PROSPECTUS
JULY 1, 2004
5,000,000 COMMON SHARES
ING PRIME RATE TRUST
[GRAPHIC]
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE ING PRIME RATE
TRUST (THE TRUST) THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW BEFORE INVESTING.
YOU SHOULD READ IT CAREFULLY BEFORE YOU INVEST, AND KEEP IT FOR FUTURE
REFERENCE.
THE TRUST HAS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (THE SEC) A
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 2004 (THE SAI) CONTAINING
ADDITIONAL INFORMATION ABOUT THE TRUST. THE SAI IS INCORPORATED BY REFERENCE IN
ITS ENTIRETY INTO THIS PROSPECTUS. YOU MAY OBTAIN A FREE COPY OF THE SAI BY
CONTACTING THE TRUST AT (800) 992-0180 OR BY WRITING TO THE TRUST AT 7337
E. DOUBLETREE RANCH ROAD, SCOTTSDALE, ARIZONA 85258. THE PROSPECTUS, SAI AND
OTHER INFORMATION ABOUT THE TRUST ARE AVAILABLE ON THE SEC'S WEBSITE
(http://www.sec.gov). THE TABLE OF CONTENTS FOR THE SAI APPEARS ON PAGE 30 OF
THIS PROSPECTUS.
COMMON SHARES OF THE TRUST TRADE ON THE NEW YORK STOCK EXCHANGE (THE NYSE) UNDER
THE SYMBOL PPR.
MARKET FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT THE
TRUST. THERE IS NO GUARANTEE THAT THE TRUST WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. INVESTMENT IN THE TRUST INVOLVES CERTAIN RISKS AND SPECIAL
CONSIDERATIONS, INCLUDING RISKS ASSOCIATED WITH THE TRUST'S USE OF LEVERAGE. SEE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" BEGINNING ON PAGE 15 FOR A DISCUSSION
OF ANY FACTORS THAT MAKE INVESTMENT IN THE TRUST SPECULATIVE OR HIGH RISK.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
[ING FUNDS LOGO]]
WHAT'S INSIDE
Introduction to the Trust 1
Prospectus Synopsis 2
What You Pay To Invest -- Trust Expenses 6
Financial Highlights 8
Trading and NAV Information 10
Investment Objective and Policies 11
The Trust's Investments 13
Risk Factors and Special Considerations 15
Transaction Policies 20
Plan of Distribution 21
Use of Proceeds 22
Dividends and Distributions 22
Investment Management and Other
Service Providers 23
Description of the Trust 25
Description of Capital Structure 27
Tax Matters 28
More Information 29
Statement of Additional Information
Table of Contents 30
[GRAPHIC] OBJECTIVE
[GRAPHIC] INVESTMENT This Prospectus describes the Trust's objective,
STRATEGY investment strategy and risks.
[GRAPHIC] RISKS
You'll also find:
WHAT YOU PAY TO INVEST.
[GRAPHIC] WHAT YOU A list of the fees and expenses you pay -- both
PAY TO directly and indirectly -- when you invest in the
INVEST Trust.
(THIS PAGE INTENTIONALLY LEFT BLANK)
INTRODUCTION TO THE TRUST
THIS PROSPECTUS IS DESIGNED TO HELP YOU MAKE AN INFORMED DECISION ABOUT MAKING
AN INVESTMENT IN ING PRIME RATE TRUST. PLEASE READ IT CAREFULLY AND RETAIN IT
FOR FUTURE REFERENCE.
Who should invest in the Trust?
ING PRIME RATE TRUST MAY SUIT YOU IF YOU:
- are seeking a high level of current income; and
- are willing to accept the risks associated with an investment in a
leveraged portfolio consisting primarily of senior loans that are typically
below investment grade credit quality.
DESCRIPTION OF THE TRUST
The Trust is a diversified, closed-end management investment company that
seeks to provide investors with as high a level of current income as is
consistent with the preservation of capital. The Trust seeks to achieve this
objective by investing in a professionally managed portfolio comprised
primarily of senior loans, an investment typically not available directly to
individual investors.
The Trust cannot guarantee that it will achieve its investment objective. In
addition, since the senior loans in the Trust's portfolio typically are below
investment grade credit quality and the portfolio is leveraged, the Trust has
speculative characteristics.
Common Shares of the Trust trade on the NYSE under the symbol PPR.
The Trust's investment manager is ING Investments, LLC. The Trust's
sub-adviser is ING Investment Management Co. (formerly known as Aeltus
Investment Management, Inc.)
[SIDENOTE]
Risk is the potential that your investment will lose money or not earn as much
as you hope. All funds have varying degrees of risk, depending upon the
securities they invest in.
This Trust involves certain risks and special considerations, including risks
associated with investing in below investment grade assets and risks associated
with the Trust's use of borrowing and other leverage strategies. See "Risk
Factors and Special Considerations" beginning on page 15.
Please read this Prospectus carefully to be sure you understand the principal
risks and strategies associated with the Trust. You should consult the SAI for a
complete list of the risks and strategies.
[GRAPHIC]
If you have any questions about the Trust, please call your financial consultant
or us at (800) 992-0180.
[GRAPHIC]
If you have any questions, please call (800) 992-0180.
Introduction to the Trust 1
PROSPECTUS SYNOPSIS
The following synopsis is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus.
DESCRIPTION OF THE TRUST
THE TRUST
The Trust is a diversified, closed-end management investment company registered
under the Investment Company Act of 1940, as amended (the 1940 Act). It was
organized as a Massachusetts business trust on December 2, 1987. As of June 15,
2004, the Trust's net asset value (NAV) per Common Share was $7.35.
NYSE LISTED
As of June 15, 2004, the Trust had 137,821,394 Common Shares outstanding, which
are traded on the NYSE under the symbol PPR. As of June 15, 2004, the last
reported sales price of a Common Share of the Trust was $7.90.
INVESTMENT OBJECTIVE
To provide investors with as high a level of current income as is consistent
with the preservation of capital. There is no assurance that the Trust will
achieve its investment objective.
INVESTMENT MANAGER/SUB-ADVISER
The Trust's investment manager is ING Investments, LLC (ING Investments or the
Investment Manager), an Arizona limited liability company. The Investment
Manager had assets under management of over $35.4 billion as of March 31, 2004.
The Investment Manager is an indirect wholly-owned subsidiary of ING Groep N.V.
(NYSE: ING) (ING Groep). ING Groep is a global financial institution active in
the fields of insurance, banking and asset management in more than 65 countries
with more than 100,000 employees.
The Investment Manager receives an annual fee, payable monthly, in an amount
equal to 0.80% of the Trust's average daily gross asset value, minus the sum of
the Trust's accrued and unpaid dividends on any outstanding preferred shares and
accrued liabilities (other than liabilities for the principal amount of any
borrowings incurred, commercial paper or notes issued by the Trust and the
liquidation preference of any outstanding preferred shares) (Managed Assets).
This definition includes the assets acquired through the Trust's use of
leverage.
Effective August 1, 2003, ING Investment Management Co. (INGIM or Sub-Adviser)
(formerly known as Aeltus Investment Management, Inc.) serves as Sub-Adviser to
the Trust. See "Investment Management and Other Service Providers --
Sub-Adviser" on page 23. INGIM is an affiliate of the Investment Manager.
DISTRIBUTIONS
Income dividends on Common Shares accrue and are declared and paid monthly.
Income dividends may be distributed in cash or reinvested in additional full and
fractional shares of the Trust through the Trust's Shareholder Investment
Program.
PRIMARY INVESTMENT STRATEGY
The Trust seeks to achieve its investment objective by investing under normal
circumstances at least 80% of its net assets, plus the amount of any borrowings
for investment purposes, in higher yielding, U.S. dollar denominated, floating
rate secured senior loans (Senior Loans). The Senior Loans are typically rated
below investment grade credit quality. The Trust makes its investments in Senior
Loans by purchasing a portion of the overall loan, I.E., the Trust becomes one
of a number of lenders participating in the loan. The Trust will provide
shareholders with at least 60 days' prior notice of any change in this
investment policy.
The Trust only invests in Senior Loans made to corporations or other business
entities organized under U.S. or Canadian law and which are domiciled in the
U.S., Canada or in U.S. territories or possessions. Senior Loans either hold the
most senior position in the capital structure of the borrower or hold an equal
ranking with other senior debt or have characteristics that the Investment
Manager believes justify treatment as senior debt.
2 PROSPECTUS SYNOPSIS
PROSPECTUS SYNOPSIS
OTHER INVESTMENT STRATEGIES AND POLICIES
Assets not invested in Senior Loans may be invested in unsecured loans,
subordinated loans, short-term debt securities, and equities acquired in
connection with investments in loans. See "Investment Objective and Policies" on
page 11.
Loans in which the Trust invests typically have interest rates which reset at
least quarterly and may reset as frequently as daily. The maximum duration of an
interest rate reset on any loan in which the Trust may invest is one year. In
order to achieve overall reset balance, the Trust will ordinarily maintain a
dollar-weighted average time to next interest rate adjustment on its loans of 90
days or less.
Normally at least 80% of the Trust's portfolio will be invested in Senior Loans
with maturities of one to ten years. The maximum maturity on any loan in which
the Trust may invest is ten years.
To seek to increase the yield on the Common Shares, the Trust may engage in
lending its portfolio securities. Such lending will be fully secured by
investment grade collateral held by an independent agent.
The Trust may hold a portion of its assets in short-term interest bearing
instruments. Moreover, in periods when, in the opinion of the Investment Manager
or Sub-Adviser, a temporary defensive position is appropriate, up to 100% of the
Trust's assets may be held in cash or short-term interest bearing instruments.
The Trust may not achieve its investment objective when pursuing a temporary
defensive position.
The Trust may not invest in Senior Loans made to foreign borrowers other than
borrowers organized under Canadian law and which are domiciled in the U.S.,
Canada or in U.S. territories or possessions.
The Trust may engage in executing repurchase and reverse repurchase agreements.
LEVERAGE
To seek to increase the yield on the Common Shares, the Trust employs financial
leverage by borrowing money and issuing preferred shares. See "Risk Factors and
Special Considerations -- Leverage" on page 16.
BORROWINGS
Under the 1940 Act, the Trust may borrow up to an amount equal to 33 1/3% of its
total assets (including the proceeds of the borrowings) less all liabilities
other than borrowings. The Trust's obligations to holders of its debt are senior
to its ability to pay dividends on, or redeem or repurchase, Common Shares and
preferred shares, or to pay holders of Common Shares and preferred shares in the
event of liquidation.
PREFERRED SHARES
Under the 1940 Act, the Trust may issue preferred shares so long as immediately
after any issuance of preferred shares the value of the Trust's total assets
(less all Trust liabilities and indebtedness that is not senior indebtedness) is
at least twice the amount of the Trust's senior indebtedness plus the
involuntary liquidation preference of all outstanding shares.
The Trust is authorized to issue an unlimited number of shares of a class of
preferred stock in one or more series. In November 2000, the Trust issued 3,600
shares each of Series M, T, W, Th and F Auction Rate Cumulative Preferred
Shares, $0.01 par value, $25,000 liquidation preference per share, for a total
issuance of $450 million (the Preferred Shares). The Trust's obligations to
holders of the Preferred Shares are senior to its ability to pay dividends on,
or redeem or repurchase, Common Shares, or to pay holders of Common Shares in
the event of liquidation.
The 1940 Act also requires that the holders of the Preferred Shares, voting as a
separate class, have the right to:
- elect at least two trustees at all times; and
- elect a majority of the trustees at any time when dividends on any series
of Preferred Shares are unpaid for two full years.
In each case, the holders of Common Shares voting separately as a class will
elect the remaining trustees.
[TELEPHONE GRAPHIC]
If you have any questions, please call (800) 992-0180.
PROSPECTUS SYNOPSIS 3
PROSPECTUS SYNOPSIS
DIVERSIFICATION
The Trust maintains a diversified investment portfolio, a strategy which seeks
to limit exposure to any one issuer or industry.
As a diversified investment company, the Trust may not make investments in any
one issuer (other than the U.S. government) if, immediately after such purchase
or acquisition, more than 5% of the value of the Trust's total assets would be
invested in such issuer, or the Trust would own more than 25% of any outstanding
issue. The Trust will consider a borrower on a loan, including a loan
participation, to be the issuer of that loan. This strategy is a fundamental
policy that may not be changed without shareholder approval. With respect to no
more than 25% of its total assets, the Trust may make investments that are not
subject to the foregoing restrictions.
In addition, a maximum of 25% of the Trust's total assets, measured at the time
of investment, may be invested in any one industry. This strategy is also a
fundamental policy that may not be changed without shareholder approval.
PLAN OF DISTRIBUTION
The Common Shares are offered by the Trust through the Trust's Shareholder
Investment Program. The Shareholder Investment Program allows participating
shareholders to reinvest all dividends in additional shares of the Trust, and
also allows participants to purchase additional Common Shares through optional
cash investments in amounts ranging from a minimum of $100 to a maximum of
$100,000 per month. The Trust reserves the right to reject any purchase order.
Please note that cash, travelers checks, third party checks, money orders and
checks drawn on non-US banks (even if payment may be effected through a US bank)
generally will not be accepted. Common Shares may be issued by the Trust under
the Shareholder Investment Program only if the Trust's Common Shares are trading
at a premium to net asset value (NAV). If the Trust's Common Shares are trading
at a discount to NAV, Common Shares purchased under the Shareholder Investment
Program will be purchased on the open market. See "Plan of Distribution" on page
21.
Shareholders may elect to participate in the Shareholder Investment Program by
telephoning the Trust or submitting a completed Participation Form to DST
Systems, Inc. (DST).
Common Shares also may be offered pursuant to privately negotiated transactions
between the Trust or ING Funds Distributor, LLC and individual investors. Common
Shares of the Trust issued in connection with privately negotiated transactions
will be issued at the greater of (i) NAV per Common Share of the Trust's Common
Shares or (ii) at a discount ranging from 0% to 5% of the average daily market
price of the Trust's Common Shares at the close of business on the two business
days preceding the date upon which Common Shares are sold pursuant to the
privately negotiated transaction. See "Plan of Distribution" on page 21.
ADMINISTRATOR
The Trust's administrator is ING Funds Services, LLC (the Administrator). The
Administrator is an affiliate of the Investment Manager. The Administrator
receives an annual fee, payable monthly, in a maximum amount equal to 0.25% of
the Trust's Managed ASSETS.
RISK FACTORS AND SPECIAL CONSIDERATIONS
CREDIT RISK ON LOANS
Loans in the Trust's portfolio will typically be below investment grade credit
quality. Investment in the Trust involves the risk that borrowers may default on
obligations to pay principal or interest when due, that lenders may have
difficulty liquidating the collateral securing the loans or enforcing their
rights under the terms of the loans, and that the Trust's investment objective
may not be realized.
4 PROSPECTUS SYNOPSIS
PROSPECTUS SYNOPSIS
INTEREST RATE RISK
Changes in market interest rates will affect the yield on the Trust's Common
Shares. If market interest rates fall, the yield on the Trust's Common Shares
will also fall. In addition, changes in market interest rates may cause the
Trust's NAV to experience moderate volatility because of the lag between changes
in market rates and the resetting of the floating rates on assets in the Trust's
portfolio. To the extent that market interest rate changes are reflected as a
change in the market spreads for loans of the type and quality in which the
Trust invests, the value of the Trust's portfolio may decrease in response to an
increase in such spreads. Finally, substantial increases in interest rates may
cause an increase in loan defaults as borrowers may lack the resources to meet
higher debt service requirements.
DISCOUNT FROM NAV
As with any security, the market value of the Common Shares may increase or
decrease from the amount that you paid for the Common Shares.
The Trust's Common Shares may trade at a discount to NAV. This is a risk
separate and distinct from the risk that the Trust's NAV per Common Share may
decrease.
LEVERAGE
The Trust's use of leverage through borrowings and the issuance of preferred
shares can adversely affect the yield on the Trust's Common Shares. To the
extent that the Trust is unable to invest the proceeds from the use of leverage
in assets which pay interest at a rate which exceeds the rate paid on the
leverage, the yield on the Trust's Common Shares will decrease. In addition, in
the event of a general market decline in the value of assets such as those in
which the Trust invests, the effect of that decline will be magnified in the
Trust because of the additional assets purchased with the proceeds of the
leverage. As of June 15, 2004, the Trust had $444 million of borrowings
outstanding under two credit facilities totaling $525, and $450 million of
Preferred Shares.
LIMITED SECONDARY MARKET FOR LOANS
Because of the limited secondary market for loans, the Trust may be limited in
its ability to sell loans in its portfolio in a timely fashion and/or at a
favorable price.
DEMAND FOR LOANS
An increase in demand for loans may adversely affect the rate of interest
payable on new loans acquired by the Trust, and it may also increase the price
of loans in the secondary market.
IMPACT OF SHAREHOLDER INVESTMENT PROGRAM AND PRIVATELY NEGOTIATED TRANSACTIONS
The issuance of Common Shares through the Shareholder Investment Program and/or
through privately negotiated transactions may have an adverse effect on prices
in the secondary market for the Trust's Common Shares by increasing the number
of Common Shares available for sale. In addition, the Common Shares may be
issued at a discount to the market price for such Common Shares, which may put
downward pressure on the market price for Common Shares of the Trust.
[TELEPHONE GRAPHIC]
If you have any questions, please call (800) 992-0180.
PROSPECTUS SYNOPSIS 5
WHAT YOU PAY TO INVEST -- TRUST EXPENSES
The cost you pay to invest in the Trust includes the expenses incurred by the
Trust. In accordance with SEC requirements, the table below shows the expenses
of the Trust, including interest expense on borrowings, as a percentage of the
average net assets of the Trust, and not as a percentage of gross assets or
Managed Assets. By showing expenses as a percentage of net assets, expenses are
not expressed as a percentage of all of the assets that are invested for the
Trust. The Table below assumes that the Trust has issued $450 million of
Preferred Shares and has borrowed an amount equal to 25% of its Managed Assets.
For information about the Trust's expense ratios if the Trust had not borrowed
or issued Preferred Shares, see "Risk Factors and Special Considerations --
Annual Expenses Without Borrowings or Preferred Shares."
SHAREHOLDER TRANSACTION EXPENSES
Shareholder Investment Program Fees NONE
Privately Negotiated Transactions
Commission (as a percentage of offering price) NONE
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES)
Management and Administrative Fees(1) 2.05%
Interest Expense on Borrowed Funds 0.89%
Other Operating Expenses(2) 0.43%
Total Annual Expenses(3) 3.37%
(1) Pursuant to the Investment Management Agreement with the Trust, ING
Investments is paid a fee of 0.80% of the Trust's Managed Assets. Pursuant
to its Administration Agreement with the Trust, ING Funds Services, LLC,
the Trust's Administrator, is paid a fee of 0.25% of the Trust's Managed
Assets. See "Investment Management and Other Service Providers -- The
Administrator."
(2) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year, which, in turn, are based on "other operating expenses" for
the fiscal year ended February 29, 2004, and does not include the expenses
of borrowing.
(3) If the Total Annual Expenses of the Trust were expressed as a percentage of
Managed Assets (assuming the same 25% borrowing), the Total Annual Expense
ratio would be 1.73%.
6 WHAT YOU PAY TO INVEST -- TRUST EXPENSES
WHAT YOU PAY TO INVEST -- TRUST EXPENSES
EXAMPLE
The following hypothetical example shows the amount of the expenses that an
investor in the Trust would bear on a $1,000 investment that is held for the
different time periods in the table. The example assumes that all dividends and
other distributions are reinvested at NAV and that the percentage amounts listed
under Total Annual Expenses above remain the same in the years shown. The tables
and the assumption in the hypothetical example of a 5% annual return are
required by regulation of the SEC applicable to all investment companies. The
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Trust's Common Shares. For more complete
descriptions of certain of the Trust's costs and expenses, see "Investment
Management and Other Service Providers."
The following example applies to shares issued in connection with the Trust's
Shareholder Investment Program and shares issued in connection with privately
negotiated transactions. This example does not take into account whether such
shares are purchased at a discount or a premium to the Trust's net asset value.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return and where the Trust has borrowed in an amount equal to 25% of its
Managed Assets $ 34 $ 106 $ 183 $ 395
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where the
Trust has not borrowed $ 20 $ 62 $ 106 $ 230
The purpose of the above table is to assist you in understanding the various
costs and expenses that an investor in the Trust will bear directly or
indirectly.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
[TELEPHONE GRAPHIC]
If you have any questions, please call (800) 992-0180.
WHAT YOU PAY TO INVEST -- TRUST EXPENSES 7
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS TABLE
The table below sets forth selected financial information which has been derived
from the financial statements in the Trust's Annual Report dated as of February
29, 2004. The information in the table below has been audited by KPMG LLP,
independent registered public accounting firm. The auditors' report is
contained in the Trust's Annual Report dated as of February 29, 2004 which is
incorporated by reference into the SAI. A free copy of the Annual Report may
be obtained by calling (800) 992-0180.
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
--------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 6.73 $ 7.20 $ 8.09
Net investment income 0.46 0.50 0.74
Net realized and unrealized gain (loss) on investments 0.61 (0.47) (0.89)
-------------- -------------- --------------
Increase (decrease) in net asset value from
investment operations 1.07 0.03 (0.15)
Distributions to Common Shareholders from net
investment income (0.42) (0.45) (0.63)
Distribution to Preferred Shareholders (0.04) (0.05) (0.11)
Reduction in net asset value from Preferred
Shares offerings -- -- --
-------------- -------------- --------------
Net asset value, end of year $ 7.34 $ 6.73 $ 7.20
============== ============== ==============
Closing market price at end of year $ 7.84 $ 6.46 $ 6.77
TOTAL INVESTMENT RETURN(1)
Total investment return at closing market price(2) 28.77% 2.53% (9.20)%
Total investment return at net asset value(3) 15.72% 0.44% (3.02)%
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 1,010,325 $ 922,383 $ 985,982
Preferred Shares Aggregate amount
outstanding (000's) $ 450,000 $ 450,000 $ 450,000
Borrowings at end of year (000's) $ 225,000 $ 167,000 $ 282,000
Liquidation and market value per share
of Preferred Shares $ 25,000 $ 25,000 $ 25,000
Asset coverage per $1,000 of debt(6) $ 2,500 $ 2,500 $ 2,350
Average borrowings (000's) $ 143,194 $ 190,671 $ 365,126
Ratios to average net assets including Preferred Shares(7)
Expenses (before interest and other
fees related to revolving credit facility) 1.45% 1.49% 1.57%
Expenses 1.65% 1.81% 2.54%
Net investment income 4.57% 4.97% 6.83%
Ratios to average net assets plus borrowing
Expenses (before interest and other
fees related to revolving credit facility) 1.84% 1.82% 1.66%
Expenses 2.09% 2.23% 2.70%
Net investment income 5.82% 6.10% 7.24%
Ratios to average net assets
Expenses (before interest and other
fees related to revolving credit facility) 2.11% 2.19% 2.25%
Expenses 2.40% 2.68% 3.64%
Net investment income 6.68% 7.33% 9.79%
Portfolio turnover rate 87% 48% 53%
Common shares outstanding at end of year (000's) 137,638 136,973 136,973
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
---------------------------------------
2001 2000(4)
-------------- --------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 8.95 $ 9.24
Net investment income 0.88 0.79
Net realized and unrealized gain (loss) on investments (0.78) (0.30)
-------------- --------------
Increase (decrease) in net asset value from
investment operations 0.10 0.49
Distributions to Common Shareholders from net
investment income (0.86) (0.78)
Distribution to Preferred Shareholders (0.06) --
Reduction in net asset value from Preferred
Shares offerings (0.04) --
-------------- --------------
Net asset value, end of year $ 8.09 $ 8.95
============== ==============
Closing market price at end of year $ 8.12 $ 8.25
TOTAL INVESTMENT RETURN(1)
Total investment return at closing market price(2) 9.10% (5.88)%
Total investment return at net asset value(3) 0.19% 5.67%
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 1,107,432 $ 1,217,339
Preferred Shares Aggregate amount
outstanding (000's) $ 450,000 --
Borrowings at end of year (000's) $ 510,000 $ 484,000
Liquidation and market value per share
of Preferred Shares $ 25,000 --
Asset coverage per $1,000 of debt(6) $ 2,150 $ 3,520
Average borrowings (000's) $ 450,197 $ 524,019
Ratios to average net assets including Preferred Shares(7)
Expenses (before interest and other
fees related to revolving credit facility) 1.62% --
Expenses 3.97% --
Net investment income 9.28% --
Ratios to average net assets plus borrowing
Expenses (before interest and other
fees related to revolving credit facility) 1.31% 1.00%(5)
Expenses 3.21% 2.79%(5)
Net investment income 7.50% 6.12%
Ratios to average net assets
Expenses (before interest and other
fees related to revolving credit facility) 1.81% 1.43%(5)
Expenses 4.45% 4.00%(5)
Net investment income 10.39% 8.77%
Portfolio turnover rate 46% 71%
Common shares outstanding at end of year (000's) 136,847 136,036
8 FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
-----------------------------------------------------
1999(4) 1998(4) 1997(4)
-------------- -------------- --------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 9.34 $ 9.45 $ 9.61
Net investment income 0.79 0.87 0.82
Net realized and unrealized gain (loss) on investments (0.10) (0.13) (0.02)
-------------- -------------- --------------
Increase (decrease) in net asset value from
investment operations 0.69 0.74 0.80
Distributions to Common Shareholders from net
investment income (0.82) (0.85) (0.82)
Distribution to Preferred Shareholders 0.03 -- --
Reduction in net asset value from Preferred
Shares offerings -- -- (0.14)
-------------- -------------- --------------
Net asset value, end of year $ 9.24 $ 9.34 $ 9.45
============== ============== ==============
Closing market price at end of year $ 9.56 $ 10.31 $ 10.00
TOTAL INVESTMENT RETURN(1)
Total investment return at closing market price(2) 1.11% 12.70% 15.04%(8)
Total investment return at net asset value(3) 7.86% 8.01% 8.06%(8)
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 1,202,565 $ 1,034,403 $ 1,031,089
Preferred Shares Aggregate amount
outstanding (000's) -- -- --
Borrowings at end of year (000's) $ 534,000 -- --
Liquidation and market value per share
of Preferred Shares -- -- --
Asset coverage per $1,000 of debt(6) $ 3,250 -- --
Average borrowings (000's) $ 490,978 $ 346,110 $ 131,773
Ratios to average net assets including Preferred Shares(7)
Expenses (before interest and other
fees related to revolving credit facility) -- -- --
Expenses -- -- --
Net investment income -- -- --
Ratios to average net assets plus borrowing
Expenses (before interest and other
fees related to revolving credit facility) 1.05%(5) 1.04% 1.13%
Expenses 2.86%(5) 2.65% 1.92%
Net investment income 6.00% 6.91% 7.59%
Ratios to average net assets
Expenses (before interest and other
fees related to revolving credit facility) 1.50%(5) 1.39% 1.29%
Expenses 4.10%(5) 3.54% 2.20%
Net investment income 8.60% 9.23% 8.67%
Portfolio turnover rate 68% 90% 82%
Common shares outstanding at end of year (000's) 130,206 110,764 109,140
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
---------------------------------------
1996(9) 1995
-------------- --------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 9.66 $ 10.02
Net investment income 0.89 0.74
Net realized and unrealized gain (loss) on investments (0.08) 0.07
-------------- --------------
Increase (decrease) in net asset value from
investment operations 0.81 0.81
Distributions to Common Shareholders from net
investment income (0.86) (0.73)
Distribution to Preferred Shareholders -- --
Reduction in net asset value from Preferred
Shares offerings -- (0.44)
-------------- --------------
Net asset value, end of year $ 9.61 $ 9.66
============== ==============
Closing market price at end of year $ 9.50 $ 8.75
TOTAL INVESTMENT RETURN(1)
Total investment return at closing market price(2) 19.19% 3.27%(8)
Total investment return at net asset value(3) 9.21% 5.24%(8)
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 862,938 $ 867,083
Preferred Shares Aggregate amount
outstanding (000's) -- --
Borrowings at end of year (000's) -- --
Liquidation and market value per share
of Preferred Shares -- --
Asset coverage per $1,000 of debt(6) -- --
Average borrowings (000's) -- --
Ratios to average net assets including Preferred Shares(7)
Expenses (before interest and other
fees related to revolving credit facility) -- --
Expenses -- --
Net investment income -- --
Ratios to average net assets plus borrowing
Expenses (before interest and other
fees related to revolving credit facility) -- --
Expenses -- --
Net investment income -- --
Ratios to average net assets
Expenses (before interest and other
fees related to revolving credit facility) -- --
Expenses 1.23% 1.30%
Net investment income 9.23% 7.59%
Portfolio turnover rate 88% 108%
Common shares outstanding at end of year (000's) 89,794 89,794
(1) Total investment return calculations are attributable to common
shareholders.
(2) Total investment return measures the change in the market value of your
investment assuming reinvestment of dividends and capital gain
distributions, if any, in accordance with the provisions of the dividend
reinvestment plan.
(3) Total investment return at net asset value has been calculated assuming a
purchase at net asset value at the beginning of each period and a sale at
net asset value at the end of each period and assumes reinvestment of
dividends and capital gain distributions in accordance with the provisions
of the dividend reinvestment plan. This calculation differs from total
investment return because it excludes the effects of changes in the market
values of the Trust's shares.
(4) The Investment Manager agreed to reduce its fee for a period of three years
from the Expiration Date of the November 12, 1996 Rights Offering to 0.60%
of the average daily net assets, plus the proceeds of any outstanding
borrowings, over $1.15 billion.
(5) Calculated on total expenses before impact of earnings credits.
(6) Asset coverage represents the total assets available for settlement of
Preferred Stockholder's interest and notes payables in relation to the
Preferred Shareholder interest and notes payable balance outstanding. The
Preferred Shares were first offered November 2, 2000.
(7) Ratios do not reflect the effect of dividend payments to Preferred
Shareholders; income ratios reflect income earned on assets attributable to
preferred shares.
(8) Calculation of total return excludes the effects of the per share dilution
resulting from the rights offering as the total account value of a fully
subscribed shareholder was minimally impacted.
(9) Pilgrim Investments, Inc., the Trust's investment manager, acquired certain
assets of Pilgrim Management Corporation, the Trust's former investment
manager, in a transaction that closed on April 7, 1995.
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FINANCIAL HIGHLIGHTS 9
TRADING AND NAV INFORMATION
The following table shows for the Trust's Common Shares for the periods
indicated: (1) the high and low closing prices as shown on the NYSE Composite
Transaction Tape; (2) the NAV per Common Share represented by each of the high
and low closing prices as shown on the NYSE Composite Transaction Tape; and (3)
the discount from or premium to NAV per Share (expressed as a percentage)
represented by these closing prices. The table also sets forth the aggregate
number of shares traded as shown on the NYSE Composite Transaction Tape during
the respective quarter.
PREMIUM/(DISCOUNT)
PRICE NAV TO NAV
---------------------- ---------------------- ------------------------ REPORTED
CALENDAR QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW NYSE VOLUME
---------- ---------- ---------- ---------- ---------- ---------- -----------
March 31, 2002 $ 6.950 $ 6.640 $ 7.29 $ 7.25 (4.66)% (8.41)% 11,781,400
June 30, 2002 6.950 6.230 7.25 7.13 (4.14) (12.62) 13,759,808
September 30, 2002 6.290 5.610 7.07 6.96 (11.03) (19.40) 16,512,192
December 31, 2002 6.100 5.440 6.69 6.55 (8.82) (16.95) 16,672,498
March 31, 2003 6.690 6.130 6.74 6.69 (0.74) (8.37) 16,702,202
June 30, 2003 7.240 6.690 6.98 6.74 3.72 (0.74) 19,962,000
September 30, 2003 7.660 7.000 7.00 7.08 9.43 (1.13) 17,908,200
December 31, 2003 8.020 7.250 7.27 7.13 10.32 1.68 15,522,226
March 31, 2004 8.170 7.710 7.36 7.34 11.01 5.04 18,287,600
On June 15, 2004, the last reported sale price of a Common Share of the Trust's
Common Shares on the NYSE was $7.90. The Trust's NAV on June 15, 2004 was $7.35.
See "Transaction Policies -- Net Asset Value." On June 15, 2004 the last
reported sale price of a share of the Trust's Common Shares on the NYSE ($7.90)
represented a 7.4% premium above NAV ($7.35) as of that date.
The Trust's Common Shares have traded in the market above, at, and below NAV
since March 9, 1992, when the Trust's Common Shares were listed on the NYSE. The
Trust cannot predict whether its Common Shares will trade in the future at a
premium or discount to NAV, and if so, the level of such premium or discount.
