As filed with the Securities and Exchange Commission on March 25, 2004
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1933 Act File No. 333-112202
1940 Act File No. 811-21496
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
[ ] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 3
[ ] Post-Effective Amendment No. _
and
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 3
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund
(formerly known as
Macquarie/First Trust Global Infrastructure Dividend & Income Fund)
Exact Name of Registrant as Specified in Declaration of Trust
1001 Warrenville Road, Suite 300, Lisle, Illinois 60532
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(630) 241-4141
Registrant's Telephone Number, including Area Code
W. Scott Jardine
First Trust Portfolios L.P.
1001 Warrenville Road, Suite 300
Lisle, Illinois 60532
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Eric F. Fess
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement
If any of the securities being registered on this form are offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
[ ] when declared effective pursuant to section 8(c)
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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---------------- ---------- ---------------- ----------------- ------------
Title of Amount Proposed Maximum Proposed Maximum Amount of
Securities Being Offering Price Aggregate Registration
Being Registered Registered Per Unit Offering Price(1) Fee(2)
---------------- ---------- ---------------- ----------------- ------------
---------------- ---------- ---------------- ----------------- ------------
Common Shares, 12,650,000 $20.00 $253,000,000 $32,055.10
$0.01 par value
---------------- ---------- ---------------- ----------------- ------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $1.62 of which has been previously paid with the initial registration
statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
dates as the Commission, acting pursuant to said Section 8(a), may determine.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 25, 2004
PROSPECTUS
----------
Shares
Macquarie/First Trust Global Infrastructure/Utilities
Dividend & Income Fund
Common Shares
$20.00 per share
----------------------
Investment Objective. The Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund (the "Fund") is a newly
organized, non-diversified, closed-end management investment company. The Fund's
investment objective is to seek a high level of current return consisting of
dividends, interest and other similar income while attempting to preserve
capital. In pursuit of the objective, the Fund will seek to manage its
investments and expenses so that a significant portion of its distributions to
the Fund's common shareholders will qualify as tax-advantaged dividends, subject
to the continued availability of favorable tax treatment for such qualifying
dividends.
(continued on following page)
No Prior Trading History. Because the Fund is newly organized, its common
shares have no history of public trading. Shares of closed-end investment
companies frequently trade at a discount from their net asset value, or "NAV."
This risk may be greater for investors who expect to sell their shares in a
relatively short period after completion of the public offering. The Fund's
common shares have been approved for listing on the New York Stock Exchange,
subjec to notice of issuance, under the symbol "MFD."
Investing in the Fund's common shares involves risks that are described in
the "Risks" section beginning on page 27 of this prospectus.
----------------------
Per Share Total
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Public offering price................................ $20.00 $
Sales load (1)....................................... $.90 $
Estimated offering expenses (2)...................... $.04 $
Proceeds, after expenses, to the Fund................ $19.06 $
(1) The Fund has agreed to pay the underwriters $.00667 per common share as
a partial reimbursement of expenses incurred in connection with the
offering and to pay certain expenses of counsel to the underwriters.
First Trust Advisors L.P. will pay certain additional compensation to
Merrill Lynch, Pierce, Fenner & Smith Incorporated. The total amount of
this additional compensation payment, plus the amounts paid by the Fund
as partial reimbursement to the underwriters and as payment of certain
expenses of counsel to the underwriters, will not exceed 4.5% of the
total price to the public of the common shares sold in this offering.
See "Underwriting."
(2) Total expenses of the offering of the common shares of the Fund paid by
the Fund (other than sales load, but including the $.00667 per common
share reimbursement of underwriter expenses) are estimated to be $ .
The Fund's investment adviser and a sub-adviser have agreed to pay
(i) all organizational expenses and (ii) all offering costs of the
Fund (other than sales load, but including the reimbursement described
above) that exceed $.04 per common share.
The underwriters may also purchase up to an additional common shares at the
public offering price, less the sales load, within 45 days from the date of this
prospectus solely to cover overallotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The common shares will be ready for delivery on or about , 2004.
----------------------
Merrill Lynch & Co.
Robert W. Baird & Co. Raymond James
RBC Capital Markets SunTrust Robinson Humphrey
----------------------
The date of this prospectus is , 2004.
===============================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
===============================================================================
Page 1
(continued from previous page)
Investments in the Fund are not deposits with or other liabilities of
Macquarie Bank Limited ACN 008 583 542, or of any entity in the Macquarie Bank
Group, and are subject to investment risk, including possible delays in
repayment and loss of income and capital invested. None of Macquarie Bank
Limited, Macquarie Infrastructure Fund Adviser, LLC, Four Corners Capital
Management, LLC, and any member company of the Macquarie Bank Group guarantees
any particular rate of return or the performance of the Fund, nor do they
guarantee the repayment of capital from the Fund or any tax treatment of any
distribution by the Fund. See "Management of the Fund" for information regarding
Macquarie Bank Limited.
In addition, the Fund's common shares ("Common Shares") do not represent a
deposit or obligation of, and are not guaranteed or endorsed by, any bank or
other insured depository institution, and are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency.
Portfolio Contents. The Fund will seek to achieve its investment objective
by investing in a non-diversified portfolio of equity, debt, preferred or
convertible securities and other instruments that are issued by U.S. and
non-U.S. issuers ("Infrastructure Issuers") that have as their primary focus (in
terms of income and/or assets) the management, ownership and/or operation of
infrastructure and utilities assets ("Infrastructure Assets") in a select group
of countries. The Fund currently intends to utilize leverage up to a maximum of
30% of the Fund's total assets, immediately after taking into account such
leverage. To the extent leverage is used, the Fund currently intends to invest
the funds raised through leverage in senior secured floating-rate U.S.
dollar-denominated loans of Infrastructure Issuers ("Infrastructure Senior
Loans"). See "Prospectus Summary - Investment Objectives and Policies -
Infrastructure Assets" for a description of Infrastructure Assets.
Therefore, the Fund's portfolio will likely consist of two components: (1)
the "Core Component," which will consist primarily of equity securities and
securities and instruments with equity characteristics issued by Infrastructure
Issuers but may also include other securities and instruments issued by
Infrastructure Issuers (collectively, "Core Infrastructure Securities") and (2)
the "Senior Loan Component," which will consist of Infrastructure Senior Loans.
The Fund currently intends to apply the proceeds of issuance of its common
shares to acquire Core Infrastructure Securities and the proceeds of any
leverage to acquire Infrastructure Senior Loans. Up to 100% of the Senior Loan
Component may consist of non-investment grade instruments. Such instruments are
commonly referred to as "high yield" or "junk bonds" and are considered
speculative with respect to the issuer's capacity to pay interest and repay
principal.
Under normal market conditions, the Fund will seek to invest more than 50%
of the Fund's total assets in the securities and instruments of non-U.S.
Infrastructure Issuers located in Australia, New Zealand, Canada, the United
Kingdom and other European Union member countries as of the date of this
prospectus, Switzerland, Japan, Hong Kong and Singapore. Across both the Core
Component and the Senior Loan Component, the Fund intends that no more than 40%
of the Fund's total assets be invested in the securities and instruments of
Infrastructure Issuers located in the U.S. and that no more than 7% of the
Fund's total assets be invested in the securities and instruments of any one
Infrastructure Issuer. The Core Component is intended to consist mainly of
exchange-listed securities and instruments of Infrastructure Issuers. Although
not a primary focus of the Fund, the Fund may invest up to 25% of the Core
Component in unlisted securities and instruments of Infrastructure Issuers. The
Fund will seek to deliver at least 50% of its distributed income attributable to
the Core Infrastructure Securities as tax-advantaged dividends under the
Internal Revenue Code of 1986, as amended, which may enable individual U.S.
investors who meet holding period and other requirements to receive the benefit
of favorable tax treatment. Tax-advantaged dividends generally include dividends
from U.S. corporations and dividends and distributions from non-U.S. entities
that meet certain criteria. See "The Fund's Investments" for a description of
holding period requirements.
Investment Adviser and Sub-Advisers. First Trust Advisors L.P. ("First
Trust" or the "Adviser") will be the Fund's investment adviser, responsible for
supervising the Fund's sub-advisers, monitoring the Fund's investment portfolio,
managing the Fund's business affairs and providing certain clerical and
bookkeeping and other administrative services. The Adviser, in consultation with
the Sub-Advisers (as defined below), is also responsible for determining the
Fund's overall investment strategy and overseeing its implementation. Macquarie
Infrastructure Fund Adviser, LLC ("MIFA") and Four Corners Capital Management,
LLC ("Four Corners") will be the Fund's sub-advisers (the "Sub-Advisers"). MIFA
is a newly organized registered investment adviser with no operating history.
The Core Component will be managed by MIFA. The Senior Loan Component will be
managed by Four Corners.
Leverage. Within approximately three months after the completion of the
offering of Common Shares described in this prospectus, the Fund currently
intends, subject to then favorable market conditions, to utilize leverage
through the issuance of preferred shares, commercial paper or notes and/or
borrowing in an aggregate amount up to 30% of the Fund's total assets
immediately after such issuance and/or borrowing. The issuance of these
instruments, which would be senior to the Common Shares, will result in the
financial leveraging of the Common Shares. Whether to offer shares of preferred
stock or engage in another form of leveraging, and, if offered, the terms of
such shares or leveraging and the timing and other terms of their offering or
Page 2
arrangement will be determined by the Board of Trustees in consultation with the
Sub-Advisers. Through leveraging, the Fund will seek to obtain a higher return
for the holders of Common Shares than if the Fund did not use leverage. Leverage
is a speculative technique and investors should note that there are special
risks and costs associated with the leveraging of the Common Shares. There can
be no assurance that a leveraging strategy will be successful during any period
in which it is employed. See "Borrowings and Preferred Shares - Effects of
Leverage," "Risks - Leverage Risk" and "Description of Shares."
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
The Fund's Statement of Additional Information, dated , 2004, and as it may be
supplemented (the "SAI"), containing additional information about the Fund, has
been filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this prospectus. You may request a free copy of
the SAI, the table of contents of which is on page 55 of this prospectus, by
calling (800) 988-5891 or by writing to the Fund, or you may obtain a copy (and
other information regarding the Fund) from the Securities and Exchange
Commission's web site (http://www.sec.gov).
Page 3
TABLE OF CONTENTS
Page
----
Prospectus Summary..................................................... 5
Summary of Fund Expenses............................................... 17
The Fund............................................................... 18
Use of Proceeds........................................................ 18
The Fund's Investments................................................. 18
Borrowings and Preferred Shares........................................ 25
Risks.................................................................. 27
Management of the Fund................................................. 40
Net Asset Value........................................................ 42
Distributions.......................................................... 44
Dividend Reinvestment Plan............................................. 44
Description of Shares.................................................. 45
Certain Provisions in the Declaration of Trust......................... 47
Closed-End Fund Structure.............................................. 47
Tax Matters............................................................ 48
Underwriting........................................................... 51
Custodian, Administrator and Transfer Agent............................ 53
Legal Opinions......................................................... 53
Table of Contents of the Statement of Additional Information........... 55
----------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCES IN THIS PROSPECTUS. THE FUND HAS NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT INFORMATION OR INCONSISTENT INFORMATION, YOU SHOULD
NOT RELY ON IT. THE FUND IS NOT, AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER
TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Page 4
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the
information that you should consider before investing in the Fund's common
shares, especially the information set forth under the heading "Special Risk
Considerations." You should review the more detailed information contained in
this prospectus and in the Statement of Additional Information.
The Fund......................... Macquarie/First Trust Global Infrastructure/
Utilities Dividend & Income Fund (the
"Fund") is a newly organized,
non-diversified, closed-end management
investment company. The Fund's principal
offices are located at 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532 and
its telephone number is (630) 241-4141.
The Offering..................... The Fund is offering common
shares of beneficial interest at $20.00 per
share through a group of underwriters (the
"Underwriters") led by Merrill Lynch,
Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). The common shares of
beneficial interest are called "Common
Shares" in this prospectus. You must
purchase at least 100 Common Shares in this
offering. The Fund has given the
Underwriters an option to purchase up to
additional Common Shares to cover orders in
excess of Common Shares. See "Underwriting."
The Adviser and Macquarie Infrastructure
Fund Adviser, LLC ("MIFA") have agreed to
pay (i) all organizational expenses and (ii)
all offering costs (other than sales load,
but including the $.00667 per Common Share
reimbursement of underwriter expenses) that
exceed $.04 per Common Share.
Investment Objective
and Policies..................... The Fund's investment objective is to seek a
high level of current return consisting of
dividends, interest and other similar income
while attempting to preserve capital. In
pursuit of the objective, the Fund will seek
to manage its investments and expenses so
that a significant portion of its
distributions to the Fund's common
shareholders will qualify as tax-advantaged
dividends, subject to the continued
availability of favorable tax treatment for
such qualifying dividends. The Fund will
seek to achieve its investment objective by
investing in a portfolio of equity, debt,
preferred or convertible securities and
other instruments (for instance, other
instruments could include Canadian income
trusts and Australian stapled securities)
issued by U.S. and non-U.S. issuers
("Infrastructure Issuers") that have as
their primary focus (in terms of income
and/or assets) the management, ownership
and/or operation of infrastructure and
utilities assets ("Infrastructure Assets")
in a select group of countries.
Under normal market conditions, the Fund's
over-riding investment philosophy will be to
seek to identify and invest in securities
and instruments that, over the long term,
are anticipated to produce, for equity
securities and securities and instruments
with equity characteristics, consistent
dividends or distribution of income and, for
debt securities and other non-equity
instruments, interest income commensurate
with the underlying risk of the debt.
The Fund intends to invest the net proceeds
of issuance of its Common Shares raised
under this offering primarily in equity
securities and securities and instruments
with equity characteristics issued by
Infrastructure Issuers but may also invest
in other securities and instruments issued
by Infrastructure Issuers (collectively,
"Core Infrastructure Securities"). This will
comprise the "Core Component" of the Fund's
investment portfolio. The Core Component
will be managed by MIFA.
The Fund currently intends to use leverage
through the issuance of instruments (each, a
"Leverage Instrument" and collectively, the
"Leverage Instruments"), such as preferred
shares of beneficial interest ("Preferred
Shares"), commercial paper or notes and/or
borrowings in an aggregate amount up to 30%
of the Fund's Total Assets (as defined
below) immediately after such issuance
and/or borrowing. The Fund currently intends
to invest the proceeds of the leverage in
U.S. dollar-denominated senior secured
floating-rate loans of Infrastructure
Issuers ("Infrastructure Senior Loans") in
an attempt to provide a stable stream of
income. The Infrastructure Senior Loans in
which the Fund invests will be the "Senior
Loan Component" of the Fund's investment
portfolio. The Senior Loan Component will be
managed by Four Corners Capital Management,
LLC ("Four Corners"; together with MIFA, the
"Sub-Advisers"). The investments in
Page 5
Infrastructure Senior Loans are expected to
largely match the currency and interest rate
characteristics of any leverage. It is
anticipated that at least 80% of the
Infrastructure Senior Loans in the Senior
Loan Component will be non-investment grade
debt instruments.
"Total Assets" generally means the average
daily gross asset value of the Fund
(including assets attributable to the
proceeds of the Fund's Preferred Shares, if
any, and the principal amount of any
borrowings) minus the sum of the Fund's
accrued and unpaid dividends on any
outstanding Preferred Shares and accrued
liabilities (other than the principal amount
of any borrowings incurred, commercial paper
or notes issued by the Fund and the
liquidation preference of any outstanding
Preferred Shares). For purposes of
determining Total Assets, the liquidation
preference of the Preferred Shares is not
treated as a liability.
The Core Component is intended to consist
mainly of listed securities and instruments
of Infrastructure Issuers. The Fund may,
when presented with an opportunity to do so,
invest up to 25% of the Core Component in
unlisted securities and instruments of
Infrastructure Issuers, although this is not
a primary focus of the Fund and MIFA will
not actively seek out such opportunities.
Under normal market conditions, the Fund
will seek to deliver at least 50% of its
income attributable to the Core
Infrastructure Securities as tax-advantaged
dividends under the United States Internal
Revenue Code of 1986, as amended (the
"Code"), to the extent that preferential
treatment for such dividends remains
available (under current law, generally up
to and including December 31, 2008).
Infrastructure Senior Loans, U.S. corporate
bonds, notes and debentures, convertible
debt securities, and other similar types of
corporate instruments, including high yield
debt securities, are not eligible to pay
tax-advantaged dividends.
Across both the Core Component and the
Senior Loan Component, under normal market
conditions, the Fund intends to invest at
least 80%, and may invest up to 100%, of its
Total Assets in securities and instruments
of Infrastructure Issuers that are expected
to provide dividends, interest and other
similar income. The Fund cannot change this
investment policy unless the shareholders of
the Fund ("Shareholders") receive at least
60 days prior notice of any such change.
Under normal market conditions, the Fund
intends that more than 50% of the Core
Component will, and up to 100% may, comprise
securities and instruments of non-U.S.
Infrastructure Issuers, and more than 50% of
the Fund's Total Assets will be invested in
securities and instruments of non-U.S.
Infrastructure Issuers. Accordingly, the
Fund will hold securities and instruments
denominated in non-U.S. currencies.
The Fund does not currently intend to enter
into arrangements to reduce its exposure to
non-U.S. currencies, other than in
connection with the Fund's exposure to
dividends received or receivable in non-U.S.
currencies. The Fund intends to restrict its
investments to securities and instruments of
Infrastructure Issuers located in Australia,
New Zealand, the United States, Canada, the
United Kingdom ("U.K.") and other European
Union member countries as of the date of
this prospectus, Switzerland, Japan, Hong
Kong and Singapore ("Permitted Countries").
The Fund also intends to apply the following
guidelines to its investments:
o Across both the Core Component and the
Senior Loan Component, no more than 7% of
the Fund's Total Assets may be invested in
the securities and instruments of any
single Infrastructure Issuer at any time.
o Across both the Core Component and the
Senior Loan Component, no more than 40% of
the Fund's Total Assets may be invested in
the securities and instruments of U.S.
Infrastructure Issuers at any time.
o Within the Core Component, no more than
20% of the Core Infrastructure Securities
may consist of securities and instruments
of U.S. Infrastructure Issuers at any
time.
Page 6
o Across both the Core Component and the
Senior Loan Component, no more than 30% of
the Fund's Total Assets may be invested in
the securities and instruments of non-U.S.
Infrastructure Issuers located in any one
country at any time.
The Fund may invest in securities and
instruments that are forecast to decline in
value due to the nature of the assets of the
Infrastructure Issuer, where such decline is
anticipated to be compensated through
enhanced yield.
The Fund intends to follow the guidelines
set out above but may deviate from such
guidelines from time to time as deemed
appropriate under prevailing economic and
market conditions to achieve its investment
objective over the long term. If any
allocation of assets exceeds the guidelines
set out above, the Fund will seek to reduce
the allocation as soon as practicable based
on the liquidity of its assets and other
market factors.
The Fund may not be appropriate for all
investors. There can be no assurance that
the Fund's investment strategy will be
successful, that the Fund will achieve its
investment objective, or that preferential
tax treatment will be achieved with respect
to its investments. See "The Fund's
Investments" and "Risks."
Infrastructure Assets. Up to 100% of the
Fund's Total Assets may be comprised of
securities and instruments of Infrastructure
Issuers that manage, own and/or operate
Infrastructure Assets. Infrastructure Assets
are an underlying foundation of basic
services, facilities and institutions upon
which the growth and development of a
community depends. Typically, in the United
States, such assets are owned, operated or
managed by government-related entities such
as municipalities. In non-U.S. countries,
these assets are often owned, operated or
managed by private entities.
Infrastructure Assets can be broadly divided
into four categories:
1. Assets that are natural or
near-natural monopolies and are regulated
in the level of revenue earned or charges
imposed, and include certain power and gas
transmission, generation and distribution
assets, as well as certain
water/waste-water treatment facilities and
incumbent local exchange carriers.
2. Assets that depend on a form of
user pay system for their main revenue
source, and include toll roads, airports,
railways, ports and certain parking lots
(e.g., airport related).
3. Assets that provide basic social
services to the community, and include
schools, hospitals and correction
facilities, as well as certain
water/waste-water treatment facilities.
4. Assets that compete in a market
for the sale of a product or service and
are therefore exposed to market risks.
Competitive assets include certain
electricity generation, solid waste
disposal facilities, city and local
carparks, and certain communication asset
classes (e.g., fixed-base wireless
transmission towers and broadband
television cable), as well as certain
water/waste-water treatment facilities.
Infrastructure Issuers. "Infrastructure
Issuers" are U.S. and non-U.S. issuers that
have as their primary focus (in terms of
income and/or assets) the management,
ownership and/or operation of infrastructure
and utilities assets in a select group of
countries. Typically, in the United States,
Infrastructure Issuers are municipalities
and federal or state government and
government-related agencies. For example,
the New York Port Authority, a
government-related entity, operates, among
other things, the Port of New York and the
John F. Kennedy International and La Guardia
Airports. Outside the United States,
Infrastructure Issuers are often
non-governmental entities, and include both
publicly traded and privately held entities.
These entities may issue debt or equity
securities, including equity securities in
which the Fund may invest. In several
developed countries outside the United
States, including the U.K., Canada and
Australia, there has been over many years a
trend of increasing privatization as
national governments spend less and less on
Infrastructure Assets. Unlike the United
States, these countries often do not utilize
municipal financing to fund these
Infrastructure Assets. Furthermore, in many
of these non-U.S. countries, some of the
larger private sector infrastructure
Page 7
companies can be public companies the shares
of which are traded on national exchanges.
For example, the fund that has a majority
stake in the Sydney Airport in Australia is
listed on the Australian Stock Exchange.
Non-U.S. Securities. More than 50% of the
Core Component will, and up to 100% may, be
comprised of securities and instruments of
non-U.S. Infrastructure Issuers, and under
normal market conditions more than 50% of
the Fund's Total Assets will be comprised of
securities and instruments of non-U.S.
Infrastructure Issuers located in the
Permitted Countries other than the United
States. The Fund does not currently intend
to reduce or hedge its exposure to non-U.S.
currencies, other than in connection with
the Fund's exposure to dividends received or
receivable in non-U.S. currencies. There may
be special risks associated with investing
in non-U.S. securities and instruments. See
"Risks - Non-U.S. Investment Risk" and
"Risks - Currency Risk."
Leverage/Infrastructure Senior Loans. The
Fund may utilize leverage up to a maximum of
30% of the Fund's Total Assets, immediately
after taking into account such leverage. To
the extent leverage is used, the Fund
intends to invest the proceeds of the
leverage in Infrastructure Senior Loans,
which are secured, floating-rate and U.S.
dollar-denominated. The Fund believes that
its investments in Infrastructure Senior
Loans may provide opportunities for the Fund
to (i) increase its income through greater
incremental returns over the interest or
dividend payments by the Fund on its
leverage through borrowings and/or the
issuance of Preferred Shares, respectively,
and (ii) largely hedge or match the Fund's
risk of increases in the interest rate on
borrowings and/or the Preferred Share
dividend rate as a result of increases in
short-term interest rates.
Senior loans generally hold one of the most
senior positions in the capital structure of
a business entity, are typically secured
with specific collateral and have a claim on
the assets and/or stock of the borrower that
is senior to that held by subordinated
debtholders and stockholders of the
borrower. The proceeds of senior loans are
primarily used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions,
stock repurchases, and, to a lesser extent,
to finance internal growth and for other
corporate purposes. Senior loans typically
have floating or variable rates of interest
that are reset either daily, monthly,
quarterly or semi-annually by reference to a
base lending rate, primarily the
London-Interbank Offered Rate ("LIBOR"),
plus a premium.
It is anticipated that at least 80% of the
Senior Loan Component will comprise
Infrastructure Senior Loans that are rated
non-investment grade debt, although from
time to time the entire Senior Loan
Component may comprise non-investment grade
Infrastructure Senior Loans.
Other Securities and Instruments. Under
normal market conditions, at least 80% of
the Fund's Total Assets (across both the
Core Component and the Senior Loan
Component) are intended to be invested in
securities and instruments of Infrastructure
Issuers that are expected to provide
dividends, interest and other similar
income. It is currently intended, however,
that 100% of the Fund's Total Assets will be
invested in securities and instruments of
Infrastructure Issuers. The Fund may invest
its assets temporarily in other investments
and securities of various types pending
investment or reinvestment in securities and
instruments of Infrastructure Issuers.
Pending investment or reinvestment, such
temporary investments and securities will
not be taken into account for purposes of
the Fund's allocation guidelines. For
temporary defensive purposes, the Fund may
depart from its principal investment
strategies and invest part or all of its
assets in securities with remaining
maturities of less than one year or cash
equivalents, or it may hold cash. During
such periods, the Fund may not be able to
achieve its investment objective.
Percentage allocation guidelines described
in this prospectus are, except as set out
below, as of the time of investment by the
Fund and may be exceeded on a going-forward
basis as a result of market value
fluctuations of the Fund's portfolio and
other events. The Fund will monitor on a
current basis its compliance with its stated
intention to invest more than 50% of the
Fund's Total Assets in the securities and
instruments of non-U.S. Infrastructure
Issuers.
Page 8
Investment Adviser
and Sub-Advisers................. First Trust Advisors L.P. ("First Trust" or
the "Adviser") will be the Fund's investment
adviser, responsible for supervising the
Fund's Sub-Advisers, monitoring the Fund's
investment portfolio, managing the Fund's
business affairs and providing certain
clerical and bookkeeping and other
administrative services. The Adviser, in
consultation with the Sub-Advisers, is also
responsible for determining the Fund's
overall investment strategy and overseeing
its implementation. MIFA and Four Corners
will be the Fund's Sub-Advisers. The Core
Component will be managed by MIFA. The
Senior Loan Component will be managed by
Four Corners.
First Trust, a registered investment
adviser, is an Illinois limited partnership
formed in 1991. It serves as investment
adviser or portfolio supervisor to
investment portfolios with approximately
$9.9 billion in assets which it managed or
supervised as of December 31, 2003. See the
SAI under "Investment Adviser."
MIFA is a Delaware limited liability company
and is registered under the Investment
Advisers Act of 1940. MIFA has not
previously served as an investment adviser.
Macquarie Infrastructure Management (USA)
Inc. ("MIMU") is the sole member of MIFA.
MIMU is wholly owned by Australia's
Macquarie Bank Limited ("MBL") through a
subsidiary. MBL together with its associated
entities worldwide ("Macquarie Group") is a
diversified international provider of
financial and investment banking services,
with over 5,700 staff in 21 countries. The
Macquarie Group's Infrastructure and
Specialized Funds Division ("Macquarie's ISF
Division") manages, directly or indirectly,
approximately $11 billion of Infrastructure
Assets (based on the most recent audited
gross assets of each fund managed by
Macquarie's ISF Division as reflected in
MBL's September 30, 2003 semi-annual public
filings). As of September 30, 2003, the
Macquarie Group had over $38 billion in
assets under management. Twelve investment
vehicles managed by the Macquarie Group are
listed on the Australian Stock Exchange, and
had a total capitalization of approximately
$12.2 billion as of December 31, 2003.
Four Corners specializes in managing
portfolios of senior loans and structured
finance assets. Four Corners is a Delaware
limited liability company founded in
September 2001 by Macquarie Holdings (USA),
Inc., an affiliate of MBL, and an
experienced group of senior loan investment
professionals. Four Corners manages
investment portfolios with approximately
$900 million of investment capacity as of
January 31, 2004.
Related Party
Transactions..................... From time to time, MIFA may determine that
it is in the best interests of the Fund to
gain exposure to Infrastructure Assets
through the purchase of Core Infrastructure
Securities the issuer of which is a listed
entity that primarily invests in the
securities of Infrastructure Issuers and is
advised by a member of the Macquarie Group
(a "MIFA Related Party"). Such listed entity
may be a non-U.S. investment company. See
"Portfolio Composition - Other Investment
Companies." To the extent that a "MIFA
Related Party" is under common control with
MIFA, it may be a second-tier affiliate of
the Fund (in other words, an "affiliated
person" of an "affiliated person" of the
Fund, as that term is defined in the 1940
Act). See "Risks - Investment Companies" and
"Risks - Certain Affiliations." Each such
transaction must be made on the open market
of the primary stock exchange on which the
relevant Core Infrastructure Securities are
listed and must be approved by the Fund's
Board of Trustees (the "Board") or otherwise
comply with any policies and procedures
adopted by the Board, and must at all times
comply with the Investment Company Act of
1940 (the "1940 Act"). The relevant Core
Infrastructure Securities must meet the
Fund's investment guidelines at the time of
the transaction and be consistent with the
Fund's investment objective. A MIFA Related
Party may earn fees from managing the issuer
of such Core Infrastructure Assets. To the
extent the Fund invests in such securities,
the Fund will be limited in its ability to
freely trade the securities to the extent
that personnel of MIFA or of Macquarie's ISF
Division have or may be deemed to have
material, non-public information in regard
to such security. For the purposes of the
Fund's investment guidelines, Core
Page 9
Infrastructure Securities issued by non-U.S.
funds advised by a MIFA Related Party will
be treated as securities of an
Infrastructure Issuer.
From time to time, MIFA may determine that
it is in the best interests of the Fund to
gain exposure to Infrastructure Assets
through an investment in unlisted equity
securities that is made at the same time
that one or more other funds managed by MIFA
Related Parties invest in such securities.
Prior to making such investments, the Board
will develop a process which will take into
account the restrictions of the 1940 Act,
recommendations of the Adviser and
Sub-Advisers, the development of processes
and procedures in connection with the
investments and other potential conflicts of
interest. The subject securities of the
transaction must meet the investment
objective of the Fund at the time of the
transaction.
The Fund has authorized the Sub-Advisers to
select the brokers or dealers that will
execute the purchases and sales of the
Fund's securities and other instruments. To
the extent consistent with the investment
policies of the Fund and approved by the
Board, a Sub-Adviser may select brokers or
dealers related to the Sub-Adviser. Such
related brokers and dealers may earn
commissions or other fees from any such
purchase and sale.
Borrowings and
Preferred Shares................. Subject to market conditions, within
approximately three months after completion
of this offering, the Fund currently intends
to establish a leverage program through the
issuance of Leverage Instruments in an
aggregate amount up to 30% of the Fund's
Total Assets, immediately after such
issuance and/or borrowings. Borrowings and
the issuance of Preferred Shares are
referred to in this prospectus collectively
as "leverage." The Fund may borrow from
banks and other financial institutions.
Preferred Shares, if any, will be expected
to pay dividends based on short-term rates,
which generally reset frequently.
Borrowings, if any, may be at a fixed or
floating rate but generally will be based
upon short-term rates. The Fund intends to
invest the proceeds of the borrowings in
securities and instruments that will largely
match the currency and interest rate
characteristics of such borrowings. So long
as the rate of return, net of applicable
Fund expenses, on the Fund's portfolio
investments purchased with leverage exceeds
the then current interest rate or dividend
rate on the Leverage Instruments, the Fund
will generate more return or income than
will be needed to pay such dividends or
interest payments. In this event, the excess
will be available to pay higher dividends to
holders of Common Shares. The converse is
also true - if the rate of return is less
than the then current interest rate or
dividend rate, the Fund will generate less
return or income than will be needed to pay
such dividends or interest payments, and
lower amounts will be available to pay
dividends. When leverage is employed, the
NAV and market prices of the Common Shares
and the yield to holders of Common Shares
will be more volatile. There is no guarantee
that the Fund's leverage strategy will be
successful. See "Risks - Leverage Risk."
Distributions.................... Dividends, distributions and interest from
investments will be the Fund's main sources
of investment income. The Fund's present
policy, which may be changed at any time by
the Board, is to distribute to Shareholders
on a quarterly basis all, or substantially
all, of the net investment income (being
investment income less Fund expenses accrued
during the period) to Shareholders. The
first distribution is expected to be paid
approximately 90 to 120 days after the
completion of this offering, depending on
market conditions. Unless you elect to
receive cash distributions, your
distributions will automatically be
reinvested in additional Common Shares
pursuant to the Fund's Dividend Reinvestment
Plan. See "Dividend Reinvestment Plan."
The Fund may realize capital gains or losses
when it sells investments, depending on
whether the sales price for an investment is
higher or lower than the purchase price.
Under normal market conditions, the Fund
intends to distribute all, or substantially
all, net capital gains to Shareholders as
capital gain dividends at least annually. As
in the case of dividends of net investment
income, capital gain dividends may
automatically be reinvested in additional
Common Shares pursuant to the Fund's
Dividend Reinvestment Plan. See
"Distributions" and "Dividend Reinvestment
Plan."
Page 10
Tax Treatment of
Common Share
Distributions.................... The Fund anticipates that taxable
distributions paid on the Common Shares will
generally consist of (i) qualified
tax-advantaged dividend income (income from
U.S. corporations and certain non-U.S.
entities) for the purposes of the Code, (ii)
long-term capital gains (gains from the sale
of a capital asset held longer than 12
months) and (iii) investment company taxable
income (other than qualified dividend
income), including non-qualified dividends,
interest income, short-term capital gains
and income from certain hedging and interest
rate transactions.
For individuals, the current maximum federal
income tax rate is 15% on qualified dividend
income, 15% on long-term capital gains and
35% on investment company taxable income
(other than qualified dividend income).
These tax rates are scheduled to apply
through 2008. The Fund expects that to the
extent it incurs any non-U.S. taxes,
Shareholders may be eligible to claim such
taxes as a foreign tax credit, subject to
the limitations imposed under the Code.
There can be no assurances as to what
percentage of the distributions paid on the
Common Shares, if any, will consist of
tax-advantaged dividend income, long-term
capital gains or what the tax rates on
various types of income will be in future
years nor the amount, if any, of foreign tax
credits that may be claimed. See "Tax
Matters."
Listing.......................... The Fund's Common Shares have been approved
for listing on the New York Stock Exchange,
subject to notice of issuance, under the
symbol "MFD." See "Description of Shares -
Common Shares."
Custodian,
Administrator and
Transfer Agent................... The Fund has retained PFPC Trust Company as
custodian, and PFPC Inc. as administrator,
fund accountant and transfer agent for the
Fund. The Adviser and the Board will be
responsible for monitoring the activities of
the custodian, administrator, fund
accountant and transfer agent. See
"Custodian, Administrator and Transfer
Agent."
Closed-End Structure............. Closed-end funds differ from open-end
management investment companies (commonly
referred to as mutual funds) in that
closed-end funds generally list their shares
for trading on a securities exchange and do
not redeem their shares at the option of the
shareholder. By comparison, mutual funds
issue securities redeemable at NAV at the
option of the shareholder and typically
engage in a continuous offering of their
shares. Mutual funds may be subject to
continuous asset in-flows and out-flows that
can complicate portfolio management, whereas
closed-end funds generally can stay more
fully invested in securities and instruments
consistent with the closed-end fund's
investment objectives and policies. In
addition, in comparison to open-end funds,
closed-end funds generally have greater
flexibility in their ability to make certain
types of investments, including investments
in illiquid securities and instruments.
Shares of closed-end investment companies
listed for trading on a securities exchange
frequently trade at a discount from NAV, but
in some cases trade at a premium. The market
price may be affected by trading volume of
the shares, general market and economic
conditions and other factors beyond the
control of the closed-end fund. The
foregoing factors may result in the market
price of the Common Shares being greater
than, less than or equal to NAV. The Board
has reviewed the structure of the Fund in
light of its investment objective and
policies and has determined that the
closed-end structure is in the best
interests of the Shareholders. As described
in this prospectus, however, the Board may
review periodically the trading range and
activity of the Fund's shares with respect
to its NAV and the Board may take certain
actions to seek to reduce or eliminate any
discount of market price to NAV. Such
actions may include open market repurchases
or tender offers for the Common Shares or
the possible conversion of the Fund to an
open-end mutual fund. There can be no
assurance that the Board will decide to
undertake any of these actions or that, if
undertaken, such actions would result in the
Common Shares trading at a price equal to or
close to NAV per Common Share. See
"Closed-End Fund Structure."
Page 11
Special Risk
Considerations................... Industry Concentration and Infrastructure
and Utilities Industry Risk. The Fund
intends to invest 80%, and may invest up to
100%, of its Total Assets in securities and
other instruments of Infrastructure Issuers
that are expected to provide dividends,
interest and other similar income. Given the
concentration in the infrastructure and
utilities industry, the Fund would become
more susceptible to adverse economic or
regulatory occurrences affecting that
industry. Infrastructure Issuers, including
utilities and companies involved in
infrastructure projects, are subject to a
variety of factors that may adversely affect
their business or operations, including high
interest costs in connection with capital
construction programs, costs associated with
environmental and other regulations, the
effects of economic slowdown and surplus
capacity, increased competition from other
providers of services, uncertainties
concerning the availability of fuel at
reasonable prices, the effects of energy
conservation policies and other factors.
Infrastructure Issuers may be subject to
regulation by various governmental
authorities and may also be affected by
governmental regulation of rates charged to
customers, service interruption due to
environmental, operational or other mishaps
and the imposition of special tariffs and
changes in tax laws, regulatory policies and
accounting standards. In addition, this
industry has some special features that give
rise to certain risks and opportunities not
found in other industry sectors. See "Risks
- Industry Concentration and Infrastructure
and Utilities Industry Risk."
Non-U.S. Investments Risk. The Fund may
invest up to 100% of the Fund's Total Assets
in securities and instruments of non-U.S.
Infrastructure Issuers. Investing in
securities and instruments of non-U.S.
issuers, which are generally denominated in
non-U.S. currencies, may involve certain
risks and opportunities not typically
associated with investing in securities and
instruments of U.S. issuers. These risks
include: (i) there may be less publicly
available information about non-U.S. issuers
or markets due to less rigorous disclosure
or accounting standards or regulatory
practices; (ii) all non-U.S. markets are
smaller, may be less liquid and more
volatile than the U.S. market; (iii)
potential adverse effects of fluctuations in
currency exchange rates or controls on the
value of the Fund's investments; (iv) the
economies of non-U.S. countries may grow at
slower rates than expected or may experience
a downturn or recession; (v) the impact of
economic, political, social or diplomatic
events; (vi) certain non-U.S. countries may
impose restrictions on the ability of
non-U.S. issuers to make payments of
principal and interest to investors located
in the United States, due to blockage of
non-U.S. currency exchanges or otherwise;
(vii) withholding and other non-U.S. taxes
may decrease the Fund's return; and (viii)
it may be more difficult to obtain the
necessary data to determine whether
dividends paid by non-U.S. issuers qualify
as tax-advantaged dividends. See "Risks -
Non-U.S. Investments Risk" and "Risks -
Currency Risk."
Currency Risk. Currency risk is the risk
that the value of a non-U.S. investment,
measured in U.S. dollars, will decrease
because of unfavorable changes in currency
exchange rates. The Fund does not currently
intend to reduce or hedge its exposure to
non-U.S. currencies other than in connection
with the Fund's exposure to dividends
received or receivable in non-U.S.
currencies. See "Risks - Currency Risk."
Country Risk. This risk arises as the Fund
may have exposure of up to 30% of the Fund's
Total Assets to Infrastructure Issuers in
any one country outside of the United
States, identified in "Investment Objective
and Policies." As the Fund does not
currently intend to reduce or hedge the
currency risk related to investing in
securities and instruments of non-U.S.
Infrastructure Issuers (other than in
connection with the Fund's exposure to
dividends received or receivable in non-U.S.
currencies and the Fund's intention to hedge
forward commitments), the Fund may be
exposed to currency changes that could have
a material and negative impact on the Fund's
NAV. Further, the impact on the Fund's NAV
of specific risks relating to investing in
non-U.S. issuers, such as political,
regulatory, interest rate and inflation may
be magnified due to the concentration of the
Fund's investments in a particular country.
See "Risks - Country Risk."
Page 12
Senior Loan Risk. The Infrastructure Senior
Loans in which the Fund may invest may not
be rated by a nationally recognized
statistical rating organization ("NRSRO") at
the time of investment, generally will not
be registered with the Securities and
Exchange Commission and generally will not
be listed on a securities exchange. In
addition, the amount of public information
available with respect to the Infrastructure
Senior Loans generally will be less
extensive than that available for more
widely rated, registered and exchange-listed
securities. Because the interest rates of
the Infrastructure Senior Loans are expected
to reset frequently, if market interest
rates fall, the loans' interest rates will
be reset to lower levels, potentially
reducing the Fund's income. The converse is
also true. No active trading market
currently exists for some of the
Infrastructure Senior Loans in which the
Fund may invest and, thus, those loans may
be illiquid. As a result, such
Infrastructure Senior Loans generally are
more difficult to value than more liquid
securities for which a trading market
exists. Some of the Infrastructure Senior
Loans are expected to be subject to
restrictions on resale. A secondary market
may be subject to irregular trading
activity, wide bid/ask spreads and extended
trade settlement periods, which may impair
the Fund's ability to realize full value and
thus cause a decline, potentially of a
material nature, in the Fund's NAV. See
"Risks - Senior Loan Risk."
It is anticipated that at least 80% of the
Senior Loan Component will be invested in
non-investment grade debt instruments,
although from time to time all of the Senior
Loan Component may be invested in such
non-investment grade debt instruments. See
"Risks - Non-Investment Grade Securities
Risk."
Non-Investment Grade Securities Risk.
Non-investment grade securities are rated
Ba1 or lower by Moody's Investors Service,
Inc. ("Moody's"), BB+ or lower by Standard &
Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. ("S&P"), or
comparably rated by another NRSRO or, if
unrated, are of comparable credit quality.
Non-investment grade debt instruments are
commonly referred to as "high yield" or
"junk bonds" and are considered speculative
with respect to the issuer's capacity to pay
interest and repay principal. They involve
greater risk of loss, are subject to greater
price volatility and are less liquid,
especially during periods of economic
uncertainty or change, than higher rated
debt instruments. Non-investment grade debt
instruments may also be more susceptible to
real or perceived adverse economic and
competitive industry conditions than higher
rated debt instruments.
In addition to the Senior Loan Component, up
to 100% of the Core Component may comprise
equity securities, securities and
instruments with equity characteristics,
hybrid securities, non-convertible preferred
stock, convertible securities or debt
securities rated non-investment grade by
NRSROs or unrated securities of comparable
quality. See "Risks - Non-Investment Grade
Securities Risk."
Illiquid and Unlisted Securities Risk. The
Fund may invest up to 25% of the Core
Component in unlisted securities and
instruments of Infrastructure Issuers. Such
securities and instruments are generally not
able to be publicly traded. In the United
States, such securities and instruments are
generally unregistered for securities law
purposes and can generally be resold only in
privately negotiated transactions with a
limited number of purchasers or in a public
offering registered under the Securities Act
of 1933, as amended (the "Securities Act").
Similar restrictions may apply outside the
United States. Considerable delay in resale
could be encountered in either event and,
unless otherwise contractually provided for,
the Fund's proceeds upon sale may be reduced
by the costs of registration or underwriting
discounts. The difficulties and delays
associated with such transactions could
result in the Fund's inability to realize a
favorable price upon disposition of unlisted
securities and instruments, and at times
might make disposition of such securities
and instruments impossible. To the extent
the Fund invests in securities and
instruments the terms of which are privately
negotiated, the terms of such securities and
instruments may contain restrictions
regarding resale and transfer. In addition,
certain listed securities and instruments,
particularly securities and instruments of
smaller capitalized or less seasoned
issuers, may from time to time lack an
active secondary market and may be subject
to more abrupt or erratic price movements
Page 13
than securities of larger, more established
companies or stock market averages in
general. In the absence of an active
secondary market, the Fund's ability to
purchase or sell such securities at a fair
price may be impaired or delayed.
Unlisted securities and instruments are
illiquid by nature and the sale price of
such assets may be materially below the
value of the interest were it to be held for
the long-term. Certain Infrastructure Assets
may decline in value over time due to the
nature of the assets. Such a decline in the
value of the underlying assets should be
reflected in the market value of the equity
and debt instruments of the issuer, thereby
providing a total return to investors that
reflects the nature of these assets. As
there may be no open market to establish an
independent value for certain of the Fund's
interests in Infrastructure Assets, the
Fund's valuation procedures provide that
such investments must be fair valued. There
can be no assurance that the Fund's
determination of fair value for an
Infrastructure Asset will be obtainable in
the market or that there will be a market
for the Infrastructure Asset. See "Risks -
Illiquid and Unlisted Securities Risk."
Leverage Risk. Under normal circumstances,
the Fund intends to utilize leverage in an
amount up to 30% of the Fund's Total Assets,
immediately after taking into account such
leverage. The Fund may use leverage for
investment purposes, to finance the
repurchase of its Common Shares, and to meet
cash requirements. Although the use of
leverage by the Fund may create an
opportunity for increased return for the
Common Shares, it also results in additional
risks and can magnify the effect of any
losses. Leverage Instruments will have
seniority over the Common Shares. If the
income and gains earned on the securities
and instruments purchased with leverage
proceeds are greater than the cost of the
leverage, the Common Shares' return will be
greater than if leverage had not been used.
Conversely, if the income or gains from the
securities and investments purchased with
such proceeds does not cover the cost of
leverage, the return to the Common Shares
will be less than if leverage had not been
used. If the Fund uses Leverage Instruments,
associated costs will be borne immediately
by the holders of the Common Shares of the
Fund (the "Common Shareholders") and result
in a reduction of the NAV of the Common
Shares. There is no assurance that a
leveraging strategy will be successful.
Leverage involves risks and special
considerations for Common Shareholders
including:
o the likelihood of greater volatility of
the NAV and market price of the Common
Shares than a comparable portfolio without
leverage;
o the risk that fluctuations in interest
rates on borrowings and short-term debt or
in the dividend rates on any Preferred
Shares that the Fund may pay will reduce
the return to the Common Shareholders or
will result in fluctuations in the
dividends paid on the Common Shares;
o the effect of leverage in a declining
market, which is likely to cause a greater
decline in the NAV of the Common Shares
than if the Fund were not leveraged, which
may result in a greater decline in the
market price of the Common Shares; and
o when the Fund uses Leverage Instruments,
the investment advisory fees payable to
the Adviser and Sub-Advisers will be
higher than if the Fund did not use
leverage.
See "Risks - Leverage Risk."
No Operating History. The Fund is a newly
organized, non-diversified, closed-end
management investment company with no
operating history. See "Risks - No Operating
History."
Non-diversified Status. As a non-diversified
investment company under the 1940 Act, the
Fund is not limited by the 1940 Act in the
proportion of its assets that may be
invested in securities and instruments of a
single issuer, and accordingly, an
investment in the Fund may, under certain
circumstances, present greater risk to an
investor than an investment in a diversified
company. See "Risks - Non-Diversified
Status."
