) if to the Fund or the Investment Adviser, c/o PIMCO Advisors Fund Management LLC, 1345 Avenue of the Americas, New York, New York, 10105, Attention: Brian Shlissel, Treasurer or (b) if to you, at the office of Citigroup Global Markets Inc. at 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Fund and the Investment Adviser, and to the extent provided in
Section 8 hereof their trustees, directors, partners, members, managers,
shareholders and officers and the other controlling persons referred to in
Section 8 hereof and their respective successors and assigns to the extent
provided herein and no other person shall acquire or have any right under or by
virtue of this Agreement. Neither the term "successor" nor the term "successors
and assigns" as used in this Agreement shall include a purchaser from any
Underwriter of any of the Preferred Shares in his status as such purchaser.
A copy of the Declaration of Trust of the Fund is on file with the Secretary of State of The Commonwealth of Massachusetts. This Agreement has been executed on behalf of the Fund by the trustees of the Fund in such capacity and not individually and the obligations of this Agreement are not binding upon any officer, any of the trustees or the shareholders individually but are binding only upon the assets and property of the Fund.
15. Applicable Law; Counterparts. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.
This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement among the Fund and the Investment Adviser and the several Underwriters.
Very truly yours,
PIMCO HIGH INCOME FUND
By: ___________________________
Title:
PIMCO ADVISORS FUND MANAGEMENT LLC
By: _____________________________
Title:
Confirmed as of the date
first above written on
behalf of the Underwriters
named in Schedule I hereto.
By: CITIGROUP GLOBAL MARKETS INC.
AS REPRESENTATIVE OF THE SEVERAL UNDERWRITERS
By: CITIGROUP GLOBAL MARKETS INC.
By: ___________________________________ Title: Vice President
SCHEDULE I
Number of
Name of Underwriter Preferred Shares
------------------- ----------------
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
|
Total Underwriters (__)
[LETTERHEAD OF ROPES & GRAY LLP]
SCHEDULE II
Certified Copy of the Fund's Declaration of Trust
Massachusetts Good Standing Certificate of the Fund
Massachusetts CSC Bring Down Confirmation of the Fund
New York Certificate of Filing of the Fund and Filing Receipt
LEXIS search on closing date showing "active" status of the Fund in New York
California Good Standing Certificate of the Fund
California Charles Baclet & Associates Inc. Bring Down Confirmation of the Fund
Secretary's Certificate of the Fund
Annex A Amended and Restated Declaration of Trust of the Fund
Annex B Second Amended and Restated By-Laws of the Fund
Annex C Resolutions adopted by the Board of Trustees of the Fund
Annex D The Underwriting Agreement
Annex E The Auction Agency Agreement
Annex F Specimen of the certificates representing the Preferred Shares
Annex G The Investment Management Agreement
Annex H The Portfolio Management Agreement
Annex I The Custodian Agreement
Annex J The Transfer Agency Services Agreement
Annex K Material written communications relating to the Fund's Registration
Statement and Prospectus (comment letter and response, acceleration
requests, effectiveness order, etc.)
Annex L Certificate of the Secretary of State of The Commonwealth of
Massachusetts certifying as to the good standing of the Fund
|
Certificate of Incumbency of the Fund
Certified Copy of the Certificate of Formation of the Investment Adviser
Delaware Good Standing Certificate of the Investment Adviser
Delaware Bring Down Good Standing Certificate of the Investment Adviser
New York Good Standing Certificate of the Investment Adviser
New York CSC Bring Down Confirmation of the Investment Adviser
California Good Standing Certificate of the Investment Adviser
California Charles Baclet & Associates Inc. Bring Down Confirmation of the Investment Adviser
Connecticut Good Standing Certificate of the Investment Adviser
Connecticut CSC Bring Down Confirmation of the Investment Adviser
Assistant Secretary's Certificate of the Investment Adviser Annex A Certificate of Formation of the Investment Adviser Annex B Limited Liability Company Agreement of the Investment Adviser Annex C Certificate of the Secretary of State of Delaware certifying as to the good standing of the Investment Adviser
Certificate of Incumbency of the Investment Adviser
Certified Copy of the Certificate of Formation of the Subadviser
Delaware Good Standing Certificate of the Subadviser
Delaware Bring Down Good Standing Certificate of the Subadviser
California Good Standing Certificate of the Subadviser
California Charles Baclet & Associates Inc. Bring Down Confirmation of the Subadviser
New York Good Standing Certificate of the Subadviser
New York CSC Bring Down Confirmation of the Subadviser
Secretary's Certificate of the Subadviser
Annex A Certificate of Formation of the Subadviser
Annex B Limited Liability Company Agreement of the Subadviser
Annex C Certificate of the Secretary of State of the State of Delaware
certifying as to the good standing of the Investment Adviser
|
Certificate of Incumbency of the Subadviser
Certification Letter of the Subadviser
Certificate of Auction Agent
Receipt of Fund
Exhibit A1
June __, 2003
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
c/o Citigroup Global Markets Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We have acted as counsel to PIMCO High Income Fund (the "Fund") in connection with the proposed issuance of 7,200 Auction Rate Cumulative Preferred Shares, Series M, 7,200 Auction Rate Cumulative Preferred Shares, Series T, 7,200 Auction Rate Cumulative Preferred Shares, Series W, 7,200 Auction Rate Cumulative Preferred Shares, Series TH, and 7,200 Auction Rate Cumulative Preferred Shares, Series F (together, the "Preferred Shares"). This opinion is furnished to you pursuant to Section 9(b) of the Underwriting Agreement dated as of June __, 2003 (the "Underwriting Agreement"), among the Fund, PIMCO Advisors Fund Management LLC (the "Investment Manager") and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and UBS Securities LLC (the "Underwriters"). Capitalized terms used in this opinion, unless otherwise defined, have the meanings specified in the Underwriting Agreement.
We have examined signed copies of the registration statement of the Fund on Form N-2 (File No. 333-104915) under the Securities Act of 1933, as amended (the "Securities Act") (which also constitutes Amendment No. 5 to the Fund's Registration Statement on Form N-2 (File No. 811-21311) under the Investment Company Act of 1940, as amended (the "Investment Company Act")), including all exhibits thereto, as filed with the Securities and Exchange Commission (the "Commission") on May 1, 2003 (the "Original Registration Statement"), Pre-Effective Amendment No. 1 to the Original Registration Statement, including all exhibits thereto, as filed with the Commission on June 16, 2003 ("Pre-Effective Amendment No. 1") and Pre-Effective
Amendment No. 2 to the Original Registration Statement, including all exhibits thereto, as filed with the Commission on June __, 2003 ("Pre-Effective Amendment No. 2," and together with Pre-Effective Amendment No. 1 and the Original Registration Statement, the "Registration Statement"); the Fund's Notification of Registration on Form N-8A (File No. 811-21311) under the Investment Company Act, as filed with the Commission on February 21, 2003 (the "Notification of Registration"); the Fund's Agreement and Declaration of Trust, as amended to the date hereof (the "Declaration of Trust"), on file in the offices of the Secretary of State of The Commonwealth of Massachusetts and the Clerk of the City of Boston; the Second Amended and Restated Bylaws of the Fund, as amended to the date hereof (the "Amended Bylaws"); a copy of the Prospectus dated June __, 2003, relating to the Preferred Shares and the Statement of Additional Information of the Fund dated June __, 2003, each as filed with the Commission pursuant to Rule 497 under the Securities Act on June __, 2003 (together, the "Prospectus"); the Investment Management Agreement dated as of April 8, 2003, between the Fund and the Investment Manager (the "Investment Management Agreement"); the Portfolio Management Agreement dated as of April 8, 2003, between Pacific Investment Management Company LLC (the "Portfolio Manager") and the Investment Manager (the "Portfolio Management Agreement"), as agreed to and accepted by the Fund; the Custodian and Investment Accounting Agreement dated as of April 8, 2003, between the Fund and State Street Bank and Trust Company (the "Custodian Agreement"); the Auction Agency Agreement dated as of June __, 2003, between the Fund and Deutsche Bank Trust Company Americas (the "Auction Agency Agreement"); the Transfer Agency Services Agreement dated as of April 14, 2003, between the Fund and PFPC Inc. (the "Transfer Agency Agreement" and together with the Custodian Agreement and the Auction Agency Agreement, the "Fund Agreements"); and the Underwriting Agreement. Additionally, we have relied solely upon the oral representation of Keith O'Connell of the Commission staff to the effect that the Registration Statement became effective as of ___ p.m. on June __, 2003, and the oral representation by a member of the Commission staff on the date hereof that as of ___ a.m., no stop order suspending the effectiveness of the Registration Statement had been issued and no proceeding for any such purpose was pending or threatened.
We have also examined and relied upon the original or copies of minutes of the meetings or written consents of the shareholders and the Board of Trustees of the Fund, the documents delivered to the Underwriters by the Fund and the Investment Manager dated as of the date hereof pursuant to the Underwriting Agreement and such other documents, including certificates of officers of the Fund, as we have deemed necessary for purposes of rendering our opinions below. For purposes of paragraph 2 below, we have relied solely on (1) the certificate dated as of June __, 2003, of the Secretary of State of the State of California as to the entitlement of the Fund to transact intrastate business in the State of California, (2) a Certificate of the Secretary of State of the State of New York dated June __, 2003, certifying copies of (a) a Certificate of Designation by the Fund dated April 8, 2003, and (b) a Statement under Section 18 of the New York General Associations Law, (3) a Filing Receipt of the Department of State of the State of New York dated April 10, 2003 relating to the Fund and (4) a LEXIS search on June __, 2003 of the New York Department of State, Corporate Record, showing the "status" of the Fund as
"active" and noting that "good standing status can only be determined by performing a search in the records of both the Department of State Corporation Records and the Department of Tax and Franchise." We have assumed the genuineness of the signatures on all documents examined by us, the authenticity of all documents submitted to us as originals and the conformity to the corresponding originals of all documents submitted to us as copies. For purposes of our opinion regarding the effectiveness of the Registration Statement, we are relying solely on the oral representations of the Commission staff.
We express no opinion as to the laws of any jurisdiction other than The Commonwealth of Massachusetts and the United States of America. We call your attention to the fact that each of the Underwriting Agreement and the Auction Agency Agreement provides that it is to be governed by and construed in accordance with the laws of the State of New York, to the fact that the Transfer Agency Agreement provides that it is to be governed by and construed in accordance with the laws of the State of Delaware and to the fact that the Investment Management Agreement does not provide that it is to be governed by the laws of any particular jurisdiction. In rendering the opinion as to enforceability expressed in paragraph 6 below, we have limited the scope of our opinion to the conclusions that would be reached by a Massachusetts court that had determined that each of the Fund Agreements would be governed by, and construed in accordance with, the internal laws of The Commonwealth of Massachusetts. Further, we express no opinion as to the state securities or Blue Sky laws of any jurisdiction, including The Commonwealth of Massachusetts.
For purposes of our opinion set forth in paragraph 2 below with respect to the power and authority of the Fund to own, lease and operate its properties and conduct its business, we have relied upon certificates of officers of the Fund as to the states in which the Fund leases or owns real property or in which it conducts material operations.
Insofar as this opinion relates to factual matters, we have made inquiries to officers of the Fund, the Investment Manager and the Portfolio Manager to the extent we believe reasonable with respect to such matters and have relied inter alia upon representations made by the Fund and the Investment Manager in the Underwriting Agreement, representations made by the Portfolio Manager to the Investment Manager and representations made to us by one or more officers of the Fund, the Investment Manager or the Portfolio Manager. We have not independently verified the accuracy of such representations. Where our opinion relates to our "knowledge," that term means the conscious awareness of facts or other information by any lawyer in our firm giving substantive attention to the representation of the Fund with respect to the transactions contemplated by the Underwriting Agreement, and does not require or imply (i) any examination of this firm's, any such lawyer's or any other person's or entity's files, or (ii) that any inquiry was made of any lawyer (other than the lawyers described above). In respect of our opinions set forth in paragraphs 8, 10 and 11 below, we have not searched the dockets of any court, administrative body or other filing office in any jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Registration Statement and all post-effective amendments filed with the Commission on or before the Closing Date, if any, are effective under the Securities Act; the filing of the Prospectus pursuant to Rule 497 under the Securities Act has been made in the manner and within the time period required by Rule 497; and based upon oral inquiries to the Commission staff on the date hereof, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for any such purpose is pending or threatened by the Commission.
2. The Fund has been duly organized and is validly existing and in good standing as an unincorporated voluntary association under and by virtue of the laws of The Commonwealth of Massachusetts and has full power and authority to own or lease its properties and to conduct its business as described in the Registration Statement and the Prospectus. The Certificate of Designation relating to the Fund's conduct of business in the State of New York is on file with the Department of State of the State of New York, and the Fund is entitled to transact intrastate business in the State of California.
3. The Fund's authorized capitalization is as set forth in the Registration Statement and the Prospectus. The Preferred Shares conform in all material respects as to legal matters to the description of them under the sections entitled "Description of Preferred Shares" and "Description of Capital Structure" in the Prospectus. The Preferred Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and, subject to the penultimate paragraph of this opinion letter, non-assessable. No person is entitled to any preemptive or other similar rights with respect to the Preferred Shares.
4. The outstanding common shares of beneficial interest of the Fund, par value $0.00001 per share, have been duly authorized and are validly issued, fully paid and, subject to the penultimate paragraph of this opinion letter, non-assessable.
