As filed with the Securities and Exchange Commission on June 30, 2005
Securities Act File No. 333-61831
Investment Company Act File No. 811-05410
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
Registration Statement Under The Securities Act Of 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 14 /X/
and/or
Registration Statement Under The Investment Company Act Of 1940 /X/
Amendment No. 61 /X/
(Check appropriate box or boxes)
ING PRIME RATE TRUST
(Exact Name of Registrant Specified in Charter)
7337 E. Doubletree Ranch Road
Scottsdale, AZ 85258
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (800) 992-0180
Huey P. Falgout, Jr. With copies to:
ING Investments, LLC Jeffrey S. Puretz, Esq.
7337 East Doubletree Ranch Road Dechert LLP
Scottsdale, AZ 85258 1775 I Street, NW
(Name and Address of Agent for Service) Washington, DC 20006
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APPROXIMATE DATE OF PROPOSED OFFERING:
As soon as practical after the effective date of this Registration Statement
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box. /X/
It is proposed that this filing will become effective:
/X/ When declared effective pursuant to Section 8(c) of the Securities Act of
1933.
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ING PRIME RATE TRUST (25 MILLION)
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement consists of the following papers and documents:
- Cover Sheet
- Contents of Registration Statement
- Supplement dated July 1, 2005.
- ING Prime Rate Trust (25 Million Common Shares) Prospectus dated
July 1, 2005.
- ING Prime Rate Trust Statement of Additional Information dated
July 1, 2005.
- Part C
- Signature Page
ING PRIME RATE TRUST ("REGISTRANT")
Supplement dated July 1, 2005
To the ING Prime Rate Trust Prospectuses
Dated July 1, 2005
The following is added to the current Prospectuses of the above listed
Registrant;
INFORMATION REGARDING TRADING OF ING'S U.S. MUTUAL FUNDS
ING Investments, LLC ("Investments"), the adviser to the ING Funds, has reported
to the Boards of Directors/Trustees (the "Board") of the ING Funds that, like
many U.S. financial services companies, Investments and certain of its U.S.
affiliates have received informal and formal requests for information since
September 2003 from various governmental and self-regulatory agencies in
connection with investigations related to mutual funds and variable insurance
products. Investments has advised the Board that it and its affiliates have
cooperated fully with each request.
In addition to responding to regulatory and governmental requests, Investments
reported that management of U.S. affiliates of ING Groep N.V., including
Investments (collectively, "ING"), on their own initiative, have conducted,
through independent special counsel and a national accounting firm, an extensive
internal review of trading in ING insurance, retirement, and mutual fund
products. The goal of this review was to identify any instances of inappropriate
trading in those products by third parties or by ING investment professionals
and other ING personnel. ING's internal review related to mutual fund trading is
now substantially completed. ING has reported that, of the millions of customer
relationships that ING maintains, the internal review identified several
isolated arrangements allowing third parties to engage in frequent trading of
mutual funds within ING's variable insurance and mutual fund products, and
identified other circumstances where frequent trading occurred, despite measures
taken by ING intended to combat market timing. ING further reported that each of
these arrangements has been terminated and fully disclosed to regulators. The
results of the internal review were also reported to the independent members of
the Board.
Investments has advised the Board that most of the identified arrangements were
initiated prior to ING's acquisition of the businesses in question in the U.S.
Investments further reported that the companies in question did not receive
special benefits in return for any of these arrangements, which have all been
terminated.
Based on the internal review, Investments has advised the Board that the
identified arrangements do not represent a systemic problem in any of the
companies that were involved.
More specifically, Investments reported to the Board that, at this time, these
instances include the following:
- ING has identified three arrangements, dating from 1995, 1996 and 1998,
under which the administrator to the then-Pilgrim Funds, which subsequently
became part of the ING Funds, entered formal and informal arrangements that
permitted frequent trading. ING Funds Distributor, LLC ("IFD") has received
a notice from the staff of the NASD informing IFD that it has made a
preliminary determination to recommend that disciplinary action be brought
against IFD and one of its registered persons for violations of the NASD
Conduct Rules and certain provisions of the federal securities laws in
connection with these arrangements. As permitted under NASD procedures, IFD
may respond to the NASD staff before the staff makes a final
recommendation.
- Aeltus Investment Management, Inc. (a predecessor entity to ING Investment
Management Co.) has identified two investment professionals who engaged in
extensive frequent trading in certain ING Funds. One was subsequently
terminated for cause and incurred substantial financial penalties in
connection with this conduct and the second has been disciplined.
- ReliaStar Life Insurance Company ("ReliaStar") entered into agreements
seven years ago permitting the owner of policies issued by the insurer to
engage in frequent trading and to submit orders until 4pm Central Time. In
2001 ReliaStar also entered into a selling agreement with a broker-dealer
that engaged in frequent trading. Employees of ING affiliates were
terminated and/or disciplined in connection with these matters.
- In 1998, Golden American Life Insurance Company entered into arrangements
permitting a broker-dealer to frequently trade up to certain specific
limits in a fund available in an ING variable annuity product. No employee
responsible for this arrangement remains at the company.
For additional information regarding these matters, you may consult the Form 8-K
for each of four life insurance companies, ING USA Annuity and Life Insurance
Company, ING Life Insurance and Annuity Company, ING Insurance Company of
America, and ReliaStar Life Insurance Company of New York, each filed with the
Securities and Exchange Commission (the "SEC") on September 9, 2004. These Forms
8-K can be accessed through the SEC's Web site at http://www.sec.gov. Despite
the extensive internal review conducted through independent special counsel and
a national accounting firm, there can be no assurance that the instances of
inappropriate trading reported to the Board are the only instances of such
trading respecting the ING Funds.
Investments reported to the Board that ING is committed to conducting its
business with the highest standards of ethical conduct with zero tolerance for
noncompliance. Accordingly, Investments advised the Board that ING management
was disappointed that its voluntary internal review identified these situations.
Viewed in the context of the breadth and magnitude of its U.S. business as a
whole, ING management does not believe that ING's acquired companies had
systemic ethical or compliance issues in these areas. Nonetheless, Investments
reported that given ING's refusal to tolerate any lapses, it has
2
taken the steps noted below, and will continue to seek opportunities to further
strengthen the internal controls of its affiliates.
- ING has agreed with the ING Funds to indemnify and hold harmless the ING
Funds from all damages resulting from wrongful conduct by ING or its
employees or from ING's internal investigation, any investigations
conducted by any governmental or self-regulatory agencies, litigation or
other formal proceedings, including any proceedings by the Securities and
Exchange Commission. Investments reported to the Board that ING management
believes that the total amount of any indemnification obligations will not
be material to ING or its U.S. business.
- ING updated its Code of Conduct for employees reinforcing its employees'
obligation to conduct personal trading activity consistent with the law,
disclosed limits, and other requirements.
- The ING Funds, upon a recommendation from ING, updated their respective
Codes of Ethics applicable to investment professionals with ING entities
and certain other fund personnel, requiring such personnel to pre-clear any
purchases or sales of ING Funds that are not systematic in nature (i.e.,
dividend reinvestment), and imposing minimum holding periods for shares of
ING Funds.
- ING instituted excessive trading policies for all customers in its variable
insurance and retirement products and for shareholders of the ING Funds
sold to the public through financial intermediaries. ING does not make
exceptions to these policies.
- ING reorganized and expanded its U.S. Compliance Department, and created an
Enterprise Compliance team to enhance controls and consistency in
regulatory compliance.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
3
[GRAPHIC]
PROSPECTUS
PROSPECTUS
JULY 1, 2005
25,000,000 COMMON SHARES
ING PRIME RATE TRUST
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE ING PRIME RATE
TRUST ("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 ("SEC") A
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 2005 ("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 EAST
DOUBLETREE RANCH ROAD, SCOTTSDALE, ARIZONA 85258. IN ADDITION, THE TRUST MAKES
AVAILABLE ITS SAI AND ANNUAL AND SEMI-ANNUAL REPORTS, FREE OF CHARGE, ON ITS
WEBSITE AT www.ingfunds.com. THE PROSPECTUS, SAI AND OTHER INFORMATION ABOUT THE
TRUST ARE ALSO 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" ON PAGES 4 AND 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 LOGO]
WHAT'S INSIDE
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[GRAPHIC]
INVESTMENT OBJECTIVE
[GRAPHIC]
PRINCIPAL INVESTMENT STRATEGIES
[GRAPHIC]
RISKS
[GRAPHIC]
WHAT YOU PAY TO INVEST
This Prospectus describes the Trust's investment objective, principal investment
strategies and risks.
You'll also find:
WHAT YOU PAY TO INVEST.
A list of the fees and expenses you pay -- both directly and indirectly -- when
you invest in the Trust.
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
(THIS PAGE INTENTIONALLY LEFT BLANK)
INTRODUCTION TO THE TRUST
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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 BE A SUITABLE INVESTMENT 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.
[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" on pages 4 and 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 investment
professional or us at (800) 992-0180.
[GRAPHIC]
If you have any questions, please call (800) 992-0180.
Introduction to the Trust 1
PROSPECTUS SYNOPSIS
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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 ("1940 Act"). It was
organized as a Massachusetts business trust on December
2, 1987. As of June 15, 2005, the Trust's net asset
value ("NAV") per Common Share was $7.33.
NYSE LISTED As of June 15, 2005, the Trust had 145,033,235 Common
Shares outstanding, which are traded on the NYSE under
the symbol PPR. At that date, the last reported sales
price of a Common Share of the Trust was $7.04.
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 The Trust's investment manager is ING Investments, LLC
MANAGER/SUB-ADVISER ("ING Investments" or "Investment Manager"), an Arizona
limited liability company. The Investment Manager had
assets under management of over $37.3 billion as of
March 31, 2005.
The Investment Manager is an indirect wholly-owned
subsidiary of ING Groep N.V. (NYSE: ING) ("ING Groep").
ING Groep is one of the largest financial services
organizations in the world with approximately 113,000
employees. Based in Amsterdam, ING Groep offers an
array of banking, insurance and asset management
services to both individual and institutional
investors.
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.
ING Investment Management Co. ("ING IM" or
"Sub-Adviser") serves as sub-adviser to the Trust. See
"Investment Management and Other Service Providers --
Sub-Adviser" on page 23. ING IM 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.
PRINCIPAL INVESTMENT The Trust seeks to achieve its investment objective by
STRATEGY 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
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OTHER INVESTMENT Assets not invested in Senior Loans may be invested in
STRATEGIES AND POLICIES 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 until the 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. The timing and terms of
leverage will be determined by the Trust's Board of
Trustees ("Board") in consultation with the Investment
Manager or Sub-Adviser. 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 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 ("Preferred Shares"). The Trust's
obligations to holders of the Preferred Shares are
senior to its ability to pay dividends on, 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.
[GRAPHIC]
If you have any questions, please call (800) 992-0180.
Prospectus Synopsis 3
PROSPECTUS SYNOPSIS
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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 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 pages 21 and
22.
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 pages 21 and 22.
ADMINISTRATOR The Trust's administrator is ING Funds Services, LLC
("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 SENIOR The Trust invests a substantial portion of its assets
LOANS in below investment grade senior loans and other below
investment grade assets. Below investment grade loans
involve a greater risk that borrowers may not make
timely payment of the interest and principal due on
their loans. They also involve a greater risk that the
value of such loans could decline significantly. If
borrowers do not make timely payments of the interest
due on their loans, the yield on the Trust's Common
Shares will decrease. If borrowers do not make timely
payment of the principal due on their loans, or if the
value of such loans decreases, the Trust's NAV will
decrease.
4 Prospectus Synopsis
PROSPECTUS SYNOPSIS
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INTEREST RATE RISK Changes in short-term market interest rates will
directly affect the yield on the Trust's Common Shares.
If short-term market interest rates fall, the yield on
the Trust's Common Shares will also fall. To the extent
that the interest rate spreads on loans in the Trust's
portfolio experience a general decline, the yield on
the Trust's Common Shares will fall and the value of
the Trust's assets may decrease, which will cause the
Trust's NAV to decrease. Conversely, when short-term
market interest rates rise, because of the lag between
changes in such short-term rates and the resetting of
the floating rates on assets in the Trust's portfolio,
the impact of rising rates will be delayed to the
extent of such lag.
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, 2005,
the Trust had $507 million of borrowings outstanding
under two credit facilities totaling $625, and $450
million of Preferred Shares issued and outstanding.
LIMITED SECONDARY Because of the limited secondary market for loans, the
MARKET FOR LOANS 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 The issuance of Common Shares through the Shareholder
INVESTMENT PROGRAM AND Investment Program and/or through privately negotiated
PRIVATELY NEGOTIATED transactions may have an adverse effect on prices in
TRANSACTIONS 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.
[GRAPHIC]
If you have any questions, please call (800) 992-0180.
Prospectus Synopsis 5
WHAT YOU PAY TO INVEST -- TRUST EXPENSES
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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
Maximum Sales Load on Your Investment (as a percentage of offering price) 3.00%
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES)
Management and Administrative Fees(1) 2.01%
Interest Expense on Borrowed Funds 1.44%
Other Operating Expenses(2) 0.36%
Total Annual Expenses(3) 3.81%
(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 July 1, 2006, and do 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 1.99%.
6 What You Pay to Invest -- Trust Expenses
WHAT YOU PAY TO INVEST -- TRUST EXPENSES
--------------------------------------------------------------------------------
EXAMPLES
The following hypothetical Examples show 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 examples assume that all dividends and
other distributions are reinvested at NAV and that the percentage amounts listed
under Total Annual Expenses remain the same in the years shown. The tables and
the assumption in the hypothetical examples of a 5% annual return are required
by regulations 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."
Example #1
The following Example applies to shares issued in connection with the Trust's
Shareholder Investment Program. This example does not take into account whether
such shares are purchased at a discount or a premium to the Trust's NAV.
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 $ 39 $ 119 $ 204 $ 437
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where the
Trust has not borrowed $ 19 $ 59 $ 101 $ 219
Example #2
The following Example applies to shares issued in connection with privately
negotiated transactions, which have the maximum front-end sales load of 3%.
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 $ 67 $ 146 $ 228 $ 454
You would pay the following expenses on a $1,000
investment, assuming a 5% annual return and where the
Trust has not borrowed $ 48 $ 87 $ 128 $ 242
The purpose of the above tables is to assist you in understanding the various
costs and expenses that an investor in the Trust will bear directly or
indirectly.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
[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
28, 2005. The information in the table below has been audited by KPMG LLP, an
independent registered public accounting firm. A report of the Trust's
independent registered public accounting firm along with the Trust's financial
statements is included in the Trust's Annual Report dated as of February 28,
2005. A free copy of the Annual Report may be obtained by calling (800)
992-0180.