Shares of closed-end investment companies frequently trade at a discount from
NAV.
10 TRADING AND NAV INFORMATION
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Trust's investment objective is to provide investors with as high a level of
current income as is consistent with the preservation of capital. The Trust
seeks to achieve this investment objective by investing in the types of assets
described below:
1. SENIOR LOANS. Under normal circumstances, at least 80% of the Trust's net
assets, plus the amount of any borrowings for investment purposes, will be
invested in higher yielding, U.S. dollar denominated, floating rate secured
senior loans (Senior Loans). The Trust will provide shareholders with at
least 60 days' prior notice of any change in this investment policy.
The Trust only invests in Senior Loans made to corporations or other business
entities organized under U.S. or Canadian law and which are domiciled in the
U.S., Canada or in U.S. territories or possessions. These Senior Loans are
typically below investment grade in quality. The Trust makes its investments
in Senior Loans by purchasing a portion of the overall loan, I.E., the Trust
becomes one of a number of lenders participating in the loan.
Senior Loans either hold the most senior position in the capital structure of
the borrower or hold an equal ranking with other senior debt or have
characteristics that the Investment Manager or Sub-Adviser believes justify
treatment as senior debt.
The Trust does not invest in Senior Loans whose interest rates are tied to
non-domestic interest rates other than the London Inter-Bank Offered Rate
(LIBOR).
2. OTHER INVESTMENTS. Under normal circumstances the Trust may also invest up to
20% of its total assets in the following types of investments (Other
Investments):
- unsecured loans
- subordinated loans
- short-term debt securities
- equity securities incidental to investment in loans
3. CASH AND SHORT-TERM INSTRUMENTS. Under normal circumstances, the Trust may
invest in cash and/or short-term instruments. During periods when, in the
opinion of the Investment Manager or Sub-Adviser, a temporary defensive
posture in the market is appropriate, the Trust may hold up to 100% of its
assets in cash and/or short-term instruments.
FUNDAMENTAL DIVERSIFICATION POLICIES
1. INDUSTRY DIVERSIFICATION. The Trust may invest in any industry. The Trust may
not invest more than 25% of its total assets in any single industry.
2. BORROWER DIVERSIFICATION. As a diversified investment company, the Trust may
not make investments in any one issuer (other than the U.S. government) if,
immediately after such purchase or acquisition, more than 5% of the value of
the Trust's total assets would be invested in such issuer, or the Trust would
own more than 25% of any outstanding issue. The Trust will consider the
borrower on a loan, including a loan participation, to be the issuer of such
loan. With respect to no more than 25% of its total assets, the Trust may
make investments that are not subject to the foregoing restrictions.
These fundamental diversification policies may only be changed with approval by
a majority of all shareholders, including the vote of a majority of the holders
of Preferred Shares, and holders of any other preferred shares, voting
separately as a class.
INVESTMENT POLICIES
The Investment Manager and Sub-Adviser follow certain investment policies set by
the Trust's Board of Trustees. Some of those policies are set forth below.
Please refer to the SAI for additional information on these and other investment
policies.
1. PAYABLE IN U.S. DOLLARS. All investments purchased by the Trust must be
denominated in U.S. dollars.
2. MATURITY. Normally at least 80% of the Trust's total assets will be invested
in Senior Loans with maturities of one to ten years. The maximum maturity on
any loan in which the Trust can invest is ten years.
3. INTEREST RATE RESETS. Normally, at least 80% of the Trust's total assets will
be invested in assets with rates of interest which reset either daily,
monthly, or quarterly. The maximum duration of an interest rate reset on any
loan investment in which the Trust may invest is one year. In addition, the
Trust will ordinarily maintain a dollar-weighted average time until the next
interest rate adjustment on its loan investments of 90 days or less.
4. LIMITATIONS ON SUBORDINATED AND UNSECURED LOANS. The Trust may also invest up
to 5% of its total assets, measured at the time of investment, in
subordinated and unsecured loans. The Trust may acquire a subordinated loan
only if, at the time of acquisition, it acquires or holds a Senior Loan from
the same borrower. The Trust will acquire unsecured loans only where the
Investment Manager or Sub-Adviser believes, at the time of acquisition, that
the Trust would have the right to payment upon default that is not
subordinate to any other creditor. The maximum of 5% of the Trust's assets
invested in subordinated and unsecured loans will constitute part of the 20%
of the Trust's assets that may be invested in "Other Investments" as
described above, and will not count toward the 80% of the Trust's assets that
are normally invested in Senior Loans.
5. INVESTMENT QUALITY; CREDIT ANALYSIS. Loans in which the Trust invests
generally are rated below investment grade credit quality or are unrated. In
acquiring a loan, the Investment Manager or Sub-Adviser will consider some or
all of the following factors concerning the borrower: ability to service
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INVESTMENT OBJECTIVE AND POLICIES 11
INVESTMENT OBJECTIVE AND POLICIES
debt from internally generated funds; adequacy of liquidity and working
capital; appropriateness of capital structure; leverage consistent with
industry norms; historical experience of achieving business and financial
projections; the quality and experience of management; and adequacy of
collateral coverage. The Investment Manager or Sub-Adviser performs its own
independent credit analysis of each borrower. In so doing, the Investment
Manager or Sub-Adviser may utilize information and credit analyses from
agents that originate or administer loans, other lenders investing in a loan,
and other sources. The Investment Manager or Sub-Adviser also may communicate
directly with management of the borrowers. These analyses continue on a
periodic basis for any Senior Loan held by the Trust. See "Risk Factors and
Special Considerations -- Credit Risk on Senior Loans."
6. USE OF LEVERAGE. The Trust may borrow money and issue preferred shares to the
fullest extent permitted by the 1940 Act. See "Policy on Borrowing" and
"Policy on Issuance of Preferred Shares" below.
7. SHORT-TERM INSTRUMENTS. Short-term instruments in which the Trust invests may
include (i) commercial paper rated A-1 by Standard and Poor's or P-1 by
Moody's Investors Service, Inc., or of comparable quality as determined by
the Investment Manager, (ii) certificates of deposit, banker's acceptances,
and other bank deposits and obligations, and (iii) securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
8. SECURITIES LENDING. The Trust also may lend portfolio securities on a
short-term or long-term basis, an amount equal to up to 33 1/3% of its
total assets.
POLICY ON BORROWING
Beginning in May of 1996, the Trust began a policy of borrowing for investment
purposes. The Trust seeks to use proceeds from borrowing to acquire loans and
other investments which pay interest at a rate higher than the rate the Trust
pays on borrowings. Accordingly, borrowing has the potential to increase the
Trust's total income available to holders of its Common Shares.
The Trust may issue notes, commercial paper, or other evidences of indebtedness
and may be required to secure repayment by mortgaging, pledging, or otherwise
granting a security interest in the Trust's assets. The terms of any such
borrowings are subject to the provisions of the 1940 Act, and also subject to
the more restrictive terms of the credit agreements relating to borrowings and
additional guidelines imposed by rating agencies which are more restrictive than
the provisions of the 1940 Act. The Trust is permitted to borrow an amount equal
to up to 331/3%, or such other percentage permitted by law, of its total assets
(including the amount borrowed) less all liabilities other than borrowings. See
"Risk Factors and Special Considerations -- Leverage" and "Risk Factors and
Special Considerations -- Restrictive Covenants and 1940 Act Restrictions."
POLICY ON ISSUANCE OF PREFERRED SHARES
The Trust has a policy of issuing preferred shares for investment purposes. The
Trust seeks to use the proceeds from preferred shares to acquire loans and other
investments which pay interest at a rate higher than the dividends payable on
preferred shares. The terms of the issuance of preferred shares are subject to
the 1940 Act and to additional guidelines imposed by rating agencies, which are
more restrictive than the provisions of the 1940 Act. Under the 1940 Act, the
Trust may issue preferred shares so long as immediately after any issuance of
preferred shares the value of the Trust's total assets (less all Trust
liabilities and indebtedness that is not senior indebtedness) is at least twice
the amount of the Trust's senior indebtedness plus the involuntary liquidation
preference of all outstanding shares. In November 2000, the Trust issued 18,000
Preferred Shares for a total of $450 million. See "Risk Factors and Special
Considerations -- Leverage."
12 INVESTMENT OBJECTIVE AND POLICIES
THE TRUST'S INVESTMENTS
As stated above under Investment Objective and Policies, the Trust will invest
primarily in Senior Loans. This section contains a discussion of the
characteristics of Senior Loans, the manner in which those investments are made
and the market for Senior Loans.
SENIOR LOAN CHARACTERISTICS
Senior Loans are loans that are typically made to business borrowers to finance
leveraged buy-outs, recapitalizations, mergers, stock repurchases and internal
growth. Senior Loans generally hold the most senior position in the capital
structure of a borrower and are usually secured by liens on the assets of the
borrowers, including tangible assets such as cash, accounts receivable,
inventory, property, plant and equipment, common and/or preferred stock of
subsidiaries, and intangible assets including trademarks, copyrights, patent
rights and franchise value. The Trust may also receive guarantees as a form of
collateral.
By virtue of their senior position and collateral, Senior Loans typically
provide lenders with the first right to cash flows or proceeds from the sale of
a borrower's collateral if the borrower becomes insolvent (subject to the
limitations of bankruptcy law, which may provide higher priority to certain
claims such as, for example, employee salaries, employee pensions and taxes).
This means Senior Loans are generally repaid before unsecured bank loans,
corporate bonds, subordinated debt, trade creditors, and preferred or common
stockholders.
Senior Loans typically pay interest at least quarterly at rates which equal a
fixed percentage spread over a base rate such as LIBOR. For example, if LIBOR
were 2.00% and the borrower were paying a fixed spread of 3.00%, the total
interest rate paid by the borrower would be 5.00%. Base rates and, therefore,
the total rates paid on Senior Loans float, I.E., they change as market rates of
interest change.
Although a base rate such as LIBOR can change every day, loan agreements for
Senior Loans typically allow the borrower the ability to choose how often the
base rate for its loan will change. Such periods can range from one day to one
year, with most borrowers choosing monthly or quarterly reset periods. During
periods of rising interest rates, borrowers will tend to choose longer reset
periods, and during periods of declining interest rates, borrowers will tend to
choose shorter reset periods. The fixed spread over the base rate on a Senior
Loan typically does not change.
Senior Loans generally are arranged through private negotiations between a
borrower and several financial institutions represented by an agent who is
usually one of the originating lenders. In larger transactions, it is common to
have several agents; however, generally only one such agent has primary
responsibility for ongoing administration of a Senior Loan. Agents are typically
paid fees by the borrower for their services. The agent is primarily responsible
for negotiating the loan agreement which establishes the terms and conditions of
the Senior Loan and the rights of the borrower and the lenders. The agent also
is responsible for monitoring collateral and for exercising remedies available
to the lenders such as foreclosure upon collateral.
Loan agreements may provide for the termination of the agent's agency status in
the event that it fails to act as required under the relevant loan agreement,
becomes insolvent, enters FDIC receivership or, if not FDIC insured, enters into
bankruptcy. Should such an agent, lender or assignor with respect to an
assignment interpositioned between the Trust and the borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the
Trust should not be included in such person's or entity's bankruptcy estate. If,
however, any such amount were included in such person's or entity's bankruptcy
estate, the Trust would incur certain costs and delays in realizing payment or
could suffer a loss of principal or interest. In this event, the Trust could
experience a decrease in NAV.
The Trust acquires Senior Loans from lenders such as banks, insurance companies,
finance companies, other investment companies and private investment funds. The
Trust may also acquire Senior Loans from U.S. branches of foreign banks that are
regulated by the Federal Reserve System or appropriate state regulatory
authorities.
INVESTMENT BY THE TRUST
The Trust invests in Senior Loans primarily by purchasing an assignment of a
portion of a Senior Loan from a third party, either in connection with the
original loan transaction (I.E., in the primary market) or after the initial
loan transaction (I.E., in the secondary market). When the Trust purchases an
assignment in the primary market, it may share in a fee paid to the original
lender. When the Trust acquires a Senior Loan in the secondary market, it may
pay a fee to, or forego a portion of interest payments from, the lender making
the assignment. The Trust will act as lender, or purchase an assignment with
respect to a Senior Loan, only if the agent is determined by the Investment
Manager or Sub-Adviser to be creditworthy.
Except for rating agency guidelines imposed on the Trust's portfolio while it
has outstanding Preferred Shares, there is no minimum rating or other
independent evaluation of a borrower limiting the Trust's investments and most
Senior Loans that the Trust may acquire, if rated, will be rated below
investment grade credit quality. See "Risk Factors and Special Considerations --
Credit Risk on Senior Loans."
ASSIGNMENTS. When the Trust is a purchaser of an assignment, it succeeds to all
the rights and obligations under the loan agreement of the assigning lender and
becomes a lender under the loan agreement with the same rights and obligations
as the assigning lender. These rights include the ability to vote along with the
other lenders on such matters as enforcing the terms of the loan agreement,
E.G., declaring defaults, initiating collection action, etc. Taking such actions
usually requires at least a vote of the lenders holding a majority of the
investment in the loan, and may require a vote by lenders holding
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THE TRUST'S INVESTMENTS 13
THE TRUST'S INVESTMENTS
two-thirds or more of the investment in the loan. Because the Trust typically
does not hold a majority of the investment in any loan, it will not be able by
itself to control decisions that require a vote by the lenders.
ACQUISITION COSTS. When the Trust acquires an interest in a Senior Loan in the
primary market, it typically acquires the loan at par less its portion of the
fee paid to all originating lenders. When the Trust acquires an interest in a
Senior Loan, in the secondary market, it may be at par, but typically the Trust
will do so at premium or discount to par.
SENIOR LOAN MARKET
Total U.S. domestic Senior Loan volume has increased dramatically over the last
10 years. This increase has helped improve the liquidity of Senior Loans.
However, this increase has also been accompanied by an increase in the number of
participants in the Senior Loan market. Currently, the Senior Loan market is
experiencing a narrowing of spreads over LIBOR and some relaxation in credit
standards due to an insufficient number of loans to satisfy the requirements of
all lenders. More loans may become available if the U.S. economy continues to
show signs of improvement.
14 THE TRUST'S INVESTMENTS
RISK FACTORS AND SPECIAL CONSIDERATIONS
RISK IS INHERENT IN ALL INVESTING. THE FOLLOWING DISCUSSION SUMMARIZES SOME OF
THE RISKS THAT YOU SHOULD CONSIDER BEFORE DECIDING WHETHER TO INVEST IN THE
TRUST. FOR ADDITIONAL INFORMATION ABOUT THE RISKS ASSOCIATED WITH INVESTING IN
THE TRUST, SEE "ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT
TECHNIQUES" IN THE SAI.
CREDIT RISK ON SENIOR LOANS
The Trust's ability to pay dividends and repurchase its Common Shares is
dependent upon the performance of the assets in its portfolio. That performance,
in turn, is subject to a number of risks, chief among which is credit risk on
the underlying assets.
Credit risk is the risk of nonpayment of scheduled interest or principal
payments. In the event a borrower fails to pay scheduled interest or principal
payments on a Senior Loan held by the Trust, the Trust will experience a
reduction in its income and a decline in the market value of the Senior Loan,
which will likely reduce dividends and lead to a decline in the NAV of the
Trust's Common Shares. See "The Trust's Investments -- Investment by the Trust."
Senior Loans generally involve less risk than unsecured or subordinated debt and
equity instruments of the same issuer because the payment of principal and
interest on Senior Loans is a contractual obligation of the issuer that, in most
instances, takes precedence over the payment of dividends, or the return of
capital, to the issuer's shareholders and payments to bond holders. The Trust
generally invests in Senior Loans that are secured with specific collateral.
However, the value of the collateral may not equal the Trust's investment when
the loan is acquired or may decline below the principal amount of the Senior
Loan subsequent to the Trust's investment. Also, to the extent that collateral
consists of stock of the borrower or its subsidiaries or affiliates, the Trust
bears the risk that the stock may decline in value, be relatively illiquid, or
may lose all or substantially all of its value, causing the Senior Loan to be
undercollateralized. Therefore, the liquidation of the collateral underlying a
Senior Loan may not satisfy the issuer's obligation to the Trust in the event of
non-payment of scheduled interest or principal, and the collateral may not be
readily liquidated.
In the event of the bankruptcy of a borrower, the Trust could experience delays
and limitations on its ability to realize the benefits of the collateral
securing the Senior Loan. Among the credit risks involved in a bankruptcy are
assertions that the pledge of collateral to secure a loan constitutes a
fraudulent conveyance or preferential transfer that would have the effect of
nullifying or subordinating the Trust's rights to the collateral.
The Senior Loans in which the Trust invests are generally rated lower than
investment grade credit quality, I.E., rated lower than "Baa" by Moody's or
"BBB" by S&P, or have been issued by issuers who have issued other debt
securities which, if unrated, would be rated lower than investment grade credit
quality. Investment decisions will be based largely on the credit analysis
performed by the Investment Manager or Sub-Adviser, and not on rating agency
evaluation. This analysis may be difficult to perform. Information about a
Senior Loan and its issuer generally is not in the public domain. Moreover,
Senior Loans are not often rated by any nationally recognized rating service.
Many issuers have not issued securities to the public and are not subject to
reporting requirements under federal securities laws. Generally, however,
issuers are required to provide financial information to lenders and information
may be available from other Senior Loan participants or agents that originate or
administer Senior Loans.
INTEREST RATE RISK
During normal market conditions, changes in market interest rates will affect
the Trust in certain ways. The principal effect will be that the yield on the
Trust's Common Shares will tend to rise or fall as market interest rates rise
and fall. This is because almost all of the assets in which the Trust invests
pay interest at rates which float in response to changes in market rates.
However, because the interest rates on the Trust's assets reset over time, there
will be an imperfect correlation between changes in market rates and changes to
rates on the portfolio as a whole. This means that changes to the rate of
interest paid on the portfolio as a whole will tend to lag behind changes in
market rates.
Market interest rate changes may also cause the Trust's NAV to experience
moderate volatility. This is because the value of a loan asset in the Trust is
partially a function of whether it is paying what the market perceives to be a
market rate of interest for the particular loan, given its individual credit and
other characteristics. If market interest rates change, a loan's value could be
affected to the extent the interest rate paid on that loan does not reset at the
same time. As discussed above, the rates of interest paid on the loans in which
the Trust invests have a weighted average reset period that typically is less
than 90 days. Therefore, the impact of the lag between a change in market
interest rates and the change in the overall rate on the portfolio is expected
to be minimal.
To the extent that changes in market rates of interest are reflected not in a
change to a base rate such as LIBOR but in a change in the spread over the base
rate which is payable on loans of the type and quality in which the Trust
invests, the Trust's NAV could also be adversely affected. Again, this is
because the value of a loan asset in the Trust is partially a function of
whether it is paying what the market perceives to be a market rate of interest
for the particular loan, given its individual credit and other characteristics.
However, unlike changes in market rates of interest for which there is only a
temporary lag before the portfolio reflects those changes, changes in a loan's
value based on changes in the market spread on loans in the Trust's portfolio
may be of longer duration.
Finally, substantial increases in interest rates may cause an increase in loan
defaults as borrowers may lack the resources to meet higher debt service
requirements.
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RISK FACTORS AND SPECIAL CONSIDERATIONS 15
RISK FACTORS AND SPECIAL CONSIDERATIONS
CHANGES TO NAV
The NAV of the Trust is expected to change in response to a variety of factors,
primarily in response to changes in the creditworthiness of the borrowers on the
loans in which the Trust invests. See "Credit Risk on Senior Loans" above.
Changes in market interest rates may also have a moderate impact on the Trust's
NAV. See "Interest Rate Risk." Another factor which can affect the Trust's NAV
is changes in the pricing obtained for the Trust's assets. See "Transaction
Policies -- Valuation of the Trust's Assets."
DISCOUNT FROM NAV
The Trust's Common Shares have traded in the market above, at, and below NAV
since March 9, 1992, when the Trust's shares were listed on the NYSE. The
reasons for the Trust's Common Shares trading at a premium to or discount from
NAV are not known to the Trust, and the Trust cannot predict whether its Common
Shares will trade in the future at a premium to or discount from NAV, and if so,
the level of such premium or discount. Shares of closed-end investment companies
frequently trade at a discount from NAV. The possibility that Common Shares of
the Trust will trade at a discount from NAV is a risk separate and distinct from
the risk that the Trust's NAV may decrease.
LEVERAGE
The Trust may borrow an amount equal to up to 331/3% (or such other percentage
permitted by law) of its total assets (including the amount borrowed) less all
liabilities other than borrowings. Under the 1940 Act, the Trust may issue
preferred shares so long as immediately after any issuance of preferred shares
the value of the Trust's total assets (less all Trust liabilities and
indebtedness that is not senior indebtedness) is at least twice the amount of
the Trust's senior indebtedness plus the involuntary liquidation preference of
all outstanding shares. In November 2000, the Trust issued 18,000 Preferred
Shares for a total of $450 million. Borrowings and the issuance of preferred
shares are referred to in this Prospectus collectively as "leverage." The Trust
may use leverage for investment purposes, to finance the repurchase of its
Common Shares, and to meet other cash requirements. The use of leverage for
investment purposes increases both investment opportunity and investment risk.
Capital raised through leverage will be subject to interest and other costs, and
these costs could exceed the income earned by the Trust on the proceeds of such
leverage. There can be no assurance that the Trust's income from the proceeds of
leverage will exceed these costs. However, the Investment Manager or Sub-Adviser
seeks to use leverage for the purposes of making additional investments only if
they believe, at the time of using leverage, that the total return on the assets
purchased with such funds will exceed interest payments and other costs on the
leverage. In addition, the Investment Manager or Sub-Adviser intends to reduce
the risk that the costs of the use of leverage will exceed the total return on
investments purchased with the proceeds of leveraging by utilizing leverage
mechanisms whose interest rates float (or reset frequently). In the event of a
default on one or more loans or other interest-bearing instruments held by the
Trust, the use of leverage would increase the loss to the Trust and may increase
the effect on the Trust's NAV. The Trust's lenders and Preferred shareholders
have priority to the Trust's assets over the Trust's Common shareholders.
The Trust currently uses leverage by borrowing money on a floating rate basis
and by the issuance of Preferred Shares. The current rate on the borrowings (as
of June 15, 2004) is 1.56%. The current dividend rate on the Preferred Shares
(as of June 15, 2004) is 1.54%. To cover the annual interest and dividends on
the borrowings and the Preferred Shares for the current fiscal year (assuming
that the current interest and dividend rates remain in effect for the entire
fiscal year and assuming that the Trust borrows an amount equal to 25% of its
Managed Assets and the current Preferred Shares remain outstanding), the Trust
would need to earn 0.74% on its amount of Managed Assets as of June 15, 2004.
The Trust's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. The
funds borrowed pursuant to the credit facilities or obtained through the
issuance of Preferred Shares, or any other preferred shares, constitute a
substantial lien and burden by reason of their prior claim against the income of
the Trust and against the net assets of the Trust in liquidation.
16 RISK FACTORS AND SPECIAL CONSIDERATIONS
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Trust is not permitted to declare dividends or other distributions,
including dividends and distributions with respect to Common Shares or Preferred
Shares, or to purchase Common Shares or, Preferred Shares unless (i) at the time
thereof the Trust meets certain asset coverage requirements and (ii) there is no
event of default under any credit facility program that is continuing. See "Risk
Factors and Special Considerations -- Restrictive Covenants and 1940 Act
Restrictions" below. In the event of a default under a credit facility program,
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
cured, the lenders may be able to control the liquidation as well.
In addition, the Trust is not permitted to pay dividends on or redeem Common
Shares unless all accrued dividends on the Preferred Shares and all accrued
interest on borrowings have been paid or set aside for payment.
Because the fee paid to the Investment Manager will be calculated on the basis
of Managed Assets, the fee will be higher when leverage is utilized, giving the
Investment Manager an incentive to utilize leverage.
The Trust is subject to certain restrictions imposed by lenders to the Trust and
by guidelines of one or more rating agencies which issue ratings for the
Preferred Shares issued by the Trust. These restrictions impose asset coverage,
fund composition requirements and limits on investment techniques, such as the
use of financial derivative products, that are more stringent than those imposed
on the Trust by the 1940 Act. These covenants or guidelines could impede the
Investment Manager or Sub-Adviser from fully managing the Trust's portfolio in
accordance with the Trust's investment objective and policies.
ANNUAL EXPENSES WITHOUT BORROWINGS OR PREFERRED SHARES
If the Trust were not to have borrowed or have Preferred Shares outstanding,
the remaining expenses, as a percentage of the net assets of the Trust, would
be as follows:
ANNUAL EXPENSES WITHOUT BORROWINGS OR PREFERRED SHARES
(AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES)
Management and Administrative Fees(1) 1.05%
Other Operating Expenses(2) 0.43%
Total Annual Expenses 1.48%
(1) Pursuant to the Investment Management Agreement with the Trust, ING
Investments is paid a fee of 0.80% of the Trust's Managed Assets. Pursuant
to its Administration Agreement with the Trust, ING Funds Services, LLC, the
Trust's Administrator, is paid a fee of 0.25% of the Trust's Managed Assets.
See "Investment Management and Other Service Providers -- The
Administrator."
(2) "Other Operating Expenses" are based on estimated amounts for the current
fiscal year, which, in turn, are based on "other operating expenses" for the
fiscal year ended February 29, 2004, and does not include the expenses of
borrowing.
EFFECT OF LEVERAGE
The following table is designed to illustrate the effect on return to a holder
of the Trust's Common Shares of the leverage created by the Trust's use of
borrowing, using an assumed initial interest rate of 1.82%, assuming the Trust
has used leverage by borrowing an amount equal to 25% of the Trust's Managed
Assets and assuming hypothetical annual returns on the Trust's portfolio of
minus 10% to plus 10%. As can be seen, leverage generally increases the return
to shareholders when portfolio return is positive and decreases return when the
portfolio return is negative. Actual returns may be greater or less than those
appearing in the table.
Assumed Portfolio Return, net of expenses(1) (10%) (5%) 0% 5% 10%
Corresponding Return to Common Shareholders(2) (13.94%) (7.27%) (0.61%) 6.06% 12.73%
(1) The Assumed Portfolio Return is required by regulation of the SEC and is not
a prediction of, and does not represent, the projected or actual performance
of the Trust.
(2) In order to compute the "Corresponding Return to Common Shareholders," the
"Assumed Portfolio Return" is multiplied by the total value of the Trust's
assets at the beginning of the Trust's fiscal year to obtain an assumed
return to the Trust. From this amount, all interest accrued during the year
is subtracted to determine the return available to shareholders. The return
available to shareholders is then divided by the total value of the Trust's
net assets attributable to Common Shares as of the beginning of the fiscal
year to determine the "Corresponding Return to Common Shareholders."
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RISK FACTORS AND SPECIAL CONSIDERATIONS 17
RISK FACTORS AND SPECIAL CONSIDERATIONS
IMPACT OF SHAREHOLDER INVESTMENT PROGRAM AND PRIVATELY NEGOTIATED TRANSACTIONS
The issuance of Common Shares through the Trust's Shareholder Investment Program
may have an adverse effect on the secondary market for the Trust's Common
Shares. The increase in the number of the Trust's outstanding Common Shares
resulting from issuances pursuant to the Trust's Shareholder Investment Program
or pursuant to privately negotiated transactions, and the discount to the market
price at which such Common Shares may be issued, may put downward pressure on
the market price for Common Shares of the Trust. Common Shares will not be
issued pursuant to the Trust's Shareholder Investment Program at any time when
Common Shares are trading at a price lower than the Trust's NAV per Common
Share.
LIMITED SECONDARY MARKET FOR LOANS
Although the resale, or secondary, market for loans is growing, it is currently
limited. There is no organized exchange or board of trade on which loans are
traded. Instead, the secondary market for loans is an unregulated inter-dealer
or inter-bank re-sale market.
Loans usually trade in large denominations (typically in $1 million or larger)
and trades can be infrequent. The market has limited transparency so that
information about actual trades may be difficult to obtain. Accordingly, some or
many of the loans in which the Trust invests will be relatively illiquid.
In addition, loans in which the Trust invests may require the consent of the
borrower and/or the agent prior to sale or assignment. These consent
requirements can delay or impede the Trust's ability to sell loans and can
adversely affect the price that can be obtained. The Trust may have difficulty
disposing of loans if it needs cash to repay debt, to pay dividends, to pay
expenses or to take advantage of new investment opportunities. Although the
Trust has not conducted a tender offer since 1992, if it determines to again
conduct a tender offer, limitations of a secondary market may result in
difficulty raising cash to purchase tendered Common Shares.
These considerations may cause the Trust to sell securities at lower prices than
it would otherwise consider to meet cash needs or cause the Trust to maintain a
greater portion of its assets in cash equivalents than it would otherwise, which
could negatively impact performance. The Trust seeks to avoid the necessity of
selling assets to meet such needs by the use of borrowings.
The Trust values its assets daily. However, because the secondary market for
loans is limited, it may be difficult to value loans. Reliable market value
quotations may not be readily available for some loans and valuation of such
loans may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in valuation of loans, than for
securities with a more developed secondary market, because there is less
reliable, objective market value data available. In addition, if the Trust
purchases a relatively large portion of a loan to generate extra income
sometimes paid to large lenders, the limitations of the secondary market may
inhibit the Trust from selling a portion of the loan and reducing its exposure
to a borrower when the Investment Manager or Sub-Adviser deems it advisable to
do so.
LENDING PORTFOLIO SECURITIES
To generate additional income, the Trust may lend portfolio securities in an
amount equal to up to 331/3% of total Trust assets to broker-dealers, major
banks, or other recognized domestic institutional borrowers of securities. As
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower default or fail
financially. The Trust intends to engage in lending portfolio securities only
when such lending is fully secured by investment grade collateral held by an
independent agent.
DEMAND FOR LOANS
Although the volume of loans has increased in recent years, demand for loans has
also grown. An increase in demand may benefit the Trust by providing increased
liquidity for loans and higher sales prices, but it may also adversely affect
the rate of interest payable on loans acquired by the Trust, the rights provided
to the Trust under the terms of a loan agreement, and increase the price of
loans that the Trust wishes to purchase in the secondary market.
UNSECURED LOANS AND SUBORDINATED LOANS
Subject to the 20% of the Trust's assets that may be invested in Other
Investments, the Trust may invest up to 5% of its total assets, measured at the
time of investment, in unsecured loans and in subordinated loans. Unsecured
loans and subordinated loans share the same credit risks as those discussed
above under "Credit Risk on Senior Loans" except that unsecured loans are not
secured by any collateral of the borrower and subordinated loans are not the
most senior debt in a borrower's capital structure. Unsecured loans do not enjoy
the security associated with collateralization and may pose a greater risk of
nonpayment of interest or loss of principal than do secured loans. The primary
additional risk in a subordinated loan is the potential loss in the event of
default by the issuer of the loan. Subordinated loans in an insolvency bear an
increased share, relative to senior secured lenders, of the ultimate risk that
the borrower's assets are insufficient to meet its obligations to its creditors.
SHORT-TERM DEBT SECURITIES
Subject to the 20% of the Trust's assets that may be invested in Other
Investments, the Trust may invest in short-term debt securities. Short-term debt
securities are subject to the risk of the issuer's inability to meet principal
and interest payments on the obligation and also may be subject to price
volatility due to such factors as interest rates, market perception of the
creditworthiness of the issuer and general market liquidity.
Because short-term debt securities pay interest at a fixed-rate, when interest
rates decline, the value of the Trust's short-term debt securities can be
expected to rise, and when interest rates rise, the value of those securities
can be expected to decline.
18 RISK FACTORS AND SPECIAL CONSIDERATIONS
RISK FACTORS AND SPECIAL CONSIDERATIONS
INVESTMENTS IN EQUITY SECURITIES INCIDENTAL TO INVESTMENT IN LOANS
Subject to the 20% of the Trust's assets that may be invested in Other
Investments, the Trust may acquire equity securities as an incident to the
purchase or ownership of a loan or in connection with a reorganization of a
borrower or its debt. Investments in equity securities incidental to investment
in loans entail certain risks in addition to those associated with investment in
loans. The value of these securities may be affected more rapidly, and to a
greater extent, by company-specific developments and general market conditions.
These risks may increase fluctuations in the Trust's NAV. The Trust may
frequently possess material non-public information about a borrower as a result
of its ownership of a loan of such borrower. Because of prohibitions on trading
in securities of issuers while in possession of such information the Trust might
be unable to enter into a transaction in a security of such a borrower when it
would otherwise be advantageous to do so.