5. The Fund was deemed to be registered under Section 8(a) of the Investment Company Act upon receipt by the Commission of the Notification of Registration. To our knowledge, the Commission has not issued to the Fund notice of any hearing or other proceeding to consider suspension or revocation of any such registration statement. All required action has been taken by the Fund under the Securities Act, the Investment Company Act and the rules and regulations thereunder in connection with the issuance and sale of the Preferred Shares to make the public offering and consummate the sale of the Preferred Shares pursuant to the Underwriting Agreement.
6. The Fund has, or at the relevant time had, full power and authority to enter into each of the Fund Agreements and to perform all of the terms and provisions thereof to be carried out by it. Each Fund Agreement has been duly and validly authorized, executed and delivered by the Fund. Each Fund Agreement complies in all material respects with all applicable provisions of the Investment Company Act and the Investment Advisers Act of 1940,
as amended, as the case may be, and the rules and regulations thereunder. Assuming due authorization, execution and delivery by the other parties thereto, each Fund Agreement constitutes the legal, valid and binding obligation of the Fund enforceable in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, moratorium, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles (regardless of whether enforceability is considered in a proceeding in equity or at law).
7. The Fund has, or at the relevant time had, full power and authority to enter into each of the Investment Management Agreement and the Underwriting Agreement and to perform all of the terms and provisions thereof to be carried out by it. The Investment Management Agreement and the Underwriting Agreement have been duly and validly authorized, executed and delivered by the Fund.
8. None of (a) the execution and delivery by the Fund of the Investment Management Agreement, the Underwriting Agreement or any of the Fund Agreements, (b) the issue and sale by the Fund of the Preferred Shares as contemplated by the Underwriting Agreement and (c) the performance by the Fund of its obligations under the Investment Management Agreement, the Underwriting Agreement or any of the Fund Agreements or the consummation by the Fund of the other transactions contemplated by the Investment Management Agreement, the Underwriting Agreement or any of the Fund Agreements conflicts or will conflict with, or results or will result in a breach of, the Declaration of Trust or the Amended Bylaws or, to our knowledge, any agreement or instrument to which the Fund is a party or by which the Fund is bound, or violates or will violate any federal or Massachusetts statute, law or regulation or any judgment, injunction, order or decree of any federal or Massachusetts governmental agency or body that is applicable to the Fund and that is known to us, which violation would have a material adverse effect on the condition or business of the Fund.
9. To our knowledge, the Fund is not currently in breach of, or in default under, any material written agreement or instrument to which it is a party or by which it or its property is bound or affected.
10. No consent, approval, authorization or order of or registration with any court or governmental agency or body or securities exchange or securities association is required by the Fund for the consummation by the Fund of the transactions contemplated in the Investment Management Agreement, the Underwriting Agreement and the Fund Agreements, except such as (a) have been obtained under the Securities Act, the Investment Company Act or the Securities Exchange Act of 1934, as amended, and (b) may be required by the National Association of Securities Dealers, Inc. or under state securities or Blue Sky laws in connection with the purchase and distribution of the Preferred Shares by the Underwriters pursuant to the Underwriting Agreement.
11. To our knowledge, there are no legal or governmental proceedings pending or threatened against the Fund, or to which the Fund or any of its properties is subject,
that are required to be described in the Registration Statement or the Prospectus but are not described therein as required.
12. To our knowledge, there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which have not been so described or filed as an exhibit or incorporated therein by reference.
13. Each of the sections in the Prospectus entitled "Tax Matters," to the extent that it states matters of United States law or legal conclusions with respect thereto, presents a fair summary of the principal federal income tax rules currently in effect applicable to the Fund and to the purchase, ownership and disposition of the Preferred Shares.
14. The Registration Statement (except for the financial statements and schedules, the notes thereto and any schedules and other financial data contained or incorporated by reference therein or omitted therefrom, as to which we express no opinion), at the effective time set forth above, and the Prospectus (except as aforesaid), as of the date thereof, complied as to form in all material respects with the applicable requirements of the Securities Act and the Investment Company Act and the rules and regulations thereunder.
We have not independently verified the accuracy, completeness or fairness of the statements made or the information contained in the Registration Statement or the Prospectus and, except in the respects and to the extent set forth in paragraphs 3, 13 and 14 above, we are not passing upon and do not assume any responsibility therefor. In the course of the preparation by the Fund of the Registration Statement and the Prospectus, we have participated in discussions with your representatives and employees and officers of the Fund, the Investment Manager and the Portfolio Manager and in discussions with the Fund's independent accountants, in which the business and the affairs of the Fund, the Investment Manager and the Portfolio Manager and the contents of the Registration Statement and the Prospectus were discussed. There is no assurance that all material facts as to the Fund, the Investment Manager, the Portfolio Manager and their affairs were disclosed to us or that our familiarity with the Fund and the Investment Manager or any familiarity with the Portfolio Manager is such that we would have necessarily recognized the materiality of such facts as were disclosed to us, and we have to a large extent relied upon statements of representatives of the Fund, the Investment Manager and the Portfolio Manager as to the materiality of the facts disclosed to us. On the basis of information that we have gained in the course of our representation of the Fund in connection with its preparation of the Registration Statement and the Prospectus and our participation in the discussions referred to above, no facts have come to our attention that would lead us to believe that, as of the effective date of the Registration Statement, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that as of the date of the Prospectus and the date hereof the Prospectus contained an untrue statement of material fact or omitted to state a material fact necessary in order to make the statements therein, in light, in each case, of the circumstances
under which they were made, not misleading (in each case, other than the financial statements and schedules, the notes thereto and any schedules and other financial data contained or incorporated by reference therein or omitted therefrom, as to which we express no opinion).
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration of Trust disclaims shareholder liability for acts or obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation, and instrument entered into or executed by the Fund or the Trustees. The Declaration of Trust provides for indemnification out of the property of the Fund for all loss and expense of any shareholder held personally liable solely by reason of being or having been a shareholder of the Fund. Thus, the risk of a shareholder's incurring financial loss on account of being a shareholder is limited to circumstances in which the Fund itself would be unable to meet its obligations.
This letter and the opinions expressed herein are furnished by us to you and are solely for benefit of the Underwriters, except that Simpson Thacher & Bartlett LLP may rely on this letter as to all matters governed by the laws of The Commonwealth of Massachusetts in delivering its opinion to you on the date hereof.
Very truly yours,
Ropes & Gray LLP
Exhibit A2
June ___, 2003
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
c/o Citigroup Global Markets Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We have acted as counsel to PIMCO High Income Fund (the "Fund") in connection with the proposed issuance of 7,200 Auction Rate Cumulative Preferred Shares, Series M, 7,200 Auction Rate Cumulative Preferred Shares, Series T, 7,200 Auction Rate Cumulative Preferred Shares, Series W, 7,200 Auction Rate Cumulative Preferred Shares, Series TH, and 7,200 Auction Rate Cumulative Preferred Shares, Series F (the "Preferred Shares"). As an accommodation to the Fund, we are also rendering this opinion on behalf of PIMCO Advisors Fund Management LLC (the "Investment Manager") solely with respect to the regulatory matters referred to below. This opinion is furnished to you pursuant to Section 9(b) of the Underwriting Agreement dated as of June __, 2003 (the "Underwriting Agreement"), among the Fund, the Investment Manager and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and UBS Securities LLC (the "Underwriters"). Capitalized terms used in this opinion, unless otherwise defined, have the meanings specified in our opinion of even date rendered on behalf of the Fund.
Solely for purposes of this opinion, we have assumed that each of the Investment Management Agreement and the Portfolio Management Agreement has been duly authorized, executed and delivered and constitutes a legal, valid and binding obligation of the parties thereto in accordance with its respective terms, and that the descriptions of the Investment Management Agreement and the Portfolio Management Agreement in the Registration Statement are accurate and complete in all respects. We have also, with your permission and without independent investigation of the matters set forth therein, relied on the opinions of even date herewith of Newton B. Schott, Jr., Esq., Chief Legal Officer of the Investment Manager.
We express no opinion as to the laws of any jurisdiction other than the United States of America.
Based upon and subject to the foregoing, we are of the opinion that:
1. Assuming the Investment Manager is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is not prohibited by the Advisers Act or the Investment Company Act of 1940, as amended (the "Investment Company Act"), from acting as investment adviser for the Fund as contemplated by the Investment Management Agreement, the Registration Statement and the Prospectus, neither the execution and delivery of the Underwriting Agreement, the Investment Management Agreement or the Portfolio Management Agreement by the Investment Manager, nor the consummation by the Investment Manager of the transactions contemplated thereby, nor compliance by the Investment Manager with any of the terms and provisions thereof will violate the provisions of the Investment Company Act, the Advisers Act or the rules and regulations thereunder; provided, however, that the foregoing does not represent an opinion as to (a) the reasonableness of the fees to be paid to the Investment Manager under the Investment Management Agreement or (b) the compliance by the Investment Manager with its indemnification and contribution obligations set forth in the Underwriting Agreement.
2. Assuming the Portfolio Manager is duly registered as an investment adviser under the Advisers Act, and is not prohibited by the Advisers Act or the Investment Company Act from acting as portfolio manager for the Fund as contemplated by the Portfolio Management Agreement, the Registration Statement and the Prospectus, neither the execution and delivery of the Portfolio Management Agreement by the Portfolio Manager, nor the consummation by the Portfolio Manager of the transactions contemplated thereby, nor compliance by the Portfolio Manager with any of the terms and provisions thereof will violate the provisions of the Investment Company Act, the Advisers Act or the rules and regulations thereunder; provided, however, that the foregoing does not represent an opinion as to the reasonableness of the fees to be paid to the Portfolio Manager under the Portfolio Management Agreement.
This letter and the opinions expressed herein are furnished by us to you and are solely for benefit of the Underwriters.
Very truly yours,
Ropes & Gray LLP
Exhibit B
PIMCO ADVISORS FUND MANAGEMENT LLC
1345 Avenue of the Americas
New York, New York 10105
June __, 2003
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
c/o Citigroup Global Markets Inc.
388 Greenwich Street
New York, New York 10013
Re: PIMCO Advisors Fund Management LLC
Ladies and Gentlemen:
I am the Chief Legal Officer of PIMCO Advisors Fund Management LLC, a Delaware limited liability company ("PIMCO Advisors"), and have counseled PIMCO Advisors in such capacity in connection with the issuance and sale to you today by PIMCO High Income Fund, a voluntary association with transferable shares organized and existing under and by virtue of the laws of The Commonwealth of Massachusetts (commonly referred to as a Massachusetts business trust) (the "Fund"), of 7,200 Auction Rate Cumulative Preferred Shares, Series M, 7,200 Auction Rate Cumulative Preferred Shares, Series T, 7,200 Auction Rate Cumulative Preferred Shares, Series W, 7,200 Auction Rate Cumulative Preferred Shares, Series TH, and 7,200 Auction Rate Cumulative Preferred Shares, Series F, of the Fund (the "Preferred Shares"), pursuant to a registration statement on Form N-2 under the Securities Act of 1933, as amended (the "Act"), and the Investment Company Act of 1940, as amended (the "Investment Company Act"), filed with the Securities and Exchange Commission (the "Commission") on May 1, 2003 (Act File No. 333-104915, and Investment Company Act File No. 811-21311), as amended by Pre-Effective Amendment No. 1 filed with the Commission on June 16, 2003, and Pre-Effective Amendment No. 2 filed with the Commission on June __, 2003 (such registration statement, as amended, referred to herein as the "Registration Statement"), and an underwriting agreement
dated June __, 2003, by and among you, the Fund and PIMCO Advisors (the "Underwriting Agreement") relating to the issuance and sale by the Fund of the Preferred Shares.
This opinion is rendered to you pursuant to Section 9(c) of the Underwriting Agreement. Capitalized terms used herein without definition have the meanings assigned to them in the Underwriting Agreement.
As such legal officer, I have examined such matters of fact and questions of law as I have considered appropriate for purposes of rendering the opinions expressed below, except where a statement is qualified as to knowledge or awareness, in which case I have made no or limited inquiry as specified below. I have examined, among other things, the following:
(a) the Underwriting Agreement;
(b) that certain Investment Management Agreement by and between the Fund and PIMCO Advisors, dated as of April 8, 2003; and
(c) that certain Portfolio Management Agreement by and between Pacific Investment Management Company LLC and PIMCO Advisors, as accepted and agreed to by the Fund, dated as of April 8, 2003.
The documents described in subsections (a)-(c) above are referred to herein collectively as the "Transaction Documents."
In my examination, I have assumed the genuineness of all signatures (other than those of officers of PIMCO Advisors on the Transaction Documents), the authenticity of all documents submitted to me as originals, and the conformity to authentic original documents of all documents submitted to me as copies.
I have been furnished with, and with your consent have relied upon, certificates of officers of PIMCO Advisors with respect to certain factual matters. In addition, I have obtained and relied upon such certificates and assurances from public officials as I have deemed necessary.
I am opining herein as to the effect of the federal laws of the United States, the internal laws of the State of New York and the internal laws of the State of Delaware, and I express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or country or as to any matters of municipal law or the laws of any other local agencies within any state or country. My opinions set forth in paragraph 4 below are based upon my consideration of only those statutes, rules and regulations which, in my experience, are normally applicable to transactions similar to those contemplated by the Transaction Documents, generally.