Investment and Market Risk. An investment in
the Fund's Common Shares is subject to
investment risk, including the possible loss
of the entire principal amount invested. An
investment in Common Shares of the Fund
represents an indirect investment in the
Page 14
securities and instruments owned by the
Fund. The value of these securities and
instruments, like other investments, may
move up or down, sometimes rapidly and
unpredictably. Shares of closed-end funds
often trade at a discount to their NAVs and
the Fund's shares may trade at such a
discount. Common Shares at any point in time
may be worth less than your original
investment, even after taking into account
the reinvestment of Fund dividends and
distributions. See "Risks - Investment and
Market Risk."
Income Risk. The Fund's income may be
affected adversely when short-term interest
rates increase, especially when the Fund is
utilizing leverage, although it is the
Fund's intention to apply leverage where the
Fund has or will acquire assets that largely
match the interest rate characteristics of
the leverage to reduce this effect. See
"Risks - Income Risk."
Market Disruption Risk. The terrorist
attacks in the United States on September
11, 2001 had a disruptive effect on the
securities markets. United States military
and related action in Iraq is ongoing and
events in the Middle East and elsewhere in
the world could have significant adverse
effects on the global economy and the stock
markets. The Fund cannot predict the effects
similar events occurring in the future will
have on the value of the Common Shares or
NAV of the Fund. See "Risks - Market
Disruption Risk."
Common Stock Risk. Common stock and other
instruments of an issuer in the Fund's
portfolio may decline in price if the issuer
fails to make anticipated dividend payments
or distributions because, among other
reasons, the issuer of the security
experiences a decline in its financial
condition. An adverse event, such as an
unfavorable earnings report, may depress the
value of common stock or instruments of an
issuer held by the Fund. Also, a drop in the
stock market could depress the price of the
securities held by the Fund. As the issuers
fall within a single industry group, any
such market change could affect a
significant portion of the portfolio that
trade on that stock market.
See "Risks - Common Stock Risk."
Interest Rate Risk. Interest rate risk is
the risk that fixed-income securities such
as preferred, debt and debt-like securities
will decline in value because of changes in
market interest rates. Securities issued by
Infrastructure Issuers may be subject to
similar risks. In addition, the income and
profits of many of the issuers in which the
Fund invests may be sensitive to interest
rate fluctuations and therefore changes in
the level of interest rates may have a
direct bearing on such issuers' ability to
pay dividends or make distributions. When
market interest rates rise, the market value
of such securities generally will fall.
Interest rates are at or near historic lows,
and as a result, they are likely to rise
over time. See "Risks - Interest Rate Risk."
Inflation Risk. Inflation risk is the risk
that the value of assets or income from
investments will be worth less in the future
as inflation decreases the value of money.
As inflation increases, the real value of
the Fund's shares and distributions thereon
can decline. See "Risks - Inflation Risk."
Environmental Risk. Infrastructure Assets
can have a substantial environmental impact.
Ordinary operation or an accident with
respect to such assets could cause major
environmental damage which could cause the
owner of such assets significant financial
distress. Community and environmental groups
may protest about the development or
operation of Infrastructure Assets, and
these protests may induce government action
to the detriment of the owner of the
Infrastructure Asset. See "Risks -
Environmental Risk."
Credit Risk. Credit risk is the risk of
nonpayment of scheduled interest and/or
principal payments. Credit risk also is the
risk that one or more investments in the
Fund's portfolio will decline in price, or
fail to pay interest or principal when due,
because the issuer of the security
experiences a decline in its financial
status. See "Risks - Credit Risk."
Anti-Takeover Provisions. The Fund's
Declaration of Trust (the "Declaration")
includes provisions that could limit the
ability of other entities or persons to
acquire control of the Fund or convert the
Fund to open-end status. These provisions
could have the effect of depriving the
Page 15
Common Shareholders of opportunities to sell
their Common Shares at a premium over the
then current market price of the Common
Shares. See "Certain Provisions in the
Declaration of Trust" and "Risks -
Anti-Takeover Provisions."
Certain Other Risks. An investment in the
Fund is subject to certain other risks
described in the "Risks" section of this
prospectus.
Page 16
SUMMARY OF FUND EXPENSES
The following table assumes the issuance of debt in an amount equal to 30%
of the Fund's Total Assets (immediately after their issuance) and shows Fund
expenses as a percentage of net assets attributable to Common Shares. Footnote 3
to the table also shows Fund expenses as a percentage of net assets attributable
to Common Shares, but assumes that no debt is issued or outstanding (such as
will be the case prior to the Fund's expected issuance of debt).
Shareholder Transaction Expenses
Sales load paid by Common Shareholders (as a percentage of offering price) ............. 4.50%
Offering expenses borne by the Fund (as a percentage of offering price)(1).............. .20%
Dividend Reinvestment Plan fees......................................................... None(2)
Percentage of Net Assets Attributable
to Common Shares (Assumes
Debt Is Issued)(3)
Annual Expenses
Management fees(4) ..................................................................... 1.579%
Other expenses.......................................................................... .500%(5)
Interest payments on Borrowed Funds..................................................... .471%(6)
Total annual expenses................................................................... 2.550%
---------------
(1) The Adviser and MIFA have contractually agreed to pay (i) all
organizational expenses of the Fund and (ii) all offering costs (other
than sales load, but including the $.00667 per Common Share
reimbursement of underwriter expenses) that exceed $.04 per Common
Share.
(2) A Common Shareholder will pay brokerage charges if the Shareholder
directs PFPC Inc., as agent for the Common Shareholders (the "Plan
Agent"), to sell the Shareholder's Common Shares held in a dividend
reinvestment account.
(3) The table presented below in this footnote estimates what the Fund's
annual expenses would be stated as percentages of the Fund's net assets
attributable to Common Shares. Assuming no debt is issued, the Fund's
expenses would be estimated to be as follows:
Percentage of Net Assets Attributable
to Common Shares (Assumes No
Debt Is Issued)
Annual Expenses
Management fees(4) ............................................................ 1.15%
Other expenses................................................................. .289%
Total annual expenses.......................................................... 1.439%
(4) Represents the maximum aggregate fee payable to the Adviser and
Sub-Advisers. See "Management of the Fund - Investment Management
Agreement and Other Agreements with the Adviser and Sub-Advisers" for a
discussion of how the fee is determined.
(5) If the Fund issues debt, costs of the issuance of the debt, estimated
to be approximately .319% of the total dollar amount of the debt
issuance, will be borne immediately by the Common Shareholders and
result in a reduction of the NAV of the Common Shares. Assuming the
issuance of debt in an amount equal to 30% of the Fund's Total Assets
(immediately after the issuance of such debt), those offering costs are
estimated to be no more than approximately $325,340 or $.026 per Common
Share (.13% of the offering price of the Common Shares).
(6) Assumes an interest rate on debt issued of 1.1%.
The purpose of the table above is to help each Common Shareholder
understand all fees and expenses that Common Shareholders would bear directly or
indirectly. The expenses shown in the table under "Other Expenses" and "Total
Annual Expenses" are based on estimated amounts for the Fund's first full year
of operation and assume that the Fund issues approximately 12,500,000 Common
Shares. If the Fund issues fewer Common Shares, all other things being equal,
these expenses as a percentage of net assets will increase. See "Management of
the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $2.00 and the estimated
offering costs of issuing debt assuming the Fund issues debt representing 30% of
the Fund's capital (immediately after its issuance) of $1.30) that a Common
Shareholder would pay on a $1,000 investment in Common Shares, assuming (1)
total net annual expenses of 2.55% of net assets attributable to Common Shares
and (2) a 5% annual return:*
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Total expenses incurred............ $73 $123 $176 $319
-----------
* THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE ASSUMED. The
example assumes that the estimated "Other Expenses" set forth in the
Annual Expense table are accurate and that all dividends and
distributions are reinvested at NAV. Moreover, the Fund's actual rate of
return may be greater or less than the hypothetical 5% return shown in
the example. In the event that the Fund does not issue any debt, an
investor would pay the following expenses based on the assumptions in
the example: 1 Year, $61; 3 Years, $90; 5 Years, $121; and 10 Years, $208.
Page 17
THE FUND
The Fund is a newly organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on January 21, 2004 pursuant to a Declaration of
Trust, as amended and restated (the "Declaration") governed by the laws of the
Commonwealth of Massachusetts. As a newly organized entity, the Fund has no
operating history. The Fund's principal office is located at 1001 Warrenville
Road, Suite 300, Lisle, Illinois 60532, and its telephone number is (630)
241-4141.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately $
($ if the Underwriters exercise the overallotment option in full) after payment
of the estimated organizational expenses and offering costs. The Adviser and
MIFA have agreed to pay (i) all organizational expenses and (ii) all offering
costs (other than sales load, but including the $.00667 per Common Share
reimbursement of underwriter expenses) that exceed $.04 per Common Share. The
Fund intends to invest the net proceeds of the offering in accordance with the
Fund's investment objective and policies as stated below. The Fund anticipates
that it will be able to invest substantially all of the net proceeds in
securities and instruments that meet the investment objective and policies
within three to six months after the completion of the offering. Pending such
investment, it is anticipated that the proceeds will be invested in high
quality, short-term fixed income securities, money market securities or cash or
cash equivalents.
THE FUND'S INVESTMENTS
Investment Objective and Policies
The Fund's investment objective is to seek a high level of current return
consisting of dividends, interest and other similar income while attempting to
preserve capital. In pursuit of the objective, the Fund will seek to manage its
investments and expenses so that a significant portion of its distributions to
the Fund's common shareholders will qualify as tax-advantaged dividends, subject
to the continued availability of favorable tax treatment for such qualifying
dividends. The Fund will seek to achieve its investment objective by investing
in a non-diversified portfolio of equity, debt, preferred or convertible
securities and other instruments (for instance, other instruments could include
Canadian income trusts and Australian stapled securities) of Infrastructure
Issuers in the Permitted Countries.
Under normal market conditions, the Fund's over-riding investment
philosophy will be to seek to identify and invest in securities and instruments
that, over the long term, are anticipated to produce consistent dividend or
distribution income. The Sub-Advisers believe that selected Infrastructure
Issuers tend to pay higher dividends and distributions and display lower
volatility over the long-term in terms of revenues, income and distributions
than issuers in many other industries.
The Fund intends to invest the proceeds of issuance of its Common Shares
raised under this offering primarily in Core Infrastructure Securities -
primarily equity securities and securities and instruments with equity
characteristics issued by Infrastructure Issuers but also other securities and
instruments issued by Infrastructure Issuers that may be debt or debt-like. This
will comprise the "Core Component" of the Fund's investment portfolio. The Core
Component will be managed by MIFA.
The Fund currently intends to utilize leverage through the issuance of
Leverage Instruments in an aggregate amount up to 30% of the Fund's Total Assets
immediately after such issuance and/or borrowing. The Fund intends to invest the
proceeds of the leverage in Infrastructure Senior Loans - U.S.
dollar-denominated senior secured floating-rate loans of Infrastructure Issuers
- in an attempt to provide a stable stream of income to the Fund. The
Infrastructure Senior Loans in which the Fund invests will be the "Senior Loan
Component" of the Fund's investment portfolio. The Senior Loan Component will be
managed by Four Corners. The investments in Infrastructure Senior Loans are
expected to largely match the currency and interest rate risks characteristics
of any associated leverage. The Fund intends that at least 80%, and up to 100%,
of the Infrastructure Senior Loans in the Senior Loan Component will be
non-investment grade debt instruments.
The Core Component is intended to consist mainly of listed securities and
instruments of Infrastructure Issuers. The Fund may, when presented with an
opportunity to do so, invest up to 25% of the Core Component in unlisted
securities and instruments of Infrastructure Issuers. These investments are not
a primary focus of the Fund and MIFA will not actively seek out such
opportunities. It should be noted, however, that the Fund intends to pay MIFA
advisory fees at a higher rate to the extent the Fund's Core Component is
invested in unlisted securities and instruments of Infrastructure Issuers.
Accordingly, MIFA will have an incentive to make such investments. Under normal
market conditions, the Fund will seek to deliver at least 50% of its income
attributable to Core Infrastructure Securities as tax-advantaged dividends under
the Code to the extent that preferential treatment for such dividends remains
available generally up to and including December 31, 2008. Under federal income
tax law enacted on May 28, 2003, tax-advantaged dividends received by individual
Shareholders are taxed at long-term capital gain rates, which currently reach a
Page 18
maximum of 15%. Tax-advantaged dividends generally include dividends from U.S.
corporations and dividends and similar distributions from non-U.S. entities that
meet certain criteria. The Fund generally can pass the tax treatment of
tax-advantaged dividends it receives through to Common Shareholders. In addition
to investing in securities and instruments that pay tax-advantaged dividends,
the Fund also may invest in securities and other instruments and debt
instruments that generate fully taxable ordinary income (i.e., income other than
tax-advantaged dividends). Infrastructure Senior Loans, U.S. corporate bonds,
notes and debentures, convertible debt securities, and other similar types of
corporate instruments, including high yield debt securities, are not eligible to
pay tax-advantaged dividends.
Across both the Core Component and the Senior Loan Component, under normal
conditions, the Fund intends to invest 80%, and may invest up to 100%, of its
Total Assets in securities and instruments of Infrastructure Issuers that are
expected to provide dividends, interest and other similar income. The Fund
cannot change this investment policy unless the Fund's Shareholders receive at
least 60 days prior notice of any such change.
Under normal market conditions, the Fund intends that more than 50% will,
and up to 100% of the Fund's Total Assets may, be comprised of securities and
instruments of non-U.S. Infrastructure Issuers. Accordingly, the Fund expects to
hold securities and instruments denominated in non-U.S. currencies. The Fund
does not currently intend to enter into arrangements to reduce its exposure to
non-U.S. currencies, other than in connection with the Fund's exposure to
dividends received or receivable in non-U.S. currencies. The Fund intends to
restrict its investments to Infrastructure Issuers located in the Permitted
Countries.
The Fund intends to apply the following additional guidelines to its
investments:
o Across both the Core Component and the Senior Loan Component, no more
than 7% of the Fund's Total Assets may be invested in the securities
and instruments of any single Infrastructure Issuer at any time.
o Across both the Core Component and the Senior Loan Component, no more
than 40% of the Fund's Total Assets may be invested in the securities
and instruments of U.S. Infrastructure Issuers at any time.
o Within the Core Component, no more than 20% of the Core Infrastructure
Securities may be invested in the securities and instruments of U.S.
Infrastructure Issuers at any time.
o Across both the Core Component and the Senior Loan Component, no more
than 30% of the Fund's Total Assets may be invested in the securities
and instruments of non-U.S. Infrastructure Issuers located in any one
country at any time.
The Fund may invest in securities and instruments that are forecast to
decline in value due to the nature of the assets of the issuer, where such
decline is anticipated to be compensated through enhanced yield.
The Fund intends to follow the guidelines set out above but may deviate
from such guidelines from time to time as deemed appropriate under prevailing
economic and market conditions to achieve its investment objective over the
long-term. If any allocation of assets exceeds the guidelines set out above, the
Fund may seek to reduce the allocation as soon as practicable based on the
liquidity of its assets and other market factors.
There can be no assurance that the Fund's investment strategy will be
successful, that the Fund will achieve its investment objective, or that
preferential tax treatment will be achieved with respect to its investments.
Further, the Fund may not be appropriate for all investors.
The Fund believes that its investments in Infrastructure Senior Loans and
other debt instruments may provide opportunities for the Fund to (i) enhance the
Fund's income through greater incremental returns on its senior loan investments
over the dividend or interest payments by the Fund on its leverage through
borrowings or the issuance of Preferred Shares, respectively, and (ii) largely
match the Fund's risk of increases in the interest rate on borrowings and/or the
Preferred Share dividend rate as a result of increases in short-term interest
rates.
The Adviser, in consultation with the Sub-Advisers, will be responsible for
determining the Fund's overall investment strategy and overseeing its
implementation. The portion of the Fund's Total Assets invested in Core
Infrastructure Securities and Infrastructure Senior Loans and other instruments
will vary from time to time consistent with the Fund's investment objective
through changes in the use of leverage.
Sub-Advisers' Investment Philosophies and Processes
MIFA is responsible for managing the Core Component and is responsible for
selecting and implementing the investment strategy for the Core Component. MIFA
intends to analyze Infrastructure Issuers to determine the quality of the assets
within the issuer's portfolio. MIFA believes that such analysis of the
underlying assets that dominate the business of the Infrastructure Issuer will
Page 19
highlight the long-term quality of the Infrastructure Issuer's revenue and
income streams. MIFA believes fundamental analysis of the underlying revenue of
the Infrastructure Issuer provides longer term superior returns than a focus on
short-term market factors. MIFA believes that a systematic fundamentals-based
approach to identifying long-term potential value in Infrastructure Issuers will
produce favorable investment performance. MIFA's advisory personnel may include
personnel shared with Macquarie's ISF Division, who will assist MIFA's other
personnel in critically assessing potential Infrastructure Issuers and their
underlying assets and businesses, and the holdings of the Core Component on an
on-going basis.
Certain members of the Macquarie Group (other than MIFA) focus on
identifying investment opportunities in unlisted securities of Infrastructure
Issuers. On occasion, in accordance with a series of protocols developed by
Macquarie's ISF Division, MIFA may be presented with the opportunity to invest
the assets of the Core Component in such securities and MIFA may, in accordance
with the Fund's investment objective, guidelines and policies, cause the Fund to
make such investment. MIFA anticipates that the vast majority, if not all, of
the Fund's opportunities to invest the assets of the Core Component in unlisted
securities of Infrastructure Issuers will be presented to MIFA through such
other members of the Macquarie Group. No assurances can be given, however, that
any such opportunities will be presented to MIFA or, if presented, will be
deemed to be a suitable investment for the Fund. No other member of the
Macquarie Group will render investment advice to the Fund.
Four Corners is responsible for managing the Senior Loan Component. Four
Corners believes that a rigorous investment process based on in depth credit
analysis and market experience, applied consistently and deliberately, results
in superior investment performance over time. In addition to the emphasis on
"bottom-up" in-depth credit analysis, "top-down" macro-economic analysis is
formalized and integrated into the investment process. Four Corners' investment
process focuses on risk minimization through an emphasis on diversification,
sell discipline, and objectivity and employs systematic and quantitative
analysis of default probabilities and collateral evaluation in sizing positions
and constructing portfolios.
Characteristics of Infrastructure Assets
Infrastructure Assets are an underlying foundation of basic services,
facilities and institutions upon which the growth and development of a community
depends. Typically, in the United States, such assets are owned, operated or
managed by government-related entities such as municipalities. In non-U.S.
countries, these assets are often owned, operated or managed by private
entities. The entities owning, operating or managing these assets may provide
the necessities of everyday life - such as fresh water, roads, airports, power,
district heating and cooling, hospitals, schools and other social services. Such
entities thereby provide the reliable transportation corridors and facilities,
communications networks, energy distribution systems and pipelines, and
institutions that are fundamental to the health of an economy. MIFA believes
that select Infrastructure Issuers tend to pay higher dividends and
distributions and display lower volatility over the long term in terms of
revenues, income and distributions than issuers in many other industries. MIFA
also believes that some Infrastructure Issuers generally have a high revenue to
operating expense ratio and have revenues that correlate with inflation. As a
result, in an inflationary period, inflation-driven increases in revenue could
likely result in increased profits for such Infrastructure Issuers.
The businesses of Infrastructure Issuers typically display characteristics
with some or all of the following attributes:
Essential services: Many Infrastructure Issuers are the sole providers of
an essential product or service (e.g., water/waste-water, power and
transportation services) to a segment of the population, at a given time
and cost, and often retain this characteristic for an extended period of
time.
Monopolistic: Many Infrastructure Assets are monopolistic or
near-monopolistic in nature, thereby providing a strategic competitive
advantage. These Infrastructure Assets may be difficult to replicate due
to: exclusive concession periods provided by legislation and/or regulation;
natural barriers, planning or environmental restrictions or availability of
land; high costs of new development; long-term sales contracts for a
significant proportion of production; and other restrictions. A monopoly
asset is attractive from an investor's perspective as the monopoly
typically provides protection against competitor-induced pricing
competition. This helps in the maintenance of operating and profit margins
and provides more stability in the earnings stream.
Fixed and regulated returns: Monopoly-type market positioning may bring
with it regulation to prevent the development of "excess" profits and to
protect public interests. For example, for roads, toll increases may be
agreed in advance with government and specified in concession deeds; for
energy utilities, revenues may be set by a regulator, typically with
reviews at fixed year intervals; and the aeronautical revenues of airports
may also be regulated in a similar manner.
Leverage on a fixed cost base: Many Infrastructure Assets are usually
characterized by large levels of capital investment during the development
phase of the asset. Once developed, on-going operational-maintenance
expenditure may be relatively low and stable. Should this be the case,
increases in revenue (for example, due to traffic increases on a road
asset) may not necessarily lead to proportionate increases in operating
expenditure, leading to relatively high increases in surplus cash flow.
Additionally, the economies of scale from leveraging a fixed cost base may
provide strategic competitive advantage.
Page 20
Relatively inelastic demand: Demand for the products or services provided
by many Infrastructure Assets may be more stable and less sensitive to
changes in the price of the products or services than products or services
provided by other assets. Demand growth is often linked to underlying
economic or demographic growth. Stable operating cash flows generally
result from this attribute and this stability may reduce the overall
volatility of investor returns.
Long-life assets: Infrastructure Assets may have long economic useful lives
and may operate under long-term concessions/agreements. For example, an
airport lease or road easement may be up to 99 years. The underlying
revenue of infrastructure assets may be linked to inflation, sometimes
directly through a regulatory framework or through concession agreements
linking price growth to inflation.
Based on the mix of the above-noted characteristics and risk factors,
Infrastructure Assets can be broadly divided into four categories:
Assets that are natural or near-natural monopolies and are regulated in
the level of revenue earned, the charges imposed or the rate of returns
allowed. Certain power and gas transmission, generation and distribution
assets fall into this category, along with certain water/waste-water
treatment facilities and incumbent local exchange carriers.
Assets that depend on a form of user payment for their main revenue
source. Examples of assets that fall into this category include toll roads,
airports, railways, ports and certain parking lots (e.g., airport related).
Assets that provide basic social services to the community, and include
schools, hospitals and correction facilities. Depending on the arrangement
with government and the regulator, if any, water/waste-water treatment
facilities may also be included in this class.
Assets that compete in a market for the sale of a product or service
and are therefore exposed to market risks (e.g., volatility of prices or
competitive pressures). Certain electricity generation, solid waste
disposal facilities, city and local carparks, and certain communication
asset classes (e.g., fixed-base wireless transmission towers and broadband
television cable) fall into this category, along with certain
water/waste-water treatment facilities.
Infrastructure Issuers
"Infrastructure Issuers" are U.S. and non-U.S. issuers that have as their
primary focus (in terms of income and/or assets) the management, ownership
and/or operation of infrastructure and utilities assets in a select group of
countries. Typically, in the United States, Infrastructure Issuers are
municipalities and federal or state government and government-related agencies.
For example, the New York Port Authority, a government-related entity, operates,
among other things, the Port of New York and the John F. Kennedy International
and La Guardia Airports. Outside the United States, Infrastructure Issuers are
often non-governmental entities, and include both publicly traded and privately
held entities. These entities may issue debt or equity securities, including
equity securities in which the Fund may invest. In several developed countries
outside the United States, including the U.K., Canada and Australia, there has
been over many years a trend of increasing privatization as national governments
spend less and less on Infrastructure Assets. Unlike the United States, these
countries often do not utilize municipal financing to fund these Infrastructure
Assets. Furthermore, in many of these non-U.S. countries, some of the larger
private sector infrastructure companies can be public companies the shares of
which are traded on national exchanges. For example, the fund that has a
majority stake in the Sydney Airport in Australia is listed on the Australian
Stock Exchange.
Portfolio Composition
The Fund's portfolio will be composed principally of the following types of
investments. A more detailed description of the Fund's investment policies and
restrictions are contained in the SAI.
Equity and Hybrid Securities. Under normal market conditions, the Fund
intends to invest the majority of the Core Component in equity securities such
as common stocks, preferred stocks, convertible securities and hybrid
securities. "Hybrid" securities and instruments, such as stapled securities and
various income trust units, are debt-like instruments where the issuers'
obligations to pay distributions on the securities and instruments may be linked
to profits.
Common stock generally represents an equity ownership interest in an
issuer. Although common stocks have historically generated higher average
returns than fixed income securities over the long term, common stocks also have
experienced significantly more volatility in those returns and in recent years
have significantly underperformed relative to fixed income securities. An
adverse event, such as an unfavorable earnings report, may depress the value of
a particular common stock held by the Fund. A drop in the stock market could
depress the price of the securities to which the Fund has exposure. Common stock
Page 21
prices fluctuate for several reasons including changes in investors' perceptions
of the financial condition of an issuer or the general condition of the relevant
stock market, or when political or economic events affecting the issuers occur.
In addition, common stocks prices may be particularly sensitive to rising
interest rates, as the cost of capital rises and borrowing costs increase.
Equity securities also include preferred stock (whether or not convertible
into common stock) and debt securities convertible into or exchangeable for
common or preferred stock. In addition, many issuers have securities, such as
trust units and income securities, that are "hybrid" securities in that they
have certain debt-like characteristics but their obligation to service the debt
may be dependent on the profits of the issuer. Examples of these types of
securities include what are commonly known as "income trusts" or "income funds"
in the Canadian securities market and "stapled securities" in the Australian
securities market.
Canadian income funds are investment vehicles designed to distribute, in a
tax-efficient manner, cash flows from an operating company to investors. They
are similar to U.S.-style real estate investment trusts, but unlike those
vehicles, income funds are not restricted to one industry. An income trust is
structured to receive pass through treatment for Canadian tax purposes, and is
only permitted to own passive investments such as common stock and debt
instruments. The distribution to unitholders may be comprised of income,
dividends and return of capital.
Stapled securities have been used by Australian-based Infrastructure
Issuers. Typically each stapled security is comprised of two or more securities
that are "stapled" together to trade as one unit. Distributions payable by the
issuers of stapled securities are not certain and could include the return of
capital. The rules to determine the amount of the distribution, if any, that
qualifies as dividends under the Code that might be eligible for tax-advantaged
treatment are complex.
Income fund units, stapled securities and other "hybrid" securities will be
treated as equity securities in this prospectus.
Preferred stock and hybrids may have a preference over common stock in
liquidation (and generally dividends as well) but are subordinated to the
liabilities of the issuer in all respects. As a general rule, the market value
of preferred stock, hybrids and trust units with a fixed dividend rate and no
conversion element varies inversely with interest rates and perceived credit
risk, while the market price of convertible preferred stock and hybrids
generally also reflects some element of conversion value.
The market value of preferred stock and hybrids will also generally reflect
whether (and if so when) the issuer may force holders to sell their preferred
stock or hybrids back to the issuer and whether (and if so when) the holders may
force the issuer to buy back their preferred stock or hybrids. Generally
speaking, the right of the issuer to repurchase the preferred stock or hybrids
tends to reduce any premium that the preferred stock or hybrids might otherwise
trade at due to interest rate or credit factors, while the right of the holders
to require the issuer to repurchase the preferred stock or hybrids tends to
reduce any discount that the preferred stock or hybrids might otherwise trade at
due to interest rate or credit factors.
Securities that are convertible into or exchangeable for preferred or
common stock are liabilities of the issuer but are generally subordinated to
more senior elements of the issuer's balance sheet. Although such securities
also generally reflect an element of conversion value, their market value also
varies with interest rates and perceived credit risk. Many convertible
securities are not investment grade, that is, not rated "BBB" or better by S&P
or "Baa" or better by Moody's and are not considered by the applicable
Sub-Adviser to be of similar quality. There is no minimum credit rating or
independent investment limitation for these securities in which the Fund may
invest. Preferred stocks and convertible securities may have many of the same
characteristics and risks as nonconvertible debt securities. See "Risks -
Non-Investment Grade Securities."
Non-U.S. Securities. The Fund may invest up to 100% of the Core Component
in securities of Infrastructure Issuers located in countries other than the
United States and such securities may be denominated in currencies other than
the U.S. dollar. Those non-U.S. Infrastructure Issuers will be located in the
Permitted Countries other than the United States. See "Risks - Non-U.S.
Investments Risk."
The Fund may also purchase sponsored American Depository Receipts ("ADRs")
or U.S. dollar-denominated securities of non-U.S. Infrastructure Issuers. ADRs
are receipts issued by United States banks or trust companies in respect of
securities of non-U.S. issuers held on deposit for use in the United States
securities markets. Issuers of such securities will be considered non-U.S.
Infrastructure Issuers for purposes of the Fund's allocation guidelines.
Unlisted Securities. Up to 25% of the Core Component of the Fund can be
invested in unlisted securities. Being unlisted, these securities and other
instruments often have premium distribution rates; given the long-term nature of
their assets, however, revenue streams derived from Infrastructure Assets may
have low volatility characteristics. MIFA considers that such securities
therefore do not always warrant the yield premium. Unlisted securities and other
instruments selected for investment by MIFA may include equity, hybrid,
convertible preferred instruments and debt instruments. Any and all instruments
held by the Fund may be rated investment grade or may be unrated or
non-investment grade. See "Risks - Illiquid and Unlisted Securities Risk" and
"Non-Investment Grade Securities."
Page 22
Senior Loans. The Fund may invest any assets raised through leverage in
Infrastructure Senior Loans - senior secured floating-rate U.S.
dollar-denominated loans of Infrastructure Issuers. Senior loans generally hold
one of the most senior positions in the capital structure of a borrower (the
"Borrower"), are typically secured with specific collateral and have a claim on
the assets and/or stock of the Borrower that is senior to that held by
subordinated debtholders and stockholders of the Borrower. The proceeds of
senior loans are primarily used to finance leveraged buyouts, recapitalizations,
mergers, acquisitions, stock repurchases, and, to a lesser extent, to finance
internal growth and for other corporate purposes. Senior loans typically have
rates of interest which are reset either daily, monthly, quarterly or semi
annually by reference to a base lending rate, plus a premium. This base lending
rate is primarily LIBOR, and secondarily the prime rate offered by one or more
major United States banks (the "Prime Rate") and the certificate of deposit
("CD") rate or other base lending rate used by commercial lenders. The
Infrastructure Senior Loans in which the Fund intends to invest are primarily
lower grade, and may include revolving credit facilities, debtor-in-possession
financing, unsecured loans, other floating-rate debt securities, such as notes,
bonds, and asset-backed securities (such as special purpose trusts investing in
bank loans), investment grade loans and fixed income debt obligations.
When interest rates decline, the value of a portfolio invested in
fixed-rate obligations can be expected to rise. Conversely, when interest rates
rise, the value of a portfolio invested in fixed-rate obligations can be
expected to decline. Although the Fund's NAV will vary, the Fund expects that
investing a significant portion of the Fund's Total Assets in Infrastructure
Senior Loans will reduce fluctuations in NAV as a result of changes in market
interest rates. However, because floating rates on Infrastructure Senior Loans
only reset periodically and because of the investments in the Core Component,
changes in prevailing interest rates can still be expected to cause significant
fluctuation. See "Risks - Senior Loan Risk."
Non-Investment Grade Securities. The Infrastructure Senior Loans in which
the Fund will invest and certain other securities in which the Fund may invest,
will likely be rated in the lower rating categories of NRSROs or unrated
securities of comparable quality. Debt securities that are not rated or rated
lower than "BBB" by S&P or lower than "Baa" by Moody's are commonly referred to
as "junk bonds." For a description of the ratings categories of certain NRSROs,
see Appendix A to the SAI.
Generally, such non-investment grade securities and unrated securities of
comparable quality offer a higher current yield than is offered by higher rated
securities, but also (i) will likely have some quality and protective
characteristics that, in the judgment of the rating organizations, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (ii) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher quality bonds. In addition, such comparable un-rated securities generally
present a higher degree of credit risk. The risk of loss due to default by these
issuers is significantly greater because such non-investment grade securities
and unrated securities of comparable quality generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness. In
light of these risks, the applicable Sub-Adviser, in evaluating the
creditworthiness of an issue, whether rated or un-rated, will take various
factors into consideration, which may include, as applicable, the issuer's
operating history, financial resources and its sensitivity to economic
conditions and trends, the market support for the facility financed by the issue
(if applicable), the perceived ability and integrity of the issuer's management
and regulatory matters.
In addition, the market value of securities in lower rating categories is
more volatile than that of higher quality securities, and the markets in which
such non-investment rated or unrated securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its NAV.
Moreover, the lack of a liquid trading market may restrict the availability of
securities for the Fund to purchase and may also have the effect of limiting the
ability of the Fund to sell securities at their fair value to respond to changes
in the economy or the financial markets.
Non-investment grade securities also present risks based on payment
expectations. If an issuer calls the obligation for redemption (often a feature
of fixed income securities), the Fund may have to replace the security with a
lower yielding security, resulting in a decreased return for investors. Also, as
the principal value of nonconvertible bonds and preferred stocks moves inversely
with movements in interest rates, in the event of rising interest rates the
value of the securities held by the Fund may decline proportionately more than a
portfolio consisting of higher rated securities. Investments in zero coupon
bonds may be more speculative and subject to greater fluctuations in value due
to changes in interest rates than bonds that pay interest currently. Interest
rates are at or near historical lows and, therefore, it is likely that they will
rise in the future.
In addition to using recognized rating agencies and other sources, the
applicable Sub-Adviser will also perform its own analysis of issuers in seeking
investments that it believes to be underrated (and thus higher-yielding) in
light of the financial condition of the issuer. Its analysis of issuers may
include, among other things, current and anticipated cash flow and borrowing
requirements, value of assets in relation to historical cost, strength of
management, responsiveness to business conditions, credit standing and current
anticipated results of operations. In selecting investments for the Fund, the
applicable Sub-Adviser may also consider general business conditions,
anticipated changes in interest rates and the outlook for specific industries.
Page 23
Corporate Bonds. The Fund may invest in corporate bonds of Infrastructure
Issuers. Corporate bonds generally are used by corporations to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest and
normally must repay the amount borrowed on or before maturity. Certain bonds are
"perpetual" in that they have no maturity date. Certain corporate bonds are zero
coupon bonds. A zero coupon bond is a bond that does not pay interest either for
the entire life of the obligation or for an initial period after the issuance of
the obligation.
Unlisted, Restricted and Illiquid Securities and Instruments. The Fund may
invest up to 25% of the Core Component in unlisted, restricted and illiquid
securities and instruments of Infrastructure Issuers. Illiquid securities
include U.S. securities legally restricted as to resale, such as commercial
paper issued pursuant to Section 4(2) of the Securities Act and securities
eligible for resale pursuant to Rule 144A thereunder. Section 4(2) and Rule 144A
securities may, however, be treated as liquid by the Fund pursuant to procedures
adopted by the Board, which require consideration of factors such as trading
activity, availability of market quotations and number of dealers willing to
purchase the security. There may or may not be similar regulatory or statutory
restrictions on unlisted, restricted or illiquid securities or instruments
issued by non-U.S. issuers.
Industry Concentration. The Fund intends, under normal market conditions,
to invest most if not all of its Total Assets in Infrastructure Issuers. See
"Risks - Industry Concentration and Infrastructure and Utilities Industry Risk."
Short-Term Debt Securities; Temporary Defensive Position; Invest Up Period.
During the period during which the net proceeds of the offering of Common Shares
are being invested, or during periods in which the applicable Sub-Adviser
determines that it is temporarily unable to follow the Fund's investment
strategy or that it is impractical to do so, the Fund may deviate from its
investment strategy and invest all or any portion of its net assets in cash or
cash equivalents. A Sub-Adviser's determination that it is temporarily unable to
follow the Fund's investment strategy or that it is impractical to do so will
generally occur only in situations in which a market disruption event has
occurred and where trading in the securities selected through application of the
Fund's investment strategy is extremely limited or absent. In such a case, the
value of shares of the Fund may be adversely affected and the Fund may not
pursue or achieve its investment objective.
Other Investment Companies. The Fund may invest up to 25% of the Core
Component in securities and instruments of other open- or closed-end U.S. or
non-U.S. investment companies that invest primarily in securities of the types
in which the Fund may invest directly. In addition, the Fund may invest a
portion of its Total Assets in U.S. or non-U.S. pooled investment vehicles
(other than investment companies) that invest primarily in securities of the
types in which the Fund may invest directly. The Fund generally expects that it
may invest in other investment companies and/or pooled investment vehicles
either during periods when it has large amount of uninvested cash, such as the
period shortly after the Fund receives the proceeds of the offering of its
Common Shares or borrowings and/or Preferred Shares, or during periods when
there is a shortage of attractive securities of the types in which the Fund may
invest directly available in the market. As an investor in an investment company
or pooled investment vehicle, the Fund will bear its ratable share of that
investment company's or vehicle's expenses, and would remain subject to payment
of the Fund's advisory and administrative fees with respect to assets so
invested. Common Shareholders would therefore be subject to duplicative expenses
to the extent the Fund invests in other investment companies or vehicles. The
Sub-Advisers will take expenses into account when evaluating the investment
merits of an investment in the investment company or pooled investment vehicle
relative to available securities of the types in which the Fund may invest
directly. In addition, the securities of other investment companies or vehicles
also may be leveraged and therefore will be subject to the same leverage risks
described herein. As described in the section entitled "Risks - Leverage Risk,"
the NAV and market value of leveraged shares will be more volatile and the yield
to shareholders will tend to fluctuate more than the yield generated by
unleveraged shares.
From time to time, MIFA may determine that it is in the best interests of
the Fund to gain exposure to Infrastructure Assets through the purchase of Core
Infrastructure Securities the issuer of which is a listed entity that primarily
invests in the securities of Infrastructure Issuers and is advised by a MIFA
Related Party. Such listed entity may be a non-U.S. investment company as
discussed above. To the extent that a "MIFA Related Party" is under common
control with MIFA, it may be a second-tier affiliate of the Fund (in other
words, an "affiliated person" of an "affiliated person" of the Fund, as that
term is defined in the 1940 Act). See "Risks - Investment Companies" and "Risks
- Certain Affiliations." Each such transaction must be made on the open market
of the primary stock exchange on which the relevant Core Infrastructure
Securities are listed. A MIFA Related Party may earn fees from managing the
issuer of such securities. To the extent the Fund invests in such securities,
the Fund will be limited in its ability to freely trade the security to the
extent that personnel of MIFA or of Macquarie's ISF Division have or may be
deemed to have material, non-public information in regard to such security.
Prior to making such investments, the Board will develop a process which will
take into account the restrictions of the 1940 Act, recommendations of the
Adviser and Sub-Advisers, the development of processes and procedures in
connection with the investments and other potential conflicts of interest.
Investment Practices
Hedging Transactions. It is the current intention of the Fund not to enter
into hedging transactions other than in connection with the Fund's exposure to
dividends received or receivable in non-U.S. currencies. However, the Fund may
use derivatives or other transactions for the purpose of hedging the Fund's
exposure to an increase in the price of a security prior to its anticipated
Page 24
purchase or a decrease in the price of a security prior to its anticipated sale.
Such hedging transactions are commonly referred to as "anticipatory hedges."
These anticipatory hedges are expected to be entered into only in limited
circumstances and are not a principal strategy of the Fund. The specific
derivative instruments to be used, or other transactions to be entered into, for
such hedging purposes may include options on common stock, stock-related future
contracts, non-U.S. currency forward contracts, swap agreements and related
instruments. Some, but not all, of the derivative instruments may be traded on
an exchange. The positions in derivatives will be marked-to-market daily at the
closing price established on the exchange or at a fair value. If market quotes
are unavailable, the Board will value these securities by using such method as
the Board shall determine in good faith to reflect their fair market value, as
described in "Net Asset Value." The Fund will use derivatives or other
transactions described in this paragraph solely for non-speculative purposes.
See "Risks - Hedging Risk" in this prospectus and "Other Investment Policies and
Techniques" in the Fund's SAI for further information on hedging transactions.
As an anticipatory hedge shifts, the Fund may purchase put and call options
on stock or other securities. A put option embodies the right of its purchaser
to compel the writer of the option to purchase from the option holder an
underlying security or its equivalent at a specified price at any time during
the option period. In contrast, a call option gives the purchaser the right to
buy the underlying security covered by the option or its equivalent from the
writer of the option at the stated exercise price. As a holder of a put option,
the Fund will have the right to sell the securities underlying the option and as
the holder of a call option, the Fund will have the right to purchase the
securities underlying the option, in each case at their exercise price at any
time prior to the option's expiration date. The Fund may seek to terminate its
option positions prior to their expiration by entering into closing
transactions. The ability of the Fund to enter into a closing sale transaction
depends on the existence of a liquid secondary market. There can be no assurance
that a closing purchase or sale transaction can be effected when the Fund so
desires.
The Fund may use interest rate swaps for risk management purposes and not
as a speculative investment and would typically use interest rate swaps to
shorten the average interest rate reset time of the Fund's holdings. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
fixed-rate payments for floating rate payments. The use of interest rate swaps
is a highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Lending of Portfolio Securities. The Fund may lend its portfolio securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and would also receive an
additional return that may be in the form of a fixed fee or a percentage of the
collateral. The Fund may pay reasonable fees to persons unaffiliated with the
Fund for services in arranging these loans. The Fund would have the right to
call the loan and obtain the securities loaned at any time on notice of not more
than five business days. The Fund would not have the right to vote the
securities during the existence of the loan but would call the loan to permit
voting of the securities, if, in the Adviser's judgment, a material event
requiring a shareholder vote would otherwise occur before the loan was repaid.
In the event of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or recovering the
loaned securities and losses, including: (a) possible decline in the value of
the collateral or in the value of the securities loaned during the period while
the Fund seeks to enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights. Loans of securities may also reduce the qualified dividend
portion of the distributions to Shareholders.
Portfolio Turnover. The Fund may engage in portfolio trading to accomplish
its investment objective. The investment policies of the Fund may lead to
frequent changes in investments, particularly in periods of rapidly fluctuating
interest or currency exchange rates.
There are no limits on the rate of portfolio turnover and investments may
be sold without regard to length of time held when the Fund's investment
strategy so dictates. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to Shareholders, will be taxable as ordinary income. See "Tax Matters."
BORROWINGS AND PREFERRED SHARES
The Fund anticipates that under current market conditions it will issue
Leverage Instruments representing up to 30% of its Total Assets immediately
after the issuance of the Leverage Instruments. The Leverage Instruments would
have complete priority upon distribution of assets over Common Shares. Although
the timing and other terms of the offering of Leverage Instruments and the terms
of the Leverage Instruments would be determined by the Board, in consultation
with the Adviser and Sub-Advisers, the Fund expects to invest the proceeds
derived from any Leverage Instrument offering in Infrastructure Senior Loans or
Page 25
other debt securities consistent with the Fund's investment objective and
policies. Such Infrastructure Senior Loans or other debt securities are
anticipated to largely match the interest rate of the Fund's then outstanding
leverage. If Preferred Shares are issued they generally would pay adjustable
rate dividends based on shorter-term interest rates, which would be reset
periodically by an auction process. The adjustment period for Preferred Shares
dividends could be as short as one day or as long as a year or more.
Leverage creates risk for holders of the Common Shares, including the
likelihood of greater volatility of NAV and market price of the Common Shares,
and the risk that fluctuations in interest rates on borrowings and debt or in
the dividend rates on any Preferred Shares may affect the return to the holders
of the Common Shares or will result in fluctuations in the dividends paid to the
Common Shares. To the extent total return on the Senior Loan Component exceeds
the cost of leverage, the Fund's return will be greater than if leverage had not
been used. Conversely, if the total return on the Senior Loan Component is less
than the cost of leverage, the Fund's return will be less than if leverage had
not been used, and therefore the amount available for distribution to Common
Shareholders as dividends and other distributions will be reduced. In the latter
case, the Fund nevertheless may determine to maintain the Fund's leveraged
position if it expects that the benefits over the long term to the Fund's Common
Shareholders of maintaining the leveraged position will outweigh the current
reduced return. Under normal market conditions, the Fund anticipates that it
will be able to invest the proceeds from leverage at a higher rate than the
costs of leverage, which would enhance returns to Common Shareholders. The fees
paid to the Adviser and Sub-Advisers will be calculated on the basis of the
Total Assets of the Fund including proceeds from borrowings for leverage and the
issuance of Preferred Shares. During periods in which the Fund is utilizing
leverage, the investment advisory fee payable to the Adviser and Sub-Advisers
will be higher than if the Fund did not utilize a leveraged capital structure.
The use of leverage creates risks and involves special considerations. See
"Risks - Leverage Risk."
The Fund's Declaration authorizes the Fund, without prior approval of the
Common Shareholders, to borrow money. In this connection, the Fund 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
subjecting as security the Fund's assets. In connection with such borrowing, the
Fund may be required to maintain minimum average balances with the lender or to
pay a commitment or other fee to maintain a line of credit. Any such
requirements will increase the cost of borrowing over the stated interest rate.
Under the requirements of the 1940 Act, the Fund, immediately after any such
borrowings, must have an "asset coverage" of at least 300% (33-1/3% of the
Fund's Total Assets after borrowings). With respect to such borrowing, asset
coverage means the ratio which the value of the Total Assets of the Fund, less
all liabilities and indebtedness not represented by senior securities (as
defined in the 1940 Act), bears to the aggregate amount of such borrowing
represented by senior securities issued by the Fund.
The rights of lenders to the Fund to receive interest on and repayment of
principal of any such borrowings will be senior to those of the Common
Shareholders, and the terms of any such borrowings may contain provisions which
limit certain activities of the Fund, including the payment of dividends to
Common Shareholders in certain circumstances. Further, the 1940 Act grants to
the lenders to the Fund, in certain circumstances, certain voting rights in the
event of default in the payment of interest on or repayment of principal. In the
event that such provisions would impair the Fund's status as a regulated
investment company under the Code, the Fund, subject to its ability to liquidate
its relatively illiquid portfolio, intends to repay the borrowings.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. The Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more rating agencies, which may
issue ratings for the short-term corporate debt securities or Preferred Shares
issued by the Fund. These guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the 1940
Act. It is not anticipated that these covenants or guidelines will impede the
Sub-Advisers from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
Under the 1940 Act, the Fund is not permitted to issue Preferred Shares
unless immediately after such issuance the value of the Fund's Total Assets is
at least 200% of the liquidation value of the outstanding Preferred Shares
(i.e., the liquidation value may not exceed 50% of the Fund's Total Assets after
such issuance). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the value of the Fund's Total Assets is at least 200% of such
liquidation value. If Preferred Shares are issued, the Fund intends, to the
extent possible, to purchase or redeem Preferred Shares from time to time to the
extent necessary in order to maintain asset coverage of any Preferred Shares of
at least 200%. In addition, as a condition to obtaining ratings on the Preferred
Shares, the terms of any Preferred Shares issued are expected to include asset
coverage maintenance provisions which will require the redemption of the
Preferred Shares in the event of non-compliance by the Fund and may also
prohibit dividends and other distributions on the Common Shares in such
circumstances. In order to meet redemption requirements, the Fund may have to
liquidate portfolio securities. Such liquidations and redemptions would cause
the Fund to incur related transaction costs and could result in capital losses
to the Fund. Prohibitions on dividends and other distributions on the Common
Shares could impair the Fund's ability to qualify as a regulated investment
company under the Code. If the Fund has Preferred Shares outstanding, two of the
Fund's trustees will be elected by the holders of Preferred Shares as a class.