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
-----------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 7.34 6.73 7.20
Income from investment operations:
Net investment income $ 0.45 0.46 0.50
Net realized and unrealized gain (loss) on investments $ 0.16 0.61 (0.47)
Total from investment operations $ 0.61 1.07 0.03
Increase (decrease) in net asset value from investment operations $ -- -- --
Distributions to Common Shareholders from net investment income $ (0.43) (0.42) (0.45)
Distribution to Preferred Shareholders $ (0.05) (0.04) (0.05)
Reduction in net asset value from Preferred Shares offerings $ -- -- --
Net asset value, end of year $ 7.47 7.34 6.73
Closing market price at end of period $ 7.56 7.84 6.46
Total Investment Return(1)
Total investment return at closing market price(2) % 2.04 28.77 2.53
Total investment return at net asset value(3) % 7.70 15.72 0.44
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 1,082,748 1,010,325 922,383
Preferred Shares-Aggregate amount outstanding (000's) $ 450,000 450,000 450,000
Liquidation and market value per share of Preferred Shares $ 25,000 25,000 25,000
Borrowings at end of year (000's) $ 496,000 225,000 167,000
Asset coverage per $1,000 of debt(4) $ 2,140 2,500 2,500
Average borrowings (000's) $ 414,889 143,194 190,671
RATIOS TO AVERAGE NET ASSETS INCLUDING PREFERRED SHARES(5)
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.60 1.45 1.49
Expenses % -- -- --
Net expenses after expense reimbursement(6) % 2.21 1.65 1.81
Gross expenses prior to expense reimbursement(6) % 2.22 1.65 1.81
Net investment income(6) % 4.21 4.57 4.97
RATIOS TO AVERAGE NET ASSETS PLUS BORROWINGS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.63 1.84 1.82
Expenses % -- -- --
Net expenses after expense reimbursement(6) % 2.26 2.09 2.23
Gross expenses prior to expense reimbursement(6) % 2.27 2.09 2.23
Net investment income(6) % 4.32 5.82 6.10
RATIOS TO AVERAGE NET ASSETS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 2.29 2.11 2.19
Expenses % -- -- --
Net expenses after expense reimbursement(6) % 3.17 2.40 2.68
Gross expenses prior to expense reimbursement(6) % 3.18 2.40 2.68
Net investment income(6) % 6.04 6.68 7.33
Portfolio turnover rate % 93 87 48
Common shares outstanding at end of period (000's) 145,033 137,638 136,973
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
-----------------------------------------
2002 2001
------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 8.09 8.95
Income from investment operations:
Net investment income $ 0.74 0.88
Net realized and unrealized gain (loss) on investments $ (0.89) (0.78)
Total from investment operations $ (0.15) 0.10
Increase (decrease) in net asset value from investment operations $ -- --
Distributions to Common Shareholders from net investment income $ (0.63) (0.86)
Distribution to Preferred Shareholders $ (0.11) (0.06)
Reduction in net asset value from Preferred Shares offerings $ -- (0.04)
Net asset value, end of year $ 7.20 8.09
Closing market price at end of period $ 6.77 8.12
Total Investment Return(1)
Total investment return at closing market price(2) % (9.20) 9.10
Total investment return at net asset value(3) % (3.02) 0.19
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 985,982 1,107,432
Preferred Shares-Aggregate amount outstanding (000's) $ 450,000 450,000
Liquidation and market value per share of Preferred Shares $ 25,000 25,000
Borrowings at end of year (000's) $ 282,000 510,000
Asset coverage per $1,000 of debt(4) $ 2,350 2,150
Average borrowings (000's) $ 365,126 450,197
RATIOS TO AVERAGE NET ASSETS INCLUDING PREFERRED SHARES(5)
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.57 1.62
Expenses % -- --
Net expenses after expense reimbursement(6) % 2.54 3.97
Gross expenses prior to expense reimbursement(6) % 2.54 3.97
Net investment income(6) % 6.83 9.28
RATIOS TO AVERAGE NET ASSETS PLUS BORROWINGS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.66 1.31
Expenses % -- --
Net expenses after expense reimbursement(6) % 2.70 3.21
Gross expenses prior to expense reimbursement(6) % 2.70 3.21
Net investment income(6) % 7.24 7.50
RATIOS TO AVERAGE NET ASSETS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 2.25 1.81
Expenses % -- --
Net expenses after expense reimbursement(6) % 3.64 4.45
Gross expenses prior to expense reimbursement(6) % 3.64 4.45
Net investment income(6) % 9.79 10.39
Portfolio turnover rate % 53 46
Common shares outstanding at end of period (000's) 136,973 136,847
8 Financial Highlights
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
-----------------------------------------------------
2000(7) 1999(7) 1998(7)
-----------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.24 9.34 9.45
Income from investment operations:
Net investment income $ 0.79 0.79 0.87
Net realized and unrealized gain (loss) on investments $ (0.30) (0.10) (0.13)
Total from investment operations $ -- -- --
Increase (decrease) in net asset value from investment operations $ 0.49 0.69 0.74
Distributions to Common Shareholders from net investment income $ (0.78) (0.82) (0.85)
Distribution to Preferred Shareholders $ -- 0.03 --
Reduction in net asset value from Preferred Shares offerings $ -- -- --
Net asset value, end of year $ 8.95 9.24 9.34
Closing market price at end of period $ 8.25 9.56 10.31
Total Investment Return(1)
Total investment return at closing market price(2) % (5.88) 1.11 12.70
Total investment return at net asset value(3) % 5.67 7.86 8.01
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 1,217,339 1,202,565 1,034,403
Preferred Shares-Aggregate amount outstanding (000's) $ -- -- --
Liquidation and market value per share of Preferred Shares $ -- -- --
Borrowings at end of year (000's) $ 484,000 534,000 --
Asset coverage per $1,000 of debt(4) $ 3,520 3,250 --
Average borrowings (000's) $ 524,019 490,978 346,110
RATIOS TO AVERAGE NET ASSETS INCLUDING PREFERRED SHARES(5)
Expenses (before interest and other fees related to revolving
credit facility)(6) % -- -- --
Expenses % -- -- --
Net expenses after expense reimbursement(6) % -- -- --
Gross expenses prior to expense reimbursement(6) % -- -- --
Net investment income(6) % -- -- --
RATIOS TO AVERAGE NET ASSETS PLUS BORROWINGS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.00(8) 1.05(8) 1.04
Expenses % 2.79(8) 2.86(8) 2.65
Net expenses after expense reimbursement(6) % -- -- --
Gross expenses prior to expense reimbursement(6) % -- -- --
Net investment income(6) % 6.12 6.00 6.91
RATIOS TO AVERAGE NET ASSETS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.43(8) 1.50(8) 1.39
Expenses % 4.00(8) 4.10(8) 3.54
Net expenses after expense reimbursement(6) % -- -- --
Gross expenses prior to expense reimbursement(6) % -- -- --
Net investment income(6) % 8.77 8.60 9.23
Portfolio turnover rate % 71 68 90
Common shares outstanding at end of period (000's) 136,036 130,206 110,764
YEARS ENDED FEBRUARY 28 OR FEBRUARY 29,
----------------------------------------
1997(7) 1996(10)
----------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 9.61 9.66
Income from investment operations:
Net investment income $ 0.82 0.89
Net realized and unrealized gain (loss) on investments $ (0.02) (0.08)
Total from investment operations $ -- --
Increase (decrease) in net asset value from investment operations $ 0.80 0.81
Distributions to Common Shareholders from net investment income $ (0.82) (0.86)
Distribution to Preferred Shareholders $ -- --
Reduction in net asset value from Preferred Shares offerings $ (0.14) --
Net asset value, end of year $ 9.45 9.61
Closing market price at end of period $ 10.00 9.50
Total Investment Return(1)
Total investment return at closing market price(2) % 15.04(9) 19.19
Total investment return at net asset value(3) % 8.06(9) 9.21
RATIOS/SUPPLEMENTAL DATA
Net assets end of year (000's) $ 1,031,089 862,938
Preferred Shares-Aggregate amount outstanding (000's) $ -- --
Liquidation and market value per share of Preferred Shares $ -- --
Borrowings at end of year (000's) $ -- --
Asset coverage per $1,000 of debt(4) $ -- --
Average borrowings (000's) $ 131,773 --
RATIOS TO AVERAGE NET ASSETS INCLUDING PREFERRED SHARES(5)
Expenses (before interest and other fees related to revolving
credit facility)(6) % -- --
Expenses % -- --
Net expenses after expense reimbursement(6) % -- --
Gross expenses prior to expense reimbursement(6) % -- --
Net investment income(6) % -- --
RATIOS TO AVERAGE NET ASSETS PLUS BORROWINGS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.13 --
Expenses % 1.92 --
Net expenses after expense reimbursement(6) % -- --
Gross expenses prior to expense reimbursement(6) % -- --
Net investment income(6) % 7.59 --
RATIOS TO AVERAGE NET ASSETS
Expenses (before interest and other fees related to revolving
credit facility)(6) % 1.29 --
Expenses % 2.20 1.23
Net expenses after expense reimbursement(6) % -- --
Gross expenses prior to expense reimbursement(6) % -- --
Net investment income(6) % 8.67 9.23
Portfolio turnover rate % 82 88
Common shares outstanding at end of period (000's) 109,140 89,794
(1) Total investment return calculations are attributable to common shares.
(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 Trust's
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) 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.
(5) Ratios do not reflect the effect of dividend payments to Preferred
Shareholders; income ratios reflect income earned on assets attributable to
the Preferred Shares.
(6) Annualized for periods less than one year.
(7) 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.
(8) Calculated on total expenses before impact of earnings credits.
(9) 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.
(10) 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.
[GRAPHIC]
If you have any questions, please call (800) 992-0180.
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, 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
June 30, 2004 8.340 7.670 7.41 7.33 13.47 4.07 15,627,844
September 30, 2004 8.150 7.560 7.42 7.35 10.48 2.58 12,768,704
December 31, 2004 7.950 7.240 7.42 7.35 8.16 (2.44) 17,125,504
March 31, 2005 7.830 7.160 7.48 7.38 5.67 (3.49) 13,877,317
On June 15, 2005, the last reported sale price of a Common Share of the Trust's
Common Shares on the NYSE was $7.04. The Trust's NAV on June 15, 2005 was $7.33.
See "Transaction Policies -- Net Asset Value." On June 15, 2005 the last
reported sale price of a share of the Trust's Common Shares on the NYSE ($7.04)
represented a 3.956% discount below NAV ($7.33) 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
typically 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 may also make its investments in
Senior Loans through the use of derivative instruments such as
participations, credit-linked notes, credit default swaps and total return
swaps as long as the reference obligation for any such instrument is a
Senior Loan. Investments through the use of such derivative instruments
involve counter party risk, I.E., the risk that the party from which such
instrument is purchased will not perform as agreed. The Trust seeks to
minimize such counter party risk by purchasing such investments only from
large, well established and highly rated counter parties.
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
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Investment Objective and Policies 11
INVESTMENT OBJECTIVE AND POLICIES
--------------------------------------------------------------------------------
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 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 33 1/3%, 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.
Senior loans are typically structured to include two or more types of loans
within a single credit agreement. The most common structure is to have a
revolving loan and a term loan. A revolving loan is a loan that can be drawn
upon, repaid fully or partially, and then the repaid portions can be drawn upon
again. A term loan is a loan that is fully drawn upon immediately and once
repaid it cannot be drawn upon again. Sometimes there may be two or more term
loans, and they may be secured by different collateral and have different
repayment schedules and maturity dates. In addition to revolving loans and term
loans, senior loan structures can also contain facilities for the issuance of
letters of credit, and may contain mechanisms for lenders to pre-fund letters of
credit through credit-linked deposits.
The Trust typically invests only in the term loan portions of Senior Loan
structures, although it does sometimes invest in the revolving loan portions and
the pre-funded letters of credit portions.
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 Federal Deposit Insurance Corporation ("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 typically 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 a Senior Loan in the primary market, it may share in a fee paid
to the original lender. When the Trust purchases a Senior Loan in the secondary
market, it may pay a fee to, or forego a portion of interest payments from, the
lender making
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The Trust's Investments 13
THE TRUST'S INVESTMENTS
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the assignment. The Trust may also make its investments in Senior Loans through
the use of derivative instruments such as participations, credit-linked notes,
credit default swaps and total return swaps as long as the reference obligation
for any such instrument is a Senior Loan. Investments through the use of such
derivative instruments involve counter party risk, I.E., the risk that the party
from which such instrument is purchased will not perform as agreed. The Trust
seeks to minimize such counter party risk by purchasing such investments only
from large, well established and highly rated counter parties.
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 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
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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
Investors Service ("Moody's") or "BBB" by Standard and Poor's Corporation
("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.
PRE-PAYMENT RISK
If a senior loan in which the Trust invests is paid off sooner than scheduled,
and interest rates are falling, the Trust will be forced to reinvest this money
at lower yields.
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. 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.
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Risk Factors and Special Considerations 15
RISK FACTORS AND SPECIAL CONSIDERATIONS
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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.
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 33 1/3% (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, 2005) is 3.46%. The current dividend rate on the Preferred Shares
(as of June 15, 2005) is 3.00%. 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 1.59% on its amount of Managed Assets as of June 15, 2005.
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
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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) 0.48%
Total Annual Expenses 1.53%
(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 28, 2005, 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 3.01%, 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) (14.34%) (7.67%) (1.00%) 5.66% 12.33%
(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."
[GRAPHIC]
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Risk Factors and Special Considerations 17
RISK FACTORS AND SPECIAL CONSIDERATIONS
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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 33 1/3% 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
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CALL RISK
During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the Fund
to reinvest in lower yielding securities. This is known as call or prepayment
risk. Lower-grade securities frequently have call features that allow the issuer
to repurchase the security prior to its stated maturity. An issuer may redeem a
lower-grade obligation if the issuer can refinance the debt at a lower cost due
to declining interest rates or an improvement in the credit standing of the
issuer.
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 $625 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, 2005, the Trust had outstanding borrowings under the
credit facilities of approximately $507 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.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Risk Factors and Special Considerations 19
TRANSACTION POLICIES
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NET ASSET VALUE
The NAV per Common Share of the Trust is determined each business day as of the
close of regular trading ("market close") on the New York Stock Exchange
("NYSE") (normally 4:00 p.m. Eastern time unless otherwise designated by the
NYSE). 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, Proxy and Brokerage Committee (formerly the 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
20 Transaction Policies
TRANSACTION POLICIES
--------------------------------------------------------------------------------
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.
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 promise 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
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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 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 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
[GRAPHIC]
If you have any questions, please call (800) 992-0180.
Transaction Policies 21
PLAN OF DISTRIBUTION
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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 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. The Trust will not pay any commissions with regard to
privately negotiated transactions, but an investor may be subject to a front end
sales load of up to 3% paid to or retained by a third party broker-dealer
through which such transaction may be effected.
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, 2005, the Trust's outstanding borrowings under its credit
facilities was $507 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 ("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 registered with the SEC as an investment adviser. ING
Investments is an indirect wholly-owned subsidiary of ING Groep N.V. (NYSE:
ING). ING Groep N.V. is one of the largest financial services organizations in
the world with approximately 113,000 employees. 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,
2005, ING Investments had assets under management of over $37.3 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.
For more information regarding the basis for the Board's approval of the
following investment advisory or sub-advisory relationships, please refer to the
SAI.
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 Trust's Board.
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 "ING IM"), a Connecticut
corporation serves as Sub-Adviser to the Trust. Founded in 1972, ING IM is
registered with the SEC as an investment adviser. ING IM is an indirect
wholly-owned subsidiary of ING Groep, N.V., and is an affiliate of ING
Investments. ING IM has acted as adviser or sub-adviser to mutual funds since
1994 and has managed institutional accounts since 1972.
As of March 31, 2005, ING IM managed approximately $60 billion in assets. Its
principal business address is 230 Park Avenue, New York, NY 10169. For its
services, ING IM is entitled to receive a sub-advisory fee of .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 following individuals comprise the investment
committee of the Trust and share responsibility for the day-to-day management of
the Trust's portfolio:
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 has managed the Trust
since April 1995 and is responsible for the operations, analytics, legal and
marketing areas for the Trust. 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 ING IM 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). Mr. Bakalar has managed the Trust
since January 1998 and is responsible for overseeing the portfolio management of
the Trust. 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 ING IM 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. Mr. Lee has
managed the Trust 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 ING IM that
invests primarily in Senior Loans.
ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGERS
The SAI provides additional information about each portfolio manager's
compensation, other accounts managed by the portfolio manager and each portfolio
manager's ownership of securities in the Trust.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Investment Management and Other Service Providers 23
INVESTMENT MANAGEMENT AND OTHER
SERVICE PROVIDERS
--------------------------------------------------------------------------------
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 N.V. 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 333 W. 11th
Street, 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,
2005.
NUMBER HELD BY
NUMBER TRUST FOR ITS NUMBER
TITLE OF CLASS AUTHORIZED OWN ACCOUNT OUTSTANDING
-------------- ---------- ----------- -----------
Common Shares unlimited 0 145,033,235
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 Shares and any other preferred shares will not be able to elect any of
such Trustees.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Description of the Trust 25
DESCRIPTION OF THE TRUST
--------------------------------------------------------------------------------
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
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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 Considerations -- 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.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
Description of Capital Structure 27
TAX MATTERS
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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.
Current tax law generally provides for a maximum tax rate for individual
taxpayers of 15% on long-term capital gains and from certain qualifying
dividends on corporate stock. These rate reductions do not apply to corporate
taxpayers or to foreign shareholders. The following are guidelines for how
certain distributions by the Fund are generally taxed to individual taxpayers:
- Distributions of earnings from qualifying dividends and qualifying
long-term capital gains will be taxed at a maximum rate of 15%.
- Note that distributions of earnings from dividends paid by certain
"qualified foreign corporations" can also qualify for the lower tax rates
on qualifying dividends.
- A shareholder will also have to satisfy a more than 60-day holding period
with respect to any distributions of qualifying dividends in order to
obtain the benefit of the lower tax rate.
- Distributions of earnings from non-qualifying dividends interest income,
other types of ordinary income and short-term capital gains will be taxed
at the ordinary income tax rate applicable to the taxpayer.
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 current 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
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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
East Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Funds Distributor,
LLC and ING Investments, LLC, the Trust's investment manager, and ING IM, the
Trust's Sub-Adviser, are indirect, wholly-owned subsidiaries of ING Groep N.V.