BORROWINGS UNDER THE CREDIT FACILITY PROGRAM
In May 1996, the Trust began a policy of borrowing to acquire income-producing
investments which, by their terms, pay interest at a rate higher than the rate
the Trust pays on borrowings. Accordingly, borrowing has the potential to
increase the Trust's total income. The Trust currently is a party to two credit
facilities with financial institutions that permit the Trust to borrow up to an
aggregate of $525 million. Interest is payable on the credit facilities by the
Trust at a variable rate that is tied to either LIBOR, the federal funds rate,
or a commercial paper based rate and includes a facility fee on unused
commitments. As of June 15, 2004, the Trust had outstanding borrowings under the
credit facilities of approximately $444 million. Collectively, the lenders under
the credit facilities have a security interest in all assets of the Trust. Under
each of the credit facilities, the lenders have the right to liquidate Trust
assets in the event of default by the Trust under such credit facility, and the
Trust may be prohibited from paying dividends in the event of certain adverse
events or conditions respecting the Trust or Investment Manager or Sub-Adviser
until the credit facility is repaid in full or until the event or condition is
cured.
RANKING OF SENIOR INDEBTEDNESS
The rights of lenders to receive payments of interest on and repayments of
principal of any borrowings made by the Trust under the credit facility program
are senior to the rights of holders of Common Shares and, Preferred Shares with
respect to the payment of dividends or upon liquidation.
RESTRICTIVE COVENANTS AND 1940 ACT RESTRICTIONS
The credit agreements governing the credit facility program (the Credit
Agreements) include usual and customary covenants for their respective type of
transaction, including limits on the Trust's ability to (i) issue preferred
shares, (ii) incur liens or pledge portfolio securities, (iii) change its
investment objective or fundamental investment restrictions without the approval
of lenders, (iv) make changes in any of its business objectives, purposes or
operations that could result in a material adverse effect, (v) make any changes
in its capital structure, (vi) amend the Trust documents in a manner which could
adversely affect the rights, interests or obligations of any of the lenders,
(vii) engage in any business other than the businesses currently engaged in,
(viii) create, incur, assume or permit to exist certain debt except for certain
specified types of debt, and (ix) permit any of its ERISA affiliates to cause or
permit to occur an event that could result in the imposition of a lien under the
Internal Revenue Code or ERISA. In addition, the Credit Agreements do not permit
the Trust's asset coverage ratio (as defined in the credit agreements) to fall
below 300% at any time (the Credit Agreement Asset Coverage Test).
Under the requirements of the 1940 Act, the Trust must have asset coverage of at
least 300% immediately after any borrowing, including borrowing under the credit
facility program. For this purpose, asset coverage means the ratio which the
value of the total assets of the Trust, less liabilities and indebtedness not
represented by senior securities, bears to the aggregate amount of borrowings
represented by senior securities issued by the Trust. The Credit Agreements
limit the Trust's ability to pay dividends or make other distributions on the
Trust's Common Shares, or purchase or redeem Common Shares, unless the Trust
complies with the Credit Agreement Asset Coverage Test. In addition, the Credit
Agreements do not permit the Trust to declare dividends or other distributions
or purchase or redeem Common Shares or any preferred shares (i) at any time that
an event of default under a Credit Agreement has occurred and is continuing; or
(ii) if, after giving effect to such declaration, the Trust would not meet the
Credit Agreement Asset Coverage Test set forth in the Credit Agreements.
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RISK FACTORS AND SPECIAL CONSIDERATIONS 19
TRANSACTION POLICIES
NET ASSET VALUE
The NAV per common share of the Trust is determined each business day as of the
close of regular trading on the New York Stock Exchange (NYSE) (normally 4:00
p.m. Eastern time). The Trust is open for business every day the NYSE is open.
The NYSE is closed on all weekends and on all national holidays and Good Friday.
Trust shares will not be priced on those days. The NAV per Common Share is
determined by dividing the value of the Trust's loan assets plus all cash and
other assets (including interest accrued but not collected) less all liabilities
(including accrued expenses but excluding capital and less the liquidation
preference of any outstanding preferred shares) by the number of
Common Shares outstanding. The NAV per Common Share is made available for
publication.
VALUATION OF THE TRUST'S ASSETS
The assets in the Trust's portfolio are valued daily in accordance with the
Trust's Loan Valuation Procedures adopted by the Board of Trustees. A majority
of the Trust's assets are valued using quotations supplied by a third party loan
pricing service. However, the loans in which the Trust invests are not listed on
any securities exchange or board of trade. Some loans are traded by
institutional investors in an over-the-counter secondary market that has
developed in the past several years. This secondary market generally has fewer
trades and less liquidity than the secondary markets for other types of
securities. Some loans have few or no trades. Accordingly, determinations of the
value of loans may be based on infrequent and dated trades. Because there is
less reliable, objective market value data available, elements of judgment may
play a greater role in valuation of loans than for other types of securities.
For further information, see "Risk Factors and Special Considerations -- Limited
Secondary Market for Loans."
Loans are normally valued at the mean of the means of one or more bid and asked
quotations obtained from a pricing service or other sources believed to be
reliable. Loans for which reliable market value quotations are not readily
available from a pricing service may be valued with reference to another loan or
a group of loans for which reliable market value quotations are readily
available and whose characteristics are comparable to the loan being valued.
Under this approach, the comparable loan or loans serve as a proxy for changes
in value of the loan being valued. The Trust has engaged an independent pricing
service to provide quotations from dealers in loans and to calculate values
under this proxy procedure.
It is expected that most of the loans held by the Trust will be valued with
reference to quotations from the independent pricing service or with reference
to the proxy procedure described above. The Investment Manager or Sub-Adviser
may believe that the price for a loan derived from quotations or the proxy
procedure described above is not reliable or accurate. Among other reasons, this
may be the result of information about a particular loan or borrower known to
the Investment Manager or Sub-Adviser that they believe may not be known to the
pricing service or reflected in a price quote. In this event, the loan is valued
at fair value under procedures established by the Trust's Board of Trustees, and
in accordance with the provisions of the 1940 Act.
Under these procedures, fair value is determined by the Investment Manager or
Sub-Adviser and monitored by the Trust's Board of Trustees through its Valuation
and Proxy Voting Committee. In fair valuing a loan, consideration is given to
several factors, which may include, among others, the following:
- the characteristics of and fundamental analytical data relating to the
loan, including the cost, size, current interest rate, period until the
next interest rate reset, maturity and base lending rate of the loan, the
terms and conditions of the loan and any related agreements, and the
position of the loan in the borrower's debt structure;
- the nature, adequacy and value of the collateral, including the Trust's
rights, remedies and interests with respect to the collateral;
- the creditworthiness of the borrower and the cash flow coverage of
outstanding principal and interest, based on an evaluation of its financial
condition, financial statements and information about the borrower's
business, cash flows, capital structure and future prospects;
- information relating to the market for the loan, including price quotations
for, and trading in, the loan and interests in similar loans and the market
environment and investor attitudes towards the loan and interests in
similar loans;
- the reputation and financial condition of the agent of the loan and any
intermediate participants in the loans;
- the borrower's management; and
- the general economic and market conditions affecting the fair value of the
loan.
Securities for which the primary market is a national securities exchange are
stated at the last reported sale price on the day of valuation. Securities
reported by NASDAQ National Market System will be valued at the NASDAQ Official
Closing Price on the valuation day. Debt and equity securities traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are valued at the mean between the last reported bid and asked price.
Valuation of short term cash equivalent investments is at amortized cost.
Securities maturing in 60 days or less are valued at amortized cost, which, when
combined with accrued interest, approximates market value.
ACCOUNT ACCESS
Unless your Common Shares are held through a third-party fiduciary or in an
omnibus registration at your bank or brokerage firm, you may be able to access
your account information over the internet at www.ingfunds.com, or via a touch
tone telephone by calling (800) 992-0180 and selecting Option 1. Should you wish
to speak with a Shareholder Services Representative, you may call the toll-free
number listed above and select Option 2.
20 TRANSACTION POLICIES
TRANSACTION POLICIES
PRIVACY POLICY
The Trust has adopted a policy concerning investor privacy. To review the
privacy policy, contact a Shareholder Services Representative at (800) 992-0180
and select Option 1, obtain a policy over the internet at www.ingfunds.com or
see the privacy policy that accompanies this Prospectus.
HOUSEHOLDING
To reduce expenses, we may mail only one copy of the Trust's prospectus and each
annual and semi-annual report to those addresses shared by two or more accounts.
If you wish to receive individual copies of these documents, please call us at
(800) 992-0180 or your investment professional. We will begin sending you
individual copies 30 days after receiving your request.
PLAN OF DISTRIBUTION
SHAREHOLDER INVESTMENT PROGRAM
The following is a summary of the Shareholder Investment Program (Program).
Shareholders are advised to review a fuller explanation of the Program contained
in the Trust's SAI.
Common Shares are offered by the Trust through the Program. The Program allows
participating shareholders to reinvest all dividends (Dividends) in additional
Common Shares of the Trust, and also allows participants to purchase additional
Common Shares through optional cash investments in amounts ranging from a
minimum of $100 to a maximum of $100,000 per month.
The Trust reserves the right to reject any purchase order. Please note that
cash, travelers checks, third party checks, money orders and checks drawn on
non-US banks (even if payment may be effected through a US bank) generally will
not be accepted.
Common Shares will be issued by the Trust under the Program when the Trust's
Common Shares are trading at a premium to NAV. If the Trust's Common Shares are
trading at a discount to NAV, Common Shares issued under the Program will be
purchased on the open market. Common Shares issued under the Program directly
from the Trust will be acquired at the greater of (i) NAV at the close of
business on the day preceding the relevant investment date or (ii) the average
of the daily market price of the Common Shares during the pricing period minus a
discount of 5% for reinvested Dividends and 0% to 5%, for optional cash
investments. Common Shares issued under the Program when shares are trading at a
discount to NAV will be purchased in the market by DST Systems, Inc. (DST) at
market price. Shares issued by the Trust under the Program will be issued
without a fee or a commission.
Shareholders may elect to participate in the Program by telephoning the Trust or
submitting a completed Participation Form to DST, the Program administrator. DST
will credit to each participant's account funds it receives from: (a) Dividends
paid on Trust shares registered in the participant's name, and (b) optional cash
investments. DST will apply all Dividends and optional cash investments received
to purchase Common Shares as soon as practicable beginning on the relevant
investment date (as described below) and not later than six business days after
the relevant investment date, except when necessary to comply with applicable
provisions of the federal securities laws. For more information on the Trust's
distribution policy, see "Dividends and Distributions."
In order for participants to purchase shares through the Program in any month,
the Program administrator must receive from the participant any optional cash
investment by the relevant investment date. The relevant investment date will be
set in advance by the Trust, upon which optional cash investments are first
applied by DST to the purchase of Common Shares. Participants may obtain a
schedule of relevant dates, including investments dates, the dates by which
optional cash investment payments must be received and the dates in which shares
will be paid by calling ING's Shareholder Services Department at (800) 992-0180.
Participants will pay a pro rata share of brokerage commissions with respect to
DST's open market purchases in connection with the reinvestment of Dividends or
purchases made with optional cash investments.
The Program is intended for the benefit of investors in the Trust. The Trust
reserves the right to exclude from participation, at any time, (i) persons or
entities who attempt to circumvent the Program's standard $100,000 maximum by
accumulating accounts over which they have control or (ii) any other persons or
entities, as determined in the sole discretion of the Trust.
Currently, persons who are not shareholders of the Trust may not participate in
the Program. The Board of Trustees of the Trust may elect to change this policy
at a future date, and permit non-shareholders to participate in the Program.
Shareholders may request to receive their Dividends in cash at any time by
giving DST written notice or by contacting ING's Shareholder Services Department
at (800) 992-0180, and selecting Option 2. Shareholders may elect to close their
account at any time by giving DST written notice. When a participant closes
their account, the participant upon request will receive a certificate for full
Common Shares in the account. Fractional Common Shares will be held and
aggregated with other fractional Common Shares being liquidated by DST as agent
of the Program and paid for by check when actually sold.
The automatic reinvestment of Dividends does not affect the tax characterization
of the Dividends (I.E., capital gains and
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TRANSACTION POLICIES 21
PLAN OF DISTRIBUTION
income are realized even though cash is not received). If shares are issued
pursuant to the Program's dividend reinvestment provisions or cash purchase
provisions at a discount from market price, participants may have income equal
to the discount.
Additional information about the Program may be obtained by contacting ING's
Shareholder Services Department at (800) 992-0180, and selecting Option 2.
PRIVATELY NEGOTIATED TRANSACTIONS
The Common Shares may also be offered pursuant to privately negotiated
transactions between the Trust or ING Funds Distributor, LLC and specific
investors. Generally, such investors will be sophisticated institutional
investors. The terms of such privately negotiated transactions will be subject
to the discretion of the management of the Trust. In determining whether to sell
Common Shares pursuant to a privately negotiated transaction, the Trust will
consider relevant factors including, but not limited to, the attractiveness of
obtaining additional funds through the sale of Common Shares, the purchase price
to apply to any such sale of Common Shares and the person seeking to purchase
the Common Shares.
Common Shares issued by the Trust in connection with privately negotiated
transactions will be issued at the greater of (i) NAV per Common Share of the
Trust's Common Shares or (ii) at a discount ranging from 0% to 5% of the average
of the daily market price of the Trust's Common Shares at the close of business
on the two business days preceding the date upon which Common Shares are sold
pursuant to the privately negotiated transaction. The discount to apply to such
privately negotiated transactions will be determined by the Trust with regard to
each specific transaction.
USE OF PROCEEDS
It is expected that 100% of the net proceeds of Common Shares issued pursuant to
the Shareholder Investment Program and privately negotiated transactions will be
invested in Senior Loans and other securities consistent with the Trust's
investment objective and policies. Pending investment in Senior Loans, the
proceeds will be used to pay down the Trust's outstanding borrowings under its
credit facilities. See "Investment Objective and Policies -- Policy on
Borrowing."
As of June 15, 2004, the Trust's outstanding borrowings under its credit
facilities was $444 million. By paying down the Trust's borrowings, the Trust
can avoid adverse impacts on yields pending investment of such proceeds in
Senior Loans. As investment opportunities are subsequently identified, it is
expected that the Trust will reborrow amounts previously repaid and invest such
amounts in additional Senior Loans.
DIVIDENDS AND DISTRIBUTIONS
DISTRIBUTION POLICY. Income dividends are declared and paid monthly. Income
dividends consist of interest accrued and amortization of fees earned less any
amortization of premiums paid and the estimated expenses of the Trust, including
fees payable to ING Investments. Income dividends are calculated monthly under
guidelines approved by the Trustees. Each dividend is payable to shareholders of
record on the 10th day of the following month (unless it is a holiday, in which
case the next business day is the record date). Accrued amounts of fees
received, including facility fees, will be taken in as income and passed on to
shareholders as part of dividend distributions. Any fees or commissions paid to
facilitate the sale of portfolio Senior Loans in connection with tender offers
or other portfolio transactions may reduce the dividend yield.
Capital gains, if any, are declared and paid annually. Because the Trust
currently has capital loss carry forwards, it is not anticipated that capital
gains distributions will be made for the foreseeable future.
DIVIDEND REINVESTMENT. Unless you instruct the Trust to pay you dividends in
cash, dividends and distributions paid by the Trust will be reinvested in
additional Common Shares of the Trust. You may request to receive dividends in
cash at any time by giving DST written notice or by contacting the ING's
Shareholder Services Department at (800) 992-0180, and selecting Option 2.
22 PLAN OF DISTRIBUTION
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS
INVESTMENT MANAGER
ING INVESTMENTS, LLC (the Investment Manager or ING Investments), an Arizona
limited liability company, serves as Investment Manager to the Trust and has
overall responsibility for the management of the Trust under the general
supervision of the Board of Trustees. Its principal business address is 7337
East Doubletree Ranch Road, Scottsdale, Arizona 85258.
The Trust and the Investment Manager have entered into an Investment Management
Agreement that requires ING Investments to provide all investment advisory and
portfolio management services for the Trust. The agreement with ING Investments
may be canceled by the Board of Trustees upon 60 days' written notice.
ING Investments is an indirect wholly-owned subsidiary of ING Groep N.V. (NYSE:
ING) (ING Groep). ING Groep is a global financial institution active in the
fields of insurance, banking and asset management in more than 65 countries with
more than 100,000 employees. The Investment Manager is registered as an
investment adviser with the SEC. ING Investments began investment management in
April, 1995, and serves as an investment adviser to registered investment
companies as well as structured finance vehicles. As of March 31, 2004, ING
Investments had assets under management of over $35.4 billion.
The Investment Manager bears its expenses of providing the services described
above. The Investment Manager currently receives from the Trust an annual fee,
paid monthly, of 0.80% of the Trust's Managed Assets.
SUB-ADVISER
ING Investments has engaged a Sub-Adviser to provide the day-to-day management
of the Trust's portfolio. The Sub-Adviser has, at least in part, been selected
primarily on the basis of its successful application of a consistent,
well-defined, long-term investment approach over a period of several market
cycles. ING Investments is responsible for monitoring the investment program and
performance of the Sub-Adviser. Under the terms of the sub-advisory agreement,
the agreement can be terminated by either ING Investments or the Board of
Trustees of the Trust. In the event the sub-advisory agreement is terminated,
the Sub-Adviser may be replaced subject to any regulatory requirements or ING
Investments may assume day-to-day investment management of the Trust.
ING INVESTMENT MANAGEMENT CO.
ING Investment Management Co. (Sub-Adviser or INGIM), formerly known as Aeltus
Investment Management, Inc., a Connecticut corporation serves as Sub-Adviser to
the Trust. Founded in 1972, INGIM is registered with the SEC as an investment
adviser. INGIM is an indirect wholly-owned subsidiary of ING Groep, N.V., and is
an affiliate of ING Investments. INGIM has acted as adviser or sub-adviser to
mutual funds since 1994 and has managed institutional accounts since 1972.
As of March 31, 2004, INGIM managed almost $53.48 billion in assets. Its
principal office is located at 10 State House Square, Hartford, Connecticut
06103-3602. For its services, INGIM is entitled to receive a sub-advisory fee of
0.36%, expressed as an annual rate based on the average daily Managed Assets of
the Trust. This sub-advisory fee is paid by ING Investments, not by the Trust.
PORTFOLIO MANAGEMENT. The Trust is managed by INGIM's Senior Debt Group. That
team is comprised of the following individuals:
DANIEL A. NORMAN. Mr. Norman is Senior Vice President and Senior Portfolio
Manager in the Senior Debt Group, and has served in that capacity since November
1999. Prior to that, Mr. Norman was Senior Vice President and Portfolio Manager
in the Senior Debt Group (since April 1995). Mr. Norman also serves as Senior
Vice President of the Trust, and he serves as Senior Vice President of ING
Senior Income Fund, another closed-end fund sub-advised by INGIM that invests
primarily in Senior Loans. Mr. Norman co-manages the Trust with Mr. Bakalar.
JEFFREY A. BAKALAR. Mr. Bakalar is Senior Vice President and Senior Portfolio
Manager in the Senior Debt Group, and has served in that capacity since November
1999. Prior to that, Mr. Bakalar was Senior Vice President and Portfolio Manager
in the Senior Debt Group (since January 1998). Before joining ING Groep N.V.,
Mr. Bakalar was Vice President of The First National Bank of Chicago (from 1994
to 1998). Mr. Bakalar also serves as Senior Vice President of the Trust and as
Senior Vice President of ING Senior Income Fund, another closed-end fund
sub-advised by INGIM that invests primarily in Senior Loans. Mr. Bakalar
co-manages the Trust with Mr. Norman.
CURTIS F. LEE. Mr. Lee is Senior Vice President and Chief Credit Officer in the
Senior Debt Group and has served in that capacity since August 1999. Prior to
joining the Investment Manager, Mr. Lee held a series of positions with Standard
Chartered Bank in the credit approval and problem loan management functions
(1992 - 1999). Mr. Lee also serves as Senior Vice President and Chief Credit
Officer of the Trust (since January 2001), and he serves as Senior Vice
President and Chief Credit Officer of ING Senior Income Fund, another closed-end
fund sub-advised by INGIM that invests primarily in Senior Loans.
ROBERT L. WILSON. Mr. Wilson is Senior Vice President in the Senior Debt Group
(since March 2003) and before that was Vice President in the Senior Debt Group
(since July 1998). Prior to joining ING Groep N.V., Mr. Wilson was Vice
President of Bank of Hawaii (from 1997 to 1998) and Vice President of Union Bank
of California (from 1994 to 1997).
MICHEL PRINCE. Mr. Prince is a Vice President in the Senior Debt Group (since
May 1998). Prior to joining the Investment Manager, Mr. Prince was Vice
President of Rabobank International, Chicago branch (from 1996 to 1998).
JASON T. GROOM. Mr. Groom is a Vice President in the Senior Debt Group (since
June 2000), and before that was an Assistant Vice President in the Senior Debt
Group (1998 to 2000). Prior to joining ING Groep N.V., Mr. Groom was an
Associate in the Corporate Finance Group of NationsBank (in 1998) and Assistant
Vice President, Corporate Finance Group, of The Industrial Bank of Japan Limited
(from 1995 to 1997).
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INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS 23
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS
CHARLES E. LEMIEUX. Mr. LeMieux is a Vice President in the Senior Debt Group
(since June 2000), and before that was Assistant Vice President in the Senior
Debt Group (from 1998 to 2000). Prior to joining ING Groep N.V., Mr. LeMieux was
Assistant Treasurer, Cash Management, with Salt River Project (from 1993 to
1998).
MARK F. HAAK. Mr. Haak is a Vice President in the Senior Debt Group (since June
1999). Prior to joining ING Groep N.V., Mr. Haak was Assistant Vice President,
Corporate Banking with Norwest Bank (from 1997 to 1998) and Lead Financial
Analyst and Portfolio Manager for Bank One AZ, N.A. (from 1996 to 1997).
WILLIAM F. NUTTING, JR. Mr. Nutting is a Vice President in the Senior Debt Group
(since November 1999), and joined ING Funds Services, LLC, an affiliate of the
Investment Manager, in 1995 as an Operations Associate.
THEODORE M. HAAG. Mr. Haag is a Vice President in the Senior Debt Group (since
March 2001). Mr. Haag joined ING Groep N.V. in June 2000 as Vice President and
Senior Portfolio Manager, a position he continues to hold. From 1997 to 2000,
Mr. Haag served as Vice President and Portfolio Manager for Gen Re-New England
Asset Management. From 1995 to 1997, Mr. Haag was a Director of Fixed Income
Securities and Securities Policy Committee member for Providian Capital
Management. Prior to working at Providian, Mr. Haag was a high yield portfolio
manager at ICH Corporation.
RALPH E. BUCHER. Mr. Bucher is a Vice President in the Senior Debt Group (since
November 2001). Prior to joining ING Groep N.V., Mr. Bucher was the North
American Head of Special Assets for Standard Chartered Bank (from 1999 to 2001).
Mr. Bucher has also held other senior credit approval positions with Societe
Generale (from 1997 to 1999).
BRIAN S. HORTON. Mr. Horton is a Vice President in the Senior Debt Group (since
September 2001). Prior to joining ING Groep N.V., Mr. Horton was a Vice
President in the Corporate and Investment Banking Group at Bank of America
Securities LLC, where he worked in the Consumer and Retail Industry Group (from
1999 to 2001). Mr. Horton also served in various other corporate finance and
relationship management positions during his seven years at Bank of America,
including corporate finance specialist for the Southeast U.S. region (from 1997
- 1999).
MOHAMED N. BASMA. Mr. Basma is a Vice President in the Senior Debt Group (since
March 2003), and before that was a Research Analyst for on the Senior Debt Group
(since January 2000). Prior to joining ING Groep N.V., Mr. Basma was a senior
auditor/consultant in the audit and business advisory group of Arthur Andersen,
LLP (from 1995 to 1997). Mr. Basma attended school for the years between his
employment at Arthur Andersen and the Investment Manager.
JAMES E. GRIMES. Mr. Grimes is a Vice President in the Senior Debt Group (since
2001), and before that was Manager of Structured Investments for the Investment
Manager (since 1999). Prior to joining ING Groep N.V., Mr. Grimes was Manager of
Finance and Strategic Planning for NationsBank Auto Leasing, Inc. (formerly
Oxford Resources Corp.) (from 1994 to 1998).
JEFFREY S. SCHULTZ. Mr. Schultz is an Analyst in the Senior Debt Group (since
March 2003), and before that was Treasury Operations Assistant (from 1998 to
2000) and Junior Research Analyst (from 2000 to 2003).
THE ADMINISTRATOR
The Administrator of the Trust is ING Funds Services, LLC (ING Funds Services).
Its principal business address is 7337 East Doubletree Ranch Road, Scottsdale,
Arizona 85258. The Administrator is a wholly-owned subsidiary of ING Groep and
the immediate parent company of the Investment Manager.
Under an Administration Agreement between ING Funds Services and the Trust, ING
Funds Services administers the Trust's corporate affairs subject to the
supervision of the Board of Trustees of the Trust. In that connection, ING Funds
Services monitors the provisions of the Senior Loan agreements and any
agreements with respect to interests in Senior Loans and is responsible for
recordkeeping with respect to the Senior Loans in the Trust's repurchase offers
portfolio. ING Funds Services also furnishes the Trust with office facilities
and furnishes executive personnel together with clerical and certain
recordkeeping and administrative services. These services include preparation of
annual and other reports to shareholders and to the SEC. ING Funds Services also
handles the filing of federal, state and local income tax returns not being
furnished by the Custodian or Transfer Agent (as defined below). The
Administration Agreement also requires ING Funds Services to assist in managing
and supervising all aspects of the general day-to-day business activities and
operations of the Trust, including custodial, transfer agency, dividend
disbursing, accounting, auditing, compliance and related services. ING Funds
Services provides the Trust with office space, equipment and personnel necessary
to administer the Trust. The Administrator has authorized all of its officers
and employees who have been elected as officers of the Trust to serve in such
capacities. All services furnished by the Administrator under the Administration
Agreement may be furnished by such officers or employees of the Administrator.
The Trust pays ING Funds Services an administration fee, computed daily and
payable monthly. The Administration Agreement states that ING Funds Services is
entitled to receive a fee at an annual rate of 0.25% of the Trust's Managed
Assets. The Administration Agreement may be canceled by the Board of Trustees
upon 60 days' written notice.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the Common
Shares is DST Systems, Inc., whose principal business address is 816 Wyandotte,
Kansas City, Missouri 64105.
CUSTODIAN
The Trust's securities and cash are held and maintained under a Custody
Agreement with State Street Bank and Trust Company, whose principal place of
business is 801 Pennsylvania Avenue, Kansas City, Missouri 64105.
24 INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS
DESCRIPTION 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
December 2, 1987, as amended (Declaration of Trust). The Board of Trustees is
responsible for protecting the interests of shareholders. The Trustees are
experienced executives who oversee the Trust's activities, review contractual
arrangements with companies that provide services to the Trust and review the
Trust's performance.
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 shares of beneficial interest, par value $0.01 per share,
all of which were initially classified as Common Shares. The Declaration of
Trust also authorizes the creation of an unlimited number of shares of
beneficial interest with preference rights, including preferred shares, having a
par value of $0.01 per share, in one or more series, with rights as determined
by the Board of Trustees, by action of the Board of Trustees without the
approval of the shareholders. The following table shows the number 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 June 15,
2004.
NUMBER HELD BY
NUMBER TRUST FOR ITS NUMBER
TITLE OF CLASS AUTHORIZED OWN ACCOUNT OUTSTANDING
-------------- ---------- ----------- -----------
Common Shares unlimited 0 137,821,394
Preferred Shares, Series M 3,600 0 3,600
Preferred Shares, Series T 3,600 0 3,600
Preferred Shares, Series W 3,600 0 3,600
Preferred Shares, Series Th 3,600 0 3,600
Preferred Shares, Series F 3,600 0 3,600
The Common Shares outstanding are fully paid and nonassessable by the Trust.
Holders of Common Shares are entitled to share equally in dividends declared by
the Board of Trustees payable to holders of Common Shares and in the net assets
of the Trust available for distribution to holders of Common Shares after
payment of the preferential amounts payable to holders of any outstanding
Preferred Shares. Neither holders of Common Shares nor holders of Preferred
Shares have pre-emptive or conversion rights and Common Shares are not
redeemable. 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. Under the rules of the NYSE applicable to
listed companies, the Trust is required to hold an annual meeting of
shareholders in each year. If the Trust is converted to an open-end investment
company or if for any other reason Common Shares are no longer listed on the
NYSE (or any other national securities exchange the rules of which require
annual meetings of shareholders), the Trust does not intend to hold annual
meetings of shareholders.
The Trust is responsible for paying the following expenses, among others: the
fees payable to the Investment Manager; the fees payable to the Administrator;
the fees and certain expenses of the Trust's custodian and transfer agent,
including the cost of providing records to the Administrator in connection with
its obligation of maintaining required records of the Trust; the charges and
expenses of the Trust's legal counsel, legal counsel to the Trustees who are not
"interested persons" of the Trust, as defined in the 1940 Act and independent
accountants; commissions and any issue or transfer taxes chargeable to the Trust
in connection with its transactions; all taxes and corporate fees payable by the
Trust to governmental agencies; the fees of any trade association of which the
Trust is a member; the costs of share certificates representing Common Shares of
the Trust; organizational and offering expenses of the Trust and the fees and
expenses involved in registering and maintaining registration of the Trust and
its Common Shares with the SEC, including the preparation and printing of the
Trust's registration statement and prospectuses for such purposes; allocable
communications expenses with respect to investor services, and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders; fees for independent
loan pricing services; the cost of insurance; and litigation and indemnification
expenses and extraordinary expenses not incurred in the ordinary course of the
Trust's business.
Under Massachusetts law, shareholders, including holders of Preferred Shares,
could under certain circumstances be held personally liable for the obligations
of the Trust. However, the Declaration of Trust disclaims shareholder liability
for acts or obligations of the Trust and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all loss and expense of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable to meet its
obligations.
Holders of Common Shares are entitled to one vote for each share held and will
vote with the holders of any outstanding Preferred Shares or any other preferred
shares on each matter submitted to a vote of holders of Common Shares, except as
described under "Description of Capital Structure -- Preferred Shares."
Shareholders are entitled to one vote for each share held. The Common Shares,
Preferred Shares and any other preferred shares do not have cumulative voting
rights, which means that the holders of more than 50% of the shares of Common
Shares, Preferred Shares and any other preferred shares voting for the election
of Trustees can elect all of the Trustees standing for election by such holders,
and, in such event, the holders of the remaining shares of Common Shares,
Preferred
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DESCRIPTION OF THE TRUST 25
DESCRIPTION OF THE TRUST
Shares and any other preferred shares will not be able to elect any of such
Trustees.
So long as any Preferred Shares or any other preferred shares are outstanding,
holders of Common Shares will not be entitled to receive any dividends of or
other distributions from the Trust, unless at the time of such declaration, (1)
all accrued dividends on preferred shares or accrued interest on borrowings has
been paid and (2) the value of the Trust's total assets (determined after
deducting the amount of such dividend or other distribution), less all
liabilities and indebtedness of the Trust not represented by senior securities,
is at least 300% of the aggregate amount of such securities representing
indebtedness and at least 200% of the aggregate amount of securities
representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares (expected to equal the aggregate original purchase
price of the outstanding preferred shares plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned or
declared and on a cumulative basis). In addition to the requirements of the 1940
Act, the Trust is required to comply with other asset coverage requirements as a
condition of the Trust obtaining a rating of the Preferred Shares from a rating
agency. These requirements include an asset coverage test more stringent than
under the 1940 Act.
The Trust will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon Trustees individually but only upon the property of the Trust and
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
CONVERSION TO OPEN-END FUND
The Trustees may at any time propose conversion of the Trust to an open-end
management investment company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing. In
considering whether to submit an open-ending proposal to shareholders, the
Trustees might consider, among other factors, the differences in operating
expenses between open-end and closed-end funds (due to the expenses of
continuously selling shares and of standing ready to effect redemptions), the
potentially adverse tax consequences to non-redeeming shareholders once a fund
is open-ended, and the impact of open-ending on portfolio management policies.
Such a conversion would require the approval of both a majority of the Trust's
outstanding Common Shares and preferred shares voting together as a single class
and a majority of the outstanding preferred shares voting as a separate class on
such conversion. Conversion of the Trust to an open-end investment company would
require the redemption of all outstanding preferred shares, including the
Preferred Shares, which would eliminate the leveraged capital structure of the
Trust with respect to the Common Shares. A delay in conversion could result
following shareholder approval due to the Trust's inability to redeem the
preferred shares. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their next computed NAV less any
redemption charge as might be in effect at the time of redemption. If the Trust
is converted to an open-end management investment company, it could be required
to liquidate portfolio securities to meet requests for redemption, and its
shares would no longer be listed on the NYSE. If the Trust were to experience
significant redemptions as an open-end fund, the decrease in total assets could
result in a higher expense ratio and inefficiencies in portfolio management. In
this regard, the Trust could reserve the right to effect redemptions in-kind
with portfolio securities, which would subject redeeming shareholders to
transaction costs in liquidating those securities.