The remaining trustees of the Fund will be elected by holders of Common Shares
and Preferred Shares voting together as a single class. In the event the Fund
failed to pay dividends on Preferred Shares for two years, holders of Preferred
Shares would be entitled to elect a majority of the trustees of the Fund.
Page 26
The Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.
Effects of Leverage
Assuming that the Leverage Instruments will represent approximately 30% of
the Fund's Total Assets and pay dividends or interest at an annual combined
average rate of 1.10%, the income generated by the Fund's portfolio (net of
estimated expenses) must exceed .43% in order to cover the dividend or interest
payments specifically related to the Leverage Instruments. Of course, these
numbers are merely estimates used for illustration. Actual dividend or interest
rates on the Leverage Instruments will vary frequently and may be significantly
higher or lower than the rate estimated above.
The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on Common Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of securities held in the
Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily indicative of
the investment portfolio returns experienced or expected to be experienced by
the Fund. See "Risks."
The table further reflects the issuance of Leverage Instruments
representing 30% of the Fund's capital, net of expenses, and the Fund's
currently projected annual Leverage Instrument expense of 1.10%.
Assumed Portfolio Total Return (Net of Expenses) ...... (10)% (5)% 0% 5% 10%
Common Share Total Return ............................. (14.76)% (7.61)% (0.47)% 6.67% 13.82%
Common Share total return is composed of two elements: the Common Share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends or interest on its Leverage
Instruments) and gains or losses on the value of the securities the Fund owns.
As required by Securities and Exchange Commission rules, the table above assumes
that the Fund is more likely to suffer capital losses than to enjoy capital
appreciation. For example, to assume a total return of 0% the Fund must assume
that the income it receives on its portfolio securities is entirely offset by
losses in the value of those portfolio securities. Until the Fund borrows or
issues Preferred Shares, the Fund's assets will not be leveraged, and the risks
related to leverage described in this prospectus will not apply. The benefits of
leveraging the Common Shares can not be achieved until the proceeds resulting
from the use of leverage have been invested in accordance with the Fund's
investment objective and policies.
RISKS
Risk is inherent in all investing. The following discussion summarizes some
of the risks that a Common Shareholder should consider before deciding whether
to invest in the Fund. For additional information about the risks associated
with investing in the Fund, see "Additional Information About the Fund's
Investments and Investment Risks" in the SAI.
Industry Concentration and Infrastructure and Utilities Industry Risk
The Fund intends to invest up to 100% of its Total Assets in the securities
and instruments of Infrastructure Issuers. Given this industry concentration,
the Fund will be more susceptible to adverse economic or regulatory occurrences
affecting that industry than an investment company that is not concentrated in a
single industry. Infrastructure Issuers, including utilities and companies
involved in infrastructure projects, may be subject to a variety of factors that
may adversely affect their business or operations, including high interest costs
in connection with capital construction programs, high leverage, costs
associated with environmental and other regulations, the effects of economic
slowdown, surplus capacity, increased competition from other providers of
services, uncertainties concerning the availability of fuel at reasonable
prices, the effects of energy conservation policies and other factors.
Infrastructure Issuers may also be affected by or subject to:
o regulation by various government authorities;
o government regulation of rates charged to customers;
o service interruption due to environmental, operational or other
mishaps;
o the imposition of special tariffs and changes in tax laws, regulatory
policies and accounting standards; and
o general changes in market sentiment towards infrastructure and
utilities assets.
Page 27
This industry also has some special features that cause certain risks and
opportunities to be more prevalent than in other industry sectors. Below is a
summary of these risks:
Technology Risk. This risk arises where a change could occur in the way a
service or product is delivered rendering the existing technology obsolete.
While the risk could be considered low in the infrastructure sector given the
massive fixed costs involved in constructing assets and the fact that many
infrastructure technologies are well established, any technology change that
occurs over the medium term could threaten the profitability of an
Infrastructure Issuer. If such a change were to occur, these assets have very
few alternative uses should they become obsolete.
Regional or Geographic Risk. This risk arises where an Infrastructure
Issuer's assets are not moveable. Should an event that somehow impairs the
performance of an Infrastructure Issuer's assets occur in the geographic
location where the issuer operates those assets, the performance of the issuer
may be adversely affected.
Through-put Risk. The revenue of many Infrastructure Issuers may be
impacted by the number of users who use the products or services produced by the
Infrastructure Issuers' assets. Any change in the number of users may positively
or negatively impact the profitability of the issuer.
Other Risks. See " - Strategic Asset Risk," " - Interest Rate Risk," " -
Documentation Risk," " - Environmental Risk," " - Operation Risk," " -
Counterparty Risk," " - Political Risk and Expropriation Risk," and " -
Regulatory Risk."
Non-U.S. Investments Risk
The Fund may invest up to 100% of the Core Component in the securities and
instruments of non-U.S. issuers. Investments in the securities and instruments
of non-U.S. issuers involve certain considerations and risks not ordinarily
associated with investments in securities and instruments of U.S. issuers.
Non-U.S. companies are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those applicable
to U.S. companies. Non-U.S. securities exchanges, brokers and listed companies
may be subject to less government supervision and regulation than exists in the
United States. Dividend and interest income may be subject to withholding and
other non-U.S. taxes, which may adversely affect the net return on such
investments. There may be difficulty in obtaining or enforcing a court judgment
abroad. In addition, it may be difficult to effect repatriation of capital
invested in certain countries. In addition, with respect to certain countries,
there are risks of expropriation, confiscatory taxation, political or social
instability or diplomatic developments that could affect assets of the Fund held
in non-U.S. countries.
There may be less publicly available information about a non-U.S. company
than a U.S. company. Non-U.S. securities markets may have substantially less
volume than U.S. securities markets and some non-U.S. company securities are
less liquid than securities of otherwise comparable U.S. companies. A portfolio
of non-U.S. securities may also be adversely affected by fluctuations in the
rates of exchange between the currencies of different nations and by exchange
control regulations. Non-U.S. markets also have different clearance and
settlement procedures that could cause the Fund to encounter difficulties in
purchasing and selling securities on such markets and may result in the Fund
missing attractive investment opportunities or experiencing a loss. In addition,
a portfolio that includes non-U.S. securities can expect to have a higher
expense ratio because of the increased transaction costs on non-U.S. securities
markets and the increased costs of maintaining the custody of non-U.S.
securities.
The Fund also may purchase ADRs or U.S. dollar-denominated securities of
non-U.S. issuers. While ADRs may not necessarily be denominated in the same
currency as the securities into which they may be converted, many of the risks
associated with non-U.S. securities may also apply to ADRs. In addition, the
underlying issuers of certain depositary receipts, particularly unsponsored or
unregistered depositary receipts, are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities.
Currency Risk
Currency risk is the risk that the value of a non-U.S. investment, measured
in U.S. dollars, will decrease because of unfavorable changes in currency
exchange rates. The Fund does not currently intend to reduce or hedge its
exposure to non-U.S. currencies, other than in connection with the Fund's
exposure to dividends received or receivable in non-U.S. currencies or in
advance of the settlement of securities trades. Up to 100% of the Fund's Total
Assets may be in investments denominated in non-U.S. currencies. Fluctuations in
the currencies of Core Infrastructure Securities will impact the NAV of the Fund
and may lead to greater volatility. Such a decrease in the NAV of the Fund when
leverage is outstanding may result in the Fund having to reduce the amount of
leverage if its statutory or other "asset coverage" ratios fall below required
amounts. Such reduction of leverage may not come at an optimum time such that
the Fund may recognize a loss on transactions undertaken to de-lever the Fund
resulting in a further loss and/or decrease in the Fund's NAV.
Page 28
Country Risk
This risk arises as the Fund may have exposure of up to 30% of the Core
Component to any one country, outside the U.S., identified in "Investment
Objective and Policies." The impact on the Fund's NAV of specific risks
identified in this prospectus such as political, regulatory, interest rate and
inflation may be magnified due to concentration of the Fund's investments in a
particular country. In addition, as the Fund does not currently intend to reduce
or hedge currency risk (other than in connection with the Fund's exposure to
dividends received or receivable in non-U.S. currencies), concentration of the
Fund's investments in a particular country may expose the Fund to greater risk
with respect to currency changes in that country.
Senior Loan Risk
In the event a Borrower fails to pay scheduled interest or principal
payments on an Infrastructure Senior Loan held by the Fund, the Fund will
experience a reduction in its income and a decline in the market value of the
Infrastructure Senior Loan, which will likely reduce dividends and lead to a
decline in the NAV of the Fund's Common Shares. If the Fund acquires an
Infrastructure Senior Loan from another lender, for example, by acquiring a
participation, the Fund may also be subject to credit risks with respect to that
lender.
The Fund intends to generally invest in Infrastructure Senior Loans that
are secured with specific collateral. However, the value of the collateral may
not equal the Fund's investment when the Infrastructure Senior Loan is acquired
or may decline below the principal amount of the Infrastructure Senior Loan
subsequent to the Fund's investment. Also, to the extent that collateral
consists of stock of the Borrower or its subsidiaries or affiliates, the Fund
bears the risk that the stock may decline in value, be relatively illiquid,
and/or may lose all or substantially all of its value, causing the
Infrastructure Senior Loan to be undercollateralized. Therefore, the liquidation
of the collateral underlying an Infrastructure Senior Loan may not satisfy the
issuer's obligation to the Fund 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 Fund could experience
delays and limitations on its ability to realize the benefits of the collateral
securing the Infrastructure Senior Loan. Among the credit risks involved in a
bankruptcy are assertions that the pledge of collateral to secure an
Infrastructure Senior Loan constitutes a fraudulent conveyance or preferential
transfer that could have the effect of nullifying or subordinating the Fund's
rights to the collateral or causing interest previously paid to be refunded to
the Borrower. If interest were required to be refunded, it could negatively
affect the Fund's performance.
Investment decisions concerning Infrastructure Senior Loans will be based
largely on the credit analysis performed by Four Corners, and not on rating
agency evaluation. This analysis may be difficult to perform. Information about
an Infrastructure Senior Loan and its issuer generally is not in the public
domain. Moreover, Infrastructure Senior Loans may not be rated by any NRSRO.
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 Infrastructure Senior Loan participants, agents or
others that invest in, trade in, originate or administer Infrastructure Senior
Loans. Other economic factors (such as a large downward movement in stock
prices, a disparity in supply and demand of certain securities or market
conditions that can reduce liquidity) can also adversely impact the markets for
debt obligations. Ratings downgrades of holdings or their issuers will generally
reduce the value of such holdings. Although the Fund intends to invest in
Infrastructure Senior Loans, there is no guarantee that it will, and the Fund's
holdings of Infrastructure Senior Loans may range from 0% to 30% of the Fund's
Total Assets.
The secondary market for Infrastructure Senior Loans is currently limited.
There is no organized exchange or board of trade on which Infrastructure Senior
Loans are traded. Instead, the secondary market for Infrastructure Senior Loans
is an unregulated inter-dealer or inter-bank resale market. The secondary market
may be subject to irregular trading activity, wide bid/ask spreads and extended
trade settlement periods, which may impair the Fund's ability to realize full
value.
Infrastructure Senior Loans usually trade in large denominations (typically
$1 million and higher) 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 Infrastructure Senior Loans in which the Fund
invests will be relatively illiquid.
In addition, Infrastructure Senior Loans in which the Fund invests are
expected to require the consent of the Borrower and/or agent prior to sale or
assignment. These consent requirements can delay or impede the Fund's ability to
sell Infrastructure Senior Loans and can adversely affect the price that can be
obtained. The Fund may have difficulty disposing of Infrastructure Senior Loans
if it needs cash to repay debt, to pay dividends, to pay expenses or to take
advantage of new investment opportunities.
The Fund will value its Infrastructure Senior Loans daily. However, because
the secondary market for Infrastructure Senior Loans is limited, it may be
difficult to value some loans. Market quotations may not be readily available
for some Infrastructure Senior Loans and valuation may require more research
than for liquid securities. In addition, elements of judgment may play a greater
Page 29
role in valuation of Infrastructure Senior Loans than for securities with a
secondary market, because there is less reliable objective data available. In
addition, if the Fund purchases a relatively large assignment of an
Infrastructure Senior Loan to generate extra income sometimes paid to large
lenders, the limitations of the secondary market may inhibit the Fund from
selling a portion of the Infrastructure Senior Loan and reducing its exposure to
the Borrower when Four Corners deems it advisable to do so. For more detailed
information about Senior Loans, including a discussion of assignments of and
participations in Senior Loans, see "Additional Information about the Fund's
Investments and Investment Risks" in the SAI.
Non-Investment Grade Securities Risk
It is anticipated that at least 80% of Senior Loan Component will be
invested in non-investment grade debt instruments, although from time to time
the entire Senior Loan Component may be invested in such non-investment grade
debt instruments. In addition to the Senior Loan Component, the Fund may invest
up to 100% of the Core Component in equity securities, securities and
instruments with equity characteristics, hybrid securities, nonconvertible
preferred stock, convertible securities or debt securities or instruments rated
non-investment grade by NRSROs or unrated securities of comparable quality.
Non-investment grade securities are rated Ba1 or lower by Moody's, BB+ or
lower by S&P, or comparably rated by another NRSRO or, if unrated, are of
comparable credit quality. Non-investment grade securities, also sometimes
referred to as "junk bonds," generally pay a premium above the yields of U.S.
government securities or debt securities of investment grade issuers because
they are subject to greater risks than these securities. These risks, which
reflect their speculative character, include the following:
o greater volatility;
o greater credit risk and risk of default;
o potentially greater sensitivity to general economic or industry
conditions;
o potential lack of attractive resale opportunities (illiquidity); and
o additional expenses to seek recovery from issuers who default.
In addition, the prices of these non-investment grade securities are more
sensitive to negative developments, such as a decline in the issuer's revenues
or a general economic downturn, than are the prices of higher grade securities.
Non-investment grade securities tend to be less liquid than investment grade
securities. The market value of non-investment grade securities may be more
volatile than the market value of investment grade securities and generally
tends to reflect the market's perception of the creditworthiness of the issuer
and short-term market developments to a greater extent than investment grade
securities, which primarily reflect fluctuations in general levels of interest
rates.
Ratings are relative and subjective and not absolute standards of quality.
Securities ratings are based largely on an issuer's historical financial
condition and the rating agencies' analyses at the time of rating. Consequently,
the rating assigned to any particular security or instrument is not necessarily
a reflection of an issuer's current financial condition. Subsequent to its
purchase by the Fund, the security or instrument may cease to be rated or its
rating may be reduced. In addition, it is possible that NRSROs might not change
their ratings of a particular security or instrument to reflect subsequent
events on a timely basis. Moreover, such ratings do not assess the risk of a
decline in market value. None of these events will require the sale of such
securities or instruments by the Fund, although the applicable Sub-Adviser will
consider these events in determining whether the Fund should continue to hold
the securities.
As a part of its investments in non-investment grade securities, the Fund
may invest in securities of issuers in default. The Fund will invest in
securities of issuers in default only when the Adviser believes that such
issuers will honor their obligations, emerge from bankruptcy protection and the
value of these securities will appreciate. By investing in the securities of
issuers in default, the Fund bears the risk that these issuers will not continue
to honor their obligations or emerge from bankruptcy protection or that the
value of these securities will not appreciate.
The market for non-investment grade and comparable unrated securities has
experienced periods of significantly adverse price and liquidity several times,
particularly at or around times of economic recession. Past market recessions
have adversely affected the value of such securities as well as the ability of
certain issuers of such securities to repay principal and pay interest thereon
or to refinance such securities. The market for these securities may react in a
similar fashion in the future.
For a further description of non-investment grade securities and the risks
associated therewith, see "Other Investment Policies and Techniques" in the SAI.
For a description of the ratings categories of certain NRSROs, see Appendix A to
the SAI.
Page 30
Illiquid and Unlisted Securities Risk
The Fund may invest up to 25% of the Core Component in unlisted securities
and other instruments of Infrastructure Issuers. Such securities and instruments
are generally not able to be publicly traded. In the United States, such
securities and instruments are generally unregistered for securities law
purposes and can generally be resold only in privately negotiated transactions
with a limited number of purchasers or in a public offering registered under the
Securities Act. Outside the United States, similar restrictions may apply.
Considerable delay in resale could be encountered in either event and, unless
otherwise contractually provided for, the Fund's proceeds upon sale may be
reduced by the costs of registration or underwriting discounts. The difficulties
and delays associated with such transactions could result in the Fund's
inability to realize a favorable price upon disposition of unlisted securities
and instruments, and at times might make disposition of such securities and
instruments impossible. To the extent the Fund invests in securities and
instruments the terms of which are privately negotiated, the terms of such
securities and instruments may contain restrictions regarding resale and
transfer.
In addition, certain listed securities and instruments, particularly
securities and instruments of smaller capitalized or less seasoned issuers, may
from time to time lack an active secondary market and may be subject to more
abrupt or erratic price movements than securities of larger, more established
companies or stock market averages in general. In the absence of an active
secondary market, the Fund's ability to purchase or sell such securities at a
fair price may be impaired or delayed.
Valuation of Unlisted Securities and Instruments
As there may be no open market to establish an independent value for the
Fund's interest in unlisted securities and instruments, the Fund's valuation
procedures provide that such investments must be fair valued. The fair value
computation will be subject to policies and procedures established by the Board.
The Fund expects in most instances that the Sub-Advisers will determine a fair
value of the investment pursuant to these policies and procedures, which
determination will be subject to Board approval. There can be no assurance that
the Fund will be able to sell an unlisted security or instrument for an amount
equal to the fair value determined by the Fund for that security or instrument
or that there will be a market for such security or instrument. Unlisted
securities and instruments are illiquid by nature and the sale price of such
assets may be materially below the value of the interest were it to be held for
the long term. Certain of such securities and instruments may decline in value
over time due to the nature of the assets. This will occur, for example, with a
solid waste disposal site with a regulated capacity limit and with an entity
that has a finite life concession agreement with a government agency to provide
a service (e.g., toll roads and airports). Such a decline in the value of the
underlying assets should be reflected in the market value of the equity and debt
instruments of the issuer, thereby providing a total return to investors that
reflects the nature of these assets. The Board will establish policies and
procedures to establish the fair value for investments, if any, in
Infrastructure Issuers with interests in these types of assets where there is no
independent market valuation available. See "Net Asset Value."
See "Senior Loan Risk" for a discussion of the risk associated with
investing in Infrastructure Senior Loans.
Leverage Risk
Under the 1940 Act, the Fund may borrow an amount up to 33-1/3% of its
Total Assets (including the amount borrowed) less all liabilities other than
borrowings. The Fund may also issue Preferred Shares in an amount up to 50% of
the Fund's Total Assets (including the proceeds of the Preferred Shares and any
borrowings). The Fund intends, however, under normal circumstances, to utilize
leverage in an amount up to 30% of the Fund's Total Assets immediately after
taking into account such leverage. Although the use of leverage by the Fund may
create an opportunity for increased return for the Common Shares, it also
results in additional risks and can magnify the effect of any losses. If the
income and gains earned on the securities and instruments purchased with
leverage proceeds are greater than the cost of the leverage, the Common Shares'
return will be greater than if leverage had not been used. Conversely, if the
income or gains from the securities and investments purchased with such proceeds
does not cover the cost of leverage, the return to the Common Shares will be
less than if leverage had not been used. The Fund nevertheless may determine to
continue to use leverage if the benefits to the Fund's Shareholders of
maintaining the leveraged position are expected to outweigh the current reduced
return. There is no assurance that a leveraging strategy will be successful.
Leverage involves risks and special considerations for Common Shareholders
including:
o the likelihood of greater volatility of NAV and market price of the
Common Shares than a comparable portfolio without leverage;
o the risk that fluctuations in interest rates on borrowings and
short-term debt or in the dividend rates on any Preferred Shares that
the Fund may pay will reduce the return to the Common Shareholders or
will result in fluctuations in the dividends paid on the Common Shares;
o the effect of leverage in a declining market, which is likely to cause
a greater decline in the NAV of the Common Shares than if the Fund were
not leveraged, which may result in a greater decline in the market
price of the Common Shares; and
Page 31
o when the Fund uses Leverage Instruments, the investment advisory fees
payable to the Adviser and the Sub-Advisers' fees will be higher than
if the Fund did not use leverage.
The funds borrowed pursuant to a leverage borrowing program (such as a
credit line or commercial paper program), or obtained through the issuance of
Preferred Shares, constitute a substantial lien and burden by reason of their
prior claim against the income of the Fund and against the net assets of the
Fund in liquidation. The rights of lenders to receive payments of interest on
and repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares and the
holders of Preferred Shares, with respect to the payment of dividends or upon
liquidation. The Fund may not be permitted to declare dividends or other
distributions, including dividends and distributions with respect to Common
Shares or Preferred Shares or purchase Common Shares or Preferred Shares unless
at the time thereof, the Fund meets certain asset coverage requirements and no
event of default exists under any leverage borrowing program. In addition, the
Fund may not be permitted to pay dividends on Common Shares unless all dividends
on the Preferred Shares and/or accrued interest on borrowings have been paid, or
set aside for payment. In an event of default under a leverage borrowing
program, the lenders have the right to cause a liquidation of collateral (i.e.,
sell Infrastructure Senior Loans and other assets of the Fund) and, if any such
default is not cured, the lenders may be able to control the liquidation as
well. Certain types of leverage may result in the Fund being subject to
covenants relating to asset coverage and Fund composition requirements. The Fund
may be subject to certain restrictions on investments imposed by guidelines of
one or more rating agencies, which may issue ratings for the Preferred Shares or
other leverage securities issued by the Fund. These guidelines may impose asset
coverage or Fund composition requirements that are more stringent than those
imposed by the 1940 Act. The Fund does not believe that these covenants or
guidelines will impede the Sub-Advisers from managing the Fund's portfolio in
accordance with the Fund's investment objective and policies.
While the Fund may from time to time consider reducing or increasing
leverage in response to actual or anticipated changes in interest rates in an
effort to mitigate the increased volatility of current income and NAV associated
with leverage, there can be no assurance that the Fund will actually reduce
leverage in the future or that any reduction, if undertaken, will benefit the
Common Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance if the Fund had not reduced leverage. The converse would be true if
the Fund had increased leverage. The Fund may decide that this risk outweighs
the likelihood of achieving the desired reduction to volatility in income and
Common Share price if the prediction were to turn out to be correct, and
determine not to reduce leverage as described above.
Restrictive Covenants and 1940 Act Restrictions
With respect to a leverage borrowing program instituted by the Fund, the
credit agreements governing such a program (the "Credit Agreements") will likely
include usual and customary covenants for their respective type of transaction,
including, but not limited to, limits on the Fund's ability to: (i) issue
Preferred Shares; (ii) incur liens or pledge portfolio securities or
investments; (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
Fund 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
business currently engaged in; and (viii) create, incur, assume or permit to
exist certain debt except for certain specific types of debt. In addition, the
Credit Agreements may not permit the Fund's asset coverage ratio (as defined in
the Credit Agreements) to fall below 300% (or such greater percentage as may be
set forth in the Credit Agreement) at any time. The Credit Agreement will limit
the Fund's ability to pay dividends or make other distributions on the Fund's
Common Shares unless the Fund complies with the Credit Agreement's asset
coverage test. In addition, the Credit Agreement may not permit the Fund to
declare dividends or other distributions or purchase or redeem Common Shares or
Preferred Shares: (i) at any time that any event of default under the Credit
Agreement has occurred and is continuing; (ii) if, after giving effect to such
declaration, the Fund would not meet the Credit Agreement's asset coverage test
set forth in the Credit Agreement; or (iii) if certain other conditions are not
met.
Under the requirements of the 1940 Act, the Fund must have asset coverage
of at least 300% immediately after any borrowing, including borrowing under any
leverage borrowing program the Fund implements. For this purpose, asset coverage
means the ratio which the value of the Total Assets of the Fund, less
liabilities and indebtedness not represented by senior securities, bears to the
aggregate amount of borrowings represented by senior securities issued by the
Fund.
No Operating History
The Fund is a newly organized, non-diversified, closed-end management
investment company with no operating history.
Page 32
Non-Diversified Status
The Fund is classified as a "non-diversified" investment company under the
1940 Act, which means the Fund is not limited by the 1940 Act in the proportion
of its assets that may be invested in the securities and instruments of a single
issuer. As a non-diversified investment company, the Fund may invest in the
securities and instruments of individual issuers to a greater degree than a
diversified investment company. As a result, the Fund may be more vulnerable to
events affecting a single issuer and, therefore, subject to greater volatility
than a fund that is more broadly diversified. Accordingly, an investment in the
Fund may present greater risk to an investor than an investment in a diversified
company. The Fund intends, however, to limit its investments such that no more
than 7% of the Fund's Total Assets are invested in the securities and
instruments of any single issuer at any time.
Long-Term Objective; Not a Complete Investment Program
The Fund is intended for long-term investors seeking a high level of
current return while attempting to preserve capital. The Fund is not meant to
provide a vehicle for those who wish to play short-term swings in the stock
market. An investment in shares of the Fund should not be considered a complete
investment program. Each Shareholder should take into account the Fund's
investment objective as well as the Shareholder's other investments when
considering an investment in the Fund.
Management Risk
The Fund is subject to management risk because it is an actively managed
portfolio. The Adviser and the Sub-Advisers will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.
MIFA Risk
MIFA is a newly organized investment adviser, with no investment history or
track record. MIFA, through its sole member MIMU, is part of Macquarie's ISF
Division. Macquarie's ISF Division has experience in the assessment and
valuation of Infrastructure Assets and experience with the operational risks and
regulatory risks faced by Infrastructure Issuers. This experience is available
to MIFA in servicing the Fund. If MIFA were to lose access to the resources
provided by Macquarie's ISF Division, its ability to service the Fund could be
adversely affected. There can be no assurance that a suitable replacement could
be found for Macquarie's ISF Division in the event that its resources become
unavailable to MIFA.
The Fund intends to pay MIFA advisory fees at a higher rate to the extent
the Fund's Core Component is invested in unlisted securities and instruments of
Infrastructure Issuers. Accordingly, MIFA will have an incentive to make such
investments.
Regulatory Risk
Infrastructure Issuers are often subject to regulatory risk. This risk
arises as a significant portion of the revenues of Infrastructure Issuers may be
set through agreement with an industry regulator. While each infrastructure
sector may have its own regulator and differing procedures and rules, it is
typical that the regulator can have a significant impact on the profitability of
an issuer. A regulator often has, among other powers, the power to change or
modify the prices an Infrastructure Issuer can charge for its products or
services. The returns on regulated assets are usually stable during the
regulated period, but may be volatile during any period that rates are reset by
the regulator.
Investment and Market Risk
An investment in the Fund's Common Shares is subject to investment risk,
including the possible loss of the entire principal amount invested. An
investment in Common Shares of the Fund represents an indirect investment in the
securities and instruments owned by the Fund, of which a large proportion will
be traded on national securities exchanges or in the over-the-counter markets.
The value of these securities and instruments, like other market investments,
may move up or down, sometimes rapidly and unpredictably.
Whether investors will realize gains or losses upon the sale of Common
Shares of the Fund will depend upon the market price of the Common Shares at the
time of sale, which may be less or more than the Fund's NAV per Common Share.
Since the market price of the Common Shares will be affected by such factors as
the relative demand for and supply of the Common Shares in the market, general
market and economic conditions and other factors beyond the control of the Fund,
the Fund cannot predict whether the Common Shares will trade at, below or above
NAV or at, below or above the initial public offering price. Shares of
closed-end funds often trade at a discount to their NAVs and the Fund's Common
Shares may trade at such a discount. This risk may be greater for investors
expecting to sell their Common Shares of the Fund soon after completion of the
public offering. The Common Shares of the Fund were designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes.
Page 33
Common Shares owned by a shareholder at any point in time may be worth less
than the Shareholder's original investment, even after taking into account the
reinvestment of dividends and distributions on the Common Shares.
Income Risk
The income Shareholders receive from the Fund is based primarily on the
dividends, interest and other distributions the Fund earns from its investments,
which can vary widely over the short and long term. The Fund's income may be
affected adversely when prevailing short-term interest rates increase and the
Fund is utilizing leverage, although it is the Fund's intention to apply
leverage when the Fund has or will acquire assets that largely match the
interest rate structure of the leverage.
Tax Risk
No assurance can be given as to what percentage of the distributions paid
on the Common Shares, if any, will consist of tax-advantaged qualified dividend
income or long-term capital gains or what the tax rates on various types of
income will be in future years. Under current law, qualified dividend income and
long-term capital gains are taxed to non-corporate investors at a maximum
federal income tax rate of 15%. This tax treatment may be adversely affected,
changed or repealed by future changes in tax laws at any time, and is currently
scheduled to expire for tax years beginning after December 31, 2008. Further,
additional risk exists as it will be more difficult to obtain information
regarding whether distributions by non-U.S. entities should be regarded as
qualifying dividends. In addition, the Fund must meet holding period and other
requirements with respect to the dividend paying stocks in its portfolio and the
Shareholder must meet holding period and other requirements with respect to the
Fund's shares for lower rates to apply. See "Tax Matters."
Ability to Source Investments Risk
The Fund will seek to invest a portion or all of the Fund's Total Assets in
a finite universe of securities and instruments of Infrastructure Issuers. To
the extent that there is a limited supply of suitable investments available that
meet the Fund's investment objective, the Fund's ability to acquire such
investments without impacting market prices may be limited.
The 1940 Act and the rules and regulations under the 1940 Act impose
certain restrictions with respect to transactions involving the Fund and any
affiliated person of the Fund (as defined in the 1940 Act). Even if an
attractive investment opportunity is identified by the Fund, these restrictions
may limit the ability of the Fund to participate in a proposed transaction to
the fullest extent desired to the extent an affiliated person of the Fund is
involved in the transaction. In addition, investments in Canadian income funds
are subject to the risk that identifiable non-Canadian owners of units could be
forced to sell their units in the event that non-Canadian ownership of all units
rises above 50%.
Strategic Asset Risk
Infrastructure Issuers may control significant strategic assets. Strategic
assets are assets that have a national or regional profile, and may have
monopolistic characteristics. The very nature of these assets could generate
additional risk not common in other industry sectors. Given the national or
regional profile and/or their irreplaceable nature, strategic assets may
constitute a higher risk target for terrorist acts or political actions. Given
the essential nature of the products or services provided by Infrastructure
Issuers, there is also a higher probability that the services provided by such
issuers will be in constant demand. Should an Infrastructure Issuer fail to make
such services available, users of such services may incur significant damage and
may, due to the characteristics of the strategic assets, be unable to replace
the supply or mitigate any such damage, thereby heightening any potential loss.
Market Disruption Risk
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. United States military and related
action in Iraq is ongoing and events in the Middle East and elsewhere in the
world could have significant adverse effects on the global economy and the stock
markets. In addition, illnesses such as Severe Acute Respiratory Syndrome and
the Asian Bird Flu spread rapidly and have the potential to significantly affect
the global economy and stock markets. The Fund cannot predict the effects
similar events occurring in the future will have on the value of the Common
Shares or NAV of the Fund.
Fund Distribution Risk
Pursuant to its distribution policy, and under normal market conditions,
the Fund intends to make regular quarterly distributions on its Common Shares.
To the extent the total quarterly distributions for a year exceed the Fund's
investment company taxable income and net capital gain for that year, the excess
will generally constitute a return of capital. Return of capital distributions
are generally tax-free up to the amount of a Shareholder's tax basis in the
shares. See "Tax Matters." In addition, such excess distributions may have the
effect of decreasing the Fund's Total Assets and may increase the Fund's expense
Page 34
ratio as the Fund's fixed expenses may become a larger percentage of the Fund's
average net assets. In order to make such distributions, the Fund might have to
sell a portion of its investment portfolio at a time when independent investment
judgment may not dictate such action.
Investment Companies
The Fund may invest in the securities and instruments of other investment
companies to the extent permitted by law. To the extent the Fund invests in the
common equity of investment companies, the Fund will bear its ratable share of
any such investment company's expenses, including management fees. The Fund will
also remain obligated to pay management fees to the Adviser and Sub-Advisers
with respect to the assets invested in the securities and instruments of other
investment companies. In these circumstances holders of the Fund's common shares
will be subject to duplicative investment expenses and certain of these fees may
be payable to affiliated entities of a Sub-Adviser.
Common Stock Risk
Common stock and other instruments of an issuer in the Fund's portfolio may
decline for a number of reasons beyond the control of the Fund or the issuer,
including:
o if the issuer fails to make anticipated dividend payments or
distributions because, among other reasons, the issuer of the security
experiences a decline in its financial condition;
o in the event that the market considers that its dividend outlook is
below alternatives sources of income;
o in the event that the market changes its risk assessment of the
industry or assets the company operates; and/or
o in the event that the market changes it assessment of the relative
performance of the issuer in its sector, the regulatory outlook for the
sector or the performance of management.
Common stock and other instruments in which the Fund will invest through
the Core Component will typically be structurally subordinated to preferred
stock, bonds and other debt instruments in a company's capital structure, in
terms of priority to corporate income, and therefore will be subject to greater
dividend risk than preferred stock or debt instruments of such issuers. In
addition, while such instruments have historically generated higher average
returns than fixed income securities, common stock has also experienced
significantly more volatility in those returns. An adverse event, such as an
unfavorable earnings report or regulatory reset may depress the value of common
stock and other instruments of an issuer held by the Fund. Also, the price of
common stock of an issuer is sensitive to general movements in the stock market
or the sector of the stock market in which the issuer of the common stock
operates. A drop in the respective stock market may depress the price of most or
all of the common stocks held by the Fund and invested in that same stock
market.
Special Risks Related to Preferred and Hybrid Securities
There are special risks associated with investing in preferred and hybrid
securities (preferred securities), including:
Deferral. Preferred securities may include provisions that permit the
issuer, at its discretion, to defer distributions for a stated period without
any adverse consequences to the issuer. If the Fund owns a preferred security
that is deferring its distributions, the Fund may be required to report income
for tax purposes even though it has not yet received such income.
Non-Cumulative Dividends. Some preferred securities are non-cumulative,
meaning that the dividends do not accumulate and need not ever be paid. A
portion of the portfolio may include investments in non-cumulative preferred
securities, whereby the issuer does not have an obligation to make up any
arrears to its Shareholders. Should an issuer of non-cumulative preferred
securities held by the Fund determine not to pay dividends on such stock, the
amount of dividends the Fund pays may be adversely affected. There is no
assurance that dividends or distributions on non-cumulative preferred stocks in
which the Fund invests will be declared or otherwise made payable or paid.
Subordination. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than more senior debt instruments. Because preferred stock
and hybrids are generally junior to debt securities and other obligations of the
issuer, deterioration in the credit quality of the issuer will cause greater
changes in the value of such instruments than senior debt securities with
similarly stated yield characteristics.
Liquidity. Preferred securities may be substantially less liquid than many
other securities, such as common stocks or U.S. government securities.
Page 35
Limited Voting Rights. Generally, preferred security holders (such as the
Fund) have no voting rights with respect to the issuing company unless preferred
dividends have been in arrears for a specified number of periods, at which time
the preferred security holders may elect a number of directors to the issuer's
board. Generally, once all the arrears have been paid, the preferred security
holders no longer have voting rights.
Special Redemption Rights. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with call
provisions, a redemption by the issuer may negatively impact the return of the
security held by the Fund.
Special Risks of Derivative Transactions
Although it is not the Fund's current intention, the Fund may in the future
participate in certain derivative transactions. Such transactions entail certain
execution, market, liquidity, hedging and tax risks. Participation in the
options or futures markets and in currency exchange transactions involves
investment risks and transaction costs to which the Fund would not be subject
absent the use of these strategies. If the applicable Sub-Adviser's prediction
of movements in the direction of the securities, non-U.S. currency and interest
rate markets is inaccurate, the consequences to the Fund may leave the Fund in a
worse position than if it had not used such strategies.
Loans of Portfolio Securities
Although it is not the Fund's current intention, consistent with applicable
regulatory requirements and the Fund's investment restrictions, the Fund may
lend its portfolio securities to securities broker-dealers or financial
institutions, provided that such loans are callable at any time by the Fund
(subject to notice provisions described in the SAI), and are at all times
secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations and which are at least equal to the
market value, determined daily, of the loaned securities. The Fund will continue
to receive the income on the loaned securities while at the same time earning
interest on the cash amounts deposited as collateral, which will be invested in
short-term obligations. As with other extensions of credit, there are risks of
delay in recovery or even loss of rights in the securities loaned if the
borrower of the securities fails financially. Loans of securities may also
reduce the qualified dividend portion of the distributions to Shareholders. The
Fund's loans of portfolio securities will be collateralized in accordance with
applicable regulatory requirements.
For a further description of such loans of portfolio securities, see "Other
Investment Policies and Techniques" in the SAI.
Interest Rate Risk
Preferred, Hybrid and Debt Securities. Interest rate risk is the risk that
fixed income securities such as preferred, hybrid and debt securities will
decline in value because of changes in market interest rates. When market
interest rates rise, the market value of such securities generally will fall.
Interest rates are at or near historic lows, and, as a result, they are likely
to rise over time. The Fund's investment in such securities means that the NAV
and market price of Common Shares may decline if market interest rates rise.
During periods of declining interest rates, the issuer of a fixed income
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. Preferred and debt securities frequently have call features
that allow the issuer to repurchase the security prior to its stated maturity.
An issuer may redeem such a security if the issuer can refinance it at a lower
cost due to declining interest rates or an improvement in the credit standing of
the issuer. During periods of rising interest rates, the average life of certain
types of securities may be extended because of slower than expected principal
payments. This may lock in a below market interest rate, increase the security's
duration and reduce the value of the security. This is known as extension risk.
Equity Securities. The income and profits of many of the issuers in which
the Fund might invest may be sensitive to interest rate fluctuations and
therefore changes in the level of interest rates may have a direct bearing on
the issuers' ability to pay dividends or make distributions. When market
interest rates rise, the market value of such investments may fall in
anticipation of a decline in the issuers' revenue and profitability because the
issuer is unable to pay out higher dividends at times of higher interest rates.
Therefore, the NAV and market price of Common Shares may decline if market
interest rates rise. Interest rates are at or near historic lows, and, as a
result, they are likely to rise over time. It is important to consider the
international aspects of the Fund's portfolio. Interest rates in the country of
the issuer of a security may generally have a greater impact than U.S. interest
rates on the Fund's portfolio. Due to the nature of Infrastructure Assets, the
impact of interest rate fluctuations may be greater for Infrastructure Issuers
than for the economy as a whole in the country in which the interest rate
fluctuation occurs.
Page 36
Infrastructure Assets. Infrastructure Assets can be highly leveraged. As
such, movements in the level of interest rates may affect the returns from these
assets. The structure and nature of the debt is therefore an important element
to consider in assessing the interest risk of Infrastructure Assets. In
particular, the type of facilities, maturity profile, rates being paid, fixed
versus variable components and covenants in place (including how they impact on
returns to equity holders) are crucial factors in assessing any interest rate
risk.
Spread Risk - Infrastructure Senior Loans
The Fund anticipates that the Senior Loan Component will contain primarily
floating rate securities with less risk that they will change in value with
changes in the overall level of interest rates than fixed-rate securities.
However, Infrastructure Senior Loans are subject to the risk that the margin
between short-term rates and borrowing rates for such loans increases or
decreases. As the margin decreases, there is less difference between borrowing
rates and lending rates. Any such spread compression will generally result in
lower profitability to the Fund with respect to investing in Infrastructure
Senior Loans.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Fund's shares and
distributions thereon can decline. In addition, during any periods of rising
inflation, interest rates on any borrowings and dividend rates of any Preferred
Shares the Fund may have issued would likely increase, which would tend to
further reduce returns to Common Shareholders to the extent any such increase in
the exposure to Leverage Instruments is not fully hedged by the Infrastructure
Senior Loans held by the Fund.
Many of the companies in which the Fund may invest will have long-term
rights to income that can be adjusted to certain extents when inflation changes.
Typically, as inflation rises the issuer will earn more revenue and when
inflation declines, it will not be able to earn a similar increase.
If the issuer is unable to increase its revenue and profits at times of
higher inflation, it will be unable to pay out higher dividends to compensate
for decreases in the value of money. The equity value of such issuers may fall.
Many issuers in the infrastructure and utilities industries may have fixed
income streams and, therefore, be unable to pay higher dividends. The market
value of Infrastructure Issuers may decline in value in times of higher
inflation rates.
The prices that an Infrastructure Issuer is able to charge users of its
assets may be linked to inflation, whether by government regulation, contractual
arrangement or some other factor. In this case, changes in the rate of inflation
may effect the forecast profitability of the Infrastructure Issuer.
Documentation Risk
Infrastructure Assets are often governed by a complex series of legal
documents and contracts. As a result, the risk of a dispute over interpretation
or enforceability of the documentation may be higher than for other issuers.
Environmental Risk
Infrastructure Assets can have a substantial environmental impact. Ordinary
operation or an accident with respect to such assets could cause major
environmental damage which could cause the owner of such assets significant
financial distress. Community and environmental groups may protest the
development or operation of Infrastructure Assets, and these protests may induce
government action to the detriment of the owner of the Infrastructure Asset.
Operation Risk
The long-term profitability of an Infrastructure Issuer is partly dependent
on the efficient operation and maintenance of the Infrastructure Assets. Should
an Infrastructure Issuer fail to efficiently maintain and operate the assets,
the Infrastructure Issuer's ability to maintain payments of dividends or
interest to investors may be impaired. The destruction or loss of an
Infrastructure Asset may have a major impact on the Infrastructure Issuer.
Failure by the Infrastructure Issuer to carry appropriate, enforceable insurance
or to operate the asset appropriately could lead to significant losses and
damages. See "Risks - Environmental Risk" and "Risks - Strategic Asset Risk."
Political Risk and Expropriation Risk
This risk arises when for political reasons governments attempt to
influence the operations, revenue, profitability or contractual relationships of
Infrastructure Issuers or expropriate the Infrastructure Assets. The public
interest aspect of the goods and services that Infrastructure Assets provide
means political oversight of the sector will remain pervasive. Given that many
Page 37
Infrastructure Issuers will control key strategic assets used by the political
constituents attempting to influence the operations, revenue, profitability or
contractual relationships of such issuers, it is possible that such governments
could seek to benefit those political constituents and thereby damage such
issuers.
Credit Risk
The Fund's NAV and ability to pay dividends is dependent upon the
performance of the Fund's investments. That performance, in turn, is subject to
a number of risks, including the credit risk of the Fund's underlying assets
invested in debt securities and Infrastructure Issuers' credit exposures to
their major customers. See "Risks - Counterparty Risk." Credit risk is the risk
of nonpayment of scheduled contractual repayments whether interest and/or
principal payments or payments for services. Credit risk also is the risk that
one or more investments in the Fund's portfolio will decline in price, or fail
to pay interest or principal when due, because the issuer of the security or
contractual counterparty experiences a decline in its financial status.
Anti-Takeover Provisions
The Fund's Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or convert the Fund to
open-end status. These provisions could have the effect of depriving the Common
Shareholders of opportunities to sell their Common Shares at a premium over the
then current market price of the Common Shares. See "Certain Provisions in the
Declaration of Trust."
Forward Currency Exchange Contracts
There is no independent limit on the Fund's ability to invest in non-U.S.
currency exchange contracts. The use of forward currency contracts may involve
certain risks, including the failure of the counter party to perform its
obligations under the contract and that the use of forward contracts may not
serve as a complete hedge because of an imperfect correlation between movements
in the prices of the contracts and the prices of the currencies hedged or used
for cover. For a further description of such investments, see "Other Investment
Policies and Techniques" in the SAI.
Counterparty Risk
Infrastructure Issuers can have a narrow customer base. Should these
customers or counterparties fail to pay their contractual obligations,
significant revenues could cease and not be replaceable. This would affect the
profitability of the Infrastructure Issuer and the value of any securities or
other instruments it has issued.
The Fund will be subject to credit risk with respect to the counterparties
to the derivative contracts purchased by the Fund. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may experience significant
delays in obtaining any recovery under the derivative contract in bankruptcy or
other reorganization proceeding. The Fund may obtain only a limited recovery or
may obtain no recovery in such circumstances.
Distribution Risk for Equity Income Portfolio Securities
In selecting equity securities in which the Fund will invest, MIFA will
consider the issuer's history of making regular periodic distributions (i.e.,
dividends) to its equity holders. An issuer's history of paying dividends,
however, does not guarantee that the issuer will continue to pay dividends in
the future. The dividend income stream associated with equity income securities
generally is not guaranteed and will be subordinate to payment obligations of
the issuer on its debt and other liabilities. Accordingly, in the event the
issuer does not realize sufficient income in a particular period both to service
its liabilities and to pay dividends on its equity securities, it may forgo
paying dividends on its equity securities. In addition, because in most
instances issuers are not obligated to make periodic distributions to the
holders of their equity securities, such distributions or dividends generally
may be discontinued at the issuer's discretion.
Portfolio Turnover Risk
The Fund may engage in portfolio trading to accomplish its investment
strategy. The investment policies of the Fund may lead to frequent changes in
investments, particularly in periods of rapidly fluctuating interest or currency
exchange rates.
The Fund cannot accurately predict its annual portfolio turnover rate.
There are no limits on the rate of portfolio turnover, and investments may be
sold without regard to length of time held when the Fund's investment strategy
so dictates. A higher portfolio turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses that are borne by the
Fund. High portfolio turnover may result in the realization of net short-term
capital gains by the Fund which, when distributed to Shareholders, will be
taxable as ordinary income. However, MIFA intends to focus on those
Infrastructure Issuers that have the potential to provide long-term stable
income, thus allowing for a greater percentage of the Fund's capital gains or
losses to be treated as long-term gains or losses for tax purposes.