Whenever a statement herein is qualified by "to my knowledge" or a similar phrase, it is intended to indicate that I do not have current actual knowledge of the inaccuracy of such statement. However, except as otherwise expressly indicated, I have not undertaken any independent investigation to determine the accuracy of any such statement, and no inference that I have any knowledge of any matters pertaining to such statement should be drawn from my position as Chief Legal Officer of PIMCO Advisors.
Subject to the foregoing and the other matters set forth herein, it is my opinion that, as of the date hereof:
1. PIMCO Advisors is a limited liability company and is validly existing and in good standing under the Delaware Limited Liability Company Act (6 Del. C ss.. 18-101, et seq.) with all necessary limited liability company power and authority to enter into and deliver the Transaction Documents and perform its obligations thereunder and to carry on its business as it is now being conducted and as described in the Registration Statement. Based solely on certificates from public officials dated _______, 2003, ________, 2003, and __________, 2003, respectively, I confirm that PIMCO Advisors is qualified to do business in the following States: California, New York and Connecticut, such States being those in which its ownership or leasing of property or its conducting of business may require such qualification and where failure to so qualify would have a material adverse effect on the ability of PIMCO Advisors to perform its obligations under the Investment Management Agreement and the Portfolio Management Agreement.
2. The execution, delivery and performance of the Transaction Documents by PIMCO Advisors have been duly authorized by all necessary limited liability company action of PIMCO Advisors and no other actions on the part of PIMCO Advisors or its unitholders or any subsidiary of PIMCO Advisors or its unitholders is necessary to authorize and consummate the transactions contemplated thereby, and the Transaction Documents have been duly executed and delivered by PIMCO Advisors.
3. Each of the Investment Management Agreement and the Portfolio Management Agreement constitutes a legally valid and binding agreement of PIMCO Advisors, enforceable against PIMCO Advisors in accordance with its terms.
4. Neither the execution and delivery of the Transaction Documents by PIMCO Advisors, nor the consummation by PIMCO Advisors of transactions contemplated thereby, nor compliance by PIMCO Advisors with any of the terms and provisions thereof will:
(i) violate any provision of the Limited Liability Company Agreement of PIMCO Advisors, effective October 23, 2002, which is still in full force and effect and which has not been amended or supplemented through the date hereof,
(ii) violate any federal, Delaware or New York statute, rule or regulation applicable to PIMCO Advisors (other than federal and state securities or blue sky laws, the Investment Company Act and the Investment Advisers Act of 1940, as amended (the "Advisers Act"), as to which I express no opinion),
(iii) violate any agreement to which PIMCO Advisors is a party or by which it is bound and which is material to PIMCO Advisors' businesses taken as a whole (the "Material Agreements"),
(iv) violate any order, writ, injunction or decree, known to me and applicable to PIMCO Advisors, or
(v) to the best of my knowledge, require any consents, approvals, authorizations, registrations, declarations or filings by PIMCO Advisors under any federal or Delaware statute, rule or regulation applicable to PIMCO Advisors, except as have been obtained under the Act, the Investment Company Act or the Advisers Act and the rules and regulations thereunder.
No opinion is expressed in this paragraph 4 as to the application of
Section 548 of the federal Bankruptcy Code and comparable provisions of state or
foreign law or of any antifraud, antitrust or trade regulation laws. No opinion
is expressed in this paragraph 4 with respect to the operating licenses
necessary for PIMCO Advisors' businesses.
5. PIMCO Advisors is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Investment Company Act or the rules and regulations thereunder from acting as investment adviser for the Fund as contemplated by the Investment Management Agreement, the Registration Statement and the Prospectus.
6. The description of PIMCO Advisors and its business, and the statements attributable to PIMCO Advisors, set forth in the Registration Statement or the Prospectus under the headings "Prospectus Summary - Investment Manager", "Management of the Fund" and "Investment Manager and Portfolio Manager" do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading.
7. There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to my knowledge, threatened against PIMCO Advisors of a nature required to be disclosed in the Registration Statement or Prospectus or that might reasonably result in any material adverse change in the ability of PIMCO Advisors to fulfill its obligations under either the Investment Management Agreement or the Portfolio Management Agreement.
The opinions expressed in paragraph 3 above are subject to the following limitations, qualifications and exceptions:
(a) the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights or remedies of creditors generally;
(b) the effect of general principles of equity, whether enforcement is considered in a proceeding in equity or at law, and the discretion of the court before which any proceeding therefor may be brought;
(c) the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy; and
(d) the unenforceability of any provision requiring the payment of attorney's fees, except to the extent that a court determines such fees to be reasonable.
In rendering the opinions expressed in paragraph 4 insofar as they require interpretation of the Material Agreements (i) I have assumed with your permission that all courts of competent jurisdiction would enforce such agreements as written but would apply the internal laws of the State of New York without giving effect to any choice of law provisions contained therein or any choice of law principles which would result in application of the internal laws of any other state and (ii) to the extent that any questions of legality or legal construction have arisen in connection with my review, I have applied the laws of the State of New York in resolving such questions. I advise you that certain of the Material Agreements may be governed by other laws, that such laws may vary substantially from the law assumed to govern for purposes of this opinion, and that this opinion may not be relied upon as to whether or not a breach or default would occur under the law actually governing such Material Agreements.
To the extent that the obligations of PIMCO Advisors may be dependent upon such matters, I assume for purposes of this opinion that: (i) all parties to the Transaction Documents other than PIMCO Advisors are duly incorporated or organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation or organization; (ii) all parties to the Transaction Documents other than PIMCO Advisors have the requisite power and authority and, in the case of natural persons, legal capacity to execute and deliver the Transaction Documents and to perform their respective obligations under the Transaction Documents to which they are a party; and (iii) the Transaction Documents to which such parties other than PIMCO Advisors are a party have been duly authorized, executed and delivered by such parties and, other than PIMCO Advisors, constitute their legally valid and binding obligations, enforceable against them in accordance with their terms. I express no opinion as to compliance by any parties to the Transaction Documents with any state or federal laws or regulations applicable to the subject transactions because of the nature of their business and I
express no opinion as to compliance by any parties to the Transaction Documents with any foreign laws or regulations applicable to the transactions contemplated by the Transaction Documents or which may affect the Transaction Documents' enforceability.
This opinion is rendered only to you and is solely for your benefit in connection with the transactions covered hereby. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to or relied upon by any other person, firm or corporation for any purpose, without my prior written consent.
Very truly yours,
Exhibit C
PIMCO ADVISORS FUND MANAGEMENT LLC
1345 Avenue of the Americas
New York, New York 10105
June __, 2003
Citigroup Global Markets Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Securities LLC
c/o Citigroup Global Markets Inc.
388 Greenwich Street
New York, New York 10013
Re: Pacific Investment Management Company LLC
Ladies and Gentlemen:
I am the Chief Legal Officer of PIMCO Advisors Fund Management LLC, a Delaware limited liability company ("PIMCO Advisors"). PIMCO Advisors is an affiliate of and under common control with Pacific Investment Management Company LLC, a Delaware limited liability company ("PIMCO"). In my capacity as Chief Legal Officer of PIMCO Advisors, I am rendering this opinion on behalf of PIMCO in connection with the issuance and sale to you today by PIMCO High Income Fund, a voluntary association with transferable shares organized and existing under and by virtue of the laws of The Commonwealth of Massachusetts (commonly referred to as a Massachusetts business trust) (the "Fund"), of 7,200 Auction Rate Cumulative Preferred Shares, Series M, 7,200 Auction Rate Cumulative Preferred Shares, Series T, 7,200 Auction Rate Cumulative Preferred Shares, Series W, 7,200 Auction Rate Cumulative Preferred Shares, Series TH, and 7,200 Auction Rate Cumulative Preferred Shares, Series F, of the Fund (the "Preferred Shares"), pursuant to a registration statement on Form N-2 under the Securities Act of 1933, as amended (the "Act"), and the Investment Company Act of 1940, as amended (the "Investment Company Act"), filed with the Securities and Exchange Commission (the "Commission") on May 1, 2003 (Act File No. 333-104915, and Investment Company Act File No. 811-21311), as amended by Pre-Effective Amendment No. 1 filed with the Commission on June 16, 2003, and Pre-Effective Amendment No. 2 filed with the Commission on June __, 2003 (such registration statement, as amended, referred to herein as the "Registration Statement"), and
an underwriting agreement dated June __, 2003, by and among you, the Fund and PIMCO Advisors (the "Underwriting Agreement") relating to the issuance and sale by the Fund of the Preferred Shares.
This opinion is rendered to you pursuant to Section 9(d) of the Underwriting Agreement. Capitalized terms used herein without definition have the meanings assigned to them in the Underwriting Agreement.
As such legal officer, I have examined such matters of fact and questions of law as I have considered appropriate for purposes of rendering the opinions expressed below, except where a statement is qualified as to knowledge or awareness, in which case I have made no or limited inquiry as specified below. I have examined, among other things, that certain Portfolio Management Agreement by and between PIMCO and PIMCO Advisors, as accepted and agreed to by the Fund, dated as of April 8, 2003 (the "Portfolio Management Agreement").
In my examination, I have assumed the genuineness of all signatures (other than those of officers of PIMCO on the Portfolio Management Agreement), the authenticity of all documents submitted to me as originals, and the conformity to authentic original documents of all documents submitted to me as copies.
I have been furnished with, and with your consent have relied upon, certificates of officers of PIMCO with respect to certain factual matters. In addition, I have obtained and relied upon such certificates and assurances from public officials as I have deemed necessary.
I am opining herein as to the effect of the federal laws of the United States, the internal laws of the State of New York and the internal laws of the State of Delaware, and I express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or country or as to any matters of municipal law or the laws of any other local agencies within any state or country. My opinions set forth in paragraph 4 below are based upon my consideration of only those statutes, rules and regulations which, in my experience, are normally applicable to transactions similar to those contemplated by the Portfolio Management Agreement, generally.
Whenever a statement herein is qualified by "to my knowledge" or a similar phrase, it is intended to indicate that I do not have current actual knowledge of the inaccuracy of such statement. However, except as otherwise expressly indicated, I have not undertaken any independent investigation to determine the accuracy of any such statement, and no inference that I have any knowledge of any matters pertaining to such statement should be drawn from my position as Chief Legal Officer of PIMCO Advisors.
Subject to the foregoing and the other matters set forth herein, it is my opinion that, as of the date hereof:
1. PIMCO is a limited liability company and is validly existing and in good standing under the Delaware Limited Liability Company Act (6 Del. C ss.. 18-101, et seq.) with all necessary limited liability company power and authority to enter into and deliver the Portfolio Management Agreement and perform its obligations thereunder and to carry on its business as it is now being conducted and as described in the Registration Statement. Based solely on certificates from public officials dated ________, 2003, and ________, 2003, respectively, I confirm that PIMCO is qualified to do business in the following States: California and New York, such States being those in which its ownership or leasing of property or its conducting of business may require such qualification and where failure to so qualify would have a material adverse effect on the ability of PIMCO to perform its obligations under the Portfolio Management Agreement.
2. The execution, delivery and performance of the Portfolio Management Agreement by PIMCO have been duly authorized by all necessary limited liability company action of PIMCO and no other actions on the part of PIMCO or its unitholders or any subsidiary of PIMCO or its unitholders is necessary to authorize and consummate the transactions contemplated thereby, and the Portfolio Management Agreement has been duly executed and delivered by PIMCO.
3. The Portfolio Management Agreement constitutes a legally valid and binding agreement of PIMCO, enforceable against PIMCO in accordance with its terms.
4. Neither the execution and delivery of the Portfolio Management Agreement by PIMCO, nor the consummation by PIMCO of transactions contemplated thereby, nor compliance by PIMCO with any of the terms and provisions thereof will:
(i) violate any provision of the limited liability company agreement of PIMCO, effective May 5, 2000, which is still in full force and effect and which has not been amended or supplemented through the date hereof,
(ii) violate any federal, Delaware or New York statute, rule or regulation applicable to PIMCO (other than federal and state securities or blue sky laws, the Investment Company Act and the Investment Advisers Act of 1940, as amended (the "Advisers Act"), as to which I express no opinion),
(iii) violate any agreement to which PIMCO is a party or by which it is bound and which is material to PIMCO's businesses taken as a whole (the "Material Agreements"),
(iv) violate any order, writ, injunction or decree, known to me and applicable to PIMCO, or
(v) to the best of my knowledge, require any consents, approvals, authorizations, registrations, declarations or filings by PIMCO under any federal or Delaware statute, rule or regulation applicable to PIMCO, except as have been obtained under the Act, the Investment Company Act or the Advisers Act and the rules and regulations thereunder.
No opinion is expressed in this paragraph 4 as to the application of
Section 548 of the federal Bankruptcy Code and comparable provisions of state or
foreign law or of any antifraud, antitrust or trade regulation laws. No opinion
is expressed in this paragraph 4 with respect to the operating licenses
necessary for PIMCO's businesses.
5. PIMCO is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act, the Investment Company Act or the rules and regulations thereunder from acting as investment sub-adviser for the Fund as contemplated by the Portfolio Management Agreement, the Registration Statement and the Prospectus.
6. The description of PIMCO and its business, and the statements attributable to PIMCO, set forth in the Registration Statement or the Prospectus under the headings "Prospectus Summary - Portfolio Manager", "Management of the Fund" and "Investment Manager and Portfolio Manager" do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading.
7. There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to my knowledge, threatened against PIMCO of a nature required to be disclosed in the Registration Statement or Prospectus or that might reasonably result in any material adverse change in the ability of PIMCO to fulfill its obligations under the Portfolio Management Agreement.
