e497
PROSPECTUS
13,100,000 Common
Shares
SELIGMAN PREMIUM TECHNOLOGY
GROWTH FUND, INC.
$20.00
PER SHARE
The Fund. Seligman Premium Technology
Growth Fund, Inc., a Maryland corporation (the
Fund), is a newly organized, non-diversified,
closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the Investment
Company Act). The Funds investment manager is
RiverSource Investments, LLC (RiverSource
Investments or the Investment Manager).
Investment Objectives. The Funds
investment objectives are to seek growth of capital and current
income.
NO PRIOR HISTORY. BECAUSE THE FUND IS NEWLY ORGANIZED, IT
HAS NO PERFORMANCE HISTORY AND ITS SHARES OF COMMON STOCK
(COMMON SHARES) HAVE NO HISTORY OF PUBLIC TRADING.
THE COMMON STOCK OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES,
SUCH AS THE FUND, FREQUENTLY TRADES AT A DISCOUNT FROM ITS NET
ASSET VALUE. THE RISK OF THE COMMON SHARES TRADING AT SUCH
A DISCOUNT MAY BE OF GREATER CONCERN FOR INVESTORS EXPECTING TO
SELL THEIR SHARES RELATIVELY SOON AFTER COMPLETION OF THIS
OFFERING.
The Funds Common Shares have been approved for listing on
the New York Stock Exchange, subject to notice of issuance,
under the symbol STK.
INVESTMENT STRATEGY. Under normal
market conditions, the Funds investment program will
consist primarily of (1) investing in a portfolio of equity
securities of technology and technology-related companies that
seeks to exceed the total return, before fees and expenses, of
the S&P North America Technology Sector
Index®
and (2) writing call options on the NASDAQ 100
Index®,
an unmanaged index that includes the largest and most active
non-financial domestic and international companies listed on the
Nasdaq Stock Market, or its exchange-traded fund equivalent (the
NASDAQ 100) on a
month-to-month
basis, with an aggregate notional amount typically ranging from
25% to 90% of the underlying value of the Funds holdings
of common stock. The Fund expects to generate current income
from premiums received from writing call options on the NASDAQ
100.
(continued on following
page)
THE FUNDS INVESTMENT POLICY OF INVESTING IN TECHNOLOGY
AND TECHNOLOGY-RELATED COMPANIES AND WRITING CALL OPTIONS
INVOLVES A HIGH DEGREE OF RISK. YOU COULD LOSE SOME OR ALL OF
YOUR INVESTMENT. SEE RISKS BEGINNING ON
PAGE 30.
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.
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Per Share
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Total(3)
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Public offering price
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$
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20.00
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$
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262,000,000
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Sales load(1)
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$
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0.90
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$
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11,790,000
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Estimated offering expenses(2)
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$
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0.04
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$
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524,000
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Proceeds, after expenses, to the Fund
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$
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19.06
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$
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249,686,000
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(1)
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The Investment Manager (and not the
Fund) has agreed to pay from its own assets a structuring fee to
each of Wells Fargo Securities, LLC, UBS Securities LLC and
Ameriprise Financial Services, Inc. The Investment Manager (and
not the Fund) has agreed to pay from its own assets a sales
incentive fee to Raymond James & Associates, Inc.
See Underwriting.
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(2)
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Total expenses of the Common Share
offering paid by the Fund (which do not include the sales load)
are estimated to be $524,000, or $599,600 assuming full exercise
of the over-allotment option, which represents $0.04 per Common
Share issued. The Fund will pay Common Share offering costs up
to $0.04 per Common Share, and the Investment Manager has agreed
to pay all of the Funds organizational expenses and Common
Share offering costs (other than sales load) that exceed $0.04
per Common Share.
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(3)
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The Fund has granted the
underwriters an option to purchase up to 1,890,000 additional
Common Shares at the public offering price, less the sales load,
within 45 days of the date of this Prospectus solely to
cover over-allotments, if any. If such option is exercised in
full, the public offering price, sales load, estimated offering
expenses and proceeds, after expenses, to the Fund will be
$299,800,000, $13,491,000, $599,600 and $285,709,400,
respectively. See Underwriting.
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The underwriters expect to deliver the Common Shares to
purchasers on or about November 30, 2009.
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Wells
Fargo Securities |
UBS Investment Bank |
Ameriprise Financial Services, Inc. |
Raymond James
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Janney
Montgomery Scott |
Oppenheimer & Co. |
RBC Capital Markets |
Stifel Nicolaus |
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Robert W.
Baird & Co. |
J.J.B.
Hilliard, W.L. Lyons, LLC |
Maxim
Group LLC |
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Wedbush
Morgan Securities Inc. |
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Wunderlich Securities |
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The date of this Prospectus is November 24, 2009.
(continued from previous
page)
Under normal market conditions, the Fund intends to invest at
least 80% of its Managed Assets (as defined herein)
in a portfolio of equity securities of technology and
technology-related companies that the Investment Manager
believes offer attractive opportunities for capital
appreciation. These companies are those which the Investment
Manager expects will generate a majority of their revenues from
the development, advancement, use or sale of technology or
technology-related products or services. Technology and
technology-related companies may include companies operating in
any industry, including but not limited to software, hardware,
communications, information, health care, medical technology and
technology services, including the internet.
The Fund may invest in companies of any size. Securities of
large companies that are well established in the world
technology market can be expected to grow with the market.
Rapidly changing technologies and expansion of
technology-related industries often provide a favorable
environment for companies of
small-
to-medium
size, and the Fund may invest in these companies as well.
Although the Fund will invest primarily in U.S. companies, the
Fund may invest up to 25% of its Managed Assets in companies
organized outside of the United States.
In addition to the Funds holdings in technology and
technology-related companies, the Fund will seek to cushion
downside volatility and produce current income by writing call
options on the NASDAQ 100 on a month-to-month basis, with an
aggregate notional amount typically ranging from 25% to 90% of
the underlying value of the Funds holdings of common
stock. In determining the level (i.e., 25% to 90%) of call
options to be written on the NASDAQ 100, the Investment Manager
will use a rules-based call option writing strategy (patent
pending) (the Rules-based Option Strategy) based on
the CBOE NASDAQ-100 Volatility
IndexSM
(the VXN Index). The VXN Index measures the
markets expectation of
30-day
volatility implicit in the prices of near-term NASDAQ 100 Index
options. The VXN Index, which is quoted in percentage points
(e.g., 19.36), is a leading barometer of investor sentiment and
market volatility relating to the NASDAQ 100 Index. In general,
the Investment Manager intends to write more call options when
market volatility, as represented by the VXN Index, is high (and
premiums received for writing the option are high) and write
fewer call options when market volatility, as represented by the
VXN Index, is low (and premiums for writing the option are low).
The Investment Managers Rules-based Option Strategy with
respect to writing call options is as follows:
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Aggregate Notional Amount of Written Call Options
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as a Percentage of the
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When the VXN Index
is:
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Funds Holdings in Common
Stocks
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17 or less
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25%
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Greater than 17, but less than 18
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Increase up to 50%
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At least 18, but less than 33
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50%
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At least 33, but less than 34
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Increase up to 90%
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At 34 or greater
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90%
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The Rules-based Option Strategy is based upon the Investment
Managers research and may change over time based upon the
Funds experience and market factors.
In addition to the Rules-based Option Strategy described above,
the Fund may write additional calls with aggregate notional
amounts of up to 25% of the value of the Funds holdings in
common stocks (to a maximum of 90% when aggregated with the
call options written pursuant to the Rules-based Option
Strategy) when call premiums are attractive relative to the risk
of the price of the NASDAQ 100. The Fund may also close (or buy
back) a written call option if the Investment Manager believes
that a substantial amount of the premium (typically, 70% or
more) to be received by the Fund has been captured before
exercise, potentially reducing the call position to 0% of total
equity until additional calls are written.
The Fund may also seek to provide downside protection by
purchasing puts on the NASDAQ 100 when premiums on these options
are considered by the Investment Manager to be low and,
therefore, attractive relative to the downside protection
provided. Furthermore, under normal market conditions, the Fund
may invest up to 20% of its Managed Assets in debt securities
(including convertible and non-
-ii-
convertible debt securities), such as debt securities issued by
technology and technology-related companies and obligations of
the U.S. Government, its agencies and instrumentalities and
government-sponsored enterprises. The Fund may exceed this limit
under certain circumstances during its initial three months of
operation.
For more information on the Funds investment strategies,
see The Funds Investments and
Risks.
There can be no assurance that the Fund will achieve its
investment objectives.
You should read this Prospectus, which contains important
information about the Fund that you ought to know before
deciding whether to invest. You should retain this Prospectus
for future reference. A Statement of Additional Information
(SAI), dated November 24, 2009, containing
additional information about the Fund, has been filed with the
Securities and Exchange Commission (SEC) and is
incorporated by reference in its entirety into (i.e., is legally
considered a part of) this Prospectus. You may request a free
copy of the SAI, the table of contents of which is on
page 58 of this Prospectus, annual and semi-annual reports
to stockholders, when available, and other information about the
Fund by calling toll-free
800-221-2450
or from the Funds website at www.seligman.com.
Additionally, you may obtain a copy (and other information
regarding the Fund) from the SECs web site
(http://www.sec.gov). All website references in this Prospectus
and the SAI are inactive textual references and the contents of
such websites are not incorporated into such documents.
Information on our website is not part of this Prospectus or the
SAI and should not be considered when making an investment
decision.
Common Shares do not represent a deposit with 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.
-iii-
TABLE OF
CONTENTS
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51
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53
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57
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57
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57
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57
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57
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58
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YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED OR
INCORPORATED BY REFERENCE INTO 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 OR INCONSISTENT
INFORMATION, YOU SHOULD NOT RELY ON IT. THE FUND IS NOT,
AND THE UNDERWRITERS ARE NOT, MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE
DATE ON THE FRONT OF THIS PROSPECTUS. THE FUNDS BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE.
-iv-
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this Prospectus. This summary does not contain all of the
information that you should consider before investing in the
Funds common stock. You should carefully read the entire
Prospectus, including the documents incorporated by reference
into it, particularly the section entitled Risks
beginning on page 30.
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The Fund |
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Seligman Premium Technology Growth Fund, Inc., a Maryland
corporation (the Fund), is a newly organized,
non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended
(the Investment Company Act). |
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The Offering of Common Shares |
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The Fund is offering shares of common stock at $20.00 per share
through a group of underwriters (the underwriters)
led by Wells Fargo Securities, LLC, UBS Securities LLC and
Ameriprise Financial Services, Inc. The shares of common stock
are called Common Shares in this Prospectus. You
must purchase at least 100 Common Shares ($2,000) in order
to participate in the offering. The Fund has given the
underwriters an option to purchase up to 1,890,000 additional
Common Shares to cover orders in excess of 13,100,000 Common
Shares. See Underwriting. The Fund will pay Common
Share offering costs up to $0.04 per Common Share, and the
Investment Manager has agreed to pay all of the Funds
organizational expenses and Common Share offering costs (other
than sales load) that exceed $0.04 per Common Share. |
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Financial intermediaries that sell shares may impose fees, terms
and conditions on investor accounts and investments in the Fund
that are in addition to the terms and conditions imposed by the
Fund. Any fees, terms and conditions imposed by financial
intermediaries may affect or limit an investors ability to
purchase shares or otherwise transact business with the Fund. |
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Investment Objectives and Principal Strategies of the Fund |
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The Funds investment objectives are to seek growth of
capital and current income. |
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Under normal market conditions, the Funds investment
program will consist primarily of (1) investing in a
portfolio of equity securities of technology and
technology-related companies that seeks to exceed the total
return, before fees and expenses, of the S&P North America
Technology Sector
Index®
and (2) writing call options on the NASDAQ 100
Index®,
an unmanaged index that includes the largest and most active
non-financial domestic and international companies listed on the
Nasdaq Stock Market, or its exchange-traded fund
(ETF) equivalent (the NASDAQ 100) on a
month-to-month
basis, with an aggregate notional amount typically ranging from
25% to 90% of the underlying value of the Funds holdings
of common stock. The Fund expects to generate current income
from premiums received from writing call options on the NASDAQ
100. |
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Under normal market conditions, the Fund intends to invest at
least 80% of its Managed Assets (as defined herein)
in a portfolio of |
1
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equity securities of technology and technology-related companies
that the Investment Manager believes offer attractive
opportunities for capital appreciation. These companies are
those which the Investment Manager expects will generate a
majority of their revenues from the development, advancement,
use or sale of technology or technology-related products or
services. Technology and technology-related companies may
include companies operating in any industry, including but not
limited to software, hardware, communications, information,
health care, medical technology and technology services,
including the internet. |
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The Fund may invest in companies of any size. Securities of
large companies that are well established in the world
technology market can be expected to grow with the market.
Rapidly changing technologies and expansion of technology and
technology-related industries often provide a favorable
environment for companies of small-to-medium size, and the Fund
may invest in these companies as well. Although the Fund will
invest primarily in U.S. companies, the Fund may invest up to
25% of its Managed Assets in companies organized outside of the
United States. |
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In addition to the Funds core holdings in technology and
technology-related companies, the Fund will seek to cushion
downside volatility and produce current income by utilizing
certain options strategies (the Options Strategies),
primarily consisting of writing call options on the NASDAQ 100
on a month-to-month basis, with an aggregate notional amount
typically ranging from 25% to 90% of the underlying value of the
Funds holdings of common stock. In determining the level
(i.e., 25% to 90%) of call options to be written on the NASDAQ
100, the Investment Manager will use a rules-based call option
writing strategy (patent pending) (the Rules-based Option
Strategy) based on the CBOE NASDAQ-100 Volatility
IndexSM
(the VXN Index). The VXN Index measures the
markets expectation of
30-day
volatility implicit in the prices of near-term NASDAQ 100 Index
options. The VXN Index, which is quoted in percentage points
(e.g., 19.36), is a leading barometer of investor sentiment and
market volatility relating to the NASDAQ 100 Index. In general,
the Investment Manager intends to write more call options when
market volatility, as represented by the VXN Index, is high (and
premiums received for writing the option are high) and write
fewer call options when market volatility, as represented by the
VXN Index, is low (and premiums for writing the option are |
2
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low). The Investment Managers Rules-based Option Strategy
with respect to writing call options is as follows: |
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Aggregate Notional Amount of Written
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When the VXN
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Call Options as a Percentage of
the
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Index is:
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Funds Holdings in Common Stocks
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17 or less
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25%
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Greater than 17, but less than 18
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Increase up to 50%
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At least 18, but less than 33
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50%
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At least 33, but less than 34
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Increase up to 90%
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At 34 or greater
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90%
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The Rules-based Option Strategy is based upon the Investment
Managers research and may change over time based upon the
Funds experience and market factors. |
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In addition to the Rules-based Option Strategy described above,
the Fund may write additional calls with aggregate notional
amounts of up to 25% of the value of the Funds holdings in
common stocks (to a maximum of 90% when aggregated with the call
options written pursuant to the Rules-based Option Strategy)
when call premiums are attractive relative to the risk of the
price of the NASDAQ 100. The Fund may also close (or buy back) a
written call option if the Investment Manager believes that a
substantial amount of the premium (typically, 70% or more) to be
received by the Fund has been captured before exercise,
potentially reducing the call position to 0% of total equity
until additional calls are written. |
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The Fund intends to write (sell) NASDAQ 100 call options that
are exchange-listed or traded over-the-counter
(OTC). However, index options differ from options on
individual securities (including ETFs) in that index options
(i) typically are settled in cash rather than by delivery
of securities and (ii) reflect price fluctuations in a
group of securities or segments of the securities market rather
than price fluctuations in a single security. Compared to call
options on individual stocks (including ETFs), writing call
options on the NASDAQ 100 Index can achieve better tax
efficiency because listed options on broad-based securities
indices are section 1256 contracts that are
subject to more favorable U.S. tax treatment than options on
individual stocks. Accordingly, given this beneficial tax
treatment and that index options are typically settled in cash
at expiration (which can be less disruptive to portfolio
management), the Investment Manager will generally prefer to
write call options on the NASDAQ 100 Index. |
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As the seller of NASDAQ 100 call options, the Fund will receive
cash (premiums) from options purchasers. The purchaser of a
NASDAQ 100 call option has the right to any appreciation in the
value of the NASDAQ 100 over a fixed price (the exercise price
or strike price) as of the relevant exercise date or exercise
dates (depending on the style of the option). Generally, the
Fund intends to sell NASDAQ 100 call options that are slightly
out-of- |
3
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the-money (i.e., the exercise price generally will be
slightly above the current level of the NASDAQ 100 when the
option is sold) and to close out the position if the Investment
Manager believes that a substantial amount of the premium
(typically, 70% or more) to be received by the Fund has been
captured before exercise, potentially reducing the call position
to 0% of total equity until additional calls are written. The
Rules-based Option Strategy approach is based upon the
Investment Managers research and may change over time
based upon the Funds experience and market factors. The
Fund will, in effect, sell the potential appreciation in the
value of the NASDAQ 100 above the exercise price in exchange for
the option premium received. In the case of a written call
option on the NASDAQ 100, if the call option sold by the Fund is
exercised, the Fund will pay the purchaser the difference
between the cash value of the NASDAQ 100 and the exercise price
of the option. The premium, the exercise price and the market
value of the NASDAQ 100 will determine the gain or loss realized
by the Fund as the seller of the index call option. In the case
of a written call option on an ETF, such as the NASDAQ 100, if
the call option is exercised, the Fund will be required to
deliver the number of shares of that ETF (representing the
NASDAQ 100) for which the option was exercised. This is
likely to require that the Fund purchase such shares at prices
in excess of the exercise price of the option, meaning that it
is likely that the Fund will incur a loss. Writing call options
on the NASDAQ 100 involves a tradeoff between the option
premiums received and reduced participation in potential future
stock price appreciation of the Funds common stock
holdings (to the extent the performance of the Funds
holdings correlate to the performance of the NASDAQ 100). |
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The Fund may also seek to provide downside protection by
purchasing puts on the NASDAQ 100 when premiums on these options
are considered by the Investment Manager to be low and,
therefore, attractive relative to the downside protection
provided. |
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The Fund may also buy or write other call and put options on
securities, indices, ETFs and market baskets of securities to
generate additional income or return or to provide the portfolio
with downside protection. In this regard, options may include
writing in- or out-of-the-money put
options or buying or selling options in connection with closing
out positions prior to expiration of any options. However, the
Fund does not intend to write naked call options on
individual stocks (i.e., selling a call option on an individual
security not owned by the Fund) other than in connection with
implementing the Options Strategies with respect to the
NASDAQ 100. The put and call options purchased, sold or
written by the Fund may be exchange-listed or OTC. |
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Furthermore, under normal market conditions, the Fund may invest
up to 20% of its Managed Assets in debt securities (including
convertible and non-convertible debt securities), such as debt
securities issued by technology and technology-related companies |
4
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and obligations of the U.S. Government, its agencies and
instrumentalities, and government-sponsored enterprises, as well
as below-investment grade securities (i.e., high-yield or junk
bonds). The Fund may exceed this limit under certain
circumstances during its initial three months of operation. See
The Funds Investments Debt
Securities. |
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The Fund may invest up to 15% of its Managed Assets in illiquid
securities (i.e., securities that at the time of purchase are
not readily marketable). See The Funds
Investments Illiquid Securities. |
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The Funds investment objectives and policies are
non-fundamental and may be changed by the Funds Board of
Directors (the Board) without approval of the
Funds stockholders. However, the Funds investment
policy of investing at least 80% of its Managed Assets in equity
securities of technology and technology-related companies and
its policy with respect to the use of the Rules-based Option
Strategy on a month-to-month basis may be changed by the Board
without stockholder approval only following the provision of
60 days prior written notice to stockholders. The
Fund has a fundamental policy of investing at least 25% of its
total assets in securities principally engaged in technology and
technology-related stocks. This policy may not be changed
without a stockholder vote. |
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Investment Rationale |
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The Investment Manager believes that a strategy of owning a
portfolio of equity securities in technology and
technology-related companies in conjunction with writing call
options on the NASDAQ 100 should generally provide returns that
are superior to investing in the same or similar stocks without
an associated call option writing program under three different
stock market scenarios: (1) down-trending technology
markets; (2) flat market conditions for technology; and
(3) moderately rising technology markets. In the Investment
Managers opinion, only in more strongly rising technology
markets would the option strategy on the NASDAQ 100 to be used
by the Fund generally be expected to underperform the stock-only
portfolio. For these purposes, the Investment Manager considers
more strongly rising technology market conditions to exist
whenever the current annual rate of return for U.S. common
stocks of technology companies (as represented by the NASDAQ 100
Index) exceeds the long-term historical average of stock
market returns as represented by the NASDAQ 100 Index. The
Investment Manager considers moderately rising technology market
conditions to exist whenever current annual returns on U.S.
common stocks of technology companies are positive, but do not
exceed their long-term historical average as represented by the
NASDAQ 100 Index. |
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In addition, the Investment Manager believes that the flexible
investment strategy of using options in a variety of
circumstances (whether buying, selling or writing options on
individual securities, indices or otherwise) will permit the
Fund to take advantage of various market conditions. This may
include purchasing put options when such options are considered
to be inexpensive or |
5
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writing call options when premiums are high. See The
Funds Investments and Risks. |
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Use of Leverage |
|
The Fund does not currently anticipate issuing preferred stock
of the Fund (Preferred Shares) or borrowing money in
order to purchase additional portfolio securities. However, the
Fund is authorized to issue Preferred Shares, so long as the
asset coverage (as defined in the Investment Company Act) with
respect to Preferred Shares is at least 200%. The Fund is also
authorized to borrow money in amounts of up to
331/3%
of the value of its Managed Assets (which includes amounts
borrowed for investment purposes) at the time of such borrowings
to purchase portfolio securities and for portfolio management
purposes. These practices are known as leverage. See
Borrowings and Preferred Shares. To the extent that
the Fund uses leverage, it would seek to obtain a higher return
for holders of Common Shares (the Common
Stockholders) than if the Fund did not use leverage.
