As filed with the Securities and Exchange Commission on April 12, 2001
1933 Act File No. 333-
1940 Act File No. 811-09013
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 3 [x]
(CHECK APPROPRIATE BOX OR BOXES)
EATON VANCE SENIOR INCOME TRUST
-------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
-----------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 482-8260
------------------------------------------------------------------
ALAN R. DYNNER
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
-----------------------------------------------------------------------
(NAME AND ADDRESS OF AGENT FOR SERVICE)
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. [x]
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
========================================================================================================================
Amount Proposed Maximum Proposed Maximum Amount of
Being Offering Price Aggregate Registration
Title of Securities Being Registered Registered Per Unit Offering Price(1) Fee
------------------------------------------------------------------------------------------------------------------------
Auction Preferred Shares 4,400 $25,000 $110,000,000 $27,500
========================================================================================================================
(1) Estimated solely for the purposes of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EATON VANCE SENIOR INCOME TRUST
AUCTION PREFERRED SHARES
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
--------------------------
PART A
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
-------- ------------ ------------------
1. Outside Front Cover Front Cover Page
2. Inside Front and Outside Back Cover Page Front and Back Cover Page
3. Fee Table and Synopsis Prospectus Summary
4. Financial Highlights Financial Highlights and Investment Performance
5. Plan of Distribution Front Cover Page; Prospectus Summary; The Auction;
Underwriting
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds; Investment Objective, Policies and
Risks
8. General Description of the Registrant Organization and Management of the Trust;
Investment Objective, Policies and Risks;
Description of Capital Structure
9. Management Management of the Trust; Shareholder Servicing
Agent, Custodian and Transfer Agent
10. Capital Stock, Long-Term Debt, and Other Organization and Management of the Trust; Taxes;
Securities Description of Preferred Shares
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of Table of Contents of the Statement of Additional
Additional Information Information
PART B STATEMENT OF
ITEM NO. ITEM CAPTION ADDITIONAL INFORMATION CAPTION
-------- ------------ ------------------------------
14. Cover Page Cover Page
15. Table of Contents Table of Contents
16. General Information and History Not Applicable
17. Investment Objective and Policies Additional Investment Information and
Restrictions
18. Management Trustees and Officers; Investment Advisory and
Other Services
19. Control Persons and Principal Holders of Other Information
Securities
20 Investment Advisory and Other Services Investment Advisory and Other Services
21. Brokerage Allocation and Other Practices Portfolio Trading
22. Tax Status Taxes
23. Financial Statements Financial Statements
C-1
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION - APRIL 12, 2001
$110,000,000
[EATON VANCE LOGO]
EATON VANCE SENIOR INCOME TRUST
2,200 SHARES SERIES A
2,200 SHARES SERIES B
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------
Eaton Vance Senior Income Trust (the "Trust") is a non-diversified, closed-end
management investment company. The Trust's investment objective is to provide a
high level of current income, consistent with the preservation of capital, by
investing primarily in senior secured floating rate loans ("Senior Loans"). This
Prospectus offers Series A and Series B Auction Preferred Shares of the Trust
(the "Preferred Shares").
The Trust's investment adviser is Eaton Vance Management ("Eaton Vance" or the
"Adviser"). Eaton Vance was one of the first investment advisers to manage a
portfolio of Senior Loans in a publicly offered investment company, and has done
so continuously since 1989. Senior Loan assets under management by Eaton Vance
exceed $9 billion.
Senior Loans are made to corporations, partnerships and other business entities
("Borrowers") which operate in various industries and geographical regions.
Senior Loans pay interest at rates which are redetermined periodically on the
basis of a floating base lending rate plus a premium. Senior Loans typically are
of below investment grade quality and have below investment grade credit
ratings, which ratings are associated with securities having high risk,
speculative characteristics. Because of the protective features of Senior Loans
(being senior in a Borrower's capital structure and secured by specific
collateral), the Adviser believes, based on its experience, that Senior Loans
tend to have more favorable loss recovery rates compared to most other types of
below investment grade obligations. An investment in the Trust's Auction
Preferred-Shares is not appropriate for all investors and there is no assurance
that the Trust will achieve its investment objective. See "Investment objective,
policies and risks" beginning on page 8 of this prospectus.
(continued on the following page)
BEFORE BUYING ANY SHARES OF THESE SHARES, YOU SHOULD CAREFULLY CONSIDER THE RISK
FACTORS DESCRIBED IN "INVESTMENT OBJECTIVE, POLICIES AND RISKS" BEGINNING ON
PAGE 10 AND "RISKS OF INVESTING IN PREFERRED SHARES" ON PAGE 14.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Per Share Total
--------------------------------------------------------------------------------
Public offering price $ 25,000 $ 110,000,000
--------------------------------------------------------------------------------
Underwriting discounts and commissions $ 250 $ 1,100,000
--------------------------------------------------------------------------------
Proceeds, before expenses, to the Trust(1) $ 24,750 $ 108,900,000
--------------------------------------------------------------------------------
(1) Plus accumulated dividends, if any, from the date the Preferred Shares are
issued.
(2) The Trust and the Adviser have agreed to indemnify the Underwriter against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
UBS WARBURG
The information in this prospectus is incomplete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is efefctive. This prospectus is not an offer to sell
these securities, and we are not soliciting offers to buy these securities, in
any state where the offer or sale is not permitted.
(continued from the cover page)
The Preferred Shares are offered by the Underwriter subject to certain
conditions. The Underwriter reserves the right to withdraw, cancel or modify the
offering in whole or in part. It is expected that the Preferred Shares will be
delivered to the nominee of The Depository Trust Company on or about
____________, 2001.
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 A Preferred Shares for the initial period from
and including the date of issue to but excluding ___________, 2001 will be ____%
per year. The dividend rate on the Series B Preferred Shares for the initial
period from and including the date of issue to but excluding __________, 2001
will be ____% per year. For each subsequent period, the auction agent will
determine the dividend rate for a particular period by an auction conducted on
the business day prior to that period. Preferred Shares are not listed on an
exchange. Investors in Preferred Shares may participate in auctions through
broker-dealers that have entered into an agreement with the auction agent and
the Trust in accordance with the procedures specified herein. Broker-dealers are
not required to maintain a secondary market in Preferred Shares, and a secondary
market may not provide you with liquidity. The Trust may redeem Preferred Shares
as described under "Description of Preferred Shares -- Redemption."
The Preferred Shares will be senior to the Trust's outstanding common shares.
The Trust's common shares are traded on the New York Stock Exchange under the
symbol "EVF." This offering is conditioned upon the Preferred Shares being rated
"aaa" from Moody's Investors Service, Inc.
This prospectus sets forth concisely information that a prospective investor
should know before investing. Please read and retain this prospectus for future
reference. A statement of additional information ("SAI") dated __________, 2001,
has been filed with the Securities and Exchange Commission ("SEC") and can be
obtained without charge by calling 1-800-225-6265 or by writing to the Trust. A
table of contents to the SAI is located on page __ of this prospectus. This
prospectus incorporates by reference the entire SAI. The SAI is available along
with other Trust-related materials at the SEC's public reference room in
Washington, DC (call 1-202-942-8090 for information on the operation of the
reference room); on the EDGAR Database on the SEC's internet site
(http://www.sec.gov); or, upon payment of copying fees, by writing to the SEC's
public reference section, Washington, DC 20549-0102, or by electronic mail at
publicinfo@sec.gov. The Trust's address is The Eaton Vance Building, 255 State
Street, Boston, Massachusetts 02109 and its telephone number is 1-800-225-6265.
The Trust's 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.
TABLE OF CONTENTS
PAGE PAGE
Prospectus summary................................ 1 The auction........................................ 23
Financial highlights and investment performance... 5 Rating agency guidelines........................... 25
The Trust......................................... 6 Underwriting....................................... 25
Capitalization.................................... 6 Shareholder servicing agent, custodian
Portfolio composition............................. 6 and transfer agent.............................. 26
Use of proceeds................................... 8 Legal matters...................................... 27
Investment objective, policies and risks.......... 8 Experts............................................ 27
Use of leverage and related risks................. 12 Additional information............................. 27
Organization and management of the Trust.......... 14 Table of contents for the statement of
Federal taxation.................................. 17 additional information.......................... 27
Description of Preferred Shares.................... 19
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
prospectus supplement and, if given or made, such information or representations
must be relied upon as having been authorized. This prospectus supplement does
not constitute an offer to sell or the solicitation of an offer to buy any
securities other than the securities described in this prospectus supplement or
an offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this prospectus supplement nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained or
incorporated by reference herein is correct as of any time subsequent to the
date of such information.
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may contain
all of the ifnormation that is important to you. To understand this offering
fully, you should read carefully the entire prospectus, including the risk
factors and the financial statements.
THE TRUST
Eaton Vance Senior Income Trust (the "Trust") is a non-diversified, closed-end
management investment company registered under the Investment Company Act of
1940, as amended (the "Investment Company Act.") The Trust commenced operations
on October 30, 1998. As of March 30, 2001, total assets of the Trust were
approximately $473 million.
THE OFFERING
The Trust is offering an aggregate of 2,200 Series A Preferred Shares and 2,200
Series B 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 by UBS Warburg LLC. See "Underwriting."
The shares of Preferred Stock 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 Stock - Dividends
and Dividend Periods," each dividend period will be 7 days. The auction agent
will determine the dividend rate for a particular period by an auction conducted
on the business day immediately prior to the start of that dividend period.
The shares of Preferred Stock are not listed on an exchange. Instead, investors
may buy or sell shares of Preferred Stock at an auction that normally is held
weekly, by submitting orders for broker-dealers that have entered into an
agreement with the auction agent and the Trust or to certain other
broker-dealers. Bankers Trust Company, the auction agent, reviews orders from
broker-dealers on behalf of existing holders that wish to sell, hold at the
auction rate, or hold only at a specified dividend rate, and on behalf of
potential holders that wish to buy shares of Preferred Stock. The auction agent
then determines the lowest dividend rate that will result in all of the
outstanding Preferred Stock continuing to be held. The first auction date for
shares of Series A Preferred Stock will be , 2001 and the first auction date for
shares of Series B Preferred Stock will be , 2001, each the business day before
the dividend payment date for the initial dividend period for shares of
Preferred Stock. The auction day for shares of Series A Preferred Stock will be
[Tuesday] and for shares of Series B Preferred Stock will be [Thursday], unless
the then current dividend period is a special rate period, or the day that
normally would be the auction date or the first day of the subsequent dividend
period is not a business day.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The Trust's investment objective is to provide a high level of current income,
consistent with preservation of capital, by investing primarily in senior
secured floating rate loans ("Senior Loans"). Senior Loans generally are made to
corporations, partnerships and other business entities ("Borrowers") which
operate in various industries and geographical regions. Senior Loans pay
interest at rates which are redetermined periodically by reference to a base
lending rate, primarily the London Inter-bank Offered Rate ("LIBOR"), plus a
premium. In normal market conditions, at least 80% of the Trust's total assets
will be invested in interests in Senior Loans. It is anticipated that the
proceeds of the Senior Loans in which the Trust will acquire interests primarily
will be used to finance leveraged buyouts, recapitalizations, mergers,
acquisitions, stock repurchases, and, to a lesser extent, to finance internal
growth and for other corporate purposes of Borrowers.
The Trust may invest up to 20% of its total assets in: loan interests which are
not secured by any, or that have lower than a senior claim on, collateral; other
income producing securities such as investment and non-investment grade
corporate debt securities and U.S. government and U.S. dollar-denominated
foreign government or supranational debt securities (subject to the limit that
not more than 10% of the Trust's total assets may have a fixed rate of
interest); and warrants and equity securities acquired in connection with its
investments in Senior Loans. The Trust may also engage in lending of its
securities, repurchase agreements, reverse repurchase agreements and, for
hedging and risk management purposes, certain derivative transactions. See
"Investment objective, policies and risks."
1
Investing in Senior Loans involves investment risk. Some Borrowers default on
their Senior Loan payments. The Trust attempts to manage credit risk through
portfolio diversification and ongoing analysis and monitoring of Borrowers. The
Trust also is subject to market, liquidity, interest rate and other risks.
LEVERAGE
The Trust utilizes financial leverage on an ongoing basis for investment
purposes. The Trust borrows money through a credit facility program equal
currently to approximately 30.8% of the Trust's total assets. After completion
of the offering of Preferred Shares, the Trust anticipates that this will be
reduced to approximately [23.2%], and total leverage from borrowings and
Preferred Shares will be approximately [46.5%]. This amount will change, but
total leverage will not exceed 50% of the Trust's total assets.
The Trust 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 special risks (including the likelihood of
greater volatility of net asset value and market price of the shares and of
dividends), and there can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. Because leverage achieved
through borrowings and Preferred Shares is based on a floating rate of interest
that fluctuates similarly to the floating rate on Senior Loans in the Trust's
portfolio, the Adviser believes that market interest rate fluctuations should
not adversely affect returns on the Senior Loans obtained with the proceeds of
such borrowings. See "Use of leverage and related risks."
INVESTMENT ADVISER AND ADMINISTRATOR..
Eaton Vance Management (the "Adviser" or "Eaton Vance"), a wholly-owned
subsidiary of Eaton Vance Corp., is the Trust's investment adviser and
administrator. Scott H. Page and Payson F. Swaffield are co-portfolio managers
of the Trust and have each served as Senior Loan investment professionals at
Eaton Vance for over a decade. See "Organization and Management of the Trust."
DIVIDENDS
The table below shows the dividend rates for the initial rate periods on
Preferred Shares offered in this Prospectus. For subsequent dividend periods,
Preferred Shares will pay dividends based on a rate set at auctions, normally
held every 7 days. In most instances dividends are also payable every 7 days, on
the first business day following the end of the rate period. See "The auction"
and "Description of Preferred Shares."
The table below also shows the dividend payment dates for the initial dividend
periods. If the day on which dividends otherwise would be paid is not a business
day, then dividends will be paid on the first business day that falls after that
day.
Finally, the table below shows the number of days of the initial dividend
periods for Preferred Shares. Subsequent rate periods generally will be 7 days.
The dividend payment date for special rate periods of more than 7 days will be
set out in the notice designating a special rate period. See "Description of
Preferred Shares."
Dividend Payment Dates for Number of Days of Initial
Preferred Shares Initial Dividend Rates Initial Dividend Periods Dividend Periods
---------------- ---------------------- ------------------------ ----------------
Series A % , 2001
--------- ---------- ---------
Series B % , 2001
--------- ---------- ---------
RISK CONSIDERATIONS
Risks of investing in Preferred Shares include:
o borrowings of the Trust may also constitute a substantial lien and burden
on your Preferred Shares by reason of its prior claim against the income of
the Trust and against the net assets of the Trust in liquidation;
2
o the Trust will not be permitted to declare dividends or other distributions
with respect to your Preferred Shares or redeem your Preferred Shares
unless the Trust meets certain asset coverage requirements and is not in
default under the terms of any senior indebtedness (including a borrowing
facility);
o if an auction fails you may not be able to sell some or all of your
Preferred Shares;
o you could receive less than the price you paid for your Preferred Shares if
you sell them outside of the auction, especially when market interest rates
are rising;
o the rating agency could downgrade Preferred Shares, which could affect
their liquidity and value;
o the Trust may be forced to redeem your Preferred Shares to meet regulatory
or rating agency requirements or may voluntarily redeem your Preferred
Shares in certain circumstances;
o in extraordinary circumstances, the Trust may not earn sufficient income
from its investments to pay dividends;
o if long-term rates rise, the value of the Trust's investment portfolio may
decline, reducing asset coverage on Preferred Stock; and
o if a borrower to which the Trust lends defaults, there may be anegative
impact on the Trust's income and asset coverage.
The primary risks of investing in the Trust include the risk of: non-payment of
scheduled interest or principal by borrowers; collateral securing a Senior Loan
being inadequate to cover a borrower's obligations if a default occurs; an
increase in prevailing interest rates, although floating rate obligations
mitigate this risk; volatility in net asset value from the use of financial
leverage, and in interest rates which affects dividends paid to all classes of
shares; investing in Senior Loans of foreign borrowers; a change in market
demand for Senior Loans affecting their value; and concentrating investments in
a limited number of issuers.
For further discussion of the risks of investing, see "Investment objective,
policies and risks," and "Use of leverage and related risks."
ASSET MAINTENANCE
The Trust must maintain asset coverage of the Preferred Shares of at least 200%
as required by the Investment Company Act, as well as asset coverage as required
by the rating agency rating the Preferred Shares.
Based on the composition of the Trust's portfolio and market conditions as of
March 30, 2001, the asset coverage of the Preferred Shares as measured pursuant
to the Investment Company Act would be approximately 248% if the Trust were to
issue all Preferred Shares offered in this Prospectus, representing
approximately 20% of the Trust's total assets, and reduce its borrowings as
planned.
In addition, under the Trust's current borrowing facility, the Trust may not
permit the Trust's asset coverage ratio (as defined separately by related credit
agreements) to fall below 300% at any time without causing an event of default
under the credit agreements. See "Use of leverage and related risks."
LIQUIDATION PREFERENCE
The liquidation preference of the Preferred Stock will be $25,000 per share,
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared). In addition, holders of Preferred Shares may be entitled to
receive Additional
Dividends in the event of the liquidation of the Trust as provided herein. See
"Description of Preferred Shares."
3
INDEPENDENT CREDIT RATING
It is a condition to their issuance that the Preferred Shares be issued with an
"aaa" credit quality rating from Moody's Investor Services, Inc. ("Moody's"). A
rating is not a financial guarantee and can change. The Trust may at some future
time seek to have the Preferred Shares rated by another rating agency. See
"Rating agency guidelines."
VOTING RIGHTS
The Investment Company Act requires that the holders of Preferred Shares and any
other Preferred Shares, voting as a separate 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 on certain other matters as required under
the Trust's Agreement and Declaration of Trust and the Investment Company Act.
See "Description of Preferred Shares."
INCOME TAXES
Dividends paid with respect to Preferred Shares should constitute dividends for
Federal income tax purposes to the extent attributable to the Trust's current or
accumulated earnings and profits. These dividends generally will be taxable as
ordinary income to holders. Corporate holders of the Preferred Shares generally
will not be entitled to the dividends received deduction for these dividends.
Distributions of net capital gain, to the extent so designated, will be treated
as long-term capital gains. See "Federal Taxation."
4
FINANCIAL HIGHLIGHTS AND INVESTMENT PERFORMANCE
The following information should be read in conjunction with the audited
financial statements that appear in the Trust's semiannual and annual reports to
shareholders. The Trust's financial statements have been audited by Deloitte &
Touche LLP, independent certified public accountants, as experts in accounting
and auditing. The financial statements and the independent auditors' report are
incorporated by reference into the SAI.
Year Ended June 30,
Six Months Ended ---------------------------------
December 31, 2000 2000 1999(1)(2)
----------------- ---- ----------
Net asset value -- Beginning of period $ 9.810 $ 10.090 $ 10.000
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations
------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.463 $ 0.868 $ 0.539
Net realized and unrealized gain (loss) (0.617) (0.271) 0.036
------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations $ (0.154) $ 0.597 $ 0.575
------------------------------------------------------------------------------------------------------------------------------
Less distributions
------------------------------------------------------------------------------------------------------------------------------
From net investment income $ (0.536) $ (0.865) $ (0.465)
In excess of net realized gain -- (0.012) --
------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS $ (0.536) $ (0.877) $ (0.465)
------------------------------------------------------------------------------------------------------------------------------
OFFERING COSTS CHARGED TO PAID-IN CAPITAL $ -- $ -- $ (0.020)
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE -- END OF PERIOD $ 9.120 $ 9.810 $ 10.090
------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE -- END OF PERIOD $ 8.375 $ 9.313 $ 10.000
------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(3) (4.72)% 2.00% 4.93%
------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data+
------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000's omitted) $ 325,348 $349,803 $ 359,705
Ratios (as a percentage of average daily net assets):
Net expenses 1.88%(4) 1.84% 1.65%(4)
Interest expense 2.74%(4) 2.41% 2.02%(4)
Total expense 4.62%(4) 4.25% 3.67%
Net investment income 9.69%(4) 8.73% 8.17%(4)
Portfolio Turnover 28% 63% 27%
------------------------------------------------------------------------------------------------------------------------------
+ The operating expenses of the Trust may reflect a reduction of the
investment adviser fee and the administration fee. Had such actions not
been taken, the ratios and net investment income per share would have been
as follows:
Ratios (as a percentage of average daily net assets):
Expenses 1.97%(4)
Interest expense 2.02%(4)
Net investment income 7.85%(4)
Net investment income per share $0.518
------------------------------------------------------------------------------------------------------------------------------
(1) Net investment income per share was computed using average common shares
outstanding.
(2) For the period from the start of business, October 30, 1998, to June 30,
1999.
(3) Total return is calculated assuming a purchase at market value on the first
day and a sale at the market value on the last day of the period reported.
Dividends and distributions, if any, are assumed reinvested on the
reinvestment date. Total return is not computed on an annualized basis.
(4) Annualized.
5
THE TRUST
Eaton Vance Senior Income Trust (the "Trust") is a non-diversified, closed-end
management investment company which was organized as a Massachusetts business
trust on September 23, 1998. The Trust commenced investment operations on
October 30, 1998 upon the closing of an initial public offering of its common
shares of beneficial interest. On March 30, 2001, the Trust had outstanding
35,726,793 common shares. As of March 30, 2001, the Trust had total assets of
approximately $473 million and net assets of approximately $326 million. The
Trust's principal office is located at The Eaton Vance Building, 255 State
Street, Boston, MA 02109 and its telephone number is 1-800-225-6265.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Trust as of
March 30, 2001 and as adjusted to give effect to the issuance of the Preferred
Shares offered hereby (including estimated offering expenses and sales load of
$1,300,000).
Actual As Adjusted
------ -----------
Shareholders' equity:
Auction Preferred Shares, $0.01 par value (no shares issued; 4,400 shares issued, as adjusted, at
$25,000 per share liquidation preference)........................................................ $ -- $110,000,000
Common Shares, $0.01 par value per share, (35,726,793 shares outstanding).......................... 327,268 327,268
Capital in excess of par value....................................................................... 356,167,776 354,867,776
------------- -------------
Undistributed net investment income.................................................................. 2,747,801 2,747,801
------------- -------------
Net realized gain (loss) from investment transactions................................................ (8,480,414) (8,480,414)
------------- -------------
Net unrealized depreciation of investments........................................................... (24,929,112) (24,929,112)
------------- -------------
Net assets........................................................................................... $325,833,319 $434,533,319
============= =============
PORTFOLIO COMPOSITION
The following tables set forth certain information with respect to the
characteristics and the composition of the Trust's investment portfolio in terms
of percentages of net assets and total assets as of March 30, 2001.
PORTFOLIO CHARACTERISTICS
Net assets $325,833,319
Total assets $473,341,090
Assets invested in senior loans and other loans $403,733,026
Average amount outstanding per loan $1,877,828
Total number of industries 54
Average loan amount per industry $7,476,537
Portfolio turnover (6 months ended 12/31/00) 28%
Weighted average days to next interest rate reset 48 days
Average loan maturity 62 months
Average age of loans held in the portfolio 14.5 months
Assets invested in other debt obligations $57,624,976
Assets invested in common stocks and warrants $3,940,000
6
TOP 10 SENIOR LOAN INDUSTRIES AS A % OF
Net Assets Total Assets
Cable Television 10.1% 7.0%
Telecommunications-Wireless 9.7% 6.7%
Manufacturing 7.3% 5.1%
Real Estate 6.2% 4.2%
Chemicals 5.9% 4.0%
Publishing & Printing 4.4% 3.0%
Entertainment 4.1% 2.9%
Commercial Services 4.1% 2.8%
Broadcast Media 4.0% 2.8%
Health Care - Providers & Services 3.6% 2.5%
TOP 10 SENIOR LOANS AS A % OF
Net Assets Total Assets
Insight Midwest Holdings, LLC 1.5% 1.1%
Western Wireless 1.5% 1.1%
Century Cable Holdings, LLC 1.5% 1.1%
Charter Communications Operating, LLC 1.5% 1.0%
Nextel Communications, Inc. 1.5% 1.0%
Crown Castle Operating Company 1.4% 1.0%
Huntsman ICI Chemicals LLC 1.4% 1.0%
Cincinnati Bell, Inc. 1.3% 0.9%
Panavision International, L.P. 1.3% 0.9%
Voicestream PCS Holdings, LLC 1.2% 0.9%
MOODY'S SECURITIES RATINGS
(Senior Loans Only)
(As of March 30, 2001)+
Aaa - Baa 0.0%
Ba 45.7%
B 24.0%
Caa 1.5%
Ca - D 0.0%
Not Rated 28.8%
+ The ratings of Moody's represent their opinion as to the quality of
securities that they undertake to rate. Ratings are relative and subjective
and not absolute standards of quality. Moody's ratings categories may be
modified further by a 1, 2 or 3 in Aa, A, Baa, Ba, B and Caa ratings.
++ Securities that are not rated by Moody's may be rated by nationally
recognized statistical rating organizations other than Moody's, or may not
be rated by any such organization. With respect to the percentage of the
Trust's assets invested in such securities, the Adviser believes that these
are of comparable quality to rated securities. This determination is based
on the Adviser's own internal evaluation and does not necessarily reflect
how such securities would be rated by Moody's if they were to rate the
securities. Accordingly, the Adviser believes most of the Trust's unrated
securities are of Ba or B quality.
7
USE OF PROCEEDS
The proceeds of this offering, after deduction of offering expenses (including
sales load), estimated to be $108,700,000, will repay part of the Trust's
borrowings under a credit facility and will be invested in accordance with the
Trust's investment objective and policies as soon as practicable, but in no
event, under normal market conditions, later than three months after the receipt
thereof. Pending such investment, the proceeds may be invested in high-quality,
short-term debt securities.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
INVESTMENT OBJECTIVE
The Trust's investment objective is to provide Shareholders with a high level of
current income, consistent with preservation of capital, by investing primarily
in senior secured floating rate loans ("Senior Loans"). Investment in such
floating rate instruments is expected to minimize changes in the underlying
principal value of the Senior Loans, and therefore the Trust's net asset value,
resulting from changes in market interest rates. The borrowers of such loans
will be corporations, partnerships and other business entities ("Borrowers")
which operate in a variety of industries and geographical regions.
INVESTMENT POLICIES -- GENERAL COMPOSITION OF THE TRUST
In normal market conditions, at least 80% of the Trust's total assets will be
invested (generally by the purchase of assignments) in interests in Senior Loans
of domestic or foreign Borrowers (so long as foreign loans are U.S.
dollar-denominated and payments of interest and repayments of principal are
required to be made in U.S. dollars). The Trust may invest up to 20% of its
total assets in (i) loan interests which are not secured by any, or that have a
lower than senior claim on, collateral, (ii) other income producing securities
such as investment and non-investment grade corporate debt securities and U.S.
government and U.S. dollar-denominated foreign government or supranational debt
securities (subject to the limit that no more than 10% of the Trust's total
assets may be invested in securities with a fixed rate of interest), and (iii)
warrants and equity securities issued by a Borrower or its affiliates as part of
a package of investments in the Borrower or its affiliates. If the Adviser
determines that market conditions temporarily warrant a defensive investment
policy, the Trust may invest up to 100% of its assets in cash and high quality,
short-term debt securities.
Senior Loans in which the Trust will invest generally pay interest at rates
which are redetermined periodically by reference to a base lending rate, plus a
premium. The base lending rate primarily is the London Inter-bank Offered Rate
("LIBOR"), but can also be the prime rate offered by one or more major United
States banks (the "Prime Rate"), the certificate of deposit ("CD") rate or other
base lending rates used by commercial lenders.
It is anticipated that the proceeds of the Senior Loans in which the Trust will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. Senior Loans have the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities of the Borrower. The capital structure of a Borrower may
include Senior Loans, senior and junior subordinated debt, preferred stock and
common stock issued by the Borrower, typically in descending order of seniority
with respect to claims on the Borrower's assets (described below). Senior Loans
are secured by specific collateral.