The opinions expressed in paragraph 3 above are subject to the following limitations, qualifications and exceptions:
(a) the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights or remedies of creditors generally;
(b) the effect of general principles of equity, whether enforcement is considered in a proceeding in equity or at law, and the discretion of the court before which any proceeding therefor may be brought;
(c) the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy; and
(d) the unenforceability of any provision requiring the payment of attorney's fees, except to the extent that a court determines such fees to be reasonable.
In rendering the opinions expressed in paragraph 4 insofar as they require interpretation of the Material Agreements (i) I have assumed with your permission that all courts of competent jurisdiction would enforce such agreements as written but would apply the internal laws of the State of New York without giving effect to any choice of law provisions contained therein or any choice of law principles which would result in application of the internal laws of any other state and (ii) to the extent that any questions of legality or legal construction have arisen in connection with my review, I have applied the laws of the State of New York in resolving such questions. I advise you that certain of the Material Agreements may be governed by other laws, that such laws may vary substantially from the law assumed to govern for purposes of this opinion, and that this opinion may not be relied upon as to whether or not a breach or default would occur under the law actually governing such Material Agreements.
To the extent that the obligations of PIMCO may be dependent upon such matters, I assume for purposes of this opinion that: (i) all parties to the Portfolio Management Agreement other than PIMCO are duly incorporated or organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation or organization; (ii) all parties to the Portfolio Management Agreement other than PIMCO have the requisite power and authority and, in the case of natural persons, legal capacity to execute and deliver the Portfolio Management Agreement and to perform their respective obligations under the Portfolio Management Agreement; and (iii) the Portfolio Management Agreement has been duly authorized, executed and delivered by such parties other than PIMCO and, other than PIMCO, constitute their legally valid and binding obligations, enforceable against them in accordance with their terms. I express no opinion as to compliance by any parties to the Portfolio Management Agreement with any state or federal laws or regulations applicable to the subject transactions because of the nature of their business and I express no opinion as to compliance by any parties to the Portfolio Management Agreement with any foreign laws or regulations applicable to the transactions contemplated by the Portfolio Management Agreement or which may affect the Portfolio Management Agreement's enforceability.
This opinion is rendered only to you and is solely for your benefit in connection with the transactions covered hereby. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to or relied upon by any other person, firm or corporation for any purpose, without my prior written consent.
Very truly yours,
EXHIBIT h.7
MASTER AGREEMENT AMONG UNDERWRITERS
Registered SEC Offerings
(including Multiple Syndicate Offerings),
Standby Underwritings and Exempt Offerings
(other than Offerings of Municipal Securities)
July 1, 1999
Ladies and Gentlemen:
From time to time Salomon Smith Barney Inc. ("Salomon Smith Barney") may invite you (and others) to participate on the terms set forth herein as an underwriter or an initial purchaser, or in a similar capacity, in connection with certain offerings of securities that are managed solely by us or with one or more other co-managers. If we invite you to participate in a specific offering and sale (an "Offering") to which this Master Agreement Among Underwriters (the "Salomon Smith Barney Master AAU") shall apply, we will send the information set forth below in Section 1.1 to you by one or more wires, telexes, facsimile or electronic data transmissions or other written communications (each a "Wire" and collectively, an "AAU"). Each Wire will indicate that it is a Wire pursuant to the Salomon Smith Barney Master AAU. The Wire inviting you to participate in an Offering is referred to herein as the "Invitation Wire". You and we hereby agree that by the terms hereof the provisions of this Salomon Smith Barney Master AAU automatically shall be incorporated by reference in each AAU, except that any such AAU may also exclude or revise any provision of this Salomon Smith Barney Master AAU or may contain such additional provisions as may be specified in such AAU.
I. GENERAL
1.1. Terms of AAU; Certain Definitions; Construction. Each AAU shall relate to an Offering and shall identify (i) the securities to be offered in the Offering (the "Securities"), their principal terms, the issuer or issuers (each an "Issuer") and any guarantor (each a "Guarantor") thereof and, if different from the Issuer, the seller or sellers (each a "Seller") of the Securities, (ii) the underwriting agreement, purchase agreement, standby underwriting agreement, distribution agreement or similar agreement (as identified in such AAU and as amended or supplemented, including a terms agreement or pricing agreement pursuant to any of the foregoing, collectively, the
"Underwriting Agreement") providing for the purchase, on a several and not joint
basis, of the Securities by the several underwriters, initial purchasers or
others acting in a similar capacity on whose behalf the Manager (as defined
below) executes the Underwriting Agreement (including the Manager and the
Co-Managers (as defined below), the "Underwriters"), (iii) if applicable, that
the Underwriting Agreement includes an option (an "Over-allotment Option") to
purchase Additional Securities (as defined below) to cover over-allotments, if
any, (iv) if applicable, that the Offering is part of an offering that includes
concurrent offerings by two or more syndicates (an "International Offering"),
each of which will offer and sell Securities subject to such restrictions as
shall be specified in any Intersyndicate Agreement (as defined below) referred
to in such AAU, (v) the price at which the Securities are to be purchased by the
several Underwriters from any Issuer or Seller thereof (the "Purchase Price"),
(vi) the offering terms, including, if applicable, the price or prices at which
the Securities initially will be offered by the Underwriters (the "Offering
Price"), any selling concession to dealers (the "Selling Concession"),
reallowance (the "Reallowance"), management fee, global coordinators' fee,
praecipium or other similar fees, discounts or commissions (collectively, the
"Fees and Commissions") with respect to the Securities, (vii) the proposed
pricing date ("Pricing Date") and settlement date (the "Settlement Date"),
(viii) any contractual restrictions on the offer and sale of the Securities
pursuant to the Underwriting Agreement, Intersyndicate Agreement or otherwise,
(ix) any co-managers for such Offering (the "Co-Managers"), (x) your proposed
participation in the Offering, (xi) if applicable, the trustee, fiscal agent or
similar agent (the "Trustee") for the indenture, trust agreement, fiscal agency
agreement or similar agreement (the "Indenture") under which such Securities
will be issued and (xii) any other principal terms of the Offering.
The term "Manager" means Salomon Smith Barney. The term "Underwriters" includes the Manager and the Co-Managers. The term "Firm Securities" means the number or amount of Securities that the several Underwriters are initially committed to purchase under the Underwriting Agreement (which may be expressed as a percentage of an aggregate number or amount of Securities to be purchased by the Underwriters as in the case of a standby Underwriting Agreement). The term "Additional Securities" means the Securities, if any, that the several Underwriters have an option to purchase under the Underwriting Agreement to cover over-allotments, if any. The number, amount or percentage of Firm Securities set forth opposite each Underwriter's name in the Underwriting Agreement plus any additional Firm Securities that such Underwriter has become obligated to purchase under the Underwriting Agreement or Article XI hereof is hereinafter referred to as the "Original Purchase Obligation" of such Underwriter and the ratio which such Original Purchase Obligation bears to the total of all Firm Securities set forth in the Underwriting Agreement (or, in the case of a standby Underwriting Agreement, to 100%) is hereinafter referred to as the "Underwriting Percentage" of such Underwriter.
References herein to statutory sections, rules, regulations, forms and interpretive materials shall be deemed to include any successor provisions.
1.2. Acceptance of AAU. You shall have accepted an AAU for an
Offering if we receive your acceptance, prior to the time specified in the Invitation Wire for such Offering, by wire, telex, facsimile or electronic data transmission or other written communication (any such manner of communication being deemed "In Writing") (or orally, if promptly confirmed In Writing) in the manner specified in the Invitation Wire, of our invitation to participate in the Offering. If we receive your timely acceptance of the invitation to participate, such AAU shall constitute a valid and binding contract between us. Your acceptance of the Invitation Wire shall also constitute acceptance by you of the terms of subsequent Wires to you relating to the Offering unless we receive In Writing, within the time and in the manner specified in such subsequent Wire, a notice from you to the effect that you do not accept the terms of such subsequent Wire, in which case you shall be deemed to have elected not to participate in the Offering.
1.3. Underwriters' Questionnaire. Your acceptance of the Invitation Wire shall confirm that you have no exceptions to the Underwriters' Questionnaire attached as Exhibit A hereto (or to any other questions addressed to you in any Wires relating to the Offering previously sent to you), other than exceptions noted by you In Writing in connection with the Offering and received from you by us before the time specified in the Invitation Wire or any subsequent Wire.
II. OFFERING MATERIALS
2.1. Registered Offerings. In the case of an Offering that will be registered in whole or in part (a "Registered Offering") under the United States Securities Act of 1933, as amended (the "1933 Act"), you understand that the Issuer has filed with the Securities and Exchange Commission (the "Commission") a registration statement including a prospectus relating to the Securities. The term "Registration Statement" means such registration statement as amended or deemed to be amended to the effective date of the Underwriting Agreement and, in the event that the Issuer files an abbreviated registration statement to register additional Securities pursuant to Rule 462(b) under the 1933 Act, such abbreviated registration statement. The term "Prospectus" means the prospectus, together with the final prospectus supplement, if any, relating to the Offering first used to confirm sales of Securities and, in the case of a Registered Offering that is an International Offering, the term "Prospectus" shall mean, collectively, each prospectus or offering circular, together with each final prospectus supplement or final offering circular supplement, if any, relating to the Offering, in the respective forms first used or made available for use to confirm sales of Securities. The term "Preliminary Prospectus" means any preliminary prospectus relating to the Offering or any preliminary prospectus supplement together with a prospectus relating to the Offering and, in the case of a Registered Offering that is an International Offering, the term "Preliminary Prospectus" shall mean, collectively, each preliminary prospectus or preliminary offering circular relating to the Offering or each preliminary prospectus supplement or preliminary offering circular supplement, together with a prospectus or offering circular, respectively, relating to the Offering. As used herein the terms "Registration Statement", "Prospectus" and "Preliminary Prospectus" shall include in each case the material, if any, incorporated by reference therein. The Manager will furnish to you, or make arrangements for you to obtain, copies of each Prospectus and Preliminary Prospectus (but excluding for this
purpose, unless otherwise required pursuant to regulations under the 1933 Act, documents incorporated therein by reference) as soon as practicable after sufficient quantities thereof have been made available by the Issuer.
2.2. Unregistered Offerings. In the case of an Offering other than a Registered Offering, you understand that no registration statement has been filed with the Commission. The term "Offering Circular" means an offering circular or memorandum, if any, or any other written materials authorized by the Issuer to be used in connection with an Offering that is not a Registered Offering. The term "Preliminary Offering Circular" means any preliminary offering circular or memorandum, if any, or any other written preliminary materials authorized by the Issuer to be used in connection with such an Offering. As used herein, the terms "Offering Circular" and "Preliminary Offering Circular" shall include the material, if any, incorporated by reference therein. We will either, as soon as practicable after the later of the date of the Invitation Wire or the date made available to us by the Issuer, furnish to you (or make available for your review in our office) a copy of any Preliminary Offering Circular or any proof or draft of the Offering Circular. In any event, in any Offering involving an Offering Circular, the Manager will furnish to you, or make arrangements for you to obtain, as soon as practicable after sufficient quantities thereof are made available by the Issuer, copies of the final Offering Circular, as amended or supplemented, if applicable (but excluding for this purpose documents incorporated therein by reference).
III. MANAGER'S AUTHORITY
3.1. Authority of Manager to Determine Form of Documents, Terms of
Offering, Etc. You authorize the Manager to act as lead manager of the Offering
of the Securities by the Underwriters (the "Underwriters' Securities") or by the
Issuer or Seller pursuant to delayed delivery contracts (the "Contract
Securities"), if any, contemplated by the Underwriting Agreement. You authorize
the Manager, on your behalf, (a) to determine the form of the Underwriting
Agreement, (b) to execute and deliver the Underwriting Agreement to the Issuer,
Guarantor or Seller, (c) to determine the form of any agreement or agreements
between or among the syndicates participating in the International Offering of
which the Offering is a part (each an "Intersyndicate Agreement"), and (d) to
execute and deliver any such Intersyndicate Agreement. You authorize the Manager
(i) to exercise any Over-allotment Option for the purchase any of or all the
Additional Securities for the accounts of the several Underwriters pursuant to
the Underwriting Agreement, (ii) to agree, on your behalf and on behalf of the
Co-Managers, to any addition to, change in or waiver of any provision of, or the
termination of, the Underwriting Agreement or any Intersyndicate Agreement
(other than an increase in the Purchase Price or in your Original Purchase
Obligation to purchase Securities, in either case from that contemplated by the
applicable AAU), (iii) to add or remove prospective Underwriters to or from the
syndicate, (iv) to exercise, in the Manager's discretion, all the authority
vested in the Manager in the Underwriting Agreement and (v) except as described
below in this Section 3.1, to take any other action as may seem advisable to the
Manager in respect of the Offering (including, without limitation, actions and
communications with the Commission, the National Association of Securities
Dealers, Inc. (the "NASD"), state blue sky or securities
commissions, stock exchanges and other regulatory bodies or organizations). If,
in accordance with the terms of the applicable AAU, the Offering of the
Securities is at varying prices based on prevailing market prices or prices
related to prevailing market prices or at negotiated prices, you authorize the
Manager to determine, on your behalf in the Manager's discretion, any Offering
Price and the Fees and Commissions applicable to the Offering from time to time.