Leveraging is a speculative technique and there are special
risks involved. See Risks Leverage Risk. |
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The Investment Manager |
|
The Funds investment manager is RiverSource Investments,
LLC, (RiverSource Investments or the
Investment Manager) located at 50606 Ameriprise
Financial Center, Minneapolis, Minnesota 55474. RiverSource
Investments is the investment manager to the RiverSource,
RiverSource Partners, Threadneedle and Seligman funds (the
RiverSource Family of Funds), and is a wholly-owned
subsidiary of Ameriprise Financial, Inc. (Ameriprise
Financial), a financial planning and financial services
company. In addition to managing investments for the RiverSource
Family of Funds, RiverSource Investments manages investments for
separate account clients, for itself and for its affiliates. For
institutional clients, RiverSource Investments and its
affiliates provide investment management and related services,
such as separate account asset management, and institutional
trust and custody, as well as other investment products. As of
September 30, 2009, the Investment Manager had assets under
management of approximately $145.76 billion. |
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The Fund will pay RiverSource Investments a fee for managing its
assets. Under the Investment Management Services Agreement (the
Investment Management Agreement), the fee will be at
the annual rate of 1.00% of the Funds average daily
Managed Assets. Managed Assets means the net asset
value of the Funds outstanding Common Shares plus any
liquidation preference of any issued and outstanding Preferred
Shares and the principal amount of any borrowings used for
leverage. |
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Dividend Distributions on Common Shares |
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Initial Distribution. The Funds
initial distribution is expected to be declared approximately
45 days after the completion of the offering, and paid
approximately 45 days later, depending upon market
conditions, and out of assets legally available therefor.
Thereafter distributions are expected to be declared quarterly
after the first full quarter of operations (i.e., June,
September, December and March), depending on market conditions.
Unless |
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you elect to receive distributions in cash, all of your
distributions will be automatically reinvested in additional
Common Shares under the Funds Dividend Investment Plan.
See Dividend Investment Plan. The Board may change
the Funds distribution policy and the amount or timing of
the distributions, based on a number of factors, including, but
not limited to, the amount of the Funds undistributed net
investment income and net short- and long-term capital gains and
historical and projected net investment income and net short-
and long-term capital gains. |
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Level Rate Distribution
Policy. Commencing with the Funds first
distribution, the Fund intends to make quarterly cash
distributions, and out of assets legally available therefor, to
Common Stockholders at a rate that reflects the past and
projected performance of the Fund. The Fund expects to receive
all or some of its current income and gains from the following
sources: (i) dividends received by the Fund that are paid
on the equity and equity-related securities in its portfolio;
and (ii) capital gains (short-term and long-term) from
option premiums and the sale of portfolio securities.
Distributions would be made only after paying dividends on
Preferred Shares, if any have been issued, and interest and
required principal payments on borrowings, if any. It is
possible that the Funds distributions will at times exceed
the earnings and profits of the Fund and therefore all or a
portion of such distributions may constitute a return of capital
as described below. A return of capital is not taxable, but it
reduces a stockholders tax basis in his or her shares,
thus reducing any loss or increasing any gain on a subsequent
taxable disposition by the stockholder of his or her shares.
Distributions may be variable, and the Funds distribution
rate will depend on a number of factors, including the net
earnings on the Funds portfolio investments and the rate
at which such net earnings change as a result of changes in the
timing of, and rates at which, the Fund receives income from the
sources described above. The net investment income of the Fund
consists of all income (other than net short-term and long-term
capital gains) less all expenses of the Fund. As portfolio and
market conditions change, the rate of dividends on the Common
Shares and the Funds distribution policy could change.
Over time, the Fund will distribute all of its net investment
income and net short-term capital gains. In addition, at least
annually, the Fund intends to distribute any net capital gain
(which is the excess of net long-term capital gain over net
short-term capital loss) or, alternatively, to retain all or a
portion of the years net capital gain and pay federal
income tax on the retained gain. As provided under federal law,
Common Stockholders of record as of the end of the Funds
taxable year will include their attributable share of the
retained gain in their income for the year as a long-term
capital gain and will be entitled to a tax credit or refund for
the tax deemed paid on their behalf by the Fund. The Fund may
treat the cash value of tax credits and amounts refunded in
connection with retained capital gains as a substitute for
equivalent cash distributions. |
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The Investment Company Act currently limits the number of times
the Fund may distribute long-term capital gains in any tax year
(unless and until it receives an exemptive order as contemplated
under Managed Distribution Policy below), which may
increase the variability of the Funds distributions and
result in certain distributions being comprised to a larger
degree of long-term capital gains eligible for more favorable
income tax treatment than others. During periods in which the
Funds strategies do not generate enough income or result
in net losses, a substantial portion of the Funds
dividends may be comprised of capital gains from the sale of
securities held by the Fund, which would involve transaction
costs and may also result in realization of taxable short-term
capital gains taxed at ordinary income tax rates, particularly
during the initial year of the Funds operations when all
of the Funds portfolio securities will have been held for
less than one year. The Board of the Fund reserves the right to
change the dividend policy from time to time. |
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Managed Distribution Policy. The
Investment Manager has applied to the Securities and Exchange
Commission (the SEC) for an exemptive order under
the Investment Company Act to permit funds managed by the
Investment Manager, including the Fund, to include that
funds realized long-term capital gains as a part of its
regular distributions to common stockholders more frequently
than would otherwise be permitted by the Investment Company Act
(generally once per taxable year). Under a managed distribution
policy, the Fund would distribute to Common Stockholders a fixed
quarterly amount, which may be adjusted from time to time. As
with the level rate distribution policy, distributions would be
made only after paying dividends on Preferred Shares, if any
have been issued, and interest and required principal payments
on borrowings, if any. Under a managed distribution policy, if,
for any quarterly distribution, net investment company taxable
income and net capital gain were less than the amount of the
distribution, the difference would be distributed from the
Funds assets and result in a return of capital. A return
of capital is a return of your original investment. Common
Stockholders who periodically receive the payment of a dividend
or other distribution consisting entirely or in part of a return
of capital may be under the impression that they are receiving
net profits when they are not. Common Stockholders should not
assume that the source of a distribution from the Fund is net
profit and should read any written disclosure accompanying
distribution payments carefully. There can be no assurance that
the SEC staff will process such application by the Investment
Manager for an exemptive order on a timely basis or ever, or
that the SEC will grant the requested relief or, if granted,
that the Funds Board will determine to implement or
maintain a managed distribution policy. As a result, the Fund
has no current expectation that it will be in a position to
include long-term capital gains in Fund distributions more
frequently than is currently permitted under the Investment
Company Act (generally, once per tax year), thus leaving the
Fund with the possibility of variability in |
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distributions (and their tax attributes) as discussed above. The
Board of the Fund reserves the right to change the dividend
policy from time to time. |
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Dividend Investment Plan |
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Pursuant to the Funds Dividend Investment Plan (the
Plan), unless a Common Stockholder elects otherwise,
all cash dividends, capital gains distributions, and other
distributions are automatically reinvested in additional Common
Shares. |
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Common Stockholders who elect not to participate in the Plan
(including those whose intermediaries do not permit
participation in the Plan by their customers) will receive all
dividends and distributions payable in cash directly to the
Common Stockholder of record (or, if the Common Shares are held
in street or other nominee name, then to such nominee) by
American Stock Transfer & Trust Company, LLC
(AST), as dividend paying agent. Common Stockholders
may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains or other
distributions in cash by sending written instructions to their
broker or other nominee. Participation in the Plan may be
terminated or resumed at any time without penalty by written
notice if received by AST prior to the record date for the next
distribution. Otherwise, such termination or resumption will be
effective with respect to any subsequently declared distribution. |
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Under the Plan, Common Stockholders receive Common Shares in
lieu of cash distributions unless they have elected otherwise as
described in the preceding paragraph. Common Shares will be
issued in lieu of cash by the Fund from authorized but unissued
Common Shares. If the market price of a share on the ex-dividend
date of such a distribution is at or above the Funds net
asset value per share on such date, the number of shares to be
issued by the Fund to each Common Stockholder receiving shares
in lieu of cash distributions will be determined by dividing the
amount of the cash distribution to which such Common Stockholder
would be entitled by the greater of the net asset value per
share on such date or 95% of the market price of a share on such
date. If the market price of a share on such an ex-dividend date
is below the net asset value per share, the number of shares to
be issued to such Common Stockholders will be determined by
dividing such amount by the per share market price. See
Dividend Investment Plan. |
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Closed-End Fund Structure |
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Closed-end funds differ from traditional 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 stockholder. By comparison,
mutual funds issue securities that are redeemable at net asset
value at the option of the stockholder and typically engage in a
continuous offering of their shares. |
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Shares of closed-end funds frequently trade at a discount from
their net asset value. In recognition of this possibility and
that such discount may not be in the interest of Common |
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Stockholders, the Board, in consultation with the Investment
Manager, from time to time may review possible actions to reduce
any discount. The Board might consider open market repurchases
or tender offers for Common Shares at net asset value. 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 net
asset value per Common Share. The Board might also consider the
conversion of the Fund to an open-end mutual fund. The
Funds organizational documents, policies and features,
however, have been designed to suit a closed-end structure.
Investors should assume, therefore, that it is highly unlikely
that the Fund would convert to an open-end management investment
company. |
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Tax Aspects |
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The Fund intends to elect to be treated as a regulated
investment company (a RIC) for U.S. federal income
tax purposes. To satisfy the distribution requirements
applicable to RICs and to avoid corporate level income taxation,
the Fund intends to make quarterly distributions so that it
distributes all or substantially all of its net investment
income and realized capital gains, if any, each year to its
stockholders. Please refer to the Tax Matters
section of this Prospectus for additional information on the
potential U.S. federal income tax consequences of the
acquisition, ownership and disposition of shares of the Fund.
You should consult your own tax advisors regarding any potential
state, local,
non-U.S. or
other tax consequences of an investment in the Fund. |
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Listing and Symbol |
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The Funds Common Shares have been approved for listing on
the New York Stock Exchange (NYSE), subject to
notice of issuance, under the symbol STK. See
Description of Common Shares Common
Shares. |
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Administrative Services Agent |
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Under an Administrative Services Agreement (the
Administrative Services Agreement), Ameriprise
Financial provides, or compensates others to provide, the Fund
with certain services, including administrative, accounting,
treasury, and other services. The Fund will pay Ameriprise
Financial a fee for providing such services. Under the
Administrative Services Agreement, the fee will be at the annual
rate of 0.06% of the Funds average daily Managed Assets. |
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Custodian, Transfer Agent, Stockholder Service Agent and
Dividend Paying Agent, and Board Services Corporation |
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JPMorgan Chase Bank, N.A. (JPMorgan) will serve as
custodian of the Funds assets. AST acts as the transfer
agent, stockholder service agent and dividend paying agent for
the Fund. See Custodian, Transfer Agent, Stockholder
Service Agent and Dividend Paying Agent. |
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The funds in the RiverSource Family of Funds, including the
Fund, have an agreement with Board Services Corporation
(Board Services) located at 901 Marquette
Avenue South, Suite 2810, Minneapolis, MN 55402. This
agreement sets forth |
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the terms of Board Services responsibility to serve as an
agent of the funds for purposes of administering the payment of
compensation to each independent Board member, to provide office
space for use by the funds and their boards, and to provide any
other services to the boards or the independent members, as may
be reasonably requested. See Board Services
Corporation. |
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Special Risk Considerations |
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Newly Organized |
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The Fund is a newly organized, non-diversified, closed-end
management investment company with no history of operations. |
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Investment Risk
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Investing in the Fund involves certain risks and the Fund may
not be able to achieve its investment objectives for a variety
of reasons, including, among others, the possibility that the
Fund may not be able to implement the Options Strategies as
anticipated. Because the value of your investment in the Fund
will fluctuate, there is a risk that you will lose money. Your
investment will decline in value if the value of the Funds
investments decreases. The market price of a Common Share may
decrease even though its net asset value increases. You cannot
redeem your shares from the Fund at net asset value. The value
of your shares also will be impacted by the Funds ability
to successfully implement its investment strategy, as well as by
market, economic and other conditions. As with any security,
complete loss of investment is possible. The Funds
Rules-based Option Strategy has not been applied in any
technology or technology-related stock portfolio managed by the
Investment Manager. Even if technology and technology-related
stocks appreciate, the value of the Fund may not. |
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Equity Securities Risk
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The Funds portfolio will include equity securities. An
equity security, or stock, represents a proportionate share of
the ownership of a company. The value of an equity security is
generally based on the success of the companys business,
any income paid to stockholders, the value of its assets and
general market conditions. Equity securities include common,
preferred and convertible preferred stocks and securities with
values that are tied to the price of stocks, such as rights,
warrants and convertible debt securities. An adverse event, such
as an unfavorable earnings report, may depress the value of a
particular common stock held by the Fund. Also, the prices of
common stocks are sensitive to general movements in the stock
market and a drop in the stock market may depress the price of
common stocks to which the Fund has exposure. Common stock
prices fluctuate for several reasons, including changes to
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 an issuer occur. In
addition, common stock prices may be particularly sensitive to
rising interest rates, as the cost of capital rises and
borrowing costs increase. Even investments in high quality or
blue chip equity securities or securities of
established companies with large market capitalizations (which
generally have strong financial characteristics) can be
negatively impacted by poor overall market and economic
conditions. Companies with |
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large market capitalizations may also have less growth potential
than smaller companies and may be able to react less quickly to
change in the marketplace. |
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Small-Cap and Mid-Cap Companies Risk |
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The Fund may invest all or a substantial portion of its assets
in companies whose market capitalization is considered
small- or mid-cap. These companies often are newer or less
established companies than larger companies. Investments in
these companies carry additional risks because earnings of these
companies tend to be less predictable; they often have limited
product lines, markets, distribution channels or financial
resources; and the management of such companies may be dependent
upon one or a few key people. The market movements of equity
securities of small-cap and mid-cap companies may be more abrupt
or erratic than the market movements of equity securities of
larger, more established companies or the stock market in
general. Historically, small-cap and mid-cap companies have
sometimes gone through extended periods when they did not
perform as well as larger companies. In addition, equity
securities of these companies generally are less liquid than
those of larger companies. This means that the Fund could have
greater difficulty selling such securities at the time and price
that the Fund would like. |
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Smaller-company stocks, as a whole, may experience larger price
fluctuations than large-company stocks or other types of
investments. During periods of investor uncertainty, investor
sentiment may favor large, well-known companies over small,
lesser-known companies. There may be less trading in a smaller
companys stock, which means that buy and sell transactions
in that stock could have a larger impact on the stocks
price than is the case with larger company stocks. |
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Technology and Technology-Related Investment Risk |
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The Fund will invest a substantial portion of its assets in
technology and technology-related companies. The market prices
of technology and technology-related stocks tend to exhibit a
greater degree of market risk and price volatility than other
types of investments. These stocks may fall in and out of favor
with investors rapidly, which may cause sudden selling and
dramatically lower market prices. These stocks also may be
affected adversely by changes in technology, consumer and
business purchasing patterns, government regulation and/or
obsolete products or services. In addition, a rising interest
rate environment tends to negatively affect technology and
technology-related companies. In such an environment, those
companies with high market valuations may appear less attractive
to investors, which may cause sharp decreases in the
companies market prices. Further, those technology or
technology-related companies seeking to finance their expansion
would have increased borrowing costs, which may negatively
impact their earnings. As a result, these factors may negatively
affect the performance of the Fund. The Fund may also be
susceptible to factors affecting the technology and
technology-related industries, and the Funds net asset
value may |
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fluctuate more than a fund that invests in a wider range of
industries. Technology and technology-related companies are
often smaller and less experienced companies and may be subject
to greater risks than larger companies, such as limited product
lines, markets and financial and managerial resources. These
risks may be heightened for technology companies in foreign
markets. |
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Writing Call Options Risk |
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A principal aspect of the Funds investment strategy
involves writing call options on the NASDAQ 100. This part of
the Funds strategy subjects the Fund to certain additional
risks. A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree
because of market behavior or unexpected events. The principal
factors affecting the market value of an option include supply
and demand, interest rates, the current market price of the
underlying index or security in relation to the exercise price
of the option, the actual or perceived volatility of the
underlying index or security and the time remaining until the
expiration date. |
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The Fund intends to write call options on the NASDAQ 100;
however, it does not intend to have a portfolio of securities
that mirrors the securities in the NASDAQ 100 Index. As a
result, during a period when the Fund has outstanding call
options written on the NASDAQ 100, the NASDAQ 100 may
appreciate to a greater extent than the securities in the
Funds portfolio. If the call options are exercised in
these circumstances, the Funds loss on the options will be
greater because it will be paying the option holder not only an
amount effectively representing appreciation on securities in
its own portfolio but also an amount representing the greater
appreciation experienced by the securities in the NASDAQ 100
Index that the Fund does not own. If, at a time these call
options may be exercised, the securities underlying these
options have market values above the exercise price, then these
call options will be exercised and the Fund will be obligated to
deliver to the option holder either the securities underlying
these options or to deliver the cash value of those securities,
in exchange for which the option holder will pay the Fund the
exercise price. In either case, the Fund will incur losses to
the extent the market value of the underlying securities exceeds
the sum of the premium the Fund received from writing the call
options and the exercise price of the call options, which loss
may be very substantial. |
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To the extent all or part of the Funds call options are
covered, the Fund forgoes, during the options life, the
opportunity to profit from increases in the market value of the
security underlying the call option above the sum of the option
premium received and the exercise price of the call, but has
retained the risk of loss should the price of the underlying
security decline below the exercise price minus the option
premium received. The writer of an exchange-listed option on a
security has no control over when during the exercise period of
the option (which may be a single day or multiple days) it may
be required to fulfill its |
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obligation as a writer of the option. Once an option writer has
received an exercise notice, it would be obligated to deliver
the underlying security at the exercise price. Thus, the writing
of call options may require the Fund to sell portfolio
securities at inopportune times or for prices other than current
market values and will limit the amount of appreciation the Fund
can realize above the exercise price of an option. |
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The Fund may be required to sell investments from its portfolio
to effect cash settlement (or transfer ownership of a stock or
other instrument to physically settle) on any written call
options that are exercised. Such sales (or transfers) may occur
at inopportune times, and the Fund may incur transaction costs
that increase the expenses borne by Common Stockholders. |
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The Fund may sell written call options over an exchange or in
the over-the-counter (OTC) market. The options in
the OTC markets may not be as liquid as exchange-listed options.
The Fund may be limited in the number of counterparties willing
to take positions opposite the Fund or may find the terms of
such counterparties to be less favorable than the terms
available for listed options. The Fund cannot guarantee that its
Options Strategies will be effective. Moreover, OTC options may
provide less favorable tax treatment than listed options. See
Risks Writing Call Options Risk. |
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Options Risk |
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The Fund intends to engage in transactions in options on
securities, indices, exchange-traded funds and market baskets of
securities on exchanges and in the OTC markets. In general,
exchange-traded options have standardized exercise prices and
expiration dates and require the parties to post margin against
their obligations, and the performance of the parties
obligations in connection with such options is guaranteed by the
exchange or a related clearing corporation. OTC options have
more flexible terms negotiated between the buyer and the seller,
but generally do not require the parties to post margin and may
be subject to greater credit risk. OTC options also involve
greater liquidity risk. |
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In addition to writing call options as described above, the Fund
may purchase put options. By buying a put option, the Fund will
pay a premium to acquire a right to sell the securities or
instruments underlying the put at the exercise price of the
option. The Fund will lose money if the securities or
instruments underlying the option do not decline in value below
the exercise price of the option by an amount sufficient to
offset the premium paid to acquire the option. To the extent the
Fund purchases put options in the OTC market, the Fund will be
subject to the credit risk of the seller of the option. The Fund
also may write put options on the types of securities or
instruments that may be held by the Fund, provided that such put
options are secured by segregated, liquid instruments. The Fund
will receive a premium for writing a put option, which increases
the Funds return. In exchange for the premium received,
the Fund has the obligation to buy the securities or instruments
underlying the option at an agreed upon price if the securities
or instruments decrease below the |
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exercise price of the option. The Fund will lose money if the
securities or instruments decrease in value so that the amount
the Fund is obligated to pay the counterparty to the option to
purchase the securities underlying the option upon exercise of
the option exceeds the value of those securities by an amount
that is greater than the premium received by the Fund for
writing the option. |
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The Fund may purchase call options on any of the types of
securities or instruments in which it may invest. In exchange
for paying the option premium, a purchased call option gives the
Fund the right to buy, and obligates the seller to sell, the
underlying security or instrument at the exercise price. The
Fund will lose money if the securities or instruments underlying
the option do not appreciate in value in an amount sufficient to
offset the premium paid by the Fund to acquire the option. |
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General Risks Related to Derivatives |
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In addition to call options or other options strategies, the
Fund may use other derivatives, such as, among others, total
return and other types of swaps, forward contracts, futures and
options on futures and swaps. The Funds use of derivatives
involves risks different from, and possibly greater than, the
risks associated with investing directly in the investments
underlying these derivatives. Derivatives may be volatile and
involve significant risk, such as, among other things, credit
risk, currency risk, leverage risk and liquidity risk. They also
involve the risk of mispricing or improper valuation and
correlation risk (i.e., the risk that changes in the value of
the derivative may not correlate perfectly, or to any degree,
with the underlying asset, interest rate or index). Using
derivatives can disproportionately increase losses and reduce
opportunities for gains when security prices, indices, currency
rates or interest rates are changing in unexpected ways. The
Fund may suffer disproportionately heavy losses relative to the
amount of its investments in derivative contracts. |
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Changes in the value of derivative contracts may not match or
offset fully changes in the values of the underlying portfolio
securities, indices or rates. The Funds investments in
derivatives could result in the Fund losing more than the
principal amount invested. The use of derivatives may also
increase the amount of taxes payable by Common Stockholders as
well as accelerate the time for the payment of taxes. Also,
suitable derivative transactions may not be available in all
circumstances. In addition, derivatives can make the Funds
assets less liquid and harder to value, especially in declining
markets. |
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Foreign Securities Risk |
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The Fund may invest up to 25% of its Managed Assets in
securities of companies organized outside the United States.