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 upon for the
Trust by Dechert LLP, 1775 I Street, NW, Washington, DC, counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP serves as the 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 of 1933, 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.
[GRAPHIC]
If you have any questions, please call 1-800-992-0180.
More Information 29
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
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 22
Investment Management and Other Service Providers 24
Plans of Distribution 31
Code of Ethics 33
Portfolio Transactions 33
Net Asset Value 35
Federal Taxation 35
Advertising and Performance Data 40
General Information 42
Financial Statements 42
30 Statement of Additional Information
ING PRIME RATE TRUST
7337 EAST DOUBLETREE RANCH ROAD
SCOTTSDALE, ARIZONA 85258
(800) 992-0180
25,000,000 COMMON SHARES OF BENEFICIAL INTEREST
TRUST ADVISORS AND AGENTS
INVESTMENT MANAGER
ING Investments, LLC
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258
SUB-ADVISER
ING Investment Management Co.
230 Park Avenue
New York, NY 10169
ADMINISTRATOR
ING Funds Services, LLC
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258
CUSTODIAN
State Street Bank and Trust
801 Pennsylvania Avenue
Kansas City, MO 64105
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
355 South Grand Avenue
Los Angeles, CA 90071
DISTRIBUTOR
ING Funds Distributor, LLC
7337 East Doubletree Ranch Road
Scottsdale, AZ 85258
TRANSFER AGENT
DST Systems, Inc.
333 W. 11th Street
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 LOGO] PRPRO-UPRT25M (07/05-07/01/05)
ING PRIME RATE TRUST
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
(800) 992-0180
STATEMENT OF ADDITIONAL INFORMATION
JULY 1, 2005,
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. ("ING IM"
or "Sub-Adviser").
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, 2005. 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 Trust's financial statements and the
independent registered public accounting firm's report thereon included in the
Annual Report dated February 28, 2005, are incorporated herein by reference. A
copy of the Prospectus may be obtained without charge by contacting the Trust at
the address and phone number written above.
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 22
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS 24
PLANS OF DISTRIBUTION 31
CODE OF ETHICS 33
PORTFOLIO TRANSACTIONS 33
NET ASSET VALUE 35
FEDERAL TAXATION 35
ADVERTISING AND PERFORMANCE DATA 40
GENERAL INFORMATION 42
FINANCIAL STATEMENTS 42
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 London Inter-Bank Offered Rate ("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, 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
4
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.
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 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
6
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 LOAN INTERESTS 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 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
7
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.
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
8
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 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.
9
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.
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.
10
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
TRUSTEES AND OFFICERS
MANAGEMENT OF THE TRUST
The Trust is governed by its Board. A trustee who is not an interested
person of the Trust, as defined in the 1940 Act, is an independent trustee
("Independent Trustee"). The Trustees of the Trust are listed below.
NUMBER OF
FUNDS IN
FUND
TERM OF OFFICE COMPLEX
POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) - OVERSEEN BY OTHER DIRECTORSHIPS/TRUSTEESHIPS
NAME, ADDRESS AND AGE WITH TRUST TIME SERVED(1) DURING THE PAST 5 YEARS TRUSTEE(2) HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
JOHN V. BOYER (3) Trustee January 2005 - Executive Director, The 154 None
7337 East Doubletree Present Mark Twain House & Museum
Ranch Rd. Scottsdale, (4) (September 1989 -
Arizona 85258 Present).
Age: 51
J. MICHAEL EARLEY Trustee February 2002 - President and Chief 154 None
7337 East Doubletree Present Executive Officer, Bankers
Ranch Rd. Scottsdale, Trust Company, N.A.
Arizona 85258 (June 1992 - Present).
Age: 60
R. BARBARA GITENSTEIN Trustee February 2002 - President, College of 154 New Jersey Resources (September
7337 East Doubletree Present New Jersey (January 1999 2003 - Present).
Ranch Rd. Scottsdale, - Present).
Arizona 85258
Age: 57
PATRICK W. KENNY (3) Trustee January 2005 - President and Chief 154 Assured Guaranty Ltd. (November
7337 East Doubletree Present Executive Officer, 2003 - Present).
Ranch Rd. Scottsdale, International Insurance
Arizona 85258 Society (June 2001 -
Age: 62 Present); and Formerly,
Executive Vice President,
Frontier Insurance Group,
Inc. (September 1998 -
March 2001).
WALTER H. MAY Trustee November 1999 - Retired. 154 BestPrep (September 1991 -
7337 East Doubletree Present Present).
Ranch Rd. Scottsdale,
Arizona 85258
Age: 68
12
NUMBER OF
FUNDS IN
FUND
TERM OF OFFICE COMPLEX
POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) - OVERSEEN BY OTHER DIRECTORSHIPS/TRUSTEESHIPS
NAME, ADDRESS AND AGE WITH TRUST TIME SERVED(1) DURING THE PAST 5 YEARS TRUSTEE(2) HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
JOCK PATTON Chairman and August 1995 - Private Investor (June 154 JDA Software Group, Inc. (January
7337 East Doubletree Trustee Present 1997 - Present). 1999 - Present); Swift
Ranch Rd. Scottsdale, Formerly, Director and Transportation Co. (March 2004 -
Arizona 85258 Chairman, Chief Executive Officer, Present).
Age: 59 January 2005 - Rainbow Multimedia Group,
Present Inc. (January 1999 -
December 2001).
DAVID W.C. PUTNAM Trustee November 1999 - President and Director, 154 Progressive Capital Accumulation
7337 East Doubletree Present F.L. Putnam Securities Trust (August 1998 - Present);
Ranch Rd. Scottsdale, Company, Inc.(June 1978 - Principled Equity Market Trust
Arizona 85258 Present). (November 1996 - Present); Mercy
Age: 65 Endowment Foundation (September
1995 - Present); Asian American
Bank and Trust Company (June 1992
- Present); and Notre Dame Health
Care Center (July 1991 -
Present).
ROGER B. VINCENT Trustee February 2002 - President, Springwell 154 AmeriGas Propane, Inc. (January
7337 East Doubletree Present Corporation (March 1989 - 1998 - Present).
Ranch Rd. Scottsdale, Present).
Arizona 85258
Age: 59
RICHARD A. WEDEMEYER Trustee February 2001 - Retired. Formerly, Vice 154 Touchstone Consulting Group (June
7337 East Doubletree Present President - Finance and 1997 - Present); and Jim Henson
Ranch Rd. Scottsdale, Administration, The Legacy (April 1994 - Present).
Arizona 85258 Channel Corporation (June
Age: 69 1996 - April 2002); and
Trustee, First Choice
Funds (February 1997 -
April 2001).
TRUSTEES WHO ARE "INTERESTED PERSONS"
THOMAS J. MCINERNEY Trustee February 2001 - Chief Executive Officer, 199 Equitable Life Insurance Co.,
(5)(6) Present ING U.S. Financial Golden American Life Insurance
7337 East Doubletree Services (January 2005 - Co., Life Insurance Company of
Ranch Rd. Scottsdale, Present). Formerly, Georgia, Midwestern United
Arizona 85258 General Manager and Chief Life Insurance Co., ReliaStar
Age: 49 Executive Officer, U.S. Life Insurance Co., Security
Financial Services Life of Denver, Security
(December 2003 - December Connecticut Life Insurance
2004); Chief Executive Co., Southland Life Insurance
Officer, ING U.S. Co., USG Annuity and Life
Financial Services Company, and United Life and
(September 2001 - Annuity Insurance Co. Inc;
December 2003); and Ameribest Life Insurance Co.;
General Manager and Chief First Columbine Life Insurance
Executive Officer, U.S. Co.; and Metro Atlanta Chamber
Worksite Financial of Commerce (January 2003 -
Services (December 2000 - Present).
September 2001).
JOHN G. TURNER(5) Trustee September 2000 Chairman, Hillcrest 154 Hormel Foods Corporation (March
7337 East Doubletree - Present Capital Partners (May 2000 - Present); ShopKo Stores,
Ranch Rd. 2002-Present); Formerly, Inc. (August
Vice Chairman of ING
Americas
13
NUMBER OF
FUNDS IN
FUND
TERM OF OFFICE COMPLEX
POSITION(S) HELD AND LENGTH OF PRINCIPAL OCCUPATION(S) - OVERSEEN BY OTHER DIRECTORSHIPS/TRUSTEESHIPS
NAME, ADDRESS AND AGE WITH TRUST TIME SERVED(1) DURING THE PAST 5 YEARS TRUSTEE(2) HELD BY TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
Scottsdale, (2000 - 2002); Chairman 1999 - Present); and Conseco,
Arizona 85258 and Chief Executive Inc. (September 2003 - Present).
Age: 65 Officer of ReliaStar
Financial Corp. and
ReliaStar Life Insurance
Company (1993 - 2000);
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).
(1) Trustees are considered for election by shareholders on an annual basis and
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
Investment Company Act of 1940 ("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 retirment 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 case the
extension would apply until such time as the shareholder meeting can be
held or is no longer needed.
(2) For the purposes of this table, "Fund Complex" means the following
investment companies: ING Equity Trust; ING Funds Trust; ING Global Equity
Dividend and Premium Opportunity Fund; 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; and ING Partners, Inc.
(3) Commenced service as a Trustee on January 1, 2005. Prior to January 1,
2005, Messrs. Boyer and Kenny were members of the board of directors of ING
Partners, Inc. On January 1, 2005, the ING Partners, Inc. board of
directors was unified with the board of the other Funds in the ING Complex
of Funds.
(4) Shaun Mathews, Senior Vice President of ILIAC, has held a seat on the board
of directors of The Mark Twain House & Museum since September 19, 2002. ING
Groep N.V. makes non-material, charitable contributions to The Mark Twain
House & Museum.
(5) Mr. McInerney and Mr. Turner are deemed to be an "interested person," as
defined by the 1940 Act, because of their affiliation with ING Groep N.V.,
the parent corporation of the investment adviser, ING Investments and the
Distributor, ING Funds Distributor, LLC.
(6) Mr. McInerney is also a Trustee of the following investment companies: 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:
POSITIONS HELD WITH THE TERM OF OFFICE AND LENGTH OF PRINCIPAL OCCUPATION(S) DURING THE LAST
NAME, ADDRESS AND AGE TRUST TIME SERVED (1) FIVE YEARS
------------------------------------------------------------------------------------------------------------------------------------
JAMES M. HENNESSY President and Chief February 2001 - Present President and Chief Executive Officer,
7337 East Doubletree Ranch Rd. Executive Officer ING Investments, LLC(2) (December 2000 -
Scottsdale, Arizona 85258 Present). Formerly, Senior Executive
Age: 56 Chief Operating Officer July 2000 - Present Vice President and Chief Operating
Officer, ING Investments, LLC(2) (April
1995 - December 2000); and Executive Vice
President, ING Investments, LLC(2) (May
1998 - June 2000).
STANLEY D. VYNER Executive Vice President August 2003 - Present Executive Vice President, ING
7337 East Doubletree Ranch Rd. Investments, LLC(2) (July 2000 - Present)
Scottsdale, Arizona 85258 and Chief Investment Risk Officer
Age: 55 (January 2003 - Present). Formerly,
Chief Investment Officer of the
International Portfolios, ING
Investments, LLC(2) (August 2000 -
January 2003); and Chief Executive
Officer, ING Investments, LLC(2) (August
1996 - August 2000).
MICHAEL J. ROLAND Executive Vice President February 2002 - Present Executive Vice President (December 2001 -
7337 East Doubletree Ranch Rd. Present) and Chief Compliance Officer
Scottsdale, Arizona 85258 (October 2004 - Present) ING Investments,
Age: 47 LLC(2). Formerly, Chief Financial Officer
and Treasurer, ING Investments, LLC(2)
(December 2001 - March 2005); and Senior
Vice President, ING Investments, LLC(2)
(June 1998 - December 2001).
JOSEPH M. O'DONNELL Chief Compliance Officer November 2004 - Present Chief Compliance Officer of the ING Funds
7337 East Doubletree Ranch Rd. (November 2004 - Present). Formerly, Vice
Scottsdale, Arizona 85258 President, Chief Legal Counsel, Chief
Age: 50 Compliance Officer and Secretary of Atlas
Securities, Inc., Atlas Advisers, Inc.
and Atlas Funds (October 2001 - October
2004); and Chief Operating Officer and
General Counsel of Matthews International
Capital Management LLC and Vice President
and Secretary of Matthews International
Funds (August 1999 - May 2001).
TODD MODIC Senior Vice President, March 2005 - Present Senior Vice President, ING Funds
7337 East Doubletree Ranch Rd. Chief/Principal Services (3) (April 2005 - Present).
Scottsdale, Arizona 85258 Financial Officer and Formerly, Vice President, ING Funds
Age: 37 Assistant Secretary Services, LLC (3) (September 2002 - March
2005). Formerly, Director of Financial
Reporting, ING Investments, LLC(2) (March
2001 - September 2002); and Director of
Financial Reporting, Axient
Communications, Inc. (May 2000 - January
2001).
ROBERT S. NAKA Senior Vice President November 1999 - Present Senior Vice President (August 1999 -
7337 East Doubletree Ranch Rd. Present) and Assistant Secretary,
Scottsdale, Arizona 85258 Assistant Secretary July 1996 - Present (October 2001 - Present) ING Funds
Age: 42 Services, LLC(3).
DANIEL A. NORMAN Senior Vice President April 1995 - Present Senior Vice President (April 1995 -
7337 East Doubletree Ranch Rd. Present) and Senior Portfolio Manager
Scottsdale, Arizona 85258 Treasurer June 1997 - Present (November 1999 - Present), ING Investment
Age: 47 Management Co. Formerly, Portfolio
Manager, ING Investment Management Co.
(April 1995 - November 1999).
15
POSITIONS HELD WITH THE TERM OF OFFICE AND LENGTH OF PRINCIPAL OCCUPATION(S) DURING THE LAST
NAME, ADDRESS AND AGE TRUST TIME SERVED (1) FIVE YEARS
------------------------------------------------------------------------------------------------------------------------------------
CURTIS F. LEE Senior Vice President February 2001 - Present Senior Vice President and Chief Credit
7337 East Doubletree Ranch Rd. and Chief Credit Officer Officer, ING Investment Management Co.
Scottsdale, Arizona 85258 (January 2001 - Present). Formerly, Vice
Age: 50 President and Senior Credit Officer, ING
Investment Management Co. (September 1999
- January 2001).
JEFFREY A. BAKALAR Senior Vice President November 1999 - Present Senior Vice President and Senior
7337 East Doubletree Ranch Rd. Portfolio Manager, ING Investment
Scottsdale, Arizona 85258 Management Co. (November 1999 - Present)
Age: 45
ELLIOT ROSEN Senior Vice President May 2002 - Present Senior Vice President, ING Investment
7337 East Doubletree Ranch Management Co. (February 1999 - Present).
Rd.Scottsdale, Arizona 85258
Age: 52
WILLIAM H. RIVOIR III Senior Vice President February 2001 - Present Vice President, ING Investment Management
7337 East Doubletree Ranch Rd. and Assistant Secretary Co. (January 2004 - Present). Formerly,
Scottsdale, Arizona 85258 Counsel, ING USFS Law Department (January
Age: 54 2003 - December 2003); and Senior Vice
President, ING Investments, LLC(2) (June
1998 - December 2002).
KIMBERLY A. ANDERSON Senior Vice President November 2003 - Present Senior Vice President, ING Investments,
7337 East Doubletree Ranch Rd. LLC(2) (October 2003 - Present).
Scottsdale, Arizona 85258 Formerly, Vice President and Assistant
Age: 41 Secretary, ING Investments, LLC(2)
(October 2001 - October 2003) and;
Assistant Vice President, ING Funds
Services, LLC(3) (November 1999 - January
2001).
ROBYN L. ICHILOV Vice President November 1997 - Present Vice President, ING Funds Services,
7337 East Doubletree Ranch Rd. LLC(3) (October 2001 - Present) and ING
Scottsdale, Arizona 85258 Investments, LLC(2) (August 1997 -
Age: 37 Present).
LAUREN D. BENSINGER Vice President August 2003 - Present Vice President and Chief Compliance
7337 East Doubletree Ranch Rd. Officer, ING Funds Distributor, LLC(4)
Scottsdale, Arizona 85258 (July 1995 - Present); and Vice President
Age: 51 (February 1996 - Present). Formerly,
Chief Compliance Officer, ING
Investments, LLC(2). (October 2001 -
October 2004).