You authorize the Manager on your behalf to arrange for any currency
transactions (including forward and hedging currency transactions) as the
Manager deems necessary to facilitate settlement of the purchase of the
Securities, but you do not authorize the Manager on your behalf to engage in any
other forward or hedging transactions in connection with the Offering unless
such transactions are specified in an applicable AAU or are otherwise consented
to by you. You further authorize the Manager, subject to the provisions of
Section 1.2 hereof, (i) to vary the offering terms of the Securities in effect
at any time, including, if applicable, the Offering Price and Fees and
Commissions set forth in the applicable AAU, (ii) to determine, on your behalf,
the Purchase Price and (iii) to increase or decrease the number, amount or
percentage of Securities being offered. Notwithstanding the foregoing provisions
of this Section 3.1, the Manager shall notify the Underwriters, prior to the
signing of the Underwriting Agreement, of any provision in the Underwriting
Agreement that could result in an increase in the amount or percentage of Firm
Securities set forth opposite each Underwriter's name in the Underwriting
Agreement by more than 25% (or such other percentage as shall have been
specified in the applicable Invitation Wire or otherwise consented to by you) as
a result of the failure or refusal of another Underwriter or Underwriters to
perform its or their obligations thereunder.
3.2. Offering Date. The Offering is to be made as soon after the Underwriting Agreement is entered into by the Issuer, Guarantor or Seller and the Manager as in the Manager's judgment is advisable, on the terms and conditions set forth in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU. You agree not to sell any Securities prior to the time the Manager releases such Securities for sale to purchasers. The date on which such Securities are released for sale is referred to herein as the "Offering Date".
3.3. Advertising; Supplemental Offering Material. Any public advertisement of the Offering shall be made by the Manager on behalf of the Underwriters on such date as the Manager shall determine. You agree not to advertise the Offering prior to the date of the Manager's advertisement thereof without the Manager's consent. If the offering is made in whole or in part in reliance on Rule 144A (or upon another exemption from registration), you agree not to engage in any general solicitation and to abide by any other restrictions in the AAU or the Underwriting Agreement in connection therewith relating to any advertising or publicity. Any advertisement you may make of the Offering after such date will be your own responsibility and at your own expense and risk. In addition to your agreement to comply with restrictions on the Offering pursuant to Sections 10.10 and 10.11 hereof, you also agree that you will not, in connection with the offer and sale of the Securities in the Offering, without the consent of the Manager, give to any prospective purchaser of the Securities or other person not in your employ any written information concerning the Offering, the Issuer, the Guarantor or the Seller, other than information contained in any
Preliminary Prospectus, Prospectus, Preliminary Offering Circular or Offering Circular or in any computational materials ("Computational Materials") or other offering materials prepared by or with the consent of the Manager for use by the Underwriters in connection with the Offering and, in the case of a Registered Offering, filed with the Commission or the NASD, as applicable (the "Supplemental Offering Materials"). You further agree to cease distribution of any Computational Materials on the Offering Date.
3.4. Institutional and Retail Sales. You authorize the Manager to sell to institutions or retail purchasers such Securities purchased by you pursuant to the Underwriting Agreement as the Manager shall determine. The Selling Concession on any such sales shall be credited to the accounts of the Underwriters as the Manager shall determine.
3.5. Sales to Dealers. You authorize the Manager to sell to Dealers (as defined below) such Securities purchased by you pursuant to the Underwriting Agreement as the Manager shall determine. A "Dealer" shall be a person who is (a) a broker or dealer (as defined in the By-Laws of the NASD) actually engaged in the investment banking or securities business and (i) a member in good standing of the NASD or (ii) a foreign bank, broker, dealer or other institution not eligible for membership in the NASD that, in the case of either clause (a)(i) or (a)(ii), makes the representations and agreements applicable to such institutions contained in Section 10.6 hereof or (b) in the case of Offerings of Securities that are exempt securities under Section 3(a)(12) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and such other Securities as from time to time may be sold by a "bank" (as defined in Section 3(a)(6) of the 1934 Act (a "Bank")), a Bank that is not a member of the NASD and that makes the representations and agreements applicable to such institutions contained in Section 10.6 hereof. If the price for any such sales by the Manager to Dealers exceeds an amount equal to the Offering Price less the Selling Concession set forth in the applicable AAU, the amount of such excess, if any, shall be credited to the accounts of the Underwriters as the Manager shall determine.
3.6. Direct Sales. The Manager will advise you promptly, on the date of the Offering, as to the Securities purchased by you pursuant to the Underwriting Agreement that you shall retain for direct sale. At any time prior to the termination of the applicable AAU, any such Securities that are held by the Manager for sale but not sold, may, on your request and at the Manager's discretion, be released to you for direct sale, and Securities so released to you shall no longer be deemed held for sale by the Manager. You may allow, and Dealers may reallow, a discount on sales to Dealers in an amount not in excess of the Reallowance set forth in the applicable AAU. You may not purchase Securities from, or sell Securities to, any other Underwriter or Dealer at any discount or concession other than the Reallowance, except with the consent of the Manager.
3.7. Release of Unsold Securities. From time to time prior to the termination of the applicable AAU, on the request of the Manager, you shall advise the Manager of the amount of Securities remaining unsold which were retained by or released to you for direct sale and of the amount of Securities and Other Securities (as
defined below) purchased for your account remaining unsold which were delivered to you pursuant to Article V hereof or pursuant to any Intersyndicate Agreement, and, on the request of the Manager, you shall release to the Manager any such Securities and Other Securities remaining unsold (i) for sale by the Manager to institutions, Dealers or retail purchasers, (ii) for sale by the Issuer or Seller pursuant to delayed delivery contracts or (iii) if, in the Manager's opinion, such Securities or Other Securities are needed to make delivery against sales made pursuant to Article V hereof or any Intersyndicate Agreement.
3.8. International Offerings. In the case of an International
Offering, you authorize the Manager (i) to make representations on your behalf
as set forth in any Intersyndicate Agreement or Underwriting Agreement and (ii)
to purchase or sell for your account pursuant to the Intersyndicate Agreement
(a) Securities, (b) any other securities of the same class and series, or any
securities into which the Securities may be converted or for which the
Securities may be exchanged or exercised and (c) any other securities designated
in the applicable AAU or applicable Intersyndicate Agreement (the securities
referred to in clauses (b) and (c) above being referred to collectively as the
"Other Securities").
IV. DELAYED DELIVERY CONTRACTS
4.1. Arrangements for Sales. You agree that arrangements for sales of Contract Securities will be made only through the Manager acting either directly or through Dealers (including Underwriters acting as Dealers), and you authorize the Manager to act on your behalf in making such arrangements. The aggregate amount of Securities to be purchased by the several Underwriters shall be reduced by the respective amounts of Contract Securities attributed to such Underwriters as hereinafter provided. Subject to the provisions of Section 4.2, the aggregate amount of Contract Securities shall be attributed to the Underwriters as nearly as practicable in their respective Underwriting Percentages, except that, as determined by the Manager in its discretion, (i) Contract Securities directed and allocated by a purchaser to specific Underwriters shall be attributed to such Underwriters and (ii) Contract Securities for which arrangements have been made for sale through Dealers shall be attributed to each Underwriter approximately in the proportion that Securities of such Underwriter held by the Manager for sales to Dealers bear to all Securities so held. The fee with respect to Contract Securities payable to the Manager for the accounts of the Underwriters pursuant to the Underwriting Agreement shall be credited to the accounts of the respective Underwriters in proportion to the Contract Securities attributed to such Underwriters pursuant to the provisions of this Section 4.1, less, in the case of each Underwriter, the concession to Dealers on Contract Securities sold through Dealers and attributed to such Underwriter.
4.2. Excess Sales. If the amount of Contract Securities attributable to an Underwriter pursuant to Section 4.1 would exceed such Underwriter's Original Purchase Obligation reduced by the amount of Underwriters' Securities sold by or on behalf of such Underwriter, such excess shall not be attributed to such Underwriter, and such Underwriter shall be regarded as having acted only as a Dealer with respect to, and shall receive only the concession to Dealers on, such excess.
V. PURCHASE AND SALE OF SECURITIES; FACILITATION OF DISTRIBUTION
5.1. Purchase and Sale of Securities; Facilitation of Distribution. In order to facilitate the distribution and sale of the Securities, you authorize the Manager to buy and sell Securities and any Other Securities, in addition to Securities sold pursuant to Article III hereof, in the open market or otherwise (including, without limitation, pursuant to any Intersyndicate Agreement), for long or short account, on such terms as it shall deem advisable, and to over-allot in arranging sales. Such purchases and sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in their respective Underwriting Percentages or, in the case of an International Offering, such purchases and sales shall be for such accounts as set forth in the applicable Intersyndicate Agreement. Any securities which may have been purchased by the Manager for stabilizing purposes in connection with the Offering prior to the execution of the applicable AAU shall be treated as having been purchased pursuant to this Section 5.1 for the accounts of the several Underwriters or, in the case of an International Offering, for such accounts as are set forth in the applicable Intersyndicate Agreement. Your net commitment pursuant to the foregoing authorization shall not exceed at the close of business on any day an amount equal to 20% of your Underwriting Percentage of the aggregate initial Offering Price of the Firm Securities, it being understood that, in calculating such net commitment, the initial Offering Price shall be used with respect to the Securities so purchased or sold and, in the case of all Other Securities, shall be the purchase price thereof. Your net commitment for short account (i.e., "naked short") shall be calculated by assuming that all Securities that may be purchased upon exercise of any over-allotment option then exercisable are acquired (whether or not actually acquired) and, in the case of an International Offering, after giving effect to the purchase of any Securities or Other Securities that the Manager has agreed to purchase for your account pursuant to any applicable Intersyndicate Agreement. On demand you shall take up and pay for any Securities or Other Securities so purchased for your account and any Securities released to you pursuant to Section 3.7 hereof and you shall deliver to the Manager against payment any Securities or Other Securities so sold or over-allotted for your account or released to you. The Manager agrees to notify you if it engages in any stabilization transaction requiring reports to be filed pursuant to Rule 17a-2 under the 1934 Act and to notify you of the date of termination of stabilization. You agree not to stabilize or engage in any syndicate covering transaction (as defined in Rule 100 of Regulation M under the 1934 Act ("Regulation M")) in connection with the Offering without the prior consent of the Manager. You further agree to provide to Salomon Smith Barney any reports required of you pursuant to Rule 17a-2 not later than the date specified therein and you authorize Salomon Smith Barney to file on your behalf with the Commission any reports required by such Rule.
If the limitations of Rule 101 of Regulation M ("Rule 101") do not apply to you with respect to the Securities, Other Securities or other reference securities (as defined in Rule 100 of Regulation M) because they satisfy the exception for actively-traded securities in subsection (c)(1) of Rule 101 or the exception for Rule 144A securities in
subsection (b)(10) of Rule 101, you agree that promptly upon notice from the Manager (or, if later, at the time stated in the notice) you will comply with Rule 101 as though such exception were not available but the other provisions of Rule 101 (as interpreted by the Commission and after giving effect to any applicable exemptions) did apply. If the securities in question are NASDAQ securities (as defined in Rule 100 of Regulation M) you may engage in passive market making in accordance with Rule 103 of Regulation M (except that the daily net purchase volume limitation will not apply and the maximum displayed bid size shall be 5,000 shares excluding transactions effected in the SOES system) unless the notice from the Manager also states that passive market making is not permitted.
5.2. Penalty With Respect to Securities Repurchased by the Manager. If pursuant to the provisions of Section 5.1 and prior to the termination of the Manager's authority to cover any short position incurred under the applicable AAU or such other date as the Manager shall specify in a Wire, either (A) the Manager purchases or contracts to purchase for the account of any Underwriter in the open market or otherwise any Securities which were retained by, or released to, you for direct sale or any Securities sold pursuant to Section 3.4 for which you received a portion of the Selling Concession set forth in the applicable AAU, or any Securities which may have been issued on transfer or in exchange for such Securities, and which Securities were therefore not effectively placed for investment or (B) if the Manager has advised you by Wire that trading in the Securities will be reported to the Manager pursuant to the "Initial Public Offering Tracking System" of The Depository Trust Company ("DTC") and the Manager determines, based on notices from DTC, that your customers sold an amount of Securities during any day that exceeds the amount previously notified to you by Wire, then you authorize the Manager either to charge your account with an amount equal to such portion of the Selling Concession set forth in the applicable AAU received by you with respect to such Securities or, in the case of clause (B), such Securities as exceed the amount specified in such Wire or to require you to repurchase such Securities or, in the case of clause (B), such Securities as exceed the amount specified in such Wire, at a price equal to the total cost of such purchase, including transfer taxes, accrued interest, dividends and commissions, if any.
5.3. Compliance with Regulation M. You represent that, at all times since you were invited to participate in the Offering, you have complied with the provisions of Regulation M applicable to such Offering, in each case as interpreted by the Commission and after giving effect to any applicable exemptions. If you have been notified in a Wire that the Underwriters may conduct passive market making in compliance with Rule 103 of Regulation M in connection with the Offering, you represent that, at all times since your receipt of such Wire, you have complied with the provisions of such Rule applicable to such Offering, as interpreted by the Commission and after giving effect to any applicable exemptions.