In order to borrow money pursuant to a Senior Loan, a Borrower will frequently,
for the term of the Senior Loan, pledge collateral, including but not limited
to: (i) working capital assets, such as accounts receivable and inventory; (ii)
tangible fixed assets, such as real property, buildings and equipment; (iii)
intangible assets, such as trademarks and patent rights (but excluding
goodwill); and (iv) security interests in shares of stock of subsidiaries or
affiliates. In the case of Senior Loans made to non-public companies, the
company's shareholders or owners may provide collateral in the form of secured
guarantees and/or security interests in assets that they own. In many instances,
a Senior Loan may be secured only by stock in the Borrower or its subsidiaries.
Collateral may consist of assets that may not be readily liquidated, and there
is no assurance that the liquidation of such assets would satisfy fully a
Borrower's obligations under a Senior Loan. The Trust will not invest in a
Senior Loan unless, at the time of investment, the Adviser determines that the
value of the collateral equals or exceeds the aggregate outstanding principal
amount of the Senior Loan.
8
The Trust may hold Senior Loans of any maturity. Senior Loans typically have a
stated term of between five and nine years, and have rates of interest which
typically are redetermined either daily, monthly, quarterly or semi-annually.
Longer interest rate reset periods generally increase fluctuations in the
Trust's net asset value as a result of changes in market interest rates. The
Senior Loans in the Trust's portfolio will have a dollar-weighted average period
until the next interest rate adjustment of approximately 90 days or less. As a
result, as short-term interest rates increase, interest payable to the Trust
from its investments in Senior Loans should increase, and as short-term interest
rates decrease, interest payable to the Trust from its investments in Senior
Loans should decrease. The Trust may utilize certain investment practices to,
among other things, shorten the effective interest rate redetermination period
of Senior Loans in its portfolio. In the experience of the Adviser over the last
decade, because of prepayments the average life of Senior Loans has been two to
four years. As of March 30, 2001, the Trust had a dollar weighted average period
to adjustment of approximately 57 days.
A lender may have certain obligations pursuant to a loan agreement relating to
Senior Loans, which may include the obligation to make additional loans in
certain circumstances. The Trust generally will reserve against such contingent
obligations by segregating a sufficient amount of cash, liquid securities and
liquid Senior Loans, subject to the Trust's borrowing limitations. The Trust
will not purchase interests in Senior Loans that would require the Trust to make
any such additional loans if such additional loan commitments in the aggregate
would exceed 20% of the Trust's total assets or would cause the Trust to fail to
meet its tax diversification requirements.
The Trust may purchase and retain in its portfolio Senior Loans where the
Borrowers have experienced, or may be perceived to be likely to experience,
credit problems, including involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. Such
investments may provide opportunities for enhanced income as well as capital
appreciation. At times, in connection with the restructuring of a Senior Loan
either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Trust may determine or be required to accept equity securities
or junior debt securities in exchange for all or a portion of a Senior Loan.
The Trust may purchase shares of other investment companies with a similar
investment objective and policies as permitted under the Investment Company Act.
Such investments are limited to 10% of total assets overall, with no more than
5% invested in any one issue. The value of shares of other closed-end investment
companies is affected by the risks of the Trust, such as demand for those
securities regardless of the demand for the underlying portfolio assets.
Investment companies bear fees and expenses that the Trust will bear indirectly,
so investors in the Trust will be subject to duplication of fees. The Trust also
may invest up to 5% of its total assets in structured notes with rates of return
determined by reference to the total rate of return on one or more Senior Loans
referenced in such notes. The rate of return on the structured note may be
determined by applying a multiplier to the rate of total return on the
referenced Senior Loan or Loans. Application of a multiplier is comparable to
the use of financial leverage, a speculative technique. Leverage magnifies the
potential for gain and the risk of loss; as a result, a relatively small decline
in the value of a referenced Loan could result in a relatively large loss in the
value of a structured note. See "Use of Leverage and Related Risks" below.
Investment company shares investing in Senior Loans and structured notes will be
treated as Senior Loans for purposes of the Trust's policy of normally investing
at least 80% of its assets in Senior Loans, and may be subject to the Trust's
leverage limitations.
The Trust has adopted certain fundamental investment restrictions set forth in
the SAI which may not be changed without a Shareholder vote. Except for such
restrictions, the investment objective and policies of the Trust may be changed
by the Board of Trustees without shareholder action.
OTHER INCOME PRODUCING SECURITIES
The Trust, with respect to 20% of its total assets, may purchase a variety of
U.S. and foreign corporate and government debt obligations that are U.S.
dollar-denominated. The Adviser may consider capital appreciation potential when
investing in such income producing debt securities, which may have fixed,
variable or floating rates of interest. These securities may include (i)
interests in loans from Borrowers that are not secured by any, or that have
lower than senior claim on, collateral, (ii) other income producing securities
such as investment and non-investment grade corporate debt securities and U.S.
government and U.S. dollar-denominated foreign government or supranational debt
securities (subject to the limit that no more than 10% of the Trust's total
assets may be invested in securities with a fixed rate of interest), and (iii)
warrants and equity securities issued by a Borrower or its affiliates as part of
a package of investments in the Borrower or its affiliates.
9
ADDITIONAL RISK CONSIDERATIONS
Credit Risk. Senior Loans, like other corporate debt obligations, are subject to
the risk of non-payment of scheduled interest or principal. Such non-payment
would result in a reduction of income to the Trust, a reduction in the value of
the Senior Loan experiencing non-payment and a potential decrease in the net
asset value of the Trust. Although, with respect to Senior Loans, the Trust
generally will invest only in Senior Loans that the Adviser believes are secured
by specific collateral the value of which equals or exceeds the principal amount
of the Senior Loan at the time of initial investment, there can be no assurance
that the liquidation of any such collateral would satisfy the Borrower's
obligation in the event of non-payment of scheduled interest or principal
payments, or that such collateral could be readily liquidated. In the event of
bankruptcy of a Borrower, the Trust could experience delays or limitations with
respect to its ability to realize the benefits of the collateral securing a
Senior Loan. As with other collateral, where stock of the Borrower or its
subsidiaries collateralizes a Senior Loan, such stock may lose all or
substantially all of its value in the event of the bankruptcy of the Borrower.
The loan agent generally is responsible for determining that the lenders have
obtained a perfected security interest in the collateral securing the Senior
Loan. Some Senior Loans in which the Trust may invest are subject to the risk
that a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such Senior Loans to presently existing or future indebtedness of
the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Trust, including, in certain circumstances, invalidating such Senior
Loans.
Senior Loans issued in connection with mergers, acquisitions, leveraged
buy-outs, recapitalizations and other highly leveraged transactions, which pose
a higher risk of default or bankruptcy of the issuer than other higher quality
securities, particularly during periods of deteriorating economic conditions and
contraction in the credit markets. The investments in the Trust's portfolio will
have speculative characteristics, and companies obligated by such debt are
generally more vulnerable in an economic downturn.
Senior Loans in which the Trust will invest may not be rated by a rating agency,
and may not be registered with the SEC or any state securities commission and
will not be listed on any national securities exchange. Although the Trust
generally will have access to financial and other information made available to
the lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for rated, registered or exchange listed securities. In
evaluating the creditworthiness of Borrowers, the Adviser will consider, and may
rely in part, on analyses performed by others. Borrowers may have outstanding
debt obligations that are rated below investment grade by a rating agency.
Rating agencies are now rating Senior Loans and most Senior Loans have been
assigned a rating below investment grade. Debt securities which are unsecured
and rated below investment grade are viewed by the rating agencies as having
speculative characteristics and are commonly known as "junk bonds." A
description of the ratings of corporate bonds by Moody's Investor Services, Inc.
and Standard & Poors Corporation ("S&P") is included as Appendix A to the SAI.
Because of the protective features of Senior Loans (being senior and secured by
specific collateral), the Adviser believes that Senior Loans tend to have more
favorable loss recovery rates as compared to most other types of below
investment grade debt obligations. Accordingly, the Adviser does not view
ratings as a primary factor in its investment decisions and relies more upon its
credit analysis abilities than upon ratings.
The Trust may invest up to 20% of its total assets in: Loans from Borrowers that
are not secured by any, or that have lower than a senior claim on, collateral;
warrants and equity securities acquired in connection with the Trust's ownership
of Senior Loans; and other income producing securities such as investment grade
and below investment grade corporate debt securities and U.S. government and
U.S. dollar-denominated foreign government or supranational debt securities
(subject to the limit that no more than 10% of the Trust's total assets may be
invested in securities with a fixed rate of interest). Securities rated below
investment grade are commonly referred to as "junk bonds."
Market and Liquidity Risk. Most Senior Loans are valued by an independent
pricing service that uses market quotations of investors and traders in Senior
Loans. Economic and other events (whether real or perceived) can reduce the
demand for certain Senior Loans or Senior Loans generally, which may reduce
market prices and cause the Trust's net asset value per share to fall. The
frequency and magnitude of such changes cannot be predicted. As of March 30,
2001, 91% of Senior Loan assets of the Trust were valued by an independent
pricing service.
Some Senior Loans are not readily marketable and may be subject to restrictions
on resale. Senior Loans generally are not listed on any national securities
exchange or automated quotation system and no active trading market may exist
for some of the Senior Loans in which the Trust will invest. Where a secondary
market exists, such market for some Senior Loans may be subject to irregular
10
trading activity, wide bid/ask spreads and extended trade settlement periods.
Senior Loans that are illiquid may impair the Trust's ability to realize the
full value of its assets in the event of a voluntary or involuntary liquidation
of such assets. The Trust has no limitation on the amount of its assets which
may be invested in securities which are not readily marketable or are subject to
restrictions on resale. The risks associated with illiquidity are particularly
acute in situations where the Trust's operations require cash, such as if the
Trust tenders for its Shares, and may result in the Trust borrowing to meet
short-term cash requirements.
Interest Rate Risk. When interest rates decline, the value of a portfolio
invested in fixed-rate obligations can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed-rate obligations
can be expected to decline. Although the Trust's net asset value will vary, the
Trust's management expects the Trust's policy of acquiring primarily interests
in floating rate Senior Loans to minimize fluctuations in net asset value as a
result of changes in market interest rates. However, because floating rates on
Senior Loans only reset periodically, changes in prevailing interest rates can
be expected to cause some fluctuation in the Trust's net asset value. Similarly,
a sudden and significant increase in market interest rates may cause a decline
in the Trust's net asset value. Moreover, as much as 10% of the total assets of
the Trust may be invested in income securities with fixed rates of interest,
which may lose value in direct response to market interest rate increases.
Foreign Securities. Although the Trust will only invest in U.S.
dollar-denominated income securities, the Trust may invest in Senior Loans and
other debt securities of non-U.S. issuers. Investment in securities of non-U.S.
issuers involves special risks, including that non-U.S. issuers may be subject
to less rigorous accounting and reporting requirements than U.S. issuers, less
rigorous regulatory requirements, differing legal systems and laws relating to
creditors' rights, the potential inability to enforce legal judgments and the
potential for political, social and economic adversity. The willingness and
ability of sovereign issuers to pay principal and interest on government
securities depends on various economic factors, including among others the
issuer's balance of payments, overall debt level, and cash flow considerations
related to the availability of tax or other revenues to satisfy the issuer's
obligations. Supranational organizations do not have taxing powers, so they are
dependent upon their members' continued support in order to meet interest and
principal payments. The securities of some foreign issuers are less liquid and
at times more volatile than securities of comparable U.S. issuers. Foreign
settlement procedures and trade regulations may involve certain risks (such as
delay in the payment or delivery of securities and interest or in the recovery
of assets held abroad) and expenses not present in the settlement of domestic
investments. Investments may include securities issued by the governments of
lesser-developed countries, which are sometimes referred to as "emerging
markets." There may be a possibility of nationalization or expropriation of
assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, armed conflict and diplomatic developments
which could affect the value of the Trust's investments in certain foreign
countries.
Regulatory Changes. To the extent that legislation or state or federal
regulators that regulate certain financial institutions impose additional
requirements or restrictions with respect to the ability of such institutions to
make loans, particularly in connection with highly leveraged transactions, the
availability of Senior Loans for investment by the Trust may be adversely
affected. Further, such legislation or regulation could depress the market value
of Senior Loans held by the Trust.
Non-Diversification. The Trust has registered as a "non-diversified" investment
company under the 1940 Act so that, subject to its investment restrictions and
in connection with federal income tax rules applicable to the Trust, with
respect to 50% of its total assets, it will be able to invest more than 5% of
the value of its assets in the obligations of any single issuer, including
Senior Loans of a single Borrower or single lender, although it has no current
intention to do so. The Trust will not invest more than 10% of the value of its
assets in securities (including interests in Senior Loans) of any single
Borrower. Moreover, the Trust may invest more than 10% (but not more than 25%)
of its total assets in Senior Loan interests for which the same intermediate
participant is interposed between the Trust and the Borrower. To the extent the
Trust invests a relatively high percentage of its assets in obligations of a
limited number of issuers, the Trust will be more susceptible than a more widely
diversified investment company to any single corporate, economic, political or
regulatory occurrence.
SPECIAL INVESTMENT PRACTICES
The Trust may engage in the following investment practices to seek to enhance
income or reduce investment risk, but has not yet done so and has no current
intention to do so.
Interest Rate and Other Hedging Transactions. The Trust may purchase or sell
derivative instruments (which are instruments that derive their value from
another instrument, security or index) to seek to hedge against fluctuations in
securities prices or interest rates. The Trust's transactions in derivative
instruments may include: the purchase or sale of futures contracts on
11
securities, securities indices or other indices, and other financial
instruments; options on futures contracts; exchange-traded and over-the-counter
options on securities or indices; index-linked securities; and interest rate
swaps. The Trust's transactions in derivative instruments involve a risk of loss
or depreciation due to: unanticipated adverse changes in securities prices,
interest rates, the other financial instruments' prices; the inability to close
out a position; default by the counterparty; imperfect correlation between a
position and the desired hedge; tax constraints on closing out positions; and
portfolio management constraints on securities subject to such transactions. The
loss on derivative instruments (other than purchased options) may substantially
exceed the Trust's initial investment in these instruments. In addition, the
Trust may lose the entire premium paid for purchased options that expire before
they can be profitably exercised by the Trust. Transaction costs will be
incurred in opening and closing positions in derivative instruments. There can
be no assurance that the Adviser's use of derivative instruments will be
advantageous to the Trust.
The Trust may use interest rate swaps for risk management purposes and not as a
speculative investment and would typically use interest rate swaps to shorten
the average interest rate reset time of the Trust's holdings. Interest rate
swaps involve the exchange by the Trust with another party of their respective
commitments to pay or receive interests, e.g., an exchange of fixed rate
payments for floating rate payments. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
Adviser has had limited experience in the use of interest rate swaps but has
utilized other types of hedging and risk management techniques. If the Adviser
is incorrect in its forecasts of market values, interest rates and other
applicable factors, the investment performance of the Trust would be unfavorably
affected.
Portfolio Lending Securities. The Trust may seek to earn income by lending
portfolio securities to broker-dealers or other institutional borrowers. As with
other extensions of credit, there are risks of delay in recovery or even loss of
rights in the securities loaned if the borrower of the securities fails
financially. In the judgment of the Adviser the loans will be made only to
organizations whose credit quality or claims paying ability is considered to be
at least investment grade and when the expected returns, net of administrative
expenses and any finders' fees, justifies the attendant risk. Securities loans
currently are required to be secured continuously by collateral in cash, cash
equivalents (such as money market instruments) or other liquid securities held
by the custodian and maintained in an amount at least equal to the market value
of the securities loaned. The financial condition of the borrower will be
monitored by the Adviser on an ongoing basis. The value of the securities loaned
will not exceed 30% of the Trust's total assets.
Repurchase Agreements. The Trust may enter into repurchase agreements (the
purchase of a security coupled with an agreement to resell at a higher price)
with respect to its permitted investments. In the event of the bankruptcy of the
other party to a repurchase agreement, the Trust might experience delays in
recovering its cash. To the extent that, in the meantime, the value of the
securities the Trust purchased may have decreased, the Trust could experience a
loss. Repurchase agreements which mature in more than seven days will be treated
as illiquid. The Trust's repurchase agreements will provide that the value of
the collateral underlying the repurchase agreement will always be at least equal
to the repurchase price, including any accrued interest earned on the agreement,
and will be marked to market daily.
Reverse Repurchase Agreements. The Trust may also enter into "reverse"
repurchase agreements which involve the sale of securities held and an agreement
to repurchase the securities at an agreed-upon price, date, and interest
payment. Reverse repurchase agreements involve risks similar to those described
below under "Use of leverage and related risks" and expose the Trust to the
credit risk of the counterparty.
USE OF LEVERAGE AND RELATED RISKS
The Trust utilizes financial leverage on an ongoing basis as an investment
technique. It has authority to do so through borrowings, including the issuance
of debt securities, or the issuance of preferred shares or through other
transactions, such as reverse repurchase agreements, which have the effect of
financial leverage. The Trust generally will not utilize leverage if the Adviser
anticipates that it would result in a lower return to common shareholders for
any significant amount of time. The Trust also may borrow money up to 5% of its
total assets as a temporary measure for extraordinary or emergency purposes,
including the payment of dividends and the settlement of securities transactions
which otherwise might require untimely dispositions of Trust securities.
Leveraging is a speculative technique in that it will increase the Trust's
exposure to capital risk. Unless the income and appreciation, if any, on assets
acquired with borrowed funds and offering proceeds exceed the cost of borrowing
and issuing and maintaining Preferred Shares (and other Trust expenses), the use
of leverage will diminish the investment performance of the Trust's common
12
shares. Leverage creates risks for holders of common shares, including the
likelihood of greater volatility of net asset value and market price of common
shares. Although there is a risk that fluctuations in interest rates on
borrowings and short-term debt or in the dividend rates on Preferred Shares may
adversely affect the return to the holders of common shares, the Adviser
believes that this should be mitigated when the Trust uses leverage with
floating rate costs, because the Trust's costs of leverage and its portfolio of
Senior Loans will ordinarily have similar floating rates of interest. If the
income from the securities purchased with such funds is not sufficient to cover
the cost of leverage, the return on the Trust will be less than if leverage had
not been used, and therefore the amount available for distribution to
shareholders as dividends and other distributions will be reduced. The Adviser
in its best judgment nevertheless may determine to maintain the Trust's
leveraged position if it deems such action to be appropriate in the
circumstances. Successful use of a leveraging strategy depends on the Adviser's
ability to predict correctly interest rates and market movements, and there is
no assurance that a leveraging strategy will be successful during any period in
which it is employed.
Under the Investment Company Act, the Trust is not permitted to incur
indebtedness unless immediately after such incurrence the Trust has an asset
coverage of at least 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of the Trust's
total assets). Additionally, under the Investment Company Act, the Trust may not
declare any dividend or other distribution upon any class of its capital shares,
or purchase any such capital shares, unless the aggregate indebtedness of the
Trust has, at the time of the declaration of any such dividend or distribution
or at the time of any such purchase, an asset coverage of at least 300% after
deducting the amount of such dividend, distribution, or purchase price, as the
case may be. Under the Investment Company Act, the Trust is not permitted to
issue preferred shares unless immediately after such issuance the net asset
value of the Trust's portfolio is at least 200% of the liquidation value of the
outstanding preferred shares (i.e., such liquidation value may not exceed 50% of
the Trust's total assets). In addition, the Trust is not permitted to declare
any cash dividend or other distribution on its common shares unless, at the time
of such declaration, the net asset value of the Trust's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% of such liquidation value. Once Preferred Shares are issued, the Trust may,
to the extent possible, to purchase or redeem Preferred Shares from time to time
to maintain coverage of any Preferred Shares of at least 200%, which may require
the Trust to pay a premium in addition to the liquidation preference of
Preferred Shares. If the Trust's asset coverage goes below the 300% asset
coverage required by the Investment Company Act, or the 200% asset coverage
required by the Investment Company Act regarding dividends, the Trust may be
required to sell a portion of its instruments when it is disadvantageous to do
so.
The Trust reserves the right at any time, if it believes that market conditions
are appropriate, to increase its level of debt or other senior securities to
maintain or increase the Trust's current level of leverage to the extent
permitted by the Investment Company Act and existing agreements between the
Trust and third parties. Because the fees paid to the Eaton Vance will be
calculated on the basis of the Trust's managed assets, the fee will be higher
when leverage is utilized, giving the Adviser an incentive to utilize leverage.
BORROWINGS
Most borrowings will result in the Trust being subject to covenants in credit
agreements relating to asset coverages or portfolio composition or otherwise
more stringent than those imposed by the Investment Company Act. The rights of
lenders to the Trust to receive interest on and repayment of principal of any
such borrowings will be senior to those of common and preferred shareholders,
and the terms of any such borrowings may contain provisions which limit certain
activities of the Trust, including the payment of dividends. Further, the terms
of any such borrowing may and the Investment Company Act does (in certain
circumstances) grant to the lenders to the Trust certain voting rights in the
event of default in the payment of interest on or repayment of principal. In the
event that such provisions would impair the Trust's status as a regulated
investment company, the Trust, intends to repay the borrowings.
The Trust currently borrows under a credit facility administered by a large New
York based commercial bank. Up to $178 million can be borrowed under this credit
facility, which will be reduced to $110 million after the Preferred Shares are
issued. Average daily borrowings were $134 million for the fiscal period ended
December 31, 2000. Outstanding borrowings on March 30, 2001 were $146 million.
The terms of the credit facility include: (i) a final maturity of November 9,
2001, subject to annual extension by mutual agreement; (ii) with respect to each
draw under the facility, a variable interest rate based upon LIBOR or an
alternate rate; and (iii) payment by the Trust of certain fees and expenses
including an underwriting fee, a commitment fee on the average undrawn amount of
the facility, an ongoing administration fee and the expenses of the lenders
under the facility incurred in connection therewith. The Trust would be required
to prepay outstanding amounts under the facility or incur a penalty rate of
interest in the event of the occurrence of certain events of default. The Trust
expects to indemnify the lenders under the facility against liabilities they may
incur in connection with the facility. In addition the credit facility contains
covenants which, among other things, limit the Trust's ability to pay dividends
in certain circumstances, incur additional debt, change its fundamental
13
investment policies and engage in certain transactions including mergers and
consolidations, and require asset coverage ratios in addition to those required
by the Investment Company Act. The Trust has pledged its assets. The obligation
to make payments required by the credit facility are senior to the rights of
Preferred Shareholders to receive dividends or liquidation proceeds. Such credit
facility may in the future be replaced or refinanced by one or more credit
facilities having substantially different terms or by the issuance of preferred
shares or debt securities.
RISKS OF INVESTING IN PREFERRED SHARES
The issuance of Preferred Shares creates special risks for Preferred
Shareholders.
Payment and Redemption Restrictions. Under the terms of its borrowing facility,
the Trust is not permitted to declare dividends or other distributions,
including dividends and distributions with respect to Preferred Shares, or
purchase or redeem shares, including Preferred Shares unless (i) at the time
thereof the Trust meets the asset coverage test under the borrowing facility
agreement and (ii) there is no event of default under the borrowing facility.
Leverage Risk. Borrowed funds constitute a substantial lien and burden on the
Preferred Shares by reason of their prior claim against the income of the Trust
and against the total assets of the Trust in liquidation. In the event of a
default under the borrowing facility, the lenders have the right to cause a
liquidation of the collateral (i.e., sell Senior Loans and other assets of the
Trust) and if any such default is not promptly cured, the lenders can control
the liquidation as well.
Auction Risk. You may not be able to sell your Preferred Shares at an auction if
the auction fails, that is, if there are more Preferred Shares offered for sale
than there are buyers for those shares. Also, if you place hold orders (orders
to retain Preferred Shares) at an auction only at a specified rate, and that bid
rate exceeds the rate set at the auction, you will not retain your Preferred
Shares. Finally, if you buy Preferred Shares or 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.
Secondary Market Risk. Broker-dealers may maintain a secondary trading market in
Preferred Shares outside of auctions, but may discontinue this activity any
time. You may transfer Preferred Shares outside of auctions only to or through a
broker-dealer or such other persons who may be permitted by the Trust. If you
try to sell your Preferred Shares between auctions, you may not be able to sell
any or all of your shares, or you may not be able to sell them for $25,000 per
share or $25,000 per share plus accumulated dividends. If the Trust has
designated a special rate period (a rate period or more than 7 days), changes in
interest rates could affect the price you would receive if you sold your shares
in the secondary market. Broker-dealers that maintain a secondary trading market
for Preferred Shares are not required to maintain this market, and the Trust is
not required to redeem shares either if an auction or an attempted secondary
market sale fails because of a lack of buyers. Preferred Shares are not
registered on a stock exchange or the NASDAQ stock market. If you sell your
Preferred Shares to a broker-dealer between auctions, you may receive less than
the price you paid for them, especially when market interest rates have risen
since the last auction and especially during a special rate period.
Ratings and Asset Coverage Risk. While Moody's has assigned a rating of "aaa" to
the Preferred Shares, the rating does not eliminate or necessarily mitigate the
risks of investing in Preferred Shares. A rating agency could downgrade
Preferred Shares, which may make the shares less liquid at an auction or in the
secondary market and less valuable. If a rating agency downgrades the Preferred
Shares, the dividend rate on the Preferred Shares will be the applicable maximum
rate based on the credit rating of the Preferred Shares.
ORGANIZATION AND MANAGEMENT OF THE TRUST
The Trust is an unincorporated business trust established under the laws of The
Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated
September 23, 1998 (the "Declaration of Trust"). The Declaration of Trust
provides that the Trustees of the Trust may authorize separate classes of shares
of beneficial interest. The Trustees have authorized an unlimited number of
common shares. The Declaration of Trust also authorizes the Trust to borrow
money or otherwise obtain credit and in this connection issue notes or other
evidence of indebtedness. The Trust intends to hold annual meetings of the
shareholders in compliance with the requirements of the New York Stock Exchange.
14
BOARD OF TRUSTEES
The management of the Trust, including general supervision of the duties
performed by the Adviser under the Advisory Agreement, is the responsibility of
the Trust's Board of Trustees under the laws of The Commonwealth of
Massachusetts.
THE ADVISER
Eaton Vance Management acts as the Trust's investment adviser under an
Investment Advisory Agreement ("Advisory Agreement"). The Adviser's principal
office is located at The Eaton Vance Building, 255 State Street, Boston, MA
02109. Eaton Vance, its affiliates and predecessor companies have been managing
assets of individuals and institutions since 1924 and of investment companies
since 1931. Eaton Vance (or its affiliates) currently serves as the investment
adviser to investment companies and various individual and institutional clients
with combined assets under management of over $49 billion. Eaton Vance is an
indirect wholly-owned subsidiary of Eaton Vance Corp., a publicly held holding
company which through its subsidiaries and affiliates engages primarily in
investment management, administration and marketing activities.
Under the general supervision of the Trust's Board of Trustees, the Adviser will
carry out the investment and reinvestment of the assets of the Trust, will
furnish continuously an investment program with respect to the Trust, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. The Adviser will furnish to the Trust investment
advice and office facilities, equipment and personnel for servicing the
investments of the Trust. The Adviser will compensate all Trustees and officers
of the Trust who are members of the Adviser's organization and who render
investment services to the Trust, and will also compensate all other Adviser
personnel who provide research and investment services to the Trust. In return
for these services, facilities and payments, the Trust has agreed to pay the
Adviser as compensation under the Advisory Agreement a fee in the amount of
0.85% of the average weekly gross assets of the Trust. Gross assets of the Trust
shall be calculated by deducting accrued liabilities of the Trust not including
the principal amount of any indebtedness constituting financial leverage.