MARIA M. ANDERSON Vice President September 2004 - Present Vice President, ING Funds Services, LLC (3)
7337 East Doubletree Ranch Rd. (September 2004 - Present).
Scottsdale, Arizona 85258 Formerly, Assistant Vice President, ING
Age: 47 Funds Services, LLC (3) (October 2001 -
September 2004); and Manager of Fund
Accounting and Fund Compliance, ING
Investments, LLC(2) (September 1999 -
October 2001).
MARY A. GASTON Vice President March 2005 - Present Vice President, ING Funds Services, LLC (3)
7337 East Doubletree Ranch Rd. (April 2005 - Present). Formerly,
Scottsdale, Arizona 85258 Assistant Vice President, Financial
Age: 39 Reporting, ING Investments, LLC (2)
(April 2004 - April 2005); Manager,
Financial Reporting, ING Investments,
LLC (2) (August 2002 - April 2004); and
Controller, Z Seven Fund, Inc. and Ziskin
Asset Management, Inc. (January 2000 -
March 2002).
16
POSITIONS HELD WITH THE TERM OF OFFICE AND LENGTH OF PRINCIPAL OCCUPATION(S) DURING THE LAST
NAME, ADDRESS AND AGE TRUST TIME SERVED (1) FIVE YEARS
------------------------------------------------------------------------------------------------------------------------------------
SUSAN P. KINENS Assistant Vice President February 2003 - Present Assistant Vice President, ING Funds
7337 East Doubletree Ranch Rd. Services, LLC(3) (December 2002 -
Scottsdale, Arizona 85258 Present); and has held various other
Age: 28 positions with ING Funds Services, LLC(3)
for more than the last five years.
KIMBERLY K. PALMER Assistant Vice President September 2004 - Present Assistant Vice President, ING Funds
7337 East Doubletree Ranch Rd. Services, LLC(3) (August 2004 -
Scottsdale, Arizona 85258 Present). Formerly, Manager,
Age: 48 Registration Statements, ING Funds
Services, LLC(3) (May 2003 - August
2004); Associate Partner, AMVESCAP PLC
(October 2000 - May 2003); and Director
of Federal Filings and Blue Sky Filings,
INVESCO Funds Group, Inc. (March 1994 -
May 2003).
HUEY P. FALGOUT, JR. Secretary August 2003 - Present Chief Counsel, ING Americas, U.S. Legal
7337 East Doubletree Ranch Rd. Services (September 2003 - Present).
Scottsdale, AZ 85258 Formerly, Counsel, ING Americas, U.S.
Age: 41 Legal Services (November 2002 - September
2003); and Associate General Counsel of
AIG American General (January 1999 -
November 2002).
THERESA K. KELETY Assistant Secretary August 2003 - Present Counsel, ING Americas, U.S. Legal
7337 East Doubletree Ranch Rd. Services (April 2003 - Present).
Scottsdale, AZ 85258 Formerly, Senior Associate with Shearman
Age: 42 & Sterling (February 2000 - April 2003).
ROBIN R. NESBITT Assistant Secretary September 2004 - Present Supervisor, Board Operations, ING Funds
7337 East Doubletree Ranch Rd. Services, LLC (3) August 2003 -
Scottsdale, AZ 85258 Present). Formerly, Senior Legal
Age: 31 Analyst, ING Funds Services, LLC (3)
(August 2002 - August 2003); Associate,
PricewaterhouseCoopers (January 2001 -
August 2001); and Paralegal, McManis,
Faulkner & Morgan (May 2000 - December
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 Pilgrim 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 Pilgrim 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
BOARD
The Board of Trustees of the Trust ("Board") governs the Trust and is
responsible for protecting the interests of the 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.
FREQUENCY OF BOARD MEETINGS
The Board currently conducts regular meetings seven (7) times a year. The
Audit and Valuation, Proxy and Brokerage Committees also meet regularly four (4)
times per year, the Investment Review Committee meets six (6) times per year,
the Contracts Committee meets seven (7) timer per year and the remaining
Committees meet as needed. In addition, the Board or the Committees may hold
special meetings by telephone or in person to discuss specific matters that may
require action prior to the next regular meeting.
COMMITTEES
The Trust currently has an Executive Committee, Audit Committee, Valuation,
Proxy and Brokerage Committee (formerly Valuation and Proxy Voting Committee),
Nominating and Governance Committee (formerly Nominating Committee), Investment
Review Committee, Compliance Committee and Contracts Committee. Each Committee
operates pursuant to a charter approved by the Board. The Audit, Valuation,
Proxy and Brokerage, Nominating and Governance, Compliance and Contracts
Committees consist entirely of Independent Trustees.
The Board has an Executive Committee whose function is to act on behalf of
the full Board of Trustees between regularly scheduled meetings when necessary.
The Executive Committee currently consists of two (2) Independent Trustees and
two (2) Trustees who are interested persons as defined in the 1940 Act. The
following Trustees serve as members of the Exective Committee: Messrs. Turner,
McInerney, May and Patton. Mr. Patton serves as Chairperson of the Committee.
The Executive Committee held three ( 3) meetings during the fiscal year ended
February 28, 2005.
The Board has an Audit Committee whose function is to meet with the
independent registered public accounting firm 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 (4) Independent Trustees: Messrs.
Earley, Kenny, Vincent and Putnam. Mr. Earley serves as Chairperson of the
Committee. The Audit Committee held four (4) meetings during the fiscal year
ended February 28, 2005.
The Board has a Valuation, Proxy and Brokerage Committee (formerly, the
Valuation and Proxy Voting 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, overseeing management's
administration of proxy voting and overseeing the effectiveness of the
investment adviser's usage of the Trust's brokerage practices and the investment
adviser's compliance with changing regulations regarding the allocation of
brokerage for services other than pure trade executions. The Valutation, Proxy
and Brokerage Committee currently consists of five (5) Independent Trustees: Dr.
Gitenstein and Messrs. May, Patton, Boyer and Wedemeyer. Mr. May serves as
Chairperson of the Committee. The Valuation, Proxy and Brokerage Committee held
three (3) meetings during the fiscal year ended February 28, 2005 as the
Valuation and Proxy Voting Committee.
18
The Board has established a Nominating and Governance Committee (formerly,
the Nominating Committee) for the purpose of, among other things, (1)
identifying and recommending to the Board candidates it proposes for nomination
to fill Independent Trustees vacancies on the Board; (2) reviewing workload and
capabilities of Independent Board members and recommending changes to size or
composition, as necessary; (3) monitoring regulatory developments and
recommending modifications to the committee's responsibilities; (4) considering
and recommending the creation of additional committees or changes to Trustee
policies and procedures based on rule changes and "best practices" in corporate
governance; (5) reviewing compensation of Independent Board members and making
recommendations for any changes; and (6) overseeing the Board's annual self
evaluation process.
In evaluating candidates, the Nominating and Governance Committee may
consider a variety of factors, but it has not at this time set any specific
minimum qualifications that must be met. Specific qualifications of candidates
for Board membership will be based on the needs of the Board at the time of
nomination. The Nominating and Governance Committee is willing to consider
nominations received from shareholders and shall assess shareholder nominees in
the same manner as it reviews its own nominees. A shareholder nominee for
trustee should be submitted in writing to the Trust's Secretary. Any such
shareholder nomination should include at a minimum the following information as
to each individual proposed for nominations as Trustee: such individual's
written consent to be named in the proxy statement as a nominee (if nominated)
and to serve as a Trustee (if elected), and all information relating to such
individual that is required to be disclosed in the solicitation of proxies for
election of Trustees, or is otherwise required, in each case under applicable
federal securities laws, rules and regulations.
The Secretary shall submit all nominations received in a timely manner to
the Nominating and Governance Committee. To be timely in connection with a
shareholder meeting to elect trustees, any such submission must be delivered to
the Trust's Secretary not earlier than the 90th day prior to such meeting and
not later than the close of business on the later of the 60th day prior to such
meeting or the 10th day following the day on which public announcement of the
date of the meeting is first made, by either the disclosure in a press release
or in a document publicly filed by the Trust with the SEC.
The Nominating and Governance Committee currently consists of four (4)
Independent Trustees: Dr. Gitenstien and Messrs. Kenny, May, and Wedemeyer. Dr.
Gitenstein serves as Chairperson of the Committee. The Nominating Committee held
two (2) meetings during the fiscal year ended February 28, 2005, as the
Nominating Committee.
The Board 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 Investment Review Committee currently
consists of five (5) Independent Trustees and one Trustee who is an interested
person as defined in the 1940 Act: Dr. Gitenstein and Messrs. Boyer, Patton,
May, McInerney and Wedemeyer. Mr. Wedemeyer serves as Chairperson of the
Committee. The Investment Review Committee held four ( 4) meetings during the
fiscal year ended February 28, 2005.
The Board has established a Compliance Committee for the purpose of
coordinating activities between the Board and the Chief Compliance Officer
("CCO") of the Funds. The Compliance Committee facilitates the flow of
information among Board members and the CCO between Board meetings; works with
the CCO and management to identify the types of reports to be submitted by the
CCO to the Compliance Committee and the Board; coordinates CCO oversight
activities with other ING Fund boards; and makes recommendations regarding the
role, performance and oversight of the CCO. The Compliance Committee currently
consists of three (3) Independent Trustees: Messrs. Earley, Boyer and Patton.
Mr. Boyer serves as Chairperson of the Committee. The Compliance Committee held
four (4) meetings during the fiscal year ended February 28, 2005.
19
The Board has a Contracts Committee for the purpose of overseeing the
annual renewal process relating to investment advisory and sub-advisory
agreements and, at the discretion of the Board, other agreements or plans
involving the ING Funds. The responsibilities of the Contracts Committee, among
other things, include: (1) identifying the scope and format of information to be
provided by services providers in connection with applicable renewals; (2)
providing guidance to independent legal counsel regarding specific information
requests to be made by such counsel on behalf of the Trustees; (3) evaluating
regulatory and other developments that might have an impact on applicable review
and renewal processes; (4) reporting to the Trustees its recommendations and
decisions regarding the foregoing matters; (5) assisting in the preparation of a
written record of the factors considered by Trustees relating to the approval
and renewal of advisory and sub-advisory agreements; and (6) recommending to the
Trustees specific steps to be taken by them regarding the renewal process,
including, for example, proposed schedules of meetings by the Trustees. The
Contracts Committee is not responsible for making substantive recommendations
whether to approve, renew, reject or modify agreements or plans. The Contracts
Committee currently consists of five (5) Independent Trustees: Messrs. Boyer,
May, Patton, Vincent and Wedemeyer. Mr. Vincent serves as Chairperson of the
Committee. The Contracts Committee held two (2) meetings during the fiscal year
ended February 28, 2005.
TRUSTEE OWNERSHIP OF SECURITIES
SHARE OWNERSHIP POLICY
In order to further align the interests of the Independent Trustees with
shareholders, it is the policy of the Board of Independent Trustees to own,
beneficially, shares of one or more funds in the ING Family of 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 Family of
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
as of December 31, 2004.
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, 2004 FAMILY OF INVESTMENT COMPANIES
-------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
John V. Boyer(1) None None
Paul S. Doherty(2) None Over $100,000
J. Michael Earley None $50,001 - $100,000
R. Barbara Gitenstein None $10,001 - $50,000
Patrick W. Kenny(1) None None
Walter H. May None Over $100,000
Jock Patton $10,001 - $50,000 $10,001 - $50,000
David W. C. Putnam Over $100,000 Over $100,000
Blaine E. Rieke(2) None $50,001 - $100,000
20
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, 2004 FAMILY OF INVESTMENT COMPANIES
-------------------------------------------------------------------------------------------------------------
Roger B. Vincent None Over $100,000
Richard A. Wedemeyer $10,001 - $50,000 $50,001 - $100,000
TRUSTEES WHO ARE INTERESTED PERSONS
Thomas J. McInerney None Over $100,000
John G. Turner Over $100,000 Over $100,000
(1) Commenced service as Trustee on January 1, 2005. Messrs, Boyer and Kenny
were members of the board of directors of ING Partners, Inc. On January 1,
2005, the ING Partners, Inc. board was unified with the board of the other
Funds in the ING Family of Funds.
(2) Retired as a Trustee on December 31, 2004.
INDEPENDENT TRUSTEE OWNERSHIP OF SECURITIES
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, 2004.
NAME OF OWNERS
AND RELATIONSHIP VALUE OF PERCENTAGE OF
NAME OF TRUSTEE TO TRUSTEE COMPANY TITLE OF CLASS SECURITIES CLASS
-----------------------------------------------------------------------------------------------
John V. Boyer(1) N/A N/A N/A $ 0 N/A
Paul S. Doherty(2) 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
Patrick W. Kenny(1) 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(2) 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
(1) Commenced service as Trustee on January 1, 2005. Messrs, Boyer and Kenny
were members of the board of directors of ING Partners, Inc. On January 1,
2005, the ING Partners, Inc. board was unified with the board of the other
Funds in the ING Family of Funds.
(2) Retired as a Trustee on December 31, 2004.
COMPENSATION OF TRUSTEES
The Trust currently pays each Trustee who is not an interested person a PRO
RATA share, as described below, of: (i) an annual retainer of $45,000 (Messrs.
Patton, Earley, May, Boyer, Wedemeyer and Dr. Gitenstein, as Chairpersons of
committees of the Board, each receives an additional annual
21
retainer of $30,000, $20,000, $10,000, $10,000, $20,000 and $2,500(1),
respectively) (additionally, as Chairperson of the Investment Review and
Contracts Committees, Mr. Vincent receives an additional retainer of $20,000 and
$15,000, respectively); (ii) $7,000 for each in person meeting of the Board (Mr.
Patton, as Chairperson of the Board, receives an additional $1,000 for each
Board meeting); (iii) $3,000 per attendance of any committee meeting
(Chairpersons of committees of the Board receive an additional $1,000 for each
committee meeting); (iv) $2,000 per special telephonic meeting; and (v)
out-of-pocket expenses. The PRO RATA share paid by the Trust is based on the
Trust's average net assets as a percentage of the average net assets of all the
funds managed by the Investment Manager or its affiliates, Directed Services,
Inc. and ING Life Insurance and Annuity Company, for which the Trustees serve in
common as Trustees.
The following table sets forth information provided by the Trust's
investment manager regarding the compensation of Trustees by the Trust and other
funds managed by ING Investments, LLC and its affiliates for the fiscal year
ended February 28, 2005. Officers of the Trust and Trustees who are interested
persons of the Trust do not receive any compensation from the Trust or any other
funds managed by the Investment Manager.
(1) The Chairperson for the Nominating and Governance Committee is paid on a
quarterly basis and only if the Nominating and Governance Committee has
been active. The compensation per quarter to the Chairperson is $625,
which if the Nominating and Governance Committee has been active for all
four quarters will result in the Chairperson receiving the full annual
retainer of $2,500.
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(1) TRUSTEES(2)
----------------------------------------------------------------------------------------------
John V. Boyer(3) $ 497 N/A N/A $ 10,000
Trustee
Paul S. Doherty(4) $ 17,112 N/A N/A $ 267,000(6)
Trustee
J. Michael Earley $ 4,279 N/A N/A $ 79,000
Trustee
R. Barbara Gitenstein $ 5,090 N/A N/A $ 93,000
Trustee
Patrick W. Kenny(3) $ 497 N/A N/A $ 10,000
Trustee
Walter H. May $ 6,200 N/A N/A $ 113,250
Trustee
Thomas J. McInerney(5) $ 0 N/A N/A $ 0
Trustee
Jock Patton $ 5,974 N/A N/A $ 109,250
Trustee
David W.C. Putnam $ 4,696 N/A N/A $ 85,000
Trustee
Blaine E. Rieke(4) $ 16,882 N/A N/A $ 263,000(6)
Trustee
22
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(1) TRUSTEES(2)
----------------------------------------------------------------------------------------------
John G. Turner(5) $ 0 N/A N/A $ 0
Trustee
Roger B. Vincent $ 5,408 N/A N/A $ 99,000
Trustee
Richard A. Wedemeyer $ 5,421 N/A N/A $ 99,000
Trustee
(1) The Trust has adopted a retirement policy under which a Trustee who has
served as an Independent 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 Trustee for one year of
service. The amount reflected is compensation from all funds in the
Complex.
(2) Trustee compensation includes compensation paid by funds that are not
discussed in the Prospectus or SAI.
(3) Commenced services as Trustee on January 1, 2005. Prior to January 1, 2005,
Messrs, Boyer and Kenny were members of the board of directors of ING
Partners, Inc. On January 1, 2005, the ING Partners, Inc. board of
directors was unified with the board of the other funds in the ING Complex
of Funds, therefore the compensation shown is only for the period from
December 31, 2004 through February 28, 2005.