Investments in foreign securities involve certain risks not
associated with investments in U.S. companies. Securities
markets in certain foreign countries are not as developed,
efficient or liquid as securities markets in the United States.
Therefore, the prices of foreign securities are often volatile
and trading costs are higher. Certain foreign countries may
impose restrictions on the ability of the issuer of foreign
securities to make payments of principal and interest to
investors located |
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outside the country, due to blockage of foreign currency
exchanges or otherwise. Generally, there is less publicly
available information about foreign companies due to less
rigorous disclosure or accounting standards and regulatory
practices. In addition, the Fund will be subject to risks
associated with adverse political and economic developments in
foreign countries, which could cause the Fund to lose money on
its investments in foreign securities. |
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The Fund may invest in securities of issuers located or doing
substantial business in emerging markets (lesser
developed countries). Because of the less developed markets and
economics and, in some countries, less mature governments and
governmental institutions, the risks of investing in foreign
securities can be intensified in the case of investments in
issuers domiciled or doing substantial business in emerging
markets. These risks include a high concentration of market
capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries;
political and social uncertainties; over-dependence on exports,
especially with respect to primary commodities, making these
economies vulnerable to changes in commodity prices;
overburdened infrastructure and obsolete or unseasoned financial
systems; environmental problems; less developed legal systems;
and less reliable custodial services and settlement practices. |
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U.S. Government Debt Securities Risk |
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The Fund may invest up to 20% of its Managed Assets in debt
securities, including U.S. government debt securities.
U.S. government debt securities generally do not involve
the credit risks associated with investments in other types of
debt securities, although, as a result, the yields available
from U.S. government debt securities are generally lower
than the yields available from other securities. Like other debt
securities, however, the values of U.S. government
securities change as interest rates fluctuate. Fluctuations in
the value of portfolio securities will not affect interest
income on existing portfolio securities but will be reflected in
the Funds net asset value. Since the magnitude of these
fluctuations will generally be greater at times when the
Funds average maturity is longer, under certain market
conditions the Fund may, for temporary defensive purposes,
accept lower current income from short-term investments rather
than investing in higher yielding long-term securities. |
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Debt Securities Risk |
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The Fund may invest up to 20% of its Managed Assets in debt
securities, including U.S. government debt securities and
below-investment grade securities (e.g., high-yield or junk
bonds). Investments in debt securities are subject to the risk
that the issuer of the security could default on its
obligations, causing the Fund to sustain losses on those
investments. A default could impact both interest and principal
payments. High-yield fixed-income securities are considered
speculative with respect to the issuers capacity to pay
interest and repay principal in accordance with the terms of the
obligations. This means that, compared to issuers of higher
rated securities, issuers of medium and lower rated securities
are less likely to have the capacity to pay interest and repay
principal when due in the event of adverse business, |
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financial or economic conditions
and/or may
be in default or not current in the payment of interest or
principal. |
|
|
|
The market values of medium and lower rated securities tend to
be more sensitive to company-specific developments and changes
in economic conditions than higher rated securities. The
companies that issue these securities often are highly
leveraged, and their ability to service their debt obligations
during an economic downturn or periods of rising interest rates
may be impaired. These companies may not have access to more
traditional methods of financing, and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default
in payment of interest or principal by these issuers is
significantly greater than with higher rated securities because
medium and lower rated securities generally are unsecured and
subordinated to senior debt. |
|
|
|
Default, or the markets perception that an issuer is
likely to default, could reduce the value and liquidity of
securities held by the Fund, thereby reducing the value of your
investment in the Fund and may cause the Fund to incur expenses
in seeking recovery of principal or interest on its portfolio
holdings. In addition, the secondary markets in which
below-investment grade securities are traded may be less liquid
than the market for high-grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at
which the Fund could sell a particular below-investment grade
security when necessary to meet liquidity needs or in response
to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, and could adversely affect and
cause large fluctuations in the net asset value of Common
Shares. The valuation of securities that are illiquid or that
trade infrequently often requires the exercise of greater
judgment. Adverse publicity and investors perceptions may
significantly impact the values and liquidity of
below-investment grade securities, which could impact the net
asset value and market price of Common Shares. In addition, new
laws and proposed new laws may have an adverse impact on the
market for below-investment grade securities. |
|
Credit Risk |
|
Credit risk is the risk that one or more fixed income securities
in the Funds portfolio will decline in price or fail to
pay interest or repay principal when due because the issuer of
the security experiences a decline in its financial status. If
the recent adverse conditions in the credit markets continue to
adversely affect the broader global economy, the credit quality
of issuers of fixed income securities in which the Fund may
invest would be more likely to decline, all other things being
equal. Changes by nationally recognized statistical rating
organizations in its rating of securities and in the ability of
an issuer to make scheduled payments may also affect the value
of the Funds investments. To the extent the Fund invests
in below-investment grade securities, it will be exposed to a
greater amount of credit risk than a fund which invests solely
in investment grade securities. The prices of lower grade
securities are more sensitive to negative developments, such as
a decline in the issuers revenues or a general |
17
|
|
|
|
|
economic downturn, than are the prices of higher grade
securities. Fixed income securities of below-investment grade
quality are predominantly speculative with respect to the
issuers capacity to pay interest and repay principal when
due and therefore involve a greater risk of default. |
|
Preferred Securities Risk |
|
To the extent the Fund invests in preferred securities, there
are special risks associated with investing in 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. |
|
|
|
Subordination. Preferred securities are
subordinated to bonds and other debt instruments in a
companys capital structure with respect to priority to
corporate income and liquidation payments, and therefore will be
subject to greater credit risk than more senior debt instruments. |
|
|
|
Liquidity. Preferred securities may be
substantially less liquid than many other securities, such as
common stocks or U.S. government securities. |
|
|
|
Limited Voting Rights. Generally,
preferred security holders 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 issuers board. Generally, once all the arrearages have
been paid, the preferred security holders no longer have voting
rights. |
|
|
|
In the case of certain trust preferred securities, holders
generally have no voting rights, except (i) if the issuer
fails to pay dividends for a specified period of time or
(ii) if a declaration of default occurs and is continuing.
In such an event, rights of holders of trust preferred
securities generally would include the right to appoint and
authorize a trustee to enforce the trust or special purpose
entitys rights as a creditor under the agreement with its
operating company. |
|
|
|
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 income tax or securities laws. As with
call provisions, a redemption by the issuer of the preferred
securities may negatively impact the return of the security held
by the Fund. |
|
Leverage Risk |
|
Although it has no present intention to do so, the Fund may use
leverage to increase its investments or for other management
activities. The Fund may borrow money from banks in amounts up
to
331/3%
of the value of its Managed Assets to finance additional
investments. In addition, the Fund may issue Preferred Shares to
the extent permitted under the Investment Company Act. The use
of leverage creates certain risks for the Funds Common
Stockholders, including the greater likelihood of higher
volatility of the |
18
|
|
|
|
|
Funds return, its net asset value and the market price of
the Funds Common Shares. Changes in the value of the
Funds total assets will have a disproportionate effect on
the net asset value per share when leverage is used. For
example, if the Fund were to use leverage equal to 50% of the
Funds Common Share equity, it would show an approximately
1.5% increase or decline in net asset value for each 1% increase
or decline in the value of its total assets. An additional risk
of leverage is that the cost of the leverage plus applicable
Fund expenses may exceed the return on the transactions
undertaken with the proceeds of the leverage, thereby
diminishing rather than enhancing the return to the Funds
Common Stockholders. These risks generally would make the
Funds return to stockholders more volatile if it were to
use leverage. The Fund also may be required to sell investments
in order to make interest payments on borrowings used for
leverage when it may be disadvantageous to do so. |
|
|
|
Because the fees received by the Investment Manager are based on
the managed assets of the Fund (including assets attributable to
any Preferred Shares and borrowings that may be outstanding),
the Investment Manager has a financial incentive for the Fund to
issue Preferred Shares or use borrowings, which may create a
conflict of interest between the Investment Manager, on the one
hand, and the Common Stockholders on the other hand. |
|
Restricted and Illiquid Securities Risk |
|
The Fund may invest, on an ongoing basis, up to 15% of its
Managed Assets in restricted securities and other investments
that may be illiquid. Illiquid securities are securities that
are not readily marketable and may include some restricted
securities, which are securities that may not be resold to the
public without an effective registration statement under the
Securities Act of 1933, as amended (the
1933 Act), or, if they are unregistered, may be
sold only in a privately negotiated transaction or pursuant to
an exemption from registration. Investments in illiquid
securities involve the risk that the securities will not be able
to be sold at the time desired by the Fund or at prices
approximating the value at which the Fund is carrying the
securities on its books. |
|
Foreign Currency Risk |
|
Although the Fund will report its net asset value and pay
dividends in U.S. dollars, foreign securities often are
purchased with, and make dividend or interest payments in,
foreign currencies. Therefore, when the Fund invests in foreign
securities, it will be subject to foreign currency risk, which
means that the Funds net asset value could decline as a
result of changes in the exchange rates between foreign
currencies and the U.S. dollar. Certain foreign countries may
impose restrictions on the ability of issuers of foreign
securities to make payments of principal and interest to
investors located outside the country, due to blockage of
foreign currency exchanges or otherwise. |
|
Interest Rate Risk |
|
The premiums from writing options and amounts available from the
Funds option activities may decrease in declining interest
rate environments. The value of the Funds portfolio
investments |
19
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|
|
|
|
may also be influenced by changes in interest rates.
High-yielding stocks and stocks of issuers whose businesses are
substantially affected by changes in interest rates may be
particularly sensitive to interest rate risk. |
|
ETF Risk |
|
If the Fund invests in ETFs, Common Stockholders would bear not
only the Funds expenses (including operating expenses and
management fees) but also similar expenses of the ETFs, and the
Funds return will therefore be lower. To the extent the
Fund invests in ETFs, the Fund is exposed to the risks
associated with the underlying investments of the ETFs and the
Funds performance may be negatively affected if the value
of those underlying investments declines. |
|
Frequent Trading Risk |
|
Frequent trading of investments increases the possibility that
the Fund will realize taxable capital gains (including
short-term capital gains, which are generally taxable at higher
rates than long-term capital gains for federal income tax
purposes), which could reduce the Funds after-tax return.
Frequent trading can also mean higher brokerage and other
transaction costs, which could reduce the Funds return. |
|
Counterparty Risk |
|
Changes in the credit quality of the companies that serve as the
Funds counterparties with respect to derivatives, or other
transactions supported by another partys credit, will
affect the value of those instruments. Certain entities that
have served as counterparties in the markets for these
transactions have recently incurred significant financial
hardships including bankruptcy and losses as a result of
exposure to sub-prime mortgages and other lower quality credit
investments that have experienced recent defaults or otherwise
suffered extreme credit deterioration. As a result, such
hardships have reduced these entities capital and called
into question their continued ability to perform their
obligations under such transactions. By using such derivatives
or other transactions, the Fund assumes the risk that its
counterparties could experience similar financial hardships. In
the event of insolvency of a counterparty, the Fund may sustain
losses or be unable to liquidate a derivatives position. |
|
Tax Risk |
|
The Funds strategy of writing calls on the NASDAQ 100
involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the
gains and losses the Fund realizes in connection therewith. The
application of these special rules would therefore also affect
the character of distributions made by the Fund, and may
increase the amount of taxes payable by a shareholder as well as
accelerate the time for the payment of taxes. See Tax
Matters. |
|
Active Management Risk |
|
The Fund is actively managed and its performance therefore will
reflect in part the ability of the Investment Manager to select
securities and to make investment decisions that are suited to
achieving the Funds investment objectives. Due to its
active management, the Fund could underperform other funds with
similar investment objectives. |
20
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|
|
Market Price of Shares; Market Discount from Net Asset
Value |
|
Shares of closed-end management investment companies frequently
trade at a discount from their net asset value. This
characteristic is separate and distinct from the risk that net
asset value could decrease as a result of investment activities
and may be a greater risk to investors expecting to sell their
shares relatively soon after completion of this offering. The
Fund cannot predict the level of trading activity or whether
Common Shares will trade at, above or below net asset value or
the initial public offering price. Common Shares are designed
primarily for long-term investors, and you should not view the
Fund as a vehicle for trading purposes. |
|
Market Disruption and Geopolitical Risk |
|
The aftermath of the war with Iraq, instability in the Middle
East and terrorist attacks in the United States and around the
world may have a substantial impact on the U.S. and world
economies and securities markets. The nature, scope and duration
of the occupation of Iraq cannot be predicted with any
certainty. Terrorist attacks closed some of the U.S. securities
markets in 2001, and similar events cannot be ruled out in the
future. The war and occupation, terrorism and related
geopolitical risks have led, and may in the future lead to,
increased short-term market volatility and may have adverse
long-term effects on U.S. and world economies and markets
generally. These risks may adversely affect individual issuers
and securities markets, interest rates, secondary trading,
ratings, investor psychology, credit risk, inflation and other
factors. High-yield securities tend to be more volatile than
higher rated securities so that these events and any actions
resulting from them may have a greater impact on the prices and
volatility of high-yield securities than on higher rated
securities. |
|
Non-Diversified Risk |
|
Because the Fund is classified as non-diversified
under the Investment Company Act, it can invest a greater
portion of its assets in obligations of a single issuer than a
diversified fund. As a result, the Fund may be more
susceptible than a diversified fund to any single
corporate, economic, political or regulatory occurrence. To
mitigate this risk, the Fund does not anticipate investing more
than 10% of its Managed Assets in the securities of any one
issuer. See The Funds Investments. Moreover,
the Fund intends to diversify its investments to the extent
necessary to maintain its status as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the
IRC). See The Funds Investments
and Risks Non-Diversified Risk. See also
Tax Matters. |
21
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|
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Anti-Takeover Provisions |
|
The Funds charter and Bylaws include provisions that could
limit the ability of other entities or persons to acquire
control of the Fund or convert the Fund to an open-end fund.
These provisions could have the effect of depriving the Common
Stockholders of opportunities to sell their Common Shares at a
price higher than the then-current market price of Common
Shares. See Description of Common Shares and
Anti-Takeover and Other Provisions of the Maryland General
Corporation Law and the Funds Charter and Bylaws and
Risks Anti-Takeover Provisions. |
22
SUMMARY
OF FUND EXPENSES
The purpose of the table and the example below is to help you
understand all fees and expenses that you, as a Common
Stockholder, would bear directly or indirectly. The amount set
forth under Other Expenses in the table is based
upon estimates for the current fiscal year and assumes the Fund
issues approximately 13,100,000 Common Shares. The
Funds actual expenses may vary from the estimated expenses
shown in the table and from year to year. See Management
of the Fund.
|
|
|
Stockholder Transaction
Expenses
|
|
|
|
Sales Load (as a percentage of the offering price)
|
|
4.5%
|
Offering Expenses of the Common Shares Borne by Common
Stockholders
|
|
0.2%(1)(2)
|
Dividend Investment Plan Fees
|
|
None(3)
|
|
|
|
|
|
|
|
Percentage of Net Assets
|
Estimated Annual
Expenses
|
|
Attributable to Common
Shares
|
|
Management Fees
|
|
|
1.00%
|
|
Interest Payments on Borrowed Money
|
|
|
None
|
|
Other Expenses(4)(5)
|
|
|
0.26%
|
|
Total Annual Expenses(1)
|
|
|
1.26%
|
|
|
|
|
(1) |
|
The Fund will pay Common Share offering costs up to $0.04 per
Common Share, and the Investment Manager has agreed to pay all
of the Funds organizational expenses and will pay Common
Share offering costs (other than sales load) that exceed $0.04
per Common Share. |
|
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(2) |
|
The Investment Manager has agreed to pay from its own assets a
structuring fee to each of Wells Fargo Securities, LLC, UBS
Securities LLC and Ameriprise Financial Services, Inc. The
Investment Manager has agreed to pay from its own assets a sales
incentive fee to Raymond James & Associates, Inc.
See Underwriting. |
|
|
|
(3) |
|
You will pay brokerage charges if you direct AST, as the plan
agent (Plan Agent) for the Funds Dividend
Investment Plan, to sell your Common Shares held in a dividend
investment account. See Dividend Investment Plan. |
|
(4) |
|
Other expenses includes costs associated with
administrative, accounting, treasury and other services provided
by Ameriprise Financial as the Funds Administrative
Services Agent. The fee paid to Ameriprise Financial for the
provision of administrative services to the Fund is subject to
approval of the Funds Board. |
|
|
|
(5) |
|
Estimated expenses based on the current fiscal year and
$249,686,000 in assets. |
Example
The following example illustrates the expenses (including the
sales load of $45 and estimated expense of this offering of $2)
that you would pay on a $1,000 investment in Common Shares,
assuming (i) Total Annual Expenses of 1.26% for
years one through ten and (ii) a 5% annual return(1):
|
|
|
|
|
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
|
$59
|
|
$85
|
|
$113
|
|
$193
|
|
|
|
(1) |
|
The example above should not be considered a representation
of future expenses. Actual expenses may be higher or lower than
those shown. The example assumes that all dividends and
distributions are reinvested at net asset value. Actual expenses
may be greater or less than those assumed. Moreover, the
Funds actual rate of return may be greater or less than
the hypothetical 5% return shown in the example. Examples do not
reflect expenses associated with the issuance of Preferred
Shares or borrowings. If the Fund issues Preferred Shares or
borrows money, the total annual expense ratio and total expenses
incurred would be greater. |
23
THE
FUND
The Fund is a newly organized, non-diversified, closed-end
management investment company registered under the Investment
Company Act. The Fund was organized as a corporation on
September 2, 2009 pursuant to the Articles of Incorporation
governed by the laws of the State of Maryland. As a newly
organized entity, the Fund has no operating history. Its
principal office is located at 707 2nd Avenue South,
Minneapolis, Minnesota 55402, and its toll-free telephone number
is 800 221-2450.
USE OF
PROCEEDS
The net proceeds of the offering of Common Shares will be
approximately $249,686,000 ($285,709,400 if the underwriters
exercise the over-allotment option in full) after payment of the
estimated organizational expenses and offering costs. The Fund
will pay its Common Share offering costs up to $0.04 per Common
Share, and the Investment Manager has agreed to pay all of the
Funds organizational expenses and Common Share offering
costs (other than sales load) that exceed $0.04 per Common
Share. The Fund will invest the net proceeds of the offering in
accordance with its investment objectives and policies as stated
below. It is currently anticipated that the Fund will be able to
invest substantially all of the net proceeds in accordance with
its investment objectives and policies within three months after
the completion of the offering. Pending such investment, it is
anticipated that the proceeds will be invested in
U.S. government securities or high-quality, short-term
money market instruments, including shares of money market funds
that are managed by the Funds Investment Manager.
THE
FUNDS INVESTMENTS
Investment
Objectives
The Funds investment objectives are to seek growth of
capital and current income. There can be no assurance that the
Fund will achieve its investment objectives.
Principal
Strategies
Under normal market conditions, the Funds investment
program will consist primarily of (1) investing in a
portfolio of equity securities of technology and
technology-related companies that seeks to exceed the total
return, before fees and expenses, of the S&P North America
Technology Sector
Index®
and (2) writing call options on the NASDAQ 100
Index®
or its exchange-traded fund equivalent (NASDAQ 100) on a
month-to-month
basis, with an aggregate notional amount typically ranging from
25% to 90% of the underlying value of the Funds holdings
of common stock. The Fund expects to generate current income
from premiums received from writing call options on the NASDAQ
100.
Technology and Technology-Related
Companies. Under normal market conditions,
the Fund intends to invest at least 80% of its Managed
Assets in a portfolio of equity securities of technology
and technology-related companies that the Investment Manager
believes offer attractive opportunities for capital
appreciation. These companies are those which the Investment
Manager expects will generate a majority of their revenues from
the development, advancement, use or sale of technology or
technology-related products or services. Technology and
technology-related companies may include companies operating in
any industry, including but not limited to software, hardware,
communications, information, health care, medical technology and
technology services, including the internet.
The Fund may invest in companies of any size. Securities of
large companies that are well established in the world
technology market can be expected to grow with the market.
Rapidly changing technologies and expansion of technology and
technology-related industries often provide a favorable
environment for companies of small- to-medium size, and the Fund
may invest in these companies as well. Although the Fund will
invest primarily in U.S. companies, the Fund may invest up
to 25% of its Managed Assets in companies organized outside of
the United States.
24
The Options Strategy. In addition to
the Funds core holdings in technology and
technology-related companies, the Fund will seek to cushion
downside volatility and produce current income by utilizing
Options Strategies, primarily consisting of writing call options
on the NASDAQ 100 on a
month-to-month
basis, with an aggregate notional amount typically ranging from
25% to 90% of the underlying value of the Funds holdings
of common stock. In determining the level (i.e., 25% to 90%) of
call options to be written on the NASDAQ 100, the Investment
Manager will use the Rules-based Option Strategy based on the
VXN Index. The VXN Index measures the markets expectation
of 30-day
volatility implicit in the prices of near-term NASDAQ 100 Index
options. The VXN Index, which is quoted in percentage points
(e.g., 19.36), is a leading barometer of investor sentiment
and market volatility relating to the NASDAQ 100 Index. In
general, the Investment Manager intends to write more call
options when market volatility, as represented by the VXN Index,
is high (and premiums received for writing the option are high)
and write fewer call options when market volatility, as
represented by the VXN Index, is low (and premiums for writing
the option are low). The Investment Managers Rules-based
Option Strategy with respect to writing call options is as
follows:
|
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|
|
Aggregate Notional Value of Written Call Options as
|
|
|
a Percentage of the
|
When the VXN Index
is:
|
|
Funds Holdings in Common
Stocks
|
|
17 or less
|
|
25%
|
Greater than 17, but less than 18
|
|
Increase up to 50%
|
At least 18, but less than 33
|
|
50%
|
At least 33, but less than 34
|
|
Increase up to 90%
|
At 34 or greater
|
|
90%
|
The Rules-based Option Strategy is based upon the Investment
Managers research and may change over time based upon the
Funds experience and market factors.