Scott H. Page and Payson F. Swaffield have been co-portfolio managers of the
Trust since its inception, and are responsible for day-to-day management of the
Trust's investments. Mr. Page has been an employee of Eaton Vance since 1989 and
Mr. Swaffield has been an employee of Eaton Vance since 1990. Each has been a
Vice President of Eaton Vance since 1992 and has been involved in the management
of Senior Loans throughout his tenure at Eaton Vance. They currently co-manage
most Senior Loan assets at Eaton Vance.
The Trust has engaged Eaton Vance to act as its administrator under an
Administration Agreement (the "Administration Agreement"). Under the
Administration Agreement, Eaton Vance is responsible for managing the business
affairs of the Trust, subject to the supervision of the Trust's Board of
Trustees. Eaton Vance will furnish to the Trust all office facilities, equipment
and personnel for administering the affairs of the Trust. Eaton Vance's
administrative services include recordkeeping, preparation and filing of
documents required to comply with federal and state securities laws, supervising
the activities of the Trust's custodian and transfer agent, providing assistance
in connection with the Trustees' and shareholders' meetings, providing service
in connection with any repurchase offers and other administrative services
necessary to conduct the Trust's business. In return for these services,
facilities and payments, the Trust pays Eaton Vance a fee in the amount of 0.25%
of the average weekly gross assets of the Trust.
COMMON SHARES
The Declaration of Trust permits the Trust to issue an unlimited number of full
and fractional common shares of beneficial interest, $0.01 par value per share.
Each common share represents an equal proportionate interest in the assets of
the Trust with each other common share in the Trust. Holders of common shares
are entitled to the payment of dividends when, as and if declared by the Board
of Trustees. Each whole common share is entitled to one vote as to matters on
which it is entitled to vote pursuant to the terms of the Declaration of Trust
on file with the SEC. Upon liquidation of the Trust, after paying or adequately
providing for the payment of all liabilities of the Trust 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 Trust
among the holders of the common shares. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Trust, requires inclusion
of a clause to that effect in every agreement entered into by the Trust and
15
indemnifies shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote. The common shares have no preemptive rights.
Because common shares of closed-end management investment companies frequently
trade at a discount to their net asset values, the Board of Trustees has
determined that from time to time it may be in the interest of shareholders for
the Trust to take corrective actions. The Board of Trustees, in consultation
with Eaton Vance, will review at least annually the possibility of open market
repurchases and/or tender offers for the common shares and will consider such
factors as the market price of the common shares, the net asset value of the
common shares, the liquidity of the assets of the Trust, effect on the Trust's
expenses, whether such transactions would impair the Trust's status as a
regulated investment company or result in a failure to comply with applicable
asset coverage requirements, general economic conditions and such other events
or conditions which may have a material effect on the Trust's ability to
consummate such transactions. There are no assurances that the Board of Trustees
will, in fact, decide to undertake either of these actions or if undertaken,
that such actions will result in the Trust's Shares trading at a price which is
equal to or approximates their net asset value. In recognition of the
possibility that the common shares might trade at a discount to net asset value
and that any such discount may not be in the interest of shareholders, the Board
of Trustees, in consultation with Eaton Vance, from time to time may review
possible actions to reduce any such discount.
The folowing table shows the amount of (i) shares authorized, (ii) shares held
by the Trust for its own account and (iii) shares outstanding, for each class of
authorized securities of the Trust as of March 30, 2001.
Amount Held by Trust
Title of Class Amount Authorized for its Own Account Amount Outstanding
-------------- ----------------- ------------------- ------------------
Common Shares Unlimited 0 35,726,793
Preferred Shares, Series A 2,200 0 0
Preferred Shares, Series B 2,200 0 0
SPECIAL PROVISIONS IN THE DECLARATION OF TRUST
Anti-Takeover Provisions of the Declaration of Trust. The Declaration of Trust
includes provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Trust or to change the composition
of its Board of Trustees, and could have the effect of depriving common
shareholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Trust. These provisions may have the effect of discouraging attempts to
acquire control of the Trust, which attempts could have the effect of increasing
the expenses of the Trust and interfering with the normal operation of the
Trust. The Board of Trustees is divided into three classes, with the term of one
class expiring at each annual meeting of shareholders. At each annual meeting,
one class of Trustees is elected to a three-year term. This provision could
delay for up to two years the replacement of a majority of the Board of
Trustees. A Trustee may be removed from office only for cause by a written
instrument signed by the remaining Trustees or by a vote of the holders of at
least two-thirds of the class of shares of the Trust that elected such Trustee
and is entitled to vote on the matter.
In addition, the Declaration of Trust requires the favorable vote of the holders
of at least 75% of the outstanding shares of each class of the Trust, voting as
a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a
5%-or-greater holder of a class of shares (a "Principal Shareholder") refers to
any person who, whether directly or indirectly and whether alone or together
with its affiliates and associates, beneficially owns 5% or more of the
outstanding shares of any class of beneficial interest of the Trust. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Trust or any subsidiary of the Trust with or into any
Principal Shareholder; (ii) the issuance of any securities of the Trust to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of the Trust to any Principal Shareholder (except
assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period);
or (iv) the sale, lease or exchange to the Trust or any subsidiary thereof, in
exchange for securities of the Trust, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
16
The Board of Trustees has determined that provisions with respect to the Board
and the 75% voting requirements described above, which voting requirements are
greater than the minimum requirements under Massachusetts law or the Investment
Company Act, are in the best interest of shareholders generally. Reference
should be made to the Declaration of Trust on file with the SEC for the full
text of these provisions.
Conversion to Open-End Fund. The Trust may be converted to an open-end
investment company at any time if approved by the lesser of (i) 2/3 or more of
the Trust's then outstanding common shares and preferred shares, each voting
separately as a class, or (ii) more than 50% of the then outstanding common
shares and preferred shares, voting separately as a class if such conversion is
recommended by at least 75% of the Trustees then in office. If approved in the
foregoing manner, conversion of the Trust could not occur until 90 days after
the shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all shareholders. The composition of
the Trust's portfolio likely would prohibit the Trust from complying with
regulations of the SEC applicable to open-end investment companies. Accordingly,
conversion likely would require significant changes in the Trust's investment
policies and liquidation of a substantial portion of its relatively illiquid
portfolio. Conversion of the Trust to an open-end investment company also would
require the redemption of any outstanding Preferred Shares and could require the
repayment of borrowings, which would eliminate the leveraged capital structure
of the Trust with respect to the Shares. In the event of conversion, the shares
would cease to be listed on the New York Stock Exchange or other national
securities exchange or market system. The Board of Trustees believes, however,
that the closed-end structure is desirable, given the Trust's investment
objective and policies. Investors should assume, therefore, that it is unlikely
that the Board of Trustees would vote to convert the Trust to an open-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 Investment Company Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. The Trust expects to pay all such redemption requests in cash, but
intends to reserve the right to pay redemption requests in a combination of cash
or securities. If such partial payment in securities were made, investors may
incur brokerage costs in converting such securities to cash. If the Trust were
converted to an open-end fund, it is likely that new common shares would be sold
at net asset value plus a sales load.
FEDERAL TAXATION
The following Federal tax discussion is only a summary of some of the important
tax considerations generally applicable to investments in the Trust. It is based
on the Internal Revenue Code of 1986, as amended (the "Code"), existing Treasury
regulations, rulings published by the Internal Revenue Service (the "Service"),
and other applicable authority, as of the date of this Prospectus. These
authorities are subject to change by legislative or administrative action. For
more detailed information regarding tax considerations, see the SAI. There may
be other tax considerations applicable to particular investors. In addition,
income earned through an investment in the Trust may be subject to state, local
and foreign taxes.
Federal Taxation Of The Trust. The Trust intends to elect and qualify each year
for taxation as a regulated investment company under Subchapter M of the Code.
Provided that the Trust so qualifies and distributes at least 90% of the sum of
its investment company taxable income and certain other income, it will not be
subject to Federal income tax on income distributed timely to its shareholders
in the form of dividends or capital gain distributions. The Trust intends to
distribute all of its investment income and net capital gain each year.
To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by the Trust to its shareholders, including
holders of its Preferred Shares, must qualify for the dividends-paid deduction.
In certain circumstances, the Service could take the position that dividends
paid on the Preferred Shares constitute preferential dividends under Section
562(c) of the Code, and thus do not qualify for the dividends-paid deduction. If
this position were upheld, the Trust could be subject to tax and could fail to
qualify to be taxed as a regulated investment company.
If at any time the Trust does not meet applicable asset coverage requirements,
it may be required to suspend distributions until the requisite asset coverage
is restored. Any such suspension may prevent the Trust from qualifying as a
regulated investment company or may cause the Trust to pay a 4% federal excise
tax (imposed on regulated investment companies that fail to distribute for a
given calendar year, generally, at least 98% of their net investment income and
capital gain net income plus certain other amounts). The Trust may redeem
Preferred Shares or pay "special dividends" to the holders of the Preferred
Shares in an effort to comply with the distribution requirement applicable to
regulated investment companies and to avoid the excise tax.
17
If the Trust were to fail to qualify as a regulated investment company, the
Trust would be taxed in the same manner as an ordinary corporation and
distributions to its shareholders would not be deductible by the Trust in
computing its taxable income. In addition, the Trust's distributions, to the
extent derived from the Trust's current or accumulated earnings and profits,
would constitute dividends (eligible for the corporate dividends received
deduction) that are taxable to shareholders as ordinary income, even though a
portion of those distributions might otherwise have been treated in the
shareholders' hands as long-term capital gains.
Federal Income Taxation Of Holders Of Preferred Shares. The Trust believes that
the Preferred Shares will constitute stock of the Trust and distributions with
respect to the Preferred Shares (other than distributions in redemption of
Preferred Shares that are treated as exchanges of stock under Section 302(b) of
the Code) thus will constitute dividends to the extent attributable to the
Trust's current and accumulated earnings and profits. Such dividends generally
will be taxable as ordinary income to holders and generally will not qualify for
the dividends received deduction available to corporations. Distributions, if
any, in excess of the Trust's current and accumulated earnings and profits will
first reduce the tax basis of the Preferred Shares and, after such basis has
been reduced to zero, will constitute capital gains (assuming such Preferred
Shares are held as a capital asset). It is possible, however, that the Service
might take a contrary position asserting, for example, that the Preferred Shares
constitute debt of the Trust. If this position were upheld, distributions by the
Trust to holders of Preferred Shares would constitute interest, whether or not
they exceeded the Trust's earnings and profits, and would be taxed as ordinary
income. Distributions of net capital gain that are designated by the Trust as
capital gain dividends will be treated as long-term capital gains in the hands
of holders regardless of the holders' respective holding periods for their
Preferred Shares. The Service currently takes the position that a regulated
investment company that has two or more classes of stock must allocate to each
such class proportionate amounts of each type of its income (such as ordinary
income and capital gains). Accordingly, the Trust intends to designate the
portion of its distributions as capital gain dividends in compliance with this
position.
The sale of Preferred Shares will be a taxable transaction for federal income
tax purposes. Selling holders of Preferred Shares will generally recognize gain
or loss in an amount equal to the difference between their basis in the
Preferred Shares and the amount received in exchange therefor. If such shares of
Preferred Shares are held as a capital asset, the gain or loss will generally be
a capital gain or loss. Similarly, a redemption (including a redemption
resulting from liquidation of the Trust), if any, of Preferred Shares by the
Trust generally will give rise to capital gain or loss if the redemption is
treated as an exchange of stock under Section 302(b) of the Code. Generally, a
holder's gain or loss will be a long-term gain or loss if the shares have been
held for more than one year. Any loss realized upon a taxable disposition of
shares of Preferred Shares held for six months or less will be treated as a
long-term capital loss to the extent of any capital gain dividends received by
the shareholder with respect to such shares. Also, any loss realized upon a
taxable disposition of shares of Preferred Shares may be disallowed if other
shares of Preferred Shares are acquired within a 61-day period beginning 30 days
before and ending 30 days after the date the shares are disposed of. If
disallowed, the loss will be reflected by an upward adjustment to the basis of
the shares acquired.
Backup Withholding. The Trust may be required to withhold, for U.S. Federal
income taxes, 31% of all dividends and redemption proceeds payable to
shareholders who fail to provide the Trust with their correct taxpayer
identification number or who fail to make required certifications, or if the
Trust or a shareholder has been notified by the Service that they are subject to
backup withholding. Corporate shareholders and other shareholders specified in
the Code are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. Federal income tax liability if the appropriate information is provided to
the Service.
Other Taxation. Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions at a
rate of 30% or such lower rates as may be prescribed by any applicable treaty.
(This U.S. Federal tax rate may significantly exceed the effective U.S. Federal
tax that would apply if such foreign investors held their share of the Trust's
assets directly rather than indirectly through their investment in the Trust.)
Investors are advised to consult their own tax advisors with respect to the
application to their own circumstances of the above-described general U.S.
Federal taxation rules and with respect to the state, local or foreign tax
consequences to them of an investment in Preferred Shares.
18
DESCRIPTION OF PREFERRED SHARES
GENERAL
The following is a brief description of the terms of the Preferred Shares. For
the complete terms of the Preferred Shares, you may refer to the Trust's Second
Amended By-Laws ("By-laws") filed as an exhibit to the Trust's registration
statement on Form N-2.
Under the Declaration of Trust, the Trust is authorized to issue an unlimited
number of preferred shares, in one or more series, with rights as determined by
the Board of Trustees without the approval of common shareholders. The Trust's
By-laws currently authorize the creation of up to [5,000] Preferred Shares. The
Preferred Shares will have a liquidation preference of $25,000 per share, plus
an amount equal to accumulated dividends. The Preferred Shares, when issued by
the Trust and sold, will be fully paid and non-assessable by the Trust, will not
by their terms be convertible into or exchangeable for shares of another class
and will have no preemptive rights. Preferred Shares will not be subject to any
sinking fund, but will be subject to mandatory redemption under the certain
circumstances described below. Series A and Series B Preferred Shares have the
same rights, except for their auction dates and related dividends.
DIVIDENDS AND DIVIDEND PERIODS
General. The following is a general description of dividends and rate periods.
See the SAI for a more detailed discussion of this topic. The dividend rate for
the initial rate period for Preferred Shares will be the rate set out on the
cover of this prospectus. For subsequent rate periods, Preferred Shares will pay
dividends based on a rate set at the auction, normally held weekly, but the rate
set at the auction will not exceed the maximum rate. Rate periods generally will
be seven days, and a rate period generally will begin on the first calendar day
after an auction. In most instances, dividends are also paid weekly, on the
business day following the end of the rate period. The Trust, subject to some
limitations, may change the length of rate periods, designating them as "special
rate periods." See "-- DESIGNATION OF SPECIAL RATE PERIODS."
Dividend Payments. Except as provided below, the dividend payment date will be
the first business day after the rate period ends. The dividend payment date for
special rate periods of more than 7 days will be set out in the notice
designating a special rate period. See "-- DESIGNATION OF SPECIAL RATE PERIODS"
for a discussion of payment dates for a special rate period.
Dividends on Preferred Shares will be paid on the dividend payment date to
holders of record as their names appear on the Trust's record books on the
business day next preceding the dividend payment date. If dividends are in
arrears, they may be declared and paid at any time to holders of record as their
names appear on the Trust's record books on such date, not more than 15 days
before the payment date, as the Trust's Board of Trustees may fix.
The Depository Trust Company, in accordance with its current procedures, is
expected to credit in same-day funds on each dividend payment date dividends
received from the Trust to the accounts of broker-dealers who act on behalf of
holders of Preferred Shares. Such broker-dealers, in turn, are expected to
distribute dividend payments to the person for whom they are acting as agents.
If a broker-dealer does not make dividends available to holders of Preferred
Shares in same-day funds, these shareholders will not have funds available until
the next business day.
Dividend Rate Set at Auction. Preferred Shares pay dividends based on a rate set
at auction. The auction usually is held weekly, but may be held less frequently.
The auction sets the dividend rate, and Preferred Shares may be bought and sold
at the auction. Bankers Trust Company, the auction agent, reviews orders from
broker-dealers on behalf of existing shareholders that wish to sell, hold at the
auction rate, or hold only at a specified rate, and on behalf of potential
shareholders that wish to buy Preferred Shares. The auction agent then
determines the lowest dividend rate that will result in all of the outstanding
Preferred Shares continuing to be held. The shares in this offering will trade
at auctions starting in the week following this offering. See "The Auction."
Determination of Dividend Rates. The Trust computes the dividends per share by
multiplying the dividend rate determined at the auction by a fraction, the
numerator of which normally is seven and the denominator of which normally is
365. This rate is then multiplied by $25,000 to arrive at the dividend per
share. The numerator may be different if the rate period includes a holiday.
19
If an auction for any subsequent rate period of Preferred Shares is not held for
any reason other than as described below, the dividend rate on those shares will
be the maximum rate on the auction date for that subsequent rate period.
Maximum Rate. The dividend rate that results from an auction for Preferred
Shares will not be greater than the "maximum rate." The maximum rate means the
applicable percentage of the "AA" Financial Composite Commercial Paper Rate on
the date of such auction determined as set forth below based on the lower of the
credit ratings assigned to the Preferred Shares by Moody's:
Moody's Credit Rating Applicable Percentage
--------------------- ---------------------
aa3 or Above 150%
a3 to a1 160%
baa3 to baa1 250%
Below baa3 275%
Effect of Failure to Pay Dividends in a Timely Manner. If the Trust fails to
pay, in a timely manner, the auction agent the full amount of any dividend on
any Preferred Shares, but the Trust cures the failure and pays any late charge
before 12:00 noon New York City time on the third business day following the
date the failure occurred, no auction will be held for the Preferred Shares of
that series for the first subsequent rate period thereafter, and the dividend
rate for the Preferred Shares of that series for that subsequent rate period
will be the maximum rate.
However, if the Trust does not effect a timely cure, no auction will be held for
the Preferred Shares of that series for the first subsequent rate period
thereafter (and for any rate period thereafter, to and including the rate period
during which the failure is cured and the late charge is paid), and the dividend
rate for the Preferred Shares of that series for each subsequent rate period
will be the default rate.
The default rate means 300% of the applicable "AA" Financial Composite
Commercial Paper Rate for a dividend period of fewer than 184 days and 300% of
the applicable Treasury Index Rate for a dividend period of 184 days or more.
Late charges are also calculated at the applicable default rate.
Restrictions on Dividends and Other Distributions. When the Trust has any
Preferred Shares outstanding, the Trust may not pay any dividend or distribution
(other than a dividend or distribution paid in shares, or options, warrants or
rights to subscribe for or purchase, common shares) in respect of common shares
or call for redemption, redeem, purchase or otherwise acquire for consideration
any common shares (except by conversion into or exchange for shares of the Trust
ranking junior to the Preferred Shares as to the payment of dividends and the
distribution of assets upon liquidation), unless (1) it has paid all cumulative
dividends on the Preferred Shares; (2) it has redeemed any Preferred Shares that
it has called for mandatory redemption; and (3) after paying the dividend, the
Trust meets the asset coverage requirements described under "Rating agency
guidelines."
Except as set forth in the next sentence, no dividends shall be declared or paid
or set apart for payment on any series of shares of the Trust ranking, as to the
payment of dividends, on a parity with the Preferred Shares for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid on the Preferred Shares through their most recent dividend payment date.
When dividends are not paid in full upon the Preferred Shares through their most
recent dividend payment date or upon any other series of shares ranking on a
parity as to the payment of dividends with Preferred Shares through their most
recent respective dividend payment dates, all dividends declared upon Preferred
Shares and any other such series of shares ranking on a parity as to the payment
of dividends with Preferred Shares shall be declared pro rata so that the amount
of dividends declared per share on Preferred Shares and such other series of
preferred shares shall in all cases bear to each other the same ratio that
accumulated dividends per share on the Preferred Shares and such other series of
preferred shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS
The Trust may instruct the auction agent to hold auctions and pay dividends less
frequently than weekly. The Trust may do this if, for example, the Trust expects
that short-term rates might increase or market conditions otherwise change, in
an effort to optimize the effect of the Trust's leverage on common shareholders.
The Trust does not currently expect to hold auctions and pay dividends less
frequently than weekly in the near future. If the Trust designates a special
rate period, changes in interest rates could affect the price received if the
shares were sold in the secondary market.
20
Before the Trust designates a special rate period: (1) at least 7 business days
(or 2 business days in the event the duration of the dividend period prior to
such special rate period is less than 8 days) and not more than 30 business days
before the first day of the proposed special rate period, the Trust must issue a
press release stating its intention to designate a special rate period and
inform the auction agent of the proposed special rate period by telephonic or
other means and confirm it in writing promptly thereafter and (2) the Trust must
inform the auction agent of the proposed special rate period by 3:00 p.m. New
York City time on the second business day before the first day of the proposed
special rate period.
VOTING RIGHTS
Holders of Preferred Shares, voting as a separate class, are entitled to elect
(1) two trustees of the Trust at all times and (2) a majority of the trustees if
at any time dividends on the Preferred Shares shall be unpaid in an amount equal
to two years' dividends thereon, and to continue to be so represented until all
dividends in arrears shall have been paid or otherwise provided for.
So long as any of the Preferred Shares are outstanding, the Trust will not,
without the affirmative vote of the holders of a majority of the outstanding
Preferred Shares: (i) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Trust or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (ii) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Trust's assets as a whole, except (A) liens the
validity of which are being contested in good faith by appropriate proceedings,
(B) liens for taxes that are not then due and payable or that can be paid
thereafter without penalty, (C) liens, pledges, charges, security interests,
security agreements or other encumbrances arising in connection with any
indebtedness senior to the Preferred Shares, (D) liens, pledges, charges,
security interests, security agreements or other encumbrances arising in
connection with any indebtedness permitted under clause (iii) below and (E)
liens to secure payment for services rendered including, without limitation,
services rendered by the Trust's paying agent and the auction agent; or (iii)
create, authorize, issue, incur or suffer to exist any indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness for borrowed
money or any direct or indirect guarantee of such indebtedness, except the Trust
may borrow as may be permitted by the Trust's investment restrictions; provided,
however, that transfers of assets by the Trust subject to an obligation to
repurchase shall not be deemed to be indebtedness for purposes of this provision
to the extent that after any such transaction the Trust has eligible assets with
an aggregate discounted value at least equal to the Preferred Shares Basic
Maintenance Amount (described below) as of the immediately preceding valuation
date.
In addition, the affirmative vote of the holders of a majority of the
outstanding Preferred Shares shall be required to approve any plan of
reorganization (as such term is used in the Investment Company Act) adversely
affecting such shares or any action requiring a vote of security holders of the
Trust under Section 13(a) of the Investment Company Act. In the event a vote of
holders of Preferred Shares is required pursuant to the provisions of Section
13(a) of the Investment Company Act, the Trust shall, not later than ten
Business Days prior to the date on which such vote is to be taken, notify the
rating agency that such vote is to be taken and the nature of the action with
respect to which such vote is to be taken and shall, not later than ten Business
Days after the date on which such vote is taken, notify the rating agency of the
results of such vote.
The affirmative vote of the holders of a majority of the outstanding Preferred
Shares of any series, voting separately from any other series, shall be required
with respect to any matter that materially and adversely affects the rights,
preferences, or powers of that series in a manner different from that of other
series or classes of the Trust's shares of capital stock. For purposes of the
foregoing, no matter shall be deemed to adversely affect any right, preference
or power unless such matter (i) alters or abolishes any preferential right of
such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish)
any restriction on transfer applicable to such series. The vote of holders of
any series described in this paragraph will in each case be in addition to a
separate vote of the requisite percentage of common shares and/or preferred
shares necessary to authorize the action in question.
21
REDEMPTION
Mandatory Redemption. In the event the Trust does not timely cure a failure to
(1) maintain a discounted value of its portfolio equal to the Preferred Shares
Basic Maintenance Amount, (2) maintain the Investment Company Act Preferred
Shares Asset Coverage, or (3) file a required certificate related to asset
coverage on time, the Preferred Shares will be subject to mandatory redemption
out of funds legally available therefore in accordance with the Declaration of
Trust, the Certificate and applicable law, at the redemption price of $25,000
per share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed for
redemption. Any such redemption will be limited to the number of Preferred
Shares necessary to restore the required discounted value or the 1940 Act
Preferred Shares Asset Coverage, as the case may be.
In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, the Trust will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the Investment Company Act Preferred Shares Asset Coverage, as the case may
be, pro rata among the Preferred Shares and other preferred shares of the Trust,
subject to redemption or retirement. If fewer than all outstanding shares of any
series are, as a result, to be redeemed, the Trust may redeem such shares by lot
or other method that it deems fair and equitable.
Optional Redemption. To the extent permitted under the Investment Company Act
and Massachusetts law, the Trust at its option may redeem Preferred Shares
having a dividend period of one year or less, in whole or in part, on the
business day after the last day of such dividend period upon not less than 15
calendar days and not more than 40 calendar days prior notice. The optional
redemption price per share shall be $25,000 per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption. Preferred Shares having a dividend period of more
than one year are redeemable at the option of the Trust, in whole or in part,
prior to the end of the relevant dividend period, subject to any specific
redemption provisions, which may include the payment of redemption premiums to
the extent required under any applicable specific redemption provisions. The
Trust shall not effect any optional redemption unless after giving effect
thereto that (i) the Trust has available certain deposit securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to holders of Preferred Shares by reason of the
redemption of Preferred Shares on such date fixed for the redemption and (ii)
the Trust would have eligible assets with an aggregate discounted value at least
equal to the Preferred Shares Basic Maintenance Amount.
Notwithstanding the foregoing, no Preferred Shares may be redeemed at the option
of the Trust unless all dividends in arrears on the outstanding Preferred
Shares, including all outstanding preferred shares, have been or are being
contemporaneously paid or set aside for payment; provided however, that the
foregoing shall not prevent the purchase or acquisition of outstanding preferred
shares pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to holders of all outstanding preferred
shares.
LIQUIDATION
Subject to the rights of holders of any series ranking on a parity with
Preferred Shares with respect to the distribution of assets upon liquidation of
the Trust, whether voluntary or involuntary, the holders of Preferred Shares
then outstanding will be entitled to receive and to be paid out of the assets of
the Trust available for distribution to its shareholders, before any payment or
distribution shall be made on the common shares, an amount equal to the
liquidation preference with respect to such shares ($25,000 per share), plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to and including the date of final distribution. After
the payment to the holders of the Preferred Shares of the full preferential
amounts provided for as described herein, the holders of the Preferred Shares as
such shall have no right or claim to any of the remaining assets of the Trust.
Neither the consolidation nor merger of the Trust with or into any other
corporation or corporations, nor the sale, lease, exchange or transfer by the
Trust of all or substantially all of its property and assets, shall be deemed to
be a liquidation, dissolution or winding up of the Trust for the purposes of the
foregoing paragraph.
22
THE AUCTION
SUMMARY OF AUCTION PROCEDURES
The following is a brief summary of the auction procedures. They are described
in more detail in the SAI. The auction determines the dividend rate for
Preferred Shares, but the dividend rate will not be higher than the maximum
rate. See "Description of Preferred Shares -- Dividends and Dividend Periods."
You may buy, sell or hold Preferred Shares in the auction.
If you own shares of Preferred Shares, you may instruct, orally or in writing, a
broker-dealer to enter an order in the auction. Existing holders of Preferred
Shares can enter three kinds of orders regarding their Preferred Shares: sell,
bid, and hold.
* If you enter a sell order, you indicate that you want to sell Preferred
Shares at $25,000 per share, no matter what the next rate period's dividend
rate will be.
* If you enter a bid (or "hold at a rate") order, you indicate that you want
to sell Preferred Shares only if the next rate period's dividend rate is
less than the rate you specify.
* If you enter a hold order, you indicate that you want to continue to own
Preferred Shares, no matter what the next rate period's dividend rate will
be.