(4) Retired as Trustee on December 31, 2004.
(5) "Interested Persons," as defined by the Investment Company Act of 1940 ,
because of their affiliation with ING Groep N.V., the parent corporation of
the Investment Manager, ING Investments, LLC and the Distributor, ING Funds
Distibutor, LLC. Officers and Trustees who are interested persons do not
receive any compensation from the Trust.
(6) Pursuant to the retirement policy adopted by the ING Funds, Messrs. Doherty
and Rieke were each paid $182,000 upon their retirement from the Boards of
Directors/Trustees of the ING Funds.
23
As of June 15, 2005, 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 , 2005, 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, 2005, 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 TRUST NAME AND ADDRESS OWNERSHIP OF CLASS OF TRUST
-----------------------------------------------------------------------------------------
ING Prime Rate Trust CEDE & CO Beneficial Owner 81.24% 81.24%
PO Box 20
Bowling Green Station
New York, NY 10274-0020
INVESTMENT MANAGEMENT AND OTHER SERVICE PROVIDERS
THE INVESTMENT MANAGER
The investment adviser for the Trust is ING Investments, LLC ("Investment
Manager" or "ING Investments"), which is registered with the SEC as an
investment adviser 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.
("Sub-Adviser" or "ING IM") The Investment Manager and ING IM are indirect,
wholly owned subsidiaries of ING Groep N.V. (NYSE: ING). 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 serves pursuant to an Investment Management
Agreement between the Investment Manager and the Trust. The Investment
Management Agreement requires the Investment Manager to oversee the provisions
of all investment advisory and portfolio management services of the Trust.
Pursuant to a sub-advisory agreement ("Sub-Advisory Agreement") the Investment
Manager has delegated certain management responsibilities to the Sub-Adviser of
the Trust. The Investment Manager oversees the investment management of the
Sub-Adviser.
The Investment Management Agreement requires the Investment Manager to
provide, subject to the supervision of the Board, investment advice and
investment services to the Trust and to furnish advice and recommendations with
respect to investment of the Trust's assets and the purchase or sale of its
portfolio securities. The Investment Manager also provides investment research
and analysis. The Investment Management Agreement provides that the Investment
Manager is not subject to liability to the Trust for any act or omission in the
course of, or connected with, rendering services under the Agreement, except by
reason
24
of willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties under the Investment Management Agreement.
On August 1, 2003, ING underwent an internal reorganization plan that,
among other things, integrated certain of its portfolio management professionals
across the U.S. under a common management structure known as ING Investment
Management Americas, which includes ING IM. One of the primary purposes of the
integration plan was to promote consistently high levels of performance in terms
of investment standards, research, policies and procedures in the portfolio
management functions related to the Trust. As a result of this integration plan,
the operational and supervisory functions of the Trust's Investment Management
Agreement 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 ING IM. The portfolio management personnel currently
employed by ING Investments became employees of ING IM, which assumed primary
responsibility for all portfolio management issues, including the purchase,
retention, or sale of portfolio securities.
After an initial term of two years, the Investment Management Agreement and
Sub-Advisory Agreement continue in effect from year to year so long as such
continuance is specifically approved at least annually by (a) the Board or (b)
the vote of a "majority" (as defined in the 1940 Act) of the Trust's outstanding
shares voting as a single class; provided that in either event the continuance
is also approved by at least a majority of the Board who are not "interested
persons" (as defined in the 1940 Act) of the Investment Manager or Sub-Adviser,
as the case may be, by vote cast in person at a meeting called for the purpose
of voting on such approval.
In considering whether to approve the Investment Management Agreement and
Sub-Advisory Agreement, the Board considered a number of 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.
In connection with their deliberations on August 31, 2004 relating to the
Trust's current Investment Management Agreement and Sub-Advisory Agreement, the
Board, including the Independent Trustees, considered information that had been
provided by the Investment Manager and the Sub-Adviser throughout the year at
regular Board meetings, as well as information specifically furnished for a
Board meeting held annually to specifically consider such renewal. This
information included the following items: (1) FACT sheets for the Trust that
provide information about the performance and expenses of the Trust and its peer
group, as well as information about the Trust's investment portfolio, objective
and strategies; (2) 15(c) Methodology Guide that describes how the FACT sheets
were prepared, including how benchmarks and peer groups were selected and how
profitability was determined; (3) responses to questions provided by legal
counsel to the Independent Trustees; (4) copies of the form of investment
management and sub-advisory agreement; (5) copies of the Form ADV for the
investment manager and sub-adviser to the Trust; (6) financial statements for
the investment manager and sub-adviser to the Trust; and (7) other information
relevant to their evaluations.
The Board was also provided with narrative summaries addressing key factors
the Board customarily considers in evaluating the renewal of investment
management and sub-advisory agreements, including an analysis for the Trust of
how performance and fees compare to its selected peer group and designated
benchmarks.
The following paragraphs outline certain of the specific factors that the
Board considered, and the conclusions reached, in relation to renewing the
Trust's current Investment Management Agreement and Sub-Advisory Agreement.
25
In its renewal deliberations for the Trust, the Board noted that (1) the
management fee for the Trust is slightly above the median and the average
management fees of its Selected Peer Group, but within one standard deviation of
the average, (2) the expense ratio for the Trust is slightly above the median
and below the average expense ratios of its Selected Peer Group, and (3) the
Trust outperformed its benchmark indices and Selected Peer Group median for all
periods reviewed by the Board.
After deliberations based on the above-listed factors, among others, the
Board renewed the Investment Management Agreement and Sub-Advisory Agreement for
the Trust because, among other considerations, (1) the management fee of the
Trust is competitive with that of its Selected Peer Group, (2) the expense ratio
for the Trust is competitive with that of its Selected Peer Group, and (3) the
Trust's performance has been strong.
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).
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.
For the fiscal years ended February 28, 2005, February 29, 2004 and
February 28, 2003 the Investment Manager was paid $15,215,686, $12,492,726 and
$12,698,403 respectively, for services rendered to the Trust.
SUB-ADVISER
The Investment Management Agreement for the Trust provides that the
Investment Manager, with the approval of the Trust's Board, 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 shall 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.
ING IM serves as sub-adviser to the Trust pursuant to a sub-advisory
agreement ("Sub-Advisory Agreement") between the Investment Manager and ING IM.
The Sub-Advisory Agreement requires ING IM to provide, subject to the
supervision of the Board of Trustees and the Investment Manager, a
26
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 ING IM to use
reasonable compliance techniques as the Sub-Adviser or the Board of Trustees may
reasonably adopt, including any written compliance procedures.
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 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, ING IM, 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 its services, ING IM is entitled to receive a sub-advisory fee of 0.36%
from the Trust, expressed as an annual rate based on the average daily Managed
Assets of the Trust, and paid by the Investment Manager. For the fiscal year
ended February 28, 2005 and the seven-month period ended February 29, 2004, ING
Investments paid ING IM, in its capacity as Sub-Adviser, $6,847,836 and
$3,093,114, respectively, in sub-advisory fees.
PORTFOLIO MANAGERS
OTHER ACCOUNTS MANAGED
The following table shows the number of accounts and total assets in the
accounts managed by the Portfolio Managers as of February 28, 2005.
27
REGISTERED INVESTMENT OTHER POOLED
COMPANIES INVESTMENT VEHICLES OTHER ACCTS*
------------------------------------------------------------------------------
PORTFOLIO NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
MANAGER ACCOUNTS (IN BILLIONS) ACCOUNTS (IN BILLIONS) ACCOUNTS (IN BILLIONS)
--------------------------------------------------------------------------------------------------
Daniel A. Norman 2 4.05b 0 N/A 8 1.1
Jeffrey A. Bakalar 2 4.05b 0 N/A 8 N/A
Curtis F. Lee 2 4.05b 0 N/A 8 N/A
* Of these other accounts, none have an advisory fee based on performance
CONFLICTS OF INTEREST
A portfolio manager may be subject to potential conflicts of interest
because the portfolio manager is responsible for other accounts in addition to a
Portfolio. These other accounts may include, among others, other mutual funds,
separately managed advisory accounts, commingled trust accounts, insurance
separate accounts, wrap fee programs and hedge funds. Potential conflicts may
arise out of the implementation of differing investment strategies for the
portfolio manager's various accounts, the allocation of investment opportunities
among those accounts or differences in the advisory fees paid by the portfolio
manager's accounts.
A potential conflict of interest may arise as a result of the portfolio
manager's responsibility for multiple accounts with similar investment
guidelines. Under these circumstances, a potential investment may be suitable
for more than one of the portfolio manager's accounts, but the quantity of the
investment available for purchase is less than the aggregate amount the accounts
would ideally devote to the opportunity. Similar conflicts may arise when
multiple accounts seek to dispose of the same investment.
A portfolio manager may also manage accounts whose objectives and policies
differ from those of the Portfolio. These differences may be such that under
certain circumstances, trading activity appropriate for one account managed by
the portfolio manager may have adverse consequences for another account managed
by the portfolio manager. For example, if an account were to sell a significant
position in a security, which could cause the market price of that security to
decrease, while the Portfolio maintained its position in that security.
A potential conflict may arise when a portfolio manager is responsible for
accounts that have different advisory fees - the difference in the fees may
create an incentive for the portfolio manager to favor one account over another,
for example, in terms of access to particularly appealing investment
opportunities. This conflict may be heightened where an account is subject to a
performance-based fee.
As part of its compliance program, ING IM has adopted policies and
procedures reasonably designed to address the potential conflicts of interest
described above.
COMPENSATION
Compensation consists of (a) fixed base salary; (b) bonus which is based on
ING IM's performance, 3 and 5 year pre-tax performance of the accounts the
portfolio managers are primarily and jointly responsible for relative to account
benchmarks and peer universe performance, and revenue
28
growth of the accounts they are responsible for; and (c) long-term equity awards
tied to the performance of our parent company, ING Groep N.V.
Portfolio managers are also eligible to participate in an annual cash
incentive plan. The overall design of the ING IM annual incentive plan was
developed to closely tie pay to performance, structured in such a way as to
drive performance and promote retention of top talent. As with base salary
compensation, individual target awards are determined and set based on external
market data and internal comparators. Investment performance is measured on both
relative and absolute performance in all areas. ING IM has a defined index, the
Standard & Poor's ("S&P's") LSTA Leveraged Loan Index and, where applicable,
peer groups including but not limited to Russell, Morningstar, Lipper and Lehman
and set performance goals to appropriately reflect requirements for each
investment team. The measures for each team are outlined on a "scorecard" that
is reviewed on an annual basis. These scorecards reflect a comprehensive
approach to measuring investment performance versus both benchmarks and peer
groups over one and three-year periods and year-to-date net cash flow (changes
in the accounts' net assets not attributable to changes in the value of the
accounts' investments) for all accounts managed by the team. The results for
overall IIM scorecards are calculated on an asset weighted performance basis of
the individual team scorecards.
Investment professionals' performance measures for bonus determinations are
weighted by 25% being attributable to the overall ING IM performance and 75%
attributable to their specific team results (60% investment performance and 15%
net cash flow).
Based on job function, internal comparators and external market data,
portfolio managers participate in the ING Long-Term Incentive Plan. Plan awards
are based on the current year's performance as defined by the ING IM component
of the annual incentive plan. The awards vest in three years and are paid in a
combination of ING restricted stock, stock options and restricted performance
units.
Portfolio managers whose base salary compensation exceeds a particular
threshold may participate in ING's deferred compensation plan. The plan provides
an opportunity to invest deferred amounts of compensation in mutual funds, ING
stock or at an annual fixed interest rate. Deferral elections are done on an
annual basis and the amount of compensation deferred is irrevocable.
OWNERSHIP OF SECURITIES
The following table shows the dollar range of shares of the Trust owned by
each team member as of February 28, 2005, including investments by their
immediate family members and amounts invested through retirement and deferred
compensation plans.
DOLLAR RANGE OF
PORTFOLIO MANAGER TRUST SHARES OWNED
----------------- ------------------
Daniel A. Norman $101,000 - $500,000
Jeffrey A. Bakalar $50,001 - $100,000
Curtis F. Lee $0
PROXY VOTING PROCEDURES
The Board 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
29
to potential conflicts of interest. In delegating voting authority to the
Investment Manager, the Board 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. In addition, the Board established the
Valuation and Proxy Voting Committee to oversee the implementation of the
Trust's proxy voting procedures. 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. No later than August 31, of each year,
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).
THE ADMINISTRATOR
ING Funds Services, LLC ("Administrator" or "ING Funds Services") serves as
Administrator for the Trust pursuant to an Administrative Services Agreement. 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 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 Trust's average daily net assets plus the
proceeds of any outstanding borrowings.
Administrative fees paid by the Trust for the fiscal years ended February
28, 2005, February 29, 2004 and February 28, 2003 were $4,754,902, $3,903,976
and $3,968,231 respectively, for services rendered to the Trust.
30
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.
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
31
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 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.
32
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 0.00% to 5.00% 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. The Trust will not pay any commissions with
regard to privately negotiated transactions, but an investor may be subject to a
front end sales load of up to 3.00% paid to or retained by a third party
broker-dealer through which such transaction may be effected.
CODE OF ETHICS
The Trust's Distributor, ING Funds Distributor, LLC ("Distributor"), the
Investment Manager and the Trust have adopted a Code of Ethics or written
supervisory procedures 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.
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
33
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 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.
The Investment Management Agreement or Sub-Advisory Agreement authorizes
the Investment Manager or Sub-Adviser to select the brokers or dealers that will
execute the purchase and sale of investment securities for the Trust. In all
purchases and sales of securities for the portfolio of the Trust, the primary
consideration is to obtain the most favorable execution available. Pursuant to
the Investment Management Agreements or Sub-Advisory Agreement, the Investment
Manager or Sub-Adviser determines, subject to the instructions of and review by
the Trust's Board, which securities are to be purchased and sold by the Trust
and which brokers are to be eligible to execute portfolio transactions of the
Trust. Purchases and sales of securities in the over-the-counter market will
generally be executed directly with a "market-maker," unless in the opinion of
the Investment Manager or the Sub-Adviser, a better price and execution can
otherwise be obtained by using a broker for the transaction.
In placing portfolio transactions, the Investment Manager or Sub-Adviser is
required to use their best efforts to choose a broker capable of providing the
brokerage services necessary to obtain the most favorable 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, capital committment
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
34
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 28, 2005, February 29, 2004 and February 28, 2003, were $ __, $28,130
and $0, respectively.
None of the total commissions paid during the fiscal years ended February
28, 2005, February 29, 2004 and February 28, 2003, were paid by the Trust to
firms which provided research, statistical or other services to the Investment
Manager.
PORTFOLIO TURNOVER RATE
The annual rate of the Trust's total portfolio turnover for the years ended
February 28, 2005, February 29, 2004 and February 28, 2003 was 93%, 87% and 48%
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 each business dayas of
the close of regular trading ("market close") on the NYSE (usually 4:00 p.m.
Eastern time unless otherwise designated by the NYSE). The Trust is open for
business every 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.
35
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
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 Trust 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 Trust failed to qualify as a RIC for a period greater than
one taxable year, the Trust may be required to recognize any net built-in
36
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 Trust 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.
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
37
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 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.
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 at the current rate of 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.
38
REPURCHASES OF SHARES
As noted above, the Fund may take action to repurchase its shares. If a
shareholder tenders all shares of the Fund that he or she owns or is considered
to own, the shareholder will realize a taxable sale or exchange (see "Sale of
Common Shares" above). If a shareholder tenders less than all of the shares of
the Fund that he or she owns or is considered to own, the repurchase may not
qualify as an exchange, and the proceeds received may be treated as a dividend,
return of capital or capital gain, depending on the Fund's earnings and profits
and the shareholder's basis in the tendered shares. If that occurs, there is a
risk that non-tendering shareholders may be considered to have received a deemed
distribution as a result of the Fund's purchase of tendered shares, and all or a
portion of that deemed distribution may be taxable as a dividend.
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 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.
39
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 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 Manageror 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
40
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 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.
41
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 REGISTERED PUBLIC ACCOUNTING FIRM
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, 2006.
FINANCIAL STATEMENTS
The Financial Statements and the independent registered public accounting
firms reports thereon, appearing in the Trust's Annual Report for the period
ending February 28, 2005 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.