Page 38
Hedging Risk
The Fund may use derivatives or other transactions for the purpose of
hedging the Fund's exposure to an increase in the price of a security prior to
its anticipated purchase or a decrease in the price of a security prior to its
anticipated sale. There may be an imperfect correlation between the Fund's
portfolio holdings and such derivatives, which may prevent the Fund from
achieving the intended consequences of the applicable transaction or expose the
Fund to risk of loss. In addition, the Fund's success in using hedging
instruments is subject to the applicable Sub-Adviser's ability to predict
correctly changes in the relationships of such hedge instruments to the Fund's
portfolio holdings, and there can be no assurance that the Sub-Adviser's
judgment in this respect will be accurate. Further, the Fund's use of
derivatives or other transactions to reduce risk involves costs. In addition, no
assurance can be given that the Fund will enter into hedging transactions at
times or under circumstances in which it would be advisable to do so. The Fund
may be subject to credit risk with respect to the counterparties to certain
derivative agreements entered into by the Fund. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may experience significant
delays in obtaining any recovery under the derivative contract in a bankruptcy
or other reorganization proceeding. The Fund may obtain only a limited recovery
or may obtain no recovery in such circumstances. Consequently, the use of
hedging transactions might result in a poorer overall performance for the Fund,
whether or not adjusted for risk, than if the Fund had not hedged its portfolio
holdings. The Fund will use derivatives or other transactions described above
solely for purposes of hedging. See "The Fund's Investments - Investment
Practices - Hedging Transactions" in this prospectus and "Other Investment
Policies and Techniques - Hedging Strategies" in the Fund's SAI.
Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of the
Fund, First Trust or the Sub-Advisers. Absent an exemption from the Securities
and Exchange Commission or other regulatory relief, the Fund is generally
precluded from effecting certain principal transactions with affiliated brokers,
and its ability to utilize affiliated brokers for agency transactions is subject
to restrictions. This could limit the Fund's ability to engage in securities
transactions and take advantage of market opportunities. In addition, unless and
until the underwriting syndicate is broken in connection with the initial public
offering of the Common Shares, the Fund will be precluded from effecting
principal transactions with brokers who are members of the syndicate.
The Fund has authorized the Sub-Advisers to select the brokers or dealers
that will execute the purchases and sales of the Fund's securities and other
instruments. To the extent consistent with the investment policies of the Fund
and approved by the Board, a Sub-Adviser may select brokers or dealers related
to the Sub-Adviser. Such related brokers and dealers may earn commissions or
other fees from any such purchase and sale.
From time to time, MIFA may determine that it is in the best interests of
the Fund to gain exposure to Infrastructure Assets through the purchase of Core
Infrastructure Securities of which the issuer is a listed entity advised by a
MIFA Related Party. Such listed entity may be a non-U.S. investment company. See
"Portfolio Composition - Other Investment Companies." To the extent that a "MIFA
Related Party" is under common control with MIFA, it may be a second-tier
affiliate of the Fund (in other words, an "affiliated person" of an "affiliated
person" of the Fund, as that term is defined in the 1940 Act). See "Risks -
Investment Companies." Each such transaction must be made on the open market of
the primary stock exchange on which the relevant Core Infrastructure Securities
are listed, must be approved by the Board or otherwise comply with any policies
and procedures adopted by the Board, and must be made in accordance with the
1940 Act. A MIFA Related Entity may earn fees from managing the issuer of such
Core Infrastructure Securities. To the extent the Fund invests in such
securities, the Fund will be limited in its ability to freely trade the security
to the extent that personnel of MIFA or of Macquarie's ISF Division have or may
be deemed to have material, non-public information in regard to such security.
For purposes of the Fund's investment guidelines, Core Infrastructure Securities
the issuer of which is a listed entity advised by a MIFA Related Party will be
treated as securities of Infrastructure Issuers.
From time to time, MIFA may determine that it is in the best interests of
the Fund to gain exposure to Infrastructure Assets through an investment in
unlisted equity securities that is made at the same time that other funds
advised by a MIFA Related Party invest in such securities. Generally, in the
absence of an SEC order or SEC staff relief, and subject to certain exceptions,
the Fund will be prohibited under Section 17(d) and Rule 17d-1 from engaging in
any "joint transaction" in which an affiliated person of the Fund (or affiliated
person of such affiliated person) participates. Under certain circumstances,
participation by the Fund and such affiliate in a concurrent investment in the
same unlisted securities may be impermissible under Section 17(d) and Rule
17d-1. As a result, each investment by the Fund in unlisted equity securities
that is proposed to be made at the same time that other funds advised by a MIFA
Related Party invest in such securities may be made only if the investment is
(i) approved in each instance by the Board, including a majority of the
independent directors, (ii) otherwise made in compliance with all policies and
procedures adopted by the Board, and (iii) made in accordance with the 1940 Act
and any other applicable law. The subject securities of the transaction must
meet the investment objective of the Fund at the time of the transaction.
Page 39
The Fund may seek to invest in Infrastructure Issuers that own
Infrastructure Assets managed by members of the Macquarie Group that are
"affiliated persons" of the Fund (or affiliated persons of such affiliated
persons) as that term is defined in the 1940 Act. Such members may earn
commissions or other fees in connection with managing such Infrastructure
Assets. The Fund may not invest in such Infrastructure Issuers until such time
as the Fund has received no-action, exemptive, or other regulatory or
interpretive relief from the SEC or SEC staff with respect to such investment.
MANAGEMENT OF THE FUND
Trustees and Officers
The Board is responsible for the management of the Fund, including
supervision of the duties performed by the Adviser. The names and business
addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the SAI.
Investment Adviser
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, is the investment adviser to the Fund and is responsible for
supervising the Sub-Advisers. The Adviser, in consultation with the
Sub-Advisers, is also responsible for determining the Fund's overall investment
strategy and overseeing its implementation. First Trust serves as investment
adviser or portfolio supervisor to investment portfolios with approximately $9.9
billion in assets which it managed or supervised as of December 31, 2003.
First Trust will also be responsible for managing the Fund's business
affairs and providing certain clerical, bookkeeping and other administrative
services.
First Trust, a registered investment adviser, is an Illinois limited
partnership formed in 1991 and an investment adviser registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940.
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P. ("Grace Partners"), and one general partner, The Charger
Corporation. Grace Partners is a limited partnership with one general partner,
The Charger Corporation, and a number of limited partners. Grace Partners' and
The Charger Corporation's primary business is investment advisory and
broker/dealer services through their interests. The Charger Corporation is an
Illinois corporation controlled by the Robert Donald Van Kampen family. First
Trust is controlled by Grace Partners and The Charger Corporation.
For additional information concerning First Trust, including a description
of the services provided, see the SAI.
Sub-Advisers
The Adviser and the Fund have selected Macquarie Infrastructure Fund
Adviser, LLC, to manage the Core Component and Four Corners Capital Management,
LLC, to manage the Senior Loan Component of the Fund.
Macquarie Infrastructure Fund Adviser, LLC, 600 5th Avenue, 21st Floor, New
York, New York 10020, serves as the Fund's investment sub-adviser with respect
to the Fund's investments in Core Infrastructure Securities. In this capacity,
MIFA is responsible for the selection and on going monitoring of the Core
Infrastructure Securities in the Fund's investment portfolio. MIFA will also
assist Four Corners by providing individual asset class overviews and analysis.
MIFA is a Delaware limited liability company founded in January 2004 and is
registered under the Investment Advisers Act of 1940. Macquarie Infrastructure
Management (USA) Inc. is the sole member of MIFA. MIMU is wholly-owned by
Macquarie Bank Limited through a subsidiary. MIFA has not previously served as
an investment adviser or sub-adviser.
MBL together with its associated entities worldwide is a diversified
international provider of financial and investment banking services, with over
5,700 staff in 21 countries. As of September 30, 2003, the Macquarie Group had
over $38 billion in assets under management. Twelve investment vehicles managed
by the Macquarie Group are listed on the Australian Stock Exchange, and had a
total capitalization of approximately $12.2 billion as of December 31, 2003.
Historically, a significant portion of the Macquarie Group's international
income has been derived from infrastructure funds management and the provision
of financial advisory services to the infrastructure industry. Project Finance
International magazine (January 2003, Thompson Financial) recognized the
Macquarie Group as the top ranked Project Finance Advisor in the Americas by
mandates awarded in 2002 (first in 2001 and second in 2000), and second ranked
Project Finance Advisor globally in 2002 (third in 2001 and second in 2000).
Page 40
Macquarie's ISF Division manages, directly or indirectly, approximately $11
billion of Infrastructure Assets (based on the most recent audited gross assets
of each fund managed by Macquarie's ISF Division as reflected in MBL's September
30, 2003 semi-annual public filings).
Day-to-day execution of the Fund's investment strategy with respect to the
Core Component will be the responsibility of MIFA. Mr. Jon Fitch will be the
lead analyst and portfolio manager for the Core Component and will be
responsible for reviewing and approving all trades for the Core Component made
by the Fund. Analysts (including the lead analyst) will largely be based in New
York, but may be based in other locations as required.
Mr. Fitch has been an equity analyst with Macquarie Equities Limited, a
wholly owned subsidiary of MBL, since 1995. Macquarie Equities Limited is the
equities research arm of MBL.
Mr. Fitch has been active in the analysis of infrastructure and utilities
stocks since 1997 and has over fifteen years' business experience encompassing
business management, equity analysis, strategic consulting and banking. From
1997 to 2000, Mr. Fitch led the equity research coverage of the infrastructure
and utilities sector in Australia for Macquarie Equities Limited and was
responsible for coverage of 12 companies across the sector, including tollroads,
gas companies, electric utilities, airports and diversified funds. During that
period, he was rated the leading analyst in that sector by the Australian
Greenwich Survey. Specifically he was rated first in 1997, second in 1998, first
for infrastructure and third for utilities in 1999 and second for both
infrastructure and utilities in 2000 by the Australian Greenwich Survey. He was
also rated first for infrastructure and utilities research in the first Reuters
Survey (Australia and New Zealand) in 1999.
From 2001 to 2003, Mr. Fitch was located in Hong Kong, where he was
responsible for establishing a Hong Kong based research team of five analysts.
While in Hong Kong, Mr. Fitch personally initiated coverage on nine
infrastructure and utilities companies with a combined market capitalization of
approximately $50 billion. Stocks covered included the Hong Kong utilities, the
Chinese power producers, airport, rail and multi-asset infrastructure investment
companies.
Mr. Fitch returned to Australia in mid 2003 where he has been responsible
for coverage of Australian utilities and energy stocks for Macquarie Equities
Limited.
Mr. Fitch has a Graduate Diploma in Applied Finance and Investment
(1992-1994) from the Securities Institute of Australia and a Masters of Business
in Accounting and Finance (1990-1992) from the University of Technology, Sydney.
He is an Associate Member of the Securities Institute of Australia.
Four Corners Capital Management, LLC, 515 South Flower Street, Suite 4310,
Los Angeles, California 90071, serves as the sub-adviser to the Fund with
respect to the Senior Loan Component of the Fund. In this capacity, Four Corners
is responsible for the selection and ongoing monitoring of such assets in the
Fund's investment portfolio. Four Corners specializes in managing portfolios of
senior loans and structured finance assets. Four Corners is a Delaware limited
liability company founded in September 2001 by Macquarie Holdings (USA), Inc.,
an affiliate of the Macquarie Group, and an experienced group of senior loan
investment professionals.
Four Corners is owned 66.67% by MBL through a subsidiary and 33.33% by the
senior management of Four Corners. Day-to-day operations and execution of
specific investment strategies relating to the Senior Loan Component held by the
Fund are the responsibility of Four Corners. Michael P. McAdams is the President
and Chief Investment Officer of Four Corners and will be co-Portfolio Manager of
the Senior Loan Component. Robert I. Bernstein is the Managing Director and
Chief Credit Officer of Four Corners and will be co-Portfolio Manager of the
Senior Loan Component.
Mr. McAdams has been involved with the management of portfolios of senior
loans since 1982. In 1988 he established, and from 1988 until 1995, he was the
founding portfolio manager for, Pilgrim Prime Rate Trust, the first U.S.
investment company that invested primarily in senior loans. Immediately prior to
establishing Four Corners, Mr. McAdams was Chief Executive Officer of ING
Capital Advisors, LLC, an institutional asset manager then having approximately
$7 billion in senior loan and high yield bond portfolios under management. In
1995, Mr. McAdams was a founding board member of the Loan Syndication and
Trading Association ("LSTA"), the senior loan industry's trade group. Mr.
McAdams has served as Chairman (2001) and Vice Chairman (2002) of the LSTA and
was the first person from the investment side of the industry to serve in any of
those capacities. Today, he remains a Director and is a member of the LSTA's
Mark-to-Market Policy Committee.
Mr. Bernstein's involvement with senior loans began in 1986, and he has
been actively involved in the senior loan market for over 12 years. Prior to
joining Four Corners in November 2001, Mr. Bernstein was most recently a General
Partner of The Yucaipa Companies, a Los Angeles-based private equity investment
firm. While at Yucaipa, Mr. Bernstein completed more than $4 billion of senior
Page 41
loan and high yield bond financings and private equity investments, and he
served on the boards of three companies. He was previously with Bankers Trust's
Leverage Finance Group, where he arranged senior loan and high yield bond
financing for financial sponsors and corporate issuers. Mr. Bernstein also
served as an infantry officer in the U.S. Marine Corps.
Investment Management Agreement and Other Agreements with the Adviser and
Sub-Advisers
Pursuant to an investment management agreement (the "Investment Management
Agreement") between First Trust and the Fund, the Fund has agreed to pay for the
services and facilities provided by First Trust an annual management fee,
payable on a quarterly basis, equal to the annual rate of .40% of the Fund's
Total Assets for Total Assets of the Fund up to and including $250 million and
..35% of the Fund's Total Assets for Total Assets of the Fund over $250 million.
For purposes of calculation of the management fee, the Fund's "Total Assets"
means the average daily gross asset value of the Fund (which includes assets
attributable to the Fund's Preferred Shares, if any, and the principal amount of
borrowings or indebtedness), minus the sum of the Fund's accrued and unpaid
dividends on any outstanding Preferred Shares and accrued liabilities (other
than the principal amount of any borrowings incurred, commercial paper or notes
issued by the Fund and the liquidation preference of any outstanding Preferred
Shares).
In addition to the management fee, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with First Trust), custodian, transfer agency, administrative,
accounting and dividend disbursing expenses, legal fees, expenses of independent
auditors, expenses of repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
Pursuant to an agreement between MIFA, First Trust and the Fund, MIFA
receives an annual portfolio management fee of .60% for that portion of the
Fund's Total Assets allocated to MIFA. Pursuant to an agreement between Four
Corners, First Trust and the Fund, Four Corners receives an annual portfolio
management fee of .60% of that portion of the Fund's Total Assets allocated to
Four Corners. However, if the Fund's Total Assets are greater than $250 million,
MIFA will receive an annual portfolio management fee of .65% for that portion of
the Fund's Total Assets over $250 million. In addition, to the extent that MIFA
invests a portion of the Core Component in unlisted securities ("Core Unlisted
Instruments"), MIFA is entitled to receive a supplemental fee of .60% of that
portion of the Fund's Total Assets invested in Core Unlisted Instruments;
provided, however, that in no event will the Core Unlisted Instruments portion
be deemed to exceed, for purposes of calculating this supplemental fee, 25% of
the Core Component. This supplemental fee paid to MIFA is in addition to the
annual portfolio management fee. The Sub-Advisers' portfolio management fees are
payable by the Fund.
Each Sub-Advisory Agreement may be terminated without the payment of any
penalty by First Trust, the Board, or a majority of the Fund's outstanding
voting securities, upon 60 days' written notice to the Sub-Adviser. Pursuant to
a separate agreement between the Sub-Advisers and First Trust, First Trust has
agreed that if First Trust or the Fund terminates or fails to renew the
Sub-Advisory Agreement with a Sub-Adviser other than for cause, First Trust will
resign and will not agree to be reinstated as investment adviser to the Fund,
which resignation shall be effective no later than 60 days following the
effective date of the Sub-Adviser's termination.
The Adviser and MIFA have agreed to pay (i) all organizational expenses and
(ii) all offering costs of the Fund (other than sales load, but including the
$.00667 per Common Share reimbursement of underwriter expenses) that exceed $.04
per Common Share. Because the fee paid to the Adviser and Sub-Advisers will be
calculated on the basis of the Fund's Total Assets, which include the proceeds
of leverage, the dollar amount of the Adviser's and Sub-Advisers' fees from the
Fund will be higher (and the Adviser and Sub-Advisers will benefit to that
extent) when leverage is utilized. In this regard, if the Fund issues debt in an
amount equal to 30% of the Fund's Total Assets (after issuance of such
leverage), the Fund's management fee would be 1.579% of net assets attributable
to Common Shares. See "Summary of Fund Expenses."
Pursuant to a name agreement by and among the Fund, MIFA and First Trust,
First Trust and MIFA have the right to preclude the Fund from using references
to First Trust and Macquarie, respectively, and to impose conditions on the use
of such references. In addition, if First Trust or an affiliate of First Trust
no longer serves as Adviser, the right of the Fund to use the reference to First
Trust in its name shall terminate. Similarly, if MIFA or an affiliate of MIFA
(other than Four Corners) no longer serves as a Sub-Adviser, the right of the
Fund to use the reference to Macquarie in its name shall terminate. In such
cases, the Fund must take appropriate steps to change its name and to terminate
the applicable reference to First Trust or Macquarie in connection with its
business.
NET ASSET VALUE
The NAV of the Common Shares of the Fund will be computed based upon the
value of the Fund's portfolio securities and other assets. The NAV will be
determined as of the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. eastern time) on each day the New York Stock Exchange is
open for trading. U.S. debt securities and non-U.S. securities will normally be
priced using data reflecting the earlier closing of the principal markets for
those securities. The Fund calculates NAV per Common Share by subtracting the
Page 42
Fund's liabilities (including accrued expenses, dividends payable and any
borrowings of the Fund) and the liquidation value of any outstanding Preferred
Shares from the Fund's Total Assets (the value of the securities and other
investments the Fund holds plus cash or other assets, including interest accrued
but not yet received) and dividing the result by the total number of Common
Shares outstanding.
The assets in the Fund's portfolio will be valued daily in accordance with
Valuation Procedures adopted by the Board. The Adviser anticipates that a
majority of the Fund's assets will be valued using market information supplied
by third parties. In the event that market quotations are not readily available,
the pricing service does not provide a valuation for a particular asset (as is
the case for Unlisted Investments), or the valuations are deemed unreliable, or
if events occurring after the close of the principal markets for particular
securities (e.g., U.S. debt and non-U.S. securities), but before the Fund values
its assets, would materially affect NAV, the Fund may use a fair value method in
good faith to value the Fund's securities and investments. The use of fair value
pricing by the Fund will be governed by Valuation Procedures established by the
Board, and in accordance with the provisions of the 1940 Act.
For purposes of determining the NAV of the Fund, readily marketable
portfolio securities listed on any U.S. exchange other than the NASDAQ National
Market are valued, except as indicated below, at the last sale price on the
business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the most recent bid
and asked prices on such day. Securities admitted to trade on the NASDAQ
National Market are valued at the NASDAQ Official Closing Price as determined by
NASDAQ. Portfolio securities traded on more than one securities exchange are
valued at the last sale price on the business day as of which such value is
being determined at the close of the exchange representing the principal market
for such securities.
U.S. equity securities traded in the over-the-counter market, but excluding
securities admitted to trading on the NASDAQ National Market, are valued at the
closing bid prices. Fixed income securities with a remaining maturity of 60 days
or more will be valued by the Fund using a pricing service. When price quotes
are not available, fair market value is based on prices of comparable
securities. Fixed income securities maturing within 60 days are valued by the
Fund on an amortized cost basis. Non-U.S. securities, currencies and other
assets denominated in non-U.S. currencies are translated into U.S. dollars at
the exchange rate of such currencies against the U.S. dollar as provided by a
pricing service.
Any derivative transaction that the Fund enters into may, depending on the
applicable market environment, have a positive or negative value for purposes of
calculating NAV. Forward non-U.S. currency exchange contracts which are traded
in the United States on regulated exchanges are valued by calculating the mean
between the last bid and asked quotation supplied to a pricing service by
certain independent dealers in such contracts. Any option transaction that the
Fund enters into may, depending on the applicable market environment, have no
value or a positive value. Exchange traded options and futures contracts are
valued at the closing price in the market where such contracts are principally
traded.
Senior Loans. The Infrastructure Senior Loans in which the Fund may invest
are not listed on any securities exchange or board of trade. Senior loans such
as the Infrastructure Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions that
function in many respects like an over-the-counter secondary market, although
typically no formal market-makers exist. This market, while having grown
substantially in the past several years, generally has fewer trades and less
liquidity than the secondary market for other types of securities. Some senior
loans have few or no trades, or trade infrequently, and information regarding a
specific senior loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of senior loans may be based on
infrequent and dated information. Because there is less reliable, objective data
available, elements of judgment may play a greater role in valuation of Senior
Loans than for other types of securities. See "Risks - Illiquid and Unlisted
Securities Risk."
Typically senior loans are valued using information provided by an
independent third party pricing service. If the pricing service cannot or does
not provide a valuation for a particular senior loan or such valuation is deemed
unreliable, the Fund may value such senior loan at a fair value as determined in
good faith under procedures established by the Board, and in accordance with the
provisions of the 1940 Act.
Non-U.S. Listed Securities. Non-U.S. exchange-listed securities will
generally be valued using information provided by an independent third party
pricing service. If the pricing service cannot or does not provide a valuation
for a particular non-U.S. listed security or such valuation is deemed
unreliable, the Board or its designee may value such security at a fair value as
determined in good faith under procedures established by the Board and in
accordance with the provisions of the 1940 Act.
Fair Value. When applicable, especially with unlisted securities, fair
value is determined by the Board or a committee of the Board or a designee of
the Board. In fair valuing the Fund's investments, consideration is given to
several factors, which may include, among others, the following:
Page 43
o the projected cash flows for the issuer or borrower;
o the fundamental business data relating to the issuer or borrower;
o an evaluation of the forces that influence the market in which these
securities are purchased and sold;
o the type, size and cost of holding;
o the financial statements of the issuer or borrower;
o the credit quality and cash flow of issuer, based on the Adviser's,
Sub-Adviser's or external analysis;
o the information as to any transactions in or offers for the holding;
o the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
o the coupon payments;
o the quality, value and saleability of collateral securing the security
or loan;
o the business prospects of the issuer/borrower, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the issuer's or borrower's management;
o the prospects for the issuer's or borrower's industry, and multiples
(of earnings and/or cash flow) being paid for similar businesses in
that industry; and
o other relevant factors.
DISTRIBUTIONS
The Fund intends to distribute to holders of its Common Shares quarterly
dividends of all or a portion of its net income after payment of dividends and
interest in connection with leverage used by the Fund. It is expected that the
initial quarterly dividend on the Fund's Common Shares will be declared
approximately 90 days, and paid approximately 90 to 120 days, after the
completion of this offering, depending on market conditions.
Various factors will affect the level of the Fund's income, including the
asset mix, the average maturity of the Fund's portfolio, the amount of leverage
utilized by the Fund and the Fund's use of hedging. To permit the Fund to
maintain a more stable quarterly distribution, the Fund may from time to time
distribute less than the entire amount of income earned in a particular period.
The undistributed income would be available to supplement future distributions.
As a result, the distributions paid by the Fund for any particular quarterly
period may be more or less than the amount of income actually earned by the Fund
during that period. Undistributed income will add to the Fund's NAV, and,
correspondingly, distributions from undistributed income will deduct from the
Fund's NAV. Shareholders will automatically have all dividends and distributions
reinvested in Common Shares of the Fund issued by the Fund or purchased in the
open market in accordance with the Fund's dividend reinvestment plan unless an
election is made to receive cash. See "Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN
If a Shareholder's Common Shares are registered directly with the Fund or
if a Shareholder holds its Common Shares with a brokerage firm that participates
in the Fund's Dividend Reinvestment Plan, unless the Shareholder elects to
receive cash distributions, all dividends, including any capital gain dividends,
on the Shareholder's Common Shares will be automatically reinvested by the Plan
Agent, PFPC Inc., in additional Common Shares under the Dividend Reinvestment
Plan (the "Plan"). If a Shareholder elects to receive cash distributions, the
Shareholder will receive all distributions in cash paid by check mailed directly
to the Shareholder by PFPC Inc., as dividend paying agent.
If a Shareholder decides to participate in the Plan, the number of Common
Shares the Shareholder will receive will be determined as follows:
Page 44
(1) If the Common Shares are trading at or above NAV at the time of
valuation, the Fund will issue new shares at a price equal to the greater
of (i) NAV per Common Share on that date or (ii) 95% of the market price on
that date.
(2) If Common Shares are trading below NAV at the time of valuation,
the Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the New York Stock Exchange
or elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan Agent has
completed its purchases. Therefore, the average purchase price per share
paid by the Plan Agent may exceed the market price at the time of
valuation, resulting in the purchase of fewer shares than if the dividend
or distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the valuation date
except where temporary curtailment or suspension of purchases is necessary
to comply with federal securities laws. Interest will not be paid on any
uninvested cash payments.
A Shareholder may withdraw from the Plan at any time by giving written
notice to the Plan Agent, or by telephone in accordance with such reasonable
requirements as the Plan Agent and Fund may agree upon. If a Shareholder
withdraws or the Plan is terminated, the Shareholder will receive a certificate
for each whole share in its account under the Plan and the Shareholder will
receive a cash payment for any fraction of a share in its account. If the
Shareholder wishes, the Plan Agent will sell the Shareholder's shares and send
the proceeds, minus brokerage commissions, to the Shareholder.
The Plan Agent maintains all Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
a Shareholder may need for tax records. Common Shares in an account will be held
by the Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy a Shareholder
receives will include all Common Shares received under the Plan.
There is no brokerage charge for reinvestment of a Shareholder's dividends
or distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that a
Shareholder does not have to pay income taxes due upon receiving dividends and
distributions. See "Tax Matters."
If a Shareholder holds Common Shares with a brokerage firm that does not
participate in the Plan, the Shareholder will not be able to participate in the
Plan and any dividend reinvestment may be effected on different terms than those
described above. Shareholders should consult their financial advisor for more
information.
The Fund reserves the right to amend or terminate the Plan if in the
judgment of the Board the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained from PFPC Inc., 301 Bellevue Parkway,
Wilmington, Delaware 19809.
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares being offered have a par value of $.01 per share and
subject to the rights of the holders of Preferred Shares, if issued, have equal
rights to the payment of dividends and the distribution of assets upon
liquidation. The Common Shares being offered will, when issued, be fully paid
and, subject to matters discussed in "Certain Provisions in the Declaration of
Trust," non-assessable, and currently have no preemptive or conversion rights
(except as may otherwise be determined by the Trustees in their sole discretion)
or rights to cumulative voting.
The Fund's Common Shares have been approved for listing on the New York
Stock Exchange, subject to notice of issuance, under the symbol "MFD." The Fund
intends to hold annual meetings of Shareholders so long as the Common Shares are
listed on a national securities exchange and such meetings are required as a
condition to such listing.
Net asset value will be reduced immediately following the offering by the
amount of the sales load and offering expenses paid by the Fund. The Adviser and
MIFA have agreed to pay (i) all organizational expenses and (ii) all offering
costs (other than sales load, but including the $.00667 per Common Share
reimbursement of underwriter expenses) that exceed $.04 per Common Share. See
"Use of Proceeds."
Page 45
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a Shareholder
determines to buy additional Common Shares or sell shares already held, the
Shareholder may do so by trading on the exchange through a broker or otherwise.
Shares of closed-end investment companies like the Fund have during some periods
traded at prices higher than NAV and during other periods have traded at prices
lower than NAV. Because the market value of the Common Shares may be influenced
by such factors as dividend levels (which are in turn affected by expenses),
dividend stability, portfolio credit quality, NAV, relative demand for and
supply of such shares in the market, general market and economic conditions, and
other factors beyond the control of the Fund, no assurances can be given that
the Common Shares will trade at a price equal to or higher than the initial
offering price or the NAV in the future. The Common Shares are designed
primarily for long-term investors, and investors in the Common Shares should not
view the Fund as a vehicle for trading purposes.
Preferred Shares
The Declaration provides that the Board may authorize and issue Preferred
Shares with rights as determined by the Board, by action of the Board without
the approval of the holders of the Common Shares. Holders of Common Shares have
no preemptive right to purchase any Preferred Shares that might be issued.
The Fund currently intends to issue Leverage Instruments, which may include
Preferred Shares, representing up to 30% of the Fund's Total Assets immediately
after the Leverage Instruments are issued. The Board also reserves the right to
issue Preferred Shares to the extent permitted by the 1940 Act, which currently
limits the aggregate liquidation preference of all outstanding Preferred Shares
to 50% of the value of the Fund's Total Assets. No assurances can be given,
however, that any Preferred Shares will be issued. Although the terms of any
Preferred Shares, including dividend rate, liquidation preference and redemption
provisions, will be determined by the Board, subject to applicable law and the
Declaration, it is likely that the Preferred Shares will be structured to carry
a relatively short-term dividend rate reflecting interest rates on short-term
bonds, by providing for the periodic reset of the dividend rate at relatively
short intervals through an auction, remarketing or other procedure. The Fund
also believes that it is likely that the liquidation preference, voting rights
and redemption provisions of the Preferred Shares will be similar to those
stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of Preferred
Shares, if any, will be entitled to receive a preferential liquidating
distribution, whether or not declared, before any distribution of assets is made
to holders of Common Shares. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of Preferred Shares will
not be entitled to any further participation in any distribution of assets by
the Fund.
Voting Rights. The 1940 Act requires that the holders of any Preferred
Shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
Common Shares and Preferred Shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any Preferred Shares have the
right to elect a majority of the trustees of the Fund at any time two years'
dividends on any Preferred Shares are unpaid. The 1940 Act also requires that,
in addition to any approval by shareholders that might otherwise be required,
the approval of the holders of a majority of any outstanding Preferred Shares,
voting separately as a class, would be required to (1) adopt any plan of
reorganization that would adversely affect the Preferred Shares, and (2) take
any action requiring a vote of security holders under Section 13(a) of the 1940
Act, including, among other things, changes in the Fund's subclassification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Declaration of Trust." As a result
of these voting rights, the Fund's ability to take any such actions may be
impeded to the extent that there are any Preferred Shares outstanding. The Board
presently intends that, except as otherwise indicated in this prospectus and
except as otherwise required by applicable law or the Declaration, holders of
Preferred Shares will have equal voting rights with holders of Common Shares
(one vote per share, unless otherwise required by the 1940 Act) and will vote
together with holders of Common Shares as a single class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The terms of
any Preferred Shares issued are expected to provide that (1) they are redeemable
by the Fund in whole or in part at the original purchase price per share plus
accrued and unpaid dividends per share, (2) the Fund may tender for or purchase
Preferred Shares and (3) the Fund may subsequently resell any shares so tendered
for or purchased. Any redemption or purchase of Preferred Shares by the Fund
will reduce the leverage applicable to the Common Shares, while any resale of
shares by the Fund will increase that leverage.
Page 46
The discussion above describes the possible offering of Preferred Shares by
the Fund. If the Board determines to proceed with such an offering, the terms of
the Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration. The Board, without
the approval of the holders of Common Shares, may authorize an offering of
Preferred Shares or may determine not to authorize such an offering, and may fix
the terms of the Preferred Shares to be offered.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, Shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
contains an express disclaimer of shareholder liability for debts or obligations
of the Fund and requires that notice of such limited liability be given in each
agreement, obligation or instrument entered into or executed by the Fund or the
Board. The Declaration further provides for indemnification out of the assets
and property of the Fund for all loss and expense of any Shareholder held
personally liable for the obligations of the Fund solely by reason of being or
having been a Shareholder of the Fund. Thus, the risk of a Shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Generally, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and Preferred Shares, if any, voting
together as a single class, except as described below and in the Declaration, to
authorize: (1) a conversion of the Fund from a closed-end to an open-end
investment company; (2) a merger or consolidation of the Fund with any
corporation, association, trust or other organization, including a series or
class of such other organization (subject to a limited exception if the
acquiring fund is not an operating entity immediately prior to the transaction);
(3) a sale, lease or exchange of all or substantially all of the Fund's assets
(other than in the regular course of the Fund's investment activities, in
connection with the termination of the Fund, and other limited circumstances set
forth in the Declaration); (4) in certain circumstances, a termination of the
Fund; (5) a removal of trustees by Shareholders; or (6) certain transactions in
which a Principal Shareholder (as defined in the Declaration) is a party to the
transaction. However, with respect to (1) above, if there are Preferred Shares
outstanding, the affirmative vote of the holders of two-thirds of the Preferred
Shares voting as a separate class shall also be required. With respect to (2)
above, except as otherwise may be required, if the transaction constitutes a
plan of reorganization which adversely affects Preferred Shares, if any, then an
affirmative vote of two-thirds of the Preferred Shares voting together as a
separate class is required as well. With respect to (1) through (3), if such
transaction has already been authorized by the affirmative vote of two-thirds of
the trustees, then the affirmative vote of the majority of the outstanding
voting securities, as defined in the 1940 Act (a "Majority Shareholder Vote"),
is required, provided that when only a particular class is affected (or, in the
case of removing a trustee, when the trustee has been elected by only one
class), only the required vote of the particular class will be required. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Fund's Shares otherwise required by law or any agreement between
the Fund and any national securities exchange. Approval of Shareholders is not
required, however, for any transaction, whether deemed a merger, consolidation,
reorganization, exchange of shares or otherwise whereby the Fund issues shares
in connection with the acquisition of assets (including those subject to
liabilities) from any other investment company or similar entity. None of the
foregoing provisions may be amended except by the vote of at least two-thirds of
the Common Shares and Preferred Shares, if any, outstanding and entitled to
vote.
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a third party. These provisions require persons seeking control of
the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
Board of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its Common
Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
CLOSED-END FUND STRUCTURE
The Fund is a newly organized, non-diversified, closed-end management
investment company (commonly referred to as a closed-end fund). Closed-end funds
differ from open-end funds (which are generally referred to as mutual funds) in
that closed-end funds generally list their shares for trading on a stock
exchange and do not redeem their shares at the request of the shareholder. This
means that if a Shareholder wishes to sell shares of a closed-end fund the
Shareholder must trade them on the market like any other stock at the prevailing
market price at that time. In a mutual fund, if the shareholder wishes to sell
shares of the fund, the mutual fund will redeem or buy back the shares at NAV.
Also, mutual funds generally offer new shares on a continuous basis to new
Page 47
investors, and closed-end funds generally do not. The continuous inflows and
outflows of assets in a mutual fund can make it difficult to manage the fund's
investments. By comparison, closed-end funds are generally able to stay more
fully invested in securities that are consistent with their investment
objectives, and also have greater flexibility to make certain types of
investments, and to use certain investment strategies, such as financial
leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their NAV.
Because of this possibility and the recognition that any such discount may not
be in the interest of shareholders, the Board may consider from time to time
engaging in open market repurchases, tender offers for shares or other programs
intended to reduce the discount. No guarantees or assurances can be given,
however, that the Board will decide to engage in any of these actions. Nor is
there any guarantee or assurance that such actions, if undertaken, would result
in the shares trading at a price equal or close to NAV per Common Share.
Although share repurchases and tenders could have a favorable effect on the
market price of the Fund's Common Shares, Shareholders should be aware that the
acquisition of Common Shares by the Fund will decrease the capital of the Fund
and, therefore, may have the effect of increasing the Fund's expense ratio and
decreasing the asset coverage with respect to any Borrowings or Preferred Shares
outstanding. Any share repurchases or tender offers will be made in accordance
with requirements of the Securities Exchange Act of 1934, as amended, the 1940
Act and the principal stock exchange on which the Common Shares are traded.
Conversion to Open-End Fund. The Fund may be converted to an open-end
investment company at any time if approved by the holders of two-thirds of the
Fund's shares outstanding and entitled to vote and by the holders of two-thirds
of the Fund's Preferred Shares, if any, voting together as a single class;
provided, however, that such vote shall be by Majority Shareholder Vote if the
action in question was previously approved by the affirmative vote of two-thirds
of the Board. Such affirmative vote or consent shall be in addition to the vote
or consent of the holders of the Shares otherwise required by law or any
agreement between the Fund and any national securities exchange. If approved in
the foregoing manner, conversion of the Fund could not occur until 90 days after
the Shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all Shareholders. In the event of
conversion, the Common Shares would cease to be listed on the New York Stock
Exchange or other national securities exchange or market system and the
Borrowings and Preferred Shares would be redeemed and the leverage would cease
to exist. The Board believes, however, that the closed-end structure is
desirable, given the Fund's investment objective and policies. 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 NAV, less such redemption charge, if any, as might be in effect at
the time of a redemption. The Fund expects to pay all such redemption requests
in cash, but intends to reserve the right to pay redemption requests in a
combination of cash or securities. If such partial payment in securities were
made, investors may incur brokerage costs in converting such securities to cash.
If the Fund were converted to an open-end fund, it is likely that new Common
Shares would be sold at NAV plus a sales load.
TAX MATTERS
The following discussion of U.S. federal income tax matters is based on the
advice of Chapman and Cutler LLP, counsel to the Fund.
This section and the discussion in the SAI summarize certain U.S. federal
income tax consequences of the acquisition, ownership and disposition of Common
Shares of the Fund. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue Service
retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal, state, local and non-U.S. tax concerns
affecting the Fund and its Shareholders (including Shareholders owning large
positions in the Fund), and the discussion set forth herein does not constitute
tax advice. Tax laws and interpretations change frequently, and this summary
does not describe all of the tax consequences to all taxpayers. For example,
this summary generally does not describe the situation if a Shareholder is a
corporation, a non-U.S. person, a broker-dealer, or other investor with special
circumstances or if a Shareholder holds Common Shares other than as capital
assets. In addition, this section does not describe state, local or non-U.S. tax
consequences of the acquisition, ownership and disposition of Common Shares of
the Fund. As with any investment, Shareholders should consult their tax adviser
about their particular consequences.
Fund Status
The Fund intends to qualify as a "regulated investment company" under the
U.S. federal income tax laws. If the Fund qualifies as a regulated investment
company and distributes all of its income, the Fund generally will not pay U.S.
federal income or excise taxes. To qualify for the favorable U.S. federal income
tax treatment generally accorded to regulated investment companies, the Fund
must satisfy certain tests with respect to its gross income, its diversification
of holdings and its distributions. See "Tax Matters - Federal Income Tax
Matters" in the SAI.
Page 48
Distributions
Fund distributions are generally taxable to Shareholders. After the end of
each year, a Shareholder will receive a tax statement that separates the
Shareholder's Fund distributions into two categories, ordinary income
distributions and capital gains dividends. Ordinary income distributions, which
are paid by the Fund from its ordinary income or from any excess of net
short-term capital gains over net long-term capital losses, are generally taxed
at the Shareholder's ordinary tax rate, but, as further discussed below, if the
Fund holds equity securities, under the recently enacted "Jobs and Growth Tax
Relief Reconciliation Act of 2003" (the "Tax Act"), certain ordinary income
distributions received from the Fund may be taxed at new tax rates equal to
those applicable to net capital gains. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in futures and options) are capital gain
dividends. Generally, a Shareholder will treat all capital gains dividends as
long-term capital gains regardless of how long the Shareholder has owned the
Common Shares. To determine the actual tax liability for capital gains
dividends, a Shareholder must calculate the total net capital gain or loss for
the tax year after considering all of the Shareholder's other taxable
transactions, as described below. In addition, the Fund may make distributions
that represent a return of capital for tax purposes and thus will generally not
be taxable to the Shareholder. The tax status of a Shareholder's distributions
from the Fund is not affected by whether the Shareholder reinvests distributions
in additional Common Shares or receives them in cash.
Dividends and other taxable distributions are taxable to Shareholders even
though they are reinvested in additional shares of the Fund. If the Fund pays a
Shareholder a dividend in January that was declared in the previous October,
November or December to Shareholders of record on a specified date in one of
such months, then such dividend will be treated for tax purposes as being paid
by the Fund and received by the Shareholder on December 31 of the year in which
the dividend was declared.
Dividends Received Deduction
A corporation that owns Common Shares generally will not be entitled to the
dividends received deduction with respect to dividends received from the Fund
because the dividends received deduction is generally not available to
corporations for distributions from regulated investment companies. However, if
the Fund holds equity securities, certain ordinary income dividends on Common
Shares that are attributable to qualifying dividends received by the Fund from
certain U.S. corporations may be designated by the Fund as being eligible for
the dividends received deduction, but this amount is not expected to be
significant.
Sale or Exchange of Fund Shares
If a Shareholder sells or otherwise disposes of Common Shares, the
Shareholder will generally recognize a taxable gain or loss. To determine the
amount of this gain or loss, a Shareholder must subtract the tax basis in the
Shareholder's Common Shares from the amount received in the transaction. A
Shareholder's tax basis in Common Shares is generally equal to the cost of the
Shareholder's Common Shares, generally including sales charges. In some cases,
however, the Shareholder may have to adjust the Shareholder's tax basis after
the Shareholder purchases Common Shares.
Any gain arising from such sale or disposition generally will be treated as
capital gain or loss if a Shareholder has held the Common Shares for more than
one year. Otherwise, it would be classified as short-term capital gain or loss.
However, any capital loss arising from the sale or disposition of Common Shares
in the Fund held for six months or less will be treated as long-term capital
loss to the extent of the amount of capital gain dividends received, or
undistributed capital gain deemed received, with respect to such Common Shares.
Taxation of Capital Gains and Losses and Certain Ordinary Income Dividends
Under the Tax Act, for an individual, the maximum marginal federal tax rate
for net capital gain is generally 15% (generally 5% for certain taxpayers in the
10% and 15% tax brackets). These new capital gains rates are generally effective
for taxable years ending on or after May 6, 2003 and beginning before January 1,
2009. For periods not covered by the Tax Act, for an individual, the maximum
marginal federal tax rate for capital gains is generally 20% (10% for certain
taxpayers in the 10% and 15% tax brackets). The 20% rate is reduced to 18% and
the 10% rate is reduced to 8% for net capital gains from most property acquired
after December 31, 2000, with a holding period of more than five years.
Net capital gain equals net long-term capital gain minus net short-term
capital loss for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. A Shareholder must exclude the
date the Shareholder purchases Common Shares to determine the Shareholder's
holding period. However, if a Shareholder receives a capital gain dividend from
the Fund and sells the Shareholder's Common Share at a loss after holding it for
six months or less, the loss will be recharacterized as long-term capital loss
to the extent of the capital gain dividend received. The tax rates for capital
gains realized from assets held for one year or less are generally the same as
for ordinary income. In addition, the Code treats certain capital gains as
ordinary income in special situations.
Page 49
For taxable years beginning on or before December 31, 2008, distributions
of investment income designated by the Fund as derived from "qualified dividend
income" will be taxable to non-corporate taxpayers (including individuals) at
the rates applicable to long-term capital gains, provided holding period and
other requirements are met at both the Common Shareholder and Fund levels. In
general, for the Fund to receive tax-advantaged dividends, the Fund must hold
stock paying an otherwise tax-advantaged dividend more than 60 days during the
120-day period beginning 60 days before the ex-dividend date (or more than 90
days during the associated 180-day period in the case of certain preferred
stocks). The Fund cannot guarantee that any distributions will be treated as
qualifying dividends.
Qualified dividend income is, in general, dividend income from taxable U.S.
corporations and certain non-U.S. corporations (e.g., generally, non-U.S.
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or non-U.S.
corporations the stock of which is readily tradable on an established securities
market in the United States). Additionally, distributions by certain non-U.S.
corporations defined as passive foreign investment companies, foreign investment
companies or foreign personal holding companies will not be regarded as
qualifying dividends. The Fund cannot guarantee that any non-U.S. corporations
it invests in will not be regarded as passive foreign investment companies,
foreign investment companies or foreign personal holding companies.
Foreign Tax Credit
The Fund may qualify for and make an election permitted under the "pass
through" provisions of Section 853 of the Code, which allows a regulated
investment company to elect to have its foreign tax credit taken by its Common
Shareholders instead of on its own tax return. To be eligible for this credit,
more than 50% of the value of the Fund's Total Assets at the close of its
taxable year must consist of stock or other securities in foreign corporations,
and the Fund must meet certain other requirements. If such an election is made,
Common Shareholders of the Fund, because they are deemed to own a pro rata
portion of the foreign securities held by the Fund, must include in their gross
income, for U.S. federal income tax purposes, both their portion of dividends
received by the Fund and also their portion of the amount which the Fund deems
to be the Common Shareholders' portion of foreign income taxes paid with respect
to, or withheld from, dividends, interest or other income of the Fund from its
foreign investments. Shareholders may then subtract from their U.S. federal
income tax the amount of such taxes withheld, or else treat such foreign taxes
as deductions from gross income; however, as in the case of investors receiving
income directly from foreign sources, the above described tax credit or
deduction is subject to certain limitations. The Code imposes a required holding
period for such credits. Shareholders should consult their tax advisers
regarding this election and its consequences to them.
Backup Withholding
The Fund is required in certain circumstances to backup withhold on taxable
dividends and certain other payments paid to non-corporate holders of the Fund's
shares who do not furnish the Fund with their correct taxpayer identification
number (in the case of individuals, their social security number) and certain
certifications, or who are otherwise subject to backup withholding. Backup
withholding is not an additional tax. Any amounts withheld from payments made to
a Shareholder may be refunded or credited against the Shareholder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service.
The foregoing is a general and abbreviated summary of the provisions of the
Code and the Treasury regulations in effect as they directly govern the taxation
of the Fund and its Shareholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive. A
more complete discussion of the tax rules applicable to the Fund and its
Shareholders can be found in the SAI that is incorporated by reference into this
prospectus. Shareholders are urged to consult their tax advisers regarding
specific questions as to U.S. federal, non-U.S., state, local income or other
taxes.
Page 50
UNDERWRITING
Subject to the terms and conditions stated in a purchase agreement dated ,
2004, each underwriter named below, for which Merrill Lynch, Pierce, Fenner &
Smith Incorporated is acting as representative, has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number of
Common Shares set forth opposite the name of such underwriter.
Number of
Underwriter Common Shares
----------- -------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................
Robert W. Baird & Co. Incorporated..............................
Raymond James & Associates, Inc.................................
RBC Dain Rauscher Inc...........................................
SunTrust Capital Markets, Inc...................................
Deutsche Bank Securities Inc....................................
Harris Nesbitt Corp.............................................
Piper Jaffray & Co..............................................
Advest, Inc. ...................................................
BB&T Capital Markets, a division of Scott & Stringfellow, Inc...
William Blair & Company, L.L.C..................................
Crowell, Weedon & Co............................................
D.A. Davidson & Co..............................................
Doft & Co., Inc.................................................
Ferris, Baker Watts, Incorporated...............................
Ladenburg Thalmann & Co. Inc....................................
McDonald Investments Inc., a KeyCorp Company...................
Morgan Keegan & Company, Inc....................................
Parker/Hunter Incorporated......................................
Quick & Reilly, Inc.............................................
Ryan Beck & Co., Inc............................................
Stifel, Nicolaus & Company, Incorporated........................
TD Waterhouse Investor Services, Inc............................
Wedbush Morgan Securities.......................................
Arthurs, Lestrange & Company, Incorporated......................
Axiom Capital Management, Inc...................................
Brean Murray & Co., Inc.........................................
Bishop, Rosen & Co., Inc........................................