You may enter different types of orders for your Preferred Shares, as well as
orders for additional Preferred Shares. All orders must be for whole shares. All
orders you submit are irrevocable. There are a fixed number of Preferred Shares,
and the dividend rate likely will vary from auction to auction depending on the
number of bidders, the number of shares the bidders seek to buy, and general
economic conditions including current interest rates. If you own Preferred
Shares and submit a bid higher than the maximum rate, your bid will be treated
as a sell order. If you do not enter an order, the broker-dealer will assume
that you want to continue to hold Preferred Shares, but if you fail to submit an
order and the rate period is longer than 91 days, the broker-dealer will treat
your failure to submit a bid as a sell order.
If you do not currently own Preferred Shares, or want to buy more shares, you
may instruct a broker-dealer to enter a bid order to buy shares in an auction at
$25,000 per share at or above a specified dividend rate. If your bid specifies a
rate higher than the maximum rate, your order will not be accepted.
Broker-dealers will submit orders from existing and potential Preferred
Shareholders to the auction agent. Neither the Trust nor the auction agent will
be responsible for a broker-dealer's failure to submit orders from existing
shareholders and potential shareholders. A broker-dealer's failure to submit
orders for Preferred Shares held by it or its customers will be treated in the
same manner as a shareholder's failure to submit an order to the broker-dealer.
A broker-dealer may submit orders to the auction agent for its own account
provided it is not an affiliate of the Trust.
The auction agent after each auction for Preferred Shares will pay to each
broker-dealer, from funds provided by the Trust, a service charge at the annual
rate of 1/4 of 1% in the case of any auction immediately preceding a rate period
of less than one year, or a percentage agreed to by the Trust and the
broker-dealers, in the case of any auction immediately preceding a rate period
of one year or longer, of the purchase price of Preferred Shares placed by the
broker-dealers at the auction.
If the number of Preferred Shares subject to bid orders with a dividend rate
equal to or lower than the maximum rate for Preferred Shares is at least equal
to the number of Preferred Shares subject to sell orders, then the dividend rate
for the next rate period will be the lowest rate submitted which, taking into
account that rate and all lower rates submitted in order from existing and
potential shareholders, would result in existing and potential shareholders
owning all the Preferred Shares available for purchase in the auction.
If the number of Preferred Shares subject to bid orders with a dividend rate
equal to or lower than the maximum rate for Preferred Shares is less than the
number of Preferred Shares subject to sell orders, then the auction is
considered to be a failed auction, and the dividend rate will be the maximum
rate. In that event, existing shareholders that have submitted sell orders (or
are treated as having submitted sell orders) may not be able to sell any or all
of the shares for which they submitted sell orders.
23
The auction agent will not accept a bid above the maximum rate. The purpose of
the maximum rate is to place an upper limit on dividends of Preferred Shares and
in so doing to help protect the earnings available to pay common share
dividends, and to serve as the dividend rate in the event of a failed auction
(that is, an auction where there are more Preferred Shares offered for sale than
there are buyers for those shares).
If broker-dealers submit or are deemed to submit hold orders for all outstanding
Preferred Shares, that is considered an "all hold" auction and the dividend rate
for the next rate period will be the all hold rate. The "all hold rate" is 80%
of the "AA" Financial Composite Commercial Paper Rate (the interest equivalent
of rates applicable to "AA"-rated securities for time periods that vary
depending on the dividend period).
The auction procedures include a pro rata allocation of Preferred Shares for
purchase and sale. This allocation process may result in an existing shareholder
continuing to hold or selling, or a potential shareholder buying, fewer shares
than the number of Preferred Shares in its order. If this happens,
broker-dealers will be required to make appropriate pro rata allocations among
their customers.
Settlement of purchases and sales will be made on the next business day (which
also is a dividend payment date) after the auction date through The Depository
Trust Company. Purchasers will pay for their Preferred Shares through
broker-dealers in same-day funds to The Depository Trust Company against
delivery to the broker-dealers. The Depository Trust Company will make payment
to the sellers' broker-dealers in accordance with its normal procedures, which
require broker-dealers to make payment against delivery in same-day funds.
Throughout this Prospectus, a business day is a day on which the New York Stock
Exchange is open for trading, and which is neither a Saturday, Sunday nor any
other day on which banks in New York, New York are authorized or obligated by
law to close.
The first auction for Series A Preferred Shares will be held on _____________,
2001, the business day preceding the dividend payment date for the initial rate
period. Thereafter, except during special rate periods, auctions for Series A
Preferred Shares will normally be held every [Tuesday], and each subsequent rate
period for Series A Preferred Shares will normally begin on the following
Wednesday.
The first auction for Series B Preferred Shares will be held on ______________,
2001, the business day preceding the dividend payment date for the initial rate
period. Thereafter, except during special rate periods, auctions for Series B
Preferred Shares will normally be held every [Thursday], and each subsequent
rate period for Series B Preferred Shares will normally begin on the following
Friday.
SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES
Broker-dealers (including the underwriter) may, but are not obligated, to
maintain a secondary trading market in Preferred Shares outside of auctions.
There can be no assurance that a secondary trading market for Preferred Shares
will develop or, if it does develop, that it will provide owners with liquidity
of investment. The Preferred Shares will not be registered on any stock exchange
or on the NASDAQ stock market. Investors who purchase Preferred Shares in an
auction for a special rate period should note that because the dividend rate on
such shares will be fixed for the length of that rate period, the value of such
shares may fluctuate in response to the changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next auction thereof, depending on market conditions.
An existing shareholder may sell, transfer, or otherwise dispose of Preferred
Shares only in whole shares and only (1) pursuant to a bid or sell order placed
with the auction agent in accordance with the auction procedures, (2) to a
broker-dealer or (3) to such other persons as may be permitted by the Trust;
provided, however, that (a) a sale, transfer or other disposition of Preferred
Shares from a customer of a broker-dealer who is listed on the records of that
broker-dealer as the holder of such shares to that broker-dealer or another
customer of that broker-dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of the foregoing if such broker-dealer remains
the existing shareholder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of all
transfers other than pursuant to auctions, the broker-dealer (or other person,
if permitted by the Trust) to whom such transfer is made shall advise the
auction agent of such transfer.
24
RATING AGENCY GUIDELINES
The Trust is required under Moody's guidelines to maintain assets having in the
aggregate a discounted value at least equal to the Preferred Shares Basic
Maintenance Amount. To the extent any particular portfolio holding does not
satisfy the guidelines, all or a portion of such holding's value will not be
included in the calculation of discounted value (as defined by Moody's). The
guidelines also impose certain diversification requirements on the Trust's
overall portfolio. The Preferred Shares Basic Maintenance Amount includes the
sum of (i) the aggregate liquidation preference of the Preferred Shares then
outstanding, (ii) the total principal of any senior debt (plus accrued and
projected dividends), (iii) certain Trust expenses and (iv) certain other
current liabilities.
The Trust is also required under Moody's guidelines to maintain, with respect to
the Preferred Shares, as of the last business day of each month in which any
Preferred Shares are outstanding, asset coverage of at least 200% with respect
to senior securities which are shares of beneficial interest in the Trust,
including the Preferred Shares (or such other asset coverage as may in the
future be specified in or under the Investment Company Act as the minimum asset
coverage for senior securities which are shares of a closed-end investment
company as a condition of declaring dividends on its common shares) ("1940 Act
Preferred Shares Asset Coverage"). Based on the composition of the Trust's
portfolio and market conditions as of March 30, 2001, the 1940 Act Preferred
Shares Asset Coverage with respect to the Preferred Shares, assuming the
issuance of all Preferred Shares offered hereby and the use of the proceeds as
intended, would be computed as follows:
Value of Trust assets less liabilities not
constituting senior securities $546 million
------------------------------------------------ = ------------------- = 248%
Senior securities representing indebtedness plus
liquidation value of the Preferred Shares $220 million
In the event the Trust does not timely cure a failure to maintain (1) a
discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (2) 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 Trust will be required to redeem Preferred
Shares as described above under "Description of Preferred Shares--REDEMPTION."
The Trust may, but is not required to, adopt any modifications to the guidelines
that may hereafter be established by Moody's. Failure to adopt any such
modifications, however, may result in a change in the ratings described above or
a withdrawal of ratings altogether. In addition, any rating agency providing a
rating for the Preferred Shares may, at any time, change or withdraw any such
rating. The Board of Trustees may, without shareholder approval, amend, alter,
add to or repeal any or all of the definitions and related provisions which have
been adopted by the Trust pursuant to the rating agency guidelines in the event
the Trust receives written confirmation from Moody's that any such change would
not impair the rating then assigned.
As described by Moody's, a preferred share rating is an assessment of the
capacity and willingness of an issuer to pay preferred share obligations. The
ratings on the Preferred Shares are not recommendations to purchase, hold or
sell Preferred Shares, inasmuch as the ratings do not comment as to market price
or suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of Preferred Shares will
be able to sell such shares in an auction or otherwise. The rating is based on
current information furnished to Moody's by the Trust and the Adviser, and
information obtained from other sources. The rating may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such information.
The rating agency guidelines will apply to the Preferred Shares only so long as
Moody's is rating such shares. The Trust will pay fees to Moody's for rating the
Preferred Shares.
UNDERWRITING
The Trust, Eaton Vance, and UBS Warburg LLC, the underwriter for this offering
(the "Underwriter") have entered into an underwriting agreement concerning the
shares of Preferred Stock being offered. Subject to the terms and conditions of
the underwriting agreement, the Underwriter has agreed to purchase the number of
shares of Preferred Stock set forth opposite its name below.
25
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------------------
UBS Warburg LLC...................................... 4,400
-----
Total....................................... 4,400
=====
The Underwriter has advised the Trust that they propose to initially offer the
Preferred Stock to the public at the public offering price set forth on the
cover page of this prospectus, and to certain dealers at such price less a
concession not in excess of $150 per share of Preferred Stock. The Underwriter
may allow, and such dealers may reallow, a discount not in excess of $100 per
share of Preferred Stock to other dealers. After the initial public offering,
the public offering price, in concession and discount may be changed. Investors
must pay for any shares of Preferred Stock purchased in the initial public
offering on or before , 2001.
The Trust and Eaton Vance have each agreed to indemnify the Underwriter for or
to contribute to the losses arising out of certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The Trust anticipates that the Underwriter may from time to time act as brokers
or dealers in connection with the execution of its portfolio transactions after
it has ceased to be Underwriter and, subject to certain restrictions, may act as
such brokers while it is Underwriter.
As described below under "Shareholder servicing agent, custodian and transfer
agent," UBS Warburg LLC will provide shareholder services to the Trust pursuant
to a Shareholder Servicing Agreement with Eaton Vance. Eaton Vance pays a
monthly fee on an annual basis equal to 0.10% of the average weekly gross assets
of the Trust for such services.
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
Pursuant to a Shareholder Servicing Agreement between UBS Warburg LLC (the
"Shareholder Servicing Agent") and Eaton Vance, the Shareholder Servicing Agent
will (i) undertake to make public information pertaining to the Trust on an
ongoing basis and to communicate to investors and prospective investors the
Trust's features and benefits (including periodic seminars or conference calls,
responses to questions from current or prospective shareholders and specific
shareholder contact where appropriate); (ii) make available to investors and
prospective investors market price, net asset value, yield and other information
regarding the Trust, if reasonably obtainable, for the purpose of maintaining
the visibility of the Trust in the investor community; (iii) at the request of
Eaton Vance, provide certain economic research and statistical information and
reports, if reasonably obtainable, on behalf of the Trust, and consult with
representatives and Trustees of the Trust in connection therewith, which
information and reports shall include: (a) statistical and financial market
information with respect to the Trust's market performance and (b) comparative
information regarding the Trust and other closed-end management investment
companies with respect to (1) the net asset value of their respective shares,
(2) the respective market performance of the Trust and such other companies and
(3) other relevant performance indicators; and (iv) at the request of Eaton
Vance, provide information to and consult with the Board of Trustees with
respect to applicable modifications to dividend policies or capital structure,
repositioning or restructuring of the Trust, conversion of the Trust to an
open-end investment company, liquidation or merger; provided, however, that
under the terms of the Shareholder Servicing Agreement, the Shareholder
Servicing Agent is not obligated to render any opinions, valuations or
recommendations of any kind or to perform any such similar services. For these
services, Eaton Vance will pay the Shareholder Servicing Agent a fee equal on an
annual basis to 0.10% of the Trust's average weekly gross assets, payable in
arrears at the end of each calendar month. Under the terms of the Shareholder
Servicing Agreement, the Shareholder Servicing Agent is relieved from liability
to Eaton Vance for any act or omission in the course of its performances under
the Shareholder Servicing Agreement in the absence of gross negligence or
willful misconduct by the Shareholder Servicing Agent. The Shareholder Servicing
Agreement will continue for an initial term of two years and thereafter for
successive one-year periods unless terminated by either party upon 60 days
written notice.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston, MA 02116
is the custodian of the Trust and will maintain custody of the securities and
cash of the Trust. IBT maintains the Trust's general ledger and computes net
asset value per share at least weekly. IBT also attends to details in connection
with the sale, exchange, substitution, transfer and other dealings with the
Trust's investments, and receives and disburses all funds. IBT also assists in
preparation of shareholder reports and the electronic filing of such reports
with the SEC.
PFPC, Inc., P.O. Box 5123, Providence, RI 02940-9653 is the transfer agent and
dividend disbursing agent of the Trust.
26
LEGAL MATTERS
It is expected that certain legal matters in connection with the Shares offered
hereby will be passed upon for the Trust by Kirkpatrick & Lockhart LLP, and for
the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliated
entities.
EXPERTS
The financial statements of the Trust as of December 31, 2000 included in this
prospectus and the registration statement has been audited by Deloitte & Touche
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. The selection of
independent auditors is subject to ratification by shareholders of the Trust.
ADDITIONAL INFORMATION
The Prospectus and the SAI do not contain all of the information set forth in
the Registration Statement that the Trust has filed with the SEC. The complete
Registration Statement may be obtained from the SEC upon payment of the fee
prescribed by its rules and regulations. The SAI can be obtained without charge
by calling 1-800-225-6265.
Statements contained in this Prospectus as to the contents of any contract or
other documents 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 of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference.
TABLE OF CONTENTS FOR THE SAI
Additional investment information and restrictions.............................1
Trustees and officers..........................................................6
Investment advisory and other services.........................................9
Determination of net asset value..............................................10
Portfolio trading.............................................................11
Taxes.........................................................................12
Other information.............................................................13
Auditors......................................................................14
Financial statements..........................................................14
Appendix A: Additional Information Concerning the Actions
for Preferred Shares......................................................A-1
Appendix B: Glossary........................................................B-1
Appendix C: Ratings of Corporate Bonds......................................C-1
27
EATON VANCE SENIOR
INCOME TRUST
2,200 SHARES SERIES A
2,200 SHARES SERIES B
AUCTION PREFERRED SHARES
LIQUIDATION PREFERENCE $25,000 PER SHARE
[EATON VANCE LOGO]
---------------
PROSPECTUS
---------------
UBS WARBURG LLC
---------------
______________, 2001
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
SUBJECT TO COMPLETION - APRIL 12, 2001
STATEMENT OF
ADDITIONAL INFORMATION
________________, 2001
EATON VANCE SENIOR INCOME TRUST
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
1-800-225-6265
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
Additional Investment Information and Restrictions.............................1
Trustees and Officers..........................................................6
Investment Advisory and Other Services.........................................9
Determination of Net Asset Value..............................................10
Portfolio Trading.............................................................11
Taxes.........................................................................12
Other Information.............................................................13
Auditors......................................................................14
Financial Statements..........................................................14
Appendix A: Additional Information Concerning the
Auctions for Preferred Shares.............................................A-1
Appendix B: Glossary........................................................B-1
Appendix C: Ratings of Corporate Bonds.......................................C-1
--------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY THE
PROSPECTUS OF EATON VANCE SENIOR INCOME TRUST (THE "TRUST") DATED ___________,
2001, AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS INCORPORATED HEREIN BY
REFERENCE. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE TRUST AT
1-800-225-6265.
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION, WHICH IS NOT A PROSPECTUS, IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Capitalized terms used in this Statement of Additional Information and not
otherwise defined have the meanings given them in the Trust's Prospectus or the
Glossary. The Investment Company Act of 1940 is referred to herein as the "1940
Act."
ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS
STRUCTURE OF SENIOR LOANS. A Senior Loan is typically originated,
negotiated and structured by a U.S. or foreign commercial bank, insurance
company, finance company or other financial institution (the "Agent") for a
group of loan investors ("Loan Investors"). The Agent typically administers and
enforces the Senior Loan on behalf of the other Loan Investors in the syndicate.
In addition, an institution, typically but not always the Agent, holds any
collateral on behalf of the Loan Investors.
Senior Loans include senior secured floating rate loans and institutionally
traded senior secured floating rate debt obligations issued by an asset-backed
pool, and interests therein. Loan interests generally take the form of direct
interests acquired during a primary distribution and may also take the form of
participation interests in, assignments of, or novations of a Senior Loan
acquired in secondary markets. Such loan interests may be acquired from U.S. or
foreign commercial banks, insurance companies, finance companies or other
financial institutions who have made loans or are members of a lending syndicate
or from other investors in loan interests.
The Trust typically purchases "Assignments" from the Agent or other Loan
Investors. The purchase of an Assignment typically succeeds to all the rights
and obligations under the Loan Agreement of the assigning Loan Investor and
becomes a loan investor under the Loan Agreement with the same rights and
obligations as the assigning party. Assignments may, however, be arranged
through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Loan Investor.
The Trust also may invest in "Participations". Participations by the Trust
in a Loan Investor's portion of a Senior Loan typically will result in the Trust
having a contractual relationship only with such Loan Investor, not with the
Borrower. As a result, the Trust may have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Loan
Investor selling the Participation and only upon receipt by such Loan Investor
of such payments from the Borrower. In connection with purchasing
Participations, the Trust generally will have no right to enforce compliance by
the Borrower with the terms of the loan agreement, nor any rights with respect
to any funds acquired by other Loan Investors through set-off against the
Borrower and the Trust may not directly benefit from the collateral supporting
the Senior Loan in which it has purchased the Participation. As a result, the
Trust may assume the credit risk of both the Borrower and the Loan Investor
selling the Participation. In the event of the insolvency of the Loan Investor
selling a Participation, the Trust may be treated as a general creditor of such
Loan Investor. The selling Loan Investors and other persons interpositioned
between such Loan Investors and the Trust with respect to such Participations
will likely conduct their principal business activities in the banking, finance
and financial services industries. Persons engaged in such industries may be
more susceptible to, among other things, fluctuations in interest rates, changes
in the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.
The Trust will only acquire Participations if the Loan Investor selling the
Participation, and any other persons interpositioned between the Trust and the
Loan Investor, at the time of investment has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or higher by Standard & Poor's
Ratings Group ("S&P") or Baa or P-3 or higher by Moody's Investors Service, Inc.
("Moody's") or comparably rated by another nationally recognized rating agency
1
(each a "Rating Agency")) or determined by the investment adviser to be of
comparable quality. Securities rated Baa by Moody's have speculative
characteristics. Similarly, the Trust will purchase an Assignment or
Participation or act as a Loan Investor with respect to a syndicated Senior Loan
only where the Agent with respect to such Senior Loan at the time of investment
has outstanding debt or deposit obligations rated investment grade or determined
by the investment adviser to be of comparable quality. Long-term debt rated BBB
by S&P is regarded by S&P as having adequate capacity to pay interest and repay
principal and debt rated Baa by Moody's is regarded by Moody's as a medium grade
obligation, i.e., it is neither highly protected nor poorly secured. Commercial
paper rated A-3 by S&P indicates that S&P believes such obligations exhibit
adequate protection parameters but that adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitment on the obligation and issues of commercial paper
rated P-3 by Moody's are considered by Moody's to have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced.
LENDING FEES. In the process of buying, selling and holding Senior Loans
the Trust may receive and/or pay certain fees. These fees are in addition to
interest payments received and may include facility fees, commitment fees,
commissions and prepayment penalty fees. When the Trust buys a Senior Loan it
may receive a facility fee and when it sells a Senior Loan it may pay a facility
fee. On an ongoing basis, the Trust may receive a commitment fee based on the
undrawn portion of the underlying line of credit portion of a Senior Loan. In
certain circumstances, the Trust may receive a prepayment penalty fee upon the
prepayment of a Senior Loan by a Borrower. Other fees received by the Trust may
include covenant waiver fees and covenant modification fees.
BORROWER COVENANTS. A Borrower must comply with various restrictive
covenants contained in a loan agreement or note purchase agreement between the
Borrower and the holders of the Senior Loan (the "Loan Agreement"). Such
covenants, in addition to requiring the scheduled payment of interest and
principal, may include restrictions on dividend payments and other distributions
to stockholders, provisions requiring the Borrower to maintain specific minimum
financial ratios, and limits on total debt. In addition, the Loan Agreement may
contain a covenant requiring the Borrower to prepay the Senior Loan with any
free cash flow. Free cash flow is generally defined as net cash flow after
scheduled debt service payments and permitted capital expenditures, and includes
the proceeds from asset dispositions or sales of securities. A breach of a
covenant which is not waived by the Agent, or by the Loan Investors directly, as
the case may be, is normally an event of acceleration; i.e., the Agent, or the
Loan Investors directly, as the case may be, has the right to call the
outstanding Senior Loan. The typical practice of an Agent or a Loan Investor in
relying exclusively or primarily on reports from the Borrower may involve a risk
of fraud by the Borrower. In the case of a Senior Loan in the form of a
Participation, the agreement between the buyer and seller may limit the rights
of the holder to vote on certain changes which may be made to the Loan
Agreement, such as waiving a breach of a covenant. However, the holder of the
Participation will, in almost all cases, have the right to vote on certain
fundamental issues such as changes in principal amount, payment dates and
interest rate.
ADMINISTRATION OF LOANS. In a typical Senior Loan the Agent administers the
terms of the Loan Agreement. In such cases, the Agent is normally responsible
for the collection of principal and interest payments from the Borrower and the
apportionment of these payments to the credit of all institutions which are
parties to the Loan Agreement. The Trust will generally rely upon the Agent or
an intermediate participant to receive and forward to the Trust its portion of
the principal and interest payments on the Senior Loan. Furthermore, unless
under the terms of a Participation Agreement the Trust has direct recourse
against the Borrower, the Trust will rely on the Agent and the other members of
the lending syndicate to use appropriate credit remedies against the Borrower.
The Agent is typically responsible for monitoring compliance with covenants
contained in the Loan Agreement based upon reports prepared by the Borrower. The
seller of the Senior Loan usually does, but is often not obligated to, notify
holders of Senior Loans of any failures of compliance. The Agent may monitor the
value of the collateral and, if the value of the collateral declines, may
accelerate the Senior Loan, may give the Borrower an opportunity to provide
additional collateral or may seek other protection for the benefit of the
participants in the Senior Loan. The Agent is compensated by the Borrower for
providing these services under a Loan Agreement, and such compensation may
include special fees paid upon structuring and funding the Senior Loan and other
fees paid on a continuing basis. With respect to Senior Loans for which the
Agent does not perform such administrative and enforcement functions, the Trust
will perform such tasks on its own behalf, although a collateral bank will
2
typically hold any collateral on behalf of the Trust and the other Loan
Investors pursuant to the applicable Loan Agreement.
A financial institution's appointment as Agent may usually be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership,
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the Loan Agreement should remain available to holders of Senior
Loans. However, if assets held by the Agent for the benefit of the Trust were
determined to be subject to the claims of the Agent's general creditors, the
Trust might incur certain costs and delays in realizing payment on a Senior
Loan, or suffer a loss of principal and/or interest. In situations involving
other intermediate participants similar risks may arise.
PREPAYMENTS. Senior Loans usually require, in addition to scheduled
payments of interest and principal, the prepayment of the Senior Loan from free
cash flow, as defined above. The degree to which Borrowers prepay Senior Loans,
whether as a contractual requirement or at their election, may be affected by
general business conditions, the financial condition of the Borrower and
competitive conditions among Loan Investors, among others. As such, prepayments
cannot be predicted with accuracy. Upon a prepayment, either in part or in full,
the actual outstanding debt on which the Trust derives interest income will be
reduced. However, the Trust may receive both a prepayment penalty fee from the
prepaying Borrower and a facility fee upon the purchase of a new Senior Loan
with the proceeds from the prepayment of the former. Prepayments generally will
not materially affect the Trust's performance because the Trust should be able
to reinvest prepayments in other Senior Loans that have similar or identical
yields and because receipt of such fees may mitigate any adverse impact on the
Trust's yield.
OTHER INFORMATION REGARDING SENIOR LOANS. From time to time, the Adviser
and its affiliates may borrow money from various banks in connection with their
business activities. Such banks may also sell Senior Loans to or acquire them
from the Trust or may be intermediate participants with respect to Senior Loans
in which the Trust owns interests. Such banks may also act as Agents for Senior
Loans held by the Trust.
The Trust may acquire interests in Senior Loans which are designed to
provide temporary or "bridge" financing to a Borrower pending the sale of
identified assets or the arrangement of longer-term loans or the issuance and
sale of debt obligations. The Trust may also invest in Senior Loans of Borrowers
who have obtained bridge loans from other parties. A Borrower's use of bridge
loans involves a risk that the Borrower may be unable to locate permanent
financing to replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.
To the extent that collateral consists of the stock of the Borrower's
subsidiaries or other affiliates, the Trust will be subject to the risk that
this stock will decline in value. Such a decline, whether as a result of
bankruptcy proceedings or otherwise, could cause the Senior Loan to be
undercollateralized or unsecured. In most credit agreements there is no formal
requirement to pledge additional collateral. In addition, the Trust may invest
in Senior Loans guaranteed by, or fully secured by assets of, shareholders or
owners, even if the Senior Loans are not otherwise collateralized by assets of
the Borrower; provided, however, that such guarantees are fully secured. There
may be temporary periods when the principal asset held by a Borrower is the
stock of a related company, which may not legally be pledged to secure a Senior
Loan. On occasions when such stock cannot be pledged, the Senior Loan will be
temporarily unsecured until the stock can be pledged or is exchanged for or
replaced by other assets, which will be pledged as security for the Senior Loan.
However, the Borrower's ability to dispose of such securities, other than in
connection with such pledge or replacement, will be strictly limited for the
protection of the holders of Senior Loans. During any such period in which the
Senior Loan is temporarily unsecured, such Senior Loans will not be treated as
secured Senior Loans for purposes of the Trust's policy of investing in normal
market conditions at least 80% of its total assets in such secured Senior Loans.
3
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Trust's security interest in the loan collateral or subordinate
the Trust's rights under the Senior Loan to the interests of the Borrower's
unsecured creditors. Such action by a court could be based, for example, on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the loan collateral to
the Trust. For Senior Loans made in connection with a highly leveraged
transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Loan were not received or retained by the
Borrower, but were instead paid to other persons (such as shareholders of the
Borrower) in an amount which left the Borrower insolvent or without sufficient
working capital. There are also other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official filings, which
could lead to the invalidation of the Trust's security interest in loan
collateral. If the Trust's security interest in loan collateral is invalidated
or the Senior Loan is subordinated to other debt of a Borrower in bankruptcy or
other proceedings, it is unlikely that the Trust would be able to recover the
full amount of the principal and interest due on the Loan.
INTEREST RATE SWAPS. The Trust may enter into interest rate swaps on either
an asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. For example, if the Trust holds a Senior Loan with an
interest rate that is reset only once each year, it may swap the right to
receive interest at this fixed rate for the right to receive interest at a rate
that is reset daily. Such a swap position would offset changes in the value of
the Senior Loan because of subsequent changes in interest rates. This would
protect the Trust from a decline in the value of the Senior Loan due to rising
interest rates, but would also limit its ability to benefit from falling
interest rates.