In addition to the Rules-based Option Strategy, the Fund may
write additional calls with aggregate notional amounts of up to
25% of the value of the Funds holdings in common stocks
(to a maximum of 90% when aggregated with the call options
written pursuant to the Rules-based Option Strategy) when call
premiums are attractive relative to the risk of the price of the
NASDAQ 100. The Fund may also close (or buy back) a written call
option if the Investment Manager believes that a substantial
amount of the premium (typically, 70% or more) to be received by
the Fund has been captured before exercise, potentially reducing
the call position to 0% of total equity until additional calls
are written.
The Fund intends to write (sell) NASDAQ 100 call options that
are either exchange-listed or traded OTC. However, index options
differ from options on individual securities (including ETFs) in
that index options (i) typically are settled in cash rather
than by delivery of securities and (ii) reflect price
fluctuations in a group of securities or segments of the
securities market rather than price fluctuations in a single
security. Compared to call options on individual stocks
(including ETFs), writing call options on the NASDAQ 100 Index
can achieve better tax efficiency because listed options on
broad-based securities indices are section 1256
contracts that are subject to more favorable U.S. tax
treatment than options on individual stocks. Accordingly, given
this beneficial tax treatment and that index options are
typically settled in cash at expiration (which can be less
disruptive to portfolio management), the Investment Manager will
generally prefer to write call options on the NASDAQ 100 Index.
As the seller of NASDAQ 100 call options, the Fund will receive
cash (premiums) from options purchasers. The purchaser of a
NASDAQ 100 call option has the right to any appreciation in the
value of the NASDAQ 100 over a fixed price (the exercise price
or strike price) as of the relevant exercise date or exercise
dates (depending on the style of the option). Generally, the
Fund intends to sell NASDAQ 100 call options that are slightly
out-of-the-money (i.e., the exercise price generally
will be slightly above the current level of the NASDAQ 100 when
the option is sold) and to close out the position if the
Investment Manager believes that a substantial amount of the
premium (typically, 70% or more) to be received by the Fund has
been captured before exercise, potentially reducing the call
position to 0% of total equity until additional calls are
written. The Rules-based Option Strategy is based upon the
Investment Managers research and may change overtime based
upon the Funds experience and market factors. The Fund
will, in
25
effect, sell the potential appreciation in the value of the
NASDAQ 100 above the exercise price in exchange for the option
premium received. In the case of a written call option on the
NASDAQ 100, if the call option sold by the Fund is exercised,
the Fund will pay the purchaser the difference between the cash
value of the NASDAQ 100 and the exercise price of the option.
The premium, the exercise price and the market value of the
NASDAQ 100 will determine the gain or loss realized by the Fund
as the seller of the index call option. In the case of a written
call option on an ETF, such as the NASDAQ 100, if the call
option is exercised, the Fund will be required to deliver the
number of shares of that ETF (representing the NASDAQ
100) for which the option was exercised. This is likely to
require that the Fund purchase such shares at prices in excess
of the exercise price of the option, meaning that it is likely
that the Fund will incur a loss. Writing call options on the
NASDAQ 100 involves a tradeoff between the option premiums
received and reduced participation in potential future stock
price appreciation of the Funds common stock holdings (to
the extent the performance of the Funds holdings correlate
to the performance of the NASDAQ 100).
The Fund may also seek to provide downside protection by
purchasing put options on the NASDAQ 100 when premiums on these
options are considered by the Investment Manager to be low and,
therefore, attractive relative to the downside protection
provided.
The Fund may also buy or write other call and put options on
securities, indices, ETFs and market baskets of securities to
generate additional income or return or to provide the portfolio
with downside protection. In this regard, options may include
writing in- or out-of-the-money put
options or buying or selling options in connection with closing
out positions prior to expiration of any options. However, the
Fund does not intend to write naked call options on
individual stocks (i.e., selling a call option on an individual
security not owned by the Fund) other than in connection with
implementing the Options Strategies with respect to the
NASDAQ 100. The put and call options purchased, sold or
written by the Fund may be exchange-listed or OTC.
Foreign Securities. The Fund, under
normal market conditions, may invest up to 25% of its Managed
Assets in equity securities of companies organized outside of
the United States. The Fund may hold foreign securities of
issuers located or doing substantial business in emerging
markets which may entail additional risks. Since foreign
securities often are purchased with and payable in currencies of
foreign countries, the value of these assets as measured in
U.S. dollars may be affected favorably or unfavorably by
changes in currency rates and exchange control regulations.
Common Stock, Preferred Stock, Warrants and Rights, and
Convertible Securities. As noted above, the
Fund, under normal market conditions, will invest at least 80%
of its Managed Assets in equity securities of technology and
technology-related companies.
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Common Stock. Common stock consists of
shares of a corporation or other entity that entitle the holder
to a pro rata share of the profits of the corporation, if any,
without preference over any other class of securities, including
such entitys debt securities, preferred stock and other
senior equity securities. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
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Preferred Stock. Preferred stock
generally has a preference as to dividends and liquidation over
an issuers common stock but ranks junior to debt
securities in an issuers capital structure. Unlike
interest payments on debt securities, preferred stock dividends
are payable only if declared by the issuers board of
directors. Preferred stock also may be subject to optional or
mandatory redemption provisions. Preferred stock in which the
Fund may invest will generally have no voting rights or their
voting rights are limited to certain extraordinary transactions
or events.
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Rights and Warrants. The Fund may
invest in common stock rights and warrants.
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Convertible Securities. A convertible
security is a bond, debenture, note, preferred stock, warrant or
other security that may be converted into or exchanged for a
prescribed amount of common stock or other security of the same
or a different issuer or into cash within a particular period of
time at a specified price or formula. A convertible security
generally entitles the holder to receive interest paid or
accrued on debt securities or the dividend paid on preferred
stock until the
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convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities generally
have characteristics similar to both debt and equity securities.
The value of convertible securities tends to decline as interest
rates rise and, because of the conversion feature, tends to vary
with fluctuations in the market value of the underlying
securities. Convertible securities ordinarily provide a stream
of income with generally higher yields than those of common
equity securities of the same or similar issuers. Convertible
securities generally rank senior to common equity securities in
a corporations capital structure but are usually
subordinated to comparable non-convertible securities.
Convertible securities generally do not participate directly in
any dividend increases or decreases of the underlying
securities, although the market prices of convertible securities
may be affected by any dividend changes or other changes in the
underlying securities.
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The portion of the Funds assets invested in common equity,
preferred and convertible securities, as well as rights and
warrants, are subject to the market conditions at the time of
such initial investment, the current market prices of such
securities and the Investment Managers views on the
marketplace for such securities. The Funds portfolio
composition can be expected to vary over time based on the
Investment Managers assessment of market conditions.
ETFs. The Fund may also invest in ETFs
and, as described herein, options on ETFs. ETFs are traded on an
exchange like individual stocks, but they generally represent
baskets of securities that seek to track the performance of
certain indices. The indices include not only broad-market
indices but more specific indices as well, including those
relating to particular sectors, countries and regions.
An ETFs share price may not track its specified market
index and may trade below its net asset value (i.e., at a
discount). ETFs generally use a passive investment
strategy and will not attempt to take defensive positions in
volatile or declining markets. An active secondary market in an
ETFs shares may not develop or be maintained and may be
halted or interrupted due to actions by its listing exchange,
unusual market conditions or other reasons. There can be no
assurance an ETFs shares will continue to be listed on an
active exchange. In addition, Common Stockholders bear both
their proportionate share of the Funds expenses and
similar expenses incurred through the Funds ownership of
the ETF.
Debt Securities. Under normal market
conditions, the Fund may invest up to 20% of its Managed Assets
in debt securities (including convertible and non-convertible
debt securities), such as debt securities issued by technology
and technology-related companies and obligations of the
U.S. Government, its agencies and instrumentalities, and
government-sponsored enterprises. As noted below, the Fund may
exceed this limit under certain circumstances during its initial
three months of operation.
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Debt Securities of Technology and Technology-Related
Companies. Debt securities in which the Fund
may invest include all types of debt obligations having varying
terms with respect to security or credit support, subordination,
purchase price, interest payments and maturity. The debt
securities in which the Fund may invest may bear interest at
fixed rates or variable rates of interest, and may involve
equity features such as contingent interest or participation
based on revenues, rents or profits. The prices of debt
securities generally vary inversely with interest rates.
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U.S. Government. Obligations
issued or guaranteed by the U.S. government and its
agencies and instrumentalities include bills, notes and bonds
issued by the U.S. Treasury, as well as certain
stripped or zero coupon
U.S. Treasury obligations representing future interest or
principal payments on U.S. Treasury notes or bonds.
Stripped securities are sold at a discount to their face
value and may exhibit greater price volatility than
interest-bearing securities since investors receive no payment
until maturity. Obligations of certain agencies and
instrumentalities of the U.S. government are supported by
the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary
authority of the U.S. government to purchase the
agencys obligations; still others, though issued by an
instrumentality chartered by the U.S. government, are
supported only by the credit of the instrumentality. The
U.S. government may choose not to provide financial support
to U.S. government-sponsored agencies or instrumentalities
if it is not legally obligated to do so. Even where a
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security is backed by the full faith and credit of the
U.S. Treasury, it does not guarantee the market price of
that security, only the payment of principal
and/or
interest.
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If interest rates rise, debt security prices generally fall; if
interest rates fall, debt security prices generally rise. Debt
securities with longer maturities generally offer higher yields
than debt securities with shorter maturities assuming all other
factors, including credit quality, are equal. For a given change
in interest rates, the market prices of longer-maturity debt
securities generally fluctuate more than the market prices of
shorter-maturity debt securities. This potential for a decline
in prices of debt securities due to rising interest rates is
referred to herein as interest rate risk.
Included among the investment grade quality debt securities in
which the Fund may invest are unrated securities determined by
the Investment Manager to be of comparable quality. In the event
that one rating agency assigns an investment grade rating and
another rating agency assigns a below-investment grade rating to
the same debt security, the Investment Manager will determine
which rating it considers more appropriate and categorize the
debt security accordingly. Investment grade quality debt
securities are those that have received ratings of Baa or higher
or BBB or higher by Moodys Investors Service, Inc.
(Moodys), Standard & Poors
(S&P) or Fitch Ratings (Fitch), as
well as unrated securities determined by the Investment Manager
to be of comparable quality.
Below-Investment Grade Securities. The
debt securities owned by the Fund may include below-investment
grade quality debt securities, commonly referred to as
junk bonds. The Investment Manager will monitor the
credit quality of the Funds debt securities. As noted
above, the Fund may also invest without limit in preferred
securities including those rated below investment grade or that
are not rated and are considered by the Investment Manager to be
of comparable quality.
Securities that are below-investment grade quality are regarded
as having predominately speculative characteristics with respect
to capacity to pay interest and repay principal. Because the
Fund may hold below-investment grade preferred stock and debt
securities, the Fund may hold below-investment grade quality
securities that have a currently identifiable vulnerability to
default on their payments of principal and interest. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest. The Fund will not
purchase securities that are in default as to payment of
principal and interest at the time of purchase. For a
description of security ratings, see Appendix A of the
Statement of Additional Information (SAI).
Illiquid Securities. Substantially all
of the equity securities of technology and technology-related
companies in which the Fund intends to invest are traded on a
national securities or foreign exchange or in the
over-the-counter markets. The Fund may, however, invest up to
15% of its Managed Assets in illiquid securities (i.e.,
securities that at the time of purchase are not readily
marketable). These securities may include, but are not limited
to, certain securities that are subject to legal or contractual
restrictions on resale, certain repurchase agreements, and
derivative instruments. To the extent the Fund invests in
illiquid or restricted securities, it may encounter difficulty
in determining a market value for the securities. Disposing of
illiquid or restricted securities may involve time-consuming
negotiations and legal expense, and it may be difficult or
impossible for the Fund to sell the investment promptly and at
an acceptable price.
In determining the liquidity of all securities and derivatives,
such as Rule 144A securities, which are unregistered
securities offered to qualified institutional buyers, and
interest-only and principal-only fixed mortgage-backed
securities (IOs and POs) issued by the U.S. government or
its agencies and instrumentalities, the Investment Manager,
under guidelines established by the Board, will consider any
relevant factors including the frequency of trades, the number
of dealers willing to purchase or sell the security and the
nature of marketplace trades.
Although one or more of the other risks described herein may
apply, the largest risks associated with illiquid and restricted
securities include liquidity risk.
Cash Positions. In anticipation of or
in response to adverse market conditions, for cash management
purposes, during a reasonable
start-up
period following the completion of this offering or for
defensive
28
purposes, the Fund may temporarily hold all or a portion of its
assets in cash or cash equivalents, money market instruments or
bonds or other debt securities. Doing so may help the Fund
minimize losses but may mean lost opportunities for the Fund to
achieve its investment objectives. A reasonable start up period
following any offering would not be expected to exceed three
months.
Money market instruments in which the Fund may invest its cash
reserves will generally consist of obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities, repurchase agreements collateralized by such
obligations and commercial paper. The Fund may also invest in
money market funds affiliated with the Investment Manager.
Portfolio Turnover. The Fund may
actively and frequently trade securities in its portfolio to
carry out its principal strategies. A high portfolio turnover
rate increases transaction costs. Frequent and active trading
may cause adverse tax consequences for investors in the Fund due
to an increase in short-term capital gains. See Tax
Matters.
Fundamental
and Other Investment Policies
The Funds investment objectives and policies are
non-fundamental and may be changed by the Funds Board
without approval of the Funds stockholders. However, the
Funds investment policy of investing at least 80% of its
Managed Assets in equity securities of technology and
technology-related companies and its policy with respect to the
use of its Rules-based Option Strategy may be changed by the
Board without stockholder approval only following the provision
of 60 days prior written notice to Common
Stockholders. The Fund has a fundamental policy of investing at
least 25% of its total assets in securities principally engaged
in technology and technology-related stocks. This policy may not
be changed without a stockholder vote.
Investment
Rationale
The portfolio managers for the Fund are described on
page 41.
The Investment Manager believes that a strategy of owning a
portfolio of equity securities in technology and
technology-related companies in conjunction with writing call
options on the NASDAQ 100 should generally provide returns that
are superior to investing in the same or similar stocks without
an associated call option writing program under three different
stock market scenarios: (1) down-trending technology
markets; (2) flat market conditions for technology; and
(3) moderately rising technology markets. In the Investment
Managers opinion, only in more strongly rising technology
markets would the option strategy on the NASDAQ 100 to be used
by the Fund generally be expected to underperform the stock-only
portfolio. For these purposes, the Investment Manager considers
more strongly rising technology market conditions to exist
whenever the current annual rate of return for U.S. common
stocks of technology companies (as represented by the NASDAQ
100) exceeds the long-term historical average of stock
market returns as represented by the NASDAQ 100 Index. The
Investment Manager considers moderately rising technology market
conditions to exist whenever current annual returns on
U.S. common stocks of technology companies are positive,
but do not exceed their long-term historical average as
represented by the NASDAQ 100 Index.
In addition, the Investment Manager believes that the investment
strategy of using options in a variety of circumstances (whether
buying, selling or writing options on individual securities,
indices or otherwise) will permit the Fund to take advantage of
various market conditions. This may include purchasing put
options when such options are considered to be inexpensive or
writing call options when premiums are high.
29
RISKS
The Fund is a non-diversified, closed-end management investment
company designed primarily as a long-term investment and not as
a trading vehicle. The Fund is not intended to be a complete
investment program, and there can be no assurance that the Fund
will achieve its investment objectives. Your Common Shares at
any point in time may be worth less than the amount you
invested, even after taking into account the reinvestment of
Fund dividends and other distributions.
Newly
Organized
The Fund is a newly organized, non-diversified, closed-end
management investment company with no history of operations.
Investment
Risk
Investing in the Fund involves certain risks and the Fund may
not be able to achieve its investments objectives for a variety
of reasons, including, among others, the possibility that the
Fund may not be able to implement the Options Strategies as
anticipated. Because the value of your investment in the Fund
will fluctuate, there is a risk that you will lose money. Your
investment will decline in value if the value of the Funds
investments decreases. The market price of a Common Share may
decrease even though its net asset value increases. You cannot
redeem your shares from the Fund at net asset value. The value
of your shares also will be impacted by the Funds ability
to successfully implement its investment strategy, as well as by
market, economic and other conditions. As with any security,
complete loss of investment is possible. The Funds
Rules-based
Option Strategy has not been applied in any technology or
technology-related stock portfolio managed by the Investment
Manager. Even if technology and technology-related stocks
appreciate, the value of the Fund may not.
Equity
Securities Risk
The Funds portfolio will include equity securities. An
equity security, or stock, represents a proportionate share of
the ownership of a company. The value of an equity security is
generally based on the success of the companys business,
any income paid to stockholders, the value of its assets and
general market conditions. Equity securities include common,
preferred and convertible preferred stocks and securities with
values that are tied to the price of stocks, such as rights,
warrants and convertible debt securities. An adverse event, such
as an unfavorable earnings report, may depress the value of a
particular common stock held by the Fund. Also, the prices of
common stocks are sensitive to general movements in the stock
market and a drop in the stock market may depress the price of
common stocks to which the Fund has exposure. Common stock
prices fluctuate for several reasons, including changes to
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 an issuer occur. In
addition, common stock prices may be particularly sensitive to
rising interest rates, as the cost of capital rises and
borrowing costs increase. Even investments in high quality or
blue chip equity securities or securities of
established companies with large market capitalizations (which
generally have strong financial characteristics) can be
negatively impacted by poor overall market and economic
conditions. Companies with large market capitalizations may also
have less growth potential than smaller companies and may be
able to react less quickly to changes in the marketplace.
Small-Cap
and Mid-Cap Companies Risk
The Fund may invest all or a substantial portion of its assets
in companies whose market capitalization is considered small- or
mid-cap. These companies often are newer or less established
companies than larger companies. Investments in these companies
carry additional risks because earnings of these companies tend
to be less predictable; they often have limited product lines,
markets, distribution channels or financial resources; and the
management of such companies may be dependent upon one or a few
key people. The market movements of equity securities of
small-cap and mid-cap companies may be
30
more abrupt or erratic than the market movements of equity
securities of larger, more established companies or the stock
market in general. Historically, small-cap and mid-cap companies
have sometimes gone through extended periods when they did not
perform as well as larger companies. In addition, equity
securities of these companies generally are less liquid than
those of larger companies. This means that the Fund could have
greater difficulty selling such securities at the time and price
that the Fund would like.
Smaller-company stocks, as a whole, may experience larger price
fluctuations than large-company stocks or other types of
investments. During periods of investor uncertainty, investor
sentiment may favor large, well-known companies over small,
lesser-known companies. There may be less trading in a smaller
companys stock, which means that buy and sell transactions
in that stock could have a larger impact on the stocks
price than is the case with larger company stocks.
Technology
and Technology-Related Investment Risk
The Fund will invest a substantial portion of its assets in
technology and technology-related companies. The market prices
of technology and technology-related stocks tend to exhibit a
greater degree of market risk and price volatility than other
types of investments. These stocks may fall in and out of favor
with investors rapidly, which may cause sudden selling and
dramatically lower market prices. These stocks also may be
affected adversely by changes in technology, consumer and
business purchasing patterns, government regulation
and/or
obsolete products or services. In addition, a rising interest
rate environment tends to negatively affect technology and
technology-related companies. In such an environment, those
companies with high market valuations may appear less attractive
to investors, which may cause sharp decreases in the
companies market prices. Further, those technology or
technology-related
companies seeking to finance their expansion would have
increased borrowing costs, which may negatively impact their
earnings. As a result, these factors may negatively affect the
performance of the Fund. Finally, the Fund may be susceptible to
factors affecting the technology and technology-related
industries, and the Funds net asset value may fluctuate
more than a fund that invests in a wider range of industries.
Technology and technology-related companies are often smaller
and less experienced companies and may be subject to greater
risks than larger companies, such as limited product lines,
markets and financial and managerial resources. These risks may
be heightened for technology companies in foreign markets.
Writing
Call Options Risk
A principal aspect of the Funds investment strategy
involves writing call options on the NASDAQ 100. This part of
the Funds strategy subjects the Fund to certain additional
risks. A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree
because of market behavior or unexpected events. The principal
factors affecting the market value of an option include supply
and demand, interest rates, the current market price of the
underlying index or security in relation to the exercise price
of the option, the actual or perceived volatility of the
underlying index or security and the time remaining until the
expiration date.
The Fund intends to write call options on the NASDAQ 100;
however, it does not intend to have a portfolio of securities
that mirrors the securities in the NASDAQ 100 Index. As a
result, during a period when the Fund has outstanding call
options written on the NASDAQ 100, the NASDAQ 100 may
appreciate to a greater extent than the securities in the
Funds portfolio. If the call options are exercised in
these circumstances, the Funds loss on the options will be
greater because it will be paying the option holder not only an
amount effectively representing appreciation on securities in
its own portfolio but also an amount representing the greater
appreciation experienced by the securities in the NASDAQ 100
Index that the Fund does not own. If, at a time these call
options may be exercised, the securities underlying these
options have market values above the exercise price, then these
call options will be exercised and the Fund will be obligated to
deliver to the option holder either the securities underlying
these options or to deliver the cash value of those securities,
in exchange for which the option holder will pay the Fund the
exercise price. In either case, the Fund will incur losses to
the extent the market value of the underlying securities exceed
the
31
sum of the premium the Fund received from writing the call
options and the exercise price of the call options, which loss
may be very substantial.