REPURCHASE OF COMMON SHARES
In recognition of the possibility that the Trust's Common Shares may trade at a
discount to their NAV, the Trust may from time to time take action to attempt to
reduce or eliminate a market value discount from NAV by repurchasing its Common
Shares in the open market or by tendering its Common Shares at NAV. So long as
any Preferred Shares are outstanding, the Trust may not purchase, redeem or
otherwise acquire any Common Shares unless (1) all accumulated dividends on the
Preferred Shares have been paid or set aside for payment through the date of
such purchase, redemption or other acquisition and (2) at the time of such
purchase, redemption or acquisition asset coverage requirements set forth in the
Declaration of Trust and the Trust's Certificate of Designation for Preferred
Shares are met. Repurchases of Common Shares may result in the Trust being
required to redeem preferred shares to satisfy asset coverage requirements.
FUNDAMENTAL AND NON-FUNDAMENTAL POLICIES OF THE TRUST
The investment objective of the Trust, certain policies of the Trust specified
herein as fundamental and the investment restrictions of the Trust described in
the SAI are fundamental policies of the Trust and may not be changed without a
Majority Vote of the shareholders of the Trust. The term Majority Vote means the
affirmative vote of (a) more than 50% of the outstanding shares of the Trust or
(b) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares of the Trust are represented at the meeting in person or by
proxy, whichever is less. All other policies of the Trust may be modified by
resolution of the Board of Trustees of the Trust.
26 DESCRIPTION OF THE TRUST
DESCRIPTION OF CAPITAL STRUCTURE
COMMON SHARES
The Trust's Declaration of Trust authorizes the issuance of an unlimited number
of Common Shares of beneficial interest, par value $.01 per share. All Common
Shares have equal rights to the payment of dividends and the distribution of
assets upon liquidation. Common Shares will, when issued, be fully paid and
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting.
Whenever preferred shares are outstanding, holders of Common Shares will not
be entitled to receive any distributions from the Trust, unless at the time
of such declaration, (1) all accrued dividends on Preferred Shares or accrued
interest on borrowings have been paid and (2) the value of the Trust's total
assets (determined after deducting the amount of such dividend or other
distribution), less all liabilities and indebtedness of the Trust not
represented by senior securities, is at least 300% of the aggregate amount of
such securities representing indebtedness and at least 200% of the aggregate
amount of securities representing indebtedness plus the aggregate liquidation
value of the outstanding preferred shares. In addition to the requirements of
the 1940 Act, the Trust is required to comply with other asset coverage
requirements as a condition of the Trust obtaining a rating of the preferred
shares from a rating agency. These requirements include asset coverage tests
more stringent than under the 1940 Act. See "Preferred Shares" below.
BORROWINGS
The Trust's Declaration of Trust authorizes the Trust, without the prior
approval of holders of Common Shares, to borrow money. In this connection, the
Trust may issue notes or other evidence of indebtedness (including bank
borrowings or commercial paper) and may secure any such borrowings by
mortgaging, pledging or otherwise granting a security interest in the Trust's
assets. See "Risk Factors and Special Consideration -- Leverage."
PREFERRED SHARES
Under the 1940 Act, the Trust is permitted to have outstanding more than one
series of preferred shares as long as no single series has priority over another
series nor holders of preferred shares have pre-emptive rights to purchase any
other preferred shares that might be issued.
The Trust's Declaration of Trust authorizes the issuance of a class of preferred
shares (which class may be divided into two or more series) as the Trustees may,
without shareholder approval, authorize. The preferred shares have such
preferences, voting powers, terms of redemption, if any, and special or relative
rights or privileges (including conversion rights, if any) as the Trustee may
determine and as are set forth in the Trust's Certificate of Designation
establishing the terms of the preferred shares. The number of shares of the
preferred class or series authorized is unlimited, and the shares authorized may
be represented in part by fractional shares. Under the Trust's Certificate of
Designation, the Trustees have authorized the creation of 18,000 Auction Rate
Cumulative Preferred Shares, having a par value of $0.01 per share, with a
liquidation preference of $25,000 per share, classified as Series M, T, W, Th
and F Auction Rate Cumulative Preferred Shares.
Any decision to offer preferred shares is subject to market conditions and to
the Board of Trustees' and the Investment Manager's continuing belief that
leveraging the Trust's capital structure through the issuance of preferred
shares is likely to achieve the benefits to the Common Shares described in this
Prospectus for long-term investors. The terms of the preferred shares will be
determined by the Board of Trustees in consultation with the Investment Manager
(subject to applicable law and the Trust's Declaration of Trust) if and when it
authorizes a preferred shares offering.
The Preferred Shares have complete priority over the Common Shares as to
distribution of assets. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Trust, holders of
preferred shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares.
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DESCRIPTION OF CAPITAL STRUCTURE 27
TAX MATTERS
The following information is meant as a general summary for U.S. shareholders.
Please see the SAI for additional information. Investors should rely on their
own tax adviser for advice about the particular federal, state and local tax
consequences to them of investing in the Trust.
The federal income tax treatment of the Trust's Preferred Shares is not entirely
clear, but the Trust believes, based on the advice of its counsel, that the
Preferred Shares will constitute stock of the Trust. It is possible, however,
that the IRS might take a contrary position, asserting, for example, that the
Preferred Shares constitute debt of the Trust. The discussion below assumes that
the Preferred Shares are stock.
The Trust will distribute all or substantially all of its net investment income
and net realized capital gains, if any, to its shareholders each year. Although
the Trust will not be taxed on amounts it distributes, most shareholders will be
taxed on amounts they receive. A particular distribution generally will be
taxable as either ordinary income or long-term capital gain. The Trust will
allocate a proportionate amount of each type of its income to the Common Shares
and to the Preferred Shares. It generally does not matter how long a shareholder
has held the Trust's Common Shares or Preferred Shares or whether the
shareholder elects to receive distributions in cash or reinvest them in
additional Trust's Common Shares or Preferred Shares. For example, if the Trust
designates a particular distribution as a long-term capital gains distribution,
it will be taxable to a shareholder at his or her long-term capital gains rate.
Dividends from the Trust are generally not eligible for the reduced rate of tax
that may apply to certain qualifying dividends on corporate stock.
Dividends declared by the Trust in October, November or December and paid during
the following January may be treated as having been received by shareholders in
the year the distributions were declared.
Each shareholder will receive an annual statement summarizing the shareholder's
dividend and capital gains distributions.
If a shareholder invests through a tax-deferred account, such as a retirement
plan, the shareholder generally will not have to pay tax on dividends until they
are distributed from the account. These accounts are subject to complex tax
rules, and shareholders should consult a tax adviser about investment through a
tax-deferred account.
There may be tax consequences to a shareholder if the shareholder sells the
Trust's Common Shares or Preferred Shares. A shareholder will generally have a
capital gain or loss, which will be long-term or short-term, generally depending
on how long the shareholder holds those Common Shares or Preferred Shares. If a
shareholder exchanges shares, the shareholder may be treated as if he or she
sold them. Shareholders are responsible for any tax liabilities generated by
their own transactions.
As with all investment companies, the Trust may be required to withhold U.S.
federal income tax at the rate of 28% of all taxable distributions payable to a
shareholder if the shareholder fails to provide the Trust with his or her
correct taxpayer identification number or to make required certifications, or if
the shareholder has been notified by the IRS that he or she is subject to backup
withholding. Backup withholding is not an additional tax; rather, it is a way in
which the IRS ensures it will collect taxes otherwise due. Any amounts withheld
may be credited against a shareholder's U.S. federal income tax liability.
28 TAX MATTERS
MORE INFORMATION
DISTRIBUTION ARRANGEMENTS
Pursuant to the terms of a Distribution Agreement, ING Funds Distributor, LLC
will act as the Trust's distributor for the optional cash investments under
the Trust's Shareholder Investment Program and for privately negotiated
transactions. The Distribution Agreement provides that ING Fund's Distributor
LLC does not receive compensation or commissions from the Trust for such
services. In addition, no fees or commissions will be paid by the Trust or
its shareholders in connection with the reinvestment of dividends and capital
gains distributions. ING Funds Distributor, LLC's principal business address
is 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Funds
Distributor, LLC and ING Investments, LLC, the Trust's Investment Manager,
and INGIM, the Trust's Sub-Adviser, are indirect, wholly-owned subsidiaries
of ING Groep. See "Plans of Distribution" in the SAI.
The Trust bears the expenses of issuing the Common Shares. These expenses
include, but are not limited to, the expense of preparation and printing of the
prospectus and SAI, the expense of counsel and auditors, and others.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed on for the Trust
by Dechert LLP, 1775 I Street, NW, Washington, DC, counsel to the Trust.
AUDITORS
KPMG LLP serves as independent registered public accounting firm for the Trust.
The auditors' address is 355 South Grand Avenue, Los Angeles, California 90071.
REGISTRATION STATEMENT
The Trust has filed with the SEC a Registration Statement under the
Securities Act, relating to the Common Shares offered hereby. For further
information with respect to the Trust and its Common Shares, reference is
made to such Registration Statement and the exhibits filed therein.
[TELEPHONE GRAPHIC]
If you have any questions, please call (800) 992-0180.
MORE INFORMATION 29
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
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Change of Name 2
Investment Objective 2
Investment Restrictions 2
Additional Information About Investments and Investment Techniques 4
Trustees and Officers 12
Compensation Table 20
Code of Ethics 22
Investment Management and Other Service Providers 23
Plans of Distribution 28
Portfolio Transactions 30
Net Asset Value 31
Federal Taxation 32
Advertising and Performance Data 36
General Information 37
Financial Statements 38
30 STATEMENT OF ADDITIONAL INFORMATION
ING PRIME RATE TRUST
7337 E. DOUBLETREE RANCH ROAD
SCOTTSDALE, ARIZONA 85258
(800) 992-0180
5,000,000 COMMON SHARES OF BENEFICIAL INTEREST
TRUST ADVISORS AND AGENTS
INVESTMENT MANAGER
ING Investments, LLC
7337 E. Doubletree Ranch Road
Scottsdale, AZ 85258
SUB-ADVISER
ING Investment Management Co.
10 State House Square
Hartford, Connecticut 06103-3602
ADMINISTRATOR
ING Funds Services, LLC
7337 E. Doubletree Ranch Road
Scottsdale, AZ 85258
CUSTODIAN
State Street Bank and Trust Company
801 Pennsylvania Avenue
Kansas City, MO 64105
INDEPENDENT AUDITORS
KPMG LLP
355 South Grand Avenue
Los Angeles, California 90071
DISTRIBUTOR
ING Funds Distributor, LLC
7337 E. Doubletree Ranch Road
Scottsdale, AZ 85258
TRANSFER AGENT
DST Systems, Inc.
816 Wyandotte
Kansas City, MO 64105
LEGAL COUNSEL
Dechert LLP
1775 I Street, NW
Washington, DC 20006
INSTITUTIONAL INVESTORS AND ANALYSTS
Call ING Prime Rate Trust
(800) 336-3436
THE TRUST HAS NOT AUTHORIZED ANY PERSON TO PROVIDE YOU WITH ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFER. YOU SHOULD RELY ONLY ON THE INFORMATION IN THIS
PROSPECTUS OR OTHER INFORMATION TO WHICH WE HAVE REFERRED YOU. THIS PROSPECTUS
IS NOT AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT
TO THIS PROSPECTUS DOES NOT IMPLY THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME AFTER THE DATE OF THIS PROSPECTUS. HOWEVER,
IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED.
WHEN CONTACTING THE SEC, YOU WILL WANT TO REFER TO THE TRUST'S SEC FILE NUMBER.
THE FILE NUMBER IS AS FOLLOWS:
1940 Act File No. 811-5410
[ING FUNDS LOGO]
PRPRO-PRT5M (07/04-07/01/04)
ING PRIME RATE TRUST
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 2004
ING Prime Rate Trust ("Trust") is a diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended ("1940 Act"). The Trust's investment objective is to provide investors
with as high a level of current income as is consistent with the preservation of
capital. There is no assurance that the Trust will achieve its investment
objective. The Trust is managed by ING Investments, LLC ("ING Investments" or
"Investment Manager") and sub-advised by ING Investment Management Co. ("INGIM"
or "Sub-Adviser"), formerly known as Aeltus Investment Management, Inc.
This Statement of Additional Information ("SAI") does not constitute a
prospectus, but should be read in conjunction with the Prospectus relating
thereto dated July 1, 2004. This SAI does not include all information that a
prospective investor should consider before purchasing Common Shares in this
offering, and investors should obtain and read the Prospectus prior to
purchasing such shares. In addition, the financial statements from the Trust's
Annual Report dated February 29, 2004, are incorporated herein by reference. A
copy of the Prospectus may be obtained without charge by calling the Investment
Manager at (800) 992-0180.
TABLE OF CONTENTS
PAGE
CHANGE OF NAME 2
INVESTMENT OBJECTIVE 2
INVESTMENT RESTRICTIONS 2
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT TECHNIQUES 4
TRUSTEES AND OFFICERS 12
COMPENSATION TABLE 20
CODE OF ETHICS 22
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS 23
PLANS OF DISTRIBUTION 28
PORTFOLIO TRANSACTIONS 30
NET ASSET VALUE 31
FEDERAL TAXATION 32
ADVERTISING AND PERFORMANCE DATA 36
GENERAL INFORMATION 37
FINANCIAL STATEMENTS 38
The Prospectus and SAI omit certain information contained in the
registration statement filed with the Securities and Exchange Commission
("Commission" or "SEC"), Washington, DC. The registration statement may be
obtained from the Commission upon payment of the fee prescribed, or inspected at
the Commission's office for no charge. The registration statement is also
available on the Commission's website (www.sec.gov).
1
CHANGE OF NAME
The Trust changed its name from Pilgrim Prime Rate Trust to Pilgrim America
Prime Rate Trust in April 1996, and then changed its name back to Pilgrim Prime
Rate Trust on November 16, 1998. Effective March 1, 2002, the Trust changed its
name to ING Prime Rate Trust.
INVESTMENT OBJECTIVE
The Trust's investment objective is to obtain as high a level of current
income as is consistent with the preservation of capital. The Trust seeks to
achieve its investment objective by investing under normal circumstances at
least 80% of its net assets, plus the amount of any borrowings for investment
purposes, in higher yielding, U.S. dollar denominated, floating rate secured
senior loans ("Senior Loans"). These Senior Loans are typically below investment
grade credit quality.
The Trust only invests in Senior Loans made to corporations or other
business entities organized under U.S. or Canadian law and which are domiciled
in the U.S., Canada or in U.S. territories or possessions. The Trust can also
invest up to 20% of its total assets in other investments, including unsecured
loans, subordinated loans, short-term debt instruments, equity securities
acquired in connection with investments in loans and other instruments as
described under "Additional Information About Investments and Investment
Techniques." During periods when, in the opinion of the Trust's Investment
Manager or Sub-Adviser, a temporary defensive posture in the market is
appropriate, the Trust may hold up to 100% of its assets in cash and/or in
short-term debt instruments.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions relating to its
investments and activities, which may not be changed without a Majority Vote, as
defined in the 1940 Act. The Trust may not:
1. Issue senior securities, except insofar as the Trust may be deemed
to have issued a senior security by reason of (i) entering into certain interest
rate hedging transactions, (ii) entering into reverse repurchase agreements, or
(iii) borrowing money in an amount not exceeding 33 1/3%, or such other
percentage permitted by law, of the Trust's total assets (including the borrowed
amount) less all liabilities other than borrowings, or (iv) issuing a class or
classes of preferred shares in an amount not exceeding 50%, or such other
percentage permitted by law, of the Trust's total assets less all liabilities
and indebtedness not represented by senior securities.
2. Invest more than 25% of its total assets in any industry.
3. Invest in marketable warrants other than those acquired in
conjunction with Senior Loans and such warrants will not constitute more than 5%
of its assets.
4. Make investments in any one issuer other than U.S. government
securities if, immediately after such purchase or acquisition, more than 5% of
the value of the Trust's total assets would be invested in such issuer, or the
Trust would own more than 25% of any outstanding issue, except that up to 25% of
the Trust's total assets may be invested without regard to the foregoing
restrictions. For the purpose of the foregoing restriction, the Trust will
consider the borrower of a Senior Loan to be the issuer of such Senior Loan. In
addition, with respect to a Senior Loan under which the Trust does not have
privity with the borrower or would not have a direct cause of action against the
borrower in the event of the failure of the borrower to pay scheduled principal
or interest, the Trust will also separately
2
meet the foregoing requirements and consider each interpositioned bank (a lender
from which the Trust acquires a Senior Loan) to be an issuer of the Senior Loan.
5. Act as an underwriter of securities, except to the extent that it
may be deemed to act as an underwriter in certain cases when disposing of its
portfolio investments or acting as an agent or one of a group of co-agents in
originating Senior Loans.
6. Purchase or sell equity securities (except that the Trust may,
incidental to the purchase or ownership of an interest in a Senior Loan, or as
part of a borrower reorganization, acquire, sell and exercise warrants and/or
acquire or sell other equity securities), real estate, real estate mortgage
loans, commodities, commodity futures contracts, or oil or gas exploration or
development programs; or sell short, purchase or sell straddles, spreads, or
combinations thereof, or write put or call options.
7. Make loans of money or property to any person, except that the Trust
(i) may make loans to corporations or other business entities, or enter into
leases or other arrangements that have the characteristics of a loan; (ii) may
lend portfolio instruments; and (iii) may acquire securities subject to
repurchase agreements.
8. Purchase shares of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization.
9. Make investments on margin or hypothecate, mortgage or pledge any of
its assets except for the purpose of securing borrowings as described above in
connection with the issuance of senior securities and then only in an amount up
to 33 1/3% (50% in the case of the issuance of a preferred class of shares), or
such other percentage permitted by law, of the value of the Trust's total assets
(including, with respect to borrowings, the amount borrowed) less all
liabilities other than borrowings (or, in the case of the issuance of senior
securities, less all liabilities and indebtedness not represented by senior
securities).
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage resulting from a change in value of the
Trust's investments or amount of total assets will not be considered a violation
of any of the foregoing restrictions.
There is no limitation on the percentage of the Trust's total assets that
may be invested in instruments which are not readily marketable or subject to
restrictions on resale, and to the extent the Trust invests in such instruments,
the Trust's portfolio should be considered illiquid. The extent to which the
Trust invests in such instruments may affect its ability to realize the net
asset value ("NAV") of the Trust in the event of the voluntary or involuntary
liquidation of its assets.
The Trust has also adopted a non-fundamental policy as required by Rule
35d-1 under the 1940 Act to invest, under normal circumstances, at least 80% of
its net assets, plus the amount of any borrowings for investment purposes, in
higher yielding, U.S. dollar denominated, floating rate secured senior loans.
The Trust has also adopted a policy to provide its shareholders with at least 60
days' prior notice of any change in such investment policy. If, subsequent to an
investment, the 80% requirement is no longer met, the Trust's future investments
will be made in a manner that will bring the Trust into compliance with this
policy.
3
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND INVESTMENT TECHNIQUES
Some of the different types of securities in which the Trust may invest,
subject to its investment objective, policies and restrictions, are described in
the prospectus under "Investment Objective and Policies." Additional information
concerning certain of the Trust's investments and investment techniques is set
forth below.
EQUITY SECURITIES
In connection with its purchase or holding of interests in Senior Loans,
the Trust may acquire (and subsequently sell) equity securities or exercise
warrants that it receives. The Trust will acquire such interests only as an
incident to the intended purchase or ownership of loans or in connection with a
reorganization of a borrower or its debt. The Trust normally will not hold more
than 20% of its total assets in equity securities. Equity securities will not be
treated as Senior Loans; therefore, an investment in such securities will not
count toward the 80% of the Trust's net assets, plus the amount of any
borrowings for investment purposes, that normally will be invested in Senior
Loans. Equity securities are subject to financial and market risks and can be
expected to fluctuate in value.
LEASE PARTICIPATIONS
Senior Loans that the Trust may acquire include particpation interests in
lease fiancings (Lease Participations) where the collateral quality, credit
quality of the borrower and the likelihood of payback are believed by the
Investment Manager or Sub-Advisert to be the same as those applied to
conventional Senior Loans. A Lease Participation is also required to have a
floating interest rate that is indexed to a benchmark indicator of prevailing
interest rates, such as LIBOR or the Prime Rate.
The credit quality standards and general requirements that the Trust
applies to Lease Participations including collateral quality, the credit quality
of the borrower and the likelihood of payback are substantially the same as
those applied to conventional Senior Loans. A Lease Participation is also
required to have a floating interest rate that is indexed to the federal funds
rate, London Inter-Bank Offered Rate ("LIBOR"), or Prime Rate in order to be
eligible for investment.
The Office of the Comptroller of the Currency has established regulations
which set forth circumstances under which national banks may engage in lease
financings. Among other things, the regulation requires that a lease be a
net-full payout lease representing the noncancelable obligation of the lessee,
and that the bank make certain determinations with respect to any estimated
residual value of leased property relied upon by the bank to yield a full return
on the lease. The Trust may invest in lease financings only if the Lease
Participation meets these banking law requirements.
INTEREST RATES AND PORTFOLIO MATURITY
Interest rates on loans in which the Trust invests adjust periodically. The
interest rates are adjusted based on a base rate plus a premium or spread over
the base rate. The base rate usually is LIBOR, the Federal Reserve federal funds
rate, the Prime Rate or other base lending rates used by commercial lenders.
LIBOR usually is an average of the interest rates quoted by several designated
banks as the rates at which they pay interest to major depositors in the London
interbank market on U.S. dollar denominated deposits. The Investment Manager and
Sub-Adviser believe that changes in short-term LIBOR rates are closely related
to changes in the Federal Reserve federal funds rate, although the two are not
technically linked. The Prime Rate quoted by a major U.S. bank is generally the
interest rate at which that bank is willing to lend U.S. dollars to its most
creditworthy borrowers, although it may not be the bank's lowest available rate.
4
Loans in which the Trust invests typically have interest rates which reset
at least quarterly and may reset as frequently as daily. The maximum duration of
an interest rate reset on any loan in which the Trust can invest is one year.
The maximum maturity on any loan in which the Trust can invest is ten years. The
Trust's portfolio of loans will ordinarily have a dollar-weighted average time
until the next interest rate adjustment of 90 days or less, although the time
may exceed 90 days. The Trust may find it possible and appropriate to use
interest rate swaps and other investment practices to shorten the effective
interest rate adjustment period of loans. If the Trust does so, it will consider
the shortened period to be the adjustment period of the loan. As short-term
interest rates rise, interest payable to the Trust should increase. As
short-term interest rates decline, interest payable to the Trust should
decrease. The amount of time that will pass before the Trust experiences the
effects of changing short-term interest rates will depend on the dollar-weighted
average time until the next interest rate adjustment on the Trust's portfolio of
loans.
Loans usually have mandatory and optional prepayment provisions. Because of
prepayments, the actual remaining maturity of a loan may be considerably less
than its stated maturity. If a loan is prepaid, the Trust will have to reinvest
the proceeds in other loans or securities which may have a lower fixed spread
over its base rate. In such a case, the amount of interest paid to the Trust
would likely decrease.
In the event of a change in the benchmark interest rate on a loan, the rate
payable to lenders under the loan will, in turn, change at the next scheduled
reset date. If the benchmark rate goes up, the Trust as lender would earn
interest at a higher rate, but only on and after the reset date. If the
benchmark rate goes down, the Trust as lender would earn interest at a lower
rate, but only on and after the reset date.
During normal market conditions, changes in market interest rates will
affect the Trust in certain ways. The principal effect will be that the yield on
the Trust's Common Shares will tend to rise or fall as market interest rates
rise and fall. This is because almost all of the assets in which the Trust
invests pay interest at rates which float in response to changes in market
rates. However, because the interest rates on the Trust's assets reset over
time, there will be an imperfect correlation between changes in market rates and
changes to rates on the portfolio as a whole. This means that changes to the
rate of interest paid on the portfolio as a whole will tend to lag behind
changes in market rates.
Market interest rate changes may also cause the Trust's NAV to experience
moderate volatility. This is because the value of a loan asset in the Trust is
partially a function of whether it is paying what the market perceives to be a
market rate of interest for the particular loan, given its individual credit and
other characteristics. If market interest rates change, a loan's value could be
affected to the extent the interest rate paid on that loan does not reset at the
same time. As discussed above, the rates of interest paid on the loans in which
the Trust invests have a weighted average reset period that typically is less
than 90 days. Therefore, the impact of the lag between a change in market
interest rates and the change in the overall rate on the portfolio is expected
to be minimal.
Finally, to the extent that changes in market rates of interest are
reflected not in a change to a base rate such as LIBOR but in a change in the
spread over the base rate which is payable on loans of the type and quality in
which the Trust invests, the Trust's NAV could be adversely affected. Again,
this is because the value of a loan asset in the Trust is partially a function
of whether it is paying what the market perceives to be a market rate of
interest for the particular loan, given its individual credit and other
characteristics. However, unlike changes in market rates of interest for which
there is only a temporary lag before the portfolio reflects those changes,
changes in a loan's value based on changes in the market spread on loans in the
Trust's portfolio may be of longer duration.
5
OTHER INVESTMENTS
Assets not invested in Senior Loans will generally consist of other
instruments, including unsecured loans and subordinated loans up to a maximum of
5% of the Trust's total assets, short-term debt instruments with remaining
maturities of 120 days or less (which may have yields tied to the Prime Rate,
commercial paper rates, the federal funds rate or LIBOR) and equity securities
acquired in connection with investments in loans. Short-term debt instruments
may include (i) commercial paper rated A-1 by Standard & Poor's Ratings Services
or P-1 by Moody's Investors Service, Inc., or of comparable quality as
determined by the Investment Manager or Sub-Adviser, (ii) certificates of
deposit, bankers' acceptances, and other bank deposits and obligations, and
(iii) securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. During periods when, in the judgment of the Investment
Manager or Sub-Adviser, a temporary defensive posture in the market is
appropriate, the Trust may hold up to 100% of its assets in cash and/or in
short-term debt instruments.
REPURCHASE AGREEMENTS
The Trust has the ability, pursuant to its investment objective and
policies, to enter into repurchase agreements. A repurchase agreement is a
contract under which the Trust may sell and simultaneously obtain the commitment
of the purchaser to sell the security back to the Trust at an agreed upon price
on an agreed upon date. Repurchase agreements will be considered borrowings by
the Trust, and as such are subject to the restrictions on borrowing. Borrowings
by the Trust create an opportunity for greater total return, but at the same
time increase exposure to capital risk. The Trust will maintain in a segregated
account with its custodian cash or liquid high grade portfolio securities in an
amount sufficient to cover its obligations with respect to the repurchase
agreements. The Trust will receive payment for such securities only upon
physical delivery or evidence of book entry transfer by its custodian.
Regulations of the Commission require either that securities sold by the Trust
under a repurchase agreement be segregated pending repurchase or that the
proceeds be segregated on the Trust's books and records pending repurchase.
Repurchase agreements may involve certain risks in the event of default or
insolvency of the other party, including possible loss from delays or
restrictions upon the Trust's ability to dispose of the underlying securities.
REVERSE REPURCHASE AGREEMENTS
The Trust has the ability, pursuant to its investment objective and
policies, to enter into repurchase agreements if the asset which is the subject
of the repurchase is a loan. Such agreements may be considered to be loans by
the Trust for purposes of the 1940 Act. Each reverse repurchase agreement must
be collateralized fully, in accordance with the provisions of Rule 5b-3 under
the 1940 Act, at all times. Pursuant to such reverse repurchase agreements, the
Trust acquires securities from financial institutions such as brokers, dealers
and banks, subject to the seller's agreement to repurchase and the Trust's
agreement to resell such securities at a mutually agreed upon date and price.
The term of such an agreement is generally quite short, possibly overnight or
for a few days, although it may extend over a number of months (up to one year)
from the date of delivery. The repurchase price generally equals the price paid
by the Trust plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio security).
The securities underlying a reverse repurchase agreement will be marked to
market every business day so that the value of the collateral is at least equal
to the value of the loan, including the accrued interest thereon, and the
Investment Manager or Sub-Adviser will monitor the value of the collateral.
Securities subject to reverse repurchase agreements will be held by the
Custodian or in the Federal Reserve/Treasury Book-Entry System. If the seller
defaults
6
on its repurchase obligation, the Trust will suffer a loss to the extent that
the proceeds from a sale of the underlying securities is less than the
repurchase price under the agreement. Bankruptcy or insolvency of such a
defaulting seller may cause the Trust's rights with respect to such securities
to be delayed or limited. To mitigate this risk, the Trust only enters into
reverse repurchase agreements with highly rated, large financial institutions.
The Trust may only enter into reverse repurchase agreements that qualify for an
exclusion from any automatic stay of creditors' rights against the counterparty
under applicable insolvency law in the event of the counterparty's insolvency.
LENDING LOANS AND OTHER PORTFOLIO INSTRUMENTS
To generate additional income, the Trust may lend its portfolio securities,
including interests in Senior Loans, in an amount equal to up to 33 1/3% of
theTrust's total assets to broker-dealers, major banks, or other recognized
domestic institutional borrowers of securities. No lending may be made to any
companies affiliated with the Investment Manager or Sub-Adviser. During the time
portfolio securities are on loan, the borrower pays the Trust any dividends or
interest paid on such securities, and the Trust may invest the cash collateral
and earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower who has delivered equivalent collateral or a letter of
credit. As with other extensions of credit, there are risks of delay in recovery
or even loss of rights in the collateral should the borrower fail financially.
The Trust may seek to increase its income by lending financial instruments
in its portfolio in accordance with present regulatory policies, including those
of the Board of Governors of the Federal Reserve System and the Commission. The
lending of financial instruments is a common practice in the securities
industry. The loans are required to be secured continuously by collateral,
consistent with the requirements of the 1940 Act discussed below, maintained on
a current basis at an amount at least equal to the market value of the portfolio
instruments loaned. The Trust has the right to call a loan and obtain the
portfolio instruments loaned at any time on such notice as specified in the
transaction documents. For the duration of the loan, the Trust will continue to
receive the equivalent of the interest paid by the issuer on the portfolio
instruments loaned and may also receive compensation for the loan of the
financial instrument. Any gain or loss in the market price of the instruments
loaned that may occur during the term of the loan will be for the account of the
Trust.
The Trust may lend its portfolio instruments so long as the terms and the
structure of such loans are not inconsistent with the requirements of the 1940
Act, which currently require that (a) the borrower pledge and maintain with the
Trust collateral consisting of cash, a letter of credit issued by a domestic
U.S. bank, or securities issued or guaranteed by the U.S. government having a
value at all times not less than 100% of the value of the instruments loaned,
(b) the borrowers add to such collateral whenever the price of the instruments
loaned rises (I.E., the value of the loan is marked to market on a daily basis),
(c) the loan be made subject to termination by the Trust at any time, and (d)
the Trust receives reasonable interest on the loan (which may include the
Trust's investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned instruments and increase in their
market value. The Trust may lend its portfolio instruments to member banks of
the Federal Reserve System, members of the New York Stock Exchange ("NYSE") or
other entities determined by the Investment Manager or Sub-Adviser to be
creditworthy. All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the
Investment Manager or Sub-Adviser, and will be considered in making decisions
with respect to the lending of portfolio instruments.
The Trust may pay reasonable negotiated fees in connection with loaned
instruments. In addition, voting rights may pass with loaned securities, but if
a material event were to occur affecting such a loan, the Trust will retain the
right to call the loan and vote the securities. If a default occurs by the other
party to such transaction, the Trust will have contractual remedies pursuant to
the agreements related to the
7
transaction, but such remedies may be subject to bankruptcy and insolvency laws
which could materially and adversely affect the Trust's rights as a creditor.
However, the loans will be made only to firms deemed by the Investment Manager
or Sub-Adviser to be of good financial standing and when, in the judgment of the
Investment Manager or Sub-Adviser, the consideration which can be earned
currently from loans of this type justifies the attendant risk.
INTEREST RATE HEDGING TRANSACTIONS
The Trust has the ability, pursuant to its investment objectives and
policies, to engage in certain hedging transactions including interest rate
swaps and the purchase or sale of interest rate caps and floors. The Trust may
undertake these transactions primarily for the following reasons: to preserve a
return on or value of a particular investment or portion of the Trust's
portfolio, to protect against decreases in the anticipated rate of return on
floating or variable rate financial instruments which the Trust owns or
anticipates purchasing at a later date, or for other risk management strategies
such as managing the effective dollar-weighted average duration of the Trust's
portfolio. Market conditions will determine whether and in what circumstances
the Trust would employ any of the hedging techniques described below.