CMG Institutional Trading, LLC..................................
C.E. Unterberg, Towbin..........................................
Chatsworth Securities LLC.......................................
City Securities Corporation.....................................
Dominick & Dominick LLC.........................................
First Southwest Company.........................................
Gilford Securities Incorporated.................................
Howe Barnes Investments, Inc....................................
Huntleigh Securities Corporation................................
Johnston, Lemon & Co. Incorporated..............................
LaSalle St. Securities, LLC.....................................
Maxim Group LLC.................................................
McGinn, Smith & Co., Inc........................................
Mesirow Financial, Inc..........................................
NatCity Investments, Inc........................................
National Securities Corporation.................................
Needham & Company, Inc..........................................
Northeast Securities, Inc.......................................
David A. Noyes & Company........................................
Page 51
Number of
Underwriter Common Shares
----------- -------------
Nutmeg Securities, Ltd..........................................
Ormes Capital Markets, Inc......................................
Paulson Investment Company, Inc.................................
Peacock, Hislop, Staley & Given, Inc............................
Sands Brothers & Co., Ltd.......................................
Sanders Morris Harris Inc.......................................
The Seidler Companies Incorporated..............................
Source Capital Group Inc........................................
Southwest Securities, Inc.......................................
Sterling Financial Investment Group, Inc........................
Torrey Pines Securities, Inc....................................
J.P. Turner & Company, L.L.C....................................
Total .........................................
The purchase agreement provides that the obligations of the underwriters to
purchase the Common Shares included in this offering are subject to the approval
of certain legal matters by counsel and certain other conditions. The
underwriters are obligated to purchase all the Common Shares sold under the
purchase agreement if any of the Common Shares are purchased. In the purchase
agreement, the Fund, the Adviser and Sub-Advisers have agreed to indemnify the
underwriters against certain liabilities, including liabilities arising under
the Securities Act, or to contribute payments the underwriters may be required
to make for any of those liabilities.
Commissions and Discounts
The underwriters propose to initially offer some of the Common Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Common Shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The sales
load the Fund will pay of $.90 per share is equal to 4.5% of the initial
offering price. The underwriters may allow, and the dealers may reallow, a
discount not in excess of $ per share on sales to other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed. Investors must pay for any common shares purchased on or before ,
2004.
The following table shows the public offering price, estimated offering
expenses, sales load and proceeds to the Fund. The information assumes either no
exercise or full exercise by the underwriters of their overallotment option.
Per Share Without Option With Option
--------- -------------- -----------
Public offering price.............. $20.00 $ $
Sales load......................... $.90 $ $
Estimated offering expenses........ $.04 $ $
Proceeds to the Fund............... $19.06 $ $
The offering costs borne by the Fund, which may include the reimbursement
of certain Fund expenses advanced by the Adviser and Sub-Advisers, are estimated
at $ . The Fund has agreed to pay the underwriters $.00667 per Common Share as a
partial reimbursement of expenses incurred in connection with the offering. The
amount paid by the Fund as this partial reimbursement to the underwriters will
not exceed .03335% of the total price to the public of the Common Shares sold in
this offering. The Fund has also agreed to pay certain expenses of counsel to
the underwriters in an amount up to $7,500, which will not exceed .00296% of the
total price to the public of the Common Shares sold in this offering. The
Adviser and MIFA have agreed to (i) pay the amount by which the Fund's offering
costs (other than the sales load, but including the reimbursement of expenses
described above) exceed $.04 per Common Share (the "Reimbursement Cap") and (ii)
pay all of the Fund's organizational expenses.
Overallotment Option
The Fund has granted the underwriters an option to purchase up to
additional Common Shares at the public offering price, less the sales load,
within 45 days from the date of this prospectus solely to cover any
overallotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional Common Shares proportionate to that
underwriter's initial amount reflected in the above table.
Page 52
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the Common Shares is complete, Securities and
Exchange Commission rules may limit underwriters and selling group members from
bidding for and purchasing the Fund's Common Shares. However, the
representatives may engage in transactions that stabilize the price of the
Common Shares, such as bids or purchase to peg, fix or maintain that price.
If the underwriters create a short position in the Common Shares in
connection with the offering, i.e., if they sell more Common Shares than are
listed on the cover of this prospectus, the representative may reduce that short
position by purchasing Common Shares in the open market. The representative may
also elect to reduce any short position by exercising all or part of the
overallotment option described above. The underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Shares sold in this offering for their
account may be reclaimed by the syndicate if such Common Shares are repurchased
by the syndicate in stabilizing or covering transactions. Purchases of the
Common Shares to stabilize the price or to reduce a short position may cause the
price of the Common Shares to be higher than it might be in the absence of such
purchases.
Neither the Fund nor any of the underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Fund nor any of the underwriters makes any representation that the
representative will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
The Fund has agreed not to offer or sell any additional Common Shares for a
period of 180 days after the date of the purchase agreement without the prior
written consent of the underwriters, except for the sale of the Common Shares to
the underwriters pursuant to the purchase agreement and certain transactions
relating to the Fund's Dividend Reinvestment Plan.
The Fund anticipates that the underwriters may from time to time act as
brokers or, after they have ceased to be underwriters, dealers in executing the
Fund's portfolio transactions. The underwriters are active underwriters of, and
dealers in, securities and act as market-makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund.
Common Shares will be sold so as to ensure that New York Stock Exchange
distribution standards (i.e., round lots, public shares and aggregate market
value) will be met.
Additional Underwriting Compensation and Other Relationships
The Adviser has also agreed to pay from its own assets additional
compensation to Merrill Lynch. This additional compensation will be payable
quarterly at the annual rate of .15% of the Fund's average weekly total assets
(including any assets attributable to any Preferred Shares that may be
outstanding or otherwise attributable to the use of Leverage Instruments) during
the continuance of the Investment Management Agreement or other investment
management agreement between the Adviser and the Fund. Merrill Lynch has agreed
to provide, as requested by the Adviser, specified after-market support services
designed to maintain the visibility of the Fund on an ongoing basis; relevant
information, studies or reports regarding the Fund and the closed end investment
company industry; and consultation regarding market discounts of the Fund. The
total amount of these additional payments to Merrill Lynch will not exceed
4.46369% of the total price to the public of the Common Shares sold in this
offering.
The total amount of the additional compensation payable to Merrill Lynch
described above, plus the amounts paid by the Fund as the $.00667 per Common
Share partial reimbursement to the underwriters and as payment of certain
expenses of counsel to the underwriters, will not exceed 4.5% of the total price
to the public of the Common Shares sold in this offering. The sum total of all
compensation to underwriters in connection with this public offering of Common
Shares, including sales load and all forms of additional compensation to and
reimbursement of underwriters, will be limited to 9.0% of the total price to the
public of the Common Shares sold in this offering.
Page 53
One or more of the underwriters of the Common Shares may also act as
underwriters of the Fund's Preferred Shares, if any.
The address of Merrill Lynch is 4 World Financial Center, New York, New
York 10080.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
The custodian of the assets of the Fund is PFPC Trust Company
("Custodian"), 301 Bellevue Parkway, Wilmington, Delaware 19809. The Fund's
transfer, shareholder services and dividend paying agent is PFPC Inc., 301
Bellevue Parkway, Wilmington, Delaware 19809. Pursuant to an Administration and
Accounting Services Agreement, PFPC Inc. also provides certain administrative
and accounting services to the Fund, including maintaining the Fund's books of
account, records of the Fund's securities transactions, and certain other books
and records; acting as liaison with the Fund's independent public accountant
providing such accountant with various audit related information with respect to
the Fund; and providing other continuous administrative and accounting services.
As compensation for administrative and accounting services, the Fund has agreed
to pay PFPC Inc. an annual fee, calculated daily and payable on a monthly basis,
of .10% of the Fund's average Total Assets, subject to decrease with respect to
additional Total Assets.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois, and for the
Underwriters by Clifford Chance US LLP, New York, New York. Chapman and Cutler
LLP and Clifford Chance US LLP may rely as to certain matters of Massachusetts
law on the opinion of Bingham McCutchen LLP.
Page 54
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds........................................................... 1
Investment Objective...................................................... 1
Investment Restrictions................................................... 2
Investment Objectives Policies and Techniques............................. 4
Additional Information About the Fund's Investments and Investment Risks.. 6
Other Investment Policies and Techniques.................................. 27
Management of the Fund.................................................... 41
Investment Adviser........................................................ 45
Sub-Advisers.............................................................. 49
Portfolio Transactions and Brokerage...................................... 50
Distributions............................................................. 52
Repurchase of Fund Shares; Conversion to Open-End Fund.................... 52
Net Asset Value........................................................... 54
Tax Matters............................................................... 57
Performance Related and Comparative Information........................... 64
Experts................................................................... 64
Custodian, Administrator and Transfer Agent............................... 65
Independent Auditors...................................................... 65
Additional Information.................................................... 65
Independent Auditors' Report.............................................. 66
Financial Statements...................................................... 67
Appendix A - Ratings of Investments....................................... A-1
Page 55
================================================================================
Until , 2004 (25 days after the date of this prospectus), all dealers that
buy, sell or trade the common shares, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriter and with
respect to its unsold allotments and subscriptions.
Shares
Macquarie/First Trust
Global Infrastructure/Utilities
Dividend & Income Fund
Common Shares
$20.00 per share
----------
PROSPECTUS
----------
Merrill Lynch & Co.
Robert W. Baird & Co.
Raymond James
RBC Capital Markets
SunTrust Robinson Humphrey
, 2004
================================================================================
Back Cover
SUBJECT TO COMPLETION, DATED MARCH 25, 2004
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND OFFER OR SALE IS NOT PERMITTED.
MACQUARIE/FIRST TRUST GLOBAL INFRASTRUCTURE/UTILITIES DIVIDEND & INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
The Macquarie/First Trust Global Infrastructure/Utilities Dividend &
Income Fund (the "Fund") is a newly organized, non-diversified closed-end
management investment company.
This Statement of Additional Information relating to common shares of
beneficial interest of the Fund ("Common Shares") is not a prospectus, but
should be read in conjunction with the Fund's Prospectus relating thereto dated
, 2004 (the "Prospectus"). This Statement of Additional Information does not
include all information that a prospective investor should consider before
purchasing Common Shares. Investors should obtain and read the Fund's Prospectus
prior to purchasing such shares. A copy of the Fund's Prospectus may be obtained
without charge by calling (800) 988-5891 or on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings ascribed
to them in the Prospectus.
This Statement of Additional Information is dated , 2004.
TABLE OF CONTENTS
PAGE
USE OF PROCEEDS...............................................................1
INVESTMENT OBJECTIVE..........................................................1
INVESTMENT RESTRICTIONS.......................................................2
INVESTMENT OBJECTIVE POLICIES AND TECHNIQUES..................................4
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND INVESTMENT RISKS......6
OTHER INVESTMENT POLICIES AND TECHNIQUES.....................................27
MANAGEMENT OF THE FUND.......................................................41
INVESTMENT ADVISER...........................................................45
SUB-ADVISERS.................................................................49
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................50
DISTRIBUTIONS................................................................52
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND.......................52
NET ASSET VALUE..............................................................54
TAX MATTERS..................................................................57
PERFORMANCE RELATED AND COMPARATIVE INFORMATION..............................64
EXPERTS......................................................................64
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT..................................65
INDEPENDENT AUDITORS.........................................................65
ADDITIONAL INFORMATION.......................................................65
INDEPENDENT AUDITORS' REPORT.................................................66
FINANCIAL STATEMENTS.........................................................67
APPENDIX A -- Ratings of Investments.....................................A-1
-i-
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be
approximately $ ($ if the Underwriters exercise the overallotment option in
full) after payment of the estimated organizational expenses and offering costs.
The Fund expects it will be able to invest substantially all of the net proceeds
in securities and other instruments that meet the investment objective and
policies within three to six months after completion of the offering.
For the Fund, First Trust Advisors L.P. ("First Trust Advisors" or
"Adviser") and Macquarie Infrastructure Fund Adviser, LLC ("MIFA") have agreed
to pay (i) all organizational expenses and (ii) all offering costs (other than
sales load but including the $.00667 per Common Share reimbursement of
underwriter expenses) that exceed $.04 per Common Share (MIFA, together with
Four Corners Capital Management, LLC ("Four Corners"), are collectively referred
to herein as the "Sub-Advisers").
Pending investment in securities that meet the Fund's investment
objectives and policies, the net proceeds of the offering will be invested in
cash or cash equivalents.
INVESTMENT OBJECTIVE
Investment Objective. The Fund's investment objective is to seek a high
level of current return consisting of dividends, interest and other similar
income while attempting to preserve capital. In pursuit of the objective, the
Fund will seek to manage its investments and expenses so that a significant
portion of its distributions to the Fund's common shareholders will qualify as
tax-advantaged dividends, subject to the continued availability of favorable tax
treatment for such qualifying dividends.
The Fund will seek to achieve its investment objective by investing in
a non-diversified portfolio of equity, debt, preferred or convertible securities
and other instruments that are issued by U.S. and non-U.S. issuers
("Infrastructure Issuers") that have as their primary focus (in terms of income
and/or assets) the management, ownership and/or operation of infrastructure and
utilities assets ("Infrastructure Assets") in a select group of countries. The
Fund currently intends to utilize leverage up to a maximum of 30% of the Fund's
Total Assets, immediately after taking into account such leverage. "Total
Assets" means the average daily gross asset value of the Fund (which includes
assets attributable to the Fund's preferred shares, if any, and the principal
amount of borrowings), minus the sum of the Fund's accrued and unpaid dividends
on any outstanding Preferred Shares and accrued liabilities (other than the
principal amount of any borrowings incurred, commercial paper or notes issued by
the Fund and the liquidation preference of any outstanding Preferred Shares). To
the extent leverage is used, the Fund currently intends to invest the funds
raised through leverage in senior secured floating-rate U.S. dollar-denominated
loans of Infrastructure Issuers ("Infrastructure Senior Loans").
Therefore, the Fund's portfolio will likely consist of two components:
(1) the "Core Component," which will consist primarily of equity securities and
securities and instruments, with equity characteristics issued by Infrastructure
Issuers, but may also include other securities and instruments issued by
Infrastructure Issuers (collectively, "Core Infrastructure Securities"); and (2)
-1-
the "Senior Loan Component," which will consist of Infrastructure Senior Loans.
The Fund currently intends to apply the proceeds of issuance of its Common
Shares to acquire Core Infrastructure Securities and the proceeds of any
leverage to acquire Infrastructure Senior Loans. Up to 100% of the Senior Loan
Component may consist of non-investment grade instruments. Such instruments are
commonly referred to as "high yield" or "junk bonds" and are considered
speculative with respect to the issuer's capacity to pay interest and repay
principal.
Under normal market conditions, the Fund will seek to invest more than
50% of the Fund's Total Assets in securities and instruments of non-U.S.
Infrastructure Issuers located in Australia, New Zealand, Canada, the United
Kingdom and other European Union member countries as of the date of this
Statement of Additional Information, Switzerland, Japan, Hong Kong and
Singapore. Across both the Core Component and the Senior Loan Component, the
Fund intends that no more than 40% of the Fund's Total Assets be invested in the
securities and instruments of Infrastructure Issuers located in the U.S. and no
more than 7% of the Fund's Total Assets be invested in the securities and
instruments of any one Infrastructure Issuer. The Core Component is intended to
consist mainly of listed securities and instruments of Infrastructure Issuers.
Although not a primary focus of the Fund, the Fund may invest up to 25% of the
Core Component in unlisted securities and instruments of Infrastructure Issuers.
The Fund will seek to deliver at least 50% of its distributed income
attributable to the Core Infrastructure Securities as tax-advantaged dividends
under the Internal Revenue Code of 1986, as amended (the "Code"), which may
enable individual U.S. investors who meet holding period and other requirements
to receive the benefit of favorable tax treatment. Tax-advantaged dividends
generally include dividends from U.S. corporations and dividends and
distributions from non-U.S. entities that meet certain criteria. See "The Fund's
Investments" in the Fund's Prospectus for a description of holding period
requirements.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares:
(1) Issue senior securities, as defined in the Investment
Company Act of 1940 (the "1940 Act"), other than (i) preferred shares
which immediately after issuance will have asset coverage of at least
200%, (ii) indebtedness which immediately after issuance will have
asset coverage of at least 300%, or (iii) the borrowings permitted by
investment restriction (2) set forth below;
(2) Borrow money, except as permitted by the 1940 Act;
For a further discussion of the limitations imposed on borrowing by the
1940 Act, please see the section entitled "Borrowings" under
"Borrowings and Preferred Shares" in the Fund's Prospectus;
(3) Act as underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 ("Securities Act") in
connection with the purchase and sale of portfolio securities;
-2-
(4) Purchase or sell real estate, but this shall not prevent
the Fund from investing in securities of companies that deal in real
estate or are engaged in the real estate business, including real
estate investment trusts, and securities secured by real estate or
interests therein and the Fund may hold and sell real estate or
mortgages on real estate acquired through default, liquidation, or
other distributions of an interest in real estate as a result of the
Fund's ownership of such securities;
(5) Purchase or sell physical commodities unless acquired as
a result of ownership of securities or other instruments (but this
shall not prevent the Fund from purchasing or selling options, futures
contracts, derivative instruments or from investing in securities or
other instruments backed by physical commodities);
(6) Make loans of funds or other assets, other than by
entering into repurchase agreements, lending portfolio securities and
through the purchase of securities in accordance with its investment
objective, policies and limitations; or
(7) Invest 25% or more of its Total Assets in securities and
instruments of issuers in any single industry except to the extent the
Fund invests in the infrastructure and utilities industry, provided
there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
For the purpose of applying the limitation set forth in subparagraph
(7) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non-governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the computation of
securities owned that are issued by such governmental or other entity. Where a
security is guaranteed by a governmental entity or some other facility, such as
a bank guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above.
For purposes of fundamental investment restriction set forth in
subparagraph (7) above, for senior loans held by the Fund, the Fund will treat
the Lender (as defined below) selling a participation and any persons
interpositioned between such Lender and the Fund as an issuer.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees without a shareholder vote. The
Fund may not:
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(1) Sell securities short, unless the Fund owns or has the
right to obtain securities equivalent in kind and amount to the
securities sold at no added cost, and provided that transactions in
options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities
short; or
(2) Purchase securities of listed companies for the purpose
of exercising control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
In connection with the Fund's ownership in Infrastructure Senior Loans,
the Fund may be subject to certain restrictions and guidelines imposed by
lenders if the Fund engages in borrowings. The Fund does not anticipate that
such guidelines would have a material adverse effect on its shareholders or the
Fund's ability to achieve its investment objective.
The foregoing fundamental investment policies, together with the
investment objective of the Fund, cannot be changed without approval by holders
of a majority of the outstanding voting securities of the Fund, as defined in
the 1940 Act, which includes Common Shares and Preferred Shares, if any, voting
together as a single class, and of the holders of the outstanding Preferred
Shares voting as a single class. Under the 1940 Act a "majority of the
outstanding voting securities" means the vote of: (i) 67% or more of the Fund's
shares present at a meeting, if the holders of more than 50% of the Fund's
shares are present or represented by proxy; or (ii) more than 50% of the Fund's
shares, whichever is less.
INVESTMENT OBJECTIVE POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objective, policies, and techniques that are described in the Fund's
Prospectus.
Temporary Investments and Defensive Position. During the period where
the net proceeds of the offering of Common Shares, the issuance of Preferred
Shares, if any, commercial paper or notes and/or borrowings are being invested
or during periods in which the Adviser or either Sub-Adviser determines that it
is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so, the Fund may deviate from its investment strategy and
invest all or any portion of its net assets in cash and cash equivalents. The
Fund's determination, in consultation with the Adviser and the Sub-Advisers,
that it is temporarily unable to follow the Fund's investment strategy or that
it is impracticable to do so will generally occur only in situations in which a
market disruption event has occurred and where trading in the securities
selected through application of the Fund's investment strategy is extremely
limited or absent. In such a case, the Fund may not pursue or achieve its
investment objective.
The cash and cash equivalents are defined to include, without
limitation, the following:
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(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government agency securities
include securities issued by: (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do
so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of
their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of Deposit issued against funds deposited in
a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. The issuer of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the certificate
on the date specified thereon. Under current FDIC regulations, the
maximum insurance payable as to any one certificate of deposit is
$100,000, therefore, certificates of deposit purchased by the Fund may
not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver
such securities to the seller, who also simultaneously agrees to buy
back the securities at a fixed price and time. This assures a
predetermined yield for the Fund during its holding period, since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the
Fund to invest temporarily available cash. Pursuant to the Fund's
policies and procedures, the Fund may enter into repurchase agreements
only with respect to obligations of the U.S. government, its agencies
or instrumentalities; certificates of deposit; or bankers' acceptances
in which the Fund may invest. Repurchase agreements may be considered
loans to the seller, collateralized by the underlying securities. The
risk to the Fund is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of default, the
repurchase agreement provides that the Fund is entitled to sell the
underlying collateral. If the seller defaults under a repurchase
agreement when the value of the underlying collateral is less than the
repurchase price, the Fund could incur a loss of both principal and
interest. The applicable Sub-Adviser monitors the value of the
collateral at the time the action is entered into and at all times
during the term of the repurchase agreement. The investment adviser
does so in an effort to determine that the value of the collateral
always equals or exceeds the agreed-upon repurchase price to be paid to
the Fund. If the seller were to be subject to a federal bankruptcy
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proceeding, the ability of the Fund to liquidate the collateral could
be delayed or impaired because of certain provisions of the bankruptcy
laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. The applicable Sub-Adviser will
consider the financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity measures) and will continuously
monitor the corporation's ability to meet all its financial
obligations, because the Fund's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper
rated in the highest categories by a nationally recognized statistical
rating organization and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
(5) The Fund may invest in bankers' acceptances which are
short-term credit instruments used to finance commercial transactions.
Generally, an acceptance is a time draft drawn on a bank by an exporter
or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on
its maturity date. The acceptance may then be held by the accepting
bank as an asset or it may be sold in the secondary market at the going
rate of interest for a specific maturity.
(6) The Fund may invest in bank time deposits, which are
monies kept on deposit with banks or savings and loan associations for
a stated period of time at a fixed rate of interest. There may be
penalties for the early withdrawal of such time deposits, in which case
the yields of these investments will be reduced.
(7) The Fund may invest in shares of money market funds in
accordance with the provisions of the 1940 Act.
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS AND INVESTMENT RISKS
INFRASTRUCTURE AND UTILITIES ASSETS
The Core Component will contain equity securities and securities and
instruments with equity characteristics issued by Infrastructure Issuers, but
the Fund may also invest in other securities and instruments issued by
Infrastructure Issuers.
Characteristics and Characterization of Infrastructure Assets.
Infrastructure Assets are an underlying foundation of basic services, facilities
and institutions upon which the growth and development of a community depends.
Typically, in the United States, such assets are owned, operated or managed by
government-related entities such as municipalities. In non-U.S. countries, these
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assets are often owned, operated or managed by private entities. The entities
owning, operating or managing these assets may provide the necessities of
everyday life--fresh water, roads, airports, power, district heating and
cooling, hospitals, schools and other social services. Such entities thereby
provide the reliable transportation corridors and facilities, communications
networks, energy distribution systems and pipelines, and institutions that are
fundamental to the health of an economy.
The businesses of Infrastructure Issuers typically display
characteristics with some or all of the following attributes:
Essential services: Many Infrastructure Issuers are the sole providers
of an essential product or service (e.g., water/waste-water, power and
transportation services) to a segment of the population, at a given time and
cost, and often retain this characteristic for an extended period of time.
Monopolistic: Many Infrastructure Assets are monopolistic or
near-monopolistic in nature, thereby providing a strategic competitive
advantage. These Infrastructure Assets may be difficult to replicate due to:
exclusive concession periods provided by legislation and/or regulation; natural
barriers, planning or environmental restrictions or availability of land; high
costs of new development; long-term sales contracts for a significant proportion
of production; and other restrictions. A monopoly asset may be attractive from
an investor's perspective as the monopoly provides protection against competitor
induced pricing competition. This helps in the maintenance of operating and
profit margins and provides more stability in the earnings stream.
Fixed and regulated returns: Monopoly-type market positioning may bring
with it regulation to prevent the development of "excess" profits and to protect
public interests. For example, for roads, toll increases may be agreed in
advance with government and specified in concession deeds; for energy utilities,
revenues may be set by a regulator, with reviews at five-year intervals; and the
aeronautical revenues of airports may also be regulated in a similar manner.
Leverage on a fixed cost base: Many Infrastructure Assets are usually
characterized by large levels of capital investment during the development phase
of the asset. Once developed, on-going operational-maintenance expenditure may
be relatively low and stable. Should this be the case, increases in revenue (for
example, due to traffic increases on a road asset) may not necessarily lead to
proportionate increases in operating expenditure, leading to relatively high
increases in surplus cash flow. Additionally, the economies of scale from
leveraging a fixed cost base may provide a strategic competitive advantage.
Relatively inelastic demand: Demand for the products or services
provided by Infrastructure Assets may be more stable and less sensitive to
changes than the products or services produced by other assets. Demand growth is
often linked to underlying economic or demographic growth. Stable operating cash
flows generally result from this attribute and this stability may reduce the
overall volatility of investor returns.
-7-
Long-life assets: Infrastructure Assets may have long economic useful
lives and may operate under long-term concessions/agreements. For example, an
airport lease or road easement may be up to 99 years. The underlying revenue of
infrastructure assets may be linked to inflation, sometimes directly through a
regulatory framework or through concession agreements linking price growth to
inflation.
Based on the mix of the above-noted characteristics and risk factors,
Infrastructure Assets can be broadly divided into four categories:
1. Assets that are natural or near-natural monopolies and
are regulated in the level of revenue earned, the charges imposed, or
the rate of returns allowed. Certain power and gas transmission,
generation and distribution assets fall into this category, along with
certain water/waste-water treatment facilities and incumbent local
exchange carriers.
2. Assets that depend on a form of user payment for their
main revenue source. Examples of assets that fall into this category
include toll roads, airports, railways, ports and certain parking lots
(e.g., airport related).
3. Assets that provide basic social services to the
community, and include schools, hospitals and correction facilities.
Depending on the arrangement with government and the regulator, if any,
water/waste-water treatment facilities may also be included in this
class.
4. Assets that compete in a market for the sale of a product
or service and are therefore exposed to market risks (e.g., volatility
of prices or competitive pressures). Certain electricity generation,
solid waste disposal facilities, city and local carparks, and certain
communication asset classes (e.g., fixed-base wireless transmission
towers and broadband television cable) fall into this category, along
with certain water/waste-water treatment facilities.
SENIOR LOANS
The Fund may also use leverage through the issuance of preferred shares
of beneficial interest, commercial paper or notes and/or borrowing in an
aggregate amount up to 30% of the Fund's Total Assets after such issuance and/or
borrowings. The Fund currently intends to invest the proceeds of the leverage in
Infrastructure Senior Loans which will comprise the Senior Loan Component of the
Fund's investment portfolio.
Senior loans are typically arranged through private negotiations
between a borrower ("Borrower" or "Issuer") and several lenders ("Lenders")
represented in each case by one or more Lenders acting as agent of the several
Lenders (the "Agent"). On behalf of the several Lenders, the Agent, which is
frequently the entity that originates the senior loan and invites the other
parties to join the lending syndicate, will be primarily responsible for
negotiating the senior loan agreements that establish the relative terms,
conditions and rights of the Borrower and the Lender (the "Loan Agreements").
The co-agents, on the other hand, are not responsible for administration of a
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senior loan, but are part of the initial group of Lenders that commit to
providing funding for a senior loan once the Borrower and Agent negotiate and
agree on material terms. In large transactions, it is common to have several
Agents; however, one Agent typically has primary responsibility for
documentation and administration of the senior loan. The Fund will not act as
sole Agent in a transaction.
Lenders generally rely on the Agent to collect their portion of the
payments on the senior loan and to use appropriate creditor remedies against the
Borrower. Typically under Loan Agreements, the Agent is given broad discretion
in enforcing the Loan Agreement. The Borrower compensates the Agent for these
services. Compensation may include special fees paid on structuring and funding
the senior loan, and other fees paid on a continuing basis. The precise duties
and rights of an Agent are defined in the Loan Agreement.
Each Lender in a senior loan is generally responsible for performing
its own credit analysis and its own investigation of the financial condition of
the Borrower. Generally, Loan Agreements will hold the Fund, as Agent, liable
for any action taken or omitted constituting gross negligence or willful
misconduct. In the event of a Borrower's default on a loan, the Loan Agreements
generally provide that the Lenders do not have recourse against the Agent.
Instead, Lenders will be required to look to the Borrower for recourse.
Senior loans generally hold the most senior position in the capital
structure of a business entity. Their secured position in a Borrower's capital
structure typically provides the holder of a senior loan with the first right to
cash flows and/or proceeds from the sale of collateral in the event of
liquidation after default. In order of priority, senior loans are typically
repaid before unsecured senior loans, unsecured senior bonds, subordinated debt,
trade creditors, and preferred and common equity holders. However, these factors
do not assure full payment of principal or interest, and delays or limitations
may result in the event of bankruptcy.
Senior loans are floating rate instruments which are issued at a fixed
spread over some pre-defined base rate. The spread is set at the time the loan
is originated, and is typically referenced to the London Inter-Bank Offered Rate
("LIBOR"), but also can be referenced to the rate on certificates of deposit or
the prime rate. The spread at the time of origination of a loan is a function of
several factors, including credit quality of the issuer, the structure of the
individual deal, and the general market conditions at the time of the
origination. As conditions change, the required spreads that market participants
demand from a specific borrower or industry may change, and any such change
could result in required spreads narrowing or widening for all corporate
credits. It should be noted that since most corporate loans may be pre-paid at
par without penalty, should general market spreads narrow, there is a high
probability that the Borrower would choose to refinance at a lower spread.
Should an existing loan be refinanced at a lower rate, or should there be a
decrease in credit spreads in the corporate loan market in general or for a
particular industry, it is expected there will be a decrease in portfolio income
and a decrease in overall portfolio return. Senior loans also may incorporate
pre-determined "step-ups" where the spread increases by some specified amount if
the credit quality of the issuer deteriorates and "step-downs" where the spread
increases if the credit quality of the borrower improves. Should credit quality
decline, and the step-up be triggered, the coupon income associated with loans
to this borrower will increase. Similarly, should a Borrower's credit quality
-9-
improve and the step-down become operative, investor income will decrease due to
the decrease in income associated with that particular borrower.
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. A breach of a 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. These covenants, in
addition to the timely payment of interest and principal, may include
restrictions on dividend payments, and usually state that a Borrower must
maintain specific minimum financial ratios, as well as establishing limits on
total debt. In addition, senior 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
Infrastructure Senior Loans, the Fund may have an obligation to make additional
loans upon demand by the Borrower. The Fund intends to reserve against
contingent obligations by segregating sufficient assets in high quality
short-term liquid investments or borrowing to cover the obligations.
The Fund may be required to pay and receive various fees and
commissions in the process of purchasing, selling and holding Infrastructure
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 senior loan as compensation for the initiation of the
transaction. An assignment fee may be paid when a senior loan is assigned to
another party. A non-use fee is paid based upon the amount committed but not
used typically under a revolving credit facility, which may be issued coincident
to the senior loan. Facility fees are on-going annual fees paid in connection
with a senior loan. Letter of credit fees are paid if a senior loan involves a
letter of credit. Ticking fees are paid from the initial commitment indication
until senior loan closing if for an extended period. The fees are negotiated at
the time of transaction.
In order to allow national banks to purchase shares of the Fund for
their own accounts without limitation, the Fund intends to invest in obligations
which are eligible for purchase by national banks for their own accounts
pursuant to the provisions of paragraph seven of Section 24 of the U.S. Code
Title 12. National banks which are contemplating purchasing shares of the Fund
for their own accounts should refer to Banking Circular 220, issued by the U.S.
Comptroller of the Currency on November 21, 1986, for a description of certain
considerations applicable to these purchases.
Lending Fees. In the process of buying, selling and holding senior
loans, the Fund may receive certain fees. These fees are in addition to interest
payments received and may include facility fees, commitment fees, commissions
and prepayment penalty fees. When the Fund buys a senior loan it may receive a
facility fee. When it sells a senior loan it may pay a facility fee. On an
ongoing basis, the Fund may receive a commitment fee based on the undrawn
portion of the underlying line of credit portion of a senior loan. In certain
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circumstances, the Fund may receive a prepayment penalty fee upon the prepayment
of a senior loan by a Borrower. Other fees received by the Fund may include
covenant waiver fees and covenant modification fees.
Borrower Covenants. A Borrower must comply with any covenants contained
in a Loan Agreement. These covenants, in addition to requiring the scheduled
payment of interest and principal, may include restrictions on dividend payments
and other distributions to equity holders, provisions requiring the Borrower to
maintain specific minimum financial ratios, and limits on total debt. In
addition, the Loan Agreement may contain a covenant requiring the Borrower to
prepay the senior loan with any free cash flow. Free cash flow is generally
defined as net cash flow after scheduled debt service payments and permitted
capital expenditures, and generally includes the proceeds from asset
dispositions or sales of securities. A breach of a covenant which is not waived
by the Agent, or by the Lenders directly, as the case may be, is normally an
event of acceleration; i.e., the Agent, or the Lenders directly, as the case may
be, has the right to call the outstanding senior loan. The typical practice of
an Agent or a Lender in relying exclusively or primarily on reports from the
Borrower may involve a risk of fraud by the Borrower. In the case of a senior
loan in the form of a participation, the agreement between the buyer and seller
may limit the rights of the holder of a senior loan to vote on certain changes
which may be made to the Loan Agreement, such as waiving a breach of a covenant.
However, the holder of the participation will, in almost all cases, have the
right to vote on certain fundamental issues such as changes in principal amount,
payment dates and interest rate.
Administration of Senior Loans. The Agent typically administers the
terms of the Loan Agreement. In these cases, the Agent is normally responsible
for the collection of principal and interest payments from the Borrower and the
apportionment of these payments to the credit of all institutions which are
parties to the Loan Agreement. The Fund will generally rely upon the Agent or an
intermediate participant to receive and forward to the Fund its portion of the
principal and interest payments on the senior loan. Furthermore, unless under
the terms of a Participation Agreement the Fund has direct recourse against the
Borrower, the Fund will rely on the Agent and the other members of the lending
syndicate to use appropriate credit remedies against the Borrower. The Agent is
typically responsible for monitoring compliance with covenants contained in the
Loan Agreement based upon reports prepared by the Borrower. The seller of the
senior loan usually does, but is often not obligated to, notify holders of
senior loans of any failures of compliance. The Agent may monitor the value of
the collateral and, if the value of the collateral declines, may accelerate the
senior loan, may give the Borrower an opportunity to provide additional
collateral, or may seek other protection for the benefit of the holders of the
senior loan. The Agent is compensated by the Borrower for providing these
services under a Loan Agreement. Compensation may include special fees paid upon
structuring and funding the senior loan and other fees paid on a continuing
basis.
Prepayments. Senior loans may require, in addition to scheduled
payments of interest and principal, the prepayment of the senior loan from free
cash flow or asset sales. The degree to which Borrowers prepay senior loans,
whether as a contractual requirement or at their election, may be affected by,
among other factors, general business conditions, the financial condition of the
Borrower and competitive conditions among Lenders. As such, prepayments cannot
be predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Fund derives interest income will be
reduced. However, the Fund may receive both a prepayment penalty fee from the
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prepaying Borrower and a facility fee upon the purchase of a new senior loan
with the proceeds from the prepayment of the former. Prepayments generally
should not materially affect the Fund's performance because the Fund should be
able to reinvest prepayments in other senior loans that have similar or
identical yields and because receipt of such fees may mitigate any adverse
impact on the Fund's yield.
Other Information Regarding Infrastructure Senior Loans. The Fund's
investments in Infrastructure Senior Loans may also take one of several forms
including: purchasing an assignment of a portion of an Infrastructure Senior
Loan from a third party, or acquiring a participation in an Infrastructure
Senior Loan. When the Fund acquires a participation in, or an assignment of, an
Infrastructure Senior Loan, it may pay a fee to, or forego a portion of interest
payments from, the Lender selling the participation or assignment. The Fund will
act as Lender, or purchase an assignment or participation, with respect to an
Infrastructure Senior Loan only if the Agent is determined by the Sub-Adviser to
be creditworthy.
Except for rating agency guidelines imposed on the Fund's portfolio
while it has outstanding Preferred Shares, there is no minimum rating or other
independent evaluation of a Borrower limiting the Fund's investments and most
Infrastructure Senior Loans that the Fund may acquire, if rated, will be rated
lower grade, meaning below investment grade quality. See "Risks--Credit Risk" in
the Fund's Prospectus.
Assignments. When the Fund is a purchaser of an assignment, it
typically 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. Assignments are, however,
arranged through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
assignment may be more limited than those held by the assigning Lender.
Participations. The Fund may also invest in participations in
Infrastructure Senior Loans. The rights of the Fund when it acquires a
participation are likely to be more limited than the rights of an original
Lender or an investor who acquired an assignment. Participation by the Fund in a
Lender's portion of an Infrastructure Senior Loan typically means that the Fund
has a contractual relationship only with the Lender, not with the Borrower. This
means that the Fund has the right to receive payments of principal, interest and
any fees to which it is entitled only from the Lender selling the participation
and only upon receipt by the Lender of payments from the Borrower.
With a participation, the Fund will have no rights to enforce
compliance by the Borrower with the terms of the loan agreement or any rights
with respect to any funds acquired by other Lenders through set-off against the
Borrower. In addition, the Fund may not directly benefit from the collateral
supporting the Infrastructure Senior Loan because it may be treated as a general
creditor of the Lender instead of the Borrower. As a result, the Fund may be
subject to delays, expenses and risks that are greater than those that exist
when the Fund is the original Lender or holds an assignment. This means the Fund
must assume the credit risk of both the Borrower and the Lender selling the
participation.
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The Fund may acquire interests in Infrastructure Senior Loans which are
designed to provide temporary or "bridge" financing to a Borrower pending the
sale of identified assets or the arrangement of longer-term loans or the
issuance and sale of debt obligations. The Fund also may invest in
Infrastructure Senior Loans of Borrowers who have obtained bridge loans from
other parties. A Borrower's use of bridge loans involves a risk that the
Borrower may be unable to locate permanent financing to replace the bridge loan,
which may impair the Borrower's perceived creditworthiness.
To the extent that collateral consists of the equity of the Borrower's
subsidiaries or other affiliates, the Fund will be subject to the risk that this
equity will decline in value. Such a decline, whether as a result of bankruptcy
proceedings or otherwise, could cause the Infrastructure Senior Loan to be
undercollateralized or unsecured. In most credit agreements there is no formal
requirement to pledge additional collateral. In addition, the Fund may invest in
Infrastructure Senior Loans guaranteed by, or fully secured by assets of,
shareholders or owners, even if the Infrastructure Senior Loans are not
otherwise collateralized by assets of the Borrower; provided, however, that the
guarantees are fully secured. There may be temporary periods when the principal
asset held by a Borrower is the equity of a related company, which may not
legally be pledged to secure an Infrastructure Senior Loan. On occasions when
the equity cannot be pledged, the Infrastructure Senior Loan will be temporarily
unsecured until the equity can be pledged or is exchanged for or replaced by
other assets, which will be pledged as security for the Infrastructure Senior
Loan. However, the Borrower's ability to dispose of the securities, other than
in connection with such pledge or replacement, will be strictly limited for the
protection of the holders of Infrastructure Senior Loans.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the loan collateral or subordinate
the Fund's rights under the Infrastructure Senior Loan to the interests of the
Borrower's unsecured creditors. Such action by a court could be based, for
example, on a "fraudulent conveyance" claim to the effect that the Borrower did
not receive fair consideration for granting the security interest in the loan
collateral to the Fund. For Infrastructure Senior Loans made in connection with
a highly leveraged transaction, consideration for granting a security interest
may be deemed inadequate if the proceeds of the Loan were not received or
retained by the Borrower, but were instead paid to other persons (such as
shareholders of the Borrower) in an amount which left the Borrower insolvent or
without sufficient working capital. There are also other events, such as the
failure to perfect a security interest due to faulty documentation or faulty
official filings, which could lead to the invalidation of the Fund's security
interest in loan collateral. If the Fund's security interest in loan collateral
is invalidated or the Infrastructure Senior Loan is subordinated to other debt
of a Borrower in bankruptcy or other proceedings, it is unlikely that the Fund
would be able to recover the full amount of the principal and interest due on
the Infrastructure Senior Loan.
CORPORATE BONDS
Corporate bonds generally are used by corporations to borrow money from
investors. The issuer pays the investor a fixed or variable rate of interest and
normally must repay the amount borrowed on or before maturity. Certain bonds are
"perpetual" in that they have no maturity date. Certain corporate bonds are zero
coupon bonds. A zero coupon bond is a bond that does not pay interest either for
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the entire life of the obligation or for an initial period after the issuance of
the obligation. Zero coupon bonds allow an issuer to avoid or delay the need to
generate cash to meet current interest payments and, as a result, may involve
greater credit risk than bonds that pay interest currently. The Fund would be
required to distribute the income on any of these instruments as it accrues,
even though the Fund will not receive all of the income on a current basis.
Thus, the Fund may have to sell other investments, even when it may not be
advisable to do so, to make income distributions to the holders of its shares
("Shareholders").
NON-INVESTMENT GRADE INSTRUMENTS
It is anticipated that at least 80% of the Senior Loan Component will
be invested in non-investment grade debt instruments, although from time to time
all of the Senior Loan Component may be invested in such non-investment grade
debt instruments. In addition to the Senior Loan Component, the Fund may invest
up to 100% of the Core Component in equity securities, securities and
instruments with equity characteristics, hybrid securities, non-convertible
preferred securities, convertible securities or debt securities or instruments
rated non-investment grade by recognized statistical rating agencies or unrated
securities of comparable quality. These non-investment grade instruments may
become the subject of bankruptcy proceedings or otherwise subsequently default
as to the repayment of principal and/or payment of interest or be downgraded to
ratings in the lower rating categories (Ca or lower by Moody's Investor
Services, Inc. ("Moody's"), CC or lower by Standard & Poor's Corporation, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") or comparably
rated by another nationally recognized statistical rating organization
("NRSRO"). The value of these securities is affected by the creditworthiness of
the issuers of the securities and by general economic and specific industry
conditions. Issuers of non-investment grade instruments are not perceived to be
as strong financially as those with higher credit ratings, so the securities are
usually considered speculative investments. These issuers generally are more
vulnerable to financial setbacks and recessions than more creditworthy issuers
which may impair their ability to make interest and principal payments.
Non-investment grade instruments tend to be less liquid than higher grade
securities.
Investing in non-investment grade instruments involves additional risks
than investment-grade securities. Non-investment grade instruments are
securities rated Ba1 or lower by Moody's or BB+ or lower by Standard & Poor's,
or comparably rated by any other NRSRO or considered to be of comparable credit
quality. When prevailing economic conditions cause a narrowing of the spreads
between the yields derived from lower grade or comparable securities and those
derived from higher rated issues, the Fund may invest in higher rated securities
which provide similar yields but have less risk. In addition, the Fund may be
forced to buy higher rated, lower yielding securities, which would decrease the
Fund's return, if issuers redeem their non-investment grade instruments at a
higher than expected rate. Changes in economic or other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments on
securities rated Ba1 or lower or BB+ or lower than is the case with higher grade
securities.
The Fund will normally invest in securities rated below B by both
Moody's and Standard & Poor's (or comparably rated by another NRSRO) only if it
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is determined that the financial condition of the issuer or the protection
afforded to the particular securities is stronger than would otherwise be
indicated by the lower ratings. Non-investment grade instruments tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of the securities may not have
been as strong as that of other issuers. Since non-investment grade instruments
generally involve greater risk of loss of income and principal than higher rated
securities, investors should consider carefully the relative risks associated
with investments in non-investment grade instruments. Investment in these
securities is a long-term investment strategy and, accordingly, investors in the
Fund should have the financial ability and willingness to remain invested for
the long-term. See "Non-Investment Grade Instrument Risk" below.
Fluctuations in the prices of fixed-income securities may be caused by,
among other things, the supply and demand for similarly rated securities. In
addition, the prices of securities fluctuate in response to the general level of
interest rates. Fluctuations in the prices of securities subsequent to their
acquisition will not necessarily affect cash income from such securities but
will be reflected in the Fund's net asset value ("NAV").
The Adviser and the Sub-Advisers will perform their own investment
analysis and rating assignment, and will not rely principally on the ratings
assigned by the rating services, although these ratings will be considered. A
description of corporate bond ratings is contained in Appendix A to this
Statement of Additional Information. Ratings of securities represent the rating
agencies' opinions regarding the credit quality and are not a guarantee of
quality. Rating agencies attempt to evaluate the safety of principal and
interest payments and do not evaluate the risks of fluctuations in market value.
Also, rating agencies may fail to make timely changes in credit ratings in
response to subsequent events, so that an issuer's current financial condition
may be better or worse than a rating indicates. Therefore, the financial
history, the financial condition, the prospects and the management of an issuer,
among other things, also will be considered in selecting securities for the
Fund's portfolio. Since some issuers do not seek ratings for their securities,
non-rated securities will be considered for investment by the Fund only when it
is determined that the financial condition of the issuers of the securities
and/or the protection afforded by the terms of the securities themselves limit
the risk to the Fund to a degree comparable to that of rated securities that are
consistent with the Fund's objective and policies.
NON-INVESTMENT GRADE INSTRUMENT RISK
Infrastructure Senior Loans and other non-investment grade securities
and debt instruments are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations (credit risk) and also may be
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower grade or similar unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. Both credit risk and market risk will be considered in making
investment decisions for the Fund. Where the Fund invests in non-investment
grade instruments, the achievement of its investment objective may be more
dependent on the Fund's own credit analysis and rating assignment than if it had
invested in higher quality securities.
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Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition, the secondary market for
non-investment grade instruments, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. Under adverse market or economic conditions, the secondary market
for non-investment grade instruments could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result,
the Fund could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if the securities were widely
traded. Prices realized upon the sale of non-investment grade instruments, under
these circumstances, may be less than the prices used in calculating the Fund's
NAV. Under circumstances where the Fund owns the majority of an issue, market
and credit risks may be greater. Moreover, from time to time, it may be more
difficult to value non-investment grade instruments than more highly rated
securities.
In addition to the risk of default, there are the related costs of
recovery on defaulted issues. The Fund will attempt to reduce these risks
through diversification of the portfolio and by analysis of each issuer and its
ability to make timely payments of income and principal, as well as broad
economic trends in corporate developments.