To the extent all or part of the Funds call options are
covered, the Fund forgoes, during the options life, the
opportunity to profit from increases in the market value of the
security underlying the call option above the sum of the option
premium received and the exercise price of the call, but has
retained the risk of loss should the price of the underlying
security decline below the exercise price minus the option
premium received. The writer of an exchange-listed option on a
security has no control over when during the exercise period of
the option (which may be a single day or multiple days) it may
be required to fulfill its obligation as a writer of the option.
Once an option writer has received an exercise notice, it would
be obligated to deliver the underlying security at the exercise
price. Thus, the writing of call options may require the Fund to
sell portfolio securities at inopportune times or for prices
other than current market values and will limit the amount of
appreciation the Fund can realize above the exercise price of an
option.
The Fund may be required to sell investments from its portfolio
to effect cash settlement (or transfer ownership of a stock or
other instrument to physically settle) on any written call
options that are exercised. Such sales (or transfers) may occur
at inopportune times, and the Fund may incur transaction costs
that increase the expenses borne by Common Stockholders. The
Fund may sell written call options over an exchange or in the
OTC market. The options in the OTC markets may not be as liquid
as exchange-listed options. The Fund may be limited in the
number of counterparties willing to take positions opposite the
Fund or may find the terms of such counterparties to be less
favorable than the terms available for listed options. The Fund
cannot guarantee that its Options Strategies will be effective.
Moreover, OTC options may provide less favorable tax treatment
than listed options.
The value of options may be adversely affected if the market for
such options becomes less liquid or smaller. There can be no
assurance that a liquid market will exist when the Fund seeks to
close out an option position, in the case of a call option
written, by buying the option back. Reasons for the absence of a
liquid secondary market on an exchange include the following:
(i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on
opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the
facilities of an exchange or the Options Clearing Corporation
(OCC) may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled to
discontinue the trading of options (or a particular class or
series of options) at some future date. If trading were
discontinued, the secondary market on that exchange (or in that
class or series of options) would cease to exist. However,
outstanding options on that exchange that had been issued by the
OCC as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. The Funds
ability to terminate over-the-counter options will be more
limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will
not fulfill their obligations.
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 would not be reflected
concurrently in the options markets. Call options are marked to
market daily and their value will be affected by changes in the
value of and dividend rates of the underlying common stocks,
changes in interest rates, changes in the actual or perceived
volatility of the stock market and the underlying common stocks
and the remaining time to the options expiration.
Additionally, the exercise price of an option may be adjusted
downward before the options expiration as a result of the
occurrence of certain corporate events affecting the underlying
equity security, such as extraordinary dividends, stock splits,
merger or other extraordinary distributions or events. A
reduction in the exercise price of an option would reduce the
Funds capital appreciation potential on the underlying
security.
The Funds options transactions will be subject to
limitations established by each of the exchanges, boards of
trade or other trading facilities on which such options are
traded. These limitations govern the
32
maximum number of options in each class which may be written or
purchased by a single investor or group of investors acting in
concert, regardless of whether the options are written or
purchased on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of
options which the Fund may write or purchase may be affected by
options written or purchased by other investment advisory
clients of the Investment Manager. An exchange, board of trade
or other trading facility may order the liquidation of positions
found to be in excess of these limits, and may impose certain
other sanctions.
Options
Risk
The Fund intends to engage in transactions in options on
securities, indices, exchange-traded funds and market baskets of
securities on exchanges and in the OTC markets. In general,
exchange-traded options have standardized exercise prices and
expiration dates and require the parties to post margin against
their obligations, and the performance of the parties
obligations in connection with such options is guaranteed by the
exchange or a related clearing corporation. OTC options have
more flexible terms negotiated between the buyer and the seller,
but generally do not require the parties to post margin and are
subject to greater credit risk. OTC options also involve greater
liquidity risk.
In addition to writing call options as described above, the Fund
may purchase put options. By buying a put option, the Fund will
pay a premium to acquire a right to sell the securities or
instruments underlying the put at the exercise price of the
option. The Fund will lose money if the securities or
instruments underlying the option do not decline in value below
the exercise price of the option by an amount sufficient to
offset the premium paid to acquire the option. To the extent the
Fund purchases put options in the OTC market, the Fund will be
subject to the credit risk of the seller of the option. The Fund
also may write put options on the types of securities or
instruments that may be held by the Fund, provided that such put
options are secured by segregated, liquid instruments. The Fund
will receive a premium for writing a put option, which increases
the Funds return. In exchange for the premium received,
the Fund has the obligation to buy the securities or instruments
underlying the option at an
agreed-upon
exercise price if the securities or instruments decrease below
the exercise price of the option. The Fund will lose money if
the securities or instruments decrease in value so that the
amount the Fund is obligated to pay the counterparty to the
option to purchase the securities underlying the option upon
exercise of the option exceeds the value of those securities by
an amount that is greater than the premium received by the Fund
for writing the option.
The Fund may purchase call options on any of the types of
securities or instruments in which it may invest. In exchange
for paying the option premium, a purchased call option gives the
Fund the right to buy, and obligates the seller to sell, the
underlying security or instrument at the exercise price. The
Fund will lose money if the securities or instruments underlying
the option do not appreciate in value in an amount sufficient to
offset the premium paid by the Fund to acquire the option.
General
Risks Related to Derivatives
In addition to call options or other option strategies, the Fund
may use other derivatives, such as, among others, total return
and other types of swaps, forward contracts, futures and options
on futures and swaps. The Funds use of derivatives
involves risks different from, and possibly greater than, the
risks associated with investing directly in the investments
underlying these derivatives.
Derivatives may be volatile and involve significant risk, such
as, among other things, credit risk, currency risk, leverage
risk and liquidity risk. They also involve the risk of
mispricing or improper valuation and correlation risk (i.e., the
risk that changes in the value of the derivative may not
correlate perfectly, or to any degree, with the underlying
asset, interest rate or index). Using derivatives can
disproportionately increase losses and reduce opportunities for
gains when security prices, indices, currency rates or interest
rates are changing in unexpected ways. The Fund may suffer
disproportionately heavy losses relative to the amount of its
investments in derivative contracts.
33
Changes in the value of derivative contracts may not match or
offset fully changes in the values of the underlying portfolio
securities, indices or rates. The Funds investments in
derivatives could result in the Fund losing more than the
principal amount invested. The use of derivatives may also
increase the amount of taxes payable by Common Stockholders as
well as accelerate the time for the payment of taxes. Also,
suitable derivative transactions may not be available in all
circumstances. In addition, derivatives can make the Funds
assets less liquid and harder to value, especially in declining
markets.
Foreign
Securities Risk
The Fund may invest up to 25% of its Managed Assets in
securities of companies organized outside the United States.
Investments in foreign securities involve certain risks not
associated with investments in U.S. companies. Securities
markets in certain foreign countries are not as developed,
efficient or liquid as securities markets in the United States.
Therefore, the prices of foreign securities are often volatile
and trading costs are higher. Certain foreign countries may
impose restrictions on the ability of issuers of foreign
securities to make payments of principal and interest to
investors located outside the country, due to blockage of
foreign currency exchanges or otherwise. Generally, there is
less publicly available information about foreign companies due
to less rigorous disclosure or accounting standards and
regulatory practices. In addition, the Fund will be subject to
risks associated with adverse political and economic
developments in foreign countries, which could cause the Fund to
lose money on its investments in foreign securities.
The Fund may invest in securities of issuers located or doing
substantial business in emerging markets (lesser
developed countries). Because of the less developed markets and
economics and, in some countries, less mature governments and
governmental institutions, the risks of investing in foreign
securities can be intensified in the case of investments in
issuers domiciled or doing substantial business in emerging
markets. These risks include a high concentration of market
capitalization and trading volume in a small number of issuers
representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries;
political and social uncertainties; over-dependence on exports,
especially with respect to primary commodities, making these
economies vulnerable to changes in commodity prices;
overburdened infrastructure and obsolete or unseasoned financial
systems; environmental problems; less developed legal systems;
and less reliable custodial services and settlement practices.
U.S.
Government Debt Securities Risk
The Fund may invest up to 20% of its Managed Assets in debt
securities, including U.S. government debt securities. U.S.
government debt securities generally do not involve the credit
risks associated with investments in other types of debt
securities, although, as a result, the yields available from
U.S. government debt securities are generally lower than
the yields available from other securities. Like other debt
securities, however, the values of U.S. government
securities change as interest rates fluctuate. Fluctuations in
the value of portfolio securities will not affect interest
income on existing portfolio securities but will be reflected in
the Funds net asset value. Since the magnitude of these
fluctuations will generally be greater at times when the
Funds average maturity is longer, under certain market
conditions the Fund may, for temporary defensive purposes,
accept lower current income from short-term investments rather
than investing in higher yielding long-term securities.
Debt
Securities Risk
The Fund may invest up to 20% of its Managed Assets in debt
securities, including U.S. government debt securities and
below-investment grade securities (e.g., high-yield or junk
bonds). Investments in debt securities are subject to the risk
that the issuer of the security could default on its
obligations, causing the Fund to sustain losses on those
investments. A default could impact both interest and principal
payments. High-yield fixed-income securities (commonly known as
junk bonds) are considered speculative with respect
to the issuers capacity to pay interest and repay
principal in accordance with the terms of the obligations. This
means that, compared to issuers of higher rated securities,
issuers of medium and lower rated securities are less likely to
have the capacity to pay interest and repay principal when due
in the
34
event of adverse business, financial or economic conditions
and/or may be in default or not current in the payment of
interest or principal.
The market values of medium and lower rated securities tend to
be more sensitive to company-specific developments and changes
in economic conditions than higher rated securities. The
companies that issue these securities often are highly
leveraged, and their ability to service their debt obligations
during an economic downturn or periods of rising interest rates
may be impaired. These companies may not have access to more
traditional methods of financing, and may be unable to repay
debt at maturity by refinancing. The risk of loss due to default
in payment of interest or principal by these issuers is
significantly greater than with higher rated securities because
medium and lower rated securities generally are unsecured and
subordinated to senior debt.
Default, or the markets perception that an issuer is
likely to default, could reduce the value and liquidity of
securities held by the Fund, thereby reducing the value of your
investment in the Fund and default may cause the Fund to incur
expenses in seeking recovery of principal or interest on its
portfolio holdings. In addition, the secondary markets in which
below-investment grade securities are traded may be less liquid
than the market for high-grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at
which the Fund could sell a particular below-investment grade
security when necessary to meet liquidity needs or in response
to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, and could adversely affect and
cause large fluctuations in the net asset value of Common
Shares. The valuation of securities that are illiquid or that
trade infrequently often requires the exercise of greater
judgment. Adverse publicity and investor perceptions may
significantly impact the values and liquidity of
below-investment grade securities, which could impact the net
asset value and market price of Common Shares. In addition, new
laws and proposed new laws may have an adverse impact on the
market for below-investment grade securities.
Credit
Risk
Credit risk is the risk that one or more fixed income securities
in the Funds portfolio will decline in price or fail to
pay interest or repay principal when due because the issuer of
the security experiences a decline in its financial status. If
the recent adverse conditions in the credit markets continue to
adversely affect the broader global economy, the credit quality
of issuers of fixed income securities in which the Fund may
invest would be more likely to decline, all other things being
equal. Changes by nationally recognized statistical rating
organizations in its rating of securities and in the ability of
an issuer to make scheduled payments may also affect the value
of the Funds investments. To the extent the Fund invests
in below-investment grade securities, it will be exposed to a
greater amount of credit risk than a fund which invests solely
in investment grade securities. The prices of lower grade
securities are more sensitive to negative developments, such as
a decline in the issuers revenues or a general economic
downturn, than are the prices of higher grade securities. Fixed
income securities of below investment grade quality are
predominantly speculative with respect to the issuers
capacity to pay interest and repay principal when due and
therefore involve a greater risk of default.
Preferred
Securities Risk
To the extent the Fund invests in preferred securities, there
are special risks associated with investing in 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.
Subordination. Preferred securities are
subordinated to bonds and other debt instruments in a
companys capital structure with respect to priority to
corporate income and liquidation payments, and therefore will be
subject to greater credit risk than more senior debt instruments.
Liquidity. Preferred securities may be
substantially less liquid than many other securities, such as
common stocks or U.S. government securities.
35
Limited Voting Rights. Generally,
preferred security holders 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 issuers board. Generally, once all the arrearages have
been paid, the preferred security holders no longer have voting
rights.
In the case of certain trust preferred securities, holders
generally have no voting rights, except (i) if the issuer
fails to pay dividends for a specified period of time or
(ii) if a declaration of default occurs and is continuing.
In such an event, rights of holders of trust preferred
securities generally would include the right to appoint and
authorize a trustee to enforce the trust or special purpose
entitys rights as a creditor under the agreement with its
operating company.
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 income tax or
securities laws. As with call provisions, a redemption by the
issuer of the preferred securities may negatively impact the
return of the security held by the Fund.
Leverage
Risk
Although it has no present intention to do so, the Fund may use
leverage to increase its investments or for other management
activities. The Fund may borrow money from banks in amounts up
to
331/3%
of the value of its Managed Assets to finance additional
investments. In addition, the Fund may issue Preferred Shares to
the extent permitted under the Investment Company Act. The use
of leverage creates certain risks for the Funds Common
Stockholders, including the greater likelihood of higher
volatility of the Funds return, its net asset value and
the market price of the Funds Common Shares. Changes in
the value of the Funds total assets will have a
disproportionate effect on the net asset value per share when
leverage is used. For example, if the Fund were to use leverage
equal to 50% of the Funds Common Share equity, it would
show an approximately 1.5% increase or decline in net asset
value for each 1% increase or decline in the value of its total
assets. An additional risk of leverage is that the cost of the
leverage plus applicable Fund expenses may exceed the return on
the transactions undertaken with the proceeds of the leverage,
thereby diminishing rather than enhancing the return to the
Funds Common Stockholders. These risks generally would
make the Funds return to stockholders more volatile if it
were to use leverage. The Fund also may be required to sell
investments in order to make interest payments on borrowings
used for leverage when it may be disadvantageous to do so.
Because the fees received by the Investment Manager are based on
the managed assets of the Fund (including assets attributable to
any Preferred Shares and borrowings that may be outstanding),
the Investment Manager has a financial incentive for the Fund to
issue Preferred Shares or use borrowings, which may create a
conflict of interest between the Investment Manager, on the one
hand, and the Common Stockholders on the other hand.
Restricted
and Illiquid Securities Risk
The Fund may invest, on an ongoing basis, up to 15% of its
Managed Assets in restricted securities and other investments
that may be illiquid. Illiquid securities are securities that
are not readily marketable and may include some restricted
securities, which are securities that may not be resold to the
public without an effective registration statement under the
1933 Act, or, if they are unregistered, may be sold only in
a privately negotiated transaction or pursuant to an exemption
from registration. Investments in illiquid securities involve
the risk that the securities will not be able to be sold at the
time desired by the Fund or at prices approximating the value at
which the Fund is carrying the securities on its books.
Foreign
Currency Risk
Although the Fund will report its net asset value and pay
dividends in U.S. dollars, foreign securities often are
purchased with, and make dividend or interest payments in,
foreign currencies. Therefore, when
36
the Fund invests in foreign securities, it will be subject to
foreign currency risk, which means that the Funds net
asset value could decline as a result of changes in the exchange
rates between foreign currencies and the U.S. dollar.
Certain foreign countries may impose restrictions on the ability
of issuers of foreign securities to make payments of principal
and interest to investors located outside the country, due to
blockage of foreign currency exchanges or otherwise.
Interest
Rate Risk
The premiums from writing options and amounts available from the
Funds option activities may decrease in declining interest
rate environments. The value of the Funds portfolio
investments may also be influenced by changes in interest rates.
High-yielding stocks and stocks of issuers whose businesses are
substantially affected by changes in interest rates may be
particularly sensitive to interest rate risk.
ETF
Risk
If the Fund invests in ETFs, Common Stockholders would bear not
only the Funds expenses (including operating expenses and
management fees) but also similar expenses of the ETFs, and the
Funds return will therefore be lower. To the extent the
Fund invests in ETFs, the Fund is exposed to the risks
associated with the underlying investments of the ETFs and the
Funds performance may be negatively affected if the value
of those underlying investments declines.
Frequent
Trading Risk
Frequent trading of investments increases the possibility that
the Fund will realize taxable capital gains (including
short-term capital gains, which are generally taxable at higher
rates than long-term capital gains for federal income tax
purposes), which could reduce the Funds after-tax return.
Frequent trading can also mean higher brokerage and other
transaction costs, which could reduce the Funds return.
Counterparty
Risk
Changes in the credit quality of the companies that serve as the
Funds counterparties with respect to derivatives, or other
transactions supported by another partys credit will
affect the value of those instruments. Certain entities that
have served as counterparties in the markets for these
transactions have recently incurred significant financial
hardships including bankruptcy and losses as a result of
exposure to sub-prime mortgages and other lower quality credit
investments that have experienced recent defaults or otherwise
suffered extreme credit deterioration. As a result, such
hardships have reduced these entities capital and called
into question their continued ability to perform their
obligations under such transactions. By using such derivatives
or other transactions, the Fund assumes the risk that its
counterparties could experience similar financial hardships. In
the event of insolvency of a counterparty, the Fund may sustain
losses or be unable to liquidate a derivatives position.
Tax
Risk
The Funds strategy of writing calls on the NASDAQ 100
involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the
gains and losses the Fund realizes in connection therewith. The
application of these special rules would therefore also affect
the character of distributions made by the Fund, and may
increase the amount of taxes payable by a shareholder as well as
accelerate the time for the payment of taxes. See Tax
Matters.
Active
Management Risk
The Fund is actively managed and its performance therefore will
reflect in part the ability of the Investment Manager to select
securities and to make investment decisions that are suited to
achieving the Funds investment objectives. Due to its
active management, the Fund could underperform other funds with
similar investment objectives.
37
Market
Price of Shares; Market Discount from Net Asset Value
Shares of closed-end management investment companies frequently
trade at a discount from their net asset value. This
characteristic is separate and distinct from the risk that the
net asset value could decrease as a result of investment
activities and may be a greater risk to investors expecting to
sell their shares relatively soon after completion of this
offering. The net asset value of the Common Shares will be
reduced immediately following the offering as a result of the
payment of the sales load and all of the Funds Common
Share offering costs up to and including $0.04 per Common Share.
Whether an investor will realize gain or loss on the sale of
Common Shares will depend not on the Funds net asset value
but on whether the market price of the Common Shares at the time
of sale is above or below the investors purchase price for
the Common Shares. The market price of the Common Shares will be
determined by factors such as relative supply of and demand for
the Common Shares in the market, general market and economic
conditions, and other factors beyond the Funds control.
The Fund cannot predict the level of trading activity or whether
Common Shares will trade at, above or below net asset value or
the initial public offering price. Common Shares are designed
primarily for long-term investors, and you should not view the
Fund as a vehicle for trading purposes.
Market
Disruption and Geopolitical Risk
The aftermath of the war with Iraq, instability in the Middle
East and terrorist attacks in the United States and around the
world may have a substantial impact on the U.S. and world
economies and securities markets. The nature, scope and duration
of the occupation of Iraq cannot be predicted with any
certainty. Terrorist attacks closed some of the
U.S. securities markets in 2001, and similar events cannot
be ruled out in the future. The war and occupation, terrorism
and related geopolitical risks have led, and may in the future
lead to, increased short-term market volatility and may have
adverse long-term effects on U.S. and world economies and
markets generally. These risks may adversely affect individual
issuers and securities markets, interest rates, secondary
trading, ratings, investor psychology, credit risk, inflation
and other factors. High-yield securities tend to be more
volatile than higher rated securities so that these events and
any actions resulting from them may have a greater impact on the
prices and volatility of high-yield securities than on higher
rated securities.
Non-Diversified
Risk
Because the Fund is classified as non-diversified
under the Investment Company Act, it can invest a greater
portion of its assets in obligations of a single issuer than a
diversified fund. As a result, the Fund may be more
susceptible than a diversified fund to any single
corporate, economic, political or regulatory occurrence. To
mitigate this risk, the Fund does not anticipate investing more
than 10% of its Managed Assets in the securities of any one
issuer. See The Funds Investments. Moreover,
the Fund intends to diversify its investments to the extent
necessary to maintain its status as a regulated investment
company under the IRC. See Tax Matters.
Anti-Takeover
Provisions
The Funds charter and Bylaws include provisions that could
limit the ability of other entities or persons to acquire
control of the Fund or convert the Fund to an open-end fund.
These provisions could have the effect of depriving the Common
Stockholders of opportunities to sell their Common Shares at a
price higher than the then-current market price of Common
Shares. See Description of Common Shares and
Anti-Takeover and Other Provisions of the Maryland General
Corporation Law and the Funds Charter and Bylaws.
Power to
Classify and Issue Additional Stock
The Funds charter authorizes the Fund to issue additional
shares of stock. The Board also may classify or reclassify any
unissued shares of stock, and may set the preferences, rights
and other terms of the classified or reclassified shares. The
Board may, without any action by its stockholders, amend the
38
charter from time to time to increase or decrease the aggregate
number of shares of stock or the number of shares of stock of
any class or series that the Fund has authority to issue. See
Description of Common Shares.
New Types
of Securities
From time to time, new types of securities have been, and may in
the future be, offered that have features other than those
described in this Prospectus. The Fund reserves the right to
invest in these securities if the Investment Manager believes
that doing so would be in the best interest of the Fund in a
manner consistent with the Funds investment objectives and
policies, as may be amended from time to time. Since the market
for these instruments will be new, the Fund may have difficulty
disposing of them at a suitable price and time. In addition to
limited liquidity, these instruments may present other risks,
such as high price volatility.