42
APPENDIX A
43
ING FUNDS
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PROXY VOTING PROCEDURES AND GUIDELINES
EFFECTIVE DATE: JULY 10, 2003
REVISION DATE: MAY 12, 2005
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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 equity assets in its investment
portfolio (the "portfolio securities"). The Procedures and Guidelines have been
approved by the Funds' Boards 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, PROXY AND BROKERAGE COMMITTEE
The Boards hereby delegate to the Valuation, Proxy and Brokerage 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 (the "Adviser
Procedures") are attached hereto as EXHIBIT 2.
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(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, Proxy and Brokerage Committee at issue. No provision in these
Procedures is intended to impose any duty upon the particular Board or
Valuation, Proxy and Brokerage Committee with respect to any other Fund.
(2) The independent Trustees/Directors are those Board members who are not
"interested persons" of the Funds within the meaning of Section 2(a)(19) of
the Investment Company Act of 1940.
A-1
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 for purposes of the Adviser 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 AUTHORITY
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
the 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, Proxy and Brokerage
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.
Funds that are "funds-of-funds" will "echo" vote their interests in underlying
mutual funds, which may include ING Funds (or portfolios or series thereof)
other than those set forth on EXHIBIT 1 attached hereto. This means that, if the
fund-of-funds must vote on a proposal with respect to an underlying investment
company, the fund-of-funds will vote its interest in that underlying fund in the
same proportion all other shareholders in the investment company voted their
interests.
A fund that is a "feeder" fund in a master-feeder structure does not echo vote.
Rather, it passes votes requested by the underlying master fund to its
shareholders. This means that, if the feeder fund is solicited by the master
fund, it will request instructions from its own shareholders, either directly
or, in the case of an insurance-dedicated Fund, through an insurance product or
retirement plan, as to the manner in which to vote its interest in an underlying
master fund.
When a Fund is a feeder in a master-feeder structure, proxies for the portfolio
securities owned by the master fund will be voted pursuant to the master fund's
proxy voting policies and procedures. As such, and except as otherwise noted
herein with respect to vote reporting requirements, feeder Funds shall not be
subject to these Procedures and Guidelines.
A-2
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 the Adviser
Procedures must be approved by the Board or the Valuation, Proxy and Brokerage
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, Proxy and Brokerage
Committee at its next regularly scheduled meeting.
V. VOTING PROCEDURES AND GUIDELINES
The Guidelines that are set forth in EXHIBIT 3 hereto specify the manner in
which the Funds generally will vote with respect to the proposals discussed
therein.
Unless otherwise noted, the defined terms used hereafter shall have the same
meaning as defined in the Adviser Procedures
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,"
"Withhold" or "Abstain" on a proposal. However, the Agent shall be directed
to refer any proxy proposal 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, it appears to involve
unusual or controversial issues, or an Investment Professional (as such
term is defined for purposes of the Adviser Procedures) 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 "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.
The Proxy Coordinator shall use best efforts to convene the Proxy Group
with respect to all matters requiring its consideration. In the event
quorum requirements cannot be timely met in connection with a voting
deadline, it shall
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be the policy of the Funds to vote in accordance with the Agent's
recommendation, unless the Agent's recommendation is deemed to be
conflicted as provided for under the Adviser Procedures, in which case no
action shall be taken on such matter (I.E., a "Non-Vote").
1. WITHIN-GUIDELINES VOTES: Votes in Accordance with a Fund's
Guidelines and/or, where applicable, Agent Recommendation
In the event the Proxy Group, and where applicable, any Investment
Professional participating in the voting process, recommend a vote
within Guidelines, the Proxy Group will instruct the Agent, through
the Proxy Coordinator, to vote in this manner. No Conflicts Report (as
such term is defined for purposes of the Adviser Procedures) is
required in connection with Within-Guidelines votes.
2. NON-VOTES: Votes in Which No Action is Taken
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, E.G., proxies in connection with
securities no longer held in the portfolio of an ING Fund or proxies
being considered on behalf of a Fund that is no longer in existence;
or (2) if the cost of voting a proxy outweighs the benefits, E.G.,
certain international proxies, particularly in cases in which share
blocking practices may impose trading restrictions on the relevant
portfolio security. In such instances, the Proxy Group may instruct
the Agent, through the Proxy Coordinator, not to vote such proxy.
Reasonable efforts shall be made to secure and vote all other proxies
for the Funds, but, particularly in markets in which shareholders'
rights are limited, Non-Votes may also occur in connection with a
Fund's related inability to timely access ballots or other proxy
information in connection with its portfolio securities.
Non-Votes may also result in certain cases in which the Agent's
recommendation has been deemed to be conflicted, as described in V.B.
above and V.B.4. below.
3. OUT-OF-GUIDELINES VOTES: Votes Contrary to Procedures and
Guidelines, or Agent Recommendation, where applicable, Where No
Recommendation is Provided by Agent, or Where Agent's
Recommendation is Conflicted
If the Proxy Group recommends that a Fund vote contrary to the
Procedures and Guidelines, or the recommendation of the Agent, where
applicable, if the Agent has made no recommendation on a matter
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requiring case-by-case consideration and the Procedures and Guidelines
are silent, or the Agent's recommendation on a matter requiring
case-by-case consideration is deemed to be conflicted as provided for
under the Adviser Procedures, the Proxy Coordinator will then request
that all members of the Proxy Group, including any members not in
attendance at the meeting at which the relevant proxy is being
considered, and each Investment Professional participating in the
voting process complete a Conflicts Report (as such term is defined
for purposes of the Adviser Procedures). As provided for in the
Adviser Procedures, the Proxy Coordinator shall be responsible for
identifying to Counsel potential conflicts of interest with respect to
the Agent.
If Counsel determines that a conflict of interest appears to exist
with respect to the Agent, any member of the Proxy Group or the
participating Investment Professional(s), the Proxy Coordinator will
then call a meeting of the Valuation, Proxy and Brokerage Committee(s)
and forward to such Committee(s) 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 Procedures).
If Counsel determines that there does not appear to be a conflict of
interest with respect to the Agent, any member of the Proxy Group or
the participating 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, Proxy and Brokerage Committee
A Fund's Valuation, Proxy and Brokerage 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. The Committee will instruct the Agent through the Proxy
Coordinator how to vote such referred proposals.
The Proxy Coordinator shall use best efforts to timely refer matters
to a Fund's Committee for its consideration. In the event any such
matter cannot be timely referred to or considered by the Committee, it
shall be the policy of the Funds to vote in accordance with the
Agent's recommendation, unless the Agent's recommendation is
conflicted on a
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matter requiring case-by-case consideration, in which case no action
shall be taken on such matter (I.E., a "Non-Vote").
The Proxy Coordinator will maintain a record of all proxy questions
that have been referred to a Fund's 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 an
Out-of-Guidelines vote, and Counsel has determined that a conflict of interest
appears to exist with respect to the Agent, any member of the Proxy Group, or
any Investment Professional participating in the voting process, the proposal
shall be referred to the Fund's Committee for determination so that the Adviser
shall have no opportunity to vote a Fund's proxy in a situation in which it or
the Agent may be deemed to have a conflict of interest. In the event a member of
a Fund's Committee believes he/she has a conflict of interest that would
preclude him/her from making a voting determination in the best interests of the
beneficial owners of the applicable Fund, such Committee member shall so advise
the Proxy Coordinator and recuse himself/herself with respect to determinations
regarding the relevant proxy.
VII. REPORTING AND RECORD RETENTION
Annually in August, each Fund that is not a feeder in a master/feeder structure
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. No proxy voting record will
be posted on the ING Funds website for any Fund that is a feeder in a
master/feeder structure; however, a cross-reference to that of the master fund's
proxy voting record as filed in the SEC's EDGAR database will be posted on the
ING Funds website. The proxy voting record for each Fund will also be available
in the EDGAR database on the SEC's website.
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EXHIBIT 1
TO THE
ING FUNDS
PROXY VOTING PROCEDURES
ING EQUITY TRUST
ING FUNDS TRUST
ING GLOBAL EQUITY DIVIDEND AND PREMIUM OPPORTUNITY FUND
ING INVESTMENT FUNDS, INC.
ING INVESTORS TRUST
ING MAYFLOWER TRUST
ING MUTUAL FUNDS
ING PARTNERS, INC.
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
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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
----------
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 (the "Adviser
Procedures") 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.
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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 (the "Procedures" or
"Guidelines" and collectively the "Procedures 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, and in connection with proxy proposals requiring
case-by-case consideration, the Proxy Coordinator will call a meeting of
the Proxy Group (as described below).
Responsibilities assigned herein to the Proxy Coordinator, or activities
in support thereof, may be performed by such members of the Proxy Group
or employees of the Advisers' affiliates as are deemed appropriate by
the Proxy Group.
Unless specified otherwise, information provided to the Proxy
Coordinator in connection with duties of the parties described herein
shall be deemed delivered to the Advisers.
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 for publicly traded securities through the provision of vote
analysis, implementation, recordkeeping and disclosure services. The
Agent is Institutional Shareholder Services, Inc. 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 Adviser 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 a
Fund's Guidelines, except as otherwise instructed through the Proxy
Coordinator by the Adviser's Proxy Group or a Fund's Valuation, Proxy
and Brokerage Committee ("Committee").
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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.
Subject to the oversight of the Advisers, the Agent shall establish and
maintain adequate internal controls and policies in connection with the
provision of proxy voting services voting to the Advisers, including
methods to reasonably ensure that its analysis and recommendations are
not influenced by conflict of interest, and shall disclose such controls
and policies to the Advisers when and as provided for herein. Unless
otherwise specified, references herein to recommendations of the Agent
shall refer to those in which no conflict of interest has been
identified.
C. Proxy Group
The Adviser shall establish a Proxy Group (the "Group" or "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 and
such other persons whose attendance may be deemed appropriate by the
Proxy Group from time to time in furtherance of its duties or the
day-to-day administration of the Funds.
A meeting of the Proxy Group will be held whenever (1) the Proxy
Coordinator receives a recommendation from an Investment Professional to
vote a Fund's proxy contrary to the Procedures and Guidelines, or the
recommendation of the Agent, where applicable, (2) the Agent has made no
recommendation with respect to a vote on a proposal, or (3) a matter
requires case-by-case consideration, including those in which the
Agent's recommendation is deemed to be conflicted as provided for under
these Adviser Procedures.
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For each proposal referred to the Proxy Group, it will review (1) the
relevant Procedures and Guidelines, (2) the recommendation of the Agent,
if any, (3) the recommendation of the Investment Professional(s), if
any, and (4) any other resources that any member of 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, or if the Agent's recommendation on a matter requiring
case-by-case consideration is deemed to be conflicted, it shall follow
the procedures for such voting as established by a Fund's Board.
The Proxy Coordinator shall use best efforts to convene the Proxy Group
with respect to all matters requiring its consideration. In the event
quorum requirements cannot be timely met in connection with to a voting
deadline, the Proxy Coordinator 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 (each
referred to herein as an "Investment Professional" and collectively,
"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,"
"Withhold" or "Abstain" on a proposal. However, the Agent shall be
directed to refer any proxy proposal 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
A-11
unclear, it appears to involve unusual or controversial issues, or an
Investment Professional recommends a vote contrary to the Guidelines.
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 "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.
1. WITHIN-GUIDELINES VOTES: Votes in Accordance with a Fund's
Guidelines and/or, where applicable, Agent Recommendation
In the event the Proxy Group, and where applicable, any Investment
Professional participating in the voting process, recommend a vote
within Guidelines, the Proxy Group will instruct the Agent, through
the Proxy Coordinator, to vote in this manner. No Conflicts Report
(as such term is defined herein) is required in connection with
Within-Guidelines votes.
2. NON-VOTES: Votes in Which No Action is Taken
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, E.G., proxies in connection with
securities no longer held in the portfolio of an ING Fund or
proxies being considered on behalf of a Fund that is no longer in
existence; or (2) if the cost of voting a proxy outweighs the
benefits, E.G., certain international proxies, particularly in
cases in which share blocking practices may impose trading
restrictions on the relevant portfolio security. In such instances,
the Proxy Group may instruct the Agent, through the Proxy
Coordinator, not to vote such proxy.
Reasonable efforts shall be made to secure and vote all other
proxies for the Funds, but, particularly in markets in which
shareholders' rights are limited, Non-Votes may also occur in
connection with a Fund's related inability to timely access ballots
or other proxy information in connection with its portfolio
securities.
A-12
Non-Votes may also result in certain cases in which the Agent's
recommendation has been deemed to be conflicted, as provided for in
the Funds' Procedures.
3. OUT-OF-GUIDELINES VOTES: Votes Contrary to Procedures and
Guidelines, or Agent Recommendation, where applicable, Where
No Recommendation is Provided by Agent, or Where Agent's
Recommendation is Conflicted
If the Proxy Group recommends that a Fund vote contrary to the
Procedures and Guidelines, or the recommendation of the Agent,
where applicable, if the Agent has made no recommendation on a
matter requiring case-by-case consideration and the Procedures and
Guidelines are silent, or the Agent's recommendation on a matter
requiring case-by-case consideration is deemed to be conflicted as
provided for under these Adviser Procedures, 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, Proxy
and Brokerage Committee, all applicable recommendations,
analysis, research and Conflicts Reports.
IV. ASSESSMENT OF THE AGENT AND CONFLICTS OF INTEREST
In furtherance of the Advisers' fiduciary duty to the Funds and their beneficial
owners, the Advisers shall establish the following:
A. Assessment of the Agent
The Advisers shall establish that the Agent (1) is independent from
the Advisers, (2) has resources that indicate it can competently
provide analysis of proxy issues and (3) can make recommendations
in an impartial manner and in the best interests of the Funds and
their beneficial owners. The Advisers shall utilize, and the Agent
shall comply with, such methods for establishing the foregoing as
the Advisers may deem reasonably appropriate and shall do not less
than annually as well as prior to engaging the services of any new
proxy service. The Agent shall also notify the Advisers in writing
within fifteen (15) calendar days of any material change to
information previously provided to an Adviser in connection with
establishing the Agent's independence, competence or impartiality.
Information provided in connection with assessment of the Agent
shall be forwarded to a member of the mutual funds practice group
of ING US Legal Services ("Counsel") for review. Counsel shall
review such information and
A-13
advise the Proxy Coordinator as to whether a material concern
exists and if so, determine the most appropriate course of action
to eliminate such concern.
B. Conflicts of Interest
The Advisers shall establish and maintain procedures to identify
and address conflicts that may arise from time to time concerning
the Agent. Upon the Advisers' request, which shall be not less than
annually, and within fifteen (15) calendar days of any material
change to such information previously provided to an Adviser, the
Agent shall provide the Advisers with such information as the
Advisers deem reasonable and appropriate for use in determining
material relationships of the Agent that may pose a conflict of
interest with respect to the Agent's proxy analysis or
recommendations. The Proxy Coordinator shall forward all such
information to Counsel for review. Counsel shall review such
information and provide the Proxy Coordinator with a brief
statement regarding whether or not a material conflict of interest
is present. Matters as to which a material conflict of interest is
deemed to be present shall be handled as provided in the Fund's
Procedures and Guidelines.
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, including taking steps to reasonably insulate the
voting process from any conflict of interest that may exist in
connection with the Agent's services or utilization thereof.
For all matters for which the Proxy Group recommends an
Out-of-Guidelines vote, 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 in connection with an
Out-of-Guidelines vote or under circumstances where a conflict of
interest exists was made solely on the investment merits and
without regard to any other consideration.
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The Proxy Coordinator shall forward all Conflicts Reports to
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 present. Matters as to which
a material 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.
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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, ING
Investments, LLC
Michael J. Roland Executive Vice President, ING Investments, LLC; Vice President,
ING Life Insurance and Annuity Company; and Assistant Secretary,
Directed Services, Inc.
Todd Modic Senior Vice President, ING Funds Services, LLC and ING Investments, LLC;
and Chief Financial Officer of the ING Funds
Maria Anderson Vice President of Fund Compliance, ING Funds Services, LLC
Karla J. Bos Proxy Coordinator for the ING Funds and Manager - Special Projects, ING
Funds Services, LLC
Julius Drelick Head of Product Strategy, ING Funds Services, LLC
Theresa K. Kelety, Esq. Counsel, ING Americas US Legal Services
Effective as of April 21, 2005
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EXHIBIT 3
TO THE
ING FUNDS PROXY VOTING PROCEDURES
----------
PROXY VOTING GUIDELINES OF THE ING FUNDS
----------
I. INTRODUCTION
The following is a statement of the Proxy Voting Guidelines ("Guidelines") that
have been adopted by the respective Boards of Directors or Trustees of each
Fund. Unless otherwise provided for herein, any defined term used herein shall
have the meaning assigned to it in the Funds' and Advisers' Proxy Voting
Procedures (the "Procedures").