Since investors generally perceive that there are greater risks
associated with the non-investment grade instruments of the type in which the
Fund may invest, the yields and prices of these securities may tend to fluctuate
more than those for higher rated securities. In the lower quality segments of
the senior loan market, changes in perceptions of issuers' creditworthiness tend
to occur more frequently and in a more pronounced manner than do changes in
higher quality senior loan securities which, as a general rule, fluctuate in
response to the general level of interest rates.
Lower grade or unrated securities also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors.
UNLISTED, RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest without limit in illiquid securities. Most of the
Infrastructure Senior Loans in which the Fund will invest will be, at times,
illiquid. In addition, although not a primary focus of the Fund, up to 25% of
the Fund's Core Component may be invested in unlisted securities and instruments
of Infrastructure Issuers, and as such securities and instruments are generally
not able to be publicly traded, they may be illiquid for some or all of the time
they are held by the Fund. Illiquid securities also include repurchase
agreements that have a maturity of longer than seven days, certain securities
with legal or contractual restrictions on resale (restricted securities) and
securities that are not readily marketable either within or outside the United
States. The Sub-Advisers will monitor the liquidity of restricted securities
under the supervision of the trustees of the Fund (the "Trustees"). Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
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Historically, illiquid securities in the United States have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act, securities which are
otherwise not readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities that have not been registered under the
Securities Act are referred to as restricted securities and are purchased
directly from the issuer or in the secondary market ("Direct Placement
Securities"). Limitations on resale may have an adverse effect on the
marketability of portfolio securities and the Fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices. The
Fund might also have to register the restricted securities to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede the public offering of securities.
Over time, a large institutional market has developed for certain
securities that are not registered under the Securities Act including repurchase
agreements, commercial paper, non-U.S. securities, municipal securities,
convertible securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
Non-U.S. markets may be more or less liquid depending on the market and
the type of security or instrument.
PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES
The Fund may invest the Senior Loan Component in pay-in-kind and
deferred payment instruments only if the Fund receives the instruments in
connection with owning Infrastructure Senior Loans of an issuer. Pay-in-kind
instruments are instruments that have interest payable by delivery of additional
instruments. Upon maturity, the holder is entitled to receive the aggregate par
value of the instruments. Deferred payment instruments are instruments that pay
no or a reduced rate of interest until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Holders of certain of these types of instruments may be deemed to
have received income ("phantom income") annually, notwithstanding that cash may
not be received currently. The Fund may have to accrue income with respect to
these instruments for federal income tax and accounting purposes prior to the
receipt of cash payments. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligations. This implicit reinvestment of earnings at the same rate
mitigates the risk of being unable to invest distributions at a rate as high as
the implicit yield on the deferred payment portion of bond, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, some of these instruments may be subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable instruments which pay interest currently, which fluctuation increases
the longer the period to maturity. These investments benefit the issuer by
mitigating its need for cash to meet debt service, but may also require a higher
rate of return to attract investors who are willing to defer receipt of cash.
Pay-in-kind and deferred payment instruments may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
-17-
conditions than comparable rated instruments paying cash interest at regular
intervals. The Fund may also buy senior loans that provide for the payment of
additional income, if certain operational benchmarks are achieved by the
Borrower, that is to be paid on a deferred basis at an uncertain future date.
PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES RISKS
In addition to the above described risks, there are certain other risks
related to investing in pay-in-kind and deferred payment securities. During a
period of severe market conditions, the market for the securities may become
even less liquid. In addition, as these securities may not pay cash interest,
the Fund's investment exposure to these securities and their risks, including
credit risk, will increase during the time these securities are held in the
Fund's portfolio. Further, to maintain its qualification for pass-through
treatment under the federal tax laws, the Fund is required to distribute income
to its shareholders and, consequently, may have to dispose of its portfolio
securities under disadvantageous circumstances to generate the cash, or may have
to leverage itself by borrowing the cash to satisfy these distributions, as they
relate to the distribution of phantom income and the value of the paid-in-kind
interest. The required distributions will result in an increase in the Fund's
exposure to these securities.
CREDIT DEFAULT SWAP TRANSACTIONS
The Fund may invest up to 5% of the Senior Loan Component in credit
default swap transactions (as measured by the notional amounts of the swaps),
including credit-linked notes (described below) for hedging and investment
purposes. However, given the current state of developments in the market, Four
Corners has no present intention to utilize such instruments. The "buyer" in a
credit default contract is obligated to pay the "seller" a periodic stream of
payments over the term of the contract provided that no event of default on an
underlying reference obligation has occurred. If an event of default occurs, the
seller must pay the buyer the full notional value, or "par value," of the
reference obligation. Credit default swap transactions are either "physical
delivery" settled or "cash" settled. Physical delivery entails the actual
delivery of the reference asset to the seller in exchange for the payment of the
full par value of the reference asset. Cash settled entails a net cash payment
from the seller to the buyer based on the difference of the par value of the
reference asset and the current value of the reference asset that may have,
through default, lost some, most or all of its value. The Fund may be either the
buyer or seller in a credit default swap transaction. If the Fund is a buyer and
no event of default occurs, the Fund will have made a series of periodic
payments and recover nothing of monetary value. However, if an event of default
occurs, the Fund (if the buyer) will receive the full notional value of the
reference obligation either through a cash payment in exchange for the asset or
a cash payment in addition to owning the reference assets. As a seller, the Fund
receives a fixed rate of income throughout the term of the contract, which
typically is between six months and five years, provided that there is no event
of default. The Fund will segregate assets in the form of cash and cash
equivalents in an amount equal to the aggregate market value of the credit
default swaps of which it is the seller, marked to market on a daily basis. If
an event of default occurs, the seller must pay the buyer the full notional
value of the reference obligation through either physical settlement or cash
settlement. Credit default swap transactions involve greater risks than if the
Fund had invested in the reference obligation directly.
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The Fund may also invest the Senior Loan Component in credit default
swap contracts in order to hedge against the risk of default of debt securities
it holds, in which case the Fund would function as the counterparty referenced
in the preceding paragraph. This would involve the risk that the swap may expire
worthless and would only generate income in the event of an actual default by
the issuer of the underlying obligation (as opposed to a credit downgrade or
other indication of financial instability). It would also involve credit risk
that the seller may fail to satisfy its payment obligations to the Fund in the
event of a default.
CREDIT-LINKED NOTES
The Fund may invest the Senior Loan Component in credit-linked notes.
Credit-linked notes are securities that are collateralized by one or more credit
default swaps on corporate credits. The difference between a credit default swap
and a credit-linked note is that the buyer of a credit-linked note receives the
principal payment from the seller at the time the contract is originated.
Through the purchase of a credit-linked note, the buyer assumes the risk of the
reference asset and funds this exposure through the purchase of the note. The
buyer takes on the exposure to the seller to the full amount of the funding it
has provided. The seller has hedged its risk on the reference asset without
acquiring any additional credit exposure. The Fund has the right to receive
periodic interest payments from the issuer of the credit-linked note at an
agreed-upon interest rate, and a return of principal at the maturity date.
Credit-linked notes are subject to credit risk of the corporate credits
underlying the credit default swaps. If one of the underlying corporate credits
defaults, the Fund may receive the security that has defaulted, and the Fund's
principal investment would be reduced by the difference between the original
face value security and the current value of the defaulted security.
Credit-linked notes typically are privately negotiated transactions
between two or more parties. The Fund bears the risk that the issuer of the
credit-linked note will default or become bankrupt. The Fund bears the risk of
loss of its principal investment, and the periodic interest payments expected to
be received for the duration of its investment in the credit-linked note.
The market for credit-linked notes is, or suddenly can become,
illiquid. The other parties to the transaction may be the only investors with
sufficient understanding of the derivative to be interested in bidding for it.
Changes in liquidity may result in significant, rapid and unpredictable changes
in the prices for credit-linked notes. In certain cases, a market price for a
credit-linked note may not be available. The collateral for a credit-linked note
is one or more credit default swaps, which, as described above, are subject to
additional risk.
STRUCTURED NOTES AND RELATED INSTRUMENTS
The Fund may invest up to 5% of the Senior Loan Component in
"structured" notes and other related instruments, which are privately negotiated
debt obligations where the principal and/or interest is determined by reference
to the performance of a benchmark asset, market or interest rate (an "embedded"
index), such as selected securities or debt investments, an index of such, or
specified interest rates, or the differential performance of two assets or
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markets, such as indexes reflecting bonds. However, given the current state of
developments in the market, Four Corners has no present intention to utilize
such instruments. The terms of structured instruments normally provide that
their principal and/or interest payments are to be adjusted upwards or downwards
(but ordinarily not below zero) to reflect changes in the embedded index while
the structured instruments are outstanding. As a result, the interest and/or
principal payments that may be made on a structured product may vary widely,
depending on a variety of factors, including the volatility of the embedded
index and the effect of changes in the embedded index on principal and/or
interest payments. The rate of return on structured notes may be determined by
applying a multiplier to the performance or differential performance of the
referenced index(es) or other assets. Application of a multiplier involves
leverage that will serve to magnify the potential for gain and the risk of loss.
NEW FINANCIAL INSTRUMENTS
New financial products continue to be developed and the Fund may invest
in any product that may be developed to the extent the investment in such
product is consistent with its investment objective, the Fund's policies and
procedures, and the regulatory and federal tax requirements applicable to
investment companies.
INTEREST RATE AND OTHER HEDGING TRANSACTIONS
It is the current intention of the Fund not to enter into hedging
transactions. However, the Fund may enter into various interest rate hedging and
risk management transactions for the purpose of hedging the Fund's exposure to
an increase in the price of a security prior to its anticipated purchase or a
decrease in the price of a security prior to its anticipated sale. Certain of
these interest rate hedging and risk management transactions involve derivative
instruments. A derivative is a financial instrument whose performance is derived
at least in part from the performance of an underlying index, security or asset.
The values of certain derivatives can be affected dramatically by even small
market movements, sometimes in ways that are difficult to predict. There are
many different types of derivatives, with many different uses. The Fund also may
enter into these transactions to seek or to preserve a return on a particular
investment or portion of its portfolio, and may also enter into such
transactions to seek to protect against decreases in the anticipated rate of
return on floating or variable rate financial instruments the Fund owns or
anticipates purchasing at a later date, or for other risk management strategies
such as managing the effective dollar-weighted average duration of the Fund's
portfolio. The Fund also may engage in hedging transactions to seek to protect
the value of its portfolio against declines in NAV resulting from changes in
interest rates or other market changes. Market conditions will determine whether
and in what circumstances the Fund would employ any of the hedging and risk
management techniques described below. The Fund will incur brokerage and other
costs in connection with its hedging transactions.
The Fund may enter into interest rate swaps or total rate of return
swaps or purchase or sell interest rate caps or floors. Interest rate swaps
involve the exchange by the Fund with another party of their respective
obligations to pay or receive interest, e.g., an exchange of an obligation to
make floating rate payments for an obligation to make fixed rate payments. For
example, the Fund may seek to shorten the effective interest rate
redetermination period of a Infrastructure Senior Loan in its portfolio with an
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interest rate redetermination period of one-year. The Fund could exchange the
Borrower's obligation to make fixed rate payments for one-year for an obligation
to make payments that re-adjust monthly.
The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
interest obligations are determined although no actual exchange of principal
occurs) from the party selling the interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling the interest rate floor.
In circumstances in which the Sub-Advisers anticipate that interest
rates will decline, the Fund might, for example, enter into an interest rate
swap as the floating rate payor or, alternatively, purchase an interest rate
floor. In the case of purchasing an interest rate floor, if interest rates
declined below the floor rate, the Fund would receive payments from its
counterparty which would wholly or partially offset the decrease in the payments
it would receive in respect of the portfolio assets being hedged. In the case
where the Fund purchases an interest rate swap, if the floating rate payments
fell below the level of the fixed rate payment set in the swap agreement, the
Fund's counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive in respect of the floating rate portfolio assets
being hedged.
The successful use of swaps, caps and floors to preserve the rate of
return on a portfolio of financial instruments depends on the Sub-Advisers'
ability to predict correctly the direction and extent of movements in interest
rates.
Although the Fund believes that use of the hedging and risk management
techniques described above should benefit the Fund if utilized, if the
Sub-Advisers' judgment about the direction or extent of the movement in interest
rates is incorrect, the Fund's overall performance would be worse than if it had
not entered into any such transactions.
Because these hedging transactions are entered into for good-faith risk
management purposes, the Sub-Advisers and the Fund believe these obligations do
not constitute senior securities. The Fund usually will enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be segregated. If the Fund enters into a swap
on other than a net basis, the Fund will segregate the full amount of the Fund's
obligations under each swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the New York Stock Exchange or
other entities determined by the Adviser, pursuant to procedures adopted and
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reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a
default occurs by the other party to the transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction, but
remedies may be subject to bankruptcy and insolvency laws that could affect the
Fund's rights as a creditor. There can be no assurance that the Fund will be
able to enter into interest rate swaps or to purchase interest rate caps or
floors at prices or on terms the Sub-Advisers believe are advantageous to the
Fund. In addition, although the terms of interest rate swaps, caps and floors
may provide for termination, there can be no assurance that the Fund will be
able to terminate an interest rate swap or to sell or offset interest rate caps
or floors that it has purchased.
The Fund may also engage in credit derivative transactions. Default
risk derivatives are linked to the price of reference securities or loans after
a default by the issuer or borrower, respectively. Market spread derivatives are
based on the risk that changes in market factors, such as credit spreads, can
cause a decline in the value of a security, loan or index. There are three basic
transactional forms for credit derivatives: swaps, options and structured
instruments. The use of credit derivatives is a highly specialized activity
which involves strategies and risks different from those associated with
ordinary portfolio security transactions. If the Fund is incorrect in its
forecasts of default risks, market spreads or other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these techniques were not used. Moreover, even if the Fund is
correct in its forecasts, there is a risk that a credit derivative position may
correlate imperfectly with the price of the asset or liability being hedged.
Credit derivative transaction exposure, if any, will be attained through the use
of derivatives described above and through credit default swap transactions and
credit linked securities.
EQUITY SECURITIES RISK
An investment in the Fund should be made with an understanding of the
risks which an investment in equity securities such as common stocks, preferred
securities, convertible securities hybrid securities such as stapled securities
and various income trust units, entails, including the risk that the financial
condition of the issuers of the equity securities or the general condition of
equity markets may worsen and the value of the equity securities and therefore
the value of the Fund may decline. The Fund may not be an appropriate investment
for those who are unable or unwilling to assume the risks involved generally
with an equity investment. The past market and earnings performance of any of
the equity securities included in the Fund is not predictive of their future
performance. Equity securities are especially susceptible to general market
movements and to volatile increases and decreases of value as market confidence
in and perceptions of the issuers change. These perceptions are based on
unpredictable factors including expectations regarding government, economic,
monetary and fiscal policies, inflation and interest rates, economic expansion
or contraction, and global or regional political, economic or banking crises.
First Trust Fund Advisors, MIFA and Four Corners (the "Fund Advisers") cannot
predict the direction or scope of any of these factors. Stakeholders of equity
securities have rights to receive payments from the issuers of those equity
securities that are generally subordinate to those of creditors of, or holders
of debt obligations or preferred securities of, such issuers. Stakeholders of
equity securities of the type held by the Fund have a right to receive
distributions only when and if, and in the amounts, declared by the issuer's
-22-
board of directors and have a right to participate in amounts available for
distribution by the issuer only after all other claims on the issuer have been
paid or provided for. Equity securities do not represent an obligation of the
issuer and, therefore, do not offer any assurance of income or provide the same
degree of protection of capital as do debt securities. The issuance of
additional debt securities or preferred securities will create prior claims for
payment of principal, interest and distributions which could adversely affect
the ability and inclination of the issuer to declare or pay distributions on its
equity securities or the rights of holders of equity securities with respect to
assets of the issuer upon liquidation or bankruptcy. The value of equity
securities is subject to market fluctuations for as long as the equity
securities remain outstanding, and thus the value of the equity securities in
the Fund will fluctuate over the life of the Fund and may be more or less than
the price at which they were purchased by the Fund. The equity securities held
in the Fund may appreciate or depreciate in value (or pay distributions)
depending on the full range of economic and market influences affecting these
securities, including the impact of the Fund's purchase and sale of the equity
securities and other factors.
Holders of equity securities incur more risk than holders of preferred
securities and debt obligations because equity stakeholders, as owners of the
entity, generally have inferior rights to receive payments from the issuer in
comparison with the rights of creditors of, or holders of debt obligations or
preferred securities issued by, the issuer. Cumulative preferred securities
distributions must be paid before equity distributions and any cumulative
preferred securities distributions omitted are added to future distributions
payable to the holders of cumulative preferred securities. Preferred equity
holders are also generally entitled to rights on liquidation that are senior to
those of common equity holders.
None of First Trust Advisors, MIFA or Four Corners shall be liable in
any way for any default, failure or defect in any security held in the Fund's
portfolio.
PREFERRED SECURITIES RISK
Preferred securities and hybrid securities also represent an equity
ownership in an issuer. Generally, preferred securities and hybrids have a
priority of claim over common equity securities in distribution payments and
upon liquidation of the issuer. Unlike common equity securities, preferred
securities do not usually have voting rights. Preferred securities in some
instances are convertible into common securities
Although they are equity securities, preferred securities have certain
characteristics of both debt securities and common equity. They are debt-like in
that their promised income is contractually fixed. They are common equity-like
in that they may not have rights to precipitate bankruptcy proceedings or
collection activities in the event of missed payments. Furthermore, they have
many of the key characteristics of equity due to their subordinated position in
an issuer's capital structure and because their quality and value are heavily
dependent on the profitability of the issuer rather than on any legal claims to
specific assets or cash flows.
In order to be payable, dividends on preferred securities must be
declared by the issuer's board of directors. In addition, distributions on
preferred securities may be subject to deferral and thus may not be
automatically payable. Income payments on some preferred securities are
-23-
cumulative, causing dividends and distributions to accrue even if not declared
by the board of directors or otherwise made payable. Other preferred securities
are non-cumulative, meaning that skipped dividends and distributions do not
accrue. There is no assurance that dividends on preferred securities in which
the Fund invests will be declared or otherwise made payable. The Fund may invest
in non-cumulative preferred securities.
Shares of preferred securities have a liquidation value that generally
equals the original purchase price at the date of issuance. The market values of
preferred securities may be affected by favorable and unfavorable changes
impacting the issuer's industries or sectors. They may also be affected by
actual and anticipated changes or ambiguities in the tax status of the security
and by actual and anticipated changes or ambiguities in tax laws, such as
changes in corporate and individual income tax rates or the characterization of
dividends as tax-advantaged.
Because the claim on an issuer's earnings represented by preferred
securities may become onerous when interest rates fall below the rate payable on
the securities or for other reasons, the issuer may redeem preferred securities,
generally after an initial period of call protection in which the securities are
not redeemable. Thus, in declining interest rate environments in particular, the
Fund's holdings of higher dividend-paying preferred securities may be reduced
and the Fund may be unable to acquire securities paying comparable rates with
the redemption proceeds.
Taxable preferred securities are treated in a similar fashion to
traditional preferred securities by several regulatory agencies, including the
Federal Reserve Bank, and by credit rating agencies, for various purposes, such
as the assignment of minimum capital ratios, over-collateralization rates and
diversification limits.
CONVERTIBLE SECURITY RISK
Convertible securities are bonds, debentures, notes, preferred
securities, hybrids, stapled securities, income unit trusts or other securities
that may be converted or exchanged (by the holder or the issuer) into shares of
the underlying common equity (or cash or securities of equivalent value) at a
stated exchange ratio or predetermined price (the "conversion price").
Convertible securities have general characteristics similar to both debt
securities and common equities. The interest paid on convertible securities may
be fixed or floating rate. Floating rate convertible securities may specify an
interest rate or rates that are conditional upon changes to the market price of
the underlying common equity. Convertible securities also may be issued in zero
coupon form with an original issue discount. Although to a lesser extent than
with debt securities, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common equity and, therefore, will also react to
the variations in the general market for common equity. Depending upon the
relationship of the conversion price to the market value of the underlying
common equity, a convertible security may trade more like common equity than a
debt instrument.
-24-
Mandatory convertible securities are distinguished as a subset of
convertible securities because they may be called for conversion by the issuer
after a particular date and under certain circumstances (including at a
specified price) established upon its issuance. If a mandatory convertible
security is called for conversion, the Fund will be required to either convert
it into the underlying common equity or sell it to a third party, which may have
an adverse effect on the Fund's ability to achieve its investment objective.
A convertible security generally entitles the holder to receive
interest paid or accrued until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities rank senior to common equity in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common equity, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a debt obligation. Before conversion,
convertible securities have characteristics similar to non-convertible debt
obligations and can provide for a stable stream of income with generally higher
yields than common equity. However, convertible securities fall below debt
obligations of the same issuer in order of preference or priority in the event
of a liquidation, and are typically unrated or rated lower than such debt
obligations. In addition, contingent payment convertible securities allow the
issuer to claim deductions based on its nonconvertible cost of debt which
generally will result in deductions in excess of the actual cash payments made
on the securities (and accordingly, holders may recognize income in amounts in
excess of the cash payments received). There can be no assurance of current
income because the issuers of the convertible securities may default on their
obligations. The convertible securities in which the Fund may invest may be
below investment grade quality. See "Additional Information About the Fund's
Investments and Investment Risks."
Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar credit quality because of the
potential for capital appreciation. A convertible security, in addition to
providing current income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from any increases
in the market price of the underlying common equity. The common equity
underlying convertible securities may be issued by a different entity than the
issuer of the convertible securities.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common equity. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will fluctuate based on the credit quality of the
issuer and will fluctuate inversely with changes in prevailing interest rates.
However, at the same time, the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common equity
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common equity, and
will therefore be subject to risks relating to the activities of the issuer
and/or general market and economic conditions. Depending upon the relationship
of the conversion price to the market value of the underlying security, a
convertible security may trade more like an equity security than a debt
instrument.
-25-
If, because of a low price of the common equity, the conversion value
is substantially below the investment value of the convertible security, the
price of the convertible security is governed principally by its investment
value. If the conversion value of a convertible security increases to a point
that approximates or exceeds its investment value, the value of the security
will be principally influenced by its conversion value. A convertible security
will sell at a premium over its conversion value to the extent investors place
value on the right to acquire the underlying common equity while holding a
fixed-income security.
Mandatory convertible securities are distinguished as a subset of
convertible securities because the conversion is not optional and the conversion
price at maturity (or redemption) is based solely upon the market price of the
underlying common equity, which may be significantly less than par or the price
(above or below par) paid. For these reasons, the risks associated with
investing in mandatory convertible securities most closely resemble the risks
inherent in common equity. Mandatory convertible securities customarily pay a
higher coupon yield to compensate for the potential risk of additional price
volatility and loss upon redemption. Since the correlation of common equity risk
increases as the security approaches its redemption date, there can be no
assurance that the higher coupon will compensate for the potential loss.
OVER-THE-COUNTER MARKET RISK
The Fund may invest in over-the-counter securities. In contrast to the
securities exchanges, the over-the-counter market is not a centralized facility
that limits trading activity to securities of companies which initially satisfy
certain defined standards. Generally, the volume of trading in an unlisted or
over-the-counter security is less than the volume of trading in a listed
security. This means that the depth of market liquidity of some securities in
which the Fund invests may not be as great as that of other securities and, if
the Fund were to dispose of such a security, it might have to offer the shares
at a discount from recent prices, or sell the shares in small lots over an
extended period of time.
LEGISLATION RISK
At any time after the date of the Prospectus, legislation may be
enacted that could negatively affect the assets of the Fund or the issuers of
such assets. Changing approaches to regulation may have a negative impact on
entities in which the Fund invests. There can be no assurance that future
legislation, regulation or deregulation will not have a material adverse effect
on the Fund or will not impair the ability of the issuers of the assets held in
the Fund to achieve their business goals, and hence, for the Fund to achieve its
investment objective.
LIQUIDITY RISK
The existence of a liquid trading market for the assets held by the
Fund may depend on whether dealers will make a market in the assets. There can
be no assurance that a market will be made for such assets, that any market for
the assets will be maintained or that there will be sufficient liquidity of the
assets in any markets made. Furthermore, certain public securities, particularly
securities of smaller capitalized or less seasoned issuers, may from time to
-26-
time lack an active secondary market and may be subject to more abrupt or
erratic price movements than larger, more established companies or securities
market averages in general. In the absence of an active trading market, the
Fund's ability to sell such assets at a fair price may be impaired or delayed
and the value of the Fund may be adversely affected.
TAX RISK
No assurances can be given what percentage of the distributions paid on
the Common Shares, if any, will consist of tax-advantaged qualified dividend
income or long-term capital gains or what the tax rates on various types of
income will be in future years. Under current law, qualified dividend income and
long-term capital gains are taxed to non-corporate investors at a maximum
federal income tax rate of 15%. This tax treatment may be adversely affected,
changed or repealed by future changes in tax laws at any time, and is currently
scheduled to expire for tax years beginning after December 31, 2008. See "Tax
Matters."
OTHER INVESTMENT POLICIES AND TECHNIQUES
HEDGING STRATEGIES
General Description of Hedging Strategies. It is the current intention
of the Fund not to enter into hedging transactions other than in regard to the
Fund's exposure to dividends received or receivable in non-US. currencies. The
Fund may use derivatives or other transactions for the purpose of hedging the
Fund's exposure to an increase in the price of a security prior to its
anticipated purchase or a decrease in the price of a security prior to its
anticipated sale. Such hedging transactions are commonly referred to as
"anticipatory hedges." These anticipatory hedges are expected to be entered into
only in limited circumstances and are not a principal strategy of the Fund. The
specific derivative instruments to be used, or other transactions to be entered
into, for such hedging purposes may include options on common equities,
stock-related futures contracts (hereinafter referred to as "Futures" or
"Futures Contracts"), non-U.S. currency forward contracts, swap agreements and
related instruments. The Fund will use derivatives or other transactions
described in this paragraph solely for non-speculative purposes.
Hedging or derivative instruments on securities generally are used to
hedge against price movements in one or more particular securities positions
that the Fund owns or intends to acquire. Such instruments may also be used to
"lock-in" recognized but unrealized gains in the value of portfolio securities.
Hedging strategies, if successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. The use of hedging instruments is subject
to applicable regulations of the Securities and Exchange Commission (the "SEC"),
the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission (the "CFTC") and various state regulatory
authorities. In addition, the Fund's ability to use hedging instruments may be
limited by tax considerations.
-27-
General Limitations on Futures and Options Transactions. The Fund has
filed a notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the National Futures Association,
which regulate trading in the futures markets. Pursuant to Section 4.5 of the
regulations under the Commodity Exchange Act (the "CEA"), the Fund is not
subject to regulation as a commodity pool under the CEA.
Various exchanges and regulatory authorities have undertaken reviews of
options and Futures trading in light of market volatility. Among the possible
actions that have been presented are proposals to adopt new or more stringent
daily price fluctuation limits for Futures and options transactions and
proposals to increase the margin requirements for various types of futures
transactions.
Asset Coverage for Futures and Options Positions. The Fund will comply
with the regulatory requirements of the SEC and the CFTC with respect to
coverage of options and Futures positions by registered investment companies
and, if the guidelines so require, will set aside cash, U.S. government
securities, high grade liquid debt securities and/or other liquid assets
permitted by the SEC and CFTC in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
Futures or options position is outstanding, unless replaced with other
permissible assets, and will be marked-to-market daily.
Options. As an anticipatory hedge, the Fund may purchase put and call
options on stock or other securities. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
an underlying security or its equivalent at a specified price at any time during
the option period. In contrast, a call option gives the purchaser the right to
buy the underlying security covered by the option or its equivalent from the
writer of the option at the stated exercise price.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time prior to the option's expiration date.
The Fund may seek to terminate its option positions prior to their expiration by
entering into closing transactions. The ability of the Fund to enter into a
closing sale transaction depends on the existence of a liquid secondary market.
There can be no assurance that a closing purchase or sale transaction can be
effected when the Fund so desires.
Certain Considerations Regarding Options. The hours of trading for
options may not conform to the hours during which the underlying securities are
traded. To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets. The
purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. The purchase of options involves the risk that the
premium and transaction costs paid by the Fund in purchasing an option will be
lost as a result of unanticipated movements in prices of the securities on which
the option is based. Imperfect correlation between the options and securities
markets may detract from the effectiveness of attempted hedging. Options
-28-
transactions may result in significantly higher transaction costs and portfolio
turnover for the Fund.
Some, but not all, of the derivative instruments may be traded and
listed on an exchange. There is no assurance that a liquid secondary market on
an options exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or elsewhere may
exist. If the Fund is unable to effect a closing sale transaction with respect
to options on securities that it has purchased, it would have to exercise the
option in order to realize any profit and would incur transaction costs upon the
purchase and sale of the underlying securities.
Futures Contracts. The Fund may enter into securities-related Futures
Contracts, including security futures contracts as an anticipatory hedge. The
Fund's hedging may include sales of Futures as an offset against the effect of
expected declines in securities prices and purchases of Futures as an offset
against the effect of expected increases in securities prices. The Fund will not
enter into Futures Contracts which are prohibited under the CEA and will, to the
extent required by regulatory authorities, enter only into Futures Contracts
that are traded on exchanges and are standardized as to maturity date and
underlying financial instrument. A security futures contract is a legally
binding agreement between two parties to purchase or sell in the future a
specific quantity of shares of a security or of the component securities of a
narrow-based security index, at a certain price. A person who buys a security
futures contract enters into a contract to purchase an underlying security and
is said to be "long" the contract. A person who sells a security futures contact
enters into a contract to sell the underlying security and is said to be "short"
the contract. The price at which the contract trades (the "contract price") is
determined by relative buying and selling interest on a regulated exchange.
Transaction costs are incurred when a Futures Contract is bought or
sold and margin deposits must be maintained. In order to enter into a security
futures contract, the Fund must deposit funds with its custodian in the name of
the futures commodities merchant equal to a specified percentage of the current
market value of the contract as a performance bond. Moreover, all security
futures contracts are marked-to-market at least daily, usually after the close
of trading. At that time, the account of each buyer and seller reflects the
amount of any gain or loss on the security futures contract based on the
contract price established at the end of the day for settlement purposes.
An open position, either a long or short position, is closed or
liquidated by entering into an offsetting transaction (i.e., an equal and
opposite transaction to the one that opened the position) prior to the contract
expiration. Traditionally, most futures contracts are liquidated prior to
expiration through an offsetting transaction and, thus, holders do not incur a
settlement obligation. If the offsetting purchase price is less than the
original sale price, a gain will be realized. Conversely, if the offsetting sale
price is more than the original purchase price, a gain will be realized; if it
is less, a loss will be realized. The transaction costs must also be included in
these calculations. There can be no assurance, however, that the Fund will be
able to enter into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Fund is not able to enter into an
offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the Futures Contract and the Fund may not be able to realize
-29-
a gain in the value of its future position or prevent losses from mounting. This
inability to liquidate could occur, for example, if trading is halted due to
unusual trading activity in either the security futures contract or the
underlying security; if trading is halted due to recent news events involving
the issuer of the underlying security; if systems failures occur on an exchange
or at the firm carrying the position; or, if the position is on an illiquid
market. Even if the Fund can liquidate its position, it may be forced to do so
at a price that involves a large loss.
Under certain market conditions, it may also be difficult or impossible
to manage the risk from open security futures positions by entering into an
equivalent but opposite position in another contract month, on another market,
or in the underlying security. This inability to take positions to limit the
risk could occur, for example, if trading is halted across markets due to
unusual trading activity in the security futures contract or the underlying
security or due to recent news events involving the issuer of the underlying
security.
There can be no assurance that a liquid market will exist at a time
when the Fund seeks to close out a Futures contract position. The Fund would
continue to be required to meet margin requirements until the position is
closed, possibly resulting in a decline in the Fund's NAV. In addition, many of
the contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
Security futures contracts that are not liquidated prior to expiration
must be settled in accordance with the terms of the contract. Some security
futures contracts are settled by physical delivery of the underlying security.
At the expiration of a security futures contract that is settled through
physical delivery, a person who is long the contract must pay the final
settlement price set by the regulated exchange or the clearing organization and
take delivery of the underlying shares. Conversely, a person who is short the
contract must make delivery of the underlying shares in exchange for the final
settlement price. Settlement with physical delivery may involve additional
costs.
Other security futures contracts are settled through cash settlement.
In this case, the underlying security is not delivered. Instead, any positions
in such security futures contracts that are open at the end of the last trading
day are settled through a final cash payment based on a final settlement price
determined by the exchange or clearing organization. Once this payment is made,
neither party has any further obligations on the contract.
As noted above, margin is the amount of funds that must be deposited by
the Fund in order to initiate Futures trading and to maintain the Fund's open
positions in Futures Contracts. A margin deposit is intended to ensure the
Fund's performance of the Futures Contract. The margin required for a particular
Futures Contract is set by the exchange on which the Futures Contract is traded
and may be significantly modified from time to time by the exchange during the
term of the Futures Contract.
If the price of an open Futures Contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
Futures Contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
-30-
if the value of a position increases because of favorable price changes in the
Future Contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the respective Fund. In computing daily NAV, the
Fund will mark to market the current value of its open Futures Contracts. The
Fund expects to earn interest income on its margin deposits.
Because of the low margin deposits required, Futures contracts trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a Futures Contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as margin, a subsequent
10% decrease in the value of the Futures Contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Future Contracts were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess of
the amount initially invested in the Futures Contract. However, the Fund would
presumably have sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold it after the
decline.
In addition to the foregoing, imperfect correlation between the Futures
Contracts and the underlying securities may prevent the Fund from achieving the
intended hedge or expose the Fund to risk of loss. Under certain market
conditions, the prices of security futures contracts may not maintain their
customary or anticipated relationships to the prices of the underlying security
or index. These pricing disparities could occur, for example, when the market
for the security futures contract is illiquid, when the primary market for the
underlying security is closed, or when the reporting of transactions in the
underlying security has been delayed.
In addition, the value of a position in security futures contracts
could be affected if trading is halted in either the security futures contract
or the underlying security. In certain circumstances, regulated exchanges are
required by law to halt trading in security futures contracts. For example,
trading on a particular security futures contract must be halted if trading is
halted on the listed market for the underlying security as a result of pending
news, regulatory concerns, or market volatility. Similarly, trading of a
security futures contract on a narrow-based security index must be halted under
circumstances such as where trading is halted on securities accounting for at
least 50% of the market capitalization of the index. In addition, regulated
exchanges are required to halt trading in all security futures contracts for a
specified period of time when the Dow Jones Industrial Average ("DJIA")
experiences one-day declines of 10-, 20- and 30%. The regulated exchanges may
also have discretion under their rules to halt trading in other circumstances -
such as when the exchange determines that the halt would be advisable in
maintaining a fair and orderly market.
A trading halt, either by a regulated exchange that trades security
futures or an exchange trading the underlying security or instrument, could
prevent the Fund from liquidating a position in security futures contracts in a
timely manner, which could expose the Fund to a loss.
Each regulated exchange trading a security futures contract may also
open and close for trading at different times than other regulated exchanges
trading security futures contracts or markets trading the underlying security or
-31-
securities. Trading in security futures contracts prior to the opening or after
the close of the primary market for the underlying security may be less liquid
than trading during regular market hours.
Risks and Special Considerations Concerning Derivatives. In addition to
the foregoing, the use of derivative instruments involves certain general risks
and considerations as described below.
(1) Market Risk. Market risk is the risk that the value of
the underlying assets may go up or down. Adverse movements in the value
of an underlying asset can expose the Fund to losses. Market risk is
the primary risk associated with derivative transactions. Derivative
instruments may include elements of leverage and, accordingly,
fluctuations in the value of the derivative instrument in relation to
the underlying asset may be magnified. The successful use of derivative
instruments depends upon a variety of factors, particularly a
Sub-Adviser's ability to predict correctly changes in the relationships
of such hedge instruments to the Fund's portfolio holdings, and there
can be no assurance the advisor's judgment in this respect will be
accurate. Consequently, the use of derivatives for hedging purposes
might result in a poorer overall performance for the Fund, whether or
not adjusted for risk, than if the Fund had not hedged its portfolio
holdings.
(2) Credit Risk. Credit risk is the risk that a loss is
sustained as a result of the failure of a counterparty to comply with
the terms of a derivative instrument. The counterparty risk for
exchange-traded derivatives is generally less than for
privately-negotiated or over-the-counter derivatives, since generally a
clearing agency, which is the issuer or counterparty to each
exchange-traded instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar clearing agency
guarantee. In all transactions, the Fund will bear the risk that the
counterparty will default, and this could result in a loss of the
expected benefit of the derivative transactions and possibly other
losses to the Fund. The Fund will enter into transactions in derivative
instruments only with counterparties that First Trust Advisors
reasonably believes are capable of performing under the contract.
(3) Correlation Risk. Correlation risk is the risk that there
might be an imperfect correlation, or even no correlation, between
price movements of a derivative instrument and price movements of
investments being hedged. When a derivative transaction is used to
completely hedge another position, changes in the market value of the
combined position (the derivative instrument plus the position being
hedged) result from an imperfect correlation between the price
movements of the two instruments. With a perfect hedge, the value of
the combined position remains unchanged with any change in the price of
the underlying asset. With an imperfect hedge, the value of the
derivative instrument and its hedge are not perfectly correlated. For
example, if the value of a derivative instrument used in a short hedge
(such as buying a put option or selling a futures contract) increased
by less than the decline in value of the hedged investments, the hedge
would not be perfectly correlated. This might occur due to factors
unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these
-32-
instruments are traded. In addition, the Fund's success in using
hedging instruments is subject to the Sub-Advisers' ability to
correctly predict changes in relationships of such hedge instruments to
the Fund's portfolio holdings, and there can be no assurance that the
Sub-Advisers' judgment in this respect with be accurate. An imperfect
correlation may prevent the Fund from achieving the intended hedge or
expose the Fund to a risk of loss.
(4) Liquidity Risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out, or replaced quickly
at or very close to its fundamental value. Generally, exchange
contracts are liquid because the exchange clearinghouse is the
counterparty of every contract. OTC transactions are less liquid than
exchange-traded derivatives since they often can only be closed out
with the other party to the transaction. The Fund might be required by
applicable regulatory requirements to maintain assets as "cover,"
maintain segregated accounts and/or make margin payments when it takes
positions in derivative instruments involving obligations to third
parties (i.e., instruments other than purchase options). If the Fund is
unable to close out its positions in such instruments, it might be
required to continue to maintain such accounts or make such payments
until the position expires, matures, or is closed out. These
requirements might impair the Fund's ability to sell a security or make
an investment at a time when it would otherwise be favorable to do so,
or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to sell or close out a position in an
instrument prior to expiration or maturity depends upon the existence
of a liquid secondary market or, in the absence of such a market, the
ability and willingness of the counterparty to enter into a transaction
closing out the position. Due to liquidity risk, there is no assurance
that any derivatives position can be sold or closed out at a time and
price that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the
unenforceability of a party's obligations under the derivative. While a
party seeking price certainty agrees to surrender the potential upside
in exchange for downside protection, the party taking the risk is
looking for a positive payoff. Despite this voluntary assumption of
risk, a counterparty that has lost money in a derivative transaction
may try to avoid payment by exploiting various legal uncertainties
about certain derivative products.
(6) Systemic or "Interconnection" Risk. Systemic or
interconnection risk is the risk that a disruption in the financial
markets will cause difficulties for all market participants. In other
words, a disruption in one market will spill over into other markets,
perhaps creating a chain reaction. Much of the OTC derivatives market
takes place among the OTC dealers themselves, thus creating a large
interconnected web of financial obligations. This interconnectedness
raises the possibility that a default by one large dealer could create
losses for other dealers and destabilize the entire market for OTC
derivative instruments.
-33-
NON-U.S. HEDGING INSTRUMENTS
Non-U.S. Currency Transactions. While the Fund does not currently
intend to enter into arrangements to reduce its exposure to non-U.S. currencies
(other than those necessary to permit the conversion of non-U.S. dividends to
U.S. dollars), the Fund has the ability to engage in non-U.S. currency forward
contracts, options, and futures transactions. The Fund would enter into non-U.S.
currency transactions for hedging and other permissible risk management purposes
only. Non-U.S. currency futures and options contracts are traded in the U.S. on
regulated exchanges such as the Chicago Mercantile Exchange, the Mid-America
Commodities Exchange, and the Philadelphia Stock Exchange. If the Fund invests
in a currency futures or options contract, it must make a margin deposit to
secure performance of such contract. With respect to investments in currency
futures contracts, the Fund may also be required to make a variation margin
deposit because the value of futures contracts fluctuates from purchase to
maturity. In addition, the Fund may segregate assets to cover its futures
contracts obligations.
Forward Non-U.S. Currency Exchange Contracts. The Fund does not
currently intend to reduce or hedge its currency risk other than to permit the
conversion of non-U.S. dividends to U.S. dollars. The Fund may, however, in the
future enter into forward currency exchange contracts. Forward non-U.S. currency
exchange contracts may limit potential gains that could result from a positive
change in such currency relationships. The Fund believes that it is important to
have the flexibility to enter into forward non-U.S. currency exchange contracts
whenever a Sub-Adviser determines that it is in the Fund's best interest to do
so. The Fund will not speculate in non-U.S. currency exchange.
The Fund will not enter into forward currency exchange contracts or
maintain a net exposure in such contracts that it would be obligated to deliver
an amount of non-U.S. currency in excess of the value of its portfolio
securities or other assets denominated in that currency or, in the case of a
"cross-hedge," denominated in a currency or currencies that a Sub-Adviser
believes will tend to be closely correlated with that currency with regard to
price movements. Generally, the Fund will not enter into a forward non-U.S.
currency exchange contract with a term longer than one year.
Non-U.S. Currency Options. A non-U.S. currency option provides the
option buyer with the right to buy or sell a stated amount of non-U.S. currency
at the exercise price on a specified date or during the option period. The owner
of a call option has the right, but not the obligation, to buy the currency.
Conversely, the owner of a put option has the right, but not the obligation, to
sell the currency. When the option is exercised, the seller (i.e., writer) of
the option is obligated to fulfill the terms of the sold option. However, either
the seller or the buyer may, in the secondary market, close its position during
the option period at any time prior to expiration.
A call option on non-U.S. currency generally rises in value if the
underlying currency appreciates in value, and a put option on a non-U.S.
currency generally rises in value if the underlying currency depreciates in
value. Although purchasing a non-U.S. currency option can protect the Fund
against an adverse movement in the value of a non-U.S. currency, the option will
not limit the movement in the value of such currency. For example, if the Fund
held securities denominated in a non-U.S. currency that was appreciating and had
-34-
purchased a non-U.S. currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise its put option. Likewise, if the
Fund entered into a contract to purchase a security denominated in non-U.S.
currency and, in conjunction with that purchase, purchased a non-U.S. currency
call option to hedge against a rise in value of the currency, and if the value
of the currency instead depreciated between the date of purchase and the
settlement date, the Fund would not have to exercise its call. Instead, the Fund
could acquire in the spot market the amount of non-U.S. currency needed for
settlement.
Special Risks Associated with Non-U.S. Currency Options. Buyers and
sellers of non-U.S. currency options are subject to the same risks that apply to
options generally. In addition, there are certain risks associated with non-U.S.
currency options. The Fund's ability to establish and close out positions on
such options would be subject to the maintenance of a liquid secondary market.
Although the Fund will not purchase or write such options unless and until, in
the opinion of a Sub-Adviser, the market for them has developed sufficiently to
ensure that the risks in connection with such options are not greater than the
risks in connection with the underlying currency, there can be no assurance that
a liquid secondary market will exist for a particular option at any specific
time.
In addition, options on non-U.S. currencies are affected by those
factors that influence non-U.S. exchange rates and investments generally. The
value of a non-U.S. currency option depends upon the value of the underlying
currency relative to the U.S. dollar. As a result, the price of the option
position may vary with changes in the value of either or both currencies and may
have no relationship to the investment merits of a non-U.S. security. Because
non-U.S. currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the use of
non-U.S. currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1 million)
for the underlying non-U.S. currencies at prices that are less favorable than
for round lots.
No assurances can be given that a systematic reporting of last sale
information for non-U.S. currencies or any regulatory requirements that
quotations available through dealers or other market sources be firm or revised
on a timely basis will exist. Available quotation information is generally
representative of very large transactions in the interbank market and thus may
not reflect relatively smaller transactions (i.e., less than $1 million) where
rates may be less favorable. The interbank market in non-U.S. currencies is a
global, around-the-clock market. To the extent that the U.S. options markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements may take place in the underlying markets that cannot be
reflected in the options markets until they reopen.
Non-U.S. Currency Futures Transactions. By using non-U.S. currency
futures contracts and options on such contracts, the Fund may be able to achieve
many of the same objectives as it would through the use of forward non-U.S.
currency exchange contracts. The Fund may be able to achieve these objectives
possibly more effectively and at a lower cost by using futures transactions
instead of forward non-U.S. currency exchange contracts.
-35-
Special Risks Associated with Non-U.S. Currency Futures Contracts and
Related Options. Buyers and sellers of non-U.S. currency futures contacts are
subject to the same risks that apply to the use of futures generally. In
addition, there are risks associated with non-U.S. currency futures contracts
and their use as a hedging device similar to those associated with options on
currencies, as described above.
Options on non-U.S. currency futures contracts may involve certain
additional risks. The ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market. To reduce
this risk, the Fund will not purchase or write options on non-U.S. currency
futures contracts unless and until, in the opinion of a Sub-Adviser, the market
for such options has developed sufficiently that the risks in connection with
such options are not greater than the risks in connection with transactions in
the underlying non-U.S. currency futures contracts. Compared to the purchase or
sale of non-U.S. currency futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss, such as when there is no
movement in the price of the underlying currency or futures contract.
SWAP AGREEMENTS
Although it is not the Fund's current intention, for hedging purposes,
the Fund may enter into swap agreements. A swap is a financial instrument that
typically involves the exchange of cash flows between two parties on specified
dates (settlement dates), where the cash flows are based on agreed-upon prices,
rates, indices, etc. The nominal amount on which the cash flows are calculated
is called the notional amount. Swaps are individually negotiated and structured
to include exposure to a variety of different types of investments or market
factors, such as interest rates, non-U.S. currency rates, mortgage securities,
corporate borrowing rates, security prices, indexes or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the Fund and its share price. The performance of swap agreements
may be affected by a change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund. If a
swap agreement calls for payments by the Fund, the Fund must be prepared to make
such payments when due. In addition, if the counterparty's creditworthiness
declines, the value of a swap agreement would be likely to decline, potentially
resulting in losses.
Generally, swap agreements have fixed maturity dates that are agreed
upon by the parties to the swap. The agreement can be terminated before the
maturity date only under limited circumstances, such as default by one of the
parties or insolvency, among others, and can be transferred by a party only with
the prior written consent of the other party. The Fund may be able to eliminate
its exposure under a swap agreement either by assignment or by other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party. If the counterparty is unable to meet
its obligations under the contract, declares bankruptcy, defaults or becomes
insolvent, the Fund may not be able to recover the money it expected to receive
under the contract.