Convertible
Securities Risk
Although to a lesser extent than with non-convertible
fixed-income 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 stock. A unique feature of
convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience
market value declines to the same extent as the underlying
common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk,
investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
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 Common Shares and distributions can decline.
Deflation
Risk
Deflation risk is the risk that the Funds dividends may be
reduced in the future as lower prices reduce interest rates and
earning power, resulting in lower distributions on the assets
owned by the Fund being redeemed by their issuers.
Portfolio
Turnover Risk
The Fund may actively and frequently trade securities in its
portfolio to carry out its principal strategies. A high
portfolio turnover rate increases transaction costs. Frequent
and active trading may cause adverse tax consequences for
investors in the Fund due to an increase in short-term capital
gains. The Funds portfolio turnover rate will not be a
limiting factor when the Fund deems it desirable to sell or
purchase securities.
Liquidity/Listing
of Funds Shares
The Funds Common Shares have been approved for listing on
the NYSE, subject to notice of issuance, under the symbol
STK. There is currently no public market for the
Funds shares and there can be no assurance that an active
public market will develop or be sustained after completion of
this offering. There also is no assurance that, should the NYSE
authorize the Fund to list its shares, the Fund will be able to
maintain the listing of its shares on the NYSE.
39
Short-Term
Investments
The Fund may, from time to time, manage its cash (for purposes
such as paying fees and expenses) by investing all or a part of
its assets in short-term, high quality fixed-income securities
and money market instruments, including shares of money market
funds managed by the Funds Investment Manager, or in cash
and cash equivalents. These types of investments typically have
a lower yield than other longer term investments and lack the
capital appreciation potential of equity securities. In
addition, while these investments are generally designed to
limit the Funds losses, they can prevent the Fund from
achieving its investment objectives.
Asset
Segregation
When the Fund enters into certain transactions that involve
obligations to make future payments to third parties that are
not otherwise covered, including, but not limited to, swap
contracts, the purchase of securities on when-issued or delayed
delivery basis, forward contracts, futures or reverse repurchase
agreements, it will segregate cash or liquid securities in a
manner consistent with the positions articulated by the SEC and
its staff.
General
Economic and Market Conditions
The success of the Funds activities may be affected by
general economic and market conditions, such as interest rates,
availability of credit, inflation rates, economic uncertainty,
changes in laws, and national and international political
circumstances. These factors may affect the level and volatility
of security prices and liquidity of the Funds investments.
Unexpected market volatility or changes in liquidity could
impair the Funds profitability or result in its suffering
losses.
40
MANAGEMENT
OF THE FUND
Directors
and Officers
The business and affairs of the Fund are managed under the
direction of the Board. Accordingly, the Funds Board is
broadly responsible for the management of the Fund, including
general supervision of the duties performed by RiverSource
Investments. The names and business addresses of the Directors
and officers of the Fund and their principal occupations and
other affiliations during the past five years are set forth
under the heading Management of the Fund contained
in the SAI.
Investment
Manager
RiverSource Investments, LLC, 50606 Ameriprise Financial Center,
Minneapolis, Minnesota 55474, is the investment manager to the
Fund, and is a wholly-owned subsidiary of Ameriprise Financial,
Inc. (Ameriprise Financial). Ameriprise Financial is
a financial planning and financial services company that has
been offering solutions for clients asset accumulation,
income management and protection needs for more than
110 years. In addition to managing investments for the
Fund, RiverSource Investments manages investments for itself and
its affiliates. For institutional clients, RiverSource
Investments and its affiliates provide investment management and
related services, such as separate account asset management and
institutional trust and custody, as well as other investment
products. As of September 30, 2009, the Investment Manager
had assets under management of approximately
$145.76 billion. For all of its clients, RiverSource
Investments seeks to allocate investment opportunities in an
equitable manner over time. See the SAI for more information.
Portfolio
Managers
The Funds portfolio is managed by RiverSource Investments
and headed by the portfolio managers for the Fund: Paul Wick,
Ajay Diwan and John K. Schonberg, CFA. Messrs. Wick and
Diwan are responsible for the day-to-day investment decisions
relating to the Funds portfolio holdings, with primary
day-to-day investment decisions relating to the Options
Strategies provided by Mr. Schonberg. In addition to
managing the Fund, Messrs. Wick and Diwan provide portfolio
management services for certain mutual funds, private funds and
offshore funds, including those that invest a substantial
portion of their assets in technology and technology-related
companies and those that use long and short strategies.
Mr. Wick is the head of the Seligman Technology Group of
RiverSource Investments. Mr. Wick began his investment
career in 1987 when he joined J. & W. Seligman &
Co. Incorporated (Seligman) as an Associate in
Investment Research. During his Seligman career, he became Vice
President and Investment Officer in 1991, Managing Director in
1995 and a member of Seligmans Board of Directors in 1997.
Mr. Wick holds a B.A. in Economics from Duke University and
an M.B.A. in Finance from Duke Universitys Fuqua School of
Business.
Mr. Diwan, a member of the Seligman Technology Group of
RiverSource Investments, began his investment career in 1992 and
joined Seligman in 2001, where he was Managing Director.
Mr. Diwan holds a B.S. in Electrical Engineering and
Applied Physics from Case Western Reserve University and an
M.B.A. in Finance from Columbia University.
Mr. Wick and Mr. Diwan joined RiverSource Investments
in November 2008 in connection with RiverSource
Investments acquisition of Seligman and each is based at
the Investment Managers Menlo Park, California office.
Mr. Schonberg is a portfolio manager of the Fund, primarily
responsible for providing the Options Strategies to the Fund.
Mr. Schonberg also provides portfolio management services
for certain mutual funds and private funds. Mr. Schonberg
joined RiverSource Investments in 1997 and is based at the
Investment Managers Minnesota office. He began his
investment career in 1988. He holds a B.S. from the University
of Nebraska.
41
Management
Pursuant to an Investment Management Services Agreement dated
November 12, 2009, between RiverSource Investments and the
Fund (the Management Agreement), the Fund will pay
RiverSource Investments a management fee, payable on a monthly
basis, at an annual rate equal to 1.00% of the Funds
average daily Managed Assets for the services it provides (the
Management Fee).
In addition to the Management Fee, the Fund will pay all other
costs and expenses of its operations, including the compensation
of its Directors (other than those affiliated with RiverSource
Investments or Ameriprise Financial), custodial expenses,
transfer agency and dividend disbursing expenses, legal fees,
expenses of independent auditors, expenses of repurchasing
shares, listing fees, expenses of preparing, printing and
distributing Prospectuses, stockholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if
any.
The basis for the Board of Directors initial approval of
the Funds Management Agreement will be provided in the
Funds initial stockholder report. The basis for subsequent
continuations of the Funds Management Agreement will be
provided in annual or semi-annual reports to Common Stockholders
for the periods during which such continuations occur.
Under an Administrative Services Agreement between Ameriprise
Financial and the Fund, Ameriprise Financial provides, or
compensates others to provide, the Fund with certain services,
including administrative, accounting, treasury and other
services. The Fund will pay Ameriprise Financial a fee for
providing such services. Under the Administrative Services
Agreement, the fee will be at the annual rate of 0.06% of the
Funds average daily Managed Assets, and is reflected in
the Funds Other Expenses in the Summary
of Fund Expenses on page 23.
NET ASSET
VALUE
The net asset value per share (NAV) of the
Funds Common Shares is determined by dividing the total
value of the Funds net assets by the total number of
shares outstanding. The Funds net assets are determined by
subtracting any liabilities (including borrowings for leverage)
from the total value of its portfolio investments and other
assets. Net asset value per Common Share is determined by
dividing the net assets available for the Common Stockholders by
the number of Common Shares outstanding. Common Shares are
valued as of a particular time (the Valuation Time)
which is normally at the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m., Eastern time) (the
NYSE Close). In unusual circumstances, the
Funds Board may determine that the Valuation Time shall be
as of 4:00 p.m., Eastern time, notwithstanding an earlier,
unscheduled close or halt of trading on the NYSE.
Securities are valued primarily on the basis of market
quotations. Market quotations are obtained from outside pricing
services approved and monitored under procedures adopted by the
Board. Certain short-term securities with maturities of
60 days or less are valued at amortized cost. When reliable
market quotations are not readily available, investments are
priced at fair value based on procedures adopted by the Board.
These procedures are also used when the value of an investment
held by the Fund is materially affected by events that occur
after the close of a securities market but prior to the time as
of which the Funds NAV is determined. Valuing investments
at fair value involves reliance on judgment. The fair value of
an investment is likely to differ from any available quoted or
published price. To the extent that the Fund has significant
holdings of foreign securities or small- or mid-cap stocks that
may trade infrequently, fair valuation may be used more
frequently than for other funds. The Fund uses an unaffiliated
service provider to assist in determining fair values for
foreign securities.
Foreign investments are valued in U.S. dollars. Some of the
Funds portfolio securities may be listed on foreign
exchanges that trade on weekends or other days when the Fund
does not price its shares. In that event, the NAV of the
Funds Common Shares may change on days when Common
Stockholders will not be able to purchase or sell the
Funds shares.
42
DISTRIBUTIONS
Initial
Distribution
The Funds initial distribution is expected to be declared
approximately 45 days after the completion of the offering,
and paid approximately 45 days later, depending upon market
conditions. Thereafter, distributions are expected to be
declared quarterly after the first full quarter of operations
(i.e., June, September, December and March), depending on market
conditions, out of assets legally available therefor.
Level
Rate Distribution Policy
Commencing with the Funds first distribution, the Fund
intends to make quarterly cash distributions to Common
Stockholders at a rate that reflects the past and projected
performance of the Fund. The Fund expects to receive all or some
of its current income and gains from the following sources:
(i) dividends received by the Fund that are paid on the
equity and equity-related securities in its portfolio; and
(ii) capital gains (short-term and long-term) from option
premiums and the sale of portfolio securities. Distributions
would be made only after paying dividends on Preferred Shares,
if any have been issued, and interest and required principal
payments on borrowings, if any. It is possible that the
Funds distributions will at times exceed the earnings and
profits of the Fund and therefore all or a portion of such
distributions may constitute a return of capital as described
below. A return of capital is not taxable, but it reduces a
stockholders tax basis in his or her shares, thus reducing
any loss or increasing any gain on a subsequent taxable
disposition by the stockholder of his or her shares.
Distributions may be variable, and the Funds distribution
rate will depend on a number of factors, including the net
earnings on the Funds portfolio investments and the rate
at which such net earnings change as a result of changes in the
timing of and rates at which the Fund receives income from the
sources described above. The net investment income of the Fund
consists of all income (other than net short-term and long-term
capital gains) less all expenses of the Fund.
As portfolio and market conditions change, the rate of dividends
on the Common Shares and the Funds distribution policy
could change. Over time, the Fund will distribute all of its net
investment income and net short-term capital gains. In addition,
at least annually, the Fund intends to distribute any net
capital gain (which is the excess of net long-term capital gain
over net short-term capital loss) or, alternatively, to retain
all or a portion of the years net capital gain and pay
federal income tax on the retained gain. As provided under
federal law, Common Stockholders of record as of the end of the
Funds taxable year will include their attributable share
of the retained gain in their income for the year as a long-term
capital gain and will be entitled to a tax credit or refund for
the tax deemed paid on their behalf by the Fund. The Fund may
treat the cash value of tax credits and amounts refunded in
connection with retained capital gains as a substitute for
equivalent cash distributions. The Investment Company Act
currently limits the number of times the Fund may distribute
long-term capital gains in any tax year (unless and until it
receives an exemptive order as contemplated under Managed
Distribution Policy below), which may increase the
variability of the Funds distributions and result in
certain distributions being comprised to a larger degree of
long-term capital gains eligible for more favorable income tax
treatment than others. During periods in which the Funds
strategies do not generate enough income or result in net
losses, a substantial portion of the Funds dividends may
be comprised of capital gains from the sale of securities held
by the Fund, which would involve transaction costs and may also
result in realization of taxable short-term capital gains taxed
at ordinary income tax rates particularly during the initial
year of the Funds operations when all of the Funds
portfolio securities will have been held for less than one year.
The Board of the Fund reserves the right to change the dividend
policy from time to time.
Managed
Distribution Policy
The Investment Manager has applied to the SEC for an exemptive
order under the Investment Company Act to permit funds managed
by the Investment Manager, including the Fund, to include that
funds realized long-term capital gains as a part of its
regular distributions to common stockholders more
43
frequently than would otherwise be permitted by the Investment
Company Act (generally once per taxable year).
Under a managed distribution policy, the Fund would distribute
to Common Stockholders a fixed quarterly amount, which may be
adjusted from time to time. As with the level rate distribution
policy, distributions would be made only after paying dividends
on Preferred Shares, if any have been issued, and interest and
required principal payments on borrowings, if any. Under a
managed distribution policy, if, for any quarterly distribution,
net investment company taxable income and net capital gain were
less than the amount of the distribution, the difference would
be distributed from the Funds assets and result in a
return of capital.
There can be no assurance that the SEC staff will process such
application by the Investment Manager for an exemptive order on
a timely basis or ever, or that the SEC will grant the requested
relief or, if granted, that the Funds Board will determine
to implement or maintain a managed distribution policy. As a
result, the Fund has no current expectation that it will be in a
position to include long-term capital gains in Fund
distributions more frequently than is currently permitted under
the Investment Company Act (generally once per tax year), thus
leaving the Fund with the possibility of variability in
distributions (and their tax attributes) as discussed above.
Common Stockholders who periodically receive the payment of a
dividend or other distribution consisting entirely or in part of
a return of capital may be under the impression that they are
receiving net profits when they are not. A return of capital
represents a return of your original investment. Common
Stockholders should not assume that the source of a distribution
from the Fund is net profit and should read any written
disclosure accompanying distribution payments carefully.
The Board of the Fund reserves the right to change the
distribution policy from time to time.
DIVIDEND
INVESTMENT PLAN
Pursuant to the Funds Dividend Investment Plan (the
Plan), unless a Common Stockholder elects otherwise,
all cash dividends, capital gains distributions, and other
distributions are automatically reinvested in additional Common
Shares. Common Stockholders who elect not to participate in the
Plan (including those whose intermediaries do not permit
participation in the Plan by their customers) will receive all
dividends and distributions payable in cash directly to the
Common Stockholder of record (or, if the Common Shares are held
in street or other nominee name, then to such nominee) as
dividend paying agent. Common Stockholders may elect not to
participate in the Plan and to receive all distributions of
dividends and capital gains or other distributions in cash by
sending written instructions to AST. Participation in the Plan
may be terminated or resumed at any time without penalty by
written notice if received by AST prior to the record date for
the next distribution. Otherwise, such termination or resumption
will be effective with respect to any subsequently declared
distribution.
Under the Plan, Common Stockholders receive Common Shares in
lieu of cash distributions unless they have elected otherwise as
described in the preceding paragraph. Common Shares will be
issued in lieu of cash by the Fund from previously authorized
but unissued Common Shares. If the market price of a share on
the ex-dividend date of such a distribution is at or above the
Funds net asset value per share on such date, the number
of shares to be issued by the Fund to each Common Stockholder
receiving shares in lieu of cash distributions will be
determined by dividing the amount of the cash distribution to
which such Common Stockholder would be entitled by the greater
of the net asset value per share on such date or 95% of the
market price of a share on such date. If the market price of a
share on such an ex-dividend date is below the net asset value
per share, the number of shares to be issued to such Common
Stockholders will be determined by dividing such amount by the
per share market price. The issuance of Common Shares at less
than net asset value per share will dilute the net asset value
of all Common Shares outstanding at that time. Market price on
any day means the closing price for the Common Shares at the
close of regular trading on the New York Stock Exchange on such
day or, if such day is not a day on which the Common
44
Shares trades, the closing price for the Common Shares at the
close of regular trading on the immediately preceding day on
which trading occurs.
Common Stockholders who hold their shares in the name of a
broker or other nominee should contact such broker or other
nominee to discuss the extent to which such nominee will permit
their participation in the Plan. The Fund will administer the
Plan on the basis of the number of shares certified from time to
time by nominees as representing the total amount of shares held
through such nominees by beneficial Common Stockholders who are
participating in the Plan and by delivering shares on behalf of
such beneficial Common Stockholders to the nominees
accounts at The Depository Trust Company.
AST will maintain all Common Stockholders accounts in the
Plan not held by The Depository Trust Company and furnish
written confirmation of all transactions in the account,
including information needed by Common Stockholders for tax
records. Shares in the account of each Plan participant will be
held in non-certificated form in the name of the participant,
and each Common Stockholders proxy will include those
shares purchased or received pursuant to the Plan.
The Fund currently intends to make open market purchases of its
Common Shares from time to time, when the Fund is trading at a
discount to NAV, in an amount approximately sufficient to offset
the growth in the number of Common Shares attributable to the
reinvestment of the portion of its distributions to Common
Stockholders that are attributable to distributions received
from portfolio investments less Fund expenses. Assets of the
Fund used to repurchase Common Shares are not available for
investment in accordance with the Funds investment
objectives and strategies.
The Fund reserves the right to amend or terminate the Plan as
applied to any distribution paid subsequent to written notice of
the change sent to participants in the Plan at least
90 days before the record date for such distribution. There
are no service or brokerage charges to participants in the Plan;
however, the Fund reserves the right to amend the Plan to
include a service charge payable to the Fund by the
participants. The Fund also reserves the right to amend the Plan
to provide for payment of brokerage fees by Plan participants in
the event the Plan is changed to provide for open market
purchases of Common Shares on behalf of Plan participants. All
correspondence concerning the Plan should be directed to AST,
59 Maiden Lane Plaza Level, New York, New York 10038.
DESCRIPTION
OF COMMON SHARES
The following description of the terms of the Funds stock
is only a summary. For a complete description, please refer to
the Maryland General Corporation Law (MGCL), and the
Funds charter and Bylaws. The charter and Bylaws are
exhibits to the Registration Statement, of which this Prospectus
forms a part.
General
The Funds charter provides that the Fund may issue up to
1,000,000,000 shares of common stock, $0.01 par value
per share (the Common Shares). A majority of the
entire Board may, without any action by the Funds
stockholders, amend the charter from time to time to increase or
decrease the aggregate number of shares of stock or the number
of shares of stock of any class or series that the Fund has
authority to issue. Under Maryland law, the stockholders
generally are not liable for the Funds debts or
obligations.
Common
Shares
All of the Common Shares offered by this Prospectus will be duly
authorized, fully paid and nonassessable. Common Stockholders
are entitled to receive distributions if, as and when authorized
by the Board and declared by the Fund out of assets legally
available for the payment of distributions. They also are
entitled to share ratably in the assets legally available for
distribution to the Funds Common Stockholders in the event
of the Funds liquidation, dissolution or winding up, after
payment of, or
45
adequate provision for, all of the Funds known debts and
liabilities. These rights are subject to the preferential rights
of any other class or series of the Funds stock.
Each outstanding Common Share entitles the holder thereof to one
vote on all matters submitted to a vote of the Common
Stockholders, including the election of Directors. Except as
provided with respect to any other class or series of stock,
Common Shares will possess the exclusive voting power. All of
the Common Shares will have equal dividend, liquidation, voting
and other rights. There is no cumulative voting in the election
of Directors, which means that the holders of a majority of the
outstanding Common Shares can elect all of the Directors then
standing for election, and the holders of the remaining shares
will not be able to elect any Directors.
Holders of Common Shares have no preference, conversion,
redemption, exchange, sinking fund, or appraisal rights and have
no preemptive rights to subscribe for any of the Funds
securities.
Power to
Reclassify Shares of the Funds Stock and Issue Additional
Shares
The Funds charter authorizes the Board to classify and
reclassify any unissued Common Shares into other classes or
series of stock, including Preferred Shares, and authorizes the
issuance of additional shares of stock. Before issuing shares of
each new class or series, the Board is required by Maryland law
and by the Funds charter to set the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions,
qualifications, and terms or conditions of redemption of the
class and series.
The Fund believes that the power to issue additional shares of
Common Shares and to classify or reclassify unissued shares of
Common Shares and thereafter to issue the classified or
reclassified shares provides the Fund with increased flexibility
in meeting needs of the Fund that might arise. Subject to the
rights of holders of Preferred Shares, if any, these actions can
be taken without Common Stockholder approval, unless Common
Stockholder approval is required by applicable law or the rules
of any stock exchange or automated quotation system on which the
Funds securities may be listed or traded. Although the
Fund has no present intention of doing so, the Fund could issue
a class or series of stock that could delay, defer or prevent a
transaction or a change in control of the Fund that might
involve a premium price for Common Stockholders or otherwise be
in the Funds best interests.
BORROWINGS
AND PREFERRED SHARES
Although the Fund does not currently intend to issue senior
securities such as Preferred Shares or debt instruments, the
Fund is permitted, without prior approval of the Common
Stockholders, to borrow money and issue Preferred Shares. 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 the Funds assets as security. 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.
Limitations. Borrowings by the Fund are
subject to certain limitations under the Investment Company Act,
including the amount of asset coverage required. In addition,
agreements related to the borrowings may also impose certain
requirements, which may be more stringent than those imposed by
the Investment Company Act. See Use of Financial
Leverage and Risks Leverage Risk.
Distribution Preference. 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 Stockholders, and the terms of any such borrowings may
contain provisions which limit certain activities of the Fund,
including the payment of dividends to Common Stockholders in
certain circumstances.
Voting Rights. In certain
circumstances, the Investment Company Act grants the Funds
lenders certain voting rights in the event of default in the
payment of interest on, or repayment of, principal. In
46
the event that such provisions would impair the Funds
status as a regulated investment company under the IRC, the
Fund, subject to its ability to liquidate its portfolio
holdings, intends to repay the borrowings. Any borrowings will
likely be ranked senior or equal to all other existing and
future borrowings of the Fund.