5.4. Standby Underwritings. You authorize the Manager in its discretion, at any time on, or from time to time prior to, the expiration of the conversion right of convertible securities identified in the applicable AAU in case of securities called for redemption, or the expiration of rights to acquire securities in the case of rights offerings, for which, in either case, standby underwriting arrangements have been
made: (i) to purchase convertible securities or rights to acquire Securities for your account, in the open market or otherwise, on such terms as the Manager determines and to convert convertible securities or exercise rights so purchased; and (ii) to offer and sell the underlying common stock or depositary shares for your account, in the open market or otherwise, for long or short account (for purposes of such commitment, such common stock or depositary shares being considered the equivalent of convertible securities or rights), on such terms consistent with the terms of the Offering set forth in the Prospectus or Offering Circular as the Manager determines. On demand you shall take up and pay for any securities so purchased for your account or you shall deliver to the Manager against payment any securities so sold, as the case may be. During such period you may offer and sell the underlying common stock or depositary shares, but only at prices set by the Manager from time to time, and any such sales shall be subject to the Manager's right to sell to you the underlying common stock or depositary shares as above provided and to the Manager's right to reserve your Securities purchased, received or to be received upon conversion. You agree not to bid for, purchase, attempt to induce others to purchase, or sell, directly or indirectly, any convertible securities or rights or underlying common stock or depositary shares, provided, however, that no Underwriter shall be prohibited from (a) selling underlying common stock owned beneficially by such Underwriter on the day the convertible securities were first called for redemption, (b) converting convertible securities owned beneficially by such Underwriter on such date or selling underlying common stock issued upon conversion of convertible securities so owned, (c) exercising rights owned beneficially by such Underwriter on the record date for a rights offering or selling the underlying common stock or depositary shares issued upon exercise of rights so owned or (d) purchasing or selling convertible securities or rights or underlying common stock or depositary shares as a broker pursuant to unsolicited orders.
VI. PAYMENT AND SETTLEMENT
6.1. Payment and Settlement. You shall deliver to the Manager on the date and at the place and time specified in the applicable AAU (or on such later date and at such place and time as may be specified by the Manager in a subsequent Wire) the funds specified in the applicable AAU, payable to the order of Salomon Smith Barney Inc., for (i) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of the Firm Securities to be purchased by you, (ii) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of such of the Firm Securities to be purchased by you as shall have been retained by or released to you for direct sale as contemplated by Section 3.6 hereof or (iii) the amount set forth or indicated in the applicable AAU, as the Manager shall advise. You shall make similar payment as the Manager may direct for Additional Securities, if any, to be purchased by you on the date specified by the Manager for such payment. The Manager will make payment to the Issuer or Seller against delivery to the Manager for your account of the Securities to be purchased by you, and the Manager will deliver to you the Securities
paid for by you which shall have been retained by or released to you for direct sale. If the Manager determines that transactions in the Securities are to be settled through the facilities of DTC or other clearinghouse facility, payment for and delivery of Securities purchased by you shall be made through such facilities, if you are a member, or, if you are not a member, settlement shall be made through your ordinary correspondent who is a member.
VII. EXPENSES
7.1. Management Fee. You authorize the Manager to charge your account as compensation for the Manager's and Co-Managers' services in connection with the Offering, including the purchase from the Issuer or Seller of the Securities, as the case may be, and the management of the Offering, the amount, if any, set forth as the management fee, global coordinators fee, praecipium or other similar fee in the applicable AAU. Such amount shall be divided among the Manager and any Co-Managers named in the applicable AAU as they may determine.
7.2. General Expenses. You authorize the Manager to charge your account with your Underwriting Percentage of all expenses of a general nature incurred by the Manager and Co-Managers under the applicable AAU in connection with the Offering, including the negotiation and preparation thereof, or in connection with the purchase, carrying, marketing and sale of any securities under the applicable AAU and any Intersyndicate Agreement, including, without limitation, legal fees and expenses, transfer taxes, costs associated with approval of the Offering by the NASD and the costs of currency transactions (including forward and hedging currency transactions) entered into to facilitate settlement of the purchase of Securities permitted under Section 3.1 hereof.
VIII. MANAGEMENT OF SECURITIES AND FUNDS
8.1. Advances; Loans; Pledges. You authorize the Manager to advance the Manager's own funds for your account, charging current interest rates, or to arrange loans for your account for the purpose of carrying out the provisions of the applicable AAU and any Intersyndicate Agreement and in connection therewith, to hold or pledge as security therefor all or any securities which the Manager may be holding for your account under the applicable AAU and any Intersyndicate Agreement, to execute and deliver any notes or other instruments evidencing such advances or loans and to give all instructions to the lenders with respect to any such loans and the proceeds thereof. The obligations of the Underwriters under loans arranged on their behalf shall be several in proportion to their respective Original Purchase Obligations and not joint. Any lender is authorized to accept the Manager's instructions as to the disposition of the proceeds of any such loans. In the event of any such advance or loan, repayment thereof shall, in the discretion of the Manager, be effected prior to making any remittance or delivery pursuant to Section 8.2, 8.3 or 9.2 hereof.
8.2. Return of Amount Paid for Securities. Out of payment received
by the Manager for Securities sold for your account which have been paid for by you, the Manager will remit to you promptly an amount equal to the price paid by you for such Securities.
8.3. Delivery and Redelivery of Securities for Carrying Purposes. The Manager may deliver to you from time to time prior to the termination of the applicable AAU pursuant to Section 9.1 hereof against payment, for carrying purposes only, any Securities or Other Securities purchased by you under the applicable AAU or any Intersyndicate Agreement which the Manager is holding for sale for your account but which are not sold and paid for. You shall redeliver to the Manager against payment any Securities or Other Securities delivered to you for carrying purposes at such times as the Manager may demand.
IX. TERMINATION; INDEMNIFICATION
9.1. Termination. Each AAU shall terminate at the close of business on the later of the date on which the Underwriters pay the Issuer or Seller for the Securities and 45 full days after the applicable Offering Date, unless sooner terminated by the Manager. The Manager may in its discretion by notice to you prior to the termination of such AAU alter any of the terms or conditions of the Offering to the extent permitted by Articles III or IV hereof, or terminate or suspend the effectiveness of Article V hereof, or any part thereof. No termination or suspension pursuant to this paragraph shall affect the Manager's authority under Section 3.1 hereof to take actions in respect of the Offering or under Article V hereof to cover any short position incurred under such AAU or in connection with covering any such short position to require you to repurchase Securities as specified in Section 5.2 hereof.
9.2. Delivery or Sale of Securities; Settlement of Accounts. Upon termination of each AAU or prior thereto at the Manager's discretion, the Manager shall deliver to you any Securities paid for by you pursuant to Section 6.1 hereof and held by the Manager for sale pursuant to Section 3.4 or 3.5 hereof but not sold and paid for and any Securities or Other Securities that are held by the Manager for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement. Notwithstanding the foregoing, at the termination of such AAU, if the aggregate initial Offering Price of any such Securities and the aggregate purchase price of any Other Securities so held and not sold and paid for does not exceed an amount equal to 20% of the aggregate initial Offering Price of the Securities, the Manager may, in its discretion, sell such Securities and Other Securities for the accounts of the several Underwriters, at such prices, on such terms, at such times and in such manner as it may determine. Within the period specified by applicable NASD Rules or, if no period is so specified, as soon as practicable after termination of such AAU, your account shall be settled and paid. The Manager may reserve from distribution such amount as the Manager deems advisable to cover possible additional expenses. The determination by the Manager of the amount so to be paid to or by you shall be final and conclusive. Any of your funds in the Manager's hands may be held with the Manager's general funds without accountability for interest
Notwithstanding any provision of this Master AAU other than Section
10.12, upon termination of each AAU or prior thereto at the Manager's
discretion, the Manager (i) may allocate to the accounts of the Underwriters the
expenses described in Section 7.2 hereof and any losses incurred upon the sale
of Securities or Other Securities pursuant to the applicable AAU or any
Intersyndicate Agreement (including any losses incurred upon the sale of
securities referred to in Section 5.4(ii) hereof), (ii) may deliver to the
Underwriters any unsold Securities or Other Securities purchased pursuant to
Section 5.1 hereof or any Intersyndicate Agreement and (iii) may deliver to the
Underwriters any unsold Securities purchased pursuant to the applicable
Underwriting Agreement, in each case in the Manager's discretion. The Manager
shall have full discretion to allocate expenses and Securities to the accounts
of any Underwriter as the Manager decides, except that (a) no Underwriter (other
than the Manager or a Co-Manager) shall bear more than its share of such
expenses, losses or Securities (such share shall not exceed such Underwriter's
Underwriting Percentage and shall be determined pro rata among all such
Underwriters based on their Underwriting Percentages), (b) no such Underwriter
shall receive Securities that, together with any Securities purchased by such
Underwriter pursuant to Section 6.1 (but excluding any Securities that such
Underwriter is required to repurchase pursuant to Section 5.2) exceed such
Underwriter's Original Purchase Obligation and (c) no Co-Manager shall bear more
than its share, as among the Manager and the other Co-Managers, of such
expenses, losses or Securities (such share to be determined pro rata among the
Manager and all Co-Managers based on (1) their relative Underwriting Percentages
as a percentage of the total combined Underwriting Percentages of the Manager
and all Co-Managers, or (2) if the Manager so determines, their relative
Offering Economics (as hereinafter defined) as a percentage of the combined
Offering Economics of the Manager and all Co-Managers together. The Manager's or
a Co-Manager's "Offering Economics" equals the sum of its Management Fee Share,
its Underwriting Fee Share and its Selling Concession Share (each as hereinafter
defined). The Manager's or a Co-Manager's "Management Fee Share" is the dollar
amount of its share, as agreed among the Manager and any Co-Managers, of the
amount payable by all Underwriters to some or all of the Manager and any
Co-Manager as a global coordinators' fee, praecipium, management fee or other
fee. The Manager's or a Co-Manager's "Underwriting Fee Share" is the dollar
amount of its Underwriting Percentage of the aggregate initial Offering Price of
the Firm Securities less the Purchase Price thereof, less the Selling Concession
thereon. The Manager's or a Co-Manager's "Selling Concession Share" is the
dollar amount of any Selling Concession credited to it on sales from the
institutional pot or on sales made for the account of any other Underwriter. If
any Securities or Other Securities returned to you pursuant to clause (ii) or
(iii) above were not paid for by you pursuant to Section 6.1 hereof, you shall
pay to the Manager an amount per security equal to the amount set forth in
Section 6.1(i), in the case of Securities returned to you pursuant to clause
(iii) above, or the purchase price of such securities, in the case of Securities
or Other Securities returned to you pursuant to clause (ii) above.
9.3. Post-Settlement Expenses. Notwithstanding any settlement on the termination of the applicable AAU, you agree to pay any transfer taxes which may be assessed and paid after such settlement on account of any sales or transfers under such AAU or any Intersyndicate Agreement for your account and your Underwriting
Percentage of (i) all expenses incurred by the Manager in investigating,
preparing to defend or defending against any action, claim or proceeding which
is asserted or instituted by any party (including any governmental or regulatory
body) relating to (a) the Registration Statement, any Preliminary Prospectus or
Prospectus (or any amendment or supplement thereto), any Preliminary Offering
Circular or Offering Circular (or any amendment or supplement thereto) or
Supplemental Offering Materials, (b) the violation of any applicable
restrictions on the offer, sale, resale or purchase of Securities or Other
Securities imposed by United States Federal or state laws or foreign laws and
the rules and regulations of any regulatory body promulgated thereunder or
pursuant to the terms of such AAU, the Underwriting Agreement or any
Intersyndicate Agreement or (c) any claim that the Underwriters constitute a
partnership, an association or an unincorporated business or other separate
entity and (ii) any liability, including attorneys' fees, incurred by the
Manager in respect of any such action, claim or proceeding, whether such
liability shall be the result of a judgment or arbitrator's determination or as
a result of any settlement agreed to by the Manager, other than any such expense
or liability as to which the Manager actually receives indemnity pursuant to
Section 9.4, contribution pursuant to Section 9.5, indemnity or contribution
pursuant to the Underwriting Agreement or damages from an Underwriter for breach
of its representations, warranties, agreements, or covenants contained in the
applicable AAU. None of the foregoing provisions of this Section 9.3 shall
relieve any defaulting or breaching Underwriter from liability for its defaults
or breach.
9.4. Indemnification. You agree to indemnify and hold harmless each other Underwriter and each person, if any, who controls any such Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the extent and upon the terms which you agree to indemnify and hold harmless any of the Issuer, the Guarantor, the Seller, any person controlling the Issuer, the Guarantor, the Seller, its directors and, in the case of a Registered Offering, its officers who signed the Registration Statement and, in the case of an Offering other than a Registered Offering, its officers, in each case as set forth in the Underwriting Agreement. You further agree to indemnify and hold harmless any investment banking firm identified in a Wire as the qualified independent underwriter as defined in Rule 2720 of the NASD's Conduct Rules ("QIU") for an Offering and each person, if any, who controls such QIU within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all losses, claims, damages and liabilities related to, arising out of or in connection with such investment banking firm's activities as QIU for the Offering. You agree with the other Underwriters to reimburse such QIU for all expenses, including fees and expenses of counsel as they are incurred, in connection with investigating, preparing for, or defending any action, claim or proceeding related to, arising out of, or in connection with such QIU's activities as a QIU for the Offering. Each Underwriter shall be responsible for its Underwriting Percentage of any amount due to such QIU on account of the foregoing indemnity. You agree that such QIU shall have no additional liability to any Underwriter or otherwise as a result of its serving as QIU in connection with the Offering. You further agree that to the extent the indemnification provided to a QIU under this Section 9.4 is unavailable to such QIU or insufficient in respect of any losses, claims, damages or liabilities (and expenses relating thereto), whether as a matter of law or public policy or as a result of the default of any Underwriter in performing its obligations under this Section 9.4, you and each other Underwriter shall
contribute to the amount paid or payable by such QIU as a result of such losses, claims, damages or liabilities (and expenses relating thereto) in proportion to your Underwriting Percentage.