-36-
A swap agreement can be a form of leverage, which can magnify the
Fund's gains or losses. In order to reduce the risk associated with leveraging,
the Fund may cover its current obligations under swap agreements according to
guidelines established by the SEC. If the Fund enters into a swap agreement on a
net basis, it will be required to segregate assets with a daily value at least
equal to the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis,
it will be required to segregate assets with a value equal to the full amount of
the Fund's accrued obligations under the agreement.
Equity Swaps. In a typical equity swap, one party agrees to pay another
party the return on a security, security index or basket of securities in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to securities making up the index
of securities without actually purchasing those securities. Equity index swaps
involve not only the risk associated with investment in the securities
represented in the index, but also the risk that the performance of such
securities, including dividends, will not exceed the interest that the Fund will
be committed to pay under the swap.
NON-U.S. INVESTMENTS
The Fund may invest up to 100% of the Fund's Total Assets in the
securities and instruments of issuers located in jurisdictions other than the
United States and such securities may be denominated in currencies other than
the U.S. dollar.
Direct Non-U.S. Investment. The Fund will invest in the securities of
non-U.S. issuers. The Fund may purchase debt obligations issued or guaranteed by
governments (including states, provinces or municipalities) of countries other
than the United States, or by their agencies, authorities, or instrumentalities.
The Fund may also purchase debt obligations issued or guaranteed by
supranational entities organized or supported by several national governments,
such as the International Bank for Reconstruction and Development (the "World
Bank"), the Inter-American Development Bank, the Asian Development Bank, and the
European Investment Bank. In addition, the Fund may purchase debt obligations of
non-U.S. corporations or financial institutions, such as Yankee bonds
(dollar-denominated bonds sold in the United States by non-U.S. issuers),
Samurai bonds (yen-denominated bonds sold in Japan by non-Japanese issuers), and
Euro bonds (bonds not issued in the country (and possibly not the currency of
the country) of the issuer).
Indirect Non-U.S. Investment--Depositary Receipts. The Fund may invest
in non-U.S. securities by purchasing depositary receipts, including American
Depositary Receipts ("ADRs"). Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets. For purposes of the Fund's investment policies, ADRs are deemed to have
the same classification as the underlying securities they represent, except that
ADRs shall be treated as indirect non-U.S. investments. Thus, an ADR
representing ownership of common stock will be treated as common stock. ADRs do
not eliminate all the risks associated with directly investing in the securities
of non-U.S. issuers.
-37-
Depositary receipts may be available through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by a
depositary and the issuer of the security underlying the receipt. An unsponsored
facility may be established by a depositary without participation by the issuer
of the security underlying the receipt. There are greater risks associated with
holding unsponsored depositary receipts. For example, if the Fund holds an
unsponsored depositary receipt, it will generally bear all the costs of
establishing the unsponsored facility. In addition, the depositary of an
unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through to the holders of the receipts voting rights with respect to the
deposited securities.
Sovereign Debt Risk. The government entity that controls the repayment
of sovereign debt may not be able or willing to repay the principal and/or
interest when due in accordance with the terms of the debt. A governmental
entity's willingness or ability to repay principal and interest due in a timely
manner may be affected by, among other factors, its cash flow situation, the
extent of its non-U.S. reserves, the availability of sufficient non-U.S.
exchange on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the governmental entity's policy toward the
International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities also may depend on
expected disbursements from non-U.S. governments, multilateral agencies and
others to reduce principal and interest arrears on their debt. The commitment on
the part of these governments, agencies and others to make disbursements may be
conditioned on a governmental entity's implementation of economic reforms and/or
economic performance and the timely service of the debtor's obligations. Failure
to implement such reforms, achieve the levels of economic performance, repay
principal or pay interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity, which may further
impair the debtor's ability or willingness to service its debts in a timely
manner. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt (including the Fund) may be requested to participate
in the rescheduling of the debt and to extend further loans to governmental
entities. There is no bankruptcy proceeding by which sovereign debt on which
governmental entities have defaulted may be collected in whole or in part.
Investors should understand and consider carefully the risks involved
in investing in non-U.S. issuers. Transactions conducted outside the U.S. may
not be regulated as rigorously as in the U.S., may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, non-U.S. securities, currencies
and other instruments. The value of such positions also could be adversely
affected by (i) other complex non-U.S. political, legal, social and economic
factors, (ii) lesser availability than in the U.S. of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in non-U.S. markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., (v) lower trading volume and liquidity,
(vi) potential adverse effects of fluctuations in currency exchange rates or the
imposition of currency exchange controls, (vii) the possible seizure,
expropriation or nationalization of the company or its assets, (viii)
withholding and other non-U.S., and (ix) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. issuers to make payments of principal
and interest to investors located in the U.S., due to blockage of non-U.S.
currency exchanges or otherwise. These risks are more pronounced to the extent
-38-
the Fund invests a significant amount of its investments in issuers located in
one region.
Currency Risks. The Fund intends to invest up to 100% of the Core
Component in non-U.S. securities. Accordingly, the Fund will be subject to
currency risk, which is the risk that an increase in the U.S. dollar relative to
the non-U.S. currency will reduce returns or portfolio value. Generally, when
the U.S. dollar rises in value relative to a non-U.S. currency, the Fund's
investment in securities denominated in that currency will lose value because
its currency is worth fewer U.S. dollars. On the other hand, when the value of
the U.S. dollar falls relative to a non-U.S. currency, the Fund's investments
denominated in that currency will tend to increase in value because that
currency is worth more U.S. dollars. The exchange rates between the U.S. dollar
and non-U.S. currencies depend upon such factors as supply and demand in the
currency exchange markets, international balances of payments, governmental
intervention, speculation, and other economic and political conditions. Although
the Fund will seek to value its assets daily in U.S. dollars, the Fund may not
convert its holdings of non-U.S. currencies to U.S. dollars daily. The Fund may
incur conversion costs when it converts its holdings to another currency.
Non-U.S. exchange dealers may realize a profit on the difference between the
price at which the Fund buys and sells currencies. The Fund may engage in
non-U.S. currency exchange transactions in connection with its portfolio
investments. The Fund will conduct its non-U.S. currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the non-U.S.
currency exchange market or through forward contracts to purchase or sell
non-U.S. contracts.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a when-issued or delayed
delivery basis, making payment or taking delivery at a later date, normally
within 15-45 days of the trade date. On such transactions, the payment
obligation and the interest rate are fixed at the time the buyer enters into the
commitment. Beginning on the date the Fund enters into a commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund is required
under rules of the SEC to maintain in a separate account liquid assets,
consisting of cash, cash equivalents or liquid securities having a market value
at all times of at least equal to the amount of the commitment. Income generated
by any such assets which provide taxable income for U.S. federal income tax
purposes is includable in the taxable income of the Fund. The Fund may enter
into contracts to purchase securities on a forward basis (i.e., where settlement
will occur more than 60 days from the date of the transaction) only to the
extent that the Fund specifically collateralizes such obligations with a
security that is expected to be called or mature within sixty days before or
after the settlement date of the forward transaction. The commitment to purchase
securities on a when-issued, delayed delivery or forward basis may involve an
element of risk because at the time of delivery the market value may be less
than cost.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements.
A repurchase agreement is a contractual agreement whereby the seller of
securities agrees to repurchase the same security at a specified price on a
future date agreed upon by the parties. The agreed-upon repurchase price
-39-
determines the yield during the Fund's holding period. Repurchase agreements are
considered to be loans collateralized by the underlying security that is the
subject of the repurchase contract. Income generated from transactions in
repurchase agreements will be taxable. The Fund will only enter into repurchase
agreements with registered securities dealers or domestic banks that, in the
opinion of the Fund Advisers, present minimal credit risk. The risk to the Fund
is limited to the ability of the issuer to pay the agreed-upon repurchase price
on the delivery date; however, although the value of the underlying collateral
at the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there is a
risk of loss of both principal and interest. In the event of default, the
collateral may be sold, but the Fund may incur a loss if the value of the
collateral declines, and may incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. The
applicable Sub-Adviser will monitor the value of the collateral at the time the
transaction is entered into and at all times subsequent during the term of the
repurchase agreement in an effort to determine that such value always equals or
exceeds the agreed-upon repurchase price. In the event the value of the
collateral declines below the repurchase price, the Fund will demand additional
collateral from the issuer to increase the value of the collateral to at least
that of the repurchase price, including interest.
LENDING OF PORTFOLIO SECURITIES
Although it is not the Fund's current intention, the Fund may lend its
portfolio securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents maintained on a
current basis in an amount at least equal to the market value of the securities
loaned by the Fund. The Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned, and would
also receive an additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Fund may pay reasonable fees for services in
arranging these loans. The Fund would have the right to call the loan and obtain
the securities loaned at any time on notice of not more than five business days.
The Fund would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities, if, in the
Sub-Advisers' judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of bankruptcy or other
default of the borrower, the Fund could experience both delays in liquidating
the loan collateral or recovering the loaned securities and losses, including
(a) possible decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce its rights
thereto, (b) possible subnormal levels of income and lack of access to income
during this period, and (c) expenses of enforcing its rights.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading will be undertaken as determined by the Fund's
Sub-Advisers. There are no limits on the rate of portfolio turnover. A higher
portfolio turnover rate results in correspondingly greater brokerage commissions
and other transactional expenses that are borne by the Fund. High portfolio
turnover may also result in the realization of net short-term capital gains by
-40-
the Fund which, when distributed to shareholders, will be taxable as ordinary
income. See "Tax Matters" in the Fund's Prospectus and in this Statement of
Additional Information.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement and Sub-Advisory
Agreements, is the responsibility of the Board of Trustees. The Trustees set
broad policies for the Fund and choose the Fund's officers. The following is a
list of the Trustees and officers of the Fund and a statement of their present
positions and principal occupations during the past five years, with the Trustee
who is an "interested person" (as such term is defined in the 1940 Act) of the
Fund identified as such. The mailing address of the officers and Trustees,
unless otherwise noted, is 1001 Warrenville Road, Suite 300, Lisle, Illinois
60532.
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE COMPLEX OTHER
AND YEAR FIRST OVERSEEN BY TRUSTEESHIPS
POSITION AND ELECTED OR PRINCIPAL OCCUPATIONS TRUSTEE OR HELD BY
NAME, ADDRESS AND AGE OFFICES WITH FUND APPOINTED DURING PAST 5 YEARS OFFICER TRUSTEE
Trustee who is an
Interested Person of the
Fund
------------------------
James A. Bowen(1)* President, o One Year(2) President, First Trust 14 Portfolios None
D.O.B.: 09/55 Chairman of the Portfolios and First
Board, Chief o 2003 Trust Advisors; Chairman
Executive Officer of the Board of
and Trustee Directors, Bond Wave, LLC
Trustees who are not
Interested Persons of the
Fund
------------------------
Richard E. Erickson Trustee o One Year(2) Physician, 14 Portfolios None
327 Gundersen Drive Sportsmed/Wheaton
Carol Stream, IL 60188 o 2003 Orthopedics
D.O.B.: 04/51
Niel B. Nielson Trustee o One Year(2) President (2002 to 14 Portfolios Director of
1117 Mountain Terrace Present), Covenant Good News
Lookout Mountain, GA 30750 o 2003 College; Pastor (1997 to Publishers
D.O.B.: 03/54 2002), College Church in - Crossway
Wheaton Books; Covenant
Transport Inc.
Thomas R. Kadlec Trustee o One Year(2) Vice President, Chief 3 Portfolios None
26W110 Sandpiper Court Financial Officer (1990
Wheaton, IL 60188-4541 o 2003 to Present), ADM Investor
D.O.B.: 11/57 Services, Inc. (Futures
Commission Merchant);
Registered Representative
(2000 to Present),
Segerdahl & Company,
Inc., an NASD member
(Broker-Dealer)
David M. Oster Trustee o One Year(2) Trader (Self-Employed) 3 Portfolios None
3N550 Wildflower Lane (1987 to Present)
West Chicago, IL 60185 o 2003 (Options Trading and
D.O.B.: 03/64 Market Making)
-41-
Officers of the Fund
Mark R. Bradley Treasurer, o Indefinite Chief Financial Officer, 14 Portfolios N/A
D.O.B.: 11/57 Controller, Chief term Managing Director, First
Financial Officer Trust Portfolios and
and Chief o 2003 First Trust Advisors
Accounting Officer
Susan M. Brix Assistant Vice o Indefinite Representative, First 14 Portfolios N/A
D.O.B.: 01/60 President term Trust Portfolios;
Assistant Portfolio
o 2003 Manager, First Trust
Advisors
Robert F. Carey Vice President o Indefinite Senior Vice President, 14 Portfolios N/A
D.O.B.: 07/63 term First Trust Portfolios
and First Trust Advisors
o 2003
W. Scott Jardine Secretary o Indefinite General Counsel, First 14 Portfolios N/A
D.O.B.: 05/60 term Trust Portfolios and
First Trust Advisors
o 2003
Roger Testin Vice President o Indefinite Vice President (August 14 Portfolios N/A
D.O.B.: 06/66 term 2001-Present), First
Trust Advisors; Analyst
o 2003 (1998-2001), Dolan
Capital Management
--------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his
position of President of First Trust Advisors, investment adviser of the
Fund.
(2) Trustees are elected each year by shareholders and serve a one year term
until their successors are elected. Mr. Bowen's officer positions with
the Fund have an indefinite term.
The Board of Trustees of the Fund has four standing committees, the
Executive Committee (and Pricing and Dividend Committee), the Nominating and
Governance Committee, the Valuation Committee, and the Audit Committee. The
Executive Committee, which meets between Board meetings, is authorized to
exercise all powers of and to act in the place of the Board of Trustees to the
extent permitted by the Fund's Declaration of Trust and By-laws. The members of
the Executive Committee shall also serve as a special committee of the Board
known as the Pricing and Dividend Committee which is authorized to exercise all
of the powers and authority of the Board in respect of the issuance and sale,
through an underwritten public offering, of the Common Shares of the Fund and
all other such matters relating to such financing, including determining the
price at which such shares are to be sold and approval of the final terms of the
underwriting agreement, including approval of the members of the underwriting
syndicate. Such committee is also responsible for the declaration and setting of
dividends. Messrs. Kadlec and Bowen are members of the Executive Committee. The
Nominating and Governance Committee is responsible for appointing and nominating
non-interested persons to the Fund's Board of Trustees. Messrs. Erickson,
Nielson, Kadlec and Oster are members of the Nominating and Governance
Committee. If there is no vacancy on the Board of Trustees, the Board will not
actively seek recommendations from other parties, including Shareholders. When a
vacancy on the Board occurs and nominations are sought to fill such vacancy, the
Nominating and Governance Committee may seek nominations from those sources it
deems appropriate in its discretion, including Shareholders of the Fund. To
submit a recommendation for nomination as a candidate for a position on the
Board, Shareholders of the Fund shall mail such recommendation to W. Scott
Jardine at the Fund's address, 1001 Warrenville Road, Suite 300, Lisle, Illinois
-42-
60532. Such recommendation shall include the following information: (a) evidence
of Fund ownership of the person or entity recommending the candidate (if a Fund
Shareholder), (b) a full description of the proposed candidate's background,
including their education, experience, current employment, and date of birth,
(c) names and addresses of at least three professional references for the
candidate, (d) information as to whether the candidate is an "interested person"
in relation to such Fund, as such term is defined in the 1940 Act, as amended,
and such other information that may be considered to impair the candidate's
independence and (e) any other information that may be helpful to the Committee
in evaluating the candidate. If a recommendation is received with satisfactorily
completed information regarding a candidate during a time when a vacancy exists
on the Board or during such other time as the Nominating and Governance
Committee is accepting recommendations, the recommendation will be forwarded to
the Chair of the Nominating and Governance Committee and the outside counsel to
the independent trustees. Recommendations received at any other time will be
kept on file until such time as the Nominating and Governance Committee is
accepting recommendations, at which point they may be considered for nomination.
The Valuation Committee is responsible for the oversight of the pricing
procedures of the Fund. Messrs. Erickson, Kadlec and Oster are members of the
Valuation Committee. The Audit Committee is responsible for overseeing the
Fund's accounting and financial reporting process, the system of internal
controls, audit process and evaluating and appointing independent auditors
(subject also to Board approval). Messrs. Erickson, Nielson, Kadlec and Oster
serve on the Audit Committee. Because the Fund is newly organized, none of the
committees have met during the Fund's last fiscal year.
Messrs. Erickson, Nielson, Kadlec and Bowen are also trustees of First
Defined Portfolio Fund, LLC, an open-end fund advised by First Trust Advisors
with 11 portfolios. Messrs. Bowen, Erickson, Nielson, Kadlec and Oster are also
trustees of the First Trust Value Line(R) 100 Fund, First Trust Value Line(R)
Dividend Fund and First Trust/Four Corners Senior Floating Rate Income Fund,
closed-end funds advised by First Trust Advisors. None of the Trustees who are
not "interested persons" of the Fund, nor any of their immediate family members,
has ever been a director, officer or employee of, or consultant to, First Trust
Advisors, First Trust Portfolios or their affiliates. In addition, Mr. Bowen and
the other officers of the Fund, hold the same positions with the First Defined
Portfolio Fund, LLC, First Trust Value Line(R) 100 Fund and the First Trust
Value Line(R) Dividend Fund as they hold with the Fund.
The officers and Trustee who is an "interested person" as designated
above serve without any compensation from the Fund. Trustees who are not
interested persons of the Fund ("Independent Trustees") receive a $10,000 annual
retainer for serving as trustee of the Fund, $1,000 per meeting fee for their
attendance (in-person or through electronic means), $500 for attendance
in-person or through electronic means at a committee meeting and are reimbursed
for expenses incurred as a result of attendance at meetings of the Trustees. The
following table sets forth estimated compensation to be paid by the Fund
projected during the Fund's first full fiscal year to each of the Independent
Trustees and estimated total compensation to be paid to each of the Independent
Trustees by the First Trust Fund Complex for a full calendar year. The Fund has
no retirement or pension plans.
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ESTIMATED TOTAL
COMPENSATION
ESTIMATED AGGREGATE FROM FUND AND
NAME OF TRUSTEE COMPENSATION FROM FUND (1) FUND COMPLEX(2)
Richard E. Erickson $13,000 $73,500
Thomas R. Kadlec $13,000 $73,500
Niel B. Nielson $13,000 $73,500
David M. Oster $13,000 $52,000
--------------------
(1) The compensation estimated to be paid by the Fund to the Independent
Trustees for the first full fiscal year for services to the Fund.
(2) The total estimated compensation to be paid to Messrs. Erickson, Kadlec
and Nielson, Independent Trustees, from the Fund and Fund Complex for a
full calendar year is based on estimated compensation to be paid to these
Trustees for a full calendar year for services as Trustees to the First
Defined Portfolio Fund, LLC, an open-end fund (with 11 portfolios)
advised by First Trust Advisors plus estimated compensation to be paid to
these Trustees by the First Value Line(R) 100 Fund, the First Trust Value
Line(R) Dividend Fund, the First Trust/Four Corners Senior Floating Rate
Income Fund and the Fund for a full calendar year. Mr. Oster is currently
not a Trustee of the First Defined Portfolio Fund, LLC. Accordingly, his
estimated total compensation is based on the estimated compensation to be
paid by the First Trust Value Line(R) 100 Fund, the First Trust Value
Line(R) Dividend Fund, the First Trust/Four Corners Senior Floating Rate
Income Fund and the Fund for a full calendar year.
The Fund has no employees. Its officers are compensated by First Trust
Advisors. The Shareholders of the Fund will elect trustees at the next annual
meeting of shareholders.
The following table sets forth the dollar range of equity securities
beneficially owned by the Trustees in the Fund and in other funds in the First
Trust Fund Complex as of December 31, 2003:
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN
DOLLAR RANGE OF ALL REGISTERED INVESTMENT COMPANIES
EQUITY SECURITIES OVERSEEN BY TRUSTEE IN
TRUSTEE IN THE FUND FIRST TRUST FUND COMPLEX
Mr. Bowen None $10,001 - $ 50,000
Mr. Erickson None $ 1 - $ 10,000
Mr. Kadlec None $50,001 - $100,000
Mr. Nielson None $ 1 - $ 10,000
Mr. Oster None $10,001 - $ 50,000
As of December 31, 2003, the Trustees of the Fund who are not
"interested persons" of the Fund and immediate family members do not own
beneficially or of record any class of securities of an investment adviser or
principal underwriter of the Fund or any person directly or indirectly
controlling, controlled by, or under common control with an investment adviser
or principal underwriter of the Fund.
As of March 22, 2004, First Trust Portfolios L.P. owned both
beneficially and of record all of the Common Shares of the Fund.
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INVESTMENT ADVISER
First Trust Advisors L.P., 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532, is the investment adviser to the Fund. As investment adviser,
First Trust Advisors provides the Fund with professional investment supervision
and management and permits any of its officers or employees to serve without
compensation as Trustees or officers of the Fund if elected to such positions.
First Trust Advisors supervises the activities of the Fund's Sub-Advisers and
provides the Fund with certain other services necessary with the management of
the Portfolio.
First Trust Advisors is an Illinois limited partnership formed in 1991
and an investment adviser registered with the SEC under the Investment Advisers
Act of 1940. First Trust Advisors is a limited partnership with one limited
partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one general
partner, The Charger Corporation. Grace Partners is a limited partnership with
one general partner, The Charger Corporation, and a number of limited partners.
Grace Partners' and The Charger Corporation's primary business is investment
advisory and broker/dealer services through their interests. The Charger
Corporation is an Illinois corporation controlled by the Robert Donald Van
Kampen family. First Trust Advisors is controlled by Grace Partners and The
Charger Corporation.
First Trust Advisors is also adviser or subadviser to approximately 8
mutual funds and three closed-end funds and is the portfolio supervisor of
certain unit investment trusts sponsored by First Trust Portfolios. First Trust
Portfolios specializes in the underwriting, trading and distribution of unit
investment trusts and other securities. First Trust Portfolios, an Illinois
limited partnership formed in 1991, acts as sponsor for successive series of The
First Trust Combined Series, FT Series (formerly known as The First Trust
Special Situations Trust), the First Trust Insured Corporate Trust, The First
Trust of Insured Municipal Bonds and The First Trust GNMA. First Trust
Portfolios introduced the first insured unit investment trust in 1974 and to
date, more than $48 billion in First Trust Portfolios unit investment trusts
have been deposited.
First Trust Advisors acts as investment adviser to the Fund pursuant to
an Investment Management Agreement. The Investment Management Agreement
continues in effect for the Fund from year to year after its initial two-year
term so long as its continuation is approved at least annually by the Trustees
including a majority of the Trustees who are not parties to such agreement or
interested persons of any such party except in their capacity as Trustees of the
Fund, or the vote of a majority of the outstanding voting securities of the
Fund. It may be terminated at any time without the payment of any penalty upon
60 days' written notice by either party, or by a majority vote of the
outstanding voting securities of the Fund (accompanied by appropriate notice),
and will terminate automatically upon assignment. The Investment Management
Agreement may also be terminated, at any time, without payment of any penalty,
by the Board or by vote of a majority of the outstanding voting securities of
the Fund, in the event that it shall have been established by a court of
competent jurisdiction that the Adviser, or any officer or director of the
Adviser, has taken any action which results in a breach of the covenants of the
Adviser set forth in the Investment Management Agreement. The Investment
Management Agreement provides that First Trust Advisors shall not be liable for
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any loss sustained by reason of the purchase, sale or retention of any security,
whether or not such purchase, sale or retention shall have been based upon the
investigation and research made by any other individual, firm or corporation, if
such recommendation shall have been selected with due care and in good faith,
except loss resulting from willful misfeasance, bad faith or gross negligence on
the part of the Adviser in performance of its obligations and duties, or by
reason of its reckless disregard of its obligations and duties under the
Investment Management Agreement. As compensation for its services, the Fund pays
First Trust Advisors a fee as described in the Prospectus. Provisions regarding
expense limitations are described in the Prospectus. See "Summary of Fund
Expenses" and "Management of the Fund -- Investment Management Agreement and
Other Agreements with the Adviser and Sub-Advisers" in the Fund's Prospectus.
In addition to the fee of First Trust Advisors and the Sub-Advisers,
the Fund pays all other costs and expenses of its operations, including
compensation of its Trustees (other than those affiliated with First Trust
Advisors), custodian, transfer agency, administrative, accounting and dividend
disbursing expenses, legal fees, sub-licensing fee, expenses of independent
auditors, expenses of repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any. All fees and expenses are accrued
daily and deducted before payment of dividends to investors.
On February 19, 2004, the Trustees of the Fund met with members of the
Fund Advisers to consider, among other things, the possible approval of the
Investment Management Agreement between the Fund and First Trust Advisors and
the Sub-Advisory Agreements between the Adviser, the Sub-Advisers and the Fund.
Prior to the meeting, the Independent Trustees received a memorandum describing
their legal obligations and duties relating to the approval of an investment
advisory contract, including the duties of the Trustees under the 1940 Act and
the general principles of state law; the requirements of the 1940 Act in such
matters; the fiduciary duty of the Adviser; the standards used in determining
whether boards of trustees have fulfilled their duties; and various factors to
be considered by the Trustees in voting on whether to approve advisory
agreements. In evaluating the Investment Management Agreement and the
Sub-Advisory Agreements, the Independent Trustees met with their legal counsel
privately (outside the presence of the interested Trustee and any officers of
the Fund Advisers) to discuss their responsibilities and obligations with
respect to the Investment Management Agreement and Sub-Advisory Agreements and
to review the matters contained in the above-referenced memorandum.
In evaluating the Investment Management Agreement and the Sub-Advisory
Agreements, the Board reviewed the Independent Trustees' role in approving the
advisory contracts under the 1940 Act. In evaluating the Investment Management
Agreement and each Sub-Advisory Agreement, the Trustees considered narrative
information concerning, among other things, the nature of the services to be
provided by the respective adviser or sub-adviser, the fees to be paid to the
respective adviser and each sub-adviser and the experience, resources and
staffing of the respective adviser and sub-adviser. More specifically, as First
Trust Advisors already serves as investment adviser on various funds in the
First Trust complex, the Trustees are already well aware of and considered its
personnel, staffing, experience, investment philosophy and fees paid by other
clients. In evaluating the Investment Management Agreement, the Trustees
considered the supervisory services to be provided by First Trust Advisors, as
-46-
the investment adviser, the resources available to fulfill such function and the
fees to be paid to First Trust Advisors (as well as fees paid by other funds).
In evaluating the Sub-Advisory Agreement with MIFA, the Trustees met
with the relevant investment personnel from MIFA and considered information
relating to the education, experience and number of investment professionals and
other personnel who would provide services under the applicable agreement, its
investment philosophy and process. The Trustees received and reviewed written
materials regarding MIFA's organizational structure, MIFA's and its affiliates
experience with the infrastructure asset class, and resources available to MIFA.
The Trustees considered the nature of the services provided by MIFA as well as
the fee to be paid, including, in particular, a supplemental portfolio
management fee to be paid on fund assets invested in certain unlisted
securities. In this regard, to the extent MIFA invests a portion of the Core
Component in unlisted securities (i.e., Core Unlisted Instruments), MIFA is
entitled to receive a supplemental fee of .60% of that portion of the Fund's
Total Assets in Core Unlisted Instruments; provided, however, that in no event
will the Core Unlisted portion be deemed to exceed, for purposes of calculated
this supplemental fee, 25% of the Core Component. In evaluating this
supplemental fee, the Trustees considered narrative information concerning the
additional costs associated with transactions in these securities, the increased
complexity in managing these assets as well as fees MIFA or its affiliates
receive from other clients (including funds) in managing these types of assets.
In addition, under the fee arrangement with MIFA, if Total Assets are more than
$250 million, MIFA would receive an additional fee at the annual rate of .05%
multiplied by that portion of the Total Assets over $250 million. In evaluating
this arrangement, the Trustees considered, among other things, the facts that
the overall advisory fee paid by the Fund would not increase (as the fee to
First Trust Advisors would correspondingly decrease), the allocation of the fees
between the Adviser and MIFA was the product of arms length negotiations between
the parties, the nature of services provided by First Trust Advisors compared to
MIFA (and corresponding responsibilities associated with increased assets) and
the level of the advisory and sub-advisory fees.
In evaluating the Sub-Advisory Agreement with Four Corners, the
Trustees similarly considered the nature of services to be provided and the fees
to be paid. As Four Corners already served as a sub-adviser to a fund in the
First Trust complex, the Trustees were familiar with and considered its
experience and skill with the senior loan asset class, its personnel, resources,
investment personnel, investment philosophy and process and fees received for
similar services. The Trustees also considered the level of complexity required
in managing this asset class. In considering the overall advisory arrangement,
the Trustees also received and reviewed written information regarding advisory
fees paid by other analogous closed-end funds and their respective expense
ratios. In light of the foregoing, the Trustees concluded that the arrangements
with the Adviser and each Sub-Adviser, including the level of fees, were
reasonable. The Trustees did not identify any single factor discussed above as
all-important or controlling.
The Board of Trustees, including a majority of the Independent Trustees
of the Fund, and the sole shareholder of the Fund, each approved the Investment
Management Agreement and each Sub-Advisory Agreement. The Trustees further
ratified the Investment Management Agreement and each Sub-Advisory Agreement at
a meeting held on March 8, 2004. The Independent Trustees have determined that
the terms of the Fund's Investment Management Agreement and the Sub-Advisory
-47-
Agreements are fair and reasonable and that the agreements are in the Fund's
best interests. The Independent Trustees believe that the Investment Management
Agreement and the Sub-Advisory Agreements will enable the Fund to obtain high
quality investment management services at a cost that they deem appropriate,
reasonable, and in the best interests of the Fund and its shareholders.
CODE OF ETHICS
The Fund, the Adviser and each Sub-Adviser have adopted codes of ethics
under Rule 17j-1 under the 1940 Act. These codes permit personnel subject to the
code to invest in securities, including securities that may be purchased or held
by the Fund. These codes can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at (202) 942-8090. The codes
of ethics are available on the EDGAR Database on the SEC's web site
(http://www.sec.gov), and copies of these code may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the SEC Public Reference Section, Washington,
D.C. 20549-0102.
PROXY VOTING PROCEDURES
The Fund has adopted a proxy voting policy that seeks to ensure that
proxies for securities held by the Fund are voted consistently and solely in the
best economic interests of the Fund.
The Board of Trustees is responsible for oversight of the Fund's proxy
voting process. The Board has delegated day-to-day proxy voting responsibility
to MIFA, with respect to the Core Component, and to the Adviser, with respect to
the Senior Loan Component. MIFA, as to the Core Component, and the Adviser, as
to the Senior Loan Component, have engaged the services of Institutional
Shareholder Services, Inc. ("ISS") to make recommendations to MIFA or the
Adviser, as the case may be, on the voting of proxies relating to securities
held by the Fund. ISS provides voting recommendations based upon established
guidelines and practices. MIFA and the Adviser review ISS recommendations and
frequently follows the ISS recommendations. However, on selected issues, MIFA or
the Adviser may not vote in accordance with the ISS recommendations when it
believes that specific ISS recommendations are not in the best economic interest
of the Fund. If MIFA or the Adviser manages the assets of a company or its
pension plan and any of MIFA's or the Adviser's clients hold any securities in
that company, MIFA or the Adviser will vote proxies relating to that company's
securities in accordance with the ISS recommendations to avoid any conflict of
interest. If a client requests MIFA or the Adviser to follow specific voting
guidelines or additional guidelines, MIFA or the Adviser will review the request
and inform the client only if MIFA or the Adviser is not able to follow the
client's request.
MIFA and the Adviser have each also adopted the ISS Proxy Voting
Guidelines. While these guidelines are not intended to be all-inclusive, they do
provide guidance on MIFA's and the Adviser's general voting policies.
-48-
When required by applicable regulations, information regarding how the
Fund voted proxies relating to portfolio securities will be available without
charge by calling (800) 988-5891 or by accessing the SEC's website at
http://www.sec.gov.
SUB-ADVISERS
Macquarie Infrastructure Fund Adviser, LLC, 600 5th Avenue, 21st Floor,
New York, New York 10020, serves as the Fund's investment sub-adviser with
respect to the Core Component of the Fund. In this capacity, MIFA is responsible
for the selection and on-going monitoring of the Core Infrastructure Securities
in the Fund's investment portfolio.
MIFA is a Delaware limited liability company founded in January 2004,
and is registered under the Investment Advisers Act of 1940. MIMU - Macquarie
Infrastructure Management (USA) Inc. - is the sole member of MIFA. MIMU is
wholly-owned by Macquarie Bank Limited ("MBL") through a subsidiary. MIFA has
not previously served as an investment adviser or sub-adviser.
MBL together with its associated entities worldwide ("Macquarie Group")
is a diversified international provider of financial and investment banking
services, with over 5,700 staff in 21 countries. The Macquarie Group's
Infrastructure and Specialized Funds Division ("Macquarie's ISF Division")
manages, directly or indirectly, approximately $11 billion of Infrastructure
Assets (based on the most recent audited gross assets of each fund managed by
Macquarie's ISF Division as reflected in MBL's September 30, 2003 semi-annual
public filings). As of September 30, 2003, the Macquarie Group had over $38
billion in assets under management. Twelve investment vehicles managed by the
Macquarie Group are listed on the Australian Stock Exchange, and have a total
capitalization of approximately $12.2 billion as of December 31, 2003.
Four Corners Capital Management, LLC acts as investment sub-adviser to
the Fund with respect to the Senior Loan Component of the Fund. Its address is
515 South Flower Street, Suite 4310, Los Angeles, California 90071. Four Corners
is 66.67% owned by Macquarie Group through a subsidiary and 33.33% by its senior
management.
For more complete information about the Sub-Advisers and additional
information regarding the management services performed by the Sub-Advisers, see
"Management of the Fund" in the Fund's Prospectus.
The Sub-Advisers, subject to the Trustees' and the Adviser's
supervision, provide the Fund with discretionary investment services.
Specifically, the Sub-Advisers are responsible for managing the investments of
the Fund in accordance with the Fund's investment objective, policies, and
restrictions as provided in the Prospectus and this Statement of Additional
Information, as may be subsequently changed by the Board of Trustees and
publicly described. The Sub-Advisers further agree to conform to all applicable
laws and regulations of the SEC in all material respects and to conduct its
activities under the respective Sub-Advisory Agreement in accordance with
applicable regulations of any governmental authority pertaining to its
investment advisory services. In the performance of their duties, the
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Sub-Advisers will satisfy their fiduciary duties to the Fund, will monitor the
Fund's investments in the applicable portion of the Fund's assets, and will
comply with the provisions of the Fund's Declaration of Trust and By-laws, as
amended from time to time, and the stated investment objective, policies and
restrictions of the Fund. Each Sub-Adviser is responsible for effecting all
security transactions for the applicable portion of the Fund's assets. The
Sub-Advisory Agreements provide that each Sub-Adviser shall not be liable for
any loss suffered by the Fund (including, without limitation, by reason of the
purchase, sale or retention of any security) in connection with the performance
of the Sub-Adviser's duties under the Sub-Advisory Agreement to which it is a
party, except for a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Sub-Adviser in performance of its duties under
such Sub-Advisory Agreement, or by reason of its reckless disregard of its
obligations and duties under such Sub-Advisory Agreement.
Pursuant to the Sub-Advisory Agreements between the Adviser, the
Sub-Advisers and the Fund, the Fund has agreed to pay for the services and
facilities provided by the Sub-Advisers through sub-advisory fees, as set forth
in the Fund's Prospectus.
Each Sub-Advisory Agreement may be terminated without the payment of
any penalty by First Trust Advisors, the Fund's Board of Trustees, or a majority
of the outstanding voting securities of the Fund (as defined in the 1940 Act),
upon 60 days' written notice to the Sub-Adviser. Pursuant to a separate
agreement between the Sub-Advisers and First Trust Advisors, First Trust
Advisors has agreed that if First Trust Advisors or the Fund terminates or fails
to renew the Sub-Advisory Agreement with a Sub-Adviser other than for cause,
First Trust Advisors will resign and will not agree to be reinstated as
investment adviser to the Fund, which resignation shall be effective no later
than 60 days following the effective date of the Sub-Adviser's termination.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The Sub-Advisory Agreements have been approved by a
majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, the applicable
Sub-Adviser is responsible for decisions to buy and sell securities for the
portion of the Fund under its management and for the placement of the applicable
part of the Fund's securities business, the negotiation of the commissions to be
paid on brokered transactions, the prices for principal trades in securities,
and the allocation of portfolio brokerage and principal business. It is the
policy of the Sub-Advisers to seek the best execution at the best security price
available with respect to each transaction, and with respect to brokered
transactions in light of the overall quality of brokerage and research services
provided to the Sub-Advisers and their advisees. The best price to the Fund
means the best net price without regard to the mix between purchase or sale
price and commission, if any. Purchases may be made from underwriters, dealers,
and, on occasion, the issuers. Commissions will be paid on the Fund's futures
and options transactions, if any. The purchase price of portfolio securities
purchased from an underwriter or dealer may include underwriting commissions and
dealer spreads. The Fund may pay mark-ups on principal transactions. In
selecting broker/dealers and in negotiating commissions, the Sub-Advisers
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consider, among other things, the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. The
selection of a broker-dealer may take into account the sale of products
sponsored or advised by the Sub-Advisers and/or their affiliates. If approved by
the Fund's Board of Trustees, the Sub-Advisers may select an affiliated
broker-dealer to effect transactions in the Fund, so long as such transactions
are consistent with Rule 17e-1 under the 1940 Act.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction.
Brokerage and research services include (a) furnishing advice as to the value of
securities, the advisability of investing, purchasing or selling securities, and
the availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In light of the above, in selecting brokers, the Sub-Advisers may
consider investment and market information and other research, such as economic,
securities and performance measurement research, provided by such brokers, and
the quality and reliability of brokerage services, including execution
capability, performance, and financial responsibility. Accordingly, the
commissions charged by any such broker may be greater than the amount another
firm might charge if the Sub-Advisers determine in good faith that the amount of
such commissions is reasonable in relation to the value of the research
information and brokerage services provided by such broker to the Sub-Advisers
or the Fund. The Sub-Advisers believe that the research information received in
this manner provides the Fund with benefits by supplementing the research
otherwise available to the Fund. The investment advisory fees paid by the Fund
to the Adviser under the Investment Management Agreement and to the Sub-Advisers
under the applicable Sub-Advisory Agreements are not reduced as a result of
receipt by the Adviser or the Sub-Advisers of research services.
The Adviser and Sub-Advisers may place portfolio transactions for other
advisory accounts advised by them, and research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Sub-Advisers in servicing all of their accounts; not all of such services may be
used by the Sub-Advisers in connection with the Fund. The Sub-Advisers believe
it is not possible to measure separately the benefits from research services to
each of the accounts (including the Fund) they advise. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of those charged by another broker paid by each account
for brokerage and research services will vary. However, the Sub-Advisers believe
such costs to the Fund will not be disproportionate to the benefits received by
the Fund on a continuing basis. The Sub-Advisers seek to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations between the Fund and other
-51-
advisory accounts, the main factors considered by the Sub-Advisers are the
investment objective, the relative size of portfolio holding of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held, and the opinions of the persons
responsible for recommending investments to the Fund and such other accounts and
funds.
DISTRIBUTIONS
Net investment income of the Fund consists of all income (other than
net capital gain) less all expenses of the Fund. Expenses are accrued each day.
As described in the Fund's Prospectus, the Fund's present policy, which may be
changed at any time by the Fund's Board of Trustees, is to distribute at least
quarterly all, or substantially all, of its net investment income as dividends
to shareholders. However, a portion of the dividends received by the Fund from
Infrastructure Senior Loans, debt instruments and certain non-U.S. securities
may be considered capital gain distributions and/or return of capital rather
than dividends. Generally, distributions received by the Fund from
Infrastructure Senior Loans, debt instruments and certain non-U.S. securities
will not be considered "qualified dividend income" which is eligible for the
reduced tax rate applicable to "qualified dividend income" and therefore it is
possible that, depending upon the composition of the assets in the Fund's
portfolio, a significant portion of the Fund's distributions will not constitute
qualifying dividends eligible for the reduced tax rate. In addition, at least
annually, the Fund also intends to distribute all, or substantially all, of any
net capital gains to shareholders as capital gains dividends. The Board of
Trustees may at its discretion in the future change the Fund's dividend policy.
Unless a Shareholder elects to receive cash distributions, dividends of net
investment income and capital gains dividends will automatically be reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
Shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), NAV, call protection, price, dividend stability,
relative demand for and supply of such shares in the market, general market and
economic conditions and other factors. Because shares of a closed-end investment
company may frequently trade at prices lower than NAV, the Trustees, in
consultation with the Fund Advisers and any corporate finance services and
consulting agent that the Adviser may retain from time to time, may review
possible actions to reduce any such discount. Actions may include the repurchase
of such shares in the open market or in private transactions, the making of a
tender offer for such shares, or the conversion of the Fund to an open-end
investment company. There can be no assurance, however, that the Trustees will
decide to take any of these actions, or that share repurchases or tender offers,
if undertaken, will reduce a market discount. After any consideration of
potential actions to seek to reduce any significant market discount, the
Trustees may, subject to their fiduciary obligations and compliance with
applicable state and federal laws, authorize the commencement of a
share-repurchase program or tender offer. The size and timing of any such share
repurchase program or tender offer will be determined by the Trustees in light
-52-
of the market discount of the Common Shares, trading volume of the Common
Shares, information presented to the Trustees regarding the potential impact of
any such share repurchase program or tender offer, and general market and
economic conditions. There can be no assurance that the Fund will in fact effect
repurchases of or tender offers for any of its Common Shares. Before deciding
whether to take any action if the Fund's Common Shares trade below NAV, the
Trustees would consider all relevant factors, including the extent and duration
of the discount, the liquidity of the Fund's portfolio, the impact of any action
that might be taken on the Fund or its Shareholders and market considerations.
Based on these considerations, even if the Fund's shares should trade at a
discount, the Trustees may determine that, in the interest of the Fund and its
Shareholders, no action should be taken.
Further, the staff of the SEC currently requires that any tender offer
made by a closed-end investment company for its shares must be at a price equal
to the NAV of such shares on the close of business on the last day of the tender
offer. Any service fees incurred in connection with any tender offer made by the
Fund will be borne by the Fund and will not reduce the stated consideration to
be paid to tendering Shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will increase the Fund's
expenses and reduce the Fund's net income. Any share repurchase, tender offer or
borrowing that might be approved by the Trustees would have to comply with the
Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and
regulations thereunder.
Although the decision to take action in response to a discount from NAV
will be made by the Trustees at the time they consider such issue, it is the
Trustees' present policy, which may be changed by the Trustees, not to authorize
repurchases of Common Shares or a tender offer for such shares if (1) such
transactions, if consummated, would (a) result in the delisting of the Common
Shares from the New York Stock Exchange, or (b) impair status as a regulated
investment company under the Code (which would make the Fund a taxable entity,
causing the Fund's income to be taxed at the corporate level in addition to the
taxation of shareholders who receive dividends from the Fund) or as a registered
closed-end investment company under the 1940 Act; (2) the Fund would not be able
to liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objective and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the New York Stock Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by United States or state banks in which the Fund invests, (d) material
limitation affecting the Fund or the issuers of its portfolio securities by
Federal or state authorities on the extension of credit by lending institutions
or on the exchange of non-U.S. currency, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Fund or its
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shareholders if shares were repurchased. The Trustees may in the future modify
these conditions in light of experience with respect to the Fund.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's shares outstanding and entitled to
vote; provided, however, that unless otherwise provided by law, if there are
preferred shares outstanding, the affirmative vote of two-thirds of the
preferred shares voting as a separate class shall be required; provided,
however, that such votes shall be by the affirmative vote of the majority of the
outstanding voting securities, as defined in the 1940 Act, if the action in
question was previously approved by the affirmative vote of two-thirds of the
Trustees. Such affirmative vote or consent shall be in addition to the vote or
consent of the holders of the shares otherwise required by law or by the terms
of any class or series of preferred stock, whether now or hereafter authorized,
or any agreement between the Fund and any national securities exchange. See the
Prospectus under "Closed-End Fund Structure" for a discussion of voting
requirements applicable to conversion of the Fund to an open-end company. If the
Fund converted to an open-end company, the Fund's Common Shares would no longer
be listed on the New York Stock Exchange. Shareholders of an open-end investment
company may require the company to redeem their shares on any business day
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less such redemption charge, if any, as might be in
effect at the time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet redemptions, open-end
companies typically engage in a continuous offering of their shares. Open-end
companies are thus subject to periodic asset in-flows and out-flows that can
complicate portfolio management. The Trustees may at any time propose conversion
of the Fund to an open-end company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below NAV will
result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tenders at or below
NAV will result in the Fund's shares trading at a price equal to their NAV.
Nevertheless, the fact that the Fund's shares may be the subject of repurchase
or tender offers from time to time may reduce any spread between market price
and NAV that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's Total Assets which would likely have the effect of increasing the
Fund's expense ratio.
NET ASSET VALUE
The NAV of the Common Shares of the Fund will be computed based upon
the value of the Fund's portfolio securities and other assets. The NAV will be
determined as of the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m. eastern time) on each day the New York Stock Exchange is
open for trading. U.S. debt securities and non-U.S. securities will normally be
priced using data reflecting the earlier closing of the principal markets for
those securities. The Fund calculates NAV per Common Share by subtracting the
Fund's liabilities (including accrued expenses, dividends payable and any
borrowings of the Fund) and the liquidation value of any outstanding Preferred
Shares from the Fund's Total Assets (the value of the securities and other
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investments the Fund holds plus cash or other assets, including interest accrued
but not yet received) and dividing the result by the total number of Common
Shares outstanding.
The assets in the Fund's portfolio will be valued daily in accordance
with Valuation Procedures adopted by the Trustees. The Adviser anticipates that
a majority of the Fund's assets will be valued using market information supplied
by third parties. In the event that market quotations are not readily available,
the pricing service does not provide a valuation for a particular asset (as is
the case for Unlisted Investments), or the valuations are deemed unreliable, or
if events occurring after the close of the principal markets for particular
securities (e.g., U.S. debt and non-U.S. securities), but before the Fund values
its assets, would materially affect NAV, the Fund may use a fair value method in
good faith to value the Fund's securities and investments. The use of fair value
pricing by the Fund will be governed by Valuation Procedures established by the
Trustees, and in accordance with the provisions of the 1940 Act.