The discussion above describes the Boards present
intention with respect to a possible offering of Preferred
Shares or borrowings. If the Board determines to authorize any
of the foregoing, the terms may be the same as, or different
from, the terms described above, subject to applicable law and
the Funds charter.
Preferred Shares. The Fund is
authorized under the Investment Company Act to issue Preferred
Shares in an amount up to 50% of its Managed Assets.
Managed Assets means the net asset value of the
Funds outstanding Common Shares plus any liquidation
preference of any issued and outstanding Preferred Shares and
the principal amount of any borrowings used for leverage.
Preferred Shares generally pay fixed or floating rate dividends
to investors, and have a preference over common
stock in the payment of dividends and the liquidation of a
companys assets. This means that a company must pay
dividends on preferred securities before paying any dividends on
its common stock. Preferred security holders usually have no
right to vote for corporate directors or on other matters.
It is not the Funds current intention to issue Preferred
Shares. However, the Fund may determine at a subsequent time to
issue Preferred Shares, subject to market conditions, in an
aggregate amount limited to approximately 50% of its Managed
Assets (including the proceeds of the leverage) as valued
immediately after the issuance of Preferred Shares in order to
purchase additional securities of technology and
technology-related companies and other securities as described
herein.
The Preferred Shares would have priority over Common Shares and
other non-Preferred Shares upon distribution of assets. Although
the timing and other terms of the offering of Preferred Shares
and the terms of the Preferred Shares would be determined by the
Funds Board of Directors, the Fund expects to invest the
proceeds of any Preferred Shares offering in accordance with its
investment objectives. So long as the Funds portfolio is
invested in securities that provide a higher level of income
than the dividend rate of the Preferred Shares, after taking
expenses into consideration, the leverage will cause Common
Stockholders to receive higher distributions than if the Fund
were not leveraged.
The Fund intends to apply for ratings on any Preferred Shares it
may issue from one or more nationally recognized ratings
agencies. The Fund believes that obtaining a rating for
Preferred Shares will enhance the marketability of the Preferred
Shares and thereby reduce the dividend rate on the Preferred
Shares from that which the Fund would be required to pay if the
Preferred Shares were not rated. The rating agencies for any
Preferred Shares may require asset coverage maintenance ratios
not imposed by the Investment Company Act. The ability of the
Fund to comply with such asset coverage maintenance ratios may
be subject to circumstances beyond control of the Fund such as
market conditions for its portfolio securities. It is expected
that the terms of any Preferred Shares will provide for
mandatory redemption of the Preferred Shares in the event the
Fund fails to meet such asset coverage maintenance ratios. In
such circumstances, the Fund may have to liquidate portfolio
securities in order to meet redemption requirements. Such
liquidations may occur at disadvantageous times, which could
have the effect of reducing the NAV to Common Stockholders.
Under the Investment Company Act, the holders of Preferred
Shares, voting as a class, must have the right to elect at least
two directors at all times, and, subject to the prior rights, if
any, of the holders of any other class of senior securities
outstanding, to elect a majority of the directors if at any time
dividends on such class of securities shall be unpaid in an
amount equal to two full years dividends on such
securities, and to continue to be so represented until all
dividends in arrears shall have been paid or otherwise provided
for. In addition, the vote of a majority of the Preferred
Shares, voting as a class, is required to approve any plan of
reorganization adversely affecting the Preferred Shares, or any
action requiring a vote of security holders pursuant to
Section 13(a) of the Investment Company Act, including,
among other things, changes in the Funds subclassification
as a closed-end investment company or changes in its fundamental
investment policies. In addition, at the discretion of the
Board, subject to the Investment
47
Company Act, the terms of any Preferred Shares may also provide
for the vote of up to
662/3%
of the class regarding certain transactions involving a merger,
sale of assets or liquidation of the Fund, or conversion of the
Fund to open-end status and other matters. See Description
of Common Shares, Anti-Takeover and Other Provisions
of the Maryland General Corporation Law and the Funds
Charter and Bylaws and Repurchase of Common Shares;
Tender Offers; Conversion to Open-End Fund.
The issuance of any Preferred Shares will entail certain initial
costs and expenses such as underwriting discounts, fees
associated with the registration of the Preferred Shares with
the SEC, filings under state securities laws, rating agency
fees, legal and accounting fees, printing costs, and certain
other ongoing expenses such as administrative and accounting
fees. These costs and expenses will be borne by the Fund and
will reduce net assets available to Common Stockholders.
Under the Investment Company Act, the Fund is not permitted to
issue Preferred Shares unless immediately after such issuance
the value of the Funds Managed Assets less certain
ordinary course liabilities is at least 200% of the sum of the
liquidation value of the outstanding Preferred Shares plus any
indebtedness for leverage purposes (i.e., the liquidation value
may not exceed 50% of the sum of the Funds net assets plus
any indebtedness incurred for leverage purposes). In addition,
the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares or repurchase any of its
Common Shares unless the Fund satisfies the asset coverage
requirements described in the previous sentence immediately
after giving effect to such declaration or repurchase. 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 to maintain 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 a reduction of
indebtedness or 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, or reductions in indebtedness,
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 Funds ability to qualify as a regulated
investment company under the Investment Company Act.
ANTI-TAKEOVER
AND OTHER PROVISIONS OF THE MARYLAND GENERAL
CORPORATION LAW AND THE FUNDS CHARTER AND BYLAWS
The MGCL and the Funds charter and Bylaws contain
provisions that could make it more difficult for a person or
group of persons to acquire control of the Fund or to convert
the Fund to open-end status by means of a tender offer, proxy
contest or otherwise. Certain of these provisions are intended
to preserve the Funds status as a closed-end investment
company and to discourage certain coercive takeover practices,
inadequate takeover bids and attempts to cause the Fund to
liquidate or convert to an open-end investment company. These
provisions could have the effect of depriving Common
Stockholders of the opportunity to sell their shares at a
premium over the then-current market price of Common Shares by
discouraging a third party from seeking to obtain control of the
Fund or from taking action intended to result in the open-ending
or liquidation of the Fund or discouraging the implementation of
measures that may result in a temporary or long-term reduction
in any market discount.
Election of Directors. The Funds
charter provides that, except as provided in the Funds
Bylaws, each director will be elected by the holders of a
majority of the Common Shares outstanding and entitled to vote
thereon. Accordingly, the holders of less than a majority of the
outstanding Common Shares will not be able to elect any
directors. If no nominee receives the required vote to be
elected, the incumbent director-nominees will continue to serve
as the Funds directors until the next annual meeting of
Common Stockholders and until their successors are duly elected
and qualify. The Board may amend the Bylaws to alter the vote
required to elect directors.
48
Classification of the Board of
Directors. Pursuant to the Funds
charter, the Board is divided into three classes of directors.
The initial terms of the first, second and third classes will
expire in 2011, 2012 and 2013, respectively. Beginning at the
Funds annual meeting in 2011, upon the expiration of their
current terms, directors of each class will be elected for
three-year terms and until their successors are duly elected and
qualify. Each year one class of directors will be elected by the
stockholders.
The classified board provision could have the effect of making
the replacement of incumbent directors more time-consuming and
difficult. At least two annual meetings of Common Stockholders,
instead of one, will generally be required to effect a change in
a majority of the Board. The staggered terms of directors may
delay, defer or prevent a tender offer or an attempt to change
control of the Fund. The Fund believes that classification of
the Board will help to assure the continuity and stability of
the Funds strategies and policies as determined by the
Board.
Removal of Directors. Subject to the
rights of holders of Preferred Shares, if any, to elect
directors, the Funds charter provides that a director may
be removed only for cause and only by the affirmative vote of at
least 75 % of the votes entitled to be cast in the election
of directors. This provision, when coupled with the provisions
in the Funds charter and Bylaws authorizing only the Board
to fill vacant directorships, precludes Common Stockholders from
removing incumbent directors except for cause and by a
substantial affirmative vote and filling the vacancies created
by the removal with their own nominees.
Certain Extraordinary Transactions; Amendments to the
Funds Charter and Bylaws. Under
Maryland law, a Maryland corporation such as the Fund generally
cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or
engage in similar transactions outside the ordinary course of
business, unless advised by the Board and approved by the
affirmative vote of stockholders entitled to cast at least
two-thirds of the votes entitled to be cast on the matter. A
Maryland corporation may, however, provide in its charter for
approval of these matters by a different percentage, but not
less than a majority of all of the votes entitled to be cast on
the matter. Subject to certain exceptions described below, the
Funds charter provides for approval of charter amendments
by the holders of a majority of the votes entitled to be cast on
the matter.
The Funds charter provides that the liquidation or
dissolution of the Fund, any merger, consolidation, share
exchange or sale or exchange of all or substantially all of the
assets of the Fund that requires the approval of the Funds
stockholders under the MGCL, certain transactions between the
Fund and any person or group of persons acting together and any
person controlling, controlled by or under common control with
any such person or member of such group, that may exercise or
direct the exercise of 10% or more of the voting power of the
Fund, any amendment to the Funds charter that would
convert the Fund from a closed-end investment company to an
open-end investment company or otherwise make the Funds
Common Shares a redeemable security and any amendment to certain
provisions of the Funds charter, including the provisions
relating to the Funds business as a closed-end management
investment company and the number, qualifications,
classification, election and removal of directors, requires the
approval of the stockholders entitled to cast at least 80% of
the votes entitled to be cast on such matter. If such a proposal
is approved by at least two-thirds of the Funds Continuing
Directors (defined below) (in addition to approval by the full
Board), however, such proposal may be approved by the
stockholders entitled to cast a majority of the votes entitled
to be cast on such matter. The Continuing Directors
are defined in the Funds charter as
(i) the Funds current Directors (ii) those
Directors whose nomination for election by the stockholders or
whose election by the Directors to fill vacancies is approved by
a majority of Continuing Directors then on the Board and
(iii) any successor directors whose nomination for election
by the stockholders or whose election by the directors to fill
vacancies is approved by a majority of the Continuing Directors
then in office. This provision could make it more difficult for
certain extraordinary transactions to be approved if they are
opposed by the Continuing Directors, and discourage proxy
contests for control of the Funds Board by persons wishing
to cause such transactions to take place.
The Funds charter and Bylaws provide that the Board will
have the exclusive power to adopt, alter or repeal any provision
of the Funds Bylaws or to make new Bylaws.
49
Quorum. The MGCL provides that the
presence of stockholders entitled to cast a majority of all the
votes entitled to be cast at a meeting of stockholders
constitutes a quorum unless the law or the charter provides
otherwise. The Funds charter provides that the presence of
stockholders entitled to cast a majority of the votes entitled
to be cast on a matter (without regard to class) shall
constitute a quorum at any meeting of stockholders with respect
to that matter. However, the Funds charter also provides
that with respect to a matter that, under applicable statutes or
regulatory requirements or the charter, requires approval by a
separate vote of the holders of one or more classes of stock,
the presence of the holders of shares entitled to cast a
majority of the votes entitled to be cast by each such class on
such a matter shall constitute a quorum. The Funds charter
specifies that the Bylaws may provide otherwise, within a
limited range of one-third to two-thirds of the votes entitled
to be cast on the matter (without regard to class). Currently,
the Funds Bylaws provide that the presence of stockholders
entitled to cast a majority of all the votes entitled to be cast
on a matter at a meeting of stockholders constitutes a quorum.
However, because the Bylaws may be amended only by the Board,
the Board has the power to specify a quorum requirement other
than a majority of the votes entitled to be cast on a matter at
the meeting.
Advance Notice of Director Nominations and New
Business. The Funds Bylaws provide
that, with respect to an annual meeting of stockholders,
nominations of persons for election to the Board and the
proposal of business to be considered by stockholders may be
made only (i) pursuant to the Funds notice of the
meeting, (ii) by or at the direction of the Board or
(iii) by a stockholder who is entitled to vote at the
meeting and who has complied with the advance notice procedures
of the Bylaws. With respect to special meetings of stockholders,
only the business specified in the Funds notice of the
meeting may be brought before the meeting. Nominations of
persons for election to the Board at a special meeting may be
made only (i) pursuant to the Funds notice of the
meeting, (ii) by or at the direction of the Board, or
(iii) provided that the Board has determined that directors
will be elected at the meeting, by a Common Stockholder who is
entitled to vote at the meeting and who has complied with the
advance notice provisions of the Bylaws.
Calling of Special Meetings of
Stockholders. The Funds Bylaws provide
that special meetings of stockholders may be called by the
Funds Board and certain of the Funds officers.
Additionally, the Funds Bylaws provide that, subject to
the satisfaction of certain procedural and informational
requirements by the stockholders requesting the meeting, a
special meeting of stockholders will be called by the Secretary
of the Fund upon the written request of stockholders entitled to
cast not less than a majority of all the votes entitled to be
cast at such meeting.
REPURCHASE
OF COMMON SHARES; TENDER OFFERS; CONVERSION TO OPEN-END
FUND
The Fund is a closed-end management investment company and, as
such, its Common Stockholders will not have the right to cause
the Fund to redeem their shares. Instead, the Common Shares will
trade in the open market at a price that will be a function of
several factors, including financial leverage, dividend levels
(which are in turn affected by expenses), net asset value, call
protection, dividend stability, portfolio credit quality,
relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Shares
of a closed-end management investment company may frequently
trade at prices lower than net asset value. The Board will
monitor the relationship between the market price and net asset
value of the Common Shares. If the Common Shares were to trade
at a substantial discount to net asset value for an extended
period of time, the Board may consider the repurchase of its
Common Shares on the open market or in private transactions, the
making of a tender offer for such shares, or the conversion of
the Fund to an open-end management investment company, which
would require approval by the stockholders. The Fund cannot
assure you that its Board will decide to consider, take or
propose any of these actions, or that share repurchases or
tender offers will actually reduce market discount.
If the Fund converted to an open-end management investment
company, it would be required to redeem all Preferred Shares
then outstanding (requiring in turn that it liquidate a portion
of its investment portfolio), and the Common Shares would be
de-listed from the NYSE. In contrast to a closed-end management
investment company, stockholders of an open-end management
investment company may require the company to redeem their
shares at any time (except in certain circumstances as
authorized by
50
or under the Investment Company Act) at their net asset value,
less any redemption charge that is in effect at the time of
redemption.
Before deciding whether to take any action to convert the Fund
to an open-end management investment company, the Board would
consider all relevant factors, including the extent and duration
of the discount, the liquidity of the Funds portfolio, the
impact of any action that might be taken on the Fund or its
stockholders, and market considerations. Based on these
considerations, even if the Common Shares should trade at a
discount, the Board may determine that, in the interest of the
Fund and its stockholders, no action should be taken. See the
SAI under Repurchase of Common Shares; Tender Offers;
Conversion to Open-End Fund for a further discussion of
possible action to reduce or eliminate such discount to net
asset value.
TAX
MATTERS
As with any investment, you should consider how your investment
in shares will be taxed. The tax information in this Prospectus
is provided as general information. You should consult your own
tax adviser about the tax consequences of an investment in
Common Shares. Unless otherwise noted, the following tax
discussion assumes that you are a U.S. stockholder and that
you hold the Common Shares as capital assets. You will be a
U.S. stockholder if you are an individual who is a citizen
or resident of the United States, a U.S. domestic
corporation, or any other person that is subject to
U.S. federal income tax on a net income basis in respect of
an investment in the Common Shares.
Unless your investment in the shares is made through a
tax-exempt entity or tax-deferred retirement account, such as an
Individual Retirement Account (IRA), you need to be
aware of the possible tax consequences when the Fund makes
distributions or you sell your Common Shares.
Fund Status
The Fund intends to elect and to qualify annually as a
regulated investment company under the federal tax
laws. To qualify, the Fund must, among other things, satisfy
certain requirements relating to the source and nature of its
income and the diversification of its assets. If the Fund
qualifies as a regulated investment company and distributes all
of its income, the Fund generally will not pay federal income or
excise taxes.
Taxes on
Distributions
Dividends from net investment income, if any, are declared and
paid quarterly. While the Fund intends to make quarterly level
distributions, it is possible that the Fund may also pay a
special distribution at the end of the calendar year to comply
with federal tax requirements. In general, your distributions
are subject to federal income tax when they are paid, whether
you take them in cash or reinvest them in the Fund. Dividends
paid out of the Funds income and net short-term capital
gains, if any, are taxable as ordinary income. Distributions of
net long-term capital gains, if any, in excess of net short-term
capital losses are taxable as long-term capital gains,
regardless of how long you have held your Common Shares.
Long-term capital gains of non-corporate taxpayers are generally
taxed at a maximum rate of 15% for taxable years beginning
before January 1, 2011. Qualified dividends for these
taxable years paid by the Fund to non-corporate shareholders may
qualify for taxation at the lower tax rates applicable to
long-term capital gains, provided that certain conditions are
met. Because the Fund primarily intends to invest in equity
securities of technology and technology-related companies, which
generally do not pay significant amounts of dividends, the Fund
does not expect to earn a significant amount of such qualified
dividends.
Distributions in excess of the Funds current and
accumulated earnings and profits are treated as a tax-free
return of capital to the extent of your basis in your Common
Shares, and as capital gain thereafter. A distribution will
reduce the Funds net asset value per Common Share and may
be taxable to you as ordinary income or capital gain even
though, from an investment standpoint, the distribution may
constitute a return of capital.
51
Some of the Funds investments and positions may be subject
to special tax rules that may change the normal treatment of
income, gains and losses recognized by the Fund (for example,
the calls written by the Fund on the NASDAQ 100, investments in
futures transactions or
non-U.S. corporations
classified as passive foreign investment companies).
Those special tax rules can, among other things, affect the
treatment of capital gain or loss as long-term or short-term and
may result in ordinary income or loss rather than capital gain
or loss. The application of these special rules would therefore
also affect the character of distributions made by the Fund, and
may increase the amount of taxes payable by Common Stockholders.
Each January, you will be sent information on the tax status of
any distributions made during the previous calendar year.
Because each Common Stockholders situation is unique, you
should always consult your tax adviser concerning the effect
income taxes may have on your individual investment.
The securities in which the Fund invest may not provide complete
tax information to the Fund as to the tax character of the
dividends distributed by such company (e.g., income, capital
gain or return of capital) until after the calendar year end.
Consequently, because of such delay, it may be necessary for the
Fund to request permission to extend the deadline for the
issuance of a
Form 1099-DIV
until after January 31 or to issue a revised
Form 1099-DIV
after January 31. Further, the tax treatment of
distributions reported on
Form 1099-DIV
may differ from the characterization of distributions provided
at the time the distribution was made.
Taxes on
Sales of Shares
When you sell your Common Shares, any gain or loss you realize
will generally be treated as a long-term capital gain or loss if
you held your Common Shares for more than one year, or as a
short-term capital gain or loss if you held your Common Shares
for one year or less. The ability to deduct capital losses may
be limited. However, if you sell your Common Shares on which a
long-term capital gain distribution has been received (or on
which amounts have been designated as undistributed capital
gains) and you held the shares for six months or less, any loss
you realize will be treated as a long-term capital loss to the
extent of the long-term capital gain distribution (or amounts
designated as undistributed capital gains) with respect to the
Common Shares. A loss realized on a sale or exchange of Common
Shares of the Fund may be disallowed if other substantially
identical shares are acquired within a 61 day period
beginning 30 days before and ending 30 days after the
date on which the Common Shares are disposed. In that case, the
basis in the newly purchased shares will be adjusted to reflect
the disallowed loss.
The foregoing discussion summarizes some of the possible
consequences under current federal tax law of an investment in
the Fund. It is not a substitute for personal tax advice. It
does not represent a detailed description of the federal income
tax considerations relevant to special classes of taxpayers
including, without limitation, financial institutions, insurance
companies, investors in pass-through entities,
U.S. stockholders whose functional currency is
not the U.S. dollar, tax-exempt organizations, dealers in
securities or currencies, traders in securities or commodities
that elect mark to market treatment, or persons that will hold
Common Shares as a position in a straddle,
hedge or as part of a constructive sale
for federal income tax purposes. In addition, this discussion
does not address the application of the U.S. federal
alternative minimum tax. You may also be subject to state and
local taxation on Fund distributions and sales of Common Shares.
You are advised to consult your personal tax adviser about the
potential tax consequences of an investment in the Common Shares
under all applicable tax laws.
52
UNDERWRITING
Wells Fargo Securities, LLC, UBS Securities LLC and Ameriprise
Financial Services, Inc. are acting as the representatives of
the underwriters named below. Subject to the terms and
conditions stated in the underwriting agreement dated the date
of the final Prospectus, each underwriter named below has agreed
to purchase, and the Fund has agreed to sell to that
underwriter, the number of Common Shares set forth opposite the
underwriters name.
|
|
|
|
|
|
|
Number of
|
|
Underwriters
|
|
Common Shares
|
|
|
Wells Fargo Securities, LLC
|
|
|
2,800,000
|
|
UBS Securities LLC
|
|
|
1,750,000
|
|
Ameriprise Financial Services, Inc.
|
|
|
3,900,000
|
|
Raymond James & Associates, Inc.
|
|
|
1,240,000
|
|
Janney Montgomery Scott LLC
|
|
|
125,000
|
|
Oppenheimer & Co. Inc.
|
|
|
850,000
|
|
RBC Capital Markets Corporation
|
|
|
850,000
|
|
Stifel, Nicolaus & Company, Incorporated
|
|
|
400,000
|
|
Robert W. Baird & Co. Incorporated
|
|
|
200,000
|
|
J.J.B. Hilliard, W.L. Lyons, Inc.
|
|
|
100,000
|
|
Maxim Group LLC
|
|
|
175,000
|
|
Wedbush Securities Inc.
|
|
|
100,000
|
|
Wunderlich Securities, Inc.
|
|
|
100,000
|
|
D.A. Davidson & Co.
|
|
|
50,000
|
|
Dominick & Dominick LLC
|
|
|
50,000
|
|
Morgan Keegan & Company, Inc.
|
|
|
50,000
|
|
R. M. Stark Co., Inc.
|
|
|
50,000
|
|
White Pacific Securities, Inc.
|
|
|
50,000
|
|
Andrew Garrett, Inc.
|
|
|
20,000
|
|
Bishop, Rosen & Co., Inc.
|
|
|
20,000
|
|
Crowell, Weedon & Co.
|
|
|
20,000
|
|
David A. Noyes & Company
|
|
|
20,000
|
|
Henley & Company LLC
|
|
|
20,000
|
|
Howe Barnes Hoefer & Arnett, Inc.
|
|
|
20,000
|
|
Jesup & Lamont Securities Corp.
|
|
|
20,000
|
|
Joseph Gunnar & Co. LLC
|
|
|
20,000
|
|
McGinn, Smith & Co., Inc.
|
|
|
20,000
|
|
Muriel Siebert & Co., Inc.
|
|
|
20,000
|
|
Newbridge Securities Corporation
|
|
|
20,000
|
|
Southwest Securities, Inc.
|
|
|
20,000
|
|
Summit Brokerage Services, Inc.
|
|
|
20,000
|
|
Total
|
|
|
13,100,000
|
|
The underwriting agreement provides that the obligations of the
underwriters to purchase the Common Shares included in this
offering are subject to approval of legal matters by counsel and
to other conditions. The underwriters are obligated to purchase
all the shares of Common Shares (other than those covered by the
over-allotment option described below) shown above if any of the
Common Shares are purchased.