9.5. Contribution. Notwithstanding any settlement on the termination of the applicable AAU, you agree to pay upon request of the Manager, as contribution, your Underwriting Percentage of any losses, claims, damages or liabilities, joint or several, paid or incurred by any Underwriter to any person other than an Underwriter, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus or Prospectus (or any amendment or supplement thereto), any Preliminary Offering Circular or Offering Circular (or any amendment or supplement thereto) or Supplemental Offering Materials or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished to the Company in writing by the Underwriter on whose behalf the request for contribution is being made expressly for use therein) and your Underwriting Percentage of any legal or other expenses reasonably incurred by the Underwriter (with the approval of the Manager) on whose behalf the request for contribution is being made in connection with investigating or defending any such loss, claim, damage or liability or any action in respect thereof; provided that no request shall be made on behalf of any Underwriter guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) from any Underwriter who was not guilty of such fraudulent misrepresentation. None of the foregoing provisions of this Section 9.5 shall relieve any defaulting or breaching Underwriter from liability for its defaults or breach.
9.6. Separate Counsel. If any claim is asserted or action or proceeding commenced pursuant to which the indemnity provided in Section 9.4 may apply, the Manager may take such action in connection therewith as it deems necessary or desirable, including retention of counsel for the Underwriters, and in its discretion separate counsel for any particular Underwriter or group of Underwriters, and the fees and disbursements of any counsel so retained shall be allocated among the several Underwriters as determined by the Manager. Any Underwriter may elect to retain at its own expense its own counsel and, on advice of such counsel but only with the consent of the Manager, may settle or consent to the settlement of any such claim, action or proceeding. The Manager may settle or consent to the settlement of any such claim, action or proceeding. Whenever the Manager receives notice of the assertion of any claim, action or proceeding to which the provisions of Section 9.4 would apply, it will give prompt notice thereof to each Underwriter, and whenever you receive notice of the assertion of any claim or commencement of any action or proceeding to which the provisions of Section 9.4 would apply, you will give prompt notice thereof to the Manager. The Manager also will furnish each Underwriter with periodic reports, at such times as it deems appropriate, as to the status of such claim, action or proceeding, and the action taken by it in connection therewith.
9.7. Survival of Agreements. Regardless of any termination of an AAU, your agreements contained in Article V and Sections 3.1, 9.3, 9.4, 9.5, 9.6 and
11.2 shall remain operative and in full force and effect regardless of (i) any termination of the Underwriting Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Issuer, the Guarantor, the Seller, its directors or officers or any person controlling the Issuer, the Guarantor or the Seller and (iii) acceptance of any payment for any Securities.
X. REPRESENTATIONS AND COVENANTS OF UNDERWRITERS
10.1. Knowledge of Offering. You understand that it is your responsibility to examine the Registration Statement, the Prospectus or the Offering Circular, as the case may be, relating to the Offering, any amendment or supplement thereto, any Preliminary Prospectus or Preliminary Offering Circular and the material, if any, incorporated by reference therein and any Supplemental Offering Materials and you will familiarize yourself with the terms of the Securities, any applicable Indenture and the other terms of the Offering thereof which are to be reflected in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU and Underwriting Agreement. The Manager is authorized, with the advice of counsel for the Underwriters, to approve on your behalf any amendments or supplements to the Registration Statement and the Prospectus or the Offering Circular, as the case may be.
10.2. Distribution of Materials. You will keep an accurate record of the names and addresses of all persons to whom you give copies of the Registration Statement, the Prospectus, any Preliminary Prospectus (or any amendment or supplement thereto) or any Offering Circular or any Preliminary Offering Circular and, when furnished with any subsequent amendment to the Registration Statement, any subsequent Prospectus, any subsequent Offering Circular or any memorandum outlining changes in the Registration Statement or any Prospectus or Offering Circular, you will, upon request of the Manager, promptly forward copies thereof to such persons.
10.3. Accuracy of Underwriters' Information. You confirm that the information that you have given or are deemed to have given in response to the Underwriters' Questionnaire attached as Exhibit A hereto (and to any other questions addressed to you in the Invitation Wire or other Wires), which information has been furnished to the Issuer for use in the Registration Statement and the Prospectus or the Offering Circular, as the case may be, or has otherwise been relied upon in connection with the Offering, is complete and accurate. You shall notify the Manager immediately of any development before the termination of the applicable AAU which makes untrue or incomplete any information that you have given or are deemed to have given in response to the Underwriters' Questionnaire (or such other questions).
10.4. Name; Address. Unless you have promptly notified the Manager in writing otherwise, your name as it should appear in the Prospectus or the Offering Circular and any advertisement, if different, and your address are as set forth on the signature pages hereof.
10.5. Capital Requirements. You represent that your commitment to purchase the Securities will not result in a violation of the financial responsibility
requirements of Rule 15c3-1 under the 1934 Act or of any similar provision of any applicable rules of any securities exchange to which you are subject or, if you are a financial institution subject to regulation by the Board of Governors of the United States Federal Reserve System, the United States Comptroller of the Currency or the United States Federal Deposit Insurance Corporation, will not place you in violation of any applicable capital requirements or restrictions of such regulator or any other regulator to which you are subject.
10.6. Compliance with NASD Requirements. You represent that you are a
member in good standing of the NASD, a Bank that is not a member of the NASD or
a foreign bank or dealer not eligible for membership in the NASD. In making
sales of Securities, if you are such a member, you agree to comply with all
applicable interpretive material ("IM") and rules of the NASD, including,
without limitation, IM-2110-1 (the NASD's interpretation with respect to
free-riding and withholding) and Rule 2740 of the NASD's Conduct Rules, or, if
you are such a foreign bank or dealer, you agree to comply, as applicable, with
IM-2110-1 and Rules 2730, 2740 and 2750 of the NASD's Conduct Rules as though
you were such a member and Rule 2420 of the NASD's Conduct Rules as it applies
to a nonmember broker or dealer in a foreign country. If you are a Bank, you
agree, to the extent required by applicable law or the Conduct Rules of the
NASD, that you will not, in connection with the public offering of any
Securities that do not constitute "exempted securities" within the meaning of
Section 3(a)(12) of the 1934 Act or such other Securities as from time to time
may be sold by a Bank, purchase any Securities at a discount from the Offering
Price from any Underwriter or dealer or otherwise accept any Fees and
Commissions from any Underwriter or Dealer, and you agree to comply, as
applicable, with Rule 2420 of the NASD's Conduct Rules as though you were a
member.
10.7. Further State Notice. The Manager will file a Further State Notice with the Department of State of New York, if required.
10.8. Compliance with Rule 15c2-8. In the case of a Registered Offering and any other Offering to which the provisions of Rule 15c2-8 under the 1934 Act are made applicable pursuant to the AAU or otherwise, you agree to comply with such Rule in connection with the Offering. In the case of an Offering other than a Registered Offering, you agree to comply with applicable Federal and state laws and the applicable rules and regulations of any regulatory body promulgated thereunder governing the use and distribution of offering circulars by underwriters.
10.9. Discretionary Accounts. In the case of a Registered Offering of Securities issued by an Issuer that was not, immediately prior to the filing of the Registration Statement, subject to the requirements of Section 13(d) or 15(d) of the 1934 Act, you agree that you will not make sales to any account over which you exercise discretionary authority in connection with such sale except as otherwise permitted by the applicable AAU for such Offering.
10.10. Offering Restrictions. If you are a foreign bank or dealer and you are not registered as a broker-dealer under Section 15 of the 1934 Act, you agree that while you are acting as an Underwriter in respect of the Securities and in any event
during the term of the applicable AAU, you will not directly or indirectly effect in, or with persons who are nationals or residents of, the United States, its territories or possessions any transactions (except for the purchases provided for in the Underwriting Agreement and transactions contemplated by Articles III and V hereof) in Securities or any Other Securities.
It is understood that, except as specified in the applicable AAU, no action has been taken by the Manager, the Issuer, the Guarantor or the Seller to permit you to offer Securities in any jurisdiction other than the United States, in the case of a Registered Offering, where action would be required for such purpose.
10.11. Representations, Warranties and Agreements. You agree to make to each other Underwriter participating in an Offering the same representations, warranties and agreements, if any, made by the Underwriters to the Issuer, the Guarantor or the Seller in the applicable Underwriting Agreement or any Intersyndicate Agreement and you authorize the Manager to make such representations, warranties and agreements to the Issuer, the Guarantor or the Seller on your behalf.
10.12. Limitation on the Authority of the Manager to Purchase and Sell Securities for the Account of Certain Underwriters. Notwithstanding any provision of this AAU authorizing the Manager to purchase or sell any Securities or Other Securities (including arranging for the sale of Contract Securities) or over-allot in arranging sales of Securities for the accounts of the several Underwriters, the Manager may not, in connection with the Offering of any Securities, make any such purchases, sales and/or over-allotments for the account of any Underwriter that, not later than its acceptance of the Invitation Wire relating to such Offering, has advised the Manager that, due to its status as, or relationship to, a bank or bank holding company such purchases, sales and/or over-allotments are prohibited by applicable law. If any Underwriter so advises the Manager, the Manager may allocate any such purchases, sales and over-allotments (and the related expenses) which otherwise would have been allocated to your account based on your respective Underwriting Percentage to your account based on the ratio of your Original Purchase Obligation to the Original Purchase Obligations of all Underwriters other than the advising Underwriter or Underwriters or in such other manner as the Manager shall determine.
XI. DEFAULTING UNDERWRITERS
11.1. Effect of Termination. If the Underwriting Agreement is terminated as permitted by the terms thereof, your obligations hereunder with respect to the Offering of the Securities shall immediately terminate except (i) as set forth in Section 9.7, (ii) that you shall remain liable for your Underwriting Percentage (or such other percentage as may be specified pursuant to Section 9.2) of all expenses and for any purchases or sales which may have been made for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement and (iii) that such termination shall not affect any obligations of any defaulting or breaching Underwriter.
11.2. Sharing of Liability. If any Underwriter shall default in its obligations (i) pursuant to Section 5.1, 5.2 or 5.4, (ii) to pay amounts charged to its account pursuant to Section 7.1, 7.2 or 8.1 or (iii) pursuant to Section 9.2, 9.3, 9.4, 9.5, 9.6 or 11.1, you will assume your proportionate share (determined on the basis of the respective Underwriting Percentages of the non-defaulting Underwriters) of such obligations, but no such assumption shall relieve any defaulting Underwriter from liability to the non-defaulting Underwriters, the Issuer, the Guarantor or the Seller for its default.
11.3. Arrangements for Purchases. The Manager is authorized to arrange for the purchase by others (including the Manager or any other Underwriter) of any Securities not purchased by any defaulting Underwriter in accordance with the terms of the applicable Underwriting Agreement or, if the applicable Underwriting Agreement does not provide arrangements for defaulting Underwriters, in the discretion of the Manager. If such arrangements are made, the respective amounts of Securities to be purchased by the remaining Underwriters and such other person or persons, if any, shall be taken as the basis for all rights and obligations hereunder, but this shall not relieve any defaulting Underwriter from liability for its default.
XII. MISCELLANEOUS
12.1. Obligations Several. Nothing contained in this Salomon Smith Barney Master AAU or any AAU constitutes you partners with the Manager or with the other Underwriters and the obligations of you and each of the other Underwriters are several and not joint. Each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the United States Internal Revenue Code of 1986, as amended. Each Underwriter authorizes the Manager, on behalf of such Underwriter, to execute such evidence of such election as may be required by the United States Internal Revenue Service.
12.2. Liability of Manager. The Manager shall be under no liability to you for any act or omission except for obligations expressly assumed by the Manager in the applicable AAU.
12.3. Termination of Master Agreement Among Underwriters. This Salomon Smith Barney Master AAU may be terminated by either party hereto upon five business days' written notice to the other party; provided that with respect to any Offering for which an AAU was sent prior to such notice, this Salomon Smith Barney Master AAU as it applies to such Offering shall remain in full force and effect and shall terminate with respect to such Offering in accordance with Section 9.1 hereof.
12.4. Governing Law. This Salomon Smith Barney Master AAU and each AAU shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State of New York.
12.5. Amendments. This Salomon Smith Barney Master AAU may be
amended from time to time by consent of the parties hereto. Your consent shall be deemed to have been given to an amendment to this Salomon Smith Barney Master AAU, and such amendment shall be effective, five business days following written notice to you of such amendment if you do not notify Salomon Smith Barney in writing prior to the close of business on such fifth business day that you do not consent to such amendment. Upon effectiveness, the provisions of this Salomon Smith Barney Master AAU as so amended shall apply to each AAU thereafter entered into except as otherwise specifically provided in any such AAU.
12.6. Notices. Any notice to any Underwriter shall be deemed to have been duly given if mailed, sent by wire, telex, facsimile or electronic transmission or other written communication or delivered in person to such Underwriter at the address which shall have been provided to Salomon Smith Barney as provided in Section 10.4 hereof. Any such notice shall take effect upon receipt thereof.