For purposes of determining the NAV of the Fund, readily marketable
portfolio securities listed on any U.S. exchange other than the NASDAQ National
Market are valued, except as indicated below, at the last sale price on the
business day as of which such value is being determined. If there has been no
sale on such day, the securities are valued at the mean of the most recent bid
and asked prices on such day. Securities admitted to trade on the NASDAQ
National Market are valued at the NASDAQ Official Closing Price as determined by
NASDAQ. Portfolio securities traded on more than one securities exchange are
valued at the last sale price on the business day as of which such value is
being determined at the close of the exchange representing the principal market
for such securities.
U.S. Equity securities traded in the over-the-counter market, but
excluding securities admitted to trading on the NASDAQ National Market, are
valued at the closing bid prices. Fixed income securities with a remaining
maturity of 60 days or more will be valued by the Fund using a pricing service.
When price quotes are not available, fair market value is based on prices of
comparable securities. Fixed income securities maturing within 60 days are
valued by the Fund on an amortized cost basis. Non-U.S. securities, currencies
and other assets denominated in non-U.S. currencies are translated into U.S.
dollars at the exchange rate of such currencies against the U.S. dollar as
provided by a pricing service. All assets denominated in non-U.S. currencies
will be converted into U.S. dollars at the exchange rates in effect at the time
of valuation.
Any derivative transaction that the Fund enters into may, depending on
the applicable market environment, have a positive or negative value for
purposes of calculating NAV. Forward non-U.S. currency exchange contracts which
are traded in the United States on regulated exchanges are valued by calculating
the mean between the last bid and asked quotation supplied to a pricing service
by certain independent dealers in such contracts. Any option transaction that
the Fund enters into may, depending on the applicable market environment, have
no value or a positive value. Exchange traded options and futures contracts are
valued at the closing price in the market where such contracts are principally
traded.
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Unlisted, Restricted and Illiquid Securities. The Infrastructure Senior
Loans in which the Fund may invest are not listed on any securities exchange or
board of trade. Senior loans such as the Infrastructure Senior Loans are
typically bought and sold by institutional investors in individually negotiated
private transactions that function in many respects like an over-the-counter
secondary market, although typically no formal market-makers exist. Some senior
loans have few or no trades, or trade infrequently, and information regarding a
specific senior loan may not be widely available or may be incomplete.
In addition, the Fund may invest up to 25% of the Core Component in
unlisted securities and other instruments of Infrastructure Issuers. Such
securities and instruments are generally not able to be publicly traded. In the
U.S., such securities and instruments are generally unregistered for securities
law purposes and can generally be resold only in privately negotiated
transactions with a limited number of purchasers or in a public offering
registered under the Securities Act. Outside the U.S., similar restrictions may
apply.
Accordingly, determinations of the market value of senior loans and
other illiquid securities may be based on infrequent and dated information.
Because there is less reliable, objective data available, elements of judgment
may play a greater role in valuation of Infrastructure Senior Loans and other
illiquid securities held by the Fund than for other types of assets held by the
Fund. For further information, see "Risks--Illiquid and Unlisted Securities
Risk" and "Risks--Senior Loan Risk" in the Fund's Prospectus.
Typically senior loans and other illiquid securities are valued using
information provided by an independent third party pricing service. If the
pricing service cannot or does not provide a valuation for a particular senior
loan (which is the case for most, if not all, unlisted investments) or such
valuation is deemed unreliable, the Fund may value such senior loan at a fair
value as determined in good faith under procedures established by the Trustees,
and in accordance with the provisions of the 1940 Act.
Non-U.S. Listed Securities. Non-U.S. exchange-listed securities will
generally be valued using information provided by an independent third party
pricing service. If the pricing service cannot or does not provide a valuation
for a particular Non-U.S. listed security or such valuation is deemed
unreliable, the Board or its designee may value such security at a fair value as
determined in good faith under procedures established by the Trustees, and in
accordance with the provisions of the 1940 Act.
Fair Value. When applicable, fair value is determined by the Trustees
or a committee of the Board or a designee of the Board. In fair valuing the
Fund's investments, consideration is given to several factors, which may
include, among others, the following:
o the projected cash flows for the issuer or borrower;
o the fundamental business data relating to the issuer or borrower;
o an evaluation of the forces which influence the market in which
these securities are purchased and sold;
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o the type, size and cost of holding;
o the financial statements of the issuer or borrower;
o the credit quality and cash flow of issuer, based on the Adviser's
or external analysis;
o the information as to any transactions in or offers for the
holding;
o the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable
companies;
o the coupon payments;
o the quality, value and saleability of collateral securing the
security or loan;
o the business prospects of the issuer/borrower, including any
ability to obtain money or resources from a parent or affiliate
and an assessment of the issuer's or borrower's management;
o the prospects for the issuer's or borrower's industry, and
multiples (of earnings and/or cash flow) being paid for similar
businesses in that industry;
o any decline in value over time due to the nature of the assets -
for example, an entity that has a finite-life concession agreement
with a government agency to provide a service (e.g., toll roads
and airports); and
o other relevant factors.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of U.S. federal income tax matters is based
upon the advice of Chapman and Cutler LLP, counsel to the Fund.
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the purchase, ownership and disposition of Common Shares of
the Fund. This discussion does not purport to be complete or to deal with all
aspects of U.S. federal income taxation that may be relevant to Shareholders in
light of their particular circumstances. Unless otherwise noted, this discussion
assumes a Shareholder is a U.S. Shareholder and that the Shareholders hold
Shares as capital assets. This discussion is based upon present provisions of
the Code, the regulations promulgated thereunder, and judicial and
administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisers with regard to the U.S. federal tax consequences of the purchase,
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ownership, or disposition of Fund shares, as well as the tax consequences
arising under the laws of any state, locality, non-U.S. country, or other taxing
jurisdiction.
The Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Code.
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer generally
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's Total Assets and not greater than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
Total Assets is invested in the securities (other than U.S. Government
securities or the securities of other regulated investment companies) of any one
issuer, or two or more issuers which the Fund controls which are engaged in the
same, similar or related trades or businesses; and (c) distribute at least 90%
of its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gains in excess of net long-term
capital losses) and at least 90% of its net tax-exempt interest income each
taxable year.
As a regulated investment company, the Fund generally will not be
subject to U.S. federal income tax on its investment company taxable income (as
that term is defined in the Code, but without regard to the deduction for
dividends paid) and net capital gain (the excess of net long-term capital gain
over net short-term capital loss), if any, that it distributes to Shareholders.
The Fund intends to distribute to its Shareholders, at least annually,
substantially all of its investment company taxable income and net capital gain.
If the Fund retains any net capital gain or investment company taxable income,
it will generally be subject to U.S. federal income tax at regular corporate
rates on the amount retained. In addition, amounts not distributed on a timely
basis in accordance with a calendar year distribution requirement are subject to
a nondeductible 4% excise tax unless, generally, the Fund distributes during
each calendar year an amount equal to the sum of (1) at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) at least 98% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the one-year period ending
October 31 of the calendar year, and (3) any ordinary income and capital gains
for previous years that were not distributed during those years. To prevent
imposition of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement. A distribution will
be treated as paid on December 31 of the current calendar year if it is declared
by the Fund in October, November or December with a record date in such a month
and paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
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If the Fund failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, the Fund
would be taxed as an ordinary corporation on its taxable income (even if such
income were distributed to its Shareholders) and all distributions out of
current or accumulated earnings and profits would be taxed to Shareholders as
ordinary income.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income are
generally taxable to the Shareholder as ordinary income to the extent of the
Fund's earnings and profits, whether paid in cash or reinvested in additional
shares. However, pursuant to the recently enacted "Jobs and Growth Tax Relief
Reconciliation Act of 2003" (the "Tax Act"), certain ordinary income
distributions received from the Fund may be taxed at new capital gains tax
rates. In particular, under the Tax Act, ordinary income dividends received by
an individual shareholder from a regulated investment company such as the Fund
are generally taxed at the same new rates that apply to net capital gain,
provided certain holding period requirements are satisfied and provided the
dividends are attributable to qualifying dividends received by the Fund itself.
In general, for the Fund to receive tax-advantaged dividends, the Fund must hold
stock paying an otherwise tax-advantaged dividend more than 60 days during the
120-day period beginning 60 days before the ex-dividend date (or more than 90
days during the associated 180-day period in the case of certain preferred
stocks). A dividend received by the Fund would not qualify if the dividend is
received from a foreign corporation that is (a) not eligible for the benefits of
a comprehensive income tax treaty with the United States (with the exception of
dividends paid on stock of such a foreign corporation readily tradable on an
established securities market in the United States) or (b) treated as a foreign
personal holding company, foreign investment company, or passive foreign
investment company. While the Fund intends to monitor its foreign investments in
order to maximize its qualified dividend income, it may be difficult to obtain
accurate and complete data in a timely manner, particularly with regard to
investments in trusts or other non-corporate entities.
These special rules relating to the taxation of ordinary income
dividends from regulated investment companies generally apply to taxable years
beginning after December 31, 2002 and beginning before January 1, 2009. The Fund
will provide notice to its shareholders of the amount of any distribution which
may be taken into account as a dividend which is eligible for the new capital
gains tax rates. The Fund can not make any guarantees as to the amount of any
distribution that will be regarded as a qualifying dividend. In general, for the
Fund to receive tax-advantaged dividends, the Fund must hold stock paying an
otherwise tax-advantaged dividend more than 60 days during the 120-day period
beginning 60 days before the ex-dividend date (or more than 90 days during the
associated 180-day period in the case of certain preferred stocks).
A corporation that owns Shares generally will not be entitled to the
dividends received deduction with respect to many dividends received from the
Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary
income dividends on Shares that are attributable to qualifying dividends
-59-
received by the Fund from certain domestic corporations may be designated by the
Fund as being eligible for the dividends received deduction.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, properly designated as capital
gain dividends are taxable to a Shareholder as long-term capital gains,
regardless of how long the Shareholder has held Fund Shares. Shareholders
receiving distributions in the form of additional Shares, rather than cash,
generally will have a cost basis in each such Share equal to the value of a
share of the Fund on the reinvestment date. A distribution of an amount in
excess of the Fund's current and accumulated earnings and profits will be
treated by a Shareholder as a return of capital which is applied against and
reduces the Shareholder's basis in his or her Shares. To the extent that the
amount of any such distribution exceeds the Shareholder's basis in his or her
Shares, the excess will be treated by the Shareholder as a gain from the sale or
exchange of the Shares.
Shareholders will be notified annually as to the U.S. federal income
tax status of distributions, and Shareholders receiving distributions in the
form of additional Shares will receive a report as to the value of those Shares.
Any investments in foreign securities may be subject to foreign
withholding or other taxes. As it is intended that the Fund will have more than
50% of its assets invested in stock or securities of foreign corporations, it is
intended that the Fund elect for Section 853 to apply so as to result in the
Fund not being allowed a deduction for foreign income or withholding taxes and
being treated as if it distributed such taxes and, should allow Shareholders to
be eligible to elect to claim a credit for such taxes, subject to the usual U.S.
limitations. The Fund can make no assurances that it will be able to satisfy the
requirements to make an election under Section 853.
If the Fund properly makes an election under Section 853, it is
intended that Shareholders will be eligible to elect to claim a foreign tax
credit with respect to foreign income or withholding taxes incurred by the Fund,
subject to the usual limitations. For purposes of determining the Shareholder's
foreign tax credit limitation, his proportionate share of any dividends from the
Fund will be treated as foreign source income, based upon the gross income of
the Fund. Any leverage the Fund has, in the form of debt, may result in interest
expense which decreases the foreign source income of the Shareholder. The Fund
cannot make any guarantees as to whether any Shareholder will be able to utilize
any or all of his foreign tax credits.
If the Fund does not make the election permitted under Section 853, any
foreign taxes paid or accrued will represent an expense to the Fund that will
reduce its investment company taxable income. In such a case, Shareholders will
not be able to claim either a credit or a deduction for their pro rata portion
of such taxes paid by the Fund, nor will Shareholders be required to treat as
part of the amounts distributed to them their pro rata portion of such taxes
paid.
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SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of Common Shares of the Fund, a
Shareholder will generally realize a capital gain or loss which will be
long-term or short-term, depending upon the Shareholder's holding period for the
Common Shares. Generally, a Shareholder's gain or loss will be a long-term gain
or loss if the Common Shares have been held for more than one year.
Any loss realized on a sale or exchange will be disallowed to the
extent that Shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of Common Shares or to the extent that the Shareholder,
during such period, acquires or enters into an option or contract to acquire,
substantially identical stock or securities. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a Shareholder on a disposition of Common Shares of the Fund held by
the Shareholder for six months or less will be treated as a long-term capital
loss to the extent of any distributions of long-term capital gain received by
the Shareholder with respect to such Shares.
NATURE OF FUND'S INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions,
will make the appropriate tax elections and take appropriate actions in order to
mitigate the effect of these rules and prevent disqualification of the Fund from
being taxed as a regulated investment company.
FUTURES CONTRACTS AND OPTIONS
The Fund's transactions in futures contracts and options will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (i.e., may affect whether
gains or losses are ordinary or capital, or short-term or long-term), may
accelerate recognition of income to the Fund and may defer Fund losses. These
rules could, therefore, affect the character, amount and timing of distributions
to Shareholders. These provisions also (a) will require the Fund to
mark-to-market certain types of the positions in its portfolio (i.e., treat them
as if they were closed out), and (b) may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the 90% distribution requirement for qualifying to be taxed as a
regulated investment company and the 98% distribution requirement for avoiding
excise taxes. The Fund will monitor its transactions, will make the appropriate
tax elections and will make or cause to be made the appropriate entries in its
books and records when it acquires any futures contract, option or hedged
-61-
investment in order to mitigate the effect of these rules and prevent
disqualification of the Fund from being taxed as a regulated investment company.
PASSIVE FOREIGN INVESTMENT COMPANIES
Equity investments by the Fund in certain "passive foreign investment
companies" ("PFICs") could potentially subject the Fund to U.S. federal income
tax (including interest charges) on distributions received from the company or
on proceeds received from the disposition of shares in the company, which tax
cannot be eliminated by making distributions to Fund Shareholders. However, the
Fund may elect to avoid the imposition of that tax. For example, the Fund may
elect to treat a PFIC as a "qualified electing fund" (a "QEF election"), in
which case the Fund would be required to include its share of the company's
income and net capital gains annually, regardless of whether it receives any
distribution from the company. The Fund may also make an election to mark the
gains (and, to a limited extent, losses) in such holdings "to market" as though
it had sold and repurchased its holdings in those PFICs on the last day of the
Fund's taxable year. Such gains and losses are treated as ordinary income and
loss. The QEF and mark-to-market elections may accelerate the recognition of
income (without the receipt of cash) and increase the amount required to be
distributed by the Fund to avoid taxation. Making either of these elections
therefore may require the Fund to liquidate other investments (including when it
is not advantageous to do so) to meet its distribution requirement, which may
also accelerate the recognition of gains and affect the Fund's total return.
Dividends paid by PFICs will not be eligible to be treated as "qualified
dividend income."
As a result of investing in stock of PFICs or securities purchased at a
discount or any other investment that produces income that is not matched by a
corresponding cash distribution to the Fund, the Fund could be required to
include in current income, income it has not yet received. Any such income would
be treated as income earned by the Fund and therefore would be subject to the
distribution requirements of the Code. This might prevent the Fund from
distributing 90% of its investment company taxable income and 90% of its net
tax-exempt interest income as is required in order to avoid Fund-level U.S.
federal income taxation on all of its income, or might prevent the Fund from
distributing enough ordinary income and capital gain net income to avoid
completely the imposition of the excise tax. To avoid this result, the Fund may
be required to borrow money or dispose of securities to be able to make
distributions to its Shareholders.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and sale proceeds payable to Shareholders who fail to
provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. The withholding percentage
is 28% until 2011, when the percentage will revert to 31% unless amended by
Congress. Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. This withholding is not
an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
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NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, for U.S. federal income tax
purposes, is a nonresident alien individual, a foreign trust or estate, a
foreign corporation or foreign partnership ("non-U.S. Shareholder") depends on
whether the income of the Fund is "effectively connected" with a U.S. trade or
business carried on by the Shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the non-U.S.
Shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld
from such distributions.
Distributions of capital gain dividends and any amounts retained by the
Fund which are designated as undistributed capital gains will not be subject to
U.S. tax at the rate of 30% (or lower treaty rate) unless the non-U.S.
Shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual present
in the United States for more than 182 days during the taxable year is generally
treated as a resident for U.S. income tax purposes; in that case, he or she
would be subject to U.S. income tax on his or her worldwide income at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S. tax. In
the case of a non-U.S. Shareholder who is a nonresident alien individual, the
Fund may be required to withhold U.S. income tax from distributions of net
capital gain unless the non-U.S. Shareholder certifies his or her non-U.S.
status under penalties of perjury or otherwise establishes an exemption. If a
non-U.S. Shareholder is a nonresident alien individual, any gain such
Shareholder realizes upon the sale or exchange of such Shareholder's Shares of
the Fund in the United States will ordinarily be exempt from U.S. tax unless the
gain is U.S. source income and such Shareholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements.
Income Effectively Connected. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a non-U.S.
Shareholder, then distributions of investment company taxable income and capital
gain dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
Shares of the Fund will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Non-U.S.
corporate Shareholders may also be subject to the branch profits tax imposed by
the Code. The tax consequences to a non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Non-U.S. Shareholders are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Fund.
-63-
OTHER TAXATION
Non-U.S. Shareholders, including Shareholders who are nonresident alien
individuals, may be subject to U.S. withholding tax on certain distributions at
a rate of 30%, or the lower rates as may be prescribed by any applicable treaty.
Fund Shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Fund.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds. In reports or other communications to shareholders of
the Fund or in advertising materials, the Fund may compare its performance with
that of (i) other investment companies listed in the rankings prepared by
Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services;
publications such as Barrons, Business Week, Forbes, Fortune, Institutional
Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values,
The New York Times, The Wall Street Journal and USA Today; or other industry or
financial publications or (ii) the Standard and Poor's Index of 500 Stocks, the
Dow Jones Industrial Average, NASDAQ Composite Index and other relevant indices
and industry publications. Comparison of the Fund to an alternative investment
should be made with consideration of differences in features and expected
performance. The Fund may obtain data from sources or reporting services, such
as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be
generally accurate.
From time to time, the Fund may quote the Fund's total return,
aggregate total return or yield in advertisements or in reports and other
communications to Shareholders. The Fund's performance will vary depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and type of the respective investment companies' portfolio
securities.
Past performance is not indicative of future results. At the time
Shareholders sell their shares, they may be worth more or less than their
original investment.
EXPERTS
The financial statements of the Fund as of March 16, 2004, appearing in
this Statement of Additional Information have been audited by Deloitte & Touche
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Deloitte & Touche
-64-
LLP provides accounting and auditing services to the Fund. The principal
business address of Deloitte & Touche LLP is 180 North Stetson Avenue, Chicago,
Illinois 60601.
CUSTODIAN, ADMINISTRATOR AND TRANSFER AGENT
PFPC Trust Company, 301 Bellevue Parkway, Wilmington, Delaware 19809,
serves as custodian for the Fund. As such, PFPC Trust Company has custody of all
securities and cash of the Fund and attends to the collection of principal and
income and payment for and collection of proceeds of securities bought and sold
by the Fund. PFPC Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809 is the
transfer, registrar, dividend disbursing agent and shareholder servicing agent
for the Fund and provides certain clerical, bookkeeping, shareholder servicing
and administrative services necessary for the operation of the Fund and
maintenance of shareholder accounts. PFPC Inc. also provides certain accounting
and administrative services to the Fund pursuant to an Administration and
Accounting Services Agreement, including maintaining the Fund's books of
account, records of the Fund's securities transactions, and certain other books
and records; acting as liaison with the Fund's independent public accountant and
providing the accountant with certain Fund accounting information; and providing
other continuous accounting and administrative services.
INDEPENDENT AUDITORS
The Fund's independent auditors, Deloitte & Touche LLP, 180 North
Stetson Avenue, Chicago, Illinois 60601, audit and report on the Fund's annual
financial statements, and perform other professional accounting, auditing and
advisory services when engaged to do so by the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Fund's Prospectus and this Statement of
Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement. Statements contained in
the Fund's Prospectus and this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement may be inspected without charge at the SEC's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the SEC upon the payment of certain fees prescribed by the SEC.
-65-
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund:
We have audited the accompanying statement of assets and liabilities of
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund
(the "Fund"), as of March 16, 2004. This statement of assets and liabilities is
the responsibility of the Fund's management. Our responsibility is to express an
opinion on the statement of assets and liabilities based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the statement
of assets and liabilities is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of cash owned as
of March 16, 2004, by correspondence with the Fund's custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial position of
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund as
of March 16, 2004, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 23, 2004
-66-
MACQUARIE/FIRST TRUST GLOBAL INFRASTRUCTURE/UTILITIES DIVIDEND & INCOME FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 16, 2004
ASSETS:
Cash $100,008
Offering costs $500,000
---------
$600,008
LIABILITIES:
Offering costs payable $500,000
---------
Net Assets 100,008
=========
NET ASSETS - Applicable to 5236 shares $100,008
=========
NET ASSET VALUE PER SHARE (net assets divided by
5236 shares.) $19,100
=========
MAXIMUM OFFERING PRICE PER SHARE (net asset
value plus sales charge of 4.5% of offering price.) $20,000
=========
NOTES TO STATEMENT OF ASSETS AND LIABILITIES:
Note 1. Organization
Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund
(the "Fund") is a newly organized, non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940. The Fund
was organized as a Massachusetts business trust on January 21, 2004 pursuant to
a Declaration governed by the laws of the Commonwealth of Massachusetts. The
Fund has had no operations through March 16, 2004 other than those relating to
organizational matters and the sale and issuance of 5,236 common shares of
beneficial interest to First Trust Portfolios, L.P.
Note 2. Significant Accounting Policies
First Trust Advisors L.P. (the "Adviser") has assumed organization costs
estimated to be $45,000. The Adviser has also agreed to assume any offering
costs in excess of $.04 a share, if any.
The Fund's statement of assets and liabilities is prepared in conformity with
accounting principles generally accepted in the United States of America which
may require the use of management estimates and assumptions. Actual results
could differ from those estimates.
-67-
The Fund intends to comply in its initial fiscal year and thereafter with
provisions of the Internal Revenue Code applicable to regulated investment
companies and as such, will not be subject to federal income taxes on otherwise
taxable income (including net realized capital gains) distributed to
shareholders.
Offering costs will be charged to paid-in-capital in proportion to the number of
shares sold during the offering period.
Note 3. Fees and Other Transactions with Affiliated Parties
The Fund has agreed to pay an annual management fee for the services and
facilities provided by the Adviser, payable on a quarterly basis, equal to the
annual rate of .40% of the Fund's total assets up to and including $250 million
and .35% for total assets in excess of $250 million. Total assets is defined as
the average daily gross asset value of the Fund, including assets attributable
to the Fund's Preferred Shares, if any, and the principal amount of borrowings
or indebtedness, minus the sum of the Fund's accrued and unpaid dividends on any
outstanding Preferred Shares and accrued liabilities (other than the principal
amount of any borrowings incurred, commercial paper or notes issued by the Fund
and the liquidation preference of any outstanding Preferred Shares).
Macquarie Infrastructure Fund Adviser, LLC ("MIFA") and Four Corners Capital
Management, LLC ("Four Corners") will be the Fund's sub-advisers (collectively,
the "Sub-Advisers"). Pursuant to an agreement between MIFA, the Adviser and the
Fund, MIFA will receive an annual portfolio management fee of .60% for that
portion of the Fund's total assets allocated to MIFA. Pursuant to an agreement
between Four Corners, the Adviser and the Fund, Four Corners receives an annual
portfolio management fee of .60% of that portion of the Fund's total assets
allocated to Four Corners. MIFA will receive an annual portfolio management fee
of .65% for that portion of the Fund's total assets over $250 million. In
addition, to the extent that MIFA invests in unlisted securities, MIFA is
entitled to receive a supplemental fee of .60% of that portion of the Fund's
total assets invested in such securities. This supplemental fee is in addition
to the annual portfolio management fee. The Sub-Advisers' portfolio management
fees are payable by the Fund.
-68-
APPENDIX A
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Corporation, a division of The McGraw-Hill Companies
("Standard & Poor's" or "S&P") rating symbols and their meanings (as published
by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days-including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
o Likelihood of payment--capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance
with the terms of the obligation;
o Nature of and provisions of the obligation; and
o Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
A-1
The issue ratings definitions are expressed in terms of default risk.
As such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA
An obligation rated `AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA
An obligation rated `AA' differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A
An obligation rated `A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated `BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC, CC, AND C
Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as
having significant speculative characteristics. `BB' indicates the least degree
of speculation and `C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB
An obligation rated `BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B
An obligation rated `B' is more vulnerable to nonpayment than
obligations rated `BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
A-2
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC
An obligation rated `CCC' is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated `CC' is currently highly vulnerable to nonpayment.
C
The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D
An obligation rated `D' is in payment default. The `D' rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The `D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus (-)
The ratings from `AA' to `CCC' may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
c
The `c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
p
The letter `p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
A-3
of the project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
*
Continuance of the ratings is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
r
The `r' highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or high
variability in expected returns as a result of noncredit risks. Examples of such
obligations are securities with principal or interest return indexed to
equities, commodities, or currencies; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an `r'
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R.
Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories (`AAA', `AA', `A', `BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
Notes. A Standard & Poor's note ratings reflects the liquidity factors
and market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
o Amortization schedule -- the larger the final maturity
relative to other maturities, the more likely it
will be treated as a note; and
A-4
o Source of payment -- the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3
Speculative capacity to pay principal and interest.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from `A-1' for the
highest quality obligations to `D' for the lowest. These categories are as
follows:
A-1
A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3
A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
A-5
B
A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C
A short-term obligation rated `C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The `D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
Moody's Investors Service, Inc. -- A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their
meanings (as published by Moody's) follows:
LONG-TERM OBLIGATION RATINGS
Moody's long-term obligation ratings are opinions of the relative
credit risk of fixed-income obligations with an original maturity of one year or
more. They address the possibility that a financial obligation will not be
honored as promised. Such ratings reflect both the likelihood of default and any
financial loss suffered in the event of default.
Aaa
Obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are subject
to very low credit risk.
A
Obligations rated A are considered upper-medium grade and are subject
to low credit risk.
A-6
Baa
Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Ba
Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B
Obligations rated B are considered speculative and are subject to high
credit risk.
Caa
Obligations rated Caa are judged to be of poor standing and are subject
to very high credit risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
C
Obligations rated C are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal or
interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
category from Aa through Caa. The modifier 1 indicates that the issuer or
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
SHORT-TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to
honor short-term financial obligations. Ratings may be assigned to issuers,
short-term programs or to individual shortterm debt instruments. Such
obligations generally have an original maturity not exceeding thirteen months,
unless explicitly noted.
Moody's employs the following designations to indicate the relative
repayment ability of rated issuers:
A-7
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior
ability to repay short-term debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay short-term debt obligations.
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within
any of the Prime rating categories.
Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
DEMAND OBLIGATION RATINGS
In the case of variable rate demand obligations (VRDOs), a
two-component rating is assigned; a long or short-term debt rating and a demand
obligation rating. The first element represents Moody's evaluation of the degree
of risk associated with scheduled principal and interest payments. The second
element represents Moody's evaluation of the degree of risk associated with the
ability to receive purchase price upon demand ("demand feature"), using a
variation of the MIG rating scale, the Variable Municipal Investment Grade or
VMIG rating. When either the long- or short-term aspect of a VRDO is not rated,
that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations
are a function of each issue's specific structural or credit features.
VMIG 1
This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG 2
This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
A-8
VMIG 3
This designation denotes acceptable credit quality. Adequate protection
is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
SG
This designation denotes speculative-grade credit quality. Demand
features rated in this category may supported by a liquidity provider that does
not have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
Fitch Ratings -- A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
International Long-Term Credit Ratings are more commonly referred to as
simply "Long-Term Ratings". The following scale applies to foreign currency and
local currency ratings.
International credit ratings assess the capacity to meet foreign or
local currency commitments. Both foreign and local currency ratings are
internationally comparable assessments. The local currency rating measures the
probability of payment only within the sovereign state's currency and
jurisdiction.
AAA
Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
A-9
BBB
Good credit quality. 'BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
BB
Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B
Highly speculative. 'B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.
DDD, DD, D
Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates
potential recoveries in the range of 50%-90% and 'D' the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated 'DDD' have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are likely to satisfy a
higher portion of their outstanding obligations, while entities rated 'D' have a
poor prospect of repaying all obligations.
A-10
SHORT-TERM CREDIT RATINGS
International Short-Term Credit Ratings are more commonly referred to
as simply "Short-Term Ratings". The following scale applies to foreign currency
and local currency ratings.
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
International credit ratings assess the capacity to meet foreign or
local currency commitments. Both foreign and local currency ratings are
internationally comparable assessments. The local currency rating measures the
probability of payment only within the sovereign state's currency and
jurisdiction.
F1
Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2
Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
B
Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D
Default. Denotes actual or imminent payment default.
A-11
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the `AAA' Long-term
rating category, to categories below `CCC', or to Short-term ratings other than
`F1'.
`NR' indicates that Fitch Ratings does not rate the issuer or issue in
question.
`Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount
of information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive," indicating a
potential upgrade, "Negative," for a potential downgrade, or "Evolving," if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are `stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify
the fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
A-12
MACQUARIE/FIRST TRUST GLOBAL INFRASTRUCTURE/UTILITIES DIVIDEND & INCOME FUND
SHARES
STATEMENT OF ADDITIONAL INFORMATION
, 2004
Back Page
PART C -- OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this
filing, other than in connection with its organization. Financial Statements
indicating that the Registrant has met the net worth requirements of Section
14(a) of the 1940 Act are filed with this Pre-effective Amendment to the
Registration Statement.
2. Exhibits:
a. Amended and Restated Declaration of Trust dated February 6, 2004. Filed
on March 1, 2004 as Exhibit a. to Registrant's Registration Statement
on Form N-2 (File No. 333-112202) and incorporated herein by reference.
b. Amended and Restated By-Laws of Registrant. Filed on March 1, 2004 as
Exhibit b. to Registrant's Registration Statement on Form N-2 (File No.
333-112202) and incorporated herein by reference.
c. None.
d. Form of Share Certificate.*
e. Terms and Conditions of the Dividend Reinvestment Plan.*
f. None.
g.1 Form of Investment Management Agreement between Registrant and First Trust
Advisors L.P.*
g.2 Form of Sub-Advisory Agreement between Registrant, First Trust
Advisors L.P. and Macquarie Infrastructure Fund Adviser, LLC.*
g.3 Form of Sub-Advisory Agreement between Registrant, First Trust
Advisors L.P. and Four Corners Capital Management, LLC.*
h.1 Form of Purchase Agreement.*
i. None.
j. Form of Custodian Services Agreement between Registrant and PFPC Trust
Company.*
k.1 Form of Transfer Agency Services Agreement between Registrant and
PFPC Inc.*
k.2 Form of Administration and Accounting Services Agreement between
Registrant and PFPC Inc.*
k.3 Form of Additional Compensation Agreement between First Trust
Advisors L.P. and Merrill Lynch.*
l.1 Opinion and consent of Chapman and Cutler LLP.*
l.2 Opinion and consent of Bingham McCutchen LLP.*
m. None.
n. Independent Auditors' Consent.*
o. None.
p. Subscription Agreement between Registrant and First Trust
Portfolios L.P.*
q. None.
r.1 Code of Ethics of Registrant.*
r.2 Code of Ethics of First Trust Portfolios L.P.*
r.3 Code of Ethics of First Trust Advisors L.P.*
r.4 Code of Ethics of Macquarie Infrastructure Fund Adviser, LLC.*
r.5 Code of Ethics of Four Corners Capital Management, LLC.*
Page 1
s. Powers of Attorney of Messrs. Bowen, Erickson, Kadlec, Nielson and Oster.
Filed on March 1, 2004 as Exhibit s. to Registrant's Registration
Statement on Form N-2 (File No. 333-112202) and incorporated herein by
reference.
-------------------------
* Filed herewith.
Item 25: Marketing Arrangements
Reference is made to the Form of Purchase Agreement among the Registrant, First
Trust Advisors L.P., Macquarie Infrastructure Fund Adviser, LLC, Four Corners
Capital Management, LLC and the Underwriters for the Registrant's common shares
of beneficial interest as filed herewith as Exhibit h.1.
Item 26: Other Expenses of Issuance and Distribution
------------------------------------------------------------ ------------------
Securities and Exchange Commission Fees $ 32,055
------------------------------------------------------------ ------------------
National Association of Securities Dealers, Inc. Fees $ 50,500
------------------------------------------------------------ ------------------
Printing and Engraving Expenses $ 83,528
------------------------------------------------------------ ------------------
Legal Fees $350,000
------------------------------------------------------------ ------------------
Listing Fees $ 30,000
------------------------------------------------------------ ------------------
Accounting Expenses $ 10,500
------------------------------------------------------------ ------------------
Blue Sky Filing Fees and Expenses $ 0
------------------------------------------------------------ ------------------
Miscellaneous Expenses $135,945*
------------------------------------------------------------ ------------------
Total $692,528
------------------------------------------------------------ ------------------
------------------
* The Adviser and a Sub-Adviser have agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales load) that exceed
$.04 per Common Share.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At March 25, 2004:
--------------------------------------- -------------------------------------
Title of Class Number of Record Holders
--------------------------------------- -------------------------------------
Common Shares, $0.01 par value 1
--------------------------------------- -------------------------------------
Item 29: Indemnification
Section 5.3 of the Registrant's Declaration of Trust provides as follows:
(a) Subject to the exceptions and limitations contained in
paragraph (b) below:
(i) every person who is or has been a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust against all liability and against all expenses
reasonably incurred or paid by him or her in connection with any claim,
Page 2
action, suit or proceeding in which that individual becomes involved as
a party or otherwise by virtue of being or having been a Trustee or
officer and against amounts paid or incurred by that individual in the
settlement thereof; and
(ii) the words "claim," "action," "suit" or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal,
administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement or
compromise, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) against any liability to the Trust or the Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that the Covered Person engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of that individual's office;
(ii) with respect to any matter as to which the Covered Person
shall have been finally adjudicated not to have acted in good faith in
the reasonable belief that that individual's action was in the best
interest of the Trust; or
(iii) in the event of a settlement involving a payment by a
Trustee, Trustee Emeritus or officer or other disposition not involving
a final adjudication as provided in paragraph (b)(i) or (b)(ii) above
resulting in a payment by a Covered Person, unless there has been
either a determination that such Covered Person did not engage in
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of that individual's office by
the court or other body approving the settlement or other disposition
or by a reasonable determination, based upon a review of readily
available facts (as opposed to a full trial-type inquiry) that that
individual did not engage in such conduct:
(A) by vote of a majority of the Disinterested
Trustees (as defined below) acting on the matter (provided that a
majority of the Disinterested Trustees then in office act on the
matter); or
(B) by written opinion of (i) the then-current legal
counsel to the Trustees who are not Interested Persons of the Trust or
(ii) other legal counsel chosen by a majority of the Disinterested
Trustees (or if there are no Disinterested Trustees with respect to the
matter in question, by a majority of the Trustees who are not
Interested Persons of the Trust) and determined by them in their
reasonable judgment to be independent.
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall
not affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to
be a Covered Person and shall inure to the benefit of the heirs,
executors and administrators of such person. Nothing contained herein
shall limit the Trust from entering into other insurance arrangements
or affect any rights to indemnification to which Trust personnel,
including Covered Persons, may be entitled by contract or otherwise
under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a)
of this Section 5.3 shall be advanced by the Trust prior to final
Page 3
disposition thereof upon receipt of an undertaking by or on behalf of
the Covered Person to repay such amount if it is ultimately determined
that the Covered Person is not entitled to indemnification under this
Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some
other appropriate security or the Trust shall be insured against losses
arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in
office act on the matter) or legal counsel meeting the requirement in
Section 5.3(b)(iii)(B) above in a written opinion, shall determine,
based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who
is not an "Interested Person" of the Trust (including anyone who has
been exempted from being an "Interested Person" by any rule, regulation
or order of the Commission), and (ii) against whom none of such
actions, suits or other proceedings or another action, suit or other
proceeding on the same or similar grounds is then or had been pending.
(e) With respect to any such determination or opinion referred to in
clause (b)(iii) above or clause (d)(ii) above, a rebuttable presumption
shall be afforded that the Covered Person has not engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office in
accordance with pronouncements of the Commission.
Sections 6 and 7 of the Purchase Agreement provide as follows:
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Fund and the Investment
Advisers, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(e) below) any such settlement is effected
with the written consent of the Fund; and
Page 4
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not
apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with
written information furnished to the Fund or an Investment Adviser by
any Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); provided, further, that the indemnity agreement
contained in this Section 6(a) shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such
Underwriter) from whom the person asserting any such loss, liability,
claim, damage and expense purchased the Securities which are the
subject thereof if the Prospectus corrected any such alleged untrue
statement or omission and if such Prospectus was delivered to such
Underwriter in a timely manner and if such Underwriter failed to send
or give a copy of the Prospectus to such person at or prior to the
written confirmation of the sale of such Securities to such person.
(b) Indemnification of the Fund, Investment Advisers, Trustees,
Directors and Officers. Each Underwriter severally agrees to indemnify and hold
harmless the Fund and the Investment Advisers, their respective trustees and
directors, each of the Fund's officers who signed the Registration Statement,
and each person, if any, who controls the Fund or an Investment Adviser within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Fund or the Investment Advisers by such Underwriter through Merrill Lynch
expressly for use in the Registration Statement (or any amendment thereto) or
such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Indemnification for Marketing Materials. In addition to the
foregoing indemnification, the Fund and the Investment Advisers also, jointly
and severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability,
claim, damage and expense described in the indemnity contained in Section 6(a),
as limited by the proviso set forth therein, with respect to any sales material.
(d) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Fund or an Investment Adviser, as
applicable. In each case such counsel shall be reasonably satisfactory to the
indemnified party, and the indemnifying party shall have the right to assume the
Page 5
defense of such action. An indemnified party may participate at its own expense
in the defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. In no event shall the indemnifying
party be liable for fees and expenses of more than one counsel (in addition to
any local counsel) separate from its own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(e) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for reasonable fees and expenses of counsel, such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 6(a)(ii) effected without its written consent if (i)
such settlement is entered into more than 60 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
SECTION 7. Contribution.
If the indemnification provided for in Section 6 hereof is for any
reason unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Fund or the Investment Advisers on
the one hand and the Underwriters on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Fund and the Investment Advisers on the
one hand and of the Underwriters on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Fund and the Investment Advisers
on the one hand and the Underwriters on the other hand in connection with the
offering of the Securities pursuant to this Agreement shall be deemed to be in
the same respective proportions as the total net proceeds from the offering of
the Securities pursuant to this Agreement (before deducting expenses) received
by the Fund and the total underwriting discount received by the Underwriters
(whether from the Fund or otherwise), in each case as set forth on the cover of
the Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet, bear to the aggregate initial public offering price of the Securities as
set forth on such cover.
The relative fault of the Fund and the Investment Advisers on the one
hand and the Underwriters on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
Page 6
to information supplied by the Fund or the Investment Advisers or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Fund, the Investment Advisers and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each trustee of the Fund and each director of an Investment Adviser,
respectively, each officer of the Fund who signed the Registration Statement,
and each person, if any, who controls the Fund or any Investment Adviser, within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, shall
have the same rights to contribution as the Fund and such Investment Adviser,
respectively. The Underwriters' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial Securities set
forth opposite their respective names in Schedule A hereto and not joint.
Reference is made to the Form of Additional Compensation Agreement
and attached Indemnification Agreement filed herewith as Exhibit k.3.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, 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 Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
Item 30: Business and Other Connections of Investment Advisers
First Trust Advisors L.P. ("First Trust Advisors") serves as investment adviser
to the funds and also serves as adviser or subadviser to 8 mutual funds and
3 closed-end funds and is the portfolio supervisor of certain unit investment
trusts. Its principal address is 1001 Warrenville Road, Suite 300, Lisle,
Illinois 60532.
Page 7
The principal business of certain of First Trust Advisors' principal executive
officers involves various activities in connection with the family of unit
investment trusts sponsored by First Trust Portfolios L. P. ("First Trust
Portfolios"). The principal address of First Trust Portfolios is 1001
Warrenville Road, Suite 300, Lisle, Illinois 60532.
OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT DURING PAST TWO YEARS
NAME AND POSITION WITH
FIRST TRUST ADVISORS L.P. EMPLOYMENT DURING PAST TWO YEARS
James A. Bowen, Managing Director/President Managing Director/President, First Trust Portfolios
Ronald Dean McAlister, Managing Director Managing Director, First Trust Portfolios
Mark R. Bradley, Chief Financial Officer and Managing Director Chief Financial Officer and Managing Director,
First Trust Portfolios and Chief Financial Officer,
Bondwave LLC
Robert W. Bredemeier, Chief Operating Officer and Managing Chief Operations Officer and Managing Director,
Director First Trust Portfolios
Robert Franklin Carey, Chief Investment Officer and Senior Senior Vice President, First Trust Portfolios
Vice President
William Scott Jardine, General Counsel General Counsel, First Trust Portfolios and
Secretary of Bondwave LLC
Scott Hall, Managing Director Managing Director, First Trust Portfolios
Andy Roggensack, Managing Director Managing Director, First Trust Portfolios
Jason Henry, Senior Vice President Senior Vice President, First Trust Portfolios
David McGarel, Senior Vice President Senior Vice President, First Trust Portfolios
Bob Porcellino, Senior Vice President Senior Vice President, First Trust Portfolios
Mark Sullivan, Senior Vice President Senior Vice President, First Trust Portfolios
Al Davis, Vice President Vice President, First Trust Portfolios
Jon Carl Erickson, Vice President Vice President, First Trust Portfolios
Bob James, Vice President Vice President, First Trust Portfolios
Page 8
Mitch Mohr, Vice President Vice President, First Trust Portfolios
David Pinsen, Vice President Vice President, First Trust Portfolios
Jonathan Steiner, Vice President Vice President, First Trust Portfolios
Rick Swiatek, Vice President Vice President, First Trust Portfolios
Roger Testin, Vice President Vice President, First Trust Portfolios
Kitty Collins, Assistant Vice President Assistant Vice President, First Trust Portfolios
Charles Bradley, Assistant Vice President Assistant Vice President, First Trust Portfolios
b) Sub-Advisers. Macquarie Infrastructure Fund Advisor, LLC ("MIFA")
serves as an investment sub-adviser of the Fund. Reference is made to: (i) the
information set forth under "Management of the Fund" in the Prospectus and
"Sub-Advisers" in the Statement of Additional Information; and (ii) the Form ADV
of MIFA (File No. 801-62755) filed with the Commission, all of which are
incorporated herein by reference.
Four Corners Capital Management, LLC ("Four Corners") serves as
an investment sub-adviser of the Fund. Reference is made to: (i) the information
set forth under "Management of the Fund" in the Prospectus and "Sub-Advisers" in
the Statement of Additional Information; and (ii) the Form ADV of Four Corners
(File No. 801-60738) filed with the Commission, all of which are incorporated
herein by reference.
Item 31: Location of Accounts and Records
First Trust Advisors L.P. maintains the Declaration of Trust, By-Laws, minutes
of trustees and shareholders meetings and contracts of the Registrant, all
advisory material of the investment adviser, all general and subsidiary ledgers,
journals, trial balances, records of all portfolio purchases and sales, and all
other required records.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it amends
its prospectus if (1) subsequent to the effective date of its Registration
Statement, the net asset value declines more than 10 percent from its net asset
value as of the effective date of the Registration Statement, or (2) the net
asset value increases to an amount greater than its net proceeds as stated in
the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
Page 9
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant under Rule 497(h) under the Securities Act of
1933 shall be deemed to be part of the Registration Statement as of the time it
was declared effective.
b. For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means designed
to ensure equally prompt delivery, within two business days of receipt of a
written or oral request, any Statement of Additional Information.
Page 10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
this City of Lisle, and State of Illinois, on the 25th day of March, 2004.
MACQUARIE/FIRST TRUST GLOBAL
INFRASTRUCTURE/UTILITIES
DIVIDEND & INCOME FUND
By: /s/ James A. Bowen
---------------------------
James A. Bowen, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
---------------------- ----------------------------- -------------------------
Signature Title Date
---------------------- ----------------------------- -------------------------
/s/ James A. Bowen President, Chairman of the March 25, 2004
------------------ Board and Trustee
James A. Bowen (Principal Executive Officer)
---------------------- ----------------------------- -------------------------
/s/ Mark R. Bradley Chief Financial Officer March 25, 2004
------------------- and Treasurer (Principal
Mark R. Bradley Financial and Accounting
Officer)
---------------------- ----------------------------- -------------------------
Richard E. Erickson* Trustee )
---------------------- ----------------------------- By: /s/ W. Scott Jardine
Thomas R. Kadlec* Trustee ) ---------------------
---------------------- ----------------------------- W. Scott Jardine
Niel B. Nielson* Trustee ) Attorney-In-Fact
---------------------- ----------------------------- March 25, 2004
David M. Oster* Trustee )
---------------------- ------------------------------ -------------------------
* Original powers of attorney authorizing James A. Bowen, W. Scott Jardine and
Eric F. Fess to execute this Registration Statement, and Amendments thereto, for
each of the trustees of the Registrant on whose behalf this Registration
Statement is filed, were previously executed and filed as an exhibit.
Page 11
Index to Exhibits
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
g.1 Form of Investment Management Agreement between Registrant and First Trust
Advisors L.P.
g.2 Form of Sub-Advisory Agreement between Registrant, First Trust
Advisors L.P. and Macquarie Infrastructure Fund Adviser, LLC.
g.3 Form of Sub-Advisory Agreement between Registrant, First Trust
Advisors L.P. and Four Corners Capital Management, LLC.
h.1 Form of Purchase Agreement.
j. Form of Custodian Services Agreement between Registrant and PFPC Trust
Company.
k.1 Form of Transfer Agency Services Agreement between Registrant and
PFPC Inc.
k.2 Form of Administration and Accounting Services Agreement between
Registrant and PFPC Inc.
k.3 Form of Additional Compensation Agreement between First Trust Advisors L.P.
and Merrill Lynch.
l.1 Opinion and consent of Chapman and Cutler LLP.
l.2 Opinion and consent of Bingham McCutchen LLP.
n. Independent Auditors' Consent.
p. Subscription Agreement between Registrant and First Trust
Portfolios L.P.
r.1 Code of Ethics of Registrant.
r.2 Code of Ethics of First Trust Portfolios L.P.
r.3 Code of Ethics of First Trust Advisors L.P.
r.4 Code of Ethics of Macquarie Infrastructure Fund Adviser, LLC.
r.5 Code of Ethics of Four Corners Capital Management, LLC.
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