The underwriters propose to 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 dealers at the public offering price less a concession not to
exceed $0.60 per share. The sales load the Fund will pay of
$0.90 per share is equal to 4.5% of the initial offering price.
If all of the Common Shares are not sold at the initial offering
price, the representatives may change the public offering price
and other selling terms. Investors must pay for any Common
Shares purchased on or before November 30, 2009. The
representatives have advised the Fund that the underwriters do
not intend to confirm any sales to any accounts over which they
exercise discretionary authority.
53
Additional
Compensation
The Investment Manager (and not the Fund) has agreed to pay to
each of Wells Fargo Securities, LLC and Ameriprise Financial
Services, Inc., from its own assets, a structuring fee for
advice relating to the structure, design and organization of the
Fund as well as services related to the sale and distribution of
the Funds Common Shares in the amount of $992,141 and
$936,922, respectively. If the over-allotment option is not
exercised, the structuring fee paid to each of Wells Fargo
Securities, LLC and Ameriprise Financial Services, Inc. will not
exceed 0.3787% and 0.3576%, respectively, of the gross offering
proceeds.
The Investment Manager (and not the Fund) has agreed to pay to
UBS Securities LLC, from its own assets, a structuring fee for
certain financial advisory services in assisting the Investment
Manager in structuring and organizing the Fund in the amount of
$529,541. If the over-allotment option is not exercised, the
structuring fee paid to UBS Securities LLC will not exceed
0.2021% of the gross offering proceeds.
The Investment Manager (and not the Fund) has agreed to pay to
Raymond James & Associates, Inc., from its own assets,
a sales incentive fee in the amount of $280,000. The sales
incentive fee paid to Raymond James & Associates, Inc.
will not exceed 0.1069% of the total public offering price of
the Common Shares sold in this offering.
The total amount of the underwriters additional
compensation payments by the Investment Manager described above
will not exceed 4.5% of the total public offering price of the
Common Shares offered hereby. The sum total of all compensation
to the underwriters in connection with this public offering of
Common Shares, including sales load and all forms of structuring
or sales incentive fee payments to the underwriters and other
expenses, will be limited to not more than 5.6% of the total
public offering price of the Common Shares sold in this offering.
The Fund has granted to the underwriters an option, exercisable
for 45 days from the date of this Prospectus, to purchase
up to 1,890,000 additional Common Shares at the public offering
price less the sales load. The underwriters may exercise the
option solely for the purpose of covering over-allotments, if
any, in connection with this offering. To the extent such option
is exercised, each underwriter must purchase a number of
additional Common Shares approximately proportionate to that
underwriters initial purchase commitment.
The Fund and the Investment Manager have agreed that, for a
period of 180 days from the date of this Prospectus, the
Fund will not, without the prior written consent of Wells Fargo
Securities, LLC, on behalf of the underwriters, dispose of or
hedge any Common Shares or any securities convertible into or
exchangeable for Common Shares, provided that the Fund may issue
and sell Common Shares pursuant to the Funds Dividend
Investment Plan.
To meet the NYSE distribution requirements for trading, the
underwriters have undertaken to sell Common Shares in a manner
such that Common Shares are held by a minimum of 400 beneficial
owners in lots of 100 or more, the minimum stock price will be
at least $4.00 at the time of listing on the NYSE, at least
1,100,000 Common Shares will be publicly held in the United
States and the aggregate market value of publicly held shares in
the United States will be at least $60 million. The
Funds Common Shares have been approved for listing on the
NYSE, subject to notice of issuance, under the symbol
STK.
The following table shows the sales load that the Fund will pay
to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of
the underwriters option to purchase additional shares of
Common Shares.
|
|
|
|
|
|
|
|
|
|
|
Paid by Fund
|
|
|
No Exercise
|
|
Full Exercise
|
|
Per Common Share
|
|
$
|
0.90
|
|
|
$
|
0.90
|
|
Total
|
|
$
|
11,790,000
|
|
|
$
|
13,491,000
|
|
54
The Fund and the Investment Manager have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the 1933 Act, or to contribute to payments the
underwriters may be required to make because of any of those
liabilities.
Certain underwriters may make a market in the Common Shares
after trading in the Common Shares has commenced on the NYSE. No
underwriter is, however, obligated to conduct market-making
activities and any such activities may be discontinued at any
time without notice, at the sole discretion of the underwriters.
No assurance can be given as to the liquidity of, or the trading
market for, the Common Shares as a result of any market-making
activities undertaken by any underwriter. This Prospectus is to
be used by any underwriter in connection with the offering and,
during the period in which a prospectus must be delivered, with
offers and sales of the Common Shares in market-making
transactions in the over-the-counter market at negotiated prices
related to prevailing market prices at the time of the sale.
In connection with the offering, Wells Fargo Securities, LLC, on
behalf of itself and the other underwriters, may purchase and
sell the Common Shares in the open market. These transactions
may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of
Common Shares in excess of the number of Common Shares to be
purchased by the underwriters in the offering, which creates a
syndicate short position. Covered short sales are
sales of Common Shares made in an amount up to the number of
Common Shares represented by the underwriters
over-allotment option. In determining the source of Common
Shares to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of
Common Shares available for purchase in the open market as
compared to the price at which they may purchase Common Shares
through the over-allotment option.
Transactions to close out the covered syndicate short position
involve either purchases of Common Shares in the open market
after the distribution has been completed or the exercise of the
over-allotment option. The underwriters may also make
naked short sales of Common Shares in excess of the
over-allotment option. The underwriters must close out any naked
short position by purchasing Common Shares in the open market. A
naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure
on the price of Common Shares in the open market after pricing
that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of bids for or
purchases of Common Shares in the open market while the offering
is in progress.
The underwriters may impose a penalty bid. Penalty bids allow
the underwriting syndicate to reclaim selling concessions
allowed to an underwriter or a dealer for distributing Common
Shares in this offering if the syndicate repurchases Common
Shares to cover syndicate short positions or to stabilize the
purchase price of the Common Shares.
Any of these activities may have the effect of preventing or
retarding a decline in the market price Common Shares. They may
also cause the price of Common Shares to be higher than the
price that would otherwise exist in the open market in the
absence of these transactions. The underwriters may conduct
these transactions on the New York Stock Exchange or in the
over-the-counter market, or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at
any time.
A Prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters. Other
than this Prospectus in electronic format, the information on
any such underwriters website is not part of this
Prospectus. The representatives may agree to allocate a number
of Common Shares to underwriters for sale to their online
brokerage account holders. The representatives will allocate
Common Shares to underwriters that may make internet
distributions on the same basis as other allocations. In
addition, Common Shares may be sold by the underwriters to
securities dealers who resell Common Shares to online brokerage
account holders.
The Fund anticipates that, from time to time, certain
underwriters may act as brokers or dealers in connection with
the execution of the Funds portfolio transactions after
they have ceased to be underwriters and, subject to certain
restrictions, may act as brokers while they are underwriters.
55
Certain underwriters may, from time to time, engage in
transactions with or perform services for the Investment Manager
and their affiliates in the ordinary course of business.
Prior to the public offering of Common Shares, the Investment
Manager or an affiliate will purchase Common Shares from the
Fund in an amount satisfying the net worth requirements of
Section 14(a) of the 1940 Act.
The principal business address of Wells Fargo Securities, LLC is
375 Park Avenue, New York, New York 10152. The principal
business address of UBS Securities LLC is 299 Park Avenue, New
York, New York 10171. The principal business address of
Ameriprise Financial Services, Inc. is 707 2nd Avenue South,
Minneapolis, Minnesota 55402.
56
CUSTODIAN
JPMorgan Chase Bank, N.A. will serve as custodian of the
Funds assets. The custodian performs custodial, fund
accounting and portfolio accounting services.
ADMINISTRATIVE
SERVICES AGENT
Ameriprise Financial, Inc., 200 Ameriprise Financial Center,
Minneapolis, Minnesota 55474, provides or compensates others to
provide administrative services to the Fund. These services
include administrative, accounting, treasury, and other
services. Fees paid by the Fund for these services are included
under Other expenses in the fees table.
TRANSFER
AGENT, STOCKHOLDER SERVICE AGENT AND DIVIDEND PAYING
AGENT
American Stock Transfer & Trust Company, LLC acts as the
transfer agent, stockholder service agent and dividend paying
agent and performs certain recordkeeping functions for the Fund,
maintains the records of stockholder accounts and furnishes
dividend paying and related services.
BOARD
SERVICES CORPORATION
The Fund, as well as the other funds in the RiverSource Family
of Funds, have an agreement with Board Services Corporation
(Board Services) located at
901 Marquette Avenue South, Suite 2810,
Minneapolis, Minnesota 55402. This agreement sets forth the
terms of Board Services responsibility to serve as an
agent of the funds for purposes of administering the payment of
compensation to each independent Board member, to provide office
space for use by the funds and their boards, and to provide any
other services to the boards or the independent members, as may
be reasonably requested.
LEGAL
OPINIONS AND EXPERTS
Certain legal matters in connection with the Common Shares will
be passed upon for the Fund by Clifford Chance US LLP, New York,
New York, and for the underwriters by Simpson
Thacher & Bartlett LLP. Clifford Chance US LLP and
Simpson Thacher & Bartlett LLP may rely as to certain
matters of Maryland law on the opinion of Venable LLP,
Baltimore, Maryland. Ernst & Young LLP, an independent
registered public accounting firm, provides auditing and tax
services to the Fund.
57
TABLE OF
CONTENTS OF THE STATEMENT
OF ADDITIONAL INFORMATION
|
|
|
|
|
Investment Strategies and Risks
|
|
|
1
|
|
Management of the Fund
|
|
|
22
|
|
Portfolio Managers
|
|
|
32
|
|
Securities Transactions
|
|
|
34
|
|
Certain Provisions of the Funds Charter and Bylaws
|
|
|
36
|
|
Repurchase of Common Shares; Tender Offers; Conversion to
Open-End Fund
|
|
|
39
|
|
Tax Matters
|
|
|
40
|
|
Tax Consequences of Certain Investments
|
|
|
43
|
|
Report to Stockholders
|
|
|
44
|
|
Custodian
|
|
|
45
|
|
Administrative Services Agent
|
|
|
45
|
|
Board Services Corporation
|
|
|
46
|
|
Transfer Agent, Stockholder Service Agent and Dividend Paying
Agent
|
|
|
47
|
|
Independent Registered Public Accounting Firm
|
|
|
47
|
|
Counsel
|
|
|
47
|
|
Other Matters
|
|
|
48
|
|
Registration Statement
|
|
|
50
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
51
|
|
Appendix A Ratings of Corporate Bonds and Commercial Paper
|
|
|
A-1
|
|
58
UNTIL DECEMBER 19, 2009 (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
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
13,100,000 SHARES
SELIGMAN PREMIUM TECHNOLOGY
GROWTH FUND, INC.
COMMON SHARES
PROSPECTUS
Wells Fargo
Securities
UBS Investment Bank
Ameriprise Financial Services,
Inc.
Raymond James
Janney Montgomery
Scott
Oppenheimer &
Co.
RBC Capital Markets
Stifel Nicolaus
Robert W. Baird &
Co.
J.J.B. Hilliard, W.L. Lyons,
LLC
Maxim Group LLC
Wedbush Morgan Securities
Inc.
Wunderlich Securities
November 24, 2009
SL-9922-99 C (11/09)
SELIGMAN PREMIUM TECHNOLOGY GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Seligman Premium
Technology Growth Fund, Inc. (Fund) is a newly
organized, non-diversified closed-end management investment company. The Fund
was organized as a corporation on September 2, 2009 pursuant to the
Articles of Incorporation governed by the laws of the State of
Maryland. The Funds investment
manager is RiverSource Investments, LLC (RiverSource Investments or the
Investment Manager).
This
Statement of Additional Information dated November 24, 2009, (SAI) relating to
shares of common stock of the Fund (Common Shares) is not a prospectus, and
should be read in conjunction with the Funds prospectus
relating to the Common
Shares dated November 24, 2009 (Prospectus). This SAI does not include all
information that a prospective investor should consider before purchasing Common
Shares, and investors should obtain and read the Prospectus prior to purchasing
such shares. You can obtain a free copy of the Prospectus by calling 1-800-221-2450.
You may also obtain a copy of the Prospectus on the web site (www.sec.gov) of
the Securities and Exchange Commission (SEC). Capitalized terms used but not
defined in this SAI have the meanings ascribed to them in the Prospectus.
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or in this SAI in connection
with the offering made by the Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Fund. The Prospectus and this SAI do not constitute an offering by the
Fund in any jurisdiction in which such offering may not lawfully be made.
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34 |
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36 |
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39 |
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40 |
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43 |
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44 |
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45 |
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45 |
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46 |
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47 |
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48 |
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51 |
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A-1 |
|
-i-
INVESTMENT STRATEGIES AND RISKS
The investment objectives and principal investment strategies of the Fund, as
well as the principal risks associated with the Funds investment strategies,
are set forth in the Prospectus. The following information regarding the Funds
investment strategies and risks supplements the information contained in the
Funds Prospectus.
ACCESS TRADES AND THEIR RISKS. The Fund may participate in access trades. Access
trades are over-the-counter transactions that provide access to a designated
security, group of securities or market index without directly investing in the
reference security/index. For a commission, the counterparty agrees to provide a
return based on the return of the reference security/index. Access trades are
typically used in foreign markets where limits on direct foreign ownership can
affect prices and/or where there are significant complexities in directly
purchasing or selling shares in the reference security/index. Since access
trades are over-the-counter transactions, the Fund bears the risk that the
counterparty will be unable or unwilling to meet its obligations. In addition,
since over-the-counter markets are generally less liquid than exchanges, the
Fund may not be able to sell when it is deemed advantageous to do so.
AGENCY AND GOVERNMENT SECURITIES AND THEIR RISKS. The
U.S. government, its
agencies and instrumentalities, and government-sponsored enterprises issue many
different types of securities, which the Fund may invest in. U.S. Treasury
bonds, notes, and bills and securities, including mortgage pass through
certificates of the Government National Mortgage Association
(GNMA), are
guaranteed by the U.S. government. Other U.S. government securities are issued
or guaranteed by federal agencies or instrumentalities or government-sponsored
enterprises but are not guaranteed by the U.S. government. This may increase the
credit risk associated with these investments. Government-sponsored entities
issuing securities include privately owned, publicly chartered entities created
to reduce borrowing costs for certain sectors of the economy, such as farmers,
homeowners, and students. They include the Federal Farm Credit Bank System, Farm
Credit Financial Assistance Corporation, Federal Home Loan Bank, Federal Home
Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Association (FNMA),
Student Loan Marketing Association (SLMA), and Resolution Trust Corporation
(RTC). On September 7, 2008, the Federal Housing Finance
Agency (FHFA), an agency
of the U.S. government, placed the FHLMC and FNMA into conservatorship, a
statutory process with the objective of returning the entities to normal
business operations. FHFA will act as the conservator to operate the enterprises
until they are stabilized. Government-sponsored entities may issue discount
notes (with maturities ranging from overnight to 360 days) and bonds. Agency and
government securities are subject to the same concerns as other debt
obligations. (See also Debt Obligations.) Although one or more of the other risks
described in this SAI may apply, the largest risks associated with agency and
government securities include Inflation Risk, Interest Rate Risk, Prepayment and
Extension Risk, and Reinvestment Risk.
BORROWING AND RELATED
RISKS. Although the Fund does not currently anticipate borrowing
money, the Fund is authorized to borrow money. If the Fund borrows
money, its net asset value per share may be subject to greater fluctuation until
the borrowing is paid off. If the Fund makes additional investments while
borrowings are outstanding, this may be considered a form of leverage. Under the
Investment Company Act of 1940, as amended (Investment Company Act), the
Fund is required to maintain continuous asset coverage of 300% with respect to
such borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidations of the Funds holdings may
be disadvantageous from an investment standpoint. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities or the Funds net asset value
(NAV), and money borrowed
will be subject to interest and other costs (which may include commitment fees
and/or the cost of maintaining minimum average balances) which may or may not
exceed the income received from the securities purchased with borrowed funds.
To the extent the Fund borrows money for investment purposes, which is commonly
referred to as leveraging, the Funds exposure to fluctuations in the prices
of its assets will be increased as compared to the Funds exposure if the Fund
did not borrow money. The Funds borrowing activities will exaggerate any
increase or decrease in the NAV of the Funds Common Shares. In addition, the
interest which the Fund pays on borrowed money, together with any additional
costs of maintaining a borrowing facility, are additional costs borne by the
Fund and could reduce or eliminate any net investment profits. Unless profits on
assets acquired with borrowed funds exceed the costs of borrowing, the use of
borrowing will diminish the investment performance of the Fund compared with
what it would have been without borrowing. Although one or more of the other
risks described in this SAI may apply, the largest risks associated with
borrowing money include Inflation Risk.
-1-
CASH/MONEY MARKET INSTRUMENTS AND THEIR RISKS. The Fund may invest in cash/money
market instruments. Cash-equivalent investments include short-term U.S. and
Canadian government securities and negotiable certificates of deposit,
non-negotiable fixed-time deposits, bankers acceptances, and letters of credit
of banks or savings and loan associations having capital, surplus, and undivided
profits (as of the date of its most recently published annual financial
statements) in excess of $100 million (or the equivalent in the instance of a
foreign branch of a U.S. bank) at the date of investment. The Fund also may
purchase short-term notes and obligations of U.S. and foreign banks and
corporations and may use repurchase agreements with broker-dealers registered
under the Securities Exchange Act of 1934 (1934 Act) and with commercial
banks. (See also risks of Commercial Paper, Debt Obligations, and Repurchase Agreements.)
These types of instruments generally offer low rates of return and subject the
Fund to certain costs and expenses.
Bankers acceptances are marketable short-term credit instruments used to
finance the import, export, transfer or storage of goods. They are termed
accepted when a bank guarantees their payment at maturity.
Bank certificates of deposit are certificates issued against funds deposited in
a bank (including eligible foreign branches of U.S. banks), are for a definite
period of time, earn a specified rate of return and are normally negotiable.
The Fund may invest its daily cash balance in RiverSource Short-Term Cash Fund or any other
money market fund established for the exclusive use of the
RiverSource, RiverSource Partners, Threadneedle and Seligman funds (RiverSource Family
of Funds) and other institutional clients of RiverSource Investments.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with cash/money market instruments include Credit Risk
and Inflation Risk.
COMMERCIAL PAPER AND THEIR RISKS. The Fund may invest in commercial paper.
Commercial paper is a short-term debt obligation with a maturity ranging from 2
to 270 days issued by banks, corporations, and other borrowers. It is sold to
investors with temporary idle cash as a way to increase returns on a short-term
basis. These instruments are generally unsecured, which increases the credit
risk associated with this type of investment. (See also Debt Obligations and
Illiquid and Restricted Securities.) Although one or more of the other risks
described in this SAI may apply, the largest risks associated with commercial
paper include Credit Risk and Liquidity Risk.
COMMON STOCKS AND THEIR RISKS. The Fund may invest in common stock of public
companies. Common stock represents units of ownership in a corporation. Owners
typically are entitled to vote on the selection of directors and other important
matters as well as to receive dividends on their holdings. In the event that a
corporation is liquidated, the claims of secured and unsecured creditors and
owners of bonds and preferred stock take precedence over the claims of those who
own common stock.
The price of common stock is generally determined by corporate earnings, type of
products or services offered, projected growth rates, experience of management,
liquidity, and general market conditions for the markets on which the stock
trades.
An adverse event, such as an unfavorable earnings report, may depress the value
of a particular common stock held by the Fund. Also, the prices of common stocks
are sensitive to general movements in the stock market and a drop in the stock
market may depress the price of common stocks to which the Fund has exposure.
Common stock prices fluctuate for several reasons, including changes to
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 an issuer occurs. In addition, common stock prices may be particularly
sensitive to rising interest rates, as the cost of capital rises and
borrowing costs increase. Although one or more of the other risks described in
this SAI may apply, the largest risks associated with common stock include
Issuer Risk, Market Risk and Small- and Mid-Sized Company Risk.
CORPORATE BONDS AND THEIR RISKS. The Fund may invest in corporate bonds.
Corporate bonds are debt obligations issued by private corporations, as distinct
from bonds issued by a government agency or a municipality. Corporate bonds
typically have four distinguishing features: (1) they are taxable; (2) they have
a par value of $1,000; (3) they have a term maturity, which means they