The Trust will enter into interest rate swaps only on a net basis, i.e.,
the two payment streams are netted out, with the Trust receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
transactions are entered into for good faith hedging and risk management
purposes and because a segregated account will be used, the Trust will not treat
them as being subject to the Trust's borrowing restrictions. The net amount of
the excess, if any, of the Trust's obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Trust's custodian. The Trust will not enter into any interest rate swap unless
the credit quality of the unsecured senior debt or the claims-paying ability of
the other party thereto is considered to be investment grade by the Adviser. If
there is a default by the other party to such a transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments
which are traded in the interbank market.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Trust is contractually obligated to make or receive. Since interest rate swaps
are individually negotiated, the Trust expects to achieve an acceptable degree
of correlation between its rights to receive interest on Senior Loans and its
rights and obligations to receive and pay interest pursuant to interest rate
swaps.
CREDIT DERIVATIVES. The Trust may engage in credit derivative transactions.
Default price risk derivatives are linked to the price of reference securities
or loans after a default by the issuer or borrower, respectively. Market spread
derivatives are based on the risk that changes in market factors, such as credit
spreads, can cause a decline in the value of a security, loan or index. There
are three basic transactional forms for credit derivatives: swaps, options and
structured instruments. The use of credit derivatives is a highly specialized
activity which involves strategies and risks different from those associated
with ordinary portfolio security transactions. If the Adviser is incorrect in
its forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Trust would diminish compared with what it would
have been if these techniques were not used. Moreover, even if the Adviser is
correct in its forecasts, there is a risk that a credit derivative position may
correlate imperfectly with the price of the asset or liability being hedged.
4
Credit derivative transaction exposure will be limited to 10% of the total
assets of the Trust.
INVESTMENT RESTRICTIONS. The following investment restrictions of the Trust
are designated as fundamental policies and as such cannot be changed without the
approval of the holders of a majority of the Trust's outstanding voting
securities, which as used in this Statement of Additional Information means the
lesser of (a) 67% of the shares of the Trust present or represented by proxy at
a meeting if the holders of more than 50% of the shares are present or
represented at the meeting or (b) more than 50% of the shares of the Trust. As a
matter of fundamental policy the Trust may not:
(1) Borrow money, except as permitted by the 1940 Act;
(2) Issue senior securities, as defined in the 1940 Act, other than
(i) Preferred Shares which immediately after issuance will have asset
coverage of at least 200%, (ii) indebtedness which immediately after
issuance will have asset coverage of at least 300%, or (iii) the borrowings
permitted by investment restriction (1) above;
(3) Purchase securities on margin (but the Trust may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The purchase of loan interests, securities or other
investment assets with the proceeds of a permitted borrowing or securities
offering will not be deemed to be the purchase of securities on margin;
(4) Underwrite securities issued by other persons, except insofar as
it may technically be deemed to be an underwriter under the Securities Act
of 1933 in selling or disposing of a portfolio investment;
(5) Make loans to other persons, except by (a) the acquisition of loan
interests, debt securities and other obligations in which the Trust is
authorized to invest in accordance with its investment objective and
policies, (b) entering into repurchase agreements, and (c) lending its
portfolio securities;
(6) Purchase any security if, as a result of such purchase, 25% or
more of the Trust's total assets (taken at current value) would be invested
in the securities of borrowers and other issuers having their principal
business activities in the same industry (the electric, gas, water and
telephone utility industries, commercial banks, thrift institutions and
finance companies being treated as separate industries for the purpose of
this restriction); provided that there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities;
(7) Purchase or sell real estate, although it may purchase and sell
securities which are secured by interests in real estate and securities of
issuers which invest or deal in real estate. The Trust reserves the freedom
of action to hold and to sell real estate acquired as a result of the
ownership of securities; or
(8) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities. Physical commodities do not
include futures contracts with respect to securities, securities indices or
other financial instruments.
For the purpose of investment restriction (6), the Trust will consider all
relevant factors in determining who is the issuer of the loan interest,
including: the credit quality of the Borrower, the amount and quality of the
collateral, the terms of the Loan Agreement and other relevant agreements
(including inter-creditor agreements), the degree to which the credit of such
interpositioned person was deemed material to the decision to purchase the
Senior Loan, the interest rate environment, and general economic conditions
applicable to the Borrower and such interpositioned person.
5
The Trust has adopted the following nonfundamental investment policy which
may be changed by the Trustees without approval of the Trust's shareholders. As
a matter of nonfundamental policy, the Trust may not make short sales of
securities or maintain a short position, unless at all times when a short
position is open it either owns an equal amount of such securities or owns
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal in amount to, the
securities sold short.
Notwithstanding the investment policies and restrictions of the Trust, upon
Board of Trustee approval the Trust may invest its investable assets in one or
more other management investment companies to the extent permitted by the 1940
Act and rules thereunder.
Whenever an investment policy or investment restriction set forth in the
Prospectus or this Statement of Additional Information states a maximum
percentage of assets that may be invested in any security or other asset or
describes a policy regarding quality standards, such percentage limitation or
standard shall be determined immediately after and as a result of the Trust's
acquisition of such security or asset. Accordingly, any later increase or
decrease resulting from a change in values, assets or other circumstances will
not compel the Trust to dispose of such security or other asset. Notwithstanding
the foregoing, the Trust must always be in compliance with the borrowing
policies set forth above.
TRUSTEES AND OFFICERS
The Trust's of the Trust are responsible for the overall management and
supervision of the Trust's affairs. Trustees and officers are listed below.
Except as indicated, each individual has held the office shown or other offices
in the same company for the last five years. Unless otherwise noted, the
business address of each Trustee and officer is The Eaton Vance Building, 255
State Street, Boston, Massachusetts 02109. Those Trustees who are "interested
persons" of the Trust as defined in the 1940 Act by virtue of their affiliation
with Eaton Vance, BMR, EVC or EV, are indicated by an asterisk(*).
JESSICA M. BIBLIOWICZ (41), TRUSTEE* (1)
President and Chief Executive Officer of National Financial Partners (a
financial services company) (since April, 1999). President and Chief Operating
Officer of John A Levin & Co. (a registered investment advisor) (July, 1997 to
April, 1999) and a Director of Baker, Fentress & Company which owns John A.
Levin & Co. (July, 1997 to April, 1999). Formerly Executive Vice President of
Smith Barney Mutual Funds (from July, 1994 to June, 1997). Elected Trustee
February 22, 1999. Trustee of various investment companies managed by Eaton
Vance or BMR since October 30, 1998.
Address: 787 Seventh Avenue, New York, New York 10019
DONALD R. DWIGHT (70), TRUSTEE (1)(4)
President of Dwight Partners, Inc. (a corporate relations and communications
company). Trustee/Director of the Royce Funds (mutual funds). Trustee of various
investment companies managed by Eaton Vance or BMR.
Address: Clover Mill Lane, Lyme, New Hampshire 03768
JAMES B. HAWKES (59), PRESIDENT AND TRUSTEE* (1)
Chairman, President and Chief Executive Officer of Eaton Vance, BMR and their
corporate parent and trustee (EVC and EV); Director of EVC and EV. Trustee and
officer of various investment companies managed by Eaton Vance or BMR.
SAMUEL L. HAYES, III (66), TRUSTEE (2)(4)
Jacob H. Schiff Professor of Investment Banking Emeritus, Harvard University
Graduate School of Business Administration. Trustee of the Kobrick Investment
Trust (mutual funds). Trustee of various investment companies managed by Eaton
Vance or BMR.
Address: 345 Nahatan Road, Westwood, Massachusetts 02090
6
NORTON H. REAMER (65), TRUSTEE (2)
Chairman and Chief Operating Officer, Hellman, Jordan Management Co., Inc. (an
investment management company) (since November, 2000) and President, Jordan
Simmons Capital LLC (manager of energy related investments) (since November,
2000). President, Unicorn Corporation (an investment and financial advisory
services company) (since September, 2000). Formerly Chairman of the Board,
United Asset Management Corporation (a holding company owning institutional
investment management firms) and Chairman, President and Director, UAM Funds
(mutual funds). Trustee of various investment companies managed by Eaton Vance
or BMR.
Address: One International Place, Boston, Massachusetts 02110
LYNN A. STOUT (43), TRUSTEE (3)
Professor of Law, Georgetown University Law Center. Elected Trustee February 22,
1999. Trustee of various investment companies managed by Eaton Vance or BMR
since October 30, 1998.
Address: 600 New Jersey Avenue, NW, Washington, DC 20001
JACK L. TREYNOR (71), TRUSTEE (3)
Investment Adviser and Consultant. Trustee of various investment companies
managed by Eaton Vance or BMR.
Address: 504 Via Almar, Palos Verdes Estates, California 90274
SCOTT H. PAGE (41), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
PAYSON F. SWAFFIELD (44), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
MICHAEL W. WEILHEIMER (39), VICE PRESIDENT
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
JAMES L. O'CONNOR (56), TREASURER
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ALAN R. DYNNER (60), SECRETARY
Vice President, Secretary and Chief Legal Officer of Eaton Vance, BMR, EV and
EVC. Prior to joining Eaton Vance on November 1, 1996, he was a Partner of the
law firm of Kirkpatrick & Lockhart LLP, New York and Washington, D.C. Officer of
various investment companies managed by Eaton Vance or BMR.
JANET E. SANDERS (65), ASSISTANT TREASURER AND ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
A. JOHN MURPHY (38), ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
ERIC G. WOODBURY (43), ASSISTANT SECRETARY
Vice President of Eaton Vance and BMR. Officer of various investment companies
managed by Eaton Vance or BMR.
----------
(1) Class I Trustee whose term expires in 2002.
(2) Class II Trustee whose term expires in 2003.
(3) Class III Trustee whose term expires in 2001.
(4) Trustee to be elected exclusively by holders of Preferred Shares as
described in the Prospectus.
7
The Nominating Committee of the Board of Trustees of the Trust is comprised
of the Trustees who are not "interested persons" as that term is defined under
the 1940 Act ("noninterested Trustees"). The purpose of the Committee is to
recommend to the Board nominees for the position of noninterested Trustee and to
assure that at least a majority of the Board of Trustees is independent of Eaton
Vance or its affiliates.
Messrs. Hayes (Chairman), Dwight, Reamer and Ms. Stout are members of the
Special Committee of the Board of Trustees of the Trust. The purpose of the
Special Committee is to consider, evaluate and make recommendations to the full
Board of Trustees concerning (i) all contractual arrangements with service
providers to the Trust, including investment advisory, administrative, transfer
agency, custodial and fund accounting and distribution services, and (ii) all
other matters in which Eaton Vance or its affiliates has any actual or potential
conflict of interest with the Trust or its shareholders.
Messrs. Treynor (Chairman), Dwight and Reamer are members of the Audit
Committee of the Board of Trustees of the Trust. Each member is independent of
the Trust, as defined by New York Stock Exchange Listing Standards. The Audit
Committee's functions include making recommendations to the Board regarding the
selection of the independent certified public accountants, and reviewing matters
relative to trading and brokerage policies and practices, accounting and
auditing practices and procedures, accounting records, internal accounting
controls, and the functions performed by the custodian, transfer agent and
dividend disbursing agent of the Trust.
Trustees of the Trust who are not affiliated with the Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with the
terms of a Trustees Deferred Compensation Plan (the "Trustees' Plan"). Under the
Trustees' Plan, an eligible Trustee may elect to have his deferred fees invested
by the Trust in the shares of one or more funds in the Eaton Vance Family of
Funds, and the amount paid to the Trustees under the Trustees' Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Trustees' Plan will have a negligible effect on the
Trust's assets, liabilities, and net income per share, and will not obligate the
Trust to retain the services of any Trustee or obligate the Trust to pay any
particular level of compensation to the Trustee. The Trust does not have a
retirement plan for its Trustees.
Each interested Trustee and officer holds comparable positions with certain
affiliates of Eaton Vance or with certain other funds of which Eaton Vance or
BMR is the investment adviser or distributor.
The fees and expenses of the noninterested Trustees of the Trust are paid
by the Trust. (The Trustees of the Trust who are members of the Eaton Vance
organization receive no compensation from the Trust.) During the fiscal year
ended June 30, 2000, the noninterested Trustees of the Trust earned the
following compensation in their capacities as Trustees of the Trust, and for the
year ended December 31, 2000 earned the following compensation in their
capacities as Trustees of the funds in the Eaton Vance fund complex(1).
Total Compensation
Compensation from Trust and
Name From Trust Fund Complex
---- ---------- ------------
Jessica M. Bibliowicz...................... $ -- $160,000
Donald R. Dwight........................... 1,737 162,500(2)
Samuel L. Hayes, III....................... 2,084 170,000
Norton H. Reamer........................... 1,083 160,000
Lynn A. Stout 1,950 160,000(3)
Jack L. Treynor............................ 1,977 170,000
8
----------
(1) As of April 15, 2001 the Eaton Vance fund complex consists of 155
registered investment companies or series thereof.
(2) Includes $60,000 of deferred compensation.
(3) Includes $16,000 of deferred compensation.
INVESTMENT ADVISORY AND OTHER SERVICES
The Trust will be responsible for all of its costs and expenses not
expressly stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to be borne by the Trust
include, without limitation: custody and transfer agency fees and expenses,
including those incurred for determining net asset value and keeping accounting
books and records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; expenses of
acquiring, holding and disposing of securities and other investments; fees and
expenses of registering under the securities laws, stock exchange listing fees
and governmental fees; expenses of reports to shareholders, proxy statements and
other expenses of shareholders' meetings; insurance premiums; printing and
mailing expenses; interest, taxes and corporate fees; legal and accounting
expenses; compensation and expenses of Trustees not affiliated with Eaton Vance;
expenses of conducting repurchase offers for the purpose of repurchasing Trust
shares; and investment advisory and administration fees. The Trust will also
bear expenses incurred in connection with any litigation in which the Trust is a
party and any legal obligation to indemnify its officers and Trustees with
respect thereto, to the extent not covered by insurance.
For the six months ended December 31, 2000 and for the fiscal year ended
June 30, 2000, the Trust paid the Adviser advisory fees aggregating $2,035,665
and $4,236,411, respectively, equivalent to 0.85% (annualized), and 0.85%,
respectively, of the Trust's average daily gross assets. As of December 31,
2000, the gross assets of the Trust were $________________. For the period from
October 30, 1998 (start of business) to June 30, 1999, the Trust paid the
Adviser advisory fees aggregating $2,747,986, equivalent to 0.85% (annualized)
of the Trust's average daily gross assets. To enhance the net income of the
Trust, the Adviser reduced its advisory fee in the amount of $579,350.
For the six months ended December 31, 2000 and for the fiscal year ended
June 30, 2000, the Trust paid Eaton Vance administration fees aggregating
$598,671 and $1,246,003, respectively, equivalent to 0.25% (annualized), and
0.25%, respectively, of the Trust's average daily gross assets. For the period
from October 30, 1998 (start of business) to June 30, 1999, the Trust paid Eaton
Vance administration fees aggregating $806,604, equivalent to 0.25% (annualized)
of the Trust's average daily gross assets. To enhance the net income of the
Trust, Eaton Vance reduced its administration fee in the amount of $173,333.
For the six months ended December 31, 2000, the fiscal year ended June 30,
2000, and for the period from the start of business, October 30, 1998 to June
30, 1999, Eaton Vance Distributors, Inc., made payments to UBS Warburg LLC under
the Shareholder Servicing Agreement for the common shares of the Trust in the
amount of $236,939, $498,401 and $254,719, respectively.
The Advisory Agreement with the Adviser continues in effect to March ___,
2002 and from year to year so long as such continuance is approved at least
annually (i) by the vote of a majority of the noninterested Trustees of the
Trust or of the Adviser cast in person at a meeting specifically called for the
purpose of voting on such approval and (ii) by the Board of Trustees of the
Trust or by vote of a majority of the outstanding interests of the Trust. The
Trust's Administration Agreement continues in effect from year to year so long
as such continuance is approved at least annually by the vote of a majority of
the Trust's Trustees. Each agreement may be terminated at any time without
penalty on sixty (60) days' written notice by the Trustees of the Trust or Eaton
Vance, as applicable, or by vote of the majority of the outstanding shares of
the Trust. Each agreement will terminate automatically in the event of its
assignment. Each agreement provides that, in the absence of willful misfeasance,
bad faith, gross negligence or reckless disregard of its obligations or duties
9
to the Trust under such agreements on the part of Eaton Vance, Eaton Vance shall
not be liable to the Trust for any loss incurred, to the extent not covered by
insurance.
INFORMATION ABOUT BMR AND EATON VANCE. BMR and Eaton Vance are business
trusts organized under Massachusetts law. Eaton Vance, Inc. ("EV") serves as
trustee of BMR and Eaton Vance. EV is a wholly-owned subsidiary of Eaton Vance
Corporation ("EVC"), a Maryland corporation and publicly-held holding company.
EVC through its subsidiaries and affiliates engages primarily in investment
management, administration and marketing activities. The Directors of EVC are
James B. Hawkes, John G.L. Cabot, Leo I. Higdon, Jr., John M. Nelson, Vincent M.
O'Reilly and Ralph Z. Sorenson. All of the issued and outstanding shares of BMR
are owned by Eaton Vance and all of the shares of Eaton Vance are owned by Eaton
Vance Business Trust, which is owned by EVC. All shares of the outstanding
Voting Common Stock of EVC are deposited in a Voting Trust, the Voting Trustees
of which are Messrs. Hawkes, Jeffrey P. Beale, Alan R. Dynner, Thomas E. Faust,
Jr., Thomas J. Fetter, Scott H. Page, Duncan W. Richardson, William M. Steul,
Payson F. Swaffield, Michael W. Weilheimer and Wharton P. Whitaker (all of whom
are officers of Eaton Vance.) The Voting Trustees have unrestricted voting
rights for the election of Directors of EVC. All of the outstanding voting trust
receipts issued under said Voting Trust are owned by certain of the officers of
BMR and Eaton Vance who are also officers, or officers and Directors of EVC and
EV. As indicated under "Trustees and Officers", all of the officers of the Trust
(as well as Mr. Hawkes who is also a Trustee) hold positions in the Eaton Vance
organization.
CODE OF ETHICS. The Adviser and Trust have adopted Codes of Ethics
governing personal securities transactions. Under the Codes, Eaton Vance
employees may purchase and sell securities (including securities held by the
Trust) subject to certain pre-clearance and reporting requirements and other
procedures.
EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Trust, IBT.
It is Eaton Vance's opinion that the terms and conditions of such transactions
were not and will not be influenced by existing or potential custodial or other
relationships between the Trust and such banks.
DETERMINATION OF NET ASSET VALUE
The net asset value per Share of the Trust is determined no less frequently
than weekly, generally on the last day of the week that the New York Stock
Exchange (the "Exchange") is open for trading, as of the close of regular
trading on the Exchange (normally 4:00 p.m. New York time). The Trust's net
asset value per Share is determined by IBT, in the manner authorized by the
Trustees of the Trust. Net asset value is computed by dividing the value of the
Trust's total assets, less its liabilities by the number of shares outstanding.
The Trustees have approved and monitor the procedures under which Senior
Loans are valued. The Adviser and the Valuation Committee may implement new
pricing methodologies or expand mark-to-market valuation of Senior Loans in the
future, which may result in a change in the Trust's net asset value per share.
The Trust's net asset value per share will also be affected by fair value
pricing decisions and by changes in the market for Senior Loans. In determining
the fair value of a Senior Loan, the Adviser will consider relevant factors,
data, and information, including: (i) the characteristics of and fundamental
analytical data relating to the Senior Loan, including the cost, size, current
rate, period until next interest rate reset, maturity and base lending rate of
the Senior Loan, the terms and conditions of the Senior Loan and any related
agreements, and the position of the Senior Loan in the Borrower's debt
structure; (ii) the nature, adequacy and value of the collateral, including the
Trust's rights, remedies and interests with respect to the collateral; (iii) the
creditworthiness of the Borrower, based on an evaluation of its financial
condition, financial statements and information about the Borrower's business,
cash flows, capital structure and future prospects; (iv) information relating to
the market for the Senior Loan, including price quotations for and trading in
the Senior Loan and interests in similar Senior Loans and the market environment
and investor attitudes towards the Senior Loan and interests in similar Senior
Loans; (v) the experience, reputation, stability and financial condition of the
10
Agent and any intermediate participants in the Senior Loan; and (vi) general
economic and market conditions affecting the fair value of the Senior Loan.
Non-loan holdings (other than short term obligations, but including listed
issues) may be valued on the basis of prices furnished by one or more pricing
services which determine prices for normal, institutional-size trading units of
such securities using market information, transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders. In certain circumstances, portfolio securities will be
valued at the last sale price on the exchange that is the primary market for
such securities, or the average of the last quoted bid price and asked price for
those securities for which the over-the- counter market is the primary market or
for listed securities in which there were no sales during the day. The value of
interest rate swaps will be based upon a dealer quotation.
Short-term obligations which mature in 60 days or less are valued at
amortized cost, if their original term to maturity when acquired by the Trust
was 60 days or less, or are valued at amortized cost using their value on the
61st day prior to maturity, if their original term to maturity when acquired by
the Trust was more than 60 days, unless in each case this is determined not to
represent fair value. Repurchase agreements will be valued by the Trust at cost
plus accrued interest. Securities for which there exist no price quotations or
valuations and all other assets are valued at fair value as determined in good
faith by or on behalf of the Trustees of the Trust.
PORTFOLIO TRADING
Specific decisions to purchase or sell securities for the Trust are made by
employees of the Adviser who are appointed and supervised by its senior
officers. Such employees may serve other clients of the Adviser in a similar
capacity. Changes in the Trust's investments are reviewed by the Board.
The Trust will acquire Senior Loans from major international banks,
selected domestic regional banks, insurance companies, finance companies and
other financial institutions. In selecting financial institutions from which
Senior Loans may be acquired, the Adviser will consider, among other factors,
the financial strength, professional ability, level of service and research
capability of the institution. While these financial institutions are generally
not required to repurchase Senior Loans which they have sold, they may act as
principal or on an agency basis in connection with their sale by the Trust.
Other fixed-income obligations which may be purchased and sold by the Trust
are generally traded in the over-the-counter market on a net basis (i.e.,
without commission) through broker-dealers or banks acting for their own account
rather than as brokers, or otherwise involve transactions directly with the
issuers of such obligations. The Trust may also purchase fixed-income and other
securities from underwriters, the cost of which may include undisclosed fees and
concessions to the underwriters. While it is anticipated that the Trust will not
pay significant brokerage commissions, on occasion it may be necessary or
desirable to purchase or sell a security through a broker on an agency basis, in
which case the Trust will incur a brokerage commission. Although spreads or
commissions on portfolio transactions will, in the judgment of the Adviser, be
reasonable in relation to the value of the services provided, spreads or
commissions exceeding those which another firm might charge may be paid to firms
who were selected to execute transactions on behalf of the Trust and the
Adviser's other clients for providing brokerage and research services to the
Adviser.
Securities considered as investments for the Trust may also be appropriate
for other investment accounts managed by the Adviser or its affiliates. Whenever
decisions are made to buy or sell securities by the Trust and one or more of
such other accounts simultaneously, the Adviser will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Trust will not participate in a transaction that is
11
allocated among other accounts. If an aggregated order cannot be filled
completely, allocations may be made on a pro rata basis. An order may not be
allocated on a pro rata basis where, for example: (i) consideration is given to
portfolio managers who have been instrumental in developing or negotiating a
particular investment; (ii) consideration is given to an account with
specialized investment policies that coincide with the particulars of a specific
investment; (iii) pro rata allocation would result in odd-lot or de minimis
amounts being allocated to a portfolio or other client; or (iv) where the
Adviser reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Trust from time to time, it is the opinion of the Trustees of the Trust that the
benefits from the Adviser organization outweigh any disadvantage that may arise
from exposure to simultaneous transactions.
For the fiscal years ended through December 31, 2000, the Trust had paid no
brokerage commissions.
The frequency of portfolio purchases and sales, known as the "turnover
rate," will vary from year to year. The Trust's turnover rate for the fiscal
years ended June 30, 2000 and 1999 were 63% and 27%, respectively.
TAXES
The following discussion is for general information purposes only.
Prospective investors should consult their tax advisors regarding the specific
federal income tax consequences of purchasing, holding and disposing of
Preferred Shares, as well as the effects of state, local and foreign tax laws
and any proposed tax law changes.
The Trust has elected to be, and intends to qualify each year for treatment
as a regulated investment company ("RIC"), under the Internal Revenue Code of
1986, as amended (the "Code"), in order to reduce or eliminate federal income
tax. Accordingly, the Trust intends to satisfy certain requirements relating to
sources of its income and diversification of its assets and to distribute a
sufficient amount of its investment company taxable income so as to effect such
qualification.
Dividends and other distributions declared by the Trust in October,
November or December of any year and payable to Shareholders of record on a date
in any of those months will be deemed to have been paid by the Trust and
received by the Shareholders on December 31st of that year if the distributions
are paid by the Trust during January of the following year. Accordingly, those
distributions will be taxed to Shareholders for the year in which that December
31st falls.
To avoid a non-deductible 4% federal excise tax, the Trust must distribute
to its Shareholders by the end of each calendar year substantially all of its
ordinary income and capital gain net income, plus certain other amounts. Under
current law, provided that the Trust qualifies as a RIC, it should not be liable
for any income, corporate excise or franchise tax in the Commonwealth of
Massachusetts.
Income and gains from investments in securities of foreign issuers may be
subject to foreign income, withholding or other taxes, which may reduce the
Trust's yield and/or total return. Tax conventions between certain countries and
the United States may reduce or eliminate these foreign taxes. Shareholders will
not be able to claim any foreign tax credit or deduction with respect to these
foreign taxes.
Certain investments of the Trust may bear original issue discount or market
discount for tax purposes. The Trust will be required to include in income each
year a portion of such original issue discount and may elect to include in
income each year a portion of such market discount. In addition, the Trust may
be required to include in income each year, for federal income tax purposes,
income with respect to these or other investments even though the collectibility
by the Trust of cash payments corresponding to such income is doubtful. The
Trust may have to dispose of investments that it would otherwise have continued
to hold to provide cash to enable it to satisfy its distribution requirements
with respect to such income.
12
Some of the Trust's investment practices (including those involving certain
risk management transactions) may be subject to special provisions of the Code
that, among other things, may defer the Trust's deduction of certain losses and
affect the holding period of certain securities it holds and the character of
certain gains or losses it realizes. These provisions may also require the Trust
to recognize income or gain without receiving cash with which to make
distributions in the amounts necessary to satisfy the distribution requirements
for avoiding income and excise taxes. The Trust will monitor its transactions
and may make certain tax elections to mitigate the effect of these rules and
prevent its disqualification as a RIC.
The Trust will designate distributions made to holders of common shares and
to holders of Preferred Shares, including the Preferred Shares, in accordance
with each class's proportionate share of each item of Trust income (such as
tax-exempt interest, net capital gains and other taxable income).
On a sale or exchange of Preferred Shares, the holder will recognize
taxable gain or loss equal to the difference between the holder's adjusted basis
for the Preferred Shares and the amount realized. Any such gain or loss will be
treated as capital gain or loss if the Preferred Shares are capital assets in
the holder's hands and as long-term capital gain or loss if the Preferred Shares
are held for more than one year. Any loss realized on the sale or exchange of
Preferred Shares held by a Shareholder for six months or less will be disallowed
to the extent the shareholder has received exempt-interest dividends with
respect to those Preferred Shares, and any such loss that exceeds the disallowed
amount will be treated as a long-term capital loss to the extent of any
distribution of net capital gain with respect to those Preferred Shares. In
addition, a loss realized on a sale of Preferred Shares will be disallowed to
the extent the Shareholder acquires other Preferred Shares within the period
beginning 30 days before, and ending 30 days after, the sale.
Investment in Preferred Shares is not appropriate for non-U.S. investors or
as a retirement plan investment.
OTHER INFORMATION
The Trust is an organization of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may, in
certain circumstances, be held personally liable as partners for the obligations
of the trust. The Declaration of Trust contains an express disclaimer of
shareholder liability in connection with the Trust property or the acts,
obligations or affairs of the Trust. The Declaration of Trust also provides for
indemnification out of the Trust property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason 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 the Trust itself is unable to meet its obligations. The
Trust believes the risk of any shareholder (including any Preferred Shareholder)
incurring any liability for the obligations of the Trust is remote.