Proxies must be voted in the best interest of the Fund(s). 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.
II. 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, 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.
GENERAL POLICIES
It shall generally be the policy of the Funds to take no action on a proxy for
which no Fund holds a position or otherwise maintains an economic interest in
the relevant security at the time the vote is to be cast.
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In all cases receiving CASE-BY-CASE consideration, including cases not
specifically provided for under these Guidelines, unless otherwise provided for
under these Guidelines, it shall generally be the policy of the Funds to vote in
accordance with the recommendation provided by the Funds' Agent, Institutional
Shareholder Services, Inc.
Unless otherwise provided for herein, it shall generally be the policy of the
Funds to vote in accordance with the Agent's recommendation in cases in which
such recommendation aligns with the recommendation of the relevant issuer's
management. However, this policy shall not apply to CASE-BY-CASE proposals for
which a contrary recommendation from the Investment Professional for the
relevant Fund has been received and is to be utilized, provided that
incorporation of any such recommendation shall be subject to the conflict of
interest review process required under the Procedures.
Recommendations from the Investment Professionals, while not required under the
Procedures, are likely to be considered with respect to proxies for private
equity securities and/or proposals related to merger transactions/corporate
restructurings, proxy contests related to takeover bids/contested business
combinations, or unusual or controversial issues. Such input shall be given
primary consideration with respect to CASE-BY-CASE proposals being considered on
behalf of the relevant Fund.
The foregoing policies may be overridden in any case as provided for in the
Procedures. Similarly, the Procedures provide that proposals whose Guidelines
prescribe a firm voting position may instead be considered on a CASE-BY-CASE
basis in cases in which unusual or controversial circumstances so dictate.
Interpretation and application of these Guidelines is not intended to supersede
any law, regulation, binding agreement or other legal requirement to which an
issuer may be or become subject.
1. THE BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Unless otherwise provided for herein, the Agent's standards with respect to
determining director independence shall apply. These standards generally provide
that, to be considered completely independent, a director shall have no material
connection to the company other than the board seat.
Agreement with the Agent's independence standards shall not dictate that a
Fund's vote shall be cast according to the Agent's corresponding recommendation.
Votes on director nominees not subject to specific policies described herein
should be made on a CASE-BY-CASE basis.
In any cases in which application of the policies described herein would result
in withholding votes from the majority of independent outside directors sitting
on a board, or removal of such directors would negatively impact majority board
independence, consider such nominees on a CASE-BY-CASE basis.
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WITHHOLD votes from a nominee who, during both of the most recent two years,
attended less than 75% of the board and committee meetings without a valid
reason for the absences. DO NOT WITHHOLD votes in connection with attendance
issues for nominees who have served on the board for less than the two most
recent years.
WITHHOLD votes from a nominee who has failed to remove restrictive (dead-hand,
slow-hand, no-hand) features from a poison pill only in cases for which
culpability for implementation or renewal of the pill in such form can be
specifically attributed to the nominee.
Provided that a nominee served on the board during the relevant time period,
WITHHOLD votes from a nominee who has failed to implement a shareholder proposal
that was approved by (1) a majority of the issuer's shares outstanding (most
recent annual meeting) or (2) a majority of the votes cast for two consecutive
years. However, in the case of shareholder proposals seeking shareholder
ratification of a poison pill, generally DO NOT WITHHOLD votes from a nominee in
such cases if the company has already implemented a policy that should
reasonably prevent abusive use of the pill.
WITHHOLD votes from inside directors or affiliated outside directors who sit on
the audit committee.
DO NOT WITHHOLD votes from inside directors or affiliated outside directors who
sit on the nominating or compensation committee, provided that such committee
meets the applicable independence requirements of the relevant listing exchange.
However, consider such nominees on a CASE-BY-CASE basis if the committee is
majority insider-controlled.
DO NOT WITHHOLD votes from inside directors or affiliated outside directors if
the full board serves as the compensation or nominating committee OR has not
created one or both committees, provided that the issuer is in compliance with
all provisions of the listing exchange in connection with performance of
relevant functions (E.G., performance of relevant functions by a majority of
independent directors in lieu of the formation of a separate committee).
In cases in which the Agent has identified a "pay for performance disconnect" or
other form of excessive executive compensation practices, consider on a
CASE-BY-CASE basis nominees who sit on the compensation committee, provided that
such nominees served on the board during the relevant time period, but DO NOT
WITHHOLD votes for this reason from the pay package recipient if also sitting
for election but not a compensation committee member.
Generally, vote FOR independent outside director nominees serving on the audit
committee, but if total non-audit fees exceed the total of audit fees,
audit-related fees and tax compliance and preparation fees, do vote AGAINST
auditor ratification if concerns
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exist that remuneration for the non-audit work is so lucrative as to taint the
auditor's independence.
Consider inside director or affiliated outside director nominees in cases in
which the full board is not majority independent on a CASE-BY-CASE basis,
excluding any non-voting director (E.G., director emeritus or advisory director)
in calculations with respect to majority board independence.
Generally vote FOR nominees who sit on up to (and including) six public company
boards unless (1) other concerns requiring CASE-BY-CASE consideration have been
raised, or (2) the nominee is also CEO of a public company, in which case the
public company board threshold shall be three, above which the nominee shall be
considered on a CASE-BY-CASE basis.
PROPOSALS REGARDING BOARD COMPOSITION OR BOARD SERVICE
Generally, vote AGAINST shareholder proposals to impose new board structures or
policies, including those requiring that the positions of chairman and CEO be
held separately, except consider such proposals on a CASE-BY-CASE basis if the
board is not majority independent or pervasive corporate governance concerns
have been identified.
Generally, vote AGAINST shareholder proposals asking that more than a simple
majority of directors be independent.
Generally, vote AGAINST shareholder proposals asking that board compensation
and/or nominating committees be composed exclusively of independent directors.
Generally, vote AGAINST shareholder proposals to limit the number of public
company boards on which a director may serve.
Generally, vote AGAINST shareholder proposals that seek to redefine director
independence or directors' specific roles (E.G., responsibilities of the lead
director).
Generally, vote AGAINST shareholder proposals requesting creation of additional
board committees or offices, except as otherwise provided for herein.
Generally, vote FOR shareholder proposals that seek creation of an audit,
compensation or nominating committee of the board, unless the committee in
question is already in existence or the issuer has availed itself of an
applicable exemption of the listing exchange (E.G., performance of relevant
functions by a majority of independent directors in lieu of the formation of a
separate committee).
Generally, vote AGAINST shareholder proposals to limit the tenure of outside
directors.
Generally, vote AGAINST shareholder proposals to impose a mandatory retirement
age for outside directors, but generally DO NOT VOTE AGAINST management
proposals seeking to establish a retirement age for 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.
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
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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.
2. PROXY CONTESTS
These proposals should generally be analyzed on a CASE-BY-CASE basis. Input from
the Investment Professional(s) for a given Fund shall be given primary
consideration with respect to proposals in connection with proxy contests
related to takeover bids or other contested business combinations being
considered on behalf of that Fund.
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.
3. AUDITORS
RATIFYING AUDITORS
Generally, except in cases of high non-audit fees, vote FOR management proposals
to ratify auditors. If total non-audit fees exceed the total of audit fees,
audit-related fees and tax compliance and preparation fees, consider on a
CASE-BY-CASE basis, voting AGAINST management proposals to ratify auditors in
cases in which concerns exist that remuneration for the non-audit work is so
lucrative as to taint the auditor's independence. If such concerns exist or an
issuer has a history of questionable accounting practices, also vote FOR
shareholder proposals asking the issuer to present its auditor annually for
ratification, but in other cases generally vote AGAINST.
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:
Generally, vote AGAINST shareholder proposals asking for mandatory audit firm
rotation.
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4. 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
Unless the company maintains a classified board of directors, generally, vote
FOR management proposals to eliminate cumulative voting.
In cases in which the company maintains a classified board of directors,
generally vote FOR shareholder proposals to restore or permit cumulative voting.
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.
5. TENDER OFFER DEFENSES
POISON PILLS
Generally, vote FOR shareholder proposals that ask a company to submit its
poison pill for shareholder ratification, unless a policy has already been
implemented by the company that should reasonably prevent abusive use of the
pill.
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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.
6. MISCELLANEOUS
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:
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- 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.
OPEN ACCESS
Consider on a CASE-BY-CASE basis shareholder proposals seeking open access to
management's proxy material in order to nominate their own candidates to the
board.
MAJORITY VOTING STANDARD
Generally, vote FOR management proposals and AGAINST shareholder proposals
seeking election of directors by the affirmative vote of the majority of votes
cast in connection with a meeting of shareholders. For issuers with a history of
board malfeasance, consider such shareholder proposals on a CASE-BY-CASE basis.
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.
OTHER BUSINESS
In connection with proxies of U.S. issuers, generally vote FOR management
proposals for Other Business.
QUORUM REQUIREMENTS
Review on a CASE-BY-CASE basis proposals to lower quorum requirements for
shareholder meetings below a majority of the shares outstanding.
7. CAPITAL STRUCTURE
Analyze on a CASE-BY-CASE basis.
COMMON STOCK AUTHORIZATION
Review proposals to increase the number of shares of common stock authorized for
issue on a CASE-BY-CASE basis Except where otherwise indicated, the Agent's
proprietary approach, utilizing quantitative criteria (E.G., dilution, peer
group comparison, company performance and history) to determine appropriate
thresholds, will generally be utilized in evaluating such proposals.
- Generally vote FOR proposals to authorize capital increases within the
Agent's allowable thresholds, but consider on a CASE-BY-CASE basis those
requests exceeding the Agent's threshold for proposals in connection
with which a contrary recommendation from the Investment Professional(s)
has been received and is to be utilized.
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- Generally vote FOR proposals to authorize capital increases within the
Agent's allowable thresholds, unless the company states that the stock
may be used as a takeover defense. In those cases, consider on a
CASE-BY-CASE basis if a contrary recommendation from the Investment
Professional(s) has been received and is to be utilized.
- Generally vote FOR proposals to authorize capital increases exceeding
the Agent's thresholds when a company's shares are in danger of being
delisted or if a company's ability to continue to operate as a going
concern is uncertain.
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.
Generally, vote FOR shareholder proposals to eliminate dual class capital
structures with unequal voting rights in cases in which the relevant Fund owns
the class with inferior voting rights, but generally vote AGAINST such proposals
in cases in which the relevant Fund owns the class with superior voting rights.
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 falls within
the Agent's allowable thresholds, but consider on a CASE-BY-CASE basis those
proposals exceeding the Agent's threshold for proposals in connection with which
a contrary recommendation from the Investment Professional(s) has been received
and is to be utilized.
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. Generally vote AGAINST in cases where the company expressly states that
the stock may be used as a takeover defense.
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.
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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
or management proposals that seek to eliminate them. 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.
Generally, vote FOR management proposals to cancel repurchased shares.
TRACKING STOCK
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis.
8. EXECUTIVE AND DIRECTOR COMPENSATION
Unless otherwise provided for herein, votes with respect to compensation and
employee benefit plans should be determined on a CASE-BY-CASE basis, with voting
decisions generally based on the Agent's quantitative approach to evaluating
such plans, which includes determination of costs and comparison to an allowable
cap. Generally vote in accordance with the Agent's recommendations FOR
equity-based plans with costs within such cap and AGAINST those with costs in
excess of it, but consider plans CASE-BY-CASE if the Agent raises other
considerations with respect to the plan.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Review on a CASE-BY-CASE basis management proposals seeking approval to
reprice/replace options, considering rationale, historic trading patterns,
value-for-value exchange, participation limits, vesting periods and replacement
option terms. Vote AGAINST compensation plans that permit repricing of stock
options without shareholder approval.
DIRECTOR COMPENSATION
Votes on stock-based plans for directors are made on a CASE-BY-CASE basis, with
voting decisions generally based on the Agent's approach as described above.
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EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be made on a CASE-BY-CASE basis.
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 REGARDING EXECUTIVE AND DIRECTOR PAY
Generally, vote AGAINST shareholder proposals that seek disclosure of the
remuneration of individuals other than senior executives and directors. Unless
evidence exists of abuse in historical compensation practices, and except as
otherwise provided for herein, generally vote AGAINST shareholder proposals that
seek to impose new compensation structures or policies.
GOLDEN AND TIN PARACHUTES
Generally, vote FOR shareholder proposals to have golden and tin parachutes
submitted for shareholder ratification, provided that such "parachutes" specify
change-in-control events and that the proposal does not include unduly
restrictive or arbitrary provisions such as advance approval requirements.
Generally vote AGAINST shareholder proposals to submit executive severance
agreements that do not specify change-in-control events, Supplemental Executive
Retirement Plans or deferred executive compensation plans for shareholder
ratification, unless such ratification is required by the listing exchange.
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
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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
Generally, vote AGAINST shareholder proposals to expense stock options before
such treatment is required by the Federal Accounting Standards Board.
HOLDING PERIODS
Generally, vote AGAINST proposals requiring mandatory periods for officers and
directors to hold company stock.
9. 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).
VOTING ON REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be examined on a
CASE-BY-CASE basis. Generally, vote FOR management reincorporation proposals
upon which another key proposal, such as a merger transaction, is contingent if
the other key proposal is also supported. Generally, vote AGAINST shareholder
reincorporation proposals not also supported by the company.
10. MERGERS AND CORPORATE RESTRUCTURINGS
Input from the Investment Professional(s) for a given Fund shall be given
primary consideration with respect to proposals regarding merger transactions or
other corporate restructurings being considered on behalf of that Fund.
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.
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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.
11. 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.
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.
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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.
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.
12. SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics. In general, unless otherwise
specified herein,
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vote CASE-BY-CASE. While a wide variety of factors may go into each analysis,
the overall principle guiding all vote recommendations focuses on how or whether
the proposal will enhance the economic value of the company. Because a company's
board is likely to have access to relevant, non-public information regarding a
company's business, such proposals will generally be voted in a manner intended
to give the board (rather than shareholders) latitude to set corporate policy
and oversee management.
Absent concurring support from the issuer, compelling evidence of abuse,
significant public controversy or litigation, the issuer's significant history
of relevant violations; or activities not in step with market practice or
regulatory requirements, or unless provided for otherwise herein, generally vote
AGAINST shareholder proposals seeking to dictate corporate conduct, apply
existing law or release information that would not help a shareholder evaluate
an investment in the corporation as an economic matter. Such proposals would
generally include those seeking preparation of reports and/or implementation or
additional disclosure of corporate policies related to issues such as consumer
and public safety, environment and energy, labor standards and human rights,
military business and political concerns, workplace diversity and
non-discrimination, sustainability, social issues, vendor activities, economic
risk or matters of science and engineering.
13. GLOBAL PROXIES
The foregoing Guidelines provided in connection with proxies of U.S. issuers
shall also be applied to global proxies where applicable and not provided for
otherwise herein. The following provide for differing regulatory and legal
requirements, market practices and political and economic systems existing in
various global markets.
Unless otherwise provided for herein, it shall generally be the policy of the
Funds to vote AGAINST global proxy proposals in cases in which the Agent
recommends voting AGAINST such proposal because relevant disclosure by the
issuer, or the time provided for consideration of such disclosure, is
inadequate.
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
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- 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 ELECTIONS
Unless otherwise provided for herein, the Agent's standards with respect to
determining director independence shall apply. These standards generally provide
that, to be considered completely independent, a director shall have no material
connection to the company other than the board seat.
Agreement with the Agent's independence standards shall not dictate that a
Fund's vote shall be cast according to the Agent's corresponding recommendation.
Further, the application of Guidelines in connection with such standards shall
apply only in cases in which the nominee's level of independence can be
ascertained based on available disclosure. Votes on director nominees not
subject to policies described herein should be made on a CASE-BY-CASE basis.
For issuers domiciled in Bermuda, Canada, Cayman Islands, British Virgin Islands
or other tax haven markets, generally vote AGAINST non-independent directors in
cases in which the full board serves as the audit committee, or the company does
not have an audit committee.
For issuers in all markets, including those in tax haven markets and those in
Japan that have adopted the U.S.-style board-with-committees structure, vote
AGAINST non-independent directors who sit on the audit committee unless the
slate of nominees is bundled, in which case the proposal(s) to elect board
members shall be considered on a CASE-BY-CASE basis.
In tax haven markets, DO NOT VOTE AGAINST non-independent directors in cases in
which the full board serves as the compensation committee, or the company does
not have a compensation committee.