Please confirm your acceptance of this Salomon Smith Barney Master AAU by signing and returning to us the enclosed duplicate copy hereof.
Very truly yours,
Salomon Smith Barney Inc.
By:____________________________
Name:
Title:
CONFIRMED:________________________________________1999
(Name of Underwriter)
By:___________________________________________________
Name:
Title:
(If person signing is not an officer or a partner, please attach instrument of authorization)
Address: _____________________________________________
Telephone: _____________________________
Fax: _____________________________
EXHIBIT A
June 1, 1999
SALOMON SMITH BARNEY INC.
UNDERWRITERS' QUESTIONNAIRE
In connection with each Offering covered by the Salomon Smith Barney Inc. Master Agreement Among Underwriters dated June 1, 1999, we confirm that except as set forth in a timely reply by us to the Invitation Wire:
(1) Neither we nor any of our directors, officers or partners have a material relationship (as "material" is defined in Regulation C under the 1933 Act) with the Issuer, the Guarantor or any Seller.
(2) (If the offer and sale of the Securities are to be registered under the 1933 Act pursuant to a Registration Statement on Form S-1 of Form F-1:) Neither we nor any "group" (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of which we are a member is the beneficial owner (determined in accordance with Rule 13d-3 under the Exchange Act) of more than 5% of any class of voting securities of the Issuer or the Guarantor, nor do we have any knowledge that more than 5% of any class of voting securities of the Issuer or the Guarantor is held or to be held subject to any voting trust or other similar agreement.
(3) Other than as may be stated in the Salomon Smith Barney Master Agreement Among Underwriters dated June 1, 1999, the applicable AAU, the Intersyndicate Agreement or dealer agreement, if any, the Prospectus, the Registration Statement or the Offering Circular, we do not know and have no reason to believe that there is an intention to over-allot or that the price of any security may be stabilized to facilitate the offering of the Securities.
(4) Except as described in the Prospectus or Offering Circular, as the case may, be and the Invitation Wire, we do not know of any discounts or commissions to be allowed or paid to dealers, including all cash, securities, contracts or other consideration to be received by any dealer in connection with the sale of the securities.
(5) We have not prepared any report or memorandum for external use in connection with the Offering. (If there are any exceptions, (i) furnish four (4) copies of each report and memorandum to Salomon Smith Barney Inc., 388 Greenwich Street, New York, N.Y. 10013, Attention: Investment Banking Department/Transaction Structuring Group, (ii) identify each class of person who received such material and the number of copies distributed to each such class, and (iii) indicate when such distribution commenced and ceased.)
(6) (If the offer and sale of the Securities are to be registered
under the 1933 Act pursuant to a Registration Statement on Form S-1 or Form
F-1:) We have not within the past twelve months prepared or had prepared
for us any engineering, management or similar report or memorandum relating
to broad aspects of the business, operations or products of the Issuer or
the Guarantor. (The immediately preceding sentence does not apply to
reports solely comprised of recommendations to buy, sell or hold the
Issuer's or the Guarantor's securities, unless such recommendations have
changed within the past six months or to information already contained in
documents filed with the Commission. If there are any exceptions, (i)
furnish four (4) copies of each report and memorandum to Salomon Smith
Barney Inc. 388 Greenwich Street, New York, N.Y. 10013, Attention:
Investment Banking Department/Transaction Structuring Group, (ii) identify
each class of persons who received such material and the number of copies
distributed to each such class, and (iii) indicate when such distribution
commenced and ceased.)
(7) We are not an "affiliate" of the Issuer or the Guarantor for purposes of Rule 2720 of the National Association of Securities Dealers, Inc.'s ("NASD") Conduct Rules. We understand that under Rule 2720 (except as provided in Rule 2720(b)(1)(C) thereof) two entities are "affiliates" of each other if one entity controls, is controlled by, or is under common control with, the second entity and that "control" is presumed to exist if one entity (or, in the case of an NASD member, the entity and all "persons associated with" it (as defined in the NASD By-Laws)) beneficially owns 10% or more of the second entity's outstanding voting securities or, if the second entity is a partnership, if the first entity has a partnership interest in 10% or more of the second entity's distributable profits or losses.
(8) (If the Securities are not investment grade debt securities or preferred stock, or equity securities for which there exists a "bona fide independent market" (as defined in Rule 2720(b)(3) of the NASD's Conduct Rules) or otherwise exempted under Rule 2720(b)(7)(D) of the NASD's Conduct Rules:) We do not have a "conflict of interest" with the Issuer or the Guarantor under Rule 2720 of the NASD's Conduct Rules. In that regard, we specifically confirm that we, our "parent" (as defined in Rule 2720), affiliates and "persons associated with" us (as defined in the NASD By-Laws), in the aggregate do not (i) beneficially own 10% or more of the Issuer's or the Guarantor's "common equity", "preferred equity", or "subordinated debt" (as each such term is defined in Rule 2720), or (ii) in the case of an Issuer or Guarantor which is a partnership, beneficially own a general, limited or special partnership interest in 10% or more
of the Issuer's or Guarantor's distributable profits or losses.
(9) (If filing with the NASD is required:) Neither we nor any of our directors, officers, partners or "persons associated with" us (as defined in the NASD By-Laws) nor, to our knowledge, any "related person" (defined by the NASD to include counsel, financial consultants and advisors, finders, members of the selling or distribution group, any NASD member participating in the offering and any other persons associated with or related to and members of the immediate family of any of the foregoing) or any other broker-dealer, (a) within the last 12 months have purchased in private transactions, or intend before, at or within six months after the commencement of the public offering of the Securities to purchase in private transactions, any securities of the Issuer, the Guarantor or any Issuer Related Party (as hereinafter defined), (b) within the last 12 months had any dealings with the Issuer, the Guarantor, any Seller or any subsidiary or controlling person thereof (other than relating to the proposed Underwriting Agreement) as to which documents or information are required to be filed with the NASD pursuant to its Corporate Financing Rule, or (c) during the 12 months immediately preceding the filing of the Registration Statement (or, if there is none, the Offering Circular), have entered into any arrangement which provided or provides for the receipt of any item of value (including, but not limited to, cash payments and expense reimbursements) and/or the transfer of any warrants, options or other securities from the Issuer, the Guarantor or any Issuer Related Party to us or any related person.
(10) (If filing with the NASD is required:) There is no association or affiliation between us and (i) any officer or director of the Issuer, the Guarantor or any Issuer Related Party, or (ii) any securityholder of five percent or more (or, in the case of an initial public offering of equity securities, any securityholder) of any class of securities of the Issuer, the Guarantor or an Issuer Related Party; it being understood that for purposes of paragraph (9) above and this paragraph (10), the term "Issuer Related Party" includes any Seller, any affiliate of the Issuer the Guarantor or a Seller and the officers or general partners, directors, employees and securityholders thereof. (If there are any exceptions, state the identity of the person with whom the association or affiliation exists and, if relevant, the number of equity securities or the face value of debt securities owned by such person, the date such securities were acquired and the price paid for such securities).
(11) (If the Securities are not issued by a real estate investment trust:) No portion of the net offering proceeds from the sale of the Securities will be paid to us or any of our affiliates or "persons associated with" us (as defined in the NASD By-Laws) or members of the immediate family of any such person.
(12) (If the Securities are debt securities and their offer and sale is to be registered under the 1933 Act:) We are not an affiliate (as defined in Rule 0-2 under the Trust Indenture Act of 1939) of the Trustee for the Securities or of its parent, if any. Neither the Trustee nor its parent, if any, nor any of their directors or executive officers is a "director, officer, partner, employee, appointee or
representative" of ours (as those terms are defined in the Trust Indenture Act of 1939 or in the relevant instructions to Form T-1). We and our directors, partners, and executive officers, taken as a group, did not on the date specified in the Invitation Wire, and do not, own beneficially 1% or more of the shares of any class of voting securities of the Trustee or of its parent, if any. If we are a corporation, we do not have outstanding and have not assumed or guaranteed any securities issued otherwise than in our present corporate name.
(13) (If the Issuer is a public utility:) We are not a "holding company" or a "subsidiary company" or an "affiliate" of a "holding company" or of a "public-utility company", each as defined in the Public Utility Holding Company Act of 1935.
(14) If we are, or we are affiliated with, a U.S. or non-U.S. bank, we hereby represent that our participation in the offering of the Securities on the terms contemplated in the applicable AAU and the proposed Underwriting Agreement does not contravene any U.S. or state banking law restricting the exercise of securities powers in the United States.
Capitalized terms used but not defined herein shall have the respective meanings given to them in the applicable AAU.
EXHIBIT L
[ROPES & GRAY LLP LETTERHEAD]
June 23, 2003
PIMCO High Income Fund
c/o PIMCO Advisors Fund Management LLC
1345 Avenue of the Americas
New York, New York 10105
Ladies and Gentlemen:
We have acted as counsel to PIMCO High Income Fund (the "Fund") in connection with the Registration Statement of the Fund on Form N-2 under the Securities Act of 1933 (File No. 333-104915) and the Investment Company Act of 1940 (File No. 811-21311) (the "Registration Statement"), each as amended (the "Acts"), relating to the proposed sale of an aggregate of 7,200 Auction Rate Cumulative Preferred Shares, Series M, 7,200 Auction Rate Cumulative Preferred Shares, Series T, 7,200 Auction Rate Cumulative Preferred Shares, Series W, 7,200 Auction Rate Cumulative Preferred Shares, Series TH, and 7,200 Auction Rate Cumulative Preferred Shares, Series F (together, the "Preferred Shares"). The Preferred Shares are to be sold pursuant to an Underwriting Agreement substantially in the form filed as an exhibit to the Registration Statement (the "Underwriting Agreement") among the Fund, PIMCO Advisors Fund Management LLC, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and UBS Securities LLC.
We have examined the Fund's Agreement and Declaration of Trust on file in the office of the Secretary of State of The Commonwealth of Massachusetts, as amended (the "Declaration of Trust"), and the Fund's Second Amended and Restated Bylaws, and are familiar with the actions taken by the Fund in connection with the issuance and sale of the Preferred Shares. We have also examined such other documents and records as we have deemed necessary for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Fund is a duly organized and validly existing unincorporated voluntary association with transferable shares under and by virtue of the laws of The Commonwealth of Massachusetts.
2. The Preferred Shares have been duly authorized and, assuming the due execution and delivery of the Underwriting Agreement by an authorized officer of the Fund, when issued and paid for in accordance with the Underwriting Agreement, will be
PIMCO High Income -2- June 23, 2003
validly issued, fully paid and, except as described in the following paragraph, nonassessable by the Fund.
The Fund is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration of Trust disclaims shareholder liability for acts or obligations of the Fund and requires that a notice of such disclaimer be given in each note, bond, contract, instrument, certificate or undertaking entered into or executed by the Fund or its Trustees. The Declaration of Trust provides for indemnification out of the property of the Fund for all loss and expense of any shareholder of the Fund held personally liable solely by reason of his being or having been a shareholder. Thus, the risk of a shareholder's incurring financial loss on account of being a shareholder is limited to circumstances in which the Fund itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the registration of the Preferred Shares for offering and sale pursuant to the Securities Act of 1933, as amended. We consent to the filing of this opinion with and as part of the Registration Statement and to the references to our firm in the related prospectus under the captions "Tax matters" and "Legal matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Ropes & Gray LLP Ropes & Gray LLP |
Exhibit s.2
POWER OF ATTORNEY
We, the undersigned Trustees and officers of PIMCO High Income Fund (the "Trust"), hereby severally constitute and appoint each of Stephen J. Treadway, Newton B. Schott, Jr., Brian S. Shlissel, Joseph B. Kittredge, Jr. and David C. Sullivan, and each of them singly, with full powers of substitution and resubstitution, our true and lawful attorney, with full power to him to sign for us, and in our name and in the capacities indicated below, any Registration Statement of the Trust on Form N-2, all Pre-Effective Amendments to any such Registration Statement of the Trust, any and all subsequent Post-Effective Amendments to said Registration Statement, any and all supplements or other instruments in connection therewith, and any subsequent Registration Statements for the same offering which may be filed under Rule 462(b), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the securities regulators of the appropriate states and territories, and generally to do all such things in our name and on our behalf in connection therewith as said attorney deems necessary or appropriate to comply with the Securities Act of 1933, the Investment Company Act of 1940, all related requirements of the Securities and Exchange Commission and of the appropriate state and territorial regulators, granting unto said attorney full power and authority to do and perform each and every act and thing requisite or necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney lawfully could do or cause to be done by virtue hereof.
Name Capacity Date --------------------------- ----------------------- ------------------------ /s/ Brian S. Shlissel President and May 1, 2003 --------------------------- Chief Executive ------------------------ Brian S. Shlissel Officer /s/ Paul Belica Trustee May 1, 2003 --------------------------- ------------------------ Paul Belica /s/ Robert E. Connor Trustee May 1, 2003 --------------------------- ------------------------ Robert E. Connor /s/ John J. Dalessandro II Trustee May 1, 2003 --------------------------- ------------------------ John J. Dalessandro II /s/ Hans Kertess Trustee June 17, 2003 --------------------------- ------------------------ Hans Kertess /s/ Lawrence Altadonna Treasurer and May 1, 2003 --------------------------- Principal Financial and ------------------------ Lawrence Altadonna Accounting Officer /s/ Newton B. Schott, Jr. Vice President and May 1, 2003 --------------------------- Secretary ------------------------ Newton B. Schott, Jr. |