The Declaration of Trust provides that the Trustees will not be liable for
errors of judgment or mistakes of fact or law; but nothing in the Declaration of
Trust protects a Trustee against any liability to the Trust or its shareholders
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. Voting rights are not cumulative, which means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees and, in such event, the holders of the remaining less
than 50% of the shares voting on the matter will not be able to elect any
Trustees.
The Declaration of Trust provides that no person shall serve as a Trustee
if shareholders holding two-thirds of the outstanding shares have removed him
from that office either by a written declaration filed with the Trust's
custodian or by votes cast at a meeting called for that purpose. The Declaration
of Trust further provides that the Trustees of the Trust shall promptly call a
meeting of the shareholders for the purpose of voting upon a question of removal
of any such Trustee or Trustees when requested in writing so to do by the record
holders of not less than 10 per centum of the outstanding shares.
13
The Trust's Prospectus and Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Fund has filed with the SEC. The complete Registration Statement may be obtained
from the SEC upon payment of the fee prescribed by its Rules and Regulations.
AUDITORS
Deloitte & Touche LLP, 200 Berkeley Street, Boston, Massachusetts, are the
independent accountants for the Trust, providing audit services, tax return
preparation, and assistance and consultation with respect to the preparation of
filings with the SEC.
FINANCIAL STATEMENTS
The audited financial statements of, and the independent auditors' reports
for, the Trust appear in the Trust's most recent annual and semiannual reports
to shareholders and are incorporated by reference into this Statement of
Additional Information. A copy of the annual and semiannual reports accompanies
this Statement of Additional Information.
HOUSEHOLDING. Consistent with applicable law, duplicate mailings of
shareholder reports and certain other Trust information to shareholders residing
at the same address may be eliminated.
Registrant incorporates by reference the audited financial information for
the Trust for the six months ended December 31, 2000 and for the fiscal year
ended June 30, 2000, as previously filed electronically with the SEC (Accession
No. 0000950156-01-000120 and 0000950156-01-000423), respectively.
14
APPENDIX A
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
GENERAL
The By-laws provides that the Applicable Rate for each Dividend Period of
shares of each series shall be equal to the rate per annum that the Auction
Agent advises has resulted on the Business Day preceding the first day of a
Dividend Period for each such series (an "Auction Date") from implementation of
the Auction Procedures set forth in the By-laws and summarized below, in which
persons determine to hold or offer to sell or, based on dividend rates bid by
them, offer to purchase or sell shares of such series. Each periodic
implementation of the Auction Procedures is referred to herein as an "Auction."
The following summary is qualified by reference to the Auction Procedures set
forth in the By-laws.
AUCTION AGENCY AGREEMENT. The Trust has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company), which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for shares of each series of Preferred Shares so long as the
Applicable Rate for shares of such series is to be based on the results of the
Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Trust, which provides for the participation of those
Broker-Dealers in Auctions for shares of a series of Preferred Shares. See
"Broker-Dealers" below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act as the
Securities Depository for the Agent Members with respect to shares of each
series of Preferred Shares. One certificate for all of the shares of each series
of Preferred Shares will be registered in the name of Cede & Co., as nominee of
the Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting transfers
of Preferred Shares contained in the By-laws. The Trust will also issue
stop-transfer instructions to the transfer agent for shares of each series of
Preferred Shares. Prior to the commencement of the right of Holders of Preferred
Shares to elect a majority of the Trust's Trustees, as described under
"Description of Preferred Shares-Voting Rights" in the Prospectus, Cede & Co.
will be the Holder of all shares of each series of Preferred Shares and owners
of such shares will not be entitled to receive certificates representing their
ownership interest in such shares.
DTC, a New York chartered limited purpose trust company, performs services
for its participants (including Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each such Agent Member in
shares of each series of Preferred Shares, whether for its own account or as a
nominee for another person.
ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS
On or prior to the Submission Deadline on each Auction Date for shares of a
series of Preferred Shares:
(a) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise a:
(i) "Hold Order" -- indicating the number of Outstanding shares, if
any, of such series that such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for such
shares of such series for the next succeeding Rate Period of such
shares;
A-1
(ii) "Bid" -- indicating the number of Outstanding shares, if any, of
such series that such Beneficial Owner offers to sell if the
Applicable Rate for such shares of such series for the next
succeeding Rate Period shall be less than the rate per annum
specified by such Beneficial Owner in such Bid; and/or
(iii)"Sell Order" -- indicating the number of Outstanding shares, if
any, of such that such Beneficial Owner offers to sell without
regard to the Applicable Rate for such shares of such series for
the next succeeding Rate Period; and
(b) Broker-Dealers shall contact customers who are Potential Beneficial
Owners by telephone or otherwise to determine whether such customers
desire to submit Bids, in which they will indicate the number of
shares, if any, of such series that they offer to purchase if the
Applicable Rate for shares of such series for the next succeeding Rate
Period is not less than the rate per annum specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer is herein
referred to as a "Bidder" and collectively as "Bidders." The submission by a
Broker-Dealer of an Order to the Auction Agent shall likewise be referred to
herein as an "Order" and collectively as "Orders," and an Existing Holder or
Potential Holder who places an Order with the Auction Agent or on whose behalf
an Order is placed with the Auction Agent shall likewise be referred to herein
as a "Bidder" and collectively as "Bidders."
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares then held
by such Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate
higher than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on
the Auction Date thereof will be treated as having submitted a Sell Order to its
Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of such series an Order or Orders
covering all the Outstanding shares of such series held by such Beneficial Owner
will be deemed to have submitted a Hold Order to its Broker-Dealer covering the
number of Outstanding shares of such series held by such Beneficial Owner and
not subject to Orders submitted to its Broker-Dealer; provided, however, that if
a Beneficial Owner fails to submit to its Broker-Dealer prior to the Submission
Deadline for shares of a series of Preferred Shares an Order or Orders covering
all of the Outstanding shares of such series held by such Beneficial Owner for
an Auction relating to a Special Rate Period consisting of more than 7 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order
to its Broker-Dealer covering the number of Outstanding shares of such series
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the
shares of such series of Preferred Shares subject thereto at a price per share
equal to $25,000. A Beneficial Owner of shares of a series of Preferred Shares
that offers to become the Beneficial Owner of additional shares of such series
of Preferred Shares is, for purposes of such offer, a Potential Beneficial
Owner.
A Potential Beneficial Owner of shares of a series of Preferred Shares may
submit to its Broker-Dealer Bids in which it offers to purchase shares of a
series if the Applicable Rate for the next Rate Period is not less than the rate
specified in such Bid. A Bid placed by a Potential Beneficial Owner specifying a
rate not higher than the Maximum Rate shall constitute an irrevocable offer to
purchase the number of shares of a series of Preferred Shares specified in such
Bid if the rate determined in the Auction is equal to or greater than the rate
specified in such Bid.
As described more fully below under "--Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of
their respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves (unless otherwise permitted
by the Trust) as Existing Holders in respect of shares of such series of
A-2
Preferred Shares subject to Orders submitted or deemed submitted to them by
Beneficial Owners and as Potential Holders in respect of shares of such series
subject to Orders submitted to them by Potential Beneficial Owners. However,
neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as
described in the preceding paragraph. Similarly, any failure by a Broker-Dealer
to submit to the Auction Agent an Order in respect of any shares of a series of
Preferred Shares held by it or its customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of shares of a series of Preferred Shares held
by it, as described in the second preceding paragraph. For information
concerning the priority given to different types of Orders placed by Existing
Holders, see "--Submission of Orders by Broker-Dealers to Auction Agent" below.
Neither the Trust nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Trust may submit
Orders in an Auction, but only if such Orders are not for its own account.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of Preferred
Share that is fewer than the number of shares of such series specified in its
Order. See "--Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as Existing
Holders or Potential Holders in respect of customer Orders will be required to
make appropriate pro rata allocations among their respective customers. Each
purchase or sale shall be made for settlement on the Business Day next
succeeding the Auction Date at a price per share equal to $25,000. See
"--Notification of Results; Settlement" below.
As described above, any Bid specifying a rate higher than the Maximum Rate
will (i) be treated as a Sell Order if submitted by a Beneficial Owner or an
Existing Holder and (ii) not be accepted if submitted by a Potential Beneficial
Owner or a Potential Holder. Accordingly, the Auction Procedures establish the
Maximum Rate as a maximum rate per annum that can result from an Auction. See
"--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and "--Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of a series of Preferred Shares, the Auction Agent's
registry of Existing Holders, the results of Auctions and notices from any
Broker-Dealer (or other person, if permitted by the Trust) with respect to
transfers described under "The Auction-Secondary Market Trading and Transfer of
Preferred Shares" in the Prospectus and notices from the Trust. The Auction
Agent is not required to accept any such notice for an Auction unless it is
received by the Auction Agent by 3:00 p.m., New York City time, on the Business
Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Trust on a date no earlier than 60 days after such notice. If the Auction
Agent should resign, the Trust 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 Trust may remove the Auction
Agent, provided that prior to such removal, the Trust shall have entered into
such an agreement with a successor Auction Agent.
A-3
BROKER-DEALERS
The Auction Agent after each Auction for shares of a series of Preferred
Shares will pay to each Broker-Dealer, from funds provided by the Trust, a
service charge at the annual rate of 1/4 of 1% in the case of any Auction
immediately preceding a Dividend Period of less than one year, or a percentage
agreed to by the Trust and the Broker-Dealers in the case of any Auction
immediately preceding a Dividend Period of one year or longer, of the purchase
price of shares of such series of Preferred Shares placed by such Broker-Dealer
at such Auction. For the purposes of the preceding sentence, shares of a series
of Preferred Shares will be placed by a Broker-Dealer if such shares were (a)
the subject of Hold Orders deemed to have been submitted to the Auction Agent by
the Broker-Dealer and were acquired by such Broker-Dealer for its customers who
are Beneficial Owners or (b) the subject of an Order submitted by such
Broker-Dealer that is (i) a Submitted Bid of an Existing Holder that resulted in
such Existing Holder continuing to hold such shares as a result of the Auction
or (ii) a Submitted Bid of a Potential Holder that resulted in such Potential
Holder purchasing such shares as a result of the Auction or (iii) a valid Hold
Order.
The Trust may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than an
affiliate of the Trust) may submit Orders in Auctions for its own account,
unless the Trust notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Trust may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have knowledge of all
Orders submitted by it in that Auction. Such Broker-Dealer, however, would not
have knowledge of Orders submitted by other Broker-Dealers in that Auction.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:00 P.M., New York City time, on each Auction Date, or such other
time on the Auction Date specified by the Auction Agent (i.e., the Submission
Deadline), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) as the Existing
Holder or Potential Holder, as the case may be, in respect of the shares of a
series of Preferred Shares subject to such Orders. Any Order submitted by a
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (0.001) of 1%.
If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Preferred
Shares of a series subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(a) all Hold Orders for shares of such series will be considered valid,
but only up to and including in the aggregate the number of
Outstanding shares of such series held by such Existing Holder, and,
if the number of shares of such series subject to such Hold Orders
exceeds the number of Outstanding shares of such series held by such
Existing Holder, the number of shares subject to each such Hold Order
shall be reduced pro rata to cover the number of Outstanding shares
held by such Existing Holder;
A-4
(b) (i) any Bid for shares of such series will be considered valid up to
and including the excess of the number of shares of Outstanding
shares of such series held by such Existing Holder over the
number of shares of such series subject to any Hold Orders
referred to in clause (a) above;
(ii) subject to subclause (i), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction
Agent with the same rate and the number of Outstanding shares of
such series subject to such Bids is greater than such excess,
such Bids will be considered valid up to and including the amount
of such excess, and the number of shares of such series subject
to each Bid with the same rate will be reduced pro rata to cover
the number of shares of such series equal to such excess;
(iii)subject to subclauses (i) and (ii), if more than one Bid of an
Existing Holder for shares of such series is submitted to the
Auction Agent with different rates, such Bids shall be considered
valid in the ascending order of their respective rates up to and
including the amount of such excess; and
(iv) in any such event, the number, if any, of such Outstanding shares
of such series subject to any portion of Bids considered not
valid in whole or in part under this clause (b) will be treated
as the subject of a Bid for shares of such series by or on behalf
of a Potential Holder at the rate specified therein; and
(c) all Sell Orders for shares of such series will be considered valid up
to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum of shares of
such series subject to valid Hold Orders referred to in clause (a)
above and valid Bids referred to in clause (b) above.
If more than one Bid of a Potential Holder for shares of a series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted will be a separate Bid with the rate
and number of shares of such series therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE
Not earlier than the Submission Deadline on each Auction Date for shares of
a series of Preferred Shares, the Auction Agent will assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers (each such Hold Order,
Bid or Sell Order as submitted or deemed submitted by a Broker-Dealer being
herein referred to as a "Submitted Hold Order," a "Submitted Bid" or a
"Submitted Sell Order," as the case may be, or as a "Submitted Order" and
collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell
Orders," as the case may be, or as "Submitted Orders") and will determine the
excess of the number of Outstanding shares of such series over the number of
Outstanding shares of such series subject to Submitted Hold Orders (such excess
being herein referred to as the "Available Preferred Shares") and whether
Sufficient Clearing Bids have been made in the Auction. "Sufficient Clearing
Bids" will have been made if the number of Outstanding shares of such series
that are the subject of Submitted Bids of Potential Holders specifying rates not
higher than the Maximum Rate for all Dividend Periods equals or exceeds the
number of outstanding shares of such series that are the subject of Submitted
Sell Orders (including the number of shares of such series subject to Bids of
Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids for shares of a series of Preferred Shares have
been made, the Auction Agent will determine the lowest rate specified in such
Submitted Bids (the "Winning Bid Rate" for shares of such series) which, taking
into account the rates in the Submitted Bids of Existing Holders, would result
in Existing Holders continuing to hold an aggregate number of Outstanding shares
of such series which, when added to the number of outstanding shares of such
series to be purchased by Potential Holders, based on the rates in their
Submitted Bids, would equal not less than the Available Preferred Shares. In
such event, the Winning Bid Rate will be the Applicable Rate for the next Rate
Period for all shares of such series.
A-5
If Sufficient Clearing Bids have not been made (other than because all of
the outstanding shares of a series of Preferred Shares are subject to Submitted
Hold Orders), the Applicable Rate for the next Dividend Period for all shares of
such series will be equal to the Maximum Rate. If Sufficient Clearing Bids have
not been made, Beneficial Owners that have submitted or that are deemed to have
submitted Sell Orders may not be able to sell in the Auction all shares of such
series subject to such Sell Orders but will continue to own shares of such
series for the next Dividend Period. "--Acceptance and Rejection of Submitted
Bids and Submitted Sell Orders and Allocation of Shares" below.
If all of the outstanding shares of a series of Preferred Shares are
subject to Submitted Hold Orders, the Applicable Rate for all shares of such
series for the next succeeding Dividend Period shall be the All Hold Rate.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES
Based on the determinations made under "--Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of shares of a series of
Preferred Shares will sell, continue to hold and/or purchase such shares as set
forth below. Existing Holders that submitted or were deemed to have submitted
Hold Orders (or on whose behalf Hold Orders were submitted or deemed to have
been submitted) will continue to hold the shares of such series subject to such
Hold Orders.
If Sufficient Clearing Bids for shares of a series of Preferred Shares have
been made:
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Sell Order or Submitted Bid specifying any rate higher than
the Winning Bid Rate will sell the outstanding shares of such series
subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
continue to hold the Outstanding shares of such series subject to such
Submitted Bid;
(c) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate lower than the Winning Bid Rate will
purchase the number of outstanding shares of such series subject to
such Submitted Bid;
(d) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate will
continue to hold the shares of such series subject to such Submitted
Bid, unless the number of Outstanding Preferred Shares of such series
subject to all such Submitted Bids is greater than the number of
Preferred Shares ("remaining shares") in excess of the Available
Preferred Shares over the number of Preferred Shares accounted for in
clauses (b) and (c) above, in which event each Existing Holder with
such a Submitted Bid will continue to hold Preferred Shares of such
series subject to such Submitted Bid determined on a pro rata basis
based on the number of Outstanding Preferred Shares subject to all
such Submitted Bids of such Existing Holders; and
(e) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to the Winning Bid Rate for
shares of such series will purchase any shares of Available Preferred
Shares not accounted for in clauses (b) through (d) above on a pro
rata basis based on the Outstanding Preferred Shares subject to all
such Submitted Bids.
A-6
If Sufficient Clearing Bids for shares of a series of Preferred Shares have
not been made (unless this results because all Outstanding shares of such series
are subject to Submitted Hold Orders):
(a) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum
Rate for shares of such series will continue to hold the Preferred
Shares subject to such Submitted Bid;
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum
Rate for shares of such series will purchase the number of Preferred
Shares subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate for
shares of such series or a Submitted Sell Order will sell a number of
shares of such series subject to such Submitted Bid or Submitted Sell
Order determined on a pro rata basis based on the number of
Outstanding shares of such series subject to all such Submitted Bids
and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
Preferred Shares of a series, the Auction Agent will, in such manner as, in its
sole discretion, it will determine, round up or down to the nearest whole share
the number of Preferred Shares of such series being sold or purchased on such
Auction Date so that the number of shares of such series sold or purchased by
each Existing Holder or Potential Holder will be whole shares of such series. If
as a result of the pro rata allocation described in clause (e) of the second
preceding paragraph, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of Preferred Shares, the Auction
Agent will, in such manner as, in its sole discretion, it will determine,
allocate shares of such series for purchase among Potential Holders so that only
whole shares of such series are purchased by any such Potential Holder, even if
such allocation results in one or more of such Potential Holders not purchasing
shares of such series.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Dividend Period and, if
the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted
or rejected, in whole or in part, by telephone by approximately 3:00 P.M., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an Order
for the account of a customer will then be required to advise such customer of
the Applicable Rate for the next Dividend Period and, if such Order was a Bid or
a Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole
or in part, will be required to confirm purchases and sales with each customer
purchasing or selling shares of such series as a result of the Auction and will
be required to advise each customer purchasing or selling Preferred Shares as a
result of the Auction to give instructions to its Agent Member of the Securities
Depository to pay the purchase price against delivery of such shares or to
deliver such shares against payment therefor, as appropriate. The Auction Agent
will be required to record each transfer of shares of a series of Preferred
Shares on the registry of Existing Holders to be maintained by the Auction
Agent.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of a
series of Preferred Shares as determined in the Auction. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery through their Agent Members; the Securities
Depository will make payment in accordance with its normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
A-7
If any Existing Holder selling shares of a series of Preferred Shares in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased such shares in such Auction may deliver to such person a
number of whole shares of such series that is less than the number of shares of
such series that otherwise was to be purchased by such person. In such event,
the number of shares of such series to be so delivered shall be determined by
such Broker-Dealer. Delivery of such lesser number of shares of such series
shall constitute good delivery.
DESCRIPTION OF PREFERRED SHARES
The descriptions of the Preferred Shares contained in this SAI do not
purport to be complete and are subject to and qualified in their entireties by
reference to the Declaration of Trust and the By-laws. Copies of the Declaration
of Trust and the By-laws are filed as exhibits to the registration statement of
which the Prospectus and this SAI are a part and may be inspected, and copies
thereof may be obtained, as described under "Further Information" in the
Prospectus.
GENERAL
The Preferred Shares will rank on a parity with each other and with shares
of any other series of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust.
DIVIDENDS AND DIVIDEND PERIODS
GENERAL. Holders of Preferred Shares will be entitled to receive, when, as
and if declared by the Board of Trustees, out of funds legally available
therefor, cumulative cash dividends on their shares, at the Applicable Rate
determined as described under "--Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the Common
Shares.
On the Business Day next preceding each Dividend Payment Date, the Trust is
required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Trust does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid by the Paying Agent to the Holder, which Holder
is expected to be the nominee of the Securities Depository. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depository's normal procedures. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. The
Agent Member of a beneficial owner will be responsible for holding or disbursing
such payments on the applicable Dividend Payment Date to such beneficial owner
in accordance with the instructions of such beneficial owner.
Holders will not be entitled to any dividends, whether payable in cash,
property or shares, in excess of full cumulative dividends except as described
under "--Determination of Dividend Rate." No interest will be payable in respect
of any dividend payment or payments which may be in arrears. See "--Default
Period."
The amount of dividends per outstanding share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
A-8
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) such share was outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by the liquidation value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
(or in respect of dividends on another date in connection with a redemption
during such Dividend Period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year consisting of
twelve 30-day months.
DETERMINATION OF DIVIDEND RATE. The dividend rate for the initial Dividend
Period (i.e. the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date for each Series
are set forth on the cover page of the Prospectus. For each subsequent Dividend
Period, subject to certain exceptions, the dividend rate will be the Applicable
Rate that the Auction Agent advises the Trust has resulted from an Auction.
Dividend Periods after the initial Dividend Period shall either be Standard
Rate Periods (generally 7 days) or, subject to certain conditions and with
notice to Holders, Special Rate Periods.
A Special Rate Period will not be effective unless Sufficient Clearing Bids
exist at the Auction in respect of such Special Rate Period (that is, in
general, the number of shares subject to Bids by Potential Beneficial Owners is
at least equal to the number of shares subject to Sell Orders by Existing
Holders). If Sufficient Clearing Bids do not exist at any Auction in respect of
a Special Rate Period, the Dividend Period commencing on the Business Day
succeeding such Auction will be the Standard Rate Period, and the Holders of the
shares of the affected series will be required to continue to hold such shares
for such Standard Rate Period.
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. Dividends
will be paid through the Securities Depository on each Dividend Payment Date.
The Applicable Rate resulting from an Auction will not be greater than the
Maximum Rate. The Maximum Rate is subject to upward but not downward adjustment
in the discretion of the Board of Trustees after consultation with the
Broker-Dealers, provided that immediately following any such increase the Trust
would be in compliance with the Preferred Shares Basic Maintenance Amount.
The Maximum Rate for the Preferred Shares will apply automatically
following an Auction for such shares in which Sufficient Clearing Bids have not
been made (other than because all Preferred Shares were subject to Submitted
Hold Orders) or following the failure to hold an Auction for any reason on the
Auction Date scheduled to occur (except for circumstances in which the Dividend
Rate is the Default Rate, as described below). The All Hold Rate will apply
automatically following an Auction in which all of the Outstanding Preferred
Shares for a particular Series are subject (or are deemed to be subject) to Hold
Orders.
Prior to each Auction, Broker-Dealers will notify Holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Trust. After each Auction, on the
Auction Date, Broker-Dealers will notify Holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
NOTIFICATION OF DIVIDEND PERIOD. The Trust will designate the duration of
Dividend Periods of the Preferred Shares; provided, however, that no such
designation is necessary for a Standard Rate Period and that any designation of
a Special Rate Period shall be effective only if (i) notice thereof shall have
been given as provided herein, (ii) any failure to pay in the timely manner to
the Auction Agent the full amount of any dividend on, or the redemption price
A-9
of, the Preferred Shares shall have been cured as set forth under "--Default
Period," (iii) Sufficient Clearing Bids shall have existed in an Auction held on
the Auction Date immediately preceding the first day of such proposed Special
Rate Period, (iv) if the Trust shall have mailed a notice of redemption with
respect to any shares, as described under "--Redemption," the Redemption Price
with respect to such shares shall have been deposited with the Paying Agent, and
(v) the Trust has confirmed that, as of the Auction Date next preceding the
first day of such Special Rate Period, it has Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
and has consulted with the Broker-Dealers and has provided notice and a
Preferred Shares Basic Maintenance Certificate to each Rating Agency which is
then rating the Preferred Shares and so requires.
If the Trust proposes to designate any Special Rate Period, not fewer than
7 Business Days (or two Business Days in the event the duration of the Special
Rate Period is fewer than 8 days) nor more than 30 Business Days prior to the
first day of such Special Rate Period, notice shall be (i) made by press release
and (ii) communicated by the Trust by telephonic or other means to the Auction
Agent and confirmed in writing promptly thereafter. Each such notice shall state
(A) that the Trust proposes to exercise its option to designate a succeeding
Special Rate Period, specifying the first and last days thereof and (B) that the
Trust will, by 3:00 p.m. New York City time, on the second Business Day next
preceding the first day of such Special Rate Period, notify the Auction Agent,
who will promptly notify the Broker-Dealers, of either (x) its determination,
subject to certain conditions, to proceed with such Special Rate Period, in
which case the Trust may specify the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Rate
Period in which latter event the succeeding Dividend Period shall be a Standard
Rate Period.
No later than 3:00 p.m., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period, the Trust
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Trust has determined to designate the
next succeeding Dividend Period as a Special Rate Period, specifying
the first and last days thereof and (B) the terms of the Specific
Redemption Provisions, if any; or
(ii) a notice stating that the Trust has determined not to exercise its
option to designate a Special Rate Period.
If the Trust fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period, the Trust shall be deemed to have delivered a notice to the
Auction Agent with respect to such Dividend Period to the effect set forth in
clause (ii) above, thereby resulting in a Standard Rate Period.
DEFAULT PERIOD. A "Default Period" with respect to a particular Series will
commence on any date the Trust fails to deposit irrevocably in trust in same-day
funds, with the Paying Agent by 12:00 noon, New York City time, (A) the full
amount of any declared dividend on that Series payable on the Dividend Payment
Date (a "Dividend Default") or (B) the full amount of any redemption price (the
"Redemption Price") payable on the date fixed for redemption (the "Redemption
Date") (a "Redemption Default") and, together with a Dividend Default and a
Redemption Default, hereinafter referred to as "Default").
A Default Period with respect to a Dividend Default or a Redemption Default
shall end on the Business Day on which, by 12:00 noon, New York City time, all
unpaid dividends and any unpaid Redemption Price shall have been deposited
irrevocably in trust in same-day funds with the Paying Agent.
In the case of a Dividend Default, no Auction will be held during a Default
Period applicable to that Series and the Applicable Rate for each Dividend
Period commencing during a Default Period, will be equal to the Default Rate.
A-10
Each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Rate Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Dividend
Period. No Auction shall be held during a Default Period applicable to that
Series.
No Default Period with respect to a Dividend Default or Redemption Default
shall be deemed to commence if the amount of any dividend or any Redemption
Price due (if such default is not solely due to the willful failure of the
Trust) is deposited irrevocably in trust, in same-day funds with the Paying
Agent by 12:00 noon, New York City time within three Business Days after the
applicable Dividend Payment Date or Redemption Date, together with an amount
equal to the Default Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 360. The Default Rate
shall be equal to the Reference Rate multiplied by three (3).
RESTRICTIONS ON DIVIDENDS, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Trust may not (i) declare any dividend with respect
to the Preferred Shares if, at the time of such declaration (and after giving
effect thereto), asset coverage with respect to the Trust's senior securities
representing indebtedness, including all outstanding senior indebtedness of the
Trust, including the Trust's obligations under any borrowing facility, would be
less than 200% (or such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring dividends on its preferred stock) or (ii) declare any other
distribution on the Preferred Shares or purchase or redeem Preferred Shares if
at the time of the declaration (and after giving effect thereto), asset coverage
with respect to the Trust's senior securities representing indebtedness would be
less than 300% (or such higher percentage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities
representing stock of a closed-end investment company as a condition of
declaring distributions, purchases or redemptions of its capital stock). A
declaration of a dividend or other distribution on or purchase or redemption of
Preferred Shares is prohibited unless there is no event of default under
indebtedness senior to the Preferred Shares, if any, and immediately after such
transaction, the Trust would have Eligible Assets with an aggregated Discounted
Value at least equal to the asset coverage requirements under indebtedness
senior to the Preferred Shares.