Interest rate swaps involve the exchange by the Trust with another party of
their respective commitments to pay or receive interest, E.G., an exchange of an
obligation to make floating rate payments on a specified dollar amount, referred
to as the "notional" principal amount, for an obligation to make fixed rate
payments. For example, the Trust may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio that has an interest
rate redetermination period of one year. The Trust could exchange its right to
receive fixed income payments for one year from a borrower for the right to
receive payments under an obligation that readjusts monthly. In such an event,
the Trust would consider the interest rate redetermination period of such Senior
Loan to be the shorter period.
The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling such
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor. The Trust will not enter into
swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Trust or to
the extent the purchase of swaps, caps or floors would be inconsistent with the
Trust's other investment restrictions.
The Trust will usually enter into interest rate swaps on a net basis, I.E.,
where the two parties make net payments with the Trust receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of the Trust's obligations over its entitlement with respect to
each interest rate swap will be accrued and an amount of cash or liquid
securities having an aggregate NAV at least equal to the accrued excess will be
maintained in a segregated account. If the Trust enters into a swap on other
than a net basis, the Trust will maintain in the segregated account the full
amount of the Trust's obligations under each such swap. The Trust may enter into
swaps, caps and floors with member banks of the Federal Reserve System, members
of the NYSE or other entities determined by ING Investments. If a default occurs
by the other party to such transaction, the Trust will have contractual remedies
pursuant to the agreements related to the transaction but such remedies may be
subject to bankruptcy and insolvency laws which could materially and adversely
affect the Trust's rights as a creditor. The Trust will not treat swaps covered
in accordance with applicable regulatory guidance as senior securities.
8
The swap, cap and floor market has grown substantially in recent years with
a large number of banks and financial services firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, this
market has become relatively liquid. There can be no assurance, however, that
the Trust will be able to enter into interest rate swaps or to purchase interest
rate caps or floors at prices or on terms the Investment Manager or Sub-Adviser
believes are advantageous to the Trust. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination, there can be
no assurance that the Trust will be able to terminate an interest rate swap or
to sell or offset interest rate caps or floors that it has purchased.
The successful utilization of hedging and risk management transactions
requires skills different from those needed in the selection of the Trust's
portfolio securities and depends on the Investment Manager's or Sub-Adviser's
ability to predict correctly the direction and degree of movements in interest
rates. Although the Trust believes that use of the hedging and risk management
techniques described above will benefit the Trust, if the Investment Manager's
or Sub-Adviser's judgment about the direction or extent of the movement in
interest rates is incorrect, the Trust's overall performance would be worse than
if it had not entered into any such transactions. The Trust will incur brokerage
and other costs in connection with its hedging transactions.
ORIGINATING SENIOR LOANS - RELIANCE ON AGENTS
The Trust has the ability to act as an agent in originating and
administering a loan on behalf of all lenders or as one of a group of co-agents
in originating Senior Loans. However, the Trust has not acted as agent or
co-agent on any loans, and has no present intention of doing so in the future.
An agent for a loan is required to administer and manage the Senior Loan and to
service or monitor the collateral. The agent is also responsible for the
collection of principal and interest and fee payments from the borrower and the
apportionment of these payments to the credit of all lenders which are parties
to the loan agreement. The agent is charged with the responsibility of
monitoring compliance by the borrower with the restrictive covenants in the loan
agreement and of notifying the lenders of any adverse change in the borrower's
financial condition. In addition, the agent generally is responsible for
determining that the lenders have obtained a perfected security interest in the
collateral securing the Senior Loan.
Lenders generally rely on the agent to collect their portion of the
payments on a Senior Loan and to use the appropriate creditor remedies against
the borrower. Typically under loan agreements, the agent is given broad
discretion in enforcing the loan agreement and is obligated to use the same care
it would use in the management of its own property. The borrower compensates the
agent for these services. Such compensation may include special fees paid on
structuring and funding the Senior Loan and other fees on a continuing basis.
The precise duties and rights of an agent are defined in the loan agreement.
The agent may enforce compliance by the borrower with the terms of the loan
agreement. Agents also have voting and consent rights under the applicable loan
agreement. Action subject to agent vote or consent generally requires the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan, which percentage varies depending on the
relative loan agreement. Certain decisions, such as reducing the amount or
increasing the time for payment of interest on or repayment of principal of a
Senior Loan, or relating collateral therefor, frequently require the unanimous
vote or consent of all lenders affected.
Pursuant to the terms of a loan agreement, the agent typically has sole
responsibility for servicing and administering a loan on behalf of the other
lenders. Each lender in a Senior Loan is generally
9
responsible for performing its own credit analysis and its own investigation of
the financial condition of the borrower. Generally, loan agreements will hold
the agent liable for any action taken or omitted that amounts to gross
negligence or willful misconduct. In the event of a borrower's default on a
loan, the loan agreements provide that the lenders do not have recourse against
the agent for its activities as agent. Instead, lenders will be required to look
to the borrower for recourse.
In a typical interest in a Senior Loan, the agent administers the loan and
has the right to monitor the collateral. The agent is also required to segregate
the principal and interest payments received from the borrower and to hold these
payments for the benefit of the lenders. The Trust normally looks to the agent
to collect and distribute principal of and interest on a Senior Loan.
Furthermore, the Trust looks to the agent to use normal credit remedies, such as
to foreclose on collateral, monitor credit loan covenants, and notify the
lenders of any adverse changes in the borrower's financial condition or
declarations of insolvency. At times the Trust may also negotiate with the agent
regarding the agent's exercise of credit remedies under a Senior Loan. The agent
is compensated for these services by the borrower as set forth in the loan
agreement. Such compensation may take the form of a fee or other amount paid
upon the making of the Senior Loan and/or an ongoing fee or other amount.
The loan agreements in connection with Senior Loans set forth the standard
of care to be exercised by the agents on behalf of the lenders and usually
provide for the termination of the agent's agency status in the event that it
fails to act properly, becomes insolvent, enters FDIC receivership, or if not
FDIC insured, enters into bankruptcy or if the agent resigns. In the event an
agent is unable to perform its obligations as agent, another lender would
generally serve in that capacity.
ADDITIONAL INFORMATION ON SENIOR LOANS
Senior Loans are direct obligations of corporations or other business
entities and are arranged by banks or other commercial lending institutions and
made generally to finance internal growth, mergers, acquisitions, stock
repurchases, and leveraged buyouts. Senior Loans usually include restrictive
covenants which must be maintained by the borrower. Such covenants, in addition
to the timely payment of interest and principal, may include mandatory
prepayment provisions arising from free cash flow and restrictions on dividend
payments, and usually state that a borrower must maintain specific minimum
financial ratios as well as establishing limits on total debt. A breach of
covenant, which is not waived by the agent, is normally an event of
acceleration, I.E., the agent has the right to call the outstanding Senior Loan.
In addition, loan covenants may include mandatory prepayment provisions stemming
from free cash flow. Free cash flow is cash that is in excess of capital
expenditures plus debt service requirements of principal and interest. The free
cash flow shall be applied to prepay the Senior Loan in an order of maturity
described in the loan documents. Under certain interests in Senior Loans, the
Trust may have an obligation to make additional loans upon demand by the
borrower. The Trust intends to ensure its ability to satisfy such demands by
segregating sufficient assets in high quality short-term liquid investments or
by sufficiently maintaining unused borrowing capacity.
10
Senior Loans, unlike certain bonds, usually do not have call protection.
This means that investments comprising the Trust's portfolio, while having a
stated one to ten-year term, may be prepaid, often without penalty. The Trust
generally holds Senior Loans to maturity unless it becomes necessary to sell
them to adjust the Trust's portfolio in accordance with the Investment Manager's
or Sub-Adviser's view of current or expected economic or specific industry or
borrower conditions.
Senior Loans frequently require full or partial prepayment of a loan when
there are asset sales or a securities issuance. Prepayments on Senior Loans may
also be made by the borrower at its election. The rate of such prepayments may
be affected by, among other things, general business and economic conditions, as
well as the financial status of the borrower. Prepayment would cause the actual
duration of a Senior Loan to be shorter than its stated maturity. Prepayment may
be deferred by the Trust. This should, however, allow the Trust to reinvest in a
new loan and recognize as income any unamortized loan fees. In many cases this
will result in a new facility fee payable to the Trust.
Because interest rates paid on these Senior Loans fluctuate periodically
with the market, it is expected that the prepayment and a subsequent purchase of
a new Senior Loan by the Trust will not have a material adverse impact on the
yield of the portfolio. See "Portfolio Transactions."
Under a Senior Loan, the borrower generally must pledge as collateral
assets which may include one or more of the following: cash, accounts
receivable, inventory, property, plant and equipment, both common and preferred
stock in its subsidiaries, trademarks, copyrights, patent rights and franchise
value. The Trust may also receive guarantees as a form of collateral. In some
instances, a Senior Loan may be secured only by stock in a borrower or its
affiliates. There is no assurance, however, that the liquidation of the existing
collateral would satisfy the borrower's obligation in the event of nonpayment of
scheduled interest or principal, or that such collateral could be readily
liquidated.
The Trust may be required to pay and receive various fees and commissions
in the process of purchasing, selling and holding Senior Loans. The fee
component may include any, or a combination of, the following elements:
arrangement fees, assignment fees, non-use fees, facility fees, letter of credit
fees and ticking fees. Arrangement fees are paid at the commencement of a loan
as compensation for the initiation of the transaction. A non-use fee is paid
based upon the amount committed but not used under the loan. Facility fees are
on-going annual fees paid in connection with a loan. Letter of credit fees are
paid if a loan involves a letter of credit. Ticking fees are paid from the
initial commitment indication until loan closing if for an extended period. The
amount of fees is negotiated at the time of transaction.
11
MANAGEMENT OF THE TRUST
Set forth in the table below is information about each Trustee of the ING
Funds.
NUMBER OF
FUNDS IN
FUND
TERM OF OFFICE COMPLEX
POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) - OVERSEEN BY
NAME, ADDRESS AND AGE WITH TRUST TIME SERVED(1) DURING THE PAST 5 YEARS TRUSTEE**
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
PAUL S. DOHERTY Trustee November 1999 - Mr. Doherty is President and Partner, Doherty, 117
7337 E. Doubletree Ranch Rd. Present Wallace, Pillsbury and Murphy, P.C., Attorneys
Scottsdale, Arizona 85258 (1996 -Present).
Date of Birth: 04/28/1934
J. MICHAEL EARLEY Trustee February 2002 - President and Chief Executive Officer, Bankers 117
7337 E. Doubletree Ranch Rd. Present Trust Company, N.A. (1992 - Present).
Scottsdale, Arizona 85258
Date of Birth: 05/02/1945
R. BARBARA GITENSTEIN Trustee February 2002 - President, College of New Jersey (1999 - 117
7337 E. Doubletree Ranch Rd. Present Present).
Scottsdale, Arizona 85258
Date of Birth: 02/18/1948
WALTER H. MAY Trustee November 1999- Retired. Formerly, Trustee of each of the funds 117
7337 E. Doubletree Ranch Rd. Present managed by Northstar Investment Management
Scottsdale, Arizona 85258 Corporation (1996 - 1999).
Date of Birth: 12/12/1936
JOCK PATTON Trustee August 1995 - Private Investor (June 1997 - Present). Formerly, 117
7337 E. Doubletree Ranch Rd. Present Director and Chief Executive Officer, Rainbow
Scottsdale, Arizona 85258 Multimedia Group, Inc. (January 1999 - December
Date of Birth: 12/11/1945 2001).
DAVID W.C. PUTNAM Trustee November 1999- President and Director, F.L. Putnam Securities 117
7337 E. Doubletree Ranch Rd. Present Company, Inc. and its affiliates (1978 - present);
Scottsdale, Arizona 85258 President, Secretary and Trustee, The Principled
Date of Birth: 10/08/1939 Equity Market Fund (1996 - present).
NAME, ADDRESS AND AGE OTHER DIRECTORSHIPS HELD BY TRUSTEE
--------------------------------------------------------------------
INDEPENDENT TRUSTEES
PAUL S. DOHERTY University of Massachusetts
7337 E. Doubletree Ranch Rd. Foundation Board (April 2004 -
Scottsdale, Arizona 85258 present).
Date of Birth: 04/28/1934
J. MICHAEL EARLEY
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 05/02/1945
R. BARBARA GITENSTEIN New Jersey Resources (September 2003
7337 E. Doubletree Ranch Rd. - present).
Scottsdale, Arizona 85258
Date of Birth: 02/18/1948
WALTER H. MAY Trustee, BestPrep Charity (1991 -
7337 E. Doubletree Ranch Rd. Present) - charitable organization.
Scottsdale, Arizona 85258
Date of Birth: 12/12/1936
JOCK PATTON Director, Hypercom, Inc. (January
7337 E. Doubletree Ranch Rd. 1999 - Present); JDA Software Group,
Scottsdale, Arizona 85258 Inc. (January 1999 - Present).
Date of Birth: 12/11/1945
DAVID W.C. PUTNAM Anchor International Bond Trust
7337 E. Doubletree Ranch Rd. (December 2000 - Present); F.L.
Scottsdale, Arizona 85258 Putnam Foundation (December 2000 -
Date of Birth: 10/08/1939 Present); Progressive Capital
Accumulation Trust (August 1998 -
Present); Principled Equity Market
Fund (November 1996 - Present),
Mercy Endowment Foundation (1995 -
Present); Asian American Bank and
Trust Company (June 1992 - Present);
Notre Dame Health Care Center (1991
- Present) F.L. Putnam Securities
12
NUMBER OF
FUNDS IN
FUND
TERM OF OFFICE COMPLEX
POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) - OVERSEEN BY
NAME, ADDRESS AND AGE WITH TRUST TIME SERVED(1) DURING THE PAST 5 YEARS TRUSTEE**
------------------------------------------------------------------------------------------------------------------------------------
BLAINE E. RIEKE Trustee February 2001 - General Partner, Huntington Partners (January 117
7337 E. Doubletree Ranch Rd. Present 1997 - Present). Chairman of the Board and
Scottsdale, Arizona 85258 Trustee of each of the funds managed by ING
Date of Birth: 09/10/1933 Investment Management Co. LLC (November 1998 -
February 2001).
ROGER B. VINCENT Trustee February 2002 - President, Springwell Corporation (1989 - 117
7337 E. Doubletree Ranch Rd. Present Present). Formerly, Director, Tatham Offshore,
Scottsdale, Arizona 85258 Inc. (1996 - 2000).
Date of Birth: 08/26/1945
RICHARD A. WEDEMEYER Trustee February 2001 - Retired. Formerly, Vice President - Finance 117
7337 E. Doubletree Ranch Rd. Present and Administration, Channel Corporation (1996
Scottsdale, Arizona 85258 -2002). Formerly, Trustee, First Choice Funds
Date of Birth: 03/23/1936 (1997 - 2001); and of each of the funds managed
by ING Investment Management Co. LLC (1998 -
2001).
TRUSTEES WHO ARE "INTERESTED PERSONS"
THOMAS J. MCINERNEY(2) Trustee February 2001 - Chief Executive Officer, ING U.S. Financial 171
7337 E. Doubletree Ranch Rd. Present Services (September 2001 - Present); Member,
Scottsdale, Arizona 85258 ING Americas Executive Committee (2001 -
Date of Birth: 05/05/1956 Present); President, Chief Executive Officer
and Director of Northern Life Insurance Company
(March 2001 - October 2002), ING Aeltus Holding
Company, Inc. (2000 - Present), ING Retail
Holding Company (1998 - Present), ING Life
Insurance and Annuity Company (September 1997 -
November 2002) and ING Retirement Holdings,
Inc. (1997 - Present). Formerly, General
Manager and Chief Executive Officer, ING
Worksite Division (December 2000 - October
2001), President, ING-SCI, Inc. (August 1997 -
December 2000); President, Aetna Financial
Services (August 1997 - December 2000).
JOHN G. TURNER(3) Chairman and September 2000- Chairman, Hillcrest Capital Partners (May 117
7337 E. Doubletree Ranch Rd. Trustee Present 2002-Present); Vice Chairman of ING Americas
Scottsdale, Arizona 85258 (2000 - 2002); Chairman and Chief Executive
Officer of
NAME, ADDRESS AND AGE OTHER DIRECTORSHIPS HELD BY TRUSTEE
--------------------------------------------------------------------
Company, Inc. (June 1978 - Present);
and an Honorary Trustee, Mercy
Hospital (1973 - Present).
BLAINE E. RIEKE Trustee, Morgan Chase Trust Co.
7337 E. Doubletree Ranch Rd. (January 1998 - Present); Director,
Scottsdale, Arizona 85258 Members Trust Co. (November 2003 -
Date of Birth: 09/10/1933 Present).
ROGER B. VINCENT Director, AmeriGas Propane, Inc.
7337 E. Doubletree Ranch Rd. (1998 - Present).
Scottsdale, Arizona 85258
Date of Birth: 08/26/1945
RICHARD A. WEDEMEYER Trustee, Touchstone Consulting Group
7337 E. Doubletree Ranch Rd. (1997 - Present); Jim Henson Legacy
Scottsdale, Arizona 85258 (1994 - Present).
Date of Birth: 03/23/1936
TRUSTEES WHO ARE "INTERESTED PERSONS"
THOMAS J. MCINERNEY(2) Trustee, Equitable Life Insurance
7337 E. Doubletree Ranch Rd. Co., Golden American Life Insurance
Scottsdale, Arizona 85258 Co., Life Insurance Company of
Date of Birth: 05/05/1956 Georgia, Midwestern United Life
Insurance Co., ReliaStar Life
Insurance Co., Security Life of
Denver, Security Connecticut Life
Insurance Co., Southland Life
Insurance Co., USG Annuity and Life
Company, and United Life and Annuity
Insurance Co. Inc (March 2001 -
Present); Member of the Board,
Bushnell Performing Arts Center; St.
Francis Hospital; National
Conference for Community Justice;
and Metro Atlanta Chamber of
Commerce.
JOHN G. TURNER(3) Director, Hormel Foods Corporation
7337 E. Doubletree Ranch Rd. (March 2000 - Present); Shopko
Scottsdale, Arizona 85258 Stores, Inc. (August 1999 -
Present); and M.A.
13
NUMBER OF
FUNDS IN
FUND
TERM OF OFFICE COMPLEX
POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) - OVERSEEN BY
NAME, ADDRESS AND AGE WITH TRUST TIME SERVED(1) DURING THE PAST 5 YEARS TRUSTEE**
------------------------------------------------------------------------------------------------------------------------------------
Date of Birth: 10/03/1939 ReliaStar Financial Corp. and ReliaStar Life
Insurance Company (1993 - 2001); Chairman of
ReliaStar Life Insurance Company of New York
(1995 - 2001); Chairman of Northern Life
Insurance Company (1992 - 2001); Chairman and
Trustee of the Northstar affiliated
investment companies (1993 - 2001); and
Director, Northstar Investment Management
Corporation and its affiliates (1993 - 1999).
NAME, ADDRESS AND AGE OTHER DIRECTORSHIPS HELD BY TRUSTEE
--------------------------------------------------------------------
Date of Birth: 10/03/1939 Mortenson Company (March 2002 -
Present); Conseco, Inc. (September
2003- Present).
(1) Trustees serve until their successors are duly elected and qualified,
subject to the Board's retirement policy which states that each duly
elected or appointed Trustee who is not an "interested person" of the
Trust, as defined in the 1940 Act ("Independent Trustees"), shall retire
from service as a Trustee at the first regularly scheduled quarterly
meeting of the Board that is held after the Trustee reaches the age of 70.
A unanimous vote of the Board may extend the retirement date of a Trustee
for up to one year. An extension may be permitted if the retirement would
trigger a requirement to hold a meeting of shareholders of the Trust under
applicable law, whether for purposes of appointing a successor to the
Trustee or if otherwise necessary under applicable law, in which the
extension would apply until such time as the shareholder meeting can be
held or is no longer needed.
(2) Mr. McInerney is an "interested person," as defined by the 1940 Act,
because of his affiliation with ING Groep N.V., the parent corporation of
the investment adviser, ING Investments and the Distributor, ING Funds
Distributor, LLC.
(3) Mr. Turner is an "interested person," as defined by the 1940 Act, because
of his affiliation with ING Groep N.V., the parent corporation of the
investment adviser, ING Investments and the Distributor, ING Funds
Distributor, LLC.
** For the purposes of this table, "Fund Complex" means the following
investment companies: ING Equity Trust; ING Funds Trust; ING Investment
Funds, Inc.; ING Investors Trust; ING Mayflower Trust; ING Mutual Funds;
ING Prime Rate Trust; ING Senior Income Fund; ING Variable Insurance Trust;
ING Variable Products Trust; ING Emerging Markets Fund, Inc.; ING VP
Natural Resources Trust; USLICO Series Fund, ING Partners, Inc.; ING VP
Balanced Portfolio, Inc.; ING Strategic Allocation Portfolio, Inc.; ING Get
Funds; ING VP Bond Portfolio; ING VP Money Market Portfolio; ING Variable
Funds, Inc.; ING Variable Portfolios, Inc.; and ING Series Fund, Inc.
14
OFFICERS
Information about the ING Funds' officers are set forth in the table below:
NAME, ADDRESS AND AGE POSITIONS HELD WITH THE TRUST TERM OF OFFICE AND LENGTH OF TIME SERVED (1)(2)
----------------------------------------------------------------------------------------------------------------------
JAMES M. HENNESSY President and Chief Executive February 2001 - Present
7337 E. Doubletree Ranch Rd. Officer
Scottsdale, Arizona 85258
Date of Birth: 04/09/1949 Chief Operating Officer July 2000 - Present
STANLEY D. VYNER Executive Vice President August 2003 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 05/14/1950
MICHAEL J. ROLAND Executive Vice President and February 2002 - Present
7337 E. Doubletree Ranch Rd. Assistant Secretary
Scottsdale, Arizona 85258
Date of Birth: 05/30/1958 Principal Financial Officer August 1998 - Present
ROBERT S. NAKA Senior Vice President November 1999 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258 Assistant Secretary July 1996 - Present
Date of Birth: 06/17/1963
DANIEL A. NORMAN Senior Vice President April 1995 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258 Treasurer June 1997 - Present
Date of Birth: 12/29/1957
JEFFREY A. BAKALAR Senior Vice President November 1999 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 12/15/1959
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION(S) DURING THE LAST FIVE YEARS (3)
------------------------------------------------------------------------------------------------------
JAMES M. HENNESSY President and Chief Executive Officer, ING Investments, LLC(2)
7337 E. Doubletree Ranch Rd. (December 2001 - Present). Formerly, Senior Executive Vice
Scottsdale, Arizona 85258 President and Chief Operating Officer, ING Investments, LLC(2)
Date of Birth: 04/09/1949 (April 1995 - December 2000); and Executive Vice President, ING
Investments, LLC(2) (May 1998 - June 2000).
STANLEY D. VYNER Executive Vice President, ING Investments, LLC(2) (July 2000 -
7337 E. Doubletree Ranch Rd. Present) and Chief Investment Risk Officer (June 2003 -
Scottsdale, Arizona 85258 Present). Formerly, Chief Investment Officer of the
Date of Birth: 05/14/1950 International Portfolios, ING Investments, LLC(2) (July 1996 -
June 2003); and President and Chief Executive Officer, ING
Investments, LLC(2) (August 1996 - August 2000).
MICHAEL J. ROLAND Executive Vice President, Chief Financial Officer and
7337 E. Doubletree Ranch Rd. Treasurer, ING Investments, LLC(2) (December 2001 - Present).
Scottsdale, Arizona 85258 Formerly, Senior Vice President, ING Investments, LLC(2) (June
Date of Birth: 05/30/1958 1998 - December 2001).
ROBERT S. NAKA Senior Vice President and Assistant Secretary, ING Funds
7337 E. Doubletree Ranch Rd. Services, LLC(3) (October 2001 - Present). Formerly, Senior
Scottsdale, Arizona 85258 Vice President and Assistant Secretary, ING Funds Services,
Date of Birth: 06/17/1963 LLC(3) (February 1997 - August 1999).
DANIEL A. NORMAN Senior Vice President (April 1995 - Present) and Senior
7337 E. Doubletree Ranch Rd. Investment Manager in the Senior Floating Rate Loan Group
Scottsdale, Arizona 85258 (November 1999 - Present), ING Investment Management Co.
Date of Birth: 12/29/1957 Formerly, Portfolio Manager in the Senior Floating Rate Loan
Group (April 1995 - November 1999).
JEFFREY A. BAKALAR Senior Vice President (January 1998 - Present) and Senior
7337 E. Doubletree Ranch Rd. Investment Manager in the Senior Floating Rate Loan Group
Scottsdale, Arizona 85258 (November 1999 - Present), ING Investment Management Co.
Date of Birth: 12/15/1959 Formerly, Portfolio Manager in the Senior Floating Rate Loan
Group (January 1998 - November 1999).
15
NAME, ADDRESS AND AGE POSITIONS HELD WITH THE TRUST TERM OF OFFICE AND LENGTH OF TIME SERVED (1)(2)
----------------------------------------------------------------------------------------------------------------------
ELLIOT ROSEN Senior Vice President May 2002 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 05/07/53
WILLIAM H. RIVOIR Senior Vice President and February 2001 - Present
7337 E. Doubletree Ranch Rd. Assistant Secretary
Scottsdale, Arizona 85258
Date of Birth: 01/19/1951
CURTIS F. LEE Senior Vice President and February 2001 - Present
7337 E. Doubletree Ranch Rd. Chief Credit Officer
Scottsdale, Arizona 85258
Date of Birth: 06/05/1954
KIMBERLY A. ANDERSON Senior Vice President November 2003 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 07/25/1964
ROBYN L. ICHILOV Vice President November 1997 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 09/25/1967
J. DAVID GREENWALD Vice President August 2003 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, AZ 85258
Date of Birth: 09/24/1957
LAUREN D. BENSINGER Vice President August 2003 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 02/06/1954
TODD MODIC Vice President August 2003 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 11/03/1967
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION(S) DURING THE LAST FIVE YEARS (3)
------------------------------------------------------------------------------------------------------
ELLIOT ROSEN Senior Vice President in the Senior Floating Rate Loan Group of
7337 E. Doubletree Ranch Rd. ING Investment Management Co. (February 1999 - Present).
Scottsdale, Arizona 85258
Date of Birth: 05/07/53
WILLIAM H. RIVOIR Vice President, ING Investment Management Co. (January 2004 -
7337 E. Doubletree Ranch Rd. Present). Formerly, Counsel, ING USFS Law Department (January
Scottsdale, Arizona 85258 2003 - December 2003); and Senior Vice President, ING
Date of Birth: 01/19/1951 Investments, LLC(2) (June 1998 - December 2002).
CURTIS F. LEE Senior Vice President and Chief Credit Officer in the Senior
7337 E. Doubletree Ranch Rd. Floating Rate Loan Group of ING Investment Management Co.
Scottsdale, Arizona 85258 (August 1999 - Present). Formerly, held a series of positions
Date of Birth: 06/05/1954 with Standard Chartered Bank in the credit approval and problem
loan management functions (1992 - 1999).
KIMBERLY A. ANDERSON Senior Vice President, ING Investments, LLC(2) (October 2003 -
7337 E. Doubletree Ranch Rd. Present). Formerly, Vice President and Assistant Secretary, ING
Scottsdale, Arizona 85258 Investments, LLC(2) (October 2001 - October 2003); Assistant
Date of Birth: 07/25/1964 Vice President, ING Funds Services, LLC(3) (November 1999 -
January 2001); and has held various other positions with ING
Funds Services, LLC(3) for more than the last five years.
ROBYN L. ICHILOV Vice President, ING Funds Services, LLC(3) (October 2001 -
7337 E. Doubletree Ranch Rd. Present) and ING Investments, LLC(2) (August 1997 - Present).
Scottsdale, Arizona 85258
Date of Birth: 09/25/1967
J. DAVID GREENWALD Vice President of Mutual Fund Compliance, ING Funds Services,
7337 E. Doubletree Ranch Rd. LLC(3) (May 2003 - Present). Formerly, Assistant Treasurer and
Scottsdale, AZ 85258 Director of Mutual Fund Compliance and Operations of American
Date of Birth: 09/24/1957 Skandia, a Prudential Financial Company (October 1996 - May
2003).
LAUREN D. BENSINGER Vice President and Chief Compliance Officer, ING Funds
7337 E. Doubletree Ranch Rd. Distributor, LLC(4) (July 1995 - Present); and Vice President
Scottsdale, Arizona 85258 (February 1996 - Present) and Chief Compliance Officer (October
Date of Birth: 02/06/1954 2001 - Present), ING Investments, LLC(2).
TODD MODIC Vice President of Financial Reporting - Fund Accounting of ING
7337 E. Doubletree Ranch Rd. Fund Services, LLC(3) (September 2002 - Present). Formerly,
Scottsdale, Arizona 85258 Director of Financial Reporting, ING Investments, LLC(2) (March
Date of Birth: 11/03/1967 2001 - September 2002); Director of Financial Reporting, Axient
Communications, Inc. (May 2000 - January 2001); and Director of
Finance, Rural/Metro Corporation (March 1995 - May 2000).
16
NAME, ADDRESS AND AGE POSITIONS HELD WITH THE TRUST TERM OF OFFICE AND LENGTH OF TIME SERVED (1)(2)
----------------------------------------------------------------------------------------------------------------------
SUSAN P. KINENS Assistant Vice President and February 2003 - Present
7337 E. Doubletree Ranch Rd. Assistant Secretary
Scottsdale, Arizona 85258
Date of Birth: 12/31/1976
MARIA M. ANDERSON Assistant Vice President August 2001 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, Arizona 85258
Date of Birth: 05/29/1958
HUEY P. FALGOUT, JR. Secretary August 2003 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, AZ 85258
Date of Birth: 11/15/1963
THERESA K. KELETY Assistant Secretary August 2003 - Present
7337 E. Doubletree Ranch Rd.
Scottsdale, AZ 85258
Date of Birth: 02/28/1963
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION(S) DURING THE LAST FIVE YEARS (3)
------------------------------------------------------------------------------------------------------
SUSAN P. KINENS Assistant Vice President and Assistant Secretary, ING Funds
7337 E. Doubletree Ranch Rd. Services, LLC(3) (December 2002 - Present); and has held
Scottsdale, Arizona 85258 various other positions with ING Funds Services, LLC(3) for
Date of Birth: 12/31/1976 more than the last five years.
MARIA M. ANDERSON Assistant Vice President, ING Funds Services, LLC(3) (October
7337 E. Doubletree Ranch Rd. 2001 - Present). Formerly, Manager of Fund Accounting and Fund
Scottsdale, Arizona 85258 Compliance, ING Investments, LLC(2) (September 1999 - November
Date of Birth: 05/29/1958 2001); and Section Manager of Fund Accounting, Stein Roe Mutual
Funds (July 1998 - August 1999).
HUEY P. FALGOUT, JR. Chief Counsel, ING U.S. Financial Services (September 2003 -
7337 E. Doubletree Ranch Rd. Present). Formerly, Counsel, ING U.S. Financial Services
Scottsdale, AZ 85258 (November 2002 - September 2003); and Associate General Counsel
Date of Birth: 11/15/1963 of AIG American General (January 1999 - November 2002).
THERESA K. KELETY Counsel, ING U.S. Financial Services (April 2003 - Present).
7337 E. Doubletree Ranch Rd. Formerly, Senior Associate with Shearman & Sterling (February
Scottsdale, AZ 85258 2000 - April 2003); and Associate with Sutherland Asbill &
Date of Birth: 02/28/1963 Brennan (1996 - February 2000).
(1) The officers hold office until the next annual meeting of the Trustees and
until their successors shall have been elected and qualified.
(2) ING Investments, LLC was previously named ING Pilgrim Investments, LLC. ING
Pilgrim Investments, LLC is the sucessor in interest to ING Pilgirm Investments,
Inc., which was previously known as Pilgrim Investments, Inc. and before that
was known as Pilgrim America Investments, Inc.
(3) ING Funds Services, LLC was previously named ING Pilgrim Group, LLC. ING
Pilgrim Group, LLC is the sucessor in interest to ING Pilgirm Group, Inc., which
was previously known as Pilgrim Group, Inc. and before that was known as Pilgrim
America Group, Inc.
(4) ING Funds Distributor, LLC is the sucessor in interest to ING Funds
Distributor, Inc., which was previously known as ING Pilgrim Securities, Inc.,
and before that was known as Pilgrim Securities, Inc., and before that was known
as Pilgrim America Securities, Inc.