DO NOT VOTE AGAINST non-independent directors who sit on the compensation or
nominating committees, provided that such committees meet the applicable
independence requirements of the relevant listing exchange.
In cases in which committee membership is unclear, consider non-independent
director nominees on a CASE-BY-CASE basis if no other issues have been raised in
connection with his/her nomination.
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INDEPENDENT STATUTORY AUDITORS
With respect to Japanese companies that have not adopted the U.S.-style
board-with-committees structure, vote AGAINST any nominee to the position of
"independent statutory auditor" whom the Agent considers affiliated, E.G., if
the nominee has worked a significant portion of his career for the company, its
main bank or one of its top shareholders. Where shareholders are forced to vote
on multiple nominees in a single resolution, vote AGAINST all nominees.
NOMINATING COMMITTEE
Generally, vote AGAINST proposals that permit non-board members to serve on the
nominating committee.
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.
RETIREMENT BONUSES
With respect to Japanese companies, follow the Agent's guidelines for proposals
regarding payment of retirement bonuses to directors and auditors: Generally
vote FOR such proposals if all payments are for directors and auditors who have
served as executives of the company. Generally vote AGAINST such proposals if
one or more payments are for non-executive, affiliated directors or statutory
auditors; when one or more of the individuals to whom the grants are being
proposed (1) has not served in an executive capacity for the company for at
least three years or (2) has been designated by the company as an independent
statutory auditor, regardless of the length of time he/she has served.
STOCK OPTION PLANS
With respect to Japanese companies, follow the Agent's guidelines with respect
to proposals regarding option grants to independent internal statutory auditors,
generally voting AGAINST such plans.
SHARES RESERVED FOR ISSUANCE OF OPTIONS OR EMPLOYEE SHARE-PURCHASE PLANS
Generally vote AGAINST option plans, or the issuance of shares in connection
with such plans, that provide discounts to executives, are administered by
potential grant recipients, or are markedly out of line with market practice.
Consider proposals in connection with option plans or the issuance of shares in
connection with them in other instances on a CASE-BY-CASE basis.
GENERAL SHARE ISSUANCES
Generally vote AGAINST proposals to issue shares (with or without preemptive
rights) in cases in which concerns have been identified by the Agent with
respect to inadequate disclosure, inadequate restrictions on discounts, or
authority to refresh share issuance amounts without prior shareholder approval.
Consider such proposals on a CASE-BY-CASE
A-33
basis in cases in which the issuance exceeds the Agent's guidelines for
issuances based on percentage of capital or dilution.
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.
INDEMNIFICATION OF AUDITORS
Generally, vote AGAINST proposals to indemnify auditors.
ALLOCATION OF INCOME AND DIVIDENDS
Consider management proposals concerning allocation of income and the
distribution of dividends on a CASE-BY-CASE basis.
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.
A-34
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;
- there is negligible or positive impact on shareholder value;
- management provides adequate reasons for the amendments; or
- the company is required to do so by law (if applicable).
With respect to article amendments for Japanese companies:
- Generally vote FOR management proposals to amend a company's articles to
provide for an expansion or reduction in the size of the board, unless
the expansion/reduction is clearly disproportionate to the
growth/decrease in the scale of the business.
- Generally follow the Agent's guidelines with respect to management
proposals regarding amendments to authorize share repurchases at the
board's discretion, voting AGAINST proposals unless there is little to
no likelihood of a "creeping takeover" (major shareholder owns nearly
enough shares to reach a critical control threshold) or constraints on
liquidity (free float of shares is low), and where the company is
trading at below book value or is facing a real likelihood of
substantial share sales; or where this amendment is bundled with other
amendments which are clearly in shareholders' interest.
OTHER BUSINESS
In connection with global proxies, vote in accordance with the Agent's
market-specific recommendations on management proposals for Other Business,
generally AGAINST.
A-35
PART C
OTHER INFORMATION
ING PRIME RATE TRUST
(25,000,000 COMMON SHARES)
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Contained in Part A:
Financial Highlights for the years ended February 28, 2005,
February 29, 2004, February 28, 2003, 2002 and 2001; February 29,
2000.
Financial Statements are incorporated in Part B by reference to
Registrant's February 289, 20045 Annual Report (audited).
2. Exhibits
(a) (i) Agreement and Declaration of Trust.(1)
(ii) Amendment to the Agreement and Declaration of Trust
dated March 26, 1996 and effective April 12,
1996.(1)
(iii) Amendment to the Agreement and Declaration of Trust
dated October 23, 1998 and effective November 16,
1998.(7)
(iv) Amendment to the Agreement and Declaration of Trust
dated October 20, 2000 and effective October 20,
2000.(9)
(v) Amendment to the Agreement and Declaration of Trust
dated February 20, 2002 and effective March 1,
2002.(10)
(b) (i) By-Laws.(2)
(ii) Amendment to By-Laws.(2)
(iii) Amendment to By-Laws.(8)
(iv) Amendment to By-Laws.(9)
(c) Not Applicable
(d) (i) Certificate of Designation for Preferred Shares.(9)
(ii) Form of Share Certificate.(9)
(e) Shareholder Investment Program.(12)
(f) Not Applicable
(g) (i) Investment Management Agreement between ING
Investment Management, LLC and ING Prime Rate
Trust.(9)
1. Amended Schedule of Approvals with respect to
the Investment Management Agreement between
ING Investments, LLC and ING Prime Rate
Trust.(12)
2. First Amendment dated September 2, 2004 to
the Investment Management Agreement between
ING Investment Management, LLC and ING Prime
Rate Trust - Filed herein.
(ii) Sub-Advisory Agreement between ING Investments, LLC
and Aeltus Investment Management, Inc.(11)
1. First Amendment to Sub-Advisory Agreement,
effective as of September 1, 2003, between
ING Investments, LLC and Aeltus Investment
Management, Inc. with regards to ING Prime
Rate Trust.(12)
(h) (i) Amended and Restated Distribution Agreement, dated
June 15, 2004, between ING Prime Rate Trust and ING
Funds Distributor, LLC (25 Million) - Filed herein.
(ii) Underwriting Agreement for the Preferred Shares,
dated November 13, 2000.(12)
1. Underwriting Agreement for the Preferred
Shares, dated October 30, 2000.(12)
(i) Not Applicable
(j) (i) Custodian and Investment Accounting Agreement
between Registrant and State Street Bank and Trust
Company, effective November 1, 2001.(12)
1. First Amendment to the Custodian and
Investment Accounting Agreement dated March
1, 2002.(12)
2. Amended and Restated Exhibit A with respect
to the Custodian and Investment Accounting
Agreement.(12)
C - 2
(ii) Fee Allocation Agreement, dated August 21, 2003.
(12)
1. Amended Schedule A to the Fee Allocation
Agreement.(12)
(iii) Proxy Agent Fee Allocation Agreement, dated August
21, 2003.(12)
1. Amended Schedule A to the Proxy Agent Fee
Allocation Agreement.(12)
(iv) Allocation Agreement Fidelity Bond, made May 24,
2002.(12)
1. Amended Schedule A to the Allocation
Agreement.(12)
(v) Allocation Agreement Directors & Officers, made May
24, 2002.(12)
1. Amended Schedule A to the Allocation
Agreement Directors & Officers.(12)
(vi) Agency Agreement, made November 30, 2000 by and
between Registrant and DST Systems, Inc.(12)
1. Amended and Restated Exhibit A dated April
11, 2005 with respect to the Agency Agreement
between The Registrant and DST Systems, Inc.-
Filed herein.
(k) (i) Amended and Restated Administration Agreement,
amended and restated on April 27, 2000.(12)
(ii) Amendment to the Amended and Restated Administration
Agreement.(10)
(iii) Revolving Credit and Security Agreement between ING
Prime Rate Trust and Citibank, dated as of July 16,
2003.(12)
1. Amendment No. 1 to the Revolving Credit and
Security Agreement, dated February 3, 2004.
(12)
2. Amendment No. 2 dated July 13, 2004 to the
Revolving Credit and Security Agreement -
Filed herein.
3. Amendment No. 3 dated October 15, 2004 to the
Revolving Credit and Security Agreement -
Filed herein.
C - 3
(iv) Second Amended and Restated Credit Agreement with
Bank of America.(12)
(v) Auction Agency Agreement, dated as of November 16,
2000.(12)
1. Auction Agency Agreement, dated as of
November 2, 2000.(12)
(vi) Broker-Dealer Agreement, dated as of November 16,
2000 (UBS).(12)
1. Broker-Dealer Agreement, dated as of November
16, 2000 (Salomon Smith Barney).(12)
2. Broker-Dealer Agreement, dated as of November
16, 2000 (Lehman Brothers).(12)
3. Broker-Dealer Agreement, dated as of November
16, 2000 (Gruntal & Co.).(12)
4. Broker-Dealer Agreement, dated as of November
2, 2000 (PaineWebber).(12)
5. Broker-Dealer Agreement, dated as of November
2, 2000 (Gruntal & Co.).(12)
6. Broker-Dealer Agreement, dated as of November
2, 2000 (Salomon Smith Barney).(12)
7. Broker-Dealer Agreement, dated as of October
31, 2000 (Lehman Brothers).(12)
(vii) DTC Letter of Representations as to Preferred
Shares, dated November 15, 2000.(12)
1. DTC Letter of Representation as to Preferred
Shares, dated November 1, 2000.(12)
(l) Opinion of Dechert Price & Rhoads.(7)
(m) Not Applicable
(n) (i) Consent of Dechert LLP - Filed herein.
(ii) Consent of KPMG LLP - Filed herein.
(o) Not Applicable
(p) Certificate of Initial Capital.(4)
(q) Not Applicable
C - 4
(r) (i) ING Funds Code of Ethics, effective June 1,
2004 as amended October 1, 2004 and
February 1, 2005 - filed herein.
(ii) Aeltus Investment Management, Inc. Code of
Ethics.(11)
----------
(1) Incorporated herein by reference to Amendment No. 20 to Registrant's
Registration Statement under the Investment Company Act of 1940 (the
"1940 Act") on Form N-2 (File No. 811-5410), filed on September 16, 1996.
(2) Incorporated herein by reference to Amendment No. 24 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on November 7, 1997.
(3) Incorporated herein by reference to Amendment No. 22 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on June 23, 1997.
(4) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's initial registration statement on form N-2 (File No.
33-18886), filed on January 22, 1988.
(5) Incorporated herein by reference to Amendment No. 27 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on May 15, 1998.
(6) Incorporated herein by reference to Amendment No. 28 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on August 19, 1998.
(7) Incorporated herein by reference to Amendment No. 29 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on December 2, 1998.
(8) Incorporated herein by reference to Amendment No. 33 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on May 9, 2000.
(9) Incorporated herein by reference to Amendment No. 38 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on October 23, 2000.
(10) Incorporated herein by reference to Amendment No. 45 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on April 30, 2002.
(11) Incorporated herein by reference to Amendment No. 53 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on June 26, 2003.
(12) Incorporated herein by reference to Amendment No. 58 to Registrant's
Registration Statement under the 1940 Act on Form N-2 (File No.
811-5410), filed on June 28, 2004.
C - 5
ITEM 25. MARKETING AGREEMENTS
Not Applicable.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses incurred or estimated to be
incurred in connection with the offering described in the Registration
Statement.
Registration Fees $ 0
Trustee Fees $ 0
Rating Agency Fees $ 0
Printing Expenses $ 32,500
Legal Fees $ 30,000
Accounting Fees and Expenses $ 5,500
Miscellaneous Expenses $ 0
Total $ 68,000
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
(2) NUMBER OF RECORD HOLDERS
(1) TITLE OF CLASS AS OF JUNE 17, 2005
------------------ ----------------------------
Auction Rate Cumulative Preferred Shares of
beneficial interest, par value $0.01 per share
Series M 527
Series T 531
Series W 593
Series Th 560
Series F 507
Common Shares of beneficial interest, par
value $0.01 per share 6,633
C - 6
ITEM 29. INDEMNIFICATION
Registrant's Agreement and Declaration of Trust generally provides that
the Trust shall indemnify each of its Trustees and officers (including persons
who serve at the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) ("Covered Persons") against all liabilities and expenses, including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, by reason of being or having been such a Covered Person except with
respect to any matter as to which such Covered Person shall have been finally
adjudicated (a) not to have acted in good faith in the reasonable belief that
such Covered Person's action was in the best interest of the Trust or (b) to be
liable to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of duties involved in the conduct
of such Covered Person's office.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will submit, unless in the opinion of its counsel the
matter has been settled by controlling precedent, to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information as to the Trustees and officers of the Adviser, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by the directors and officers of the Adviser in
the last two years, is included in its application for registration as an
investment adviser on Form ADV (File No. 801-48282) filed under the Investment
Advisers Act of 1940, as amended ("Advisers Act"), and is incorporated herein by
reference thereto.
Information as to the directors and officers of the sub-adviser, together
with information as to any other business, profession, vocation or employment of
a substantial nature engaged in by the directors and officers of the sub-adviser
in the last two years, is included in its application for registration as an
investment adviser on Form ADV for ING Investment Management Co. (File No.
801-9046) filed under the Investment Adviser Act of 1940, as amended, and is
incorporated by reference thereto.
C - 7
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The amounts and records of the Registrant will be maintained at its
office at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, at the
office of its sub-adviser, ING Investment Management Co., 230 Park Avenue, New
York, NY 10169 and at the office of its custodian, State Street Bank & Trust -
Kansas City, 801 Pennsylvania, Kansas City, Missouri 64105.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
1. The Registrant undertakes to suspend the Offer until the
prospectus is amended if (1) subsequent to the effective date of this
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of this registration statement or
(2) the net asset value increases to an amount greater than the net proceeds as
stated in the prospectus included in this registration statement.
2. Not Applicable.
3. Not Applicable.
4. Not Applicable.
5.
a. The Registrant undertakes that for the purpose of
determining any liability under the 1933 Act, the information omitted from the
form of prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant under
Rule 497(h) under the 1933 Act [17 CFR 230.497(h)] shall be deemed to be part of
this Registration Statement as of the time it was declared effective; and
b. that for the purpose of determining any liability under the
1933 Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
C - 8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Scottsdale in
the State of Arizona this 29th day of June, 2005.
ING PRIME RATE TRUST
By: /s/ Huey P. Falgout, Jr.
------------------------
Huey P. Falgout, Jr.
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
SIGNATURE TITLE DATE
--------- ----- ----
Trustee June 29, 2005
---------------------------------------------
John V. Boyer*
Trustee June 29, 2005
---------------------------------------------
John G. Turner*
President and Chief June 29, 2005
Executive Officer
---------------------------------------------
James M. Hennessy*
Senior Vice President,
Chief/Principal Financial
/s/ Todd Modic Officer June 29, 2005
---------------------------------------------
Todd Modic
Trustee June 29, 2005
---------------------------------------------
J. Michael Earley*
Trustee June 29, 2005
---------------------------------------------
R. Barbara Gitenstein*
Trustee June 29, 2005
---------------------------------------------
Patrick W. Kenny*
Trustee June 29, 2005
---------------------------------------------
Walter H. May, Jr.*
Trustee June 29, 2005
---------------------------------------------
Thomas J. McInerney*
Trustee June 29, 2005
---------------------------------------------
Jock Patton*
Trustee June 29, 2005
---------------------------------------------
David W.C. Putnam*
Trustee June 29, 2005
---------------------------------------------
Roger B. Vincent*
Trustee June 29, 2005
---------------------------------------------
Richard A. Wedemeyer*
*By: /s/ Huey P. Falgout, Jr.
------------------------
Huey P. Falgout, Jr.
Attorney-in-Fact**
----------
** Powers of Attorney for each Trustee and James M. Hennessy are incorporated
herein by reference to Amendment No. 59 to Registrant's Registration
Statement under the 1940 Act on Form N-2 (File No. 811-5410), filed on April
22, 2005.
EXHIBIT INDEX
ING PRIME RATE TRUST
(25,000,000 COMMON SHARES)
EXHIBIT NUMBER EXHIBIT NAME
-------------- ------------
(g)(i)(2) First Amendment to Investment Management Agreement
(h)(i) Amended and Restated Distribution Agreement (25 Million Common Shares)
(j)(vi)(1) Amended and Restated Exhibit A to Agency Agreement
(k)(iii)(2) Amendment No. 2 to the Revolving Credit and Security Agreement
(k)(iii)(3) Amendment No. 3 to the Revolving Credit and Security Agreement
(n)(i) Consent of Dechert LLP
(n)(ii) Consent of KPMG LLP
(r)(i) Code of ethics