For so long as the Preferred Shares are Outstanding, except as otherwise
provided in the By-laws, the Trust will not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other shares, ranking junior to the Preferred
Shares as to dividends or upon liquidation) with respect to Common Shares or any
other shares of the Trust ranking junior to the Preferred Shares as to dividends
or upon liquidation, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or other shares ranking junior to
the Preferred Shares (except by conversion into or exchange for shares of the
Trust ranking junior to the Preferred Shares as to dividends and upon
liquidation), unless (i) immediately after such transaction, the Trust would
have Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount and the 1940 Act Preferred Shares
Asset Coverage would be achieved, (ii) all cumulative and unpaid dividends due
on or prior to the date of the transaction have been declared and paid in full
with respect to the Trust's Preferred Shares, including the Preferred Shares,
and (iii) the Trust has redeemed the full number of Preferred Shares required to
be redeemed by any mandatory provision for redemption including shares of the
Preferred Shares required to be redeemed by any provision for mandatory
redemption contained in the By-laws.
For so long as the Preferred Shares are Outstanding, except as set forth in
the next sentence, the Trust will not declare, pay or set apart for payment on
any series of shares of the Trust ranking, as to the payment of dividends, on a
parity with the Preferred Shares for any period unless full cumulative dividends
have been or contemporaneously are declared and paid on the Preferred Shares
through their most recent Dividend Payment Date. When dividends are not paid in
A-11
full upon the Preferred Shares through their most recent Dividend Payment Date
or upon any other series of shares ranking on a parity as to the payment of
dividends with Preferred Shares through their most recent respective Dividend
Payment Dates, all dividends declared upon Preferred Shares and any other such
series of shares ranking on a parity as to the payment of dividends with
Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on Preferred Shares and such other series of Preferred Shares
shall in all cases bear to each other the same ratio that accumulated dividends
per share on the Preferred Shares and such other series of Preferred Shares bear
to each other.
REDEMPTION
OPTIONAL REDEMPTION. To the extent permitted under the 1940 Act and
Massachusetts law, the Trust at its option may redeem Preferred Shares having a
Dividend Period of one year or less, in whole or in part, on the Dividend
Payment Date upon not less than 15 days' and not more than 40 days' prior
notice. The optional redemption price per share shall be $25,000 per share, plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) to the date fixed for redemption. Preferred Shares having a
Dividend Period of more than one year are redeemable at the option of the Trust,
in whole or in part, prior to the end of the relevant Dividend Period, subject
to any Specific Redemption Provisions, which may include the payment of
redemption premiums to the extent required under any applicable Specific
Redemption Provisions. The Trust shall not effect any optional redemption unless
after giving effect thereto (i) the Trust has available certain Deposit
Securities with maturity or tender dates not later than the day preceding the
applicable redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of Preferred Shares by reason
of the redemption of Preferred Shares on such date fixed for the redemption and
(ii) the Trust would have Eligible Assets with an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount.
MANDATORY REDEMPTION. If the Trust fails as of any Valuation Date to meet
the Preferred Shares Basic Maintenance Amount Test or, as of the last Business
Day of any month, the 1940 Act Preferred Shares Asset Coverage, and such failure
is not cured within five Business Days following the relevant Valuation Date in
the case of a failure to meet the Preferred Shares Basic Maintenance Amount Test
or the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an "Asset Coverage Cure
Date"), the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. The number of Preferred Shares to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares the redemption of which, if deemed to have occurred immediately
prior to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Trust meeting the Preferred Shares Basic Maintenance Amount Test,
and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in either
case as of the relevant Asset Coverage Cure Date (provided that, if there is no
such minimum number of shares the redemption of which would have such result,
all Preferred Shares then Outstanding will be redeemed), and (B) the maximum
number of Preferred Shares that can be redeemed out of funds expected to be
available therefor on the Mandatory Redemption Date at the Mandatory Redemption
Price.
Preferred Shares may be subject to mandatory redemption in accordance with
the foregoing redemption provisions notwithstanding the terms of any Specific
Redemption Provision.
The Trust shall effect any required mandatory redemption pursuant to: (A)
the Preferred Shares Basic Maintenance Amount Test, no later than 30 days after
the Trust last met the Preferred Shares Basic Maintenance Amount Test or (B) the
1940 Act Preferred Shares Asset Coverage, no later than 30 days after the Asset
Coverage Cure Date (the "Mandatory Redemption Date"), except that if the Trust
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of Preferred Shares
which are subject to mandatory redemption, or the Trust otherwise is unable to
effect such redemption on or prior to such Mandatory Redemption Date, the Trust
will redeem those Preferred Shares on the earliest practicable date on which the
Trust will have such funds available, upon notice to record owners of Preferred
Shares and the Paying Agent. The Trust's ability to make a mandatory redemption
may be limited by the provisions of the 1940 Act or Massachusetts law.
A-12
The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
plus (in the case of a Dividend Period of more than one year) any redemption
premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions
(the "Mandatory Redemption Price").
REDEMPTION PROCEDURE. Pursuant to Rule 23c-2 under the 1940 Act, the Trust
will file a notice of its intention to redeem with the SEC so as to provide at
least the minimum notice required by such Rule or any successor provision
(notice currently must be filed with the SEC generally at least 30 days prior to
the redemption date). The Auction Agent will use its reasonable efforts to
provide telephonic notice to each Holder of Preferred Shares called for
redemption not later than the close of business on the Business Day immediately
following the Business Day on which the Auction Agent determines the shares to
be redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives notice of redemption from the Trust). Such
telephonic notice will be confirmed promptly in writing not later than the close
of business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each Holder of Preferred Shares called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository ("Notice of Redemption"). Notice of Redemption will be
addressed to the registered owners of the Preferred Shares at their addresses
appearing on the share records of the Trust. Such notice will set forth (i) the
redemption date, (ii) the number and identity of Preferred Shares to be
redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such redemption date, and (v) the provision
under which redemption shall be made.
If fewer than all of the shares of a series of Preferred Shares are
redeemed on any date, the shares to be redeemed on such date will be selected by
the Trust on a pro rata basis in proportion to the number of shares held by such
Holders, by lot or by such other method as is determined by the Trust to be fair
and equitable, subject to the terms of any Specific Redemption Provisions.
Preferred Shares may be subject to mandatory redemption as described herein
notwithstanding the terms of any Specific Redemption Provisions. The Auction
Agent will give notice to the Securities Depository, whose nominee will be the
Holder of all of the Preferred Shares, and the Securities Depository will
determine the number of shares to be redeemed from the account of the Agent
Member of each beneficial owner. Each Agent Member will determine the number of
shares to be redeemed from the account of each beneficial owner for which it
acts as agent. An Agent Member may select for redemption shares from the
accounts of some beneficial owners without selecting for redemption any shares
from the accounts of other beneficial owners. Notwithstanding the foregoing, if
neither the Securities Depository nor its nominee is Holder of all of the
shares, the particular shares to be redeemed shall be selected by the Trust by
lot, on a pro rata basis between each series or by such other method as the
Trust shall deem fair and equitable, as contemplated above.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be outstanding for any purpose. The Trust shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the Preferred Shares called for redemption on such date and
(ii) such other amounts, if any, to which Holders of Preferred Shares called for
redemption may be entitled. The Trust will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Trust upon its
request; provided, however, the Paying Agent shall notify all owners of the
shares whose funds are unclaimed by placing a notice in the Wall Street Journal
concerning the availability of such funds for three consecutive weeks. Thereupon
the Paying Agent will be relieved of all responsibility to the owners of such
shares and such owners may look only to the Trust for payment.
A-13
So long as any Preferred Shares are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the person for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no Preferred
Shares may be redeemed at the option of the Trust unless all dividends in
arrears on the outstanding Preferred Shares, and all capital stock of the Trust
ranking on a parity with the Preferred Shares with respect to the payment of
dividends or upon liquidation, have been or are being contemporaneously paid or
set aside for payment, except in connection with the liquidation of the Trust in
which case all Preferred Shares and all shares ranking in a parity with the
Preferred Shares must receive proportionate amounts.
Except for the provisions described above, nothing contained in the By-laws
limits any legal right of the Trust to purchase or otherwise acquire any
Preferred Shares outside of an Auction at any price, whether higher or lower
than the price that would be paid in connection with an optional or mandatory
redemption, so long as, at the time of any such purchase, there is no arrearage
in the payment of dividends on or the mandatory or optional redemption price
with respect to, any Preferred Shares for which Notice of Redemption has been
given and the Trust is in compliance with the 1940 Act Preferred Shares Asset
Coverage and has Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount after giving effect to
such purchase or acquisition on the date thereof. Any shares which are
purchased, redeemed or otherwise acquired by the Trust shall have no voting
rights. If fewer than all the outstanding Preferred Shares are redeemed or
otherwise acquired by the Trust, the Trust shall give notice of such transaction
to the Auction Agent, in accordance with the procedures agreed upon by the Board
of Trustees.
ASSET MAINTENANCE
The Trust is required to satisfy two separate asset maintenance
requirements in respect of the Preferred Shares: (1) the Trust must maintain
assets in its portfolio that have a value, discounted in accordance with the
Rating Agency Guidelines, at least equal to the aggregate liquidation preference
of the Preferred Shares plus specified liabilities, payment obligations and
other amounts; and (ii) the Trust must maintain asset coverage for Preferred
Shares of at least 200%.
PREFERRED SHARES BASIC MAINTENANCE AMOUNT. The Trust will be required under
Rating Agency Guidelines to maintain, as of each Business Day on which the
Preferred Shares are outstanding, assets having in the aggregate a Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount
established by the rating agency or agencies then rating the Preferred Shares.
If the Trust fails to meet such requirement on any Valuation Date and such
failure is not cured by the Asset Coverage Cure Date, the Trust will be required
under certain circumstances to redeem certain of the Preferred Shares.
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 sum of the products resulting from multiplying the number of
Outstanding shares of each Series of Preferred Shares on such date by
the Liquidation Preference per share of such Series; (B) the aggregate
amount of dividends that will have accumulated at the Applicable Rate
(whether or not earned or declared) to and including the first
Dividend Payment Date for each Outstanding Preferred Share that
follows such Valuation Date (or to the 30th day after such Valuation
A-14
Date, if such 30th day occurs before the first following Dividend
Payment Date); (C) the amount of anticipated Trust non-interest
expenses for 90 days subsequent to such Valuation Date; (D) the amount
of current outstanding balances of any indebtedness which is senior to
the Preferred Shares plus interest actually accrued together with
additional interest on the current outstanding balances calculated at
the current rate multiplied by 1.93 and (E) any other current
liabilities payable during the 30 days subsequent to such Valuation
Date, including, without limitation, any indebtedness service to the
Preferred Shares and indebtedness due within one year and any
redemption premium due with respect to Preferred Shares for which a
Notice of Redemption has been given, as of such Valuation Date to the
extent reflected in any of (i)(A) through (i)(D): less
(ii) the sum of any cash plus the value of any Trust assets irrevocably
deposited by the Trust for payment of any (i)(B) through (i)(E)
(except that if the security matures prior to the relevant redemption
payment date and is either fully guaranteed by the U.S. Government or
is rated P1 by Moody's and A+/A-1 by S&P, it will be valued at its
face value).
The Advance Rates, the criteria used to determine whether the assets held
in the Trust's portfolio are Eligible Assets, and guidelines for determining the
market value of the Trust's portfolio holdings for purposes of determining
compliance with the Preferred Shares Basic Maintenance Amount are based on the
criteria established in connection with the rating the Preferred Shares. The
Moody's Advance Rate relating to any asset of the Trust, the Preferred Shares
Basic Maintenance Amount, the assets eligible for inclusion in the calculation
of the Moody's Advance Rate of the Trust's portfolio and certain definitions and
methods of calculation relating thereto may be changed from time to time by the
Trust, without shareholder approval, but only in event that the Trust receives
written confirmation from Moody's and which so requires that any such changes
would not impair the "aaa" credit rating from Moody's.
A Rating Agency's Guidelines will apply to the Preferred Shares only so
long as such Rating Agency is rating such shares. The Trust will pay certain
fees to Moody's for rating the Preferred Shares. The ratings assigned to
Preferred Shares are not recommendations to buy, sell or hold Preferred Shares.
Such ratings may be subject to revision or withdrawal by the assigning Rating
Agency at any time. Any rating of Preferred Shares should be evaluated
independently of any other rating.
Upon any failure to maintain the required Discounted Value of the Trust's
Eligible Assets, the Trust will seek to alter the composition of its portfolio
to reattain the Preferred Shares Basic Maintenance Amount on or prior to the
Preferred Shares Basic Maintenance Cure Date, thereby incurring additional
transaction costs and possible losses and/or gains on dispositions of portfolio
securities.
1940 ACT PREFERRED SHARES ASSET COVERAGE. The Trust is also required to
maintain, as of the last Business Day on any month in which the Preferred Shares
are outstanding, asset coverage of at least 200% (or such other percentage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities representing shares of a closed-end company as a
condition of declaring dividends on its common shares). If the Trust fails to
maintain the 1940 Act Preferred Shares Asset Coverage as of the last Business
Day of any month and such failure is not cured as of the related Asset Coverage
Cure Date, the Trust will be required to redeem certain Preferred Shares.
NOTICES. The Trust must deliver to the Auction Agent and the Rating Agency
a Preferred Shares Basic Maintenance By-laws which sets forth a determination of
(i) the Market Value of each Eligible Asset owned by the Trust on that date,
(ii) the Discounted Value of each such Eligible Asset, (iii) whether the
Preferred Shares Basic Maintenance Amount Test is met as of (A) the Date of
Original Issue, (B) the last Valuation Date of each month, (C) any date
requested by any Rating Agency, (D) a Business Day on or before any Asset
Coverage Cure Date relating to the Trust's cure of a failure to meet the
Preferred Shares Basic Maintenance Amount Test, and (E) on any day that Common
or Preferred Shares are redeemed. Such Preferred Shares Basic Maintenance
Certificate shall be delivered in the case of clause (A) above on the Date of
Original Issue and in the case of all other clauses above on or before the
seventh Business Day after the relevant Valuation Date or Asset Coverage Cure
Date.
A-15
The Trust is required to deliver to the Auction Agent, and the Rating
Agency a certificate which sets forth a determination of (i) the value (as used
in the 1940 Act) of the total assets of the Trust, less all liabilities and (ii)
whether the 1940 Act Preferred Shares Asset Coverage is met as of that date (a
"1940 Act Preferred Shares Asset Coverage Certificate") as of (A) the Date of
Original Issue, (B) the last Valuation Date of each quarter thereafter and (C) a
Business Day on or before any Asset Coverage Cure Date relating to the failure
to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act Preferred
Shares Asset Coverage Certificate shall be delivered in the case of clause (A)
above on the Date of Original Issue and in the case of clauses (B) and (C) above
on or before the seventh Business Day after the relevant Valuation Date or the
Asset Coverage Cure Date.
Within ten Business Days of the Date of Original Issue, the Trust shall
deliver to the Auction Agent and Moody's an Auditor's Certificate regarding the
accuracy of the calculations made by the Trust in the Preferred Shares Basic
Maintenance Certificate and the 1940 Act Preferred Shares Asset Coverage
Certificate required to be delivered by the Trust on the Date of Original Issue.
Within ten Business Days after delivery of the Preferred Shares Basic
Maintenance Certificate and the 1940 Act Preferred Shares Asset Coverage
Certificate relating to the last Valuation Date of each fiscal quarter of the
Trust, the Trust will deliver to the Auction Agent and Moody's an Auditor's
Certificate regarding the accuracy of the calculations made by the Trust in such
Certificates and in one other Preferred Shares Basic Maintenance Certificate
randomly selected by the Trust's independent auditors during such fiscal
quarter. In addition, the Trust will deliver to the persons specified in the
preceding sentence an Auditor's Certificate regarding the accuracy of the
calculations made by the Trust on each Preferred Shares Basic Maintenance
Certificate and 1940 Act Preferred Shares Asset Coverage Certificate delivered
in relation to an Asset Coverage Cure Date within ten days after the relevant
Asset Coverage Cure Date. If an Auditor's Certificate shows that an error was
made in any such report, the calculation or determination made by the Trust's
independent auditors will be conclusive and binding on the Trust. The Auditor's
Certificate will confirm, based upon the independent auditors review of
portfolio data provided by the Trust, (i) the mathematical accuracy of the
calculations reflected in the related Preferred Shares Basic Maintenance Amount
Certificates, the 1940 Act Preferred Shares Asset Coverage Certificates, (ii)
that, based upon such calculations, the Trust had, at such Valuation Date, met
the Preferred Shares Basic Maintenance Amount Test, and (iii) that the Trust met
Moody's General Portfolio Requirements.
VOTING
All voting rights (as described in the Prospectus under "Description of
Capital Structure" and "Description of Preferred Shares - -Voting Rights") will
not apply with respect to Preferred Shares if, at or prior to the time when a
vote is required, such shares have been (i) redeemed or (ii) called for
redemption and sufficient funds have been deposited in trust to effect such
redemption.
The Board of Trustees may without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions required to be
contained in the By-laws or Declaration of Trust by Moody's in the event the
Trust receives written confirmation from Moody's that any such amendment,
alteration or repeal would not impair the ratings then assigned by Moody's to
the Preferred Shares.
RESTRICTIONS ON TRANSFER
Preferred Shares may be transferred only (a) pursuant to an Order placed in
an Auction, (b) to or through a Broker-Dealer, or (c) to the Trust or any
Affiliate. Notwithstanding the foregoing, a transfer other than pursuant to an
Auction will not be effective unless the selling Existing Holder or the Agent
Member of such Existing Holder, in the case of an Existing Holder whose shares
are listed in its own name on the books of the Auction Agent, or the
Broker-Dealer or Agent Member of such Broker-Dealer, in the case of a transfer
between persons holding Preferred Shares through different Broker-Dealers,
advises the Auction Agent of such transfer.
A-16
MOODY'S GUIDELINES
The descriptions of the Moody's Guidelines contained in this SAI do not
purport to be complete and are subject to and qualified in their entireties by
reference to the By-laws. A copy of the By-laws is filed as an exhibit to the
registration statement of which the Prospectus and this SAI are a part and may
be inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.
GENERAL
The composition of the Trust's portfolio reflects Rating Agency Guidelines
established by Moody's in connection with the Trust's receipt of a rating of
"aaa" from Moody's for the Preferred Shares. These Rating Agency Guidelines
relate, among other things, to industry and credit quality characteristics of
issuers and specify various Advance Rates for debt securities.
The Rating Agency Guidelines require that the Trust maintain assets having
an aggregate Discounted Value greater than the aggregate liquidation preference
of the Preferred Shares plus specified liabilities, payment obligations and
other amounts, as of periodic Valuation Dates. The Rating Agency Guidelines also
require the Trust to maintain asset coverage for the Preferred Shares on a
non-discounted basis of at least 200% as of the end of each month, and the 1940
Act requires such asset coverage as a condition to paying dividends or other
distributions on Common Stock. See "Description of Preferred Shares - Asset
Maintenance." The Rating Agency Guidelines also impose certain diversification
requirements on the Trust's overall portfolio.
The Trust intends to maintain, at specified times, a Discounted Value for
its portfolio at least equal to the Preferred Shares Basic Maintenance Amount,
the determination of which is as set forth under "Description of Preferred
Shares -- Asset Maintenance." Moody's has established guidelines for determining
Discounted Value. To the extent any particular portfolio holding does not
satisfy Moody's Guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by Moody's.).
For purposes of calculating the Discounted Value of the Trust's portfolio
under current Rating Agency Guidelines, the fair market value of portfolio
securities eligible for consideration under such guidelines ("Moody's Eligible
Assets") must be discounted by certain advance rates set forth below ("Moody's
Advance Rates"). The Discounted Value of a portfolio security under the Rating
Agency Guidelines is the Market Value thereof, determined as specified by
Moody's, multiplied by the Moody's Advance Rate.
As described by Moody's, an issue of preferred stock which is rated "aaa"
is considered to be top-quality preferred stock with good asset protection and
the least risk of dividend impairment within the universe of preferred stocks. A
Moody's credit rating of preferred stock does not address the likelihood that a
resale mechanism (e.g., the Auction) will be successful.
Ratings are not recommendations to purchase, hold or sell Preferred Shares,
inasmuch as the rating does not comment as to market price or suitability for a
particular investor. The rating is based on current information furnished to
Moody's by the Trust and obtained by Moody's from other sources. The rating may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information.
A-17
MOODY'S GUIDELINES
The Trust's portfolio must meet the following diversification requirements
("Moody's General Portfolio Requirements"):
(a) no more than 25% by par value of the Trust's total assets can be
invested in the securities of borrowers and other issuers having their
principal business activities in the same Moody's Industry
Classification; provided, that this limitation shall not apply with
respect to U.S. Government Securities and provided further that for
purposes of this subsection (a), the term "issuer" shall not include a
lender selling a participation to the Trust or any other person
interpositioned between such lender and the Trust with respect to a
participation and
(b) no more than 10% by par value of the Trust's total assets can be
invested in securities of a single issuer, and provided further that
for purposes of this subsection (b), the term "issuer" includes both
the borrower under a loan agreement and the lender selling a
participation to the Trust together with any other persons
interpositioned between such lender and the Trust with respect to such
participation.
So long as the Trust's portfolio complies with the Moody's General
Portfolio Requirements, the Moody's Advance Rate is the percentage determined
below:
(i) Loans: for each Moody's Asset Category, the percentage specified
in the table below opposite such Moody's Asset Category.
Moody's Asset Category Advance Rate
---------------------- ------------
A 84.5%
B 73%
C 62%
D 45%
E 45%
(ii) Short Term Money Market Instruments: (A) 97%, so long as such
investments mature or have a demand feature at par exercisable
within 30 days, (B) 90%, so long as such investments mature or
have a demand feature at par not exercisable within 30 days, and
(C) 83%, if such securities are not rated by Moody's, so long as
such investments are rated at least A-2/AA or SP-2/AA by S&P and
mature or have a demand feature at par exercisable within 30
days.
Moody's Asset Category means the following five categories (and, for
purposes of this categorization, the Market Value Price of a Moody's Eligible
Asset trading at par is equal to $1.00).
(a) Moody's Asset Category A means Performing Senior Loans and bonds which
have a Market Value Price or an Approved Price greater than or equal
to $.90.
(b) Moody's Asset Category B means:
(i) Performing Senior Loans and bonds which have a Market Value Price
or an Approved Price of greater than or equal to $.80 but less
than $.90; and
(ii) Non-Performing Senior Loans and bonds which have a Market Value
Price or an Approved Price greater than or equal to $.85.
A-18
(c) Moody's Asset Category C means:
(i) Performing Senior Loans and bonds which have a Market Value Price
or an Approved Price greater than or equal to $.70 but less than
$.80; and
(ii) Non-Performing Senior Loans and bonds which have a Market Value
Price or an Approved Price greater than or equal to $.75 but less
than $.85.
(d) Moody's Asset Category D means Senior Loans and bonds which have a
Market Value Price or an Approved Price less than $.75.
(e) Moody's Asset Category E means Non-Senior Loans which have a Market
Value Price 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
Asset Category, to the extent that any Moody's Eligible Asset would fall in more
than one of the Moody's Asset Categories, such Moody's Eligible Asset shall be
deemed to fall into the Moody's Asset Category with the highest applicable
Moody's Advance Rate.
Moody's Eligible Assets include the following:
(i) Senior Loans and Senior Unsecured Loans and bonds; provided,
however, that (a) Senior Loans and Senior Unsecured Loans with an
Approved Price will qualify as Moody's Eligible Assets only up to
a maximum of 10% of the Trust's total assets; (b) Senior Loans
and Senior Unsecured Loans under Moody's Asset Category D will
qualify as Moody's Eligible Assets only up to a maximum of 20% of
the Trust's total assets; and (c) Senior Unsecured Loans will
qualify as Moody's Eligible Assets only up to a maximum of 10% of
the Trust's total assets;
(ii) Non-Senior Loans; provided, however, that Non-Senior Loans will
qualify as Moody's Eligible Assets only up to a maximum of 10% of
the Trust's total assets;
(iii)Short-Term Money Market Instruments so long as (a) such
securities are rated at least P-2, (b) in the case of demand
deposits, time deposits, banker's acceptances and certificate of
deposit and overnight funds, the supporting entity is rated at
least A2, (c) such securities are U.S. Government Securities, or
(d) in all other cases, the supporting entity (1) is rated A2 and
the security matures within one month, (2) is rated A2 and the
security matures within three months or (3) is rated at least Aa3
and the security matures within six months; and
(iv) Cash.
In addition, for so long as any of the Preferred Shares are Outstanding and
Moody's so requires:
(a) the Trust will not, unless it has received written confirmation from
such Rating Agency that any such action would not impair the rating
then assigned by Moody's to the Preferred Shares, engage in any one or
more of the following transactions:
(i) purchase or sell futures contracts or options thereon with
respect to portfolio securities or write put or call options on
portfolio securities;
A-19
(ii) except in connection with a refinancing of the Preferred Shares,
issue additional shares of any series of Preferred Shares,
including any Series or reissue any Preferred Shares, including
any Series previously purchased or redeemed by the Trust;
(iii) engage in any short sales of securities;
(iv) lend portfolio securities;
(iv) merge or consolidate into or with any other corporation;
(vi) engage in any reverse repurchase agreement; or
(vii)change the Pricing Service to a service other than an Approved
Pricing Service.
(b) The Trust has also agreed
(i) no less frequently than semi-annually, the Trust's independent
auditors shall verify the pricing of at least 25% of the Moody's
Eligible Assets and provide to Moody's a letter describing the
results of such verification. For the purposes of this item (i),
"verify" shall mean that the independent auditors agreed the
prices reported by the Trust to the prices received by the Trust
from an Approved Pricing Service; and
(ii) the Trust shall notify Moody's if, on any Valuation Date, the
aggregate Discounted Value of the Moody's Eligible Assets is less
than 125% of the Preferred Shares Basic Maintenance Amount.
A-20
GLOSSARY
"`AA' Financial Composite Commercial Paper Rate" on any date means (i) the
interest equivalent of the 7-day rate, in the case of a Dividend Period which is
a Standard Rate Period or shorter; for Dividend Periods greater than 7 days but
fewer than or equal to 31 days, the 30-day rate; for Dividend Periods greater
than 31 days but fewer than or equal to 61 days, the 60-day rate; for Dividend
Periods greater than 61 days but fewer than or equal to 91 days, the 90 day
rate; for Dividend Periods greater than 91 days but fewer than or equal to 270
days, the rate described in (ii); for Dividend Periods greater than 270 days,
the Treasury Index Rate; on commercial paper on behalf of issuers whose
corporate bonds are rated "AA" by S&P, or the equivalent of such rating by
another nationally recognized rating agency, as announced by the Federal Reserve
Bank of New York for the close of business on the Business Day immediately
preceding such date; or (ii) if the Federal Reserve Bank of New York does not
make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the "AA" 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) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (2) in lieu
of any thereof, its respective Affiliate or successor; and (3) in the event that
any of the foregoing shall cease to quote rates for commercial paper of issuers
of the sort described above, in substitution therefor, a nationally recognized
dealer in commercial paper of such issuers then making such quotations selected
by the 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 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 365.
"Advance Rate" means the Moody's Advance.
"Affiliate" means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Trust; provided that Eaton
Vance Management shall not be deemed to be an Affiliate nor shall any
corporation or any person controlled by, in control of or under common control
with such corporation, one of the trustees, directors or executive officers of
which is also a trustee, director or executive officer of the Trust, be deemed
to be an Affiliate.
"Agent Member" means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.
"All Hold Rate" means 80% of the "AA" Financial Composite Commercial Paper
Rate.
"Applicable Rate" means, with respect to each Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not exist
for the Auction in respect thereof, the Maximum Rate.
"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.
B-1
"Approved Pricing Service" means for Senior Loans Loan Pricing Corporation
or any other quotation service designated in writing by the Trust provided that
no Rating Agency has objected, in its reasonable discretion, in writing to the
Trust within ten business days of receipt of the Trust's written notice of the
designation of such quotation service.