17
The Trust currently has an Executive Committee, Audit Committee, Valuation
and Proxy Voting Committee (formerly Valuation Committee), Nominating Committee,
an Investment Review Committee and Compliance and Coordination Committee. The
Audit, Valuation and Proxy Voting, Nominating and Compliance and Coordination
Committees consist entirely of Independent Trustees.
COMMITTEES
The Board of Trustees has an Executive Committee whose function is to act
on behalf of the full Board of Trustees between regularly scheduled meetings
when necessary. The Committee currently consists of two Independent Trustees and
two Trustees who are interested persons as defined in the 1940 Act: Messrs.
Turner, McInerney, May and Patton. Mr. Turner serves as Chairman of the
Committee. The Executive Committee held two (2) meetings during the fiscal year
ended February 29, 2004.
The Board of Trustees has an Audit Committee whose function is to meet with
the independent auditors of the Trust to review the scope of the Trust's audit,
its financial statements and interim accounting controls, and to meet with
management concerning these matters, among other things. The Audit Committee
currently consists of four Independent Trustees: Messrs. Earley, Rieke, Vincent
and Putnam. Mr. Earley serves as Chairman of the Committee. The Audit Committee
held four (4) meetings during the fiscal year ended February 29, 2004.
The Board of Trustees has formed a Valuation and Proxy Voting Committee
(formerly the Valuation Committee) whose functions include, among others,
reviewing the determination of the value of securities held by the Trust for
which market value quotations are not readily available and, beginning in July
2003, overseeing management's administration of proxy voting. The Committee
currently consists of five Independent Trustees: Dr. Gitenstein and Messrs. May,
Patton, Doherty and Wedemeyer. Mr. Patton serves as Chairman of the Committee.
The Valuation and Proxy Voting Committee held four (4) meetings during the
fiscal year ended February 29, 2004.
The Board of Trustees has established a Nominating Committee for the
purpose of considering and presenting to the Board of Trustees candidates it
proposes for nomination to fill Independent Trustee vacancies on the Board of
Trustees. The Nominating Committee currently consists of four Independent
Trustees: Dr. Gitenstein and Messrs. Doherty, May, and Wedemeyer. Mr. May serves
as Chairman of the Committee. The Committee does not currently have a charter
nor does it have a policy regarding whether it will consider nominees
recommended by shareholders. However, the Board of Trustees expects to have the
Committee consider these matters fully during the upcoming year with a view
towards adopting and publishing a charter and policies regarding shareholder
recommendations for Trustee nominees. As part of its consideration, the
Committee will also consider minimum qualifications for Trustee positions as
well as a process for the Trust to identify and evaluate potential nominees. The
Nominating Committee did not hold a meeting during the fiscal year ended
February 29, 2004.
The Board of Trustees has established an Investment Review Committee that
will monitor the investment performance of the Trust and make recommendations to
the Board of Trustees with respect to the Trust. The Committee currently
consists of five Independent Trustees and one Trustee who is an interested
person as defined in the 1940 Act: Dr. Gitenstein and Messrs. Doherty, Patton,
May, McInerney and Wedemeyer. Mr. Wedemeyer serves as Chairman of the Committee.
The Investment Review Committee held four (4) meetings during the fiscal year
ended February 29, 2004.
18
The Board of Trustees has established a Compliance and Coordination
Committee for the purpose of facilitating information flow among Board members
and with management between Board meetings, developing agendas for executive
sessions of independent Board members, evaluating potential improvements in the
allocation of work load among the Board members and Board committees, and
evaluating other opportunities to enhance the efficient operations of the Board.
The Compliance and Coordination Committee currently consists of five Independent
Trustees: Messrs. Earley, May, Patton, Vincent and Wedemeyer. The Compliance and
Coordination Committee held one (1) meeting during the fiscal year ended
February 29, 2004.
TRUSTEE OWNERSHIP OF SECURITIES
SHARE OWNERSHIP POLICY
In order to further align the interests of the Independent Trustees with
shareholders, the Board of Trustees has adopted a policy to own, beneficially,
shares of one or more ING Funds at all times ("Policy"). For this purpose,
beneficial ownership of Fund shares includes ownership of a variable annuity
contract or a variable life insurance policy whose proceeds are invested in a
Fund.
Under this Policy, the initial value of investments in the ING Funds that are
beneficially owned by a Trustee must equal at least $50,000. Existing Trustees
have a reasonable amount of time from the date of adoption of this Policy in
order to satisfy the foregoing requirements. A new Trustee must satisfy the
foregoing requirements within a reasonable amount of time of becoming a Trustee.
A decline in the value of any Fund investments will not cause a Trustee to have
to make any additional investments under this Policy.
Set forth below is the dollar range of equity securities owned by each Trustee.
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF EQUITY SECURITIES IN ALL REGISTERED INVESTMENT
SECURITIES IN THE TRUST AS OF COMPANIES OVERSEEN BY TRUSTEE IN
NAME OF TRUSTEE DECEMBER 31, 2003 FAMILY OF INVESTMENT COMPANIES
--------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Paul S. Doherty None Over $100,000
J. Michael Earley None $10,001 - $50,000
R. Barbara Gitenstein None $10,001 - $50,000
Walter H. May None Over $100,000
Jock Patton $10,001 - $50,000 Over $100,000
David W. C. Putnam Over $100,000 Over $100,000
Blaine E. Rieke None $50,001 - 100,000
Roger B. Vincent None Over $100,000
Richard A. Wedemeyer None $10,001 - $50,000
TRUSTEES WHO ARE INTERESTED PERSONS
Thomas J. McInerney None $50,001 - 100,000
John G. Turner Over $100,000 Over $100,000
INDEPENDENT TRUSTEE OWNERSHIP OF SECURITIES
19
Set forth in the table below is information regarding each Independent
Trustee's (and his or her immediate family members') share ownership in
securities of the Trust's investment adviser or principal underwriter, and the
ownership of securities in an entity controlling, controlled by or under common
control with the investment adviser or principal underwriter of the Trust (not
including registered investment companies) as of December 31, 2003.
NAME OF OWNERS
AND RELATIONSHIP VALUE OF PERCENTAGE OF
NAME OF TRUSTEE TO TRUSTEE COMPANY TITLE OF CLASS SECURITIES CLASS
---------------------------------------------------------------------------------------------------------------------
Paul S. Doherty N/A N/A N/A $ 0 N/A
J. Michael Earley N/A N/A N/A $ 0 N/A
R. Barbara Gitenstein N/A N/A N/A $ 0 N/A
Walter H. May N/A N/A N/A $ 0 N/A
Jock Patton N/A N/A N/A $ 0 N/A
David W. C. Putnam N/A N/A N/A $ 0 N/A
Blaine E. Rieke N/A N/A N/A $ 0 N/A
Roger B. Vincent N/A N/A N/A $ 0 N/A
Richard A. Wedemeyer N/A N/A N/A $ 0 N/A
COMPENSATION OF TRUSTEES
The Trust pays each Trustee who is not an interested person a pro rata
share, as described below of: (i) an annual retainer of $40,000 (Messrs. Patton
and May, as lead trustees, receive an annual retainer of $55,000); (ii) $7,000
for each in person meeting of the Board; (iii) $2,000 per attendance of any
committee meeting; (iv) $1,000 for meeting attendance as a chairperson; (v)
$2,000 per telephonic meeting; and (vi) out-of-pocket expenses. The pro rata
share paid by the Trust is based on the average net assets as a percentage of
the average net assets of all the funds managed by the Investment Manager or its
affiliates for which the Trustees serve in common as Directors/Trustees.
The following table has been provided to the Trust by ING Investments and
sets forth information regarding the compensation paid to the Trustees for the
Trust's fiscal year ended February 29, 2004 for service on the Boards of the ING
Funds complex. Officers of the Trust and Trustees who are interested persons of
the Trust do not receive any compensation from the Trust or any funds managed by
the Investment Manager or its affiliates.
COMPENSATION TABLE
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM TRUST AND
AGGREGATE ACCRUED AS ANNUAL FUND COMPLEX
COMPENSATION PART OF TRUST BENEFITS UPON PAID TO
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT(4) TRUSTEES(5)
-----------------------------------------------------------------------------------------------------------
Paul S. Doherty $ 5,982 N/A N/A $ 104,000
J. Michael Earley $ 6,098 N/A N/A $ 106,000
R. Barbara Gitenstein $ 5,524 N/A N/A $ 97,000
R. Glenn Hilliard(1) $ 0 N/A N/A $ 0
Walter H. May $ 7,114 N/A N/A $ 123,000
20
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM TRUST AND
AGGREGATE ACCRUED AS ANNUAL FUND COMPLEX
COMPENSATION PART OF TRUST BENEFITS UPON PAID TO
NAME OF TRUSTEE FROM TRUST EXPENSES RETIREMENT(4) TRUSTEES(5)
-----------------------------------------------------------------------------------------------------------
Thomas J. McInerney(2) $ 0 N/A N/A $ 0
Jock Patton $ 7,513 N/A N/A $ 129,000
David W.C. Putnam $ 5,216 N/A N/A $ 92,000
Blaine E. Rieke $ 5,751 N/A N/A $ 100,000
John G. Turner(3) $ 0 N/A N/A $ 0
Roger B. Vincent(6) $ 6,836 N/A N/A $ 118,000
Richard A. Wedemeyer(6) $ 6,836 N/A N/A $ 118,000
(1) An interested person, as defined in the 1940 Act, because of his
relationship with ING Groep N.V., the parent company of the Investment
Manager, ING Investments, LLC and the Distributor, ING Funds Distributor
LLC. Mr. Hilliard resigned as of April 30, 2003.
(2) An interested person, as defined in the 1940 Act, because of his
affiliation with ING Groep N.V. the parent company of the Investment
Manager, ING Investments, LLC and the Distributor, ING Funds Distributor
LLC.
(3) An interested person, as defined in the 1940 Act, because of his former
affiliation with ING Americas, an affiliate of ING Investments, LLC.
(4) The ING Funds have adopted a retirement policy under which a
director/trustee who has served as an Independent Director/Trustee for five
years or more will be paid by the ING Funds at the time of his or her
retirement an amount equal to twice the compensation normally paid to the
Independent Director/Trustee for one year of service.
(5) Represents compensation from 117 funds.
(6) Mr. Wedemeyer and Mr. Vincent were paid $10,000 each in recognition of an
extensive time commitment to format a methodolgy for presenting valuation
information to the Board.
21
As of June 15, 2004, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the Trust's Common Shares.
As of June 15 , 2004, the Trustees and Officers of the Trust as a group
owned beneficially less than 1% of the Trust's Preferred Shares.
As of June 15, 2004, no person to the knowledge of the Trust, owned
beneficially or of record more than 5% of the outstanding Common Shares or
Preferred Shares of the Trust except as set forth below:
CLASS AND TYPE OF PERCENTAGE PERCENTAGE
NAME OF FUND NAME AND ADDRESS OWNERSHIP OF CLASS OF FUND
-----------------------------------------------------------------------------------------------------------
ING Prime Rate Trust Pilgrim Prime Rate Trust Beneficial Owner 6.22% 6.22%
Structured Equity Shelf Holding A/C
Attn Dan Ryan
7337 E. Doubletree Ranch Road
Scottsdale, AZ 85258-2160
ING Prime Rate Trust CEDE & CO Beneficial Owner 78.68% 78.68%
PO Box 20
Bowling Green Station
New York, NY 10274-0020
CODE OF ETHICS
The Trust's Distributor, ING Funds Distributor, LLC ("Distributor"), the
Investment Manager and the Trust have adopted a Code of Ethics governing
personal trading activities of all Trustees and the officers of the Trust and
the Distributor and persons who, in connection with their regular functions,
play a role in the recommendation of any purchase or sale of a security by the
Trust or obtain information pertaining to such purchase or sale. The Code of
Ethics is intended to prohibit fraud against the Trust that may arise from
personal trading of securities that may be purchased or held by the Trust or of
Trust shares. Personal trading is permitted by such persons subject to certain
restrictions; however such persons are generally required to pre-clear all
security transactions with the Trust's Compliance Officer or her designee and to
report all transactions on a regular basis. The Sub-Adviser has adopted its own
Codes of Ethics to govern the personal trading activities of its personnel.
The Code of Ethics can be reviewed and copied at the SEC's Public Reference
Room located at 450 Fifth Street, NW, Washington, DC 20549. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
(202) 942-8090. The Code of Ethics is available on the SEC's website
(http://www.sec.gov) and copies may also be obtained at prescribed rates by
electronic request at publicinfo@sec.gov, or by writing the SEC's Public
Reference Section at the address listed above.
22
PROXY VOTING PROCEDURES
The Board of Trustees for the Trust has adopted proxy voting procedures and
guidelines to govern the voting of proxies relating to the Trust's portfolio
securities. The procedures and guidelines delegate to the Investment Manager the
authority to vote proxies relating to portfolio securities, and provide a method
for responding to potential conflicts of interest. In delegating voting
authority to the Investment Manager, the Board of Trustees has also approved the
Investment Manager's proxy voting procedures which require the Investment
Manager to vote proxies in accordance with the Trust's proxy voting procedures
and guidelines. An independent proxy voting service has been retained to assist
in the voting of Trust proxies through the provision of vote analysis,
implementation and recordkeeping and disclosure services. A copy of the proxy
voting procedures and guidelines of the Trust, including the procedures of the
Investment Manager, is attached hereto as Appendix A. Beginning on or about
August 31, 2004, and no later than August 31st annually thereafter, information
regarding how the Trust votes proxies relating to portfolio securities for the
one year period ending June 30th will be made available through the ING Funds'
website (www.ingfunds.com) or by accessing the SEC's EDGAR database(
www.sec.gov).
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS
THE INVESTMENT MANAGER
The investment adviser for the ING Funds is ING Investments, LLC
("Investment Manager" or "ING Investments"), which is registered as an
investment adviser with the SEC and serves as an investment adviser to
registered investment companies (or series thereof), as well as structured
finance vehicles. The Investment Manager, subject to the authority of the Board
of Trustees, has the overall responsibility for the management of the Trust's
portfolio subject to delegation of certain responsibilities to ING Investment
Management Co. (the "Sub-Adviser" or "INGIM") (formerly known as Aeltus
Investment Management, Inc.). The Investment Manager and the Sub-Adviser are
direct, wholly owned subsidiaries of ING Groep N.V. (NYSE: ING) ("ING Groep
N.V.") and are affiliates of each other. ING Groep N.V. is a global financial
institution active in the fields of insurance, banking, and asset management in
more than 65 countries, with more than 100,000 employees.
On February 26, 2001, the name of the Investment Manager changed from ING
Pilgrim Investments, Inc. to ING Pilgrim Investments, LLC. On March 1, 2002, the
name of the Investment Manager was changed from ING Pilgrim Investments, LLC to
ING Investments, LLC.
The Investment Manager pays all of its expenses from the performance of its
obligations under the Investment Management Agreement, including executive
salaries and expenses of the officers of the Trust who are employees of the
Investment Manager. Other expenses incurred in the operation of the Trust are
borne by the Trust, including, without limitation, expenses incurred in
connection with the sale, issuance, registration and transfer of its Common
Shares; fees of its Custodian, Transfer and Shareholder Servicing; salaries of
officers and fees and expenses of Trustees or members of any advisory board or
committee of the Trust who are not members of, affiliated with or interested
persons of the Investment Manager; the cost of preparing and printing reports,
proxy statements and prospectuses of the Trust or other communications for
distribution to its shareholders; legal, auditing and accounting fees; the fees
of any trade association of which the Trust is a member; fees and expenses of
registering and maintaining registration of its Common Shares for sale under
federal and applicable state securities laws; fees for
23
independent loan pricing services; and all other charges and costs of its
operation plus any extraordinary or non-recurring expenses.
After an initial term, the Investment Management Agreement continues from
year to year if specifically approved at least annually by the Trustees or the
Shareholders. In either event, the Investment Management Agreement must also be
approved by vote of a majority of the Trustees who are not parties to the
Investment Management Agreement or interested persons of any party, cast in
person at a meeting called for that purpose.
In connection with their deliberations relating to the Trust's current
Investment Management Agreement, the Board of Trustees, including a majority
of the Independent Trustees, considered information that had been provided by
the Investment Manager throughout the year at regular Board meetings, as well
as information specifically furnished for a Board meeting held annually to
specifically consider such renewal, and considered several factors they
believed, in light of the legal advice furnished to them by their independent
legal counsel and their own business judgment, to be relevant. Foremost among
them was the positive performance of the Trust. In their approval of the
arrangement, the Board considered several factors, including but not limited
to, the following: (1) the continued belief that the Trust is well-managed by
the Investment Manager; (2) the fact that the Trust has consistently earned
income in furtherance of its investment objective; and (3) the positive
performance of the Investment Manager in the areas of leverage,
administration, credit analysis and fair valuation with respect to the Trust
and its portfolio assets. In addition, the Board considered: (1) the
performance of the Trust compared to those of a peer group of closed-end loan
participation funds; (2) the nature and quality of the services provided by
the Investment Manager to the Trust including the Investment Manager's
experience in managing a similar fund and the nature and depth of the
services it provides to that fund and the Trust; (3) the fairness of the
compensation under the Investment Management Agreement in light of the
services provided to the Trust; (4) the profitability to the Investment
Manager from the Investment Management Agreement; (5) the personnel,
including the portfolio managers, operations, financial condition, and
investment management capabilities, methodologies and resources of the
Investment Manager, as well as its efforts in recent years to build its
investment management capabilities and administrative infrastructure; (6) the
expenses borne by shareholders of the Trust and a comparison of the Trust's
fees and expenses to those of a peer group of funds; (7) the Investment
Manager's compliance capabilities and efforts on behalf of the Trust; (8) the
complexity of the instruments in which the Trust invests and the investment
research associated with those instruments performed by the Investment
Manager and the Investment Manager's proven expertise in managing the types
of investments in which the Trust invests; and (9) the substantial time and
resources devoted to the valuation process by the Investment Manager. The
Board of Trustees also considered the total services provided by ING Funds
Services, LLC, the Trust's administrator, as well as the fees it receives for
such services.
In considering the Investment Management Agreement, the Board of Trustees,
including the Independent Trustees, did not identify any single factor as
all-important or controlling. However, the Independent Trustees indicated that,
generally, they initially scrutinized the performance of the Trust, including
performance in relation to a peer group of funds, and the fees paid by the
Trust. The Board of Trustees concluded that the fees to be paid to the
Investment Manager are reasonable in relation to the services to be rendered,
and that the anticipated expenses to be borne by the shareholders were
reasonable. The Board of Trustees further determined that the contractual
arrangements offer an appropriate means for the Trust to obtain high quality
portfolio management services in furtherance of the Trust's objectives, and to
obtain other appropriate services for the Trust.
24
In reviewing the terms of the Investment Management Agreement and in
discussions with the Investment Manager concerning such Investment Management
Agreement, the Independent Trustees were represented by independent legal
counsel. Based upon its review, the Board of Trustees has determined that the
Investment Management Agreement is in the best interests of the Trust and its
shareholders, and that the Investment Management fees are fair and reasonable.
Accordingly, after consideration of the factors described above, and such other
factors and information it considered relevant, the Board of Trustees of the
Trust, including the unanimous vote of the Independent Trustees, approved the
Investment Management Agreement.
The Investment Management Agreement is terminable without penalty with not
less than 60 days' notice by the Board of Trustees or by a vote of the holders
of a majority of the Trust's outstanding shares voting as a single class, or
upon not less than 60 days' notice by the Investment Manager. The Investment
Management Agreement will terminate automatically in the event of its
"assignment" (as defined in the 1940 Act).
For the fiscal years ended February 29, 2004, February 28, 2003, and
February 28, 2002 the Investment Manager was paid $12,492,726, $12,698,403, and
$14,838,307 respectively, for services rendered to the Trust.
The use of the name ING in the Trust's name is pursuant to the Investment
Management Agreement between the Trust and the Investment Manager, and in the
event that the Agreement is terminated, the Trust has agreed to amend its
Agreement and Declaration of Trust to remove the reference to ING.
SUB-ADVISER
The Investment Management Agreement for the Trust provides that the
Investment Manager, with the approval of the Board of Trustees, may select and
employ an investment adviser to serve as a Sub-Adviser to the Trust, shall
monitor the Sub-Adviser's investment programs and results, and coordinate the
investment activities of the Sub-Adviser to ensure compliance with regulatory
restrictions. The Investment Manager pays all of its expenses arising from the
performance of its obligations under the Investment Management Agreement,
including all fees payable to the Sub-Adviser, and executive salaries and
expenses of the officers of the Trust who are employees of the Investment
Manager. The Sub-Adviser pays all of its expenses arising from the performance
of its obligations under the sub-advisory agreement.
On August 1, 2003, ING underwent an internal reorganization plan that among
other things, integrated its portfolio management professionals across the U.S.
under a common management structure known as ING Investment Management Americas,
which includes ING Investment Management Co. ("INGIM" or "Sub-Adviser"). One of
the primary purposes of the integration plan was to use the resources of several
ING Groep N.V. companies to promote consistently high levels of performance in
terms of investment standards, research, policies and procedures from the
portfolio management functions related to the Trust. As a result of this
integration plan the operational and supervisory functions were separated from
the portfolio management functions related to the Trust, with the former
continuing to be provided by the Investment Manager and the latter provided by
INGIM. The portfolio management personnel currently employed by ING Investments
became employees of INGIM, which assumed primary responsibility for all
portfolio management issues, including the purchase, retention, or sale of
portfolio securities.
25
INGIM serves as sub-adviser to the Trust pursuant to a sub-advisory
agreement ("Sub-Advisory Agreement") between the Investment Manager and INGIM.
The Sub-Advisory Agreement requires INGIM to provide, subject to the supervision
of the Board of Trustees and the Investment Manager, a continuous investment
program for the Trust and to determine the composition of the assets of the
Trust, including determination of the purchase, retention or sale of the
securities, cash and other investments for the Trust, in accordance with the
Trust's investment objectives, policies and restrictions and applicable laws and
regulations. The Sub-Advisory Agreement also requires INGIM to use reasonable
compliance techniques as the Sub-Adviser or the Board of Trustees may reasonably
adopt, including any written compliance procedures.
In determining whether or not it was appropriate to approve the
Sub-Advisory Agreement through September 1, 2005 and to recommend approval to
shareholders, the Board, including a majority of the Independent Trustees,
considered several factors. Foremost among them was the fact that the new
arrangement will not affect the fees charged to the Trust, nor the provision of
portfolio management services to the Trust. In their approval of the
arrangement, the Board of Trustees considered several factors, including, but
not limited to, the following: (1) the centralization of asset managers will
allow ING to access and leverage the capabilities of its portfolio management
personnel among all subsidiaries; (2) the reorganization will facilitate more
effective use of research and trading facilities and capabilities for greater
efficiency; (3) the consolidation of portfolio management within one entity will
permit certain future changes in portfolio managers without the potential
expense of shareholder proxy solicitations; and (4) the reorganization can help
INGIM to build a larger, more coherent management structure and to retain and
attract highly qualified portfolio managers. The Board of Trustees noted that
INGIM had taken steps to ameliorate any disadvantages, which might result from
the reorganization. In addition, the Board of Trustees considered: (1) the
current portfolio managers will remain and continue to provide services under
the direction of the Sub-Adviser; (2) that the nature and quality of the
services to be provided by the Sub-Adviser, including the Sub-Adviser's
extensive investment management experience and the quality of services provided
to the other mutual funds advised by the Sub-Adviser; (3) the fairness of the
compensation under the Sub-Advisory Agreement in light of the services to be
provided; (4) the personnel, operations, financial condition, and investment
management capabilities and methodologies of INGIM after the reorganization; (5)
the expectation of management that the reorganization will enable the
Sub-Adviser to attract additional highly qualified personnel and to leverage its
portfolio management resources and trading and research capabilities; and (6)
compensation and the fact that the cost of the Sub-Adviser will be paid by the
Investment Manager and not directly by the Trust. The Board of Trustees also
reviewed information provided by the Sub-Adviser relating to their compliance
systems, disaster recovery plans and personal trading policies and internal
monitoring procedures. In the context of reviewing the Sub-Advisory Agreement
with the Sub-Adviser, the Board of Trustees met with senior management and
reviewed absolute and relative performance of the Trust. The Board of Trustees
also considered the compensation structure within the Sub-Adviser and its
ability to attract and retain high quality investment professionals. The Board
of Trustees also considered the advisory fee to be retained by the Investment
Manager for its oversight and monitoring services that will be provided to the
Trust. After considering the Investment Manager's recommendation and these other
factors, the Board of Trustees concluded that engaging INGIM as Sub-Adviser
would be in the best interests of the Trust and its shareholders.
The Sub-Advisory Agreement may be terminated at any time by the Trust by a
vote of the majority of the Board of Trustees or by a vote of a majority of the
outstanding securities. The Sub-Advisory Agreement also may be terminated by:
(i) the Investment Manager at any time, upon sixty (60) days' written notice to
the Trust and the Sub-Adviser; (ii) at any time, without payment of any penalty
by the Trust, by the Trust's Board of Trustees or a majority of the outstanding
voting securities of the Trust upon sixty (60) days' written notice to the
Investment Manager and the Sub-Adviser; or (iii) by the Sub-Adviser upon three
(3) months' written notice unless the Trust or the Investment Manager requests
additional time to find a replacement for the Sub-Adviser, in which case, the
Sub-Adviser shall allow the
26
additional time, requested by the Trust or the Investment Manager, not to exceed
three (3) additional months beyond the initial three (3) month notice period;
provided, however, that the Sub-Adviser may terminate the Sub-Advisory Agreement
at any time without penalty, effective upon written notice to the Investment
Manager and the Trust, in the event either the Sub-Adviser (acting in good
faith) or the Investment Manager ceases to be registered as an investment
adviser under the Investment Advisers Act of 1940, as amended or otherwise
becomes legally incapable of providing investment management services pursuant
to its respective contract with the Trust, or in the event the Investment
Manager becomes bankrupt or otherwise incapable of carrying out its obligations
under the Sub-Advisory Agreement, or in the event that the Sub-Adviser does not
receive compensation for its services from the Investment Manager or the Trust
as required by the terms of the Sub-Advisory Agreement. Otherwise, the
Sub-Advisory Agreement will remain in effect for two years and will, thereafter,
continue in effect from year to year, subject to the annual appoval of the Board
of Trustees, on behalf of the Trust, or the vote of a majority of the
outstanding voting securities, and the vote, cast in person at a meetnig duly
called and held, of a majority of the Trustees, on behalf of the Trust, who are
not parties to the Sub-Advisory Agreement or interested persons (as defined in
the 1940 Act) of any such party. The Sub-Advisory Agreement will terminate
automatically in the event of an assignment (as defined in the 1940 Act).
In this capacity, the Sub-Adviser, subject to the supervision and control
of ING Investments and the Trustees of the Trust, will manage the Trust's
portfolio investments, consistently with its investment objective, and execute
any of the Trust's investment policies that it deems appropriate to utilize from
time to time.
For the 7 months ended February 29, 2004, ING Investments paid INGIM, in
its capacity as Sub-Adviser, $3,093,114 in sub-advisory fees.
THE ADMINISTRATOR
The Administrator of the Trust is ING Funds Services, LLC ("Administrator"
or "ING Funds Services") which is an affiliate of the Investment Manager. In
connection with its administration of the corporate affairs of the Trust, the
Administrator bears the following expenses: the salaries and expenses of all
personnel of the Trust and the Administrator except for the fees and expenses of
Trustees not affiliated with the Administrator or the Investment Manager; costs
to prepare information; determination of daily NAV by the recordkeeping and
accounting agent; expenses to maintain certain of the Trust's books and records
that are not maintained by the Investment Manager, the custodian, or transfer
agent; costs incurred to assist in the preparation of financial information for
the Trust's income tax returns, proxy statements, quarterly, semi-annual, and
annual shareholder reports; costs of providing shareholder services in
connection with any tender offers or to shareholders proposing to transfer their
shares to a third party; providing shareholder services in connection with the
dividend reinvestment plan; and all expenses incurred by the Administrator or by
the Trust in connection with administering the ordinary course of the Trust's
business other than those assumed by the Trust, as described below.
Except as indicated immediately above and under "The Investment Manager,"
the Trust is responsible for the payment of its expenses including: the fees
payable to the Investment Manager; the fees payable to the Administrator; the
fees and certain expenses of the Trust's custodian and transfer agent, including
the cost of providing records to the Administrator in connection with its
obligation of maintaining required records of the Trust; the charges and
expenses of the Trust's legal counsel, legal counsel to the Trustees who are not
"interested persons" as defined in the 1940 Act and independent accountants;
commissions and any issue or transfer taxes chargeable to the Trust in
connection with its
27
transactions; all taxes and corporate fees payable by the Trust to governmental
agencies; the fees of any trade association of which the Trust is a member; the
costs of share certificates representing Common Shares of the Trust;
organizational and offering expenses of the Trust and the fees and expenses
involved in registering and maintaining registration of the Trust and its Common
Shares with the Commission, including the preparation and printing of the
Trust's registration statement and prospectuses for such purposes; allocable
communications expenses with respect to investor services, and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders; the cost of
insurance; and litigation and indemnification expenses and extraordinary
expenses not incurred in the ordinary course of the Trust's business.
For its services, the Administrator is entitled to receive from the Trust a
fee at an annual rate of 0.25% of the Fund's average daily net assets plus the
proceeds of any outstanding borrowings.
Administrative fees paid by the Trust for the fiscal years ended February
29, 2004, February 28, 2003, and February 28, 2002 and the Administrator was
paid $3,903,976, $3,968,231, and $4,637,682, respectively, for services rendered
to the Trust.
PLANS OF DISTRIBUTION
THE DISTRIBUTOR
Pursuant to an Amended and Restated Distribution Agreement (the
"Distribution Agreement"), ING Funds Distributor, LLC, an affiliate of the
Investment Manager and the Administrator, is the principal underwriter and
distributor for the shares of the Trust and acts as agent of the Trust in the
continuous offering of its shares. The Distributor bears all of its expenses of
providing services pursuant to the Distribution Agreement. The Trust pays the
cost for the prospectus and shareholder reports to be set in type and printed
for existing shareholders, and the Trust pays for the printing and distribution
of copies thereof used in connection with the offering of shares to prospective
investors. The Trust also pays for supplementary sales literature and
advertising costs.
The Distribution Agreement continues in effect from year to year so long as
such continuance is approved at least annually by a vote of the Board of the
Trust, including the Trustees who are not interested persons of the Trust and
who have no direct or indirect financial interest in the Distribution Agreement.
The Distribution Agreement automatically terminates in the event of its
assignment and may be terminated at any time without penalty by the Trust or by
the Distributor upon 60 days' written notice. Termination by the Trust may be by
vote of a majority of the Board, and a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the Distribution Agreement, or a majority of the outstanding voting
securities of the Trust, as defined under the 1940 Act.
The Common Shares will only be sold on such days as shall be agreed to by
the Trust and ING Funds Distributor. The Common Shares will be sold at market
prices, which shall be determined with reference to trades on the NYSE, subject
to a minimum price to be established each day by the Trust. The mininum price on
any day will not be less than the current NAV per Common Share. The Trust and
ING Funds Distributor will suspend the sale of Common Shares if the per share
price of the Common Shares is less than the minimum price.
28
Settlements of sales of Common Shares will occur on the third business day
following the date on which any such sales are made. Unless otherwise indicated
in a further prospectus supplement, ING Funds Distributor as underwriter will
act as underwriter on a reasonable efforts basis.
In connection with the sale of the Common Shares on behalf of the Trust,
ING Funds Distributor may be deemed to be an underwriter within the meaning of
the 1940 Act. As described below, ING Funds Distributor also serves as
distributor for the Trust in connection with the sale of Common Shares of the
Trust pursuant to privately negotiated transactions and pursuant to optional
cash investments. In addition, ING Funds Distributor provides administrative
services in connection with a separate at-the-market offering of Common Shares
of the Trust. The offering of Common Shares pursuant to the Distribution
Agreement will terminate upon the earlier of (i) the sale of all Common Shares
subject thereto or (ii) termination of the Distribution Agreement.
SHAREHOLDER INVESTMENT PROGRAM
The Trust maintains a Shareholder Investment Program ("Program"), which
allows participating shareholders to reinvest all dividends and capital gain
distributions ("Dividends") in additional Common Shares of the Trust. The
Program also allows participants to purchase additional Common Shares through
optional cash investments in amounts ranging from a minimum of $100 to a maximum
of $100,000 per month. Common Shares may be issued by the Trust under the
Program only if the Trust's Common Shares are trading at a premium to NAV. If
the Trust's Common Shares are trading at a discount to NAV, Common Shares
purchased under the Program will be purchased on the open market.
If the Market Price (the volume-weighted average sales price, per share, as
reported on the New York Stock Exchange Composite Transaction Tape as shown
daily on Bloomberg's AQR screen) plus estimated commissions for Common Shares of
the Trust is less than the NAV on the Valuation Date (defined below), DST will
purchase Common Shares on the open market through a bank or securities broker as
provided herein. Open market purchases may be effected on any securities
exchange on which Common Shares of the Trust trade or in the over-the-counter
market. If the Market Price, plus estimated commissions, exceeds the NAV before
DST has completed its purchases, DST will use reasonable efforts to cease
purchasing Common Shares, and the Trust shall issue the remaining Common Shares.
If the Market Price, plus estimated commissions, is equal to or exceeds the NAV
on the Valuation Date, the Trust will issue the Common Shares to be acquired by
the Program. The Valuation Date is a date preceding the DRIP Investment Date and
OCI Investment Date, on which it is determined, based on the Market Price and
NAV of Common Shares of the Trust, whether DST will purchase Common Shares on
the open market or the Trust will issue the Common Shares for the Program. The
Trust may, without prior notice to participants, determine that it will not
issue new Common Shares for purchase pursuant to the Program, even when the
Market Price plus estimated commissions equals or exceeds NAV, in which case DST
will purchase Common Shares on the open market.
Common Shares issued by the Trust under the Program will be issued without
incurring a fee. Common Shares purchased for the Program directly from the Trust
in connection with the reinvestment of Dividends will be acquired on the DRIP
Investment Date at the greater of (i) NAV at the close of business on the
Valuation Date or (ii) the average of the daily Market Price of the shares
during the DRIP Pricing Period, minus a discount of 5%. The DRIP Pricing Period
for a dividend reinvestment is the Valuation Date and the prior Trading Day. A
Trading Day means any day on which trades of the Common Shares of the Trust are
reported on the NYSE.
Common Shares purchased directly from the Trust pursuant to optional cash
investments will be acquired on an OCI Investment Date at the greater of (i) NAV
at the close of business on the Valuation Date or (ii) the average of the daily
Market Price of the shares during the OCI Pricing Period minus a discount,
determined at the sole discretion of the Trust and announced in advance, ranging
from 0% to 5%. The OCI Pricing Period for an OCI Investment Date means the
period beginning four Trading Days
29
prior to the Valuation Date through and including the Valuation Date. The
discount for optional cash investments is set by the Trust and may be changed or
eliminated by the Trust without prior notice to participants at any time. The
discount for optional cash investments is determined on the last business day of
each month. In all instances, however, the discount on Common Shares issued
directly by the Trust shall not exceed 5% of the market price, and Common Shares
may not be issued at a price less than NAV without prior specific approval of
shareholders or of the Commission. Optional cash investments received by DST no
later than 4:00 p.m. Eastern time on the OCI payment Due Date to be invested on
the relevant OCI Investment Date.
Subject to the availability of Common Shares registered for issuance under
the Program, there is no total maximum number of Common Shares that can be
issued pursuant to the Program.
See "Federal Taxation - Distributions" for a discussion of the federal
income tax ramifications of obtaining Common Shares under the Program.
PRIVATELY NEGOTIATED TRANSACTIONS
The Common Shares may also be offered pursuant to privately negotiated
transactions between the Trust and specific investors. The terms of such
privately negotiated transactions will be subject to the discretion of the
management of the Trust. In determining whether to sell Common Shares pursuant
to a privately negotiated transaction, the Trust will consider relevant factors
including, but not limited to, the attractiveness of obtaining additional funds
through the sale of Common Shares, the purchase price to apply to any such sale
of Common Shares and the person seeking to purchase the Common Shares.
Common Shares issued by the Trust in connection with privately negotiated
transactions will be issued at the greater of (1) NAV per Common Share of the
Trust's Common Shares or (ii) at a discount ranging from 0% to 5% of the average
of the daily market price of the Trust's Common Shares at the close of business
on the two business days preceding the date upon which Common Shares are sold
pursuant to the privately negotiated transaction. The discount to apply to such
privately negotiated transactions will be determined by the Trust with regard to
each specific transaction.
PORTFOLIO TRANSACTIONS
The Trust will generally have at least 80% of its net assets, plus the
amount of any borrowings for investment purposes, invested in Senior Loans. The
remaining assets of the Trust will generally consist of short-term debt
instruments with remaining maturities of 120 days or less, longer-term debt
securities, certain other instruments such as subordinated or unsecured loans up
to a maximum of 5% of the Trust's net assets, interest rate swaps, caps and
floors, repurchase agreements, reverse repurchase agreements and equity
securities acquired in connection with investments in loans. The Trust will
acquire Senior Loans from and sell Senior Loans to banks, insurance companies,
finance companies, and other investment companies and private investment funds.
The Trust may also purchase Senior Loans from and sell Senior Loans to U.S.
branches of foreign banks which are regulated by the Federal Reserve System or
appropriate state regulatory authorities. The Trust's interest in a particular
Senior Loan will terminate when the Trust receives full payment on the loan or
sells a Senior Loan in the secondary market. Costs associated with purchasing or
selling investments in the secondary market include commissions paid to brokers
and processing fees paid to agents. These costs are allocated between the
purchaser and seller as agreed between the parties.
Purchases and sales of short-term debt and other financial instruments for
the Trust's portfolio usually are principal transactions, and normally the Trust
will deal directly with the underwriters or dealers who make a market in the
securities involved unless better prices and execution are available
30
elsewhere. Such market makers usually act as principals for their own account.
On occasion, securities may be purchased directly from the issuer. Short-term
debt instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of portfolio securities
transactions of the Trust that are not transactions with principals will consist
primarily of brokerage commissions or dealer or underwriter spreads between the
bid and asked price, although purchases from underwriters may involve a
commission or concession paid by the issuer.
In placing portfolio transactions, the Investment Manager or Sub-Adviser
will use commercially reasonable efforts to choose a broker capable of providing
the brokerage services necessary to obtain the most favorable price and
execution available. The full range and quality of brokerage services available
will be considered in making these determinations, such as the size of the
order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities and other
factors. While the Investment Manager or Sub-Adviser seeks to obtain the most
favorable net results in effecting transactions in the Trust's portfolio
securities, brokers or dealers who provide research services may receive orders
for transactions by the Trust. Such research services ordinarily consist of
assessments and analyses of the business or prospects of a company, industry, or
economic sector. The Investment Manager is authorized to pay spreads or
commissions to brokers or dealers furnishing such services which are in excess
of spreads or commissions that other brokers or dealers not providing such
research may charge for the same transaction, even if the specific services were
not imputed to the Trust and were useful to the Investment Manager in advising
other clients. Information so received will be in addition to, and not in lieu
of, the services required to be performed by the Investment Manager under the
Investment ManagementAgreement between the Investment Manager and the Trust. The
expenses of the Investment Manager will not necessarily be reduced as a result
of the receipt of such supplemental information. The Investment Manager or
Sub-Adviser may use any research services obtained in providing investment
advice to its other investment advisory accounts. Conversely, such information
obtained by the placement of business for the Investment Manager or Sub-Adviser
or other entities advised by the Investment Manager or Sub-Adviser will be
considered by and may be useful to the Investment Manager or Sub-Adviser in
carrying out its obligations to the Trust. As permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended ("1934 Act") the Investment Manager
may cause the Trust to pay a broker-dealer which provides brokerage and research
services (as defined in the 1934 Act) to the Investment Manager or Sub-Adviser
an amount of disclosed commissions for effecting a securities transaction for
the Trust in excess of the commission which another broker-dealer would have
charged for effecting the transaction.
The Trust does not intend to effect any brokerage transaction in its
portfolio securities with any broker-dealer affiliated directly or indirectly
with the Investment Manager or Sub-Adviser, except for any sales of portfolio
securities pursuant to a tender offer, in which event the Investment Manager or
Sub-Adviser will offset against the management fee a part of any tender fees
which legally may be received by such affiliated broker-dealer. To the extent
certain services which the Trust is obligated to pay for under the Investment
Management Agreement are performed by the Investment Manager, the Trust will
reimburse the Investment Manager for the costs of personnel involved in placing
orders for the execution of portfolio transactions.
In connection with its purchase or holding interests in Senior Loans, the
Trust may acquire (and subsequently sell) equity securities or warrants it
recevies. Brokerage commissions paid by the Trust during the fiscal years ended
February 29, 2004, February 28, 2003 and February 29, 2002, were $28,130, $0 and
$0, respectively.
None of the total commissions paid during the fiscal years ended
February 29, 2004, February 28, 2003 and February 29, 2002, were paid by the
Trust to firms which provided research, statistical or other services to the
Investment Manager.
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PORTFOLIO TURNOVER RATE
The annual rate of the Trust's total portfolio turnover for the years ended
February 29, 2004, February 28, 2003, and February 28, 2002 was 87%, 48%, and
53% respectively. The annual turnover rate of the Trust is generally expected to
be between 50% and 100%, although as part of its investment policies, the Trust
places no restrictions on portfolio turnover and the Trust may sell any
portfolio security without regard to the period of time it has been held. The
annual turnover rate of the Trust also includes Senior Loans on which the Trust
has received full or partial payment. The Investment Manager believes that full
and partial payments on loans generally comprise approximately 25% to 75% of the
Trust's total portfolio turnover each year.
NET ASSET VALUE
The NAV per Common Share of the Trust is determined once daily at the close
of regular trading on the NYSE (usually 4:00 p.m. Eastern time) on each day the
NYSE is open. As of the date of this SAI, the NYSE is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. The NAV per Common Share is determined by dividing the value of
the Trust's loan assets plus all cash and other assets (including interest
accrued but not collected) less all liabilities (including accrued expenses but
excluding capital and surplus) by the number of Common Shares outstanding. The
NAV per Common Share is made available for publication.
FEDERAL TAXATION
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Trust and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Trust or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Trust.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Trust will elect each year to be taxed as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code ("Code"). As a
RIC, the Trust generally will not be subject to federal income tax on the
portion of its investment company taxable income (I.E., taxable interest,
dividends and other taxable ordinary income, net of expenses, and net short-term
capital gains in excess of long-term capital losses) and net capital gain (I.E.,
the excess of net long-term capital gains over the sum of net short-term capital
losses and capital loss carryovers from prior years) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income for the taxable year ("Distribution Requirement"), and
satisfies certain other requirements of the Code that are described below.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a RIC must derive at least 90% of
its gross income for each taxable year from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies and other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.
In addition to satisfying the requirements described above, the Trust must
satisfy an asset diversification test in order to qualify as a RIC. Under this
test, at the close of each quarter of the Trust's taxable year, at least 50% of
the value of the Trust's assets must consist of cash and cash items (including
32
receivables), U.S. government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Trust has
not invested more than 5% of the value of the Trust's total assets in securities
of any such issuer and as to which the Trust does not hold more than 10% of the
outstanding voting securities of any such issuer), and no more than 25% of the
value of its total assets may be invested in the securities of any one issuer
(other than U.S. government securities and securities of other regulated
investment companies), or in two or more issuers which the Trust controls and
which are engaged in the same or similar trades or businesses.
In general, gain or loss recognized by the Trust on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Trust at a market discount
(generally at a price less than its principal amount) other than at the original
issue will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Trust held the debt
obligation.
In general, investments by the Trust in zero coupon or other original issue
discount securities will result in income to the Trust equal to a portion of the
excess of the face value of the securities over their issue price ("original
issue discount") each year that the Trust holds the securities, even though the
Trust receives no cash interest payments. This income is included in determining
the amount of income which the Trust must distribute to maintain its status as a
RIC and to avoid federal income and excise taxes.
If for any taxable year the Trust does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable as ordinary dividends to the extent of
the Trust's current and accumulated earnings and profits. Such distributions
generally would be eligible for the dividends-received deduction in the case of
corporate shareholders.
If the Fund fails to qualify as a RIC in any year, it must pay out its
earnings and profits accumulated in that year in order to qualify again as a
RIC. Moreover, if the Fund failed to qualify as a RIC for a period greater than
one taxable year, the Fund may be required to recognize any net built-in gains
with respect to certain of its assets (the excess of the aggregate gains,
including items of income, over aggregate losses that would have been realized
if the Fund had been liquidated) in order to qualify as a RIC in a subsequent
year.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a RIC that fails to distribute
in each calendar year an amount equal to the sum of (1) 98% of its ordinary
taxable income for the calendar year, (2) 98% of its capital gain net income
(I.E., capital gains in excess of capital losses) for the one-year period ended
on October 31 of such calendar year, and (3) any ordinary taxable income and
capital gain net income for previous years that was not distributed or taxed to
the RIC during those years. A distribution will be treated as paid on December
31 of the current calendar year if it is declared by the Trust in October,
November or December with a record date in such a month and paid by the Trust
during January of the following calendar year. Such distributions will be taxed
to shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
The Trust intends to make sufficient distributions or deemed distributions
(discussed below) of its ordinary taxable income and capital gain net income to
avoid liability for the excise tax.
33
HEDGING TRANSACTIONS
The Trust has the ability, pursuant to its investment objectives and
policies, to hedge its investments in a variety of transactions, including
interest rate swaps and the purchase or sale of interest rate caps and floors.
The treatment of these transactions for federal income tax purposes may in some
instances be unclear, and the RIC qualification requirements may limit the
extent to which the Trust can engage in hedging transactions.
Under certain circumstances, the Trust may recognize gain from a
constructive sale of an appreciated financial position. If the Trust enters into
certain transactions in property while holding substantially identical property,
the Trust would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but not loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Trust's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Trust's holding period and the application of various loss
deferral provisions in the Code. Constructive sale treatment does not apply to
transactions closed in the 90-day period ending with the 30th day after the
close of the taxable year, if certain conditions are met.
DISTRIBUTIONS
The Trust anticipates distributing all or substantially all of its
investment company taxable income for the taxable year. Such distributions will
be taxable to shareholders as ordinary income. If a portion of the Trust's
income consists of dividends paid by U.S. corporations, a portion of the
dividends paid by the Trust may be eligible for the corporate dividends received
deduction.
The Trust may either retain or distribute to shareholders its net capital
gain for each taxable year. The Trust currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will generally be taxable to shareholders at a maximum federal tax
rate of 15%. Distributions are subject to these capital gains rates regardless
of the length of time the shareholder has held his shares. Conversely, if the
Trust elects to retain its net capital gain, the Trust will be taxed thereon
(except to the extent of any available capital loss carryovers) at the
applicable corporate tax rate. In such event, it is expected that the Trust also
will elect to treat such gain as having been distributed to shareholders. As a
result, each shareholder will be required to report his pro rata share of such
gain on his tax return as long-term capital gain, will be entitled to claim a
tax credit for his pro rata share of tax paid by the Trust on the gain, and will
increase the tax basis for his shares by an amount equal to the deemed
distribution less the tax credit.
Recently enacted tax legislation generally provides for a maximum tax rate
for individual taxpayers of 15% on long-term capital gains from sales on or
after May 6, 2003 and on certain qualifying dividend income. The rate reductions
do not apply to corporate taxpayers. The Trust will be able to separately
designate distributions of any qualifying long-term capital gains or qualifying
dividends earned by the Trust that would be eligible for the lower maximum rate,
although it does not expect to distribute a material amount of qualifying
dividends. A shareholder would also have to qualify a 60-day holding period with
respect to any distributions of qualifying dividend in order to obtain the
benefit of the lower rate. Distributions from funds, such as the Trust,
investing in debt instruments will not generally qualify for the lower rate.
Distributions by the Trust in excess of the Trust's earnings and profits
will be treated as a return of capital to the extent of (and in reduction of)
the shareholder's tax basis in his shares; any such return of capital
distributions in excess of the shareholder's tax basis will be treated as gain
from the sale of his shares, as discussed below.
34
Distributions by the Trust will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Trust. If the NAV at the time a shareholder purchases
shares of the Trust reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.
The Trust will be required in certain cases to withhold and remit to the
U.S. Treasury 28% of all dividends and redemption proceeds payable to any
shareholder (1) who fails to provide the Trust with a certified, correct
identification number or other required certifications, or (2) if the Internal
Revenue Service notifies the Trust that the shareholder is 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 IRS.
SALE OF COMMON SHARES
A shareholder will recognize gain or loss on the sale or exchange of shares
of the Trust in an amount generally equal to the difference between the proceeds
of the sale and the shareholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the shareholder's holding period for the shares. However, any
capital loss arising from the sale of shares held for six months or less will be
treated as a long-term capital loss to the extent of any long-term capital gains
distributed (or deemed distributed) with respect to such shares. Also, any loss
realized on a sale or exchange of shares will be disallowed to the extent the
shares disposed of are replaced (including shares acquired through the
Shareholder Investment Program within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such case, the
tax basis of the acquired shares will be adjusted to reflect the disallowed
loss.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder") depends, in part, on whether the
shareholder's income from the Trust is effectively connected with a U.S. trade
or business carried on by such shareholder.
If the income from the Trust is not effectively connected with a U.S. trade
or business carried on by a foreign shareholder, distributions of investment
company taxable income will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate). Such a foreign shareholder would generally be exempt
from U.S. federal income tax on gains realized on the sale or exchange of shares
of the Trust, capital gain dividends, and amounts retained by the Trust that are
designated as undistributed capital gains.
If the income from the Trust is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income, capital gain dividends, amounts retained by the Trust
that are designated as undistributed capital gains and any gains realized upon
the sale or exchange of shares of the Trust will be subject to U.S. federal
income tax at the rates applicable to U.S. citizens or domestic corporations.
Such shareholders that are classified as corporations for U.S. tax purposes also
may be subject to a branch profits tax.
In the case of foreign noncorporate shareholders, the Trust may be required
to withhold U.S. federal income tax at a rate of 30% on distributions that are
otherwise exempt from withholding tax (or
35
taxable at a reduced treaty rate) unless such shareholders furnish the Trust
with proper notification of their foreign status. See "Distributions."
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Trust, including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein.
Income received by the Trust from foreign sources may be subject to
withholding and other taxes imposed by such foreign jurisdictions, absent treaty
relief. Distributions to shareholders also may be subject to state, local and
foreign taxes, depending upon each shareholder's particular situation.
Shareholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Trust.
ADVERTISING AND PERFORMANCE DATA
ADVERTISING
From time to time, advertisements and other sales materials for the Trust
may include information concerning the historical performance of the Trust. Any
such information may include trading volume of the Trust's Common Shares, the
number of Senior Loan investments, annual total return, aggregate total return,
distribution rate, average compounded distribution rates and yields of the Trust
for specified periods of time, and diversification statistics. Such information
may also include rankings, ratings and other information from independent
organizations such as Lipper Analytical Services, Inc. ("Lipper"), Morningstar,
Value Line, Inc., CDA Technology, Inc., Standard & Poor's, Portfolio Management
Data (a division of Standard & Poor's), Moody's, Bloomberg or other industry
publications. These rankings will typically compare the Trust to all closed-end
Funds, to other Senior Loan funds, and/or also to taxable closed-end fixed
income funds. Any such use of rankings and ratings in advertisements and sales
literature will conform with the guidelines of the NASD approved by the
Commission. Ranking comparisons and ratings should not be considered
representative of the Trust's relative performance for any future period.
Reports and promotional literature may also contain the following
information: (i) number of shareholders; (ii) average account size; (iii)
identification of street and registered account holdings; (iv) lists or
statistics of certain of the Trust's holdings including, but not limited to,
portfolio composition, sector weightings, portfolio turnover rates, number of
holdings, average market capitalization and modern portfolio theory statistics
alone or in comparison with itself (over time) and with its peers and industry
group; (v) public information about the assets class; and (vi) discussions
concerning coverage of the Trust by analysts.
In addition, reports and promotional literature may contain information
concerning the Investment Manager, the Sub-Adviser, ING Groep, the Portfolio
Managers, the Administrator or affiliates of the Trust including (i) performance
rankings of other funds managed by the Investment Manager or
36
Sub-Adviser, or the individuals employed by the Investment Manager or
Sub-Adviser who exercise responsibility for the day-to-day management of the
Trust, including rankings and ratings of investment companies published by
Lipper, Morningstar, Inc., Value Line, Inc., CDA Technologies, Inc., or other
rating services, companies, publications or other persons who rank or rate
investment companies or other investment products on overall performance or
other criteria; (ii) lists of clients, the number of clients, or assets under
management; (iii) information regarding the acquisition of the ING Funds by ING
Capital; (iv) the past performance of ING Capital and ING Funds Services; (v)
the past performance of other funds managed by the Investment Manager or
Sub-Adviser; (vi) quotes from a portfolio manager of the Trust or industry
specialists; and (vii) information regarding rights offerings conducted by
closed-end funds managed by the Investment Manager or Sub-Adviser.
The Trust may compare the frequency of its reset period to the frequency
which LIBOR changes. Further, the Trust may compare its yield to (i) LIBOR, (ii)
the federal funds rate, (iii) the Prime Rate, quoted daily in the Wall Street
Journal as the base rate on corporate loans at large U.S. money center
commercial banks, (iv) the average yield reported by the Bank Rate Monitor
National Index for money market deposit accounts offered by the 100 leading
banks and thrift institutions in the ten largest standard metropolitan
statistical areas, (v) yield data published by Lipper, Bloomberg or other
industry sources, or (vi) the yield on an investment in 90-day Treasury bills on
a rolling basis, assuming quarterly compounding. Further, the Trust may compare
such other yield data described above to each other. The Trust may also compare
its total return, NAV stability and yield to fixed income investments. As with
yield and total return calculations, yield comparisons should not be considered
representative of the Trust's yield or relative performance for any future
period.
The Trust may provide information designed to help individuals understand
their investment goals and explore various financial strategies. Such
information may include information about current economic, market and political
conditions; materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, and goal setting; worksheets
used to project savings needs based on assumed rates of inflation and
hypothetical rates of return; and action plans offering investment alternatives.
Materials may also include discussion of other investment companies in the ING
Funds, products and services, and descriptions of the benefits of working with
investment professionals in selecting investments.
PERFORMANCE DATA
The Trust may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the value of such investment at the end of
the period. On occasion, the Trust may quote total return calculations published
by Lipper, a widely recognized independent publication that monitors the
performance of both open-end and closed-end investment companies.
The Trust's distribution rate is calculated on a monthly basis by
annualizing the dividend declared in the month and dividing the resulting
annualized dividend amount by the Trust's corresponding month-end NAV (in the
case of NAV) or the last reported market price (in the case of Market). The
distribution rate is based solely on the actual dividends and distributions,
which are made at the discretion of management. The distribution rate may or may
not include all investment income, and ordinarily will not include capital gains
or losses, if any.
Total return and distribution rate and compounded distribution rate figures
utilized by the Trust are based on historical performance and are not intended
to indicate future performance. Distribution rate, compounded distribution rate
and NAV per share can be expected to fluctuate over time. Total
37
return will vary depending on market conditions, the Senior Loans, and other
securities comprising the Trust's portfolio, the Trust's operating expenses and
the amount of net realized and unrealized capital gains or losses during the
period.
GENERAL INFORMATION
CUSTODIAN
State Street Bank and Trust Company, 801 Pennsylvania Avenue, Kansas City,
Missouri 64105 has been retained to act as the custodian for the Trust. State
Street Bank and Trust Company does not have any part in determining the
investment policies of the Trust or in determining which portfolio securities
are to be purchased or sold by the Trust or in the declaration of dividends and
distributions.
LEGAL COUNSEL
Legal matters for the Trust are passed upon by Dechert LLP, 1775 I Street,
NW, Washington, DC 20006.
INDEPENDENT AUDITORS
KPMG LLP, 355 South Grand Avenue, Los Angeles, California 90071, currently
serves as the independent registered public accounting firm and has been
selected as independent auditors for the Trust for the fiscal year ending
February 28, 2005.
FINANCIAL STATEMENTS
The Financial Statements and the independent auditors' reports thereon,
appearing in the Trust's Annual Report for the period ending February 29, 2004
are incorporated by reference in this SAI. The Trust's Annual and Semi-Annual
Reports are available at 7337 East Doubletree Ranch Road, Scottsdale, Arizona
85258, upon request and without charge by calling (800) 992-0180.
38
APPENDIX A
39
ING FUNDS
PROXY VOTING PROCEDURES AND GUIDELINES
Effective as of July 10, 2003
As amended August 21, 2003 and November 11, 2003
I. INTRODUCTION
The following are the Proxy Voting Procedures and Guidelines (the "Procedures
and Guidelines") of the ING Funds set forth on Exhibit 1 attached hereto and
each portfolio or series thereof (each a "Fund" and collectively, the "Funds").
The purpose of these Procedures and Guidelines is to set forth the process by
which each Fund will vote proxies related to the assets in its investment
portfolio (the "portfolio securities"). The Procedures and Guidelines have been
approved by each of the Funds' Board of Trustees/Directors(1) (each a "Board"
and collectively, the "Boards"), including a majority of the independent
Trustees/Directors(2) of the Board. These Procedures and Guidelines may be
amended only by the Board. The Board shall review these Procedures and
Guidelines at its discretion, and make any revisions thereto as deemed
appropriate by the Board.
II. VALUATION AND PROXY VOTING COMMITTEE
The Boards hereby delegate to the Valuation and Proxy Voting Committee of each
Board (each a "Committee" and collectively, the "Committees") the authority and
responsibility to oversee the implementation of these Procedures and Guidelines,
and where applicable, to make determinations on behalf of the Board with respect
to the voting of proxies on behalf of each Fund. Furthermore, the Boards hereby
delegate to each Committee the authority to review and approve material changes
to proxy voting procedures of any Fund's investment adviser (the "Adviser"). The
Proxy Voting Procedures of the Adviser are attached hereto as Exhibit 2. Any
determination regarding the voting of proxies of each Fund that is made by a
Committee, or any member thereof, as permitted herein, shall be deemed to be a
good faith determination regarding the voting of proxies by the full Board. Each
Committee may rely on the Adviser through the Agent, Proxy Coordinator and/or
Proxy Group (as such terms are defined below and in the Adviser's proxy voting
procedures) to deal in the first instance with the application of these
Procedures and Guidelines. Each Committee shall conduct itself in accordance
with its charter.
III. DELEGATION OF VOTING RESPONSIBILITY
----------
(1) Reference in these Procedures to one or more Funds shall, as applicable,
mean those Funds that are under the jurisdiction of the particular Board or
Valuation and Proxy Voting Committee at issue. No provision in these
Procedures is intended to impose any duty upon the particular Board or
Valuation and Proxy Voting Committee with respect to any other Fund.
(2) The independent Trustees/Directors are those Board members who are not
"interested persons" within the meaning of Section 2(a)(19) the Investment
Company Act of 1940.
40
The Board hereby delegates to the Adviser to each Fund the authority and
responsibility to vote all proxies with respect to all portfolio securities of
each Fund in accordance with then current proxy voting procedures and guidelines
that have been approved by the Board. The Board may revoke such delegation with
respect to any proxy or proposal, and assume the responsibility of voting any
Fund proxy or proxies, as it deems appropriate. Non-material amendments to the
Procedures and Guidelines may be approved for immediate implementation by the
President or Chief Financial Officer of a Fund, subject to ratification at the
next regularly scheduled meeting of the Valuation and Proxy Voting Committee.
When a Fund participates in the lending of its securities and the securities are
on loan at record date, proxies related to such securities will not be forwarded
to the Adviser by the Fund's custodian and therefore will not be voted.
When a Fund is a feeder in a master/feeder structure, proxies for the portfolio
securities of the master fund will be voted pursuant to the master fund's proxy
voting policies and procedures.
IV. APPROVAL AND REVIEW OF PROCEDURES
Each Fund's Adviser has adopted proxy voting procedures in connection with the
voting of portfolio securities for the Funds as attached hereto in Exhibit 2.
The Board hereby approves such procedures. All material changes to such
procedures must be approved by the Board or the Valuation and Proxy Voting
Committee prior to implementation; however, the President or Chief Financial
Officer of a Fund may make such non-material changes as they deem appropriate,
subject to ratification by the Board or the Valuation and Proxy Voting Committee
at its next regularly scheduled meeting.
V. VOTING PROCEDURES AND GUIDELINES
THE GUIDELINES WHICH ARE SET FORTH IN EXHIBIT 3 HERETO SPECIFY THE MANNER IN
WHICH THE FUNDS GENERALLY WILL VOTE WITH RESPECT TO THE PROPOSALS DISCUSSED
THEREIN.
A. Routine Matters
The Agent shall be instructed to submit a vote in accordance with the
Guidelines where such Guidelines provide a clear "For", "Against" or
"Abstain" on a proposal. However, the Agent shall be directed to refer
proxy proposals to the Proxy Coordinator for instructions as if it were a
matter requiring case-by-case consideration under circumstances where the
application of the Guidelines is unclear, they appear to involve unusual or
controversial issues, or an Investment Professional recommends a vote
contrary to the Guidelines.
B. Matters Requiring Case-by-Case Consideration
The Agent shall be directed to refer proxy proposals accompanied by its
written analysis and voting recommendation to the Proxy Coordinator where
the Guidelines have noted a "case-by-case" consideration.
Upon receipt of a referral from the Agent, the Proxy Coordinator may
solicit additional research from the Agent, Investment Professional(s), as
well as from any other source or service.
41
The Proxy Coordinator will forward the Agent's analysis and recommendation
and/or any research obtained from the Investment Professional(s), the Agent
or any other source to the Proxy Group. The Proxy Group may consult with
the Agent and/or Investment Professional(s), as it deems necessary.
1. Votes in Accordance with Agent Recommendation
In the event the Proxy Group recommends a vote in accordance with the
Agent's recommendation, the Proxy Group will instruct the Agent,
through the Proxy Coordinator, to vote in accordance with the Agent's
recommendation.
2. Non-Votes
The Proxy Group may recommend that a Fund refrain from voting under
the following circumstances: (1) if the economic effect on
shareholders' interests or the value of the portfolio holding is
indeterminable or insignificant or (2) if the cost of voting a proxy
outweighs the benefits, E.G., certain international proxies. In such
instances, the Proxy Group may instruct the Agent, through the Proxy
Coordinator, not to vote such proxy.
3. Votes Contrary to Procedures and Guidelines, or Agent Recommendation,
where applicable, or where No Recommendation is provided by Agent.
If the Proxy Group recommends that a Fund vote contrary to the
Procedures and Guidelines, or the recommendation of the Agent, where
applicable, or if the Agent has made no recommendation and the
Procedures and Guidelines are silent, the Proxy Coordinator will then
request that each member of the Proxy Group and each Investment
Professional participating in the voting process provide a Conflicts
Report (as such term is defined for purposes of the Adviser's proxy
voting procedures).
If Counsel determines that a conflict of interest appears to exist
with respect to any member of the Proxy Group or the relevant
Investment Professional(s), the Proxy Coordinator will then call a
meeting of the Valuation and Proxy Voting Committee and forward to
such committee all information relevant to their review, including the
following materials or a summary thereof: the applicable Procedures
and Guidelines, the recommendation of the Agent where applicable, the
recommendation of the Investment Professional(s), where applicable,
any resources used by the Proxy Group in arriving at its
recommendation, the Conflicts Report and any other written materials
establishing whether a conflict of interest exists, and findings of
Counsel (as such term is defined for purposes of the Adviser's proxy
voting procedures).
If Counsel determines that there does not appear to be a conflict of
interest with respect to any member of the Proxy Group or the relevant
Investment Professional(s), the Proxy Coordinator will instruct the
Agent to vote the proxy as recommended by the Proxy Group.
4. Referrals to a Fund's Valuation and Proxy Voting Committee
A Fund's Valuation and Proxy Voting Committee may consider all
recommendations, analysis, research and Conflicts Reports provided to
it by the Agent, Proxy Group and/or Investment Professional(s), and
any other written materials used to establish whether a conflict of
interest exists, in determining how to vote the proxies referred to
the Committee.
42
The Committee will instruct the Agent through the Proxy Coordinator
how to vote such referred proposals.
The Proxy Coordinator will maintain a record of all proxy questions
that have been referred to a Fund's Valuation and Proxy Voting
Committee, all applicable recommendations, analysis, research and
Conflicts Reports.
VI. CONFLICTS OF INTEREST
In all cases in which a vote has not been clearly determined in advance by the
Procedures and Guidelines or for which the Proxy Group recommends a vote
contrary to the Procedures and Guidelines, or contrary to the recommendation of
the Agent, or where the Procedures and Guidelines are silent and the Agent has
made no recommendation, and Counsel has determined that a conflict of interest
appears to exist with respect to any member of the Proxy Group or any Investment
Professional participating in the voting process, the proposal shall be referred
to the Fund's Valuation and Proxy Voting Committee for determination so that the
Adviser shall have no opportunity to vote a Fund's proxy in a situation in which
it may be deemed to have a conflict of interest.
VII. REPORTING AND RECORD RETENTION
Beginning in August 2004, on an annual basis, each Fund will post its proxy
voting record or a link thereto for the prior one-year period ending on June
30th on the ING Funds website. The proxy voting record posted for any Fund that
is a feeder in a master/feeder structure will be that of the master fund. The
proxy voting record for each Fund will also be available in the EDGAR database
on the SEC's website.
43
EXHIBIT 1
TO THE
ING FUNDS
PROXY VOTING PROCEDURES
ING EQUITY TRUST
ING FUNDS TRUST
ING INVESTMENT FUNDS, INC.
ING INVESTORS TRUST
ING MAYFLOWER TRUST
ING MUTUAL FUNDS
ING PRIME RATE TRUST
ING SENIOR INCOME FUND
ING VARIABLE INSURANCE TRUST
ING VARIABLE PRODUCTS TRUST
ING VP EMERGING MARKETS FUND, INC.
ING VP NATURAL RESOURCES TRUST
USLICO SERIES FUND
Effective as of July 10, 2003
44
EXHIBIT 2
TO THE
ING FUNDS
PROXY VOTING PROCEDURES
ING INVESTMENTS, LLC,
DIRECTED SERVICES, INC.
AND
ING LIFE INSURANCE AND ANNUITY COMPANY
PROXY VOTING PROCEDURES
Effective as of July 10, 2003, as amended
I. INTRODUCTION
ING Investments, LLC, Directed Services, Inc. and ING Life Insurance and
Annuity Company (each an "Adviser" and collectively, the "Advisers") are the
investment advisers for the registered investment companies and each series or
portfolio thereof (each a "Fund" and collectively, the "Funds") comprising the
ING family of funds. As such, the Advisers have been delegated the authority to
vote proxies with respect to securities for the Funds over which they have
day-to-day portfolio management responsibility.
The Advisers will abide by the proxy voting guidelines adopted by a
Fund's respective Board of Directors or Trustees (each a "Board" and
collectively, the "Boards") with regard to the voting of proxies unless
otherwise provided in the proxy voting procedures adopted by a Fund's Board.
In voting proxies, the Advisers are guided by general fiduciary
principles. Each must act prudently, solely in the interest of the beneficial
owners of the Funds it manages. The Advisers will not subordinate the interest
of beneficial owners to unrelated objectives. Each Adviser will vote proxies in
the manner that it believes will do the most to maximize shareholder value.
The following are the Proxy Voting Procedures of ING Investments, LLC,
Directed Services, Inc. and ING Life Insurance and Annuity Company with respect
to the voting of proxies on behalf of their client Funds as approved by the
respective Board of each Fund.
Unless otherwise noted, proxies will be voted in all instances.
II. ROLES AND RESPONSIBILITIES
A. Proxy Coordinator
The Proxy Coordinator identified in Appendix 1 will assist in the coordination
of the voting of each Fund's proxies in accordance with the ING Funds Proxy
Voting Procedures and Guidelines ("Procedures
45
and Guidelines"). The Proxy Coordinator is authorized to direct the Agent to
vote a Fund's proxy in accordance with the Procedures and Guidelines unless the
Proxy Coordinator receives a recommendation from an Investment Professional (as
described below) to vote contrary to the Procedures and Guidelines. In such
event, the Proxy Coordinator will call a meeting of the Proxy Group.
B. Agent
An independent proxy voting service (the "Agent"), as approved by
the Board of each Fund, shall be engaged to assist in the voting of Fund
proxies through the provision of vote analysis, implementation,
recordkeeping and disclosure services. The Agent is responsible for
coordinating with the Funds' custodians to ensure that all proxy
materials received by the custodians relating to the portfolio
securities are processed in a timely fashion. To the extent applicable,
the Agent is required to vote and/or refer all proxies in accordance
with these Procedures. The Agent will retain a record of all proxy votes
handled by the Agent. Such record must reflect all the information
required to be disclosed in a Fund's Form N-PX pursuant to Rule 30b1-4
under the Investment Company Act. In addition, the Agent is responsible
for maintaining copies of all proxy statements received by issuers and
to promptly provide such materials to the Adviser upon request.
The Agent shall be instructed to vote all proxies in accordance
with the ING Funds' Guidelines, except as otherwise instructed through
the Proxy Coordinator by the Adviser's Proxy Group, or a Fund's
Valuation and Proxy Voting Committee.
The Agent shall be instructed to obtain all proxies from the Funds'
custodians and to review each proxy proposal against the Guidelines. The
Agent also shall be requested to call the Proxy Coordinator's attention
to specific proxy proposals that although governed by the Guidelines
appear to involve unusual or controversial issues.
C. Proxy Group
The Adviser shall establish a Proxy Group (the "Proxy Group") which
shall assist in the review of the Agent's recommendations when a proxy
voting issue is referred to the Group through the Proxy Coordinator. The
members of the Proxy Group, which may include employees of the Advisers'
affiliates, are identified in Appendix 1, as may be amended from time at
the Advisers' discretion.
A minimum of four (4) members of the Proxy Group (or three (3) if
one member of the quorum is either the Fund's Chief Investment Risk
Officer or Chief Financial Officer) shall constitute a quorum for
purposes of taking action at any meeting of the Group. The vote of a
simple majority of the members present and voting shall determine any
matter submitted to a vote. The Proxy Group may meet in person or by
telephone. The Proxy Group also may take action via electronic mail in
lieu of a meeting, provided that each Group member has received a copy
of any relevant electronic mail transmissions circulated by each other
participating Group member prior to voting and provided that the Proxy
Coordinator follows the directions of a majority of a quorum (as defined
above) responding via electronic mail. For all votes taken in person or
by telephone or teleconference, the vote shall be taken outside the
presence of any person other than the members of the Proxy Group.
A meeting of the Proxy Group will be held whenever the Proxy
Coordinator receives a recommendation from an Investment Professional to
vote a Fund's proxy contrary to the
46
Procedures and Guidelines, or the recommendation of the Agent, where
applicable, or if the Agent has made no recommendation with respect to a
vote on a proposal.
For each proposal referred to the Proxy Group, it will review (1)
the Procedures and Guidelines, (2) the recommendation of the Agent, if
any, (3) the recommendation of the Investment Professional(s) and (4)
any other resources that the Proxy Group deems appropriate to aid in a
determination of a recommendation.
If the Proxy Group recommends that a Fund vote in accordance with
the Procedures and Guidelines, or the recommendation of the Agent, where
applicable, it shall instruct the Proxy Coordinator to so advise the
Agent.
If the Proxy Group recommends that a Fund vote contrary to the
Procedures and Guidelines, or the recommendation of the Agent, where
applicable, it shall follow the procedures for such voting as
established by a Fund's Board.
D. Investment Professionals
The Funds' Advisers, sub-advisers and/or portfolio managers
(referred to herein as "Investment Professionals") may be asked to
submit a recommendation to the Proxy Group regarding the voting of
proxies related to the portfolio securities over which they have
day-to-day portfolio management responsibility. The Investment
Professionals may accompany their recommendation with any other research
materials that they deem appropriate.
III. VOTING PROCEDURES
A. In all cases, the Adviser shall follow the voting procedures as set
forth in the Procedures and Guidelines of the Fund on whose behalf
the Adviser is exercising delegated authority to vote.
B. Routine Matters
The Agent shall be instructed to submit a vote in accordance with
the Guidelines where such Guidelines provide a clear "For", "Against" or
"Abstain" on a proposal. However, the Agent shall be directed to refer
proxy proposals to the Proxy Coordinator for instructions as if it were
a matter requiring case-by-case consideration under circumstances where
the application of the Guidelines is unclear.
C. Matters Requiring Case-by-Case Consideration
The Agent shall be directed to refer proxy proposals accompanied by its
written analysis and voting recommendation to the Proxy Coordinator
where the Guidelines have noted a "case-by-case" consideration.
Upon receipt of a referral from the Agent, the Proxy Coordinator may
solicit additional research from the Agent, Investment Professional(s),
as well as from any other source or service.
The Proxy Coordinator will forward the Agent's analysis and
recommendation and/or any research obtained from the Investment
Professional(s), the Agent or any other source to the Proxy Group. The
Proxy Group may consult with the Agent and/or Investment
Professional(s), as it deems necessary.
47
1. Votes in Accordance with Agent Recommendation
In the event the Proxy Group recommends a vote in accordance with
the Agent's recommendation, the Proxy Group will instruct the
Agent, through the Proxy Coordinator, to vote in accordance with
the Agent's recommendation.
2. Non-Votes
The Proxy Group may recommend that a Fund refrain from voting under
the following circumstances: (1) if the economic effect on
shareholders' interests or the value of the portfolio holding is
indeterminable or insignificant or (2) if the cost of voting a
proxy outweighs the benefits, E.G., certain international proxies.
In such instances, the Proxy Group may instruct the Agent, through
the Proxy Coordinator, not to vote such proxy.
3. Votes Contrary to Procedures and Guidelines, or Agent
Recommendation, where applicable, or Where No Recommendation is
Provided by Agent.
If the Proxy Group recommends that a Fund vote contrary to the
Procedures and Guidelines, or the recommendation of the Agent,
where applicable, or if the Agent has made no recommendation and
the Procedures and Guidelines are silent, the Proxy Coordinator
will then implement the procedures for handling such votes as
adopted by the Fund's Board.
4. The Proxy Coordinator will maintain a record of all proxy questions
that have been referred to a Fund's Valuation and Proxy Voting
Committee, all applicable recommendations, analysis, research and
Conflicts Reports.
IV. CONFLICTS OF INTEREST
In connection with their participation in the voting process for portfolio
securities, each member of the Proxy Group and each Investment Professional
participating in the voting process must act solely in the best interests of the
beneficial owners of the applicable Fund. The members of the Proxy Group may not
subordinate the interests of the Fund's beneficial owners to unrelated
objectives.
For all matters for which the Proxy Group recommends a vote contrary to
Procedures and Guidelines, or the recommendation of the Agent, where applicable,
or where the Agent has made no recommendation and the Procedures and Guidelines
are silent, the Proxy Coordinator will implement the procedures for handling
such votes as adopted by the Fund's Board, including completion of such
Conflicts Reports as may be required under the Fund's procedures. Completed
Conflicts Reports shall be provided to the Proxy Coordinator within two (2)
business days. Such Conflicts Report should describe any known conflicts of
either a business or personal nature, and set forth any contacts with respect to
the referral item with non-investment personnel in its organization or with
outside parties (except for routine communications from proxy solicitors). The
Conflicts Report should also include written confirmation that any
recommendation from an Investment Professional provided under circumstances
where a conflict of interest exists was made solely on the investment merits and
without regard to any other consideration.
The Proxy Coordinator shall forward all Conflicts Reports to a member of the
mutual funds practice group of ING US Legal Services ("Counsel") for review.
Counsel shall review each report and provide the Proxy Coordinator with a brief
statement regarding whether or not a material conflict of interest is
48
present. Matters as to which a conflict of interest is deemed to be present
shall be handled as provided in the Fund's Procedures and Guidelines.
V. REPORTING AND RECORD RETENTION
The Adviser shall maintain the records required by Rule 204-2(c)(2), as may be
amended from time to time, including the following: (1) A copy of each proxy
statement received regarding a Fund's portfolio securities. Such proxy
statements received from issuers are available either in the SEC's EDGAR
database or are kept by the Agent and are available upon request. (2) A record
of each vote cast on behalf of a Fund. (3) A copy of any document created by the
Adviser that was material to making a decision how to vote a proxy, or that
memorializes the basis for that decision. (4) A copy of written requests for
Fund proxy voting information and any written response thereto or to any oral
request for information on how the Adviser voted proxies on behalf of a Fund.
All proxy voting materials and supporting documentation will be retained for a
minimum of six (6) years.
49
APPENDIX 1
TO THE
ADVISERS' PROXY VOTING PROCEDURES
Proxy Group for registered investment company clients of ING Investments, LLC,
Directed Services, Inc. and ING Life Insurance and Annuity Company:
NAME TITLE OR AFFILIATION
Stanley D. Vyner Chief Investment Risk Officer and Executive Vice President of ING
Investments, LLC
Karla J. Bos Acting Proxy Coordinator
Maria Anderson Assistant Vice President - Manager Fund Compliance of ING Funds Services,
LLC
Michael J. Roland Executive Vice President and Chief Financial Officer of ING Investments, LLC
Todd Modic Vice President of Financial Reporting- Fund Accounting of ING Fund
Services, LLC
Theresa K. Kelety, Esq. Counsel, ING Americas US Legal Services
Effective as of April 21, 2004
50
FORM OF EXHIBIT 3
TO THE
ING FUNDS PROXY VOTING PROCEDURES
PROXY VOTING GUIDELINES OF THE ING FUNDS
Effective as of July 10, 2003
As amended August 21, 2003 and November 11, 2003
I. INTRODUCTION
The following is a statement of the proxy voting Guidelines that have been
adopted by the respective Boards of Directors or Trustees of each Fund.
Proxies must be voted in the best interest of the Fund. The Guidelines summarize
the Funds' positions on various issues of concern to investors, and give a
general indication of how Fund portfolio securities will be voted on proposals
dealing with particular issues. The Guidelines are not exhaustive and do not
include all potential voting issues.
The Advisers, in exercising their delegated authority, will abide by the
Guidelines as outlined below with regard to the voting of proxies except as
otherwise provided in the Procedures. In voting proxies, the Advisers are guided
by general fiduciary principles. Each must act prudently, solely in the interest
of the beneficial owners of the Funds it manages. The Advisers will not
subordinate the interest of beneficial owners to unrelated objectives. Each
Adviser will vote proxies in the manner that it believes will do the most to
maximize shareholder value.
a. GUIDELINES
The following Guidelines are grouped according to the types of
proposals generally presented to shareholders of U.S. issuers: Board
of Directors, Proxy Contests, Auditors, Proxy Contest Defenses, Tender
Offer Defenses, Miscellaneous Governance Provisions, Capital
Structure, Executive and Director Compensation, State of
Incorporation, Mergers and Corporate Restructurings, Mutual Fund
Proxies and Social and Environmental Issues. An additional section
addresses proposals most frequently found in Global Proxies.
In all cases where "case-by-case" consideration is noted, it shall be
the policy of the Funds to vote in accordance with the recommendation
provided by the Funds' Agent, Institutional Shareholder Services, Inc.
Such policy may be overridden in any case pursuant to the procedures
outlined herein.
THE BOARD OF DIRECTORS
Voting on Director Nominees in Uncontested Elections. Votes on director nominees
should be made on a CASE-BY-CASE basis.
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SEPARATING CHAIRMAN AND CEO
Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions
of chairman and CEO be held separately.
PROPOSALS SEEKING A MAJORITY OF INDEPENDENT DIRECTORS
Evaluate on a CASE-BY-CASE basis shareholder proposals asking that a majority of
directors be independent. Vote FOR shareholder proposals asking that board
audit, compensation, and/or nominating committees be composed exclusively of
independent directors.
STOCK OWNERSHIP REQUIREMENTS
Generally, vote AGAINST shareholder proposals requiring directors to own a
minimum amount of company stock in order to qualify as a director or to remain
on the board.
TERM OF OFFICE
Generally, vote AGAINST shareholder proposals to limit the tenure of outside
directors.
AGE LIMITS
Generally, vote AGAINST shareholder proposals to impose a mandatory retirement
age for outside directors.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Proposals on director and officer indemnification and liability protection
should be evaluated on a CASE-BY-CASE basis, using Delaware law as the standard.
Vote AGAINST proposals to limit or eliminate entirely directors' and officers'
liability for monetary damages for violating the duty of care. Vote AGAINST
indemnification proposals that would expand coverage beyond just legal expenses
to acts, such as negligence, that are more serious violations of fiduciary
obligation than mere carelessness. Vote FOR only those proposals providing such
expanded coverage in cases when a director's or officer's legal defense was
unsuccessful if:
(1) The director was found to have acted in good faith and in a manner
that he reasonably believed was in the best interests of the company,
and
(2) Only if the director's legal expenses would be covered.
PROXY CONTESTS
Voting for Director Nominees in Contested Elections. Votes in a contested
election of directors must be evaluated on a CASE-BY-CASE basis.
REIMBURSE PROXY SOLICITATION EXPENSES
Voting to reimburse proxy solicitation expenses should be analyzed on a
CASE-BY-CASE basis.
AUDITORS
RATIFYING AUDITORS
Generally, vote FOR proposals to ratify auditors.
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Non-Audit Services
Consider on a CASE-BY-CASE basis proposals to approve auditors when total
non-audit fees exceed the total of audit fees, audit-related fees and
permissible tax fees.
AUDITOR INDEPENDENCE
Generally, vote AGAINST shareholder proposals asking companies to prohibit their
auditors from engaging in non-audit services (or capping the level of non-audit
services).
AUDIT FIRM ROTATION (SHAREHOLDER PROPOSALS):
Generally, vote AGAINST shareholder proposals asking for mandatory audit firm
rotation.
PROXY CONTEST DEFENSES
Board Structure: Staggered vs. Annual Elections
Generally, vote AGAINST proposals to classify the board.
Generally, vote FOR proposals to repeal classified boards and to elect all
directors annually.
SHAREHOLDER ABILITY TO REMOVE DIRECTORS
Generally, vote AGAINST proposals that provide that directors may be removed
only for cause.
Generally, vote FOR proposals to restore shareholder ability to remove directors
with or without cause.
Generally, vote AGAINST proposals that provide that only continuing directors
may elect replacements to fill board vacancies.
Generally, vote FOR proposals that permit shareholders to elect directors to
fill board vacancies.
CUMULATIVE VOTING
Generally, vote AGAINST proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
relative to the company's other governance provisions.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Generally, vote AGAINST proposals to restrict or prohibit shareholder ability to
call special meetings.
Generally, vote FOR proposals that remove restrictions on the right of
shareholders to act independently of management.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally, vote AGAINST proposals to restrict or prohibit shareholder ability to
take action by written consent.
Generally, vote FOR proposals to allow or make easier shareholder action by
written consent.
SHAREHOLDER ABILITY TO ALTER THE SIZE OF THE BOARD
Review on a CASE-BY-CASE basis proposals that seek to fix the size of the board.
Review on a CASE-BY-CASE basis proposals that give management the ability to
alter the size of the board without shareholder approval.
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TENDER OFFER DEFENSES
Poison Pills
Generally, vote FOR shareholder proposals that ask a company to submit its
poison pill for shareholder ratification.
Review on a CASE-BY-CASE basis shareholder proposals to redeem a company's
poison pill.
Review on a CASE-BY-CASE basis management proposals to ratify a poison pill.
FAIR PRICE PROVISIONS
Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis.
Generally, vote AGAINST fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
GREENMAIL
Generally, vote FOR proposals to adopt antigreenmail charter of bylaw amendments
or otherwise restrict a company's ability to make greenmail payments.
Review on a CASE-BY-CASE basis antigreenmail proposals when they are bundled
with other charter or bylaw amendments.
PALE GREENMAIL
Review on a CASE-BY-CASE basis restructuring plans that involve the payment of
pale greenmail.
UNEQUAL VOTING RIGHTS
Generally, vote AGAINST dual-class exchange offers.
Generally, vote AGAINST dual-class recapitalizations.
SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO AMEND THE CHARTER OR BYLAWS
Generally, vote AGAINST management proposals to require a supermajority
shareholder vote to approve charter and bylaw amendments.
Generally, vote FOR shareholder proposals to lower supermajority shareholder
vote requirements for charter and bylaw amendments.
SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO APPROVE MERGERS
Generally, vote AGAINST management proposals to require a supermajority
shareholder vote to approve mergers and other significant business combinations.
Generally, vote FOR shareholder proposals to lower supermajority shareholder
vote requirements for mergers and other significant business combinations.
WHITE SQUIRE PLACEMENTS
Generally, vote FOR shareholder proposals to require approval of blank check
preferred stock issues for other than general corporate purposes.
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MISCELLANEOUS GOVERNANCE PROVISIONS
CONFIDENTIAL VOTING
Generally, vote FOR shareholder proposals that request companies to adopt
confidential voting, use independent tabulators, and use independent inspectors
of election as long as the proposals include clauses for proxy contests as
follows:
- In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting policy.
- If the dissidents agree, the policy remains in place.
- If the dissidents do not agree, the confidential voting policy is
waived.
Generally, vote FOR management proposals to adopt confidential voting.
EQUAL ACCESS
Generally, vote FOR shareholder proposals that would allow significant company
shareholders (defined as those holding more than $5 million in securities of the
company in question) equal access to management's proxy material in order to
evaluate and propose voting recommendations on proxy proposals and director
nominees, and in order to nominate their own candidates to the board.
BUNDLED PROPOSALS
Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals.
SHAREHOLDER ADVISORY COMMITTEES
Review on a CASE-BY-CASE basis proposals to establish a shareholder advisory
committee.
CAPITAL STRUCTURE
Common Stock Authorization
Review proposals to increase the number of shares of common stock authorized for
issue on a CASE-BY-CASE basis.
Generally, vote AGAINST proposals to increase the number of authorized shares of
the class of stock that has superior voting rights in companies that have
dual-class capitalization structures.
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Generally, vote FOR management proposals to increase common share authorization
for a stock split, provided that the increase in authorized shares would not
result in an excessive number of shares available for issuance given a company's
industry and performance in terms of shareholder returns.
REVERSE STOCK SPLITS
Consider on a CASE-BY-CASE basis management proposals to implement a reverse
stock split.
PREFERRED STOCK
Generally, vote AGAINST proposals authorizing the creation of new classes of
preferred stock with unspecified voting, conversion, dividend distribution, and
other rights ("blank check" preferred stock). Generally, vote FOR proposals to
create blank check preferred stock in cases when the company expressly states
that the stock will not be used as a takeover defense.
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Generally, vote FOR proposals to authorize preferred stock in cases where the
company specifies the voting, dividend, conversion, and other rights of such
stock and the terms of the preferred stock appear reasonable.
Vote CASE-BY-CASE on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for issue given
a company's industry and performance in terms of shareholder returns.
SHAREHOLDER PROPOSALS REGARDING BLANK CHECK PREFERRED STOCK
Generally, vote FOR shareholder proposals to have blank check preferred stock
placements, other than those shares issued for the purpose of raising capital or
making acquisitions in the normal course of business, submitted for shareholder
ratification.
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Generally, vote FOR management proposals to reduce the par value of common
stock.
PREEMPTIVE RIGHTS
Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive
rights. In evaluating proposals on preemptive rights, consider the size of a
company and the characteristics of its shareholder base.
DEBT RESTRUCTURINGS
Review on a CASE-BY-CASE basis proposals to increase common and/or preferred
shares and to issue shares as part of a debt restructuring plan.
SHARE REPURCHASE PROGRAMS
Generally, vote FOR management proposals to institute open-market share
repurchase plans in which all shareholders may participate on equal terms.
TRACKING STOCK
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis.
EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to compensation plans should be determined on a CASE-BY-CASE
basis.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Generally, vote AGAINST management proposals seeking approval to reprice
options.
DIRECTOR COMPENSATION
Votes on stock-based plans for directors are made on a CASE-BY-CASE basis.
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be made on a CASE-BY-CASE basis.
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OBRA-RELATED COMPENSATION PROPOSALS:
AMENDMENTS THAT PLACE A CAP ON ANNUAL GRANTS OR AMEND ADMINISTRATIVE
FEATURES
Generally, vote FOR plans that simply amend shareholder-approved plans to
include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m) of
OBRA.
AMENDMENTS TO ADD PERFORMANCE-BASED GOALS
Generally, vote FOR amendments to add performance goals to existing
compensation plans to comply with the provisions of Section 162(m) of OBRA.
AMENDMENTS TO INCREASE SHARES AND RETAIN TAX DEDUCTIONS UNDER OBRA
Votes on amendments to existing plans to increase shares reserved and to
qualify the plan for favorable tax treatment under the provisions of
Section 162(m) should be evaluated on a CASE-BY-CASE basis.
APPROVAL OF CASH OR CASH-AND-STOCK BONUS PLANS
Generally, vote FOR cash or cash-and-stock bonus plans to exempt the
compensation from taxes under the provisions of Section 162(m) of OBRA.
SHAREHOLDER PROPOSALS TO LIMIT EXECUTIVE AND DIRECTOR PAY
Generally, vote FOR shareholder proposals that seek additional disclosure of
executive and director pay information.
Review on a CASE-BY-CASE basis all other shareholder proposals that seek to
limit executive and director pay.
GOLDEN AND TIN PARACHUTES
Generally, vote FOR shareholder proposals to have golden and tin parachutes
submitted for shareholder ratification.
Review on a CASE-BY-CASE basis all proposals to ratify or cancel golden or tin
parachutes.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPs)
Generally, vote FOR proposals that request shareholder approval in order to
implement an ESOP or to increase authorized shares for existing ESOPs, except in
cases when the number of shares allocated to the ESOP is "excessive" (i.e.,
generally greater than five percent of outstanding shares).
401(k) EMPLOYEE BENEFIT PLANS
Generally, vote FOR proposals to implement a 401(k) savings plan for employees.
EXPENSING OF STOCK OPTIONS
Consider shareholder proposals to expense stock options on a CASE-BY-CASE basis.
STATE OF INCORPORATION
VOTING ON STATE TAKEOVER STATUTES
Review on a CASE-BY-CASE basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, antigreenmail
provisions, and disgorgement provisions).
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VOTING ON REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be examined on a
CASE-BY-CASE basis.
MERGERS AND CORPORATE RESTRUCTURINGS
MERGERS AND ACQUISITIONS
Votes on mergers and acquisitions should be considered on a CASE-BY-CASE basis.
CORPORATE RESTRUCTURING
Votes on corporate restructuring proposals, including minority squeezeouts,
leveraged buyouts, spinoffs, liquidations, and asset sales should be considered
on a CASE-BY-CASE basis.
SPINOFFS
Votes on spinoffs should be considered on a CASE-BY-CASE basis.
ASSET SALES
Votes on asset sales should be made on a CASE-BY-CASE basis.
LIQUIDATIONS
Votes on liquidations should be made on a CASE-BY-CASE basis.
ADJOURNMENT
Generally, vote FOR proposals to adjourn a meeting to provide additional time
for vote solicitation when the primary proposal is also voted FOR.
APPRAISAL RIGHTS
Generally, vote FOR proposals to restore, or provide shareholders with, rights
of appraisal.
CHANGING CORPORATE NAME
Generally, vote FOR changing the corporate name.
MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Vote the election of directors on a CASE-BY-CASE basis.
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Vote conversion proposals on a CASE-BY-CASE basis.
PROXY CONTESTS
Vote proxy contests on a CASE-BY-CASE basis.
INVESTMENT ADVISORY AGREEMENTS
Vote the investment advisory agreements on a CASE-BY-CASE basis.
APPROVING NEW CLASSES OR SERIES OF SHARES
Generally, vote FOR the establishment of new classes or series of shares.
PREFERRED STOCK PROPOSALS
Vote the authorization for or increase in preferred shares on a CASE-BY-CASE
basis.
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1940 ACT POLICIES
Vote these proposals on a CASE-BY-CASE basis.
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Vote these proposals on a CASE-BY-CASE basis.
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Generally, vote AGAINST proposals to change a fund's fundamental investment
objective to nonfundamental.
NAME RULE PROPOSALS
Vote these proposals on a CASE-BY-CASE basis.
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote these proposals on a CASE-BY-CASE basis.
CHANGES TO THE CHARTER DOCUMENT
Vote changes to the charter document on a CASE-BY-CASE basis.
CHANGING THE DOMICILE OF A FUND
Vote reincorporations on a CASE-BY-CASE basis.
CHANGE IN FUND'S SUBCLASSIFICATION
Vote these proposals on a CASE-BY-CASE basis.
AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISORS WITHOUT SHAREHOLDER
APPROVAL
Generally, vote FOR these proposals.
DISTRIBUTION AGREEMENTS
Vote these proposals on a CASE-BY-CASE basis.
MASTER-FEEDER STRUCTURE
Generally, vote FOR the establishment of a master-feeder structure.
CHANGES TO THE CHARTER DOCUMENT
Vote changes to the charter document on a CASE-BY-CASE basis.
MERGERS
Vote merger proposals on a CASE-BY-CASE basis.
ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
Generally, vote AGAINST shareholder proposals for the establishment of a
director ownership requirement.
REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Voting to reimburse proxy solicitation expenses should be analyzed on a
CASE-BY-CASE basis.
TERMINATE THE INVESTMENT ADVISOR
Vote to terminate the investment advisor on a CASE-BY-CASE basis.
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SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics, including consumer and public safety,
environment and energy, general corporate issues, labor standards and human
rights, military business, and workplace diversity.
In general, vote CASE-BY-CASE. While a wide variety of factors goes into each
analysis, the overall principal guiding all vote recommendations focuses on how
the proposal will enhance the economic value of the company.
GLOBAL PROXIES
While a number of the foregoing Guidelines may be applied to both U.S. and
global proxies, the following provide for the differing regulatory and legal
requirements, market practices and political and economic systems existing in
various global markets.
ROUTINE MANAGEMENT PROPOSALS
Generally, vote FOR the following and other similar routine management
proposals:
- the opening of the shareholder meeting
- that the meeting has been convened under local regulatory requirements
- the presence of quorum
- the agenda for the shareholder meeting
- the election of the chair of the meeting
- the appointment of shareholders to co-sign the minutes of the meeting
- regulatory filings (E.G., to effect approved share issuances)
- the designation of inspector or shareholder representative(s) of
minutes of meeting
- the designation of two shareholders to approve and sign minutes of
meeting
- the allowance of questions
- the publication of minutes
- the closing of the shareholder meeting
DISCHARGE OF MANAGEMENT/SUPERVISORY BOARD MEMBERS
Generally, vote FOR management proposals seeking the discharge of management and
supervisory board members, unless there is concern about the past actions of the
company's auditors or directors or legal action is being taken against the board
by other shareholders.
DIRECTOR REMUNERATION
Consider director compensation plans on a CASE-BY-CASE basis. Generally, vote
FOR proposals to approve the remuneration of directors as long as the amount is
not excessive and there is no evidence of abuse.
APPROVAL OF FINANCIAL STATEMENTS AND DIRECTOR AND AUDITOR REPORTS
Generally, vote FOR management proposals seeking approval of financial accounts
and reports, unless there is concern about the company's financial accounts and
reporting.
REMUNERATION OF AUDITORS
Generally, vote FOR proposals to authorize the board to determine the
remuneration of auditors, unless there is evidence of excessive compensation
relative to the size and nature of the company.
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INDEMNIFICATION OF AUDITORS
Generally, vote AGAINST proposals to indemnify auditors.
ALLOCATION OF INCOME AND DIVIDENDS
Generally, vote FOR management proposals concerning allocation of income and the
distribution of dividends, unless the amount of the distribution is consistently
and unusually small or large.
STOCK (SCRIP) DIVIDEND ALTERNATIVES
Generally, vote FOR most stock (scrip) dividend proposals, but vote AGAINST
proposals that do not allow for a cash option unless management demonstrates
that the cash option is harmful to shareholder value.
DEBT ISSUANCE REQUESTS
When evaluating a debt issuance request, the issuing company's present financial
situation is examined. The main factor for analysis is the company's current
debt-to-equity ratio, or gearing level. A high gearing level may incline markets
and financial analysts to downgrade the company's bond rating, increasing its
investment risk factor in the process. A gearing level up to 100 percent is
considered acceptable.
Generally, vote FOR debt issuances for companies when the gearing level is
between zero and 100 percent. Review on a CASE-BY-CASE basis proposals where the
issuance of debt will result in the gearing level being greater than 100
percent, comparing any such proposed debt issuance to industry and market
standards.
FINANCING PLANS
Generally, vote FOR the adoption of financing plans if they are in the best
economic interests of shareholders.
RELATED PARTY TRANSACTIONS
Consider related party transactions on a CASE-BY-CASE basis. Generally, vote FOR
approval of such transactions unless the agreement requests a strategic move
outside the company's charter or contains unfavorable terms.
CAPITALIZATION OF RESERVES
Generally, vote FOR proposals to capitalize the company's reserves for bonus
issues of shares or to increase the par value of shares.
ARTICLE AMENDMENTS
Review on a CASE-BY-CASE basis all proposals seeking amendments to the articles
of association.
Generally, vote FOR an article amendment if:
- it is editorial in nature;
- shareholder rights are protected;
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- there is negligible or positive impact on shareholder value;
- management provides adequate reasons for the amendments; and
- the company is required to do so by law (if applicable).
62