"Asset Coverage Cure Date" has the meaning set forth in "Description of
Preferred Shares -- Redemption."
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Trustees enters into an agreement with the Trust to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Date" means the first Business Day next preceding the first day of
a Dividend Period for each Series.
"Auction Procedures" means the procedures described in "Additional
Information Concerning the Auction for Preferred Shares" and the procedures
described in Part II of the By-laws.
"Auditor's Certificate" has the meaning set forth in "Description of
Preferred Shares -- Asset Maintenance."
"Available Preferred Shares" has the meaning set forth in Additional
Information Concerning the Auction For Preferred Shares -- Determination of
Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.
"Beneficial Owner," with respect to shares of each Series, means a customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if
applicable, the Auction Agent) as a holder of shares of such series.
"Bid" has the meaning set forth Additional Information Concerning the
Auction for Preferred Shares -- Submission of Orders by Broker-Dealers to
Auction Agents."
"Bidder" has the meaning set forth in Additional Information Concerning the
Auction for Preferred Shares -- Submission of Orders by Broker-Dealers to
Auction Agents."
"Board of Trustees" means the Board of Trustees of the Trust or any duly
authorized committee thereof as permitted by applicable law.
"Broker-Dealer" means any broker-dealer or broker-dealers, or other entity
permitted by law to perform the functions required of a Broker-Dealer by the
Auction Procedures, that has been selected by the Trust and has entered into a
Broker-Dealer Agreement 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
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in The
City of New York, New York are authorized or obligated by law to close.
"By-laws" means the Second Amended By-laws of the Trust, dated _________,
2001, specifying the powers, preferences and rights of Preferred Shares.
"Code" means the Internal Revenue Code of 1986, as amended.
B-2
"Commission" means the Securities and Exchange Commission.
"Common Share" means the shares of beneficial interest, par value $.01 per
share, of the Trust.
"Date of Original Issue" means the date on which a Series is originally
issued by the Trust.
"Declaration of Trust" means the Agreement and Declaration of Trust, as
amended.
"Default Period" has the meaning set forth in "Description of Preferred
Shares -- Dividends and Dividend Period."
"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of optional
redemption such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-1 by Moody's.
"Discounted Value" means the product of the Market Value (plus accrued
interest) of an Eligible Asset multiplied by the applicable Advance Rate.
"Dividend Default" has the meaning set forth in "Description of Preferred
Shares -- Dividends and Dividend Period."
"Dividend Payment Date" means (i) with respect to any Dividend Period of
one year or less, the Business Day next succeeding the last day thereof and, if
any, the 91st, 181st and 271st days thereof, and (ii) with respect to any
Dividend Period of more than one year, on a quarterly basis on each January 1,
April 1, July 1 and October 1 and on the Business Day following the last day of
such Dividend Period.
"Dividend Period" means, with respect to each Series, the period commencing
on the Date of Original Issue thereof and ending on the date specified for such
Series on the Date of Original Issue thereof and thereafter, from and including
one Dividend Payment Date for shares of such Series to but excluding the next
succeeding Dividend Payment Date for shares of such Series; provided, however,
that if any Dividend Period is also a Special Rate Period, such term shall mean
the period commencing on the first day of such Special Rate Period and ending on
the last day of the last Dividend Period thereof.
"Eligible Assets" means Moody's Eligible Assets.
"Existing Holder" means (a) a person who has signed a Master Purchaser's
Letter and beneficially owns those Preferred Shares listed in that person's name
in the records of the Auction Agent or (b) the beneficial owner of those
Preferred Shares which are listed under such person's Broker-Dealer's name in
the records of the Auction Agent, which Broker-Dealer shall have signed a Master
Purchaser's Letter.
"Hold Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Orders By Existing Holders and
Potential Holders."
"Holder" means, with respect to Preferred Shares, the registered holder of
shares of each Series as the same appears on the share ledger or share records
of the Trust.
B-3
"Loan" means any assignment of or participation in any bank loan
denominated in U.S. dollars including term loans, the funded and unfounded
portions of revolving credit lines (provided that the Trust shall place in
reserve an amount equal to any unfunded portion of any revolving credit line)
and debtor-in possession financings; provided that such loan (a) is not extended
for the purpose of purchasing or carrying any margin stock and (b) is similar to
those typically made, syndicated, purchased or participated by a commercial bank
in the ordinary course of business.
"Mandatory Redemption Date" has the meaning set forth in "Description of
Preferred Shares -- Redemption."
"Mandatory Redemption Price" has the meaning set forth in set forth in
"Description of Preferred Shares -- Redemption."
"Market Value" means the Market Value Price or, if a Market Value Price is
not readily available, the Approved Price of each Eligible Asset held by the
Trust.
"Market Value Price" means the price of an Eligible Asset which is the
price obtained from an Approved Pricing Service or such other price used
pursuant to the Trust's valuation procedures adopted pursuant to the 1940 Act.
"Maximum Rate" means, on any date on which the Applicable Rate is
determined, the applicable percentage of the "AA" Financial Composite Commercial
Paper Rate on the date of such Auction determined as set forth below based on
the credit ratings assigned to the Preferred Shares by Moody's 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 Trust would be in compliance with the Preferred Shares Basic
Maintenance Amount.
Moody's Applicable
Credit Rating Percentage
----------------- --------------
aa3 or Above 150%
a3 or a1 160%
baa3 to baa1 250%
Below baa3 275%
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Moody's Advance Rate" has the meaning set forth in "Moody's Guidelines --
Moody's Guidelines."
"Moody's Asset Category" has the meaning set forth in "Moody's Guidelines
-- Moody's Guidelines."
"Moody's Asset Category A" has the meaning set forth in "Moody's Guidelines
-- Moody's Guidelines."
"Moody's Asset Category B" has the meaning set forth in "Moody's Guidelines
-- Moody's Guidelines."
"Moody's Asset Category C" has the meaning set forth in "Moody's Guidelines
-- Moody's Guidelines."
"Moody's Asset Category D" has the meaning set forth in "Moody's Guidelines
-- Moody's Guidelines."
"Moody's Asset Category E" has the meaning set forth in "Moody's Guidelines
-- Moody's Guidelines."
"Moody's Eligible Assets" has the meaning set forth in "Moody's Guidelines
-- Moody's Guidelines."
B-4
"Moody's General Portfolio Requirements" has the meaning set forth in
"Moody's Guidelines -- Moody's Guidelines."
"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, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes, Cigars,
Leaf/Snuff, Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls, Contracting,
Engineering, Construction, Hardware, Forest Products (building-related only),
Plumbing, Roofing, Wallboard, Real Estate, Real Estate Development, REITs, Land
Development
6. Chemicals, Plastics and Rubber: Chemicals (non-agriculture), Industrial
Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings, Paints,
Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers made of:
Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non-Durable Consumer Products (Manufacturing Only): 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, Mining and Sales
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and Waste
Disposal
13. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service Communicating
Systems, Radios, TVs, Tape Machines, Speakers, Printers, Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication, Securities
15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture
Chemicals, Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
B-5
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment
18. Home and Office Furnishings, Housewares, and Durable Consumer Products:
Carpets, Floor Coverings, Furniture, Cooking, Ranges
19. Hotels, Motels, Inns and Gaming
20. Insurance: Life, Property and Casualty, Broker, Agent, Surety
21. Leisure, Amusement, Entertainment: Boating, Bowling, Billiards, Musical
Instruments, Fishing, Photo Equipment, Records, Tapes, Sports, Outdoor Equipment
(Camping), Tourism, Resorts, Games, Toy Manufacturing
22. Machinery (Non-Agriculture, Non-Construction, Non-Electronic):
Industrial, Machine Tools, Steam Generators
23. Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production,
Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and
Sales
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
25. Personal, Food and Miscellaneous
26. Printing and Publishing: Graphic Arts, Paper, Paper Products, Business
Forms, Magazines, Books, Periodicals, Newspapers, Textbooks
27. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking, Truck
Manufacturing, Trailer Manufacturing, Air Cargo, Transport
28. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
29. North American Cellular and North American Cable
30. Data and Internet Services
31. Satellite
32. Telecommunications Equipment
33. Other Telecommunications
34. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
35. Utilities: Electric, Water, Hydro Power, Gas, Diversified
36. Radio and TV Broadcasting
37. Foreign Cellular, Foreign Cable, Foreign TV, Foreign Radio and
Equipment
38. Other Broadcasting and Entertainment
B-6
"1940 Act Preferred Shares Asset Coverage" means asset coverage, as
determined in accordance with Section 18(h) of the Investment Company Act, of at
least 200% with respect to all outstanding senior securities of the Trust which
are stock, including all Outstanding Preferred Shares (or such other asset
coverage as may in the future be specified in or under the Investment Company
Act as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring dividends on its
common shares), determined on the basis of values calculated as of a time within
48 hours (not including Sundays or holidays) next preceding the time of such
determination.
"1940 Act Preferred Shares Asset Coverage By-laws" has the meaning set
forth in "Description of Preferred Shares -- Asset Maintenance."
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Non-Senior Loan" means a Loan that is a hybrid loan, a subordinated loan
or an unsecured loan other than a Senior Unsecured Loan.
"Notice of Redemption" has the meaning set forth in "Description of
Preferred Shares -- Redemption."
"Order" has the meaning set forth in "Additional Information Concerning the
Auction for Preferred Shares -- Orders By Existing Holders and Potential
Holders."
"Outstanding" means, as of any date, Preferred Shares theretofore issued by
the Trust except, without duplication, (i) Preferred Shares theretofore
canceled, redeemed or repurchased by the Trust, or delivered to the Auction
Agent for cancellation or with respect to which the Trust has given notice of
redemption and irrevocably deposited with the Paying Agent sufficient funds to
redeem such Preferred Shares and (ii) any Preferred Shares represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Trust. Notwithstanding the foregoing, (A) for purposes of voting rights
(including the determination of the number of shares required to constitute a
quorum), any Preferred Shares as to which the Trust or any Affiliate shall be
the Existing Holder shall be disregarded and not deemed Outstanding; (B) in
connection with any Auction, any Preferred Shares as to which the Trust or any
person known to the Auction Agent to be an Affiliate shall be the Existing
Holder shall be disregarded and not deemed Outstanding; and (C) for purposes of
determining the Preferred Shares Basic Maintenance Amount, Preferred Shares held
by the Trust shall be disregarded and not deemed Outstanding, but shares held by
any Affiliate shall be deemed Outstanding.
"Paying Agent" means Bankers Trust Company unless and until another entity
appointed by a resolution of the Board of Trustees enters into an agreement with
the Trust to serve as paying agent, which paying agent may be the same as the
Auction Agent.
"Performing" means that no default as to the payment of principal or
interest has occurred and is continuing.
"Potential Beneficial Owner or Holder," means (1) any Existing Holder who
may be interested in acquiring additional Preferred Shares or (ii) any other
person who may be interested in acquiring Preferred Shares and who has signed a
Master Purchaser's letter or whose shares will be listed under such person's
Broker-Dealer's name on the records of the Auction Agent which Broker-Dealer
shall have executed a Master Purchaser's letter.
"Preferred Shares" means the Class A and Class B Auction Preferred Shares
of the Trust.
B-7
"Preferred Shares Basic Maintenance Amount" as of any Valuation Date means
the dollar amount equal to the sum of
(i) (A) the sum of the products resulting from multiplying the number of
Outstanding shares of each Series of Preferred Shares on such date by
the Liquidation Preference (and redemption premium, if any) per share
of such Series; (B) the aggregate amount of dividends that will have
accumulated at the Applicable Rate (whether or not earned or declared)
to and including the first Dividend Payment Date for each Outstanding
Preferred Share that follows such Valuation Date (or to the 30th day
after such Valuation Date, if such 30th day occurs before the first
following Dividend Payment Date); (C) the amount of anticipated Trust
non-interest expenses for the 90 days subsequent to such Valuation
Date; (D) the amount of the current outstanding balances of any
indebtedness which is senior to the Preferred Shares plus interest
actually accrued together with 30 days additional interest on the
current outstanding balances calculated at the current rate multiplied
by 1.93 and (E) any other current liabilities payable during the 30
days subsequent to such Valuation Date, including, without limitation,
any indebtedness service to the Preferred Shares and indebtedness due
within one year and any redemption premium due with respect to
Preferred Shares for which a Notice of Redemption has been given, as
of such Valuation Date to the extent not reflected in any of (i)(A)
through (i)(D): less
(ii) the sum of any cash plus the value of any Trust assets irrevocably
deposited by the Trust for the payment of any (i)(B) through (i)(E)
(except that if the security matures prior to the relevant redemption
payment date and is either fully guaranteed by the U.S. Government or
is rated P1 by Moody's and A+/A-1 by S&P, it will be valued at its
face value).
"Preferred Shares Basic Maintenance Amount Test" means a test which is met
if the aggregate Discounted Values of the Moody's Eligible Assets meets or
exceeds the Preferred Shares Basic Maintenance Amount.
"Preferred Shares Basic Maintenance Certificate" has the meaning set forth
in "Description of Preferred Shares -- Asset Maintenance."
"Rate Period" means either a Standard Rate Period or a Special Rate Period.
"Rating Agency" means Moody's as long as such rating agency is then rating
the Preferred Shares.
"Redemption Date" has the meaning set forth in "Description of Preferred
Shares -- Dividends and Dividend Period."
"Redemption Default" has the meaning set forth in "Description of Preferred
Shares -- Dividends and Dividend Period."
"Redemption Price" has the meaning set forth in "Description of Preferred
Shares -- Dividends and Dividend Period."
"Reference Rate" means, with respect to the determination of the Default
Rate, the applicable "AA" Financial Composite Commercial Paper Rate.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of each Series.
"Sell Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."
B-8
"Senior Loan" means any secured Loan that is not subordinated by its terms
to any other indebtedness of the borrower.
"Senior Loan Participations" means participations by the Trust in a
lender's portion of a Senior Loan where the Trust has a contractual relationship
with such lender and not the borrower, and such lender is rated at least A-1/A-.
"Senior Unsecured Loan" means any unsecured Loan that is not subordinated
by its terms to any other indebtedness of the borrower and is rated BBB- or
better by S&P or Baa3 or better by Moody's, as applicable.
"Series" means any of the series of Preferred Shares issued by the Trust.
"Short-Term Money Market Instrument" 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 :
(i) commercial paper rated A-1 if such commercial paper matures in 30 days
or A-1+ 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; and
(iv) U.S. Government Securities.
"Special Rate Period" means a Dividend Period that is not a Standard Rate
Period.
"Specific Redemption Provisions" means, with respect to any Special Rate
Period of more than one year, either, or any combination of (i) a period (a
"Non-Call Period") determined by the Board of Trustees after consultation with
the Broker-Dealers, during which the shares subject to such Special Rate Period
are not subject to redemption at the option of the Trust and (ii) a period (a
"Premium Call Period"), consisting of a number of whole years as determined by
the Board of Trustees after consultation with the Broker-Dealers, during each
year of which the shares subject to such Special Rate Period shall be redeemable
at the Trust's option at a price per share equal to the Liquidation Value plus
accumulated but unpaid dividends (whether or not earned or declared) plus a
premium expressed as a percentage or percentages of the Liquidation Value or
expressed as a formula using specified variables as determined by the Board of
Trustees after consultation with the Broker-Dealers.
"Standard Rate Period" means the period from and including one Dividend
Payment Date for shares of such Series to but excluding the next succeeding
Dividend Payment Date for shares of such Series, and generally means a Dividend
Period of 7 days.
"Submission Deadline" means 1:00 P.M., New York City time, on any Auction
Date or such other time on any Auction Date by which Broker-Dealers are required
to submit Orders to the Auction Agent as specified by the Auction Agent from
time to time.
"Submitted Bid Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."
B-9
"Submitted Hold Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."
"Submitted Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."
"Submitted Sell Order" has the meaning set forth in "Additional Information
Concerning the Auction for Preferred Shares -- Submission of Orders by
Broker-Dealers to Auction Agents."
"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 by its agencies or instrumentalities that are entitled to the full faith and
credit of the United States and that, other than United States Treasury Bills,
provide for the periodic payment of interest and the full payment of principal
at maturity or call for redemption.
"Valuation Date" means the last Business Day of each week.
"Winning Bid Rate" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/Sell Order from Existing Holders specifying
such lowest rate and all other Submitted Hold/Sell Orders from Existing Holders
specifying lower rates were accepted and (B) each Submitted Buy Order from
Potential Holders specifying such lowest rate and all other Submitted Buy Orders
from Potential Holders specifying lower rates were accepted, would result in the
Existing Holders described in clause (A) above continuing to hold an aggregate
number of Preferred Shares which, when added to the number of Preferred Shares
to be purchased by the Potential Holders described in clause (B) above and the
number of Preferred Shares subject to Submitted Hold Orders, would be equal to
the number of Preferred Shares.
B-10
APPENDIX C
DESCRIPTION OF CORPORATE BONDS
The rating indicated herein are believed to be the most recent ratings available
at the date of this SAI for the securities listed. Ratings are generally given
to securities at the time of issuance. While the rating agencies may from time
to time revise such ratings, they undertake no obligation to do so, and the
ratings indicated do not necessarily represent ratings which would be given to
these securities on the date of the Trust's fiscal year end.
Bonds which are unrated expose the investor to risks with respect to capacity to
pay interest or repay principal which are similar to the risks of lower-rated
speculative bonds. The Trust is dependent on the investment adviser's judgment,
analysis and experience in the evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a rating
agency may not reflect the effect of recent developments on the issuer's ability
to make interest and principal payments.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
C-1
Absence of Rating: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through B. 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.
C-2
EATON VANCE SENIOR INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
______________, 2001
--------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 021090
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116
TRANSFER AGENT
PFPC, Inc.
P.O. Box 9653
Providence, RI 02940-9653
(800) 262-1122
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
SITSAI
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
INCLUDED IN PART A:
Financial highlights for the six months ended December 31, 2000, the year
ended June 30, 2000 and the period from the start of business, October 30,
1998, to June 30, 1999
INCLUDED IN PART B:
INCORPORATED BY REFERENCE TO THE ANNUAL REPORT DATED JUNE 30, 2000
(ACCESSION NO. 0000950156-00-000423) AND TO THE SEMI-ANNUAL REPORT
DATED DECEMBER 31, 2000 (ACCESSION NO. 0000950156-01-000120), EACH
FILED ELECTRONICALLY PURSUANT TO SECTION 30(B)(2) OF THE INVESTMENT
COMPANY ACT OF 1940.
Financial Statements dated June 30, 2000 for EATON VANCE SENIOR
INCOME TRUST:
Portfolio of Investments as of June 30, 2000
Statement of Assets and Liabilities as of June 30, 2000
Statement of Operations for the year ended June 30, 2000
Statements of Changes in Net Assets for the year ended June 30,
2000 and for the period from the start of business, October
30, 1998, to June 30, 1999
Statement of Cash Flows for the year ended June 30, 2000
Financial Highlights for the year ended June 30, 2000 and for
the period from the start of business, October 30, 1998, to
June 30, 1999
Notes to Financial Statements
Independent Auditors' Report
Financial Statements dated December 31, 2000 for EATON VANCE
SENIOR INCOME TRUST:
Portfolio of Investments as of December 31, 2000
Statement of Assets and Liabilities as of December 31, 2000
Statement of Operations for the six months ended December 31,
2000
Statements of Changes in Net Assets for the six months ended
December 31, 2000 and for the year ended June 30, 2000
Statement of Cash Flows for the six months ended December 31,
2000
Financial Highlights for the six months ended December 31,2000,
the year ended June 30, 2000 and for the period from the
start of business, October 30, 1998, to June 30, 1999
Notes to Financial Statements
Independent Auditors' Report
(2) EXHIBITS (WITH INAPPLICABLE ITEMS DELETED):
(a) Agreement and Declaration of Trust dated September 23, 1998 filed
as Exhibit (a) to the Registration Statement under the Securities
Act of 1933 (1933 Act File No. 333-64151) and to the Registration
Statement under the Investment Company Act of 1940 (1940 Act File
No. 811-09013) filed with the Commission on September 24, 1998
(Registration Statement) and incorporated herein by reference.
C-2
(b)(1) Amended By-Laws filed as Exhibit (b) to Pre-Effective Amendment
No. 1 to the Registration Statement under the Securities Act of
1933 (1933 Act File No. 333-64151) and Amendment No. 1 to the
Registration Statement under the Investment Company Act of 1940
(1940 Act File No. 811-09013) filed with the Commission on
October 27, 1998 ("Amendment No. 1").
(2) Form of Second Amended By-Laws filed herewith.
(d)(1) Specimen Certificate representing the Registrant's Common Shares
of Beneficial Interest filed as Exhibit (d) to Amendment No. 1
and incorporated herein by reference.
(2) Specimen Certificate representing the Registrant's Auction
Preferred Shares of Beneficial Interest to be filed by amendment.
(g) Investment Advisory Agreement dated October 19, 1998 filed as
Exhibit (g) to Amendment No. 1 and incorporated herein by
reference.
(h) Form of Purchase Agreement for Auction Preferred Shares to be
filed by amendment.
(i) The Securities and Exchange Commission has granted the Registrant
an exemptive order that permits the Registrant to enter into
deferred compensation arrangements with its independent Trustees.
See in the Matter of Capital Exchange Fund, Inc., Release No.
IC-20671 (November 1, 1994).
(j)(1) Custodian Agreement dated October 19, 1998 filed as Exhibit (j)
to Amendment No. 1 and incorporated herein by reference.
(2) Amendment to Master Custodian Agreement with Investors Bank &
Trust Company dated December 21, 1998 as Exhibit (g)(3) to the
Registration Statement of Eaton Vance Municipals Trust (File Nos.
33-572 and 811-4409) (Accession No. 0000950156-99-000050) filed
January 25, 1999 and incorporated herein by reference.
(3) Extension Agreement dated August 31, 2000 to Master Custodian
Agreement with Investors Bank & Trust Company filed as Exhibit
(j)(d) to the Post-Effective Amendment No. 4 of Eaton Vance Prime
Rate Reserves (File Nos. 333-32268, 811-05808) filed with the
Commission on January 18, 2001 (Accession No.
0000940394-01-500021) and incorporated herein by reference.
(4) Delegation Agreement dated December 11, 2000 with Investors Bank
& Trust Company filed as Exhibit (j)(d) to the Post-Effective
Amendment No. 5 of Eaton Vance Prime Rate Reserves (File Nos.
333-32268, 811-05808) filed with the Commission on April 3, 2001
(Accession No. 0000940394-01-500126) and incorporated herein by
reference herewith.
(k)(1) Auction Agency Agreement to the Auction Preferred Shares to be
filed by amendment.
(2) Broker-Dealer Agreement as to the Registrant's Auction Preferred
Shares to be filed by amendment.
(3) DTC Representations Letter as to the Registrant's Auction
Preferred Shares to be filed by amendment.
(4) Transfer Agency and Services Agreement dated as of October 19,
1998 filed as Exhibit (k)(1) to Amendment No. 1 and incorporated
herein by reference.
(5) Administration Agreement dated October 19, 1998 filed as Exhibit
(k)(2) to Amendment No. 1 and incorporated herein by reference.
(6) Shareholder Servicing Agreement dated as of October 19, 1998
filed as Exhibit (k)(3) to Amendment No. 1 and incorporated
herein by reference.
C-3
(l) Opinion and Consent of Counsel to be filed by amendment.
(n) Consent of Independent Auditors' filed herewith.
(p) Letter Agreement with Eaton Vance Management dated October 23,
1998 filed as Exhibit (p) to Amendment No. 1 and incorporated
herein by reference.
(r) Code of Ethics adopted by Eaton Vance Corp., Eaton Vance
Management, Boston Management and Research, Eaton Vance
Distributors, Inc. and the Eaton Vance Funds effective September
1, 2000 as revised November 6, 2000 filed as Exhibit (p)(1) to
Post-Effective Amendment No. 75 of Eaton Vance Growth Trust (File
Nos. 02-22019, 811-1241) filed December 21, 2000 and incorporated
herein by reference.
(s) Power of Attorney dated April 10, 2001 filed herewith.
ITEM 25. MARKETING ARRANGEMENTS
To be included in Purchase Agreement to be filed as Exhibit (h) hereto.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the approximate expenses incurred and
estimated to be in connection with the offering of Registrant:
Registration fees $ 27,500
National Association of Securities Dealers, Inc. Fees $ 11,500
Printing $ 10,000
Accounting fees and expenses $ 5,000
Legal fees and expenses $ 75,000
---------
Total $ 129,000
=========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Auction Preferred Shares of beneficial 0
interest, par value $.01 per share as of April 10, 2001
Common Shares of beneficial interest, 35,726,793
par value $.01 per share as of April 10, 2001
ITEM 29. INDEMNIFICATION
The Registrant's By-Laws filed in Amendment No. 1 and incorporated herein
by reference contains, and the Purchase Agreement to be filed in Amendment No. 4
is expected to contain, provisions limiting the liability, and providing for
indemnification, of the Trustees and officers under certain circumstances.
Registrant's Trustees and officers are insured under a standard investment
company errors and omissions insurance policy covering loss incurred by reason
of negligent errors and omissions committed in their capacities as such.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant and the Adviser and any underwriter to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
C-4
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person or the Registrant and the Underwriters in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person or the Distributor in
connection with the Preferred Shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Reference is made to: (i) the information set forth under the captions
"Management of the Fund" in the Prospectus and "Investment Advisory and Other
Services" in the Statement of Additional Information; (ii) the Eaton Vance Corp.
10-K filed under the Securities Exchange Act of 1934 (File No. 1-8100); and
(iii) the Forms ADV of Eaton Vance Management (File No. 801-15930) filed with
the Commission, all of which are incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the possession and custody of the
Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street,
Boston, MA 02116, and its transfer agent, PFPC, Inc., 4400 Computer Drive,
Westborough, MA 01581-5120, with the exception of certain corporate documents
and portfolio trading documents which are in the possession and custody of Eaton
Vance Management, The Eaton Vance Building, 255 State Street, Boston, MA 02109.
Registrant is informed that all applicable accounts, books and documents
required to be maintained by registered investment advisers are in the custody
and possession of Eaton Vance Management.
ITEM 32. MANAGEMENT SERVICES
None.
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend offering of its Preferred Shares until
it amends its prospectus if (a) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(2) - (4) Not applicable
(5)(a) For purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 497(h) under the Securities
Act of 1933, shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(5)(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be initial bona fide offering thereof.
(6) 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, its Statement of Additional Information for the
Preferred Shares.
C-5
NOTICE
A copy of the Declaration of Trust of Eaton Vance Senior Income Trust 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 Registrant by an
officer of the Registrant 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, officers or shareholders individually, but are binding only upon the
assets and property of the Registrant.
C-6
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 Boston, and the Commonwealth of Massachusetts, on
April 10, 2001.
EATON VANCE SENIOR INCOME TRUST
By: /s/ James B. Hawkes
----------------------------------
James B. Hawkes, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities on April 10, 2001.
Signature Title
--------- -----
/s/ James B. Hawkes Trustee, President and Principal
---------------------------- Executive Officer
James B. Hawkes
/s/ James L. O'Connor Treasurer (Principal Financial and
---------------------------- Accounting Officer)
James L. O'Connor
Trustee
----------------------------
Jessica M. Bibliowicz
Trustee
----------------------------
Donald R. Dwight
/s/ Samuel L. Hayes, III Trustee
----------------------------
Samuel L. Hayes, III
/s/ Norton H. Reamer Trustee
----------------------------
Norton H. Reamer
Trustee
----------------------------
Lynn A. Stout
/s/ Jack L. Treynor Trustee
----------------------------
Jack L. Treynor
By:
------------------------------------
Alan R. Dynner (As attorney-in-fact)
C-7
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(b)(2) Form of Second Amended By-laws
(n) Independent Auditors' Consent
(s) Power of Attorney dated April 10, 2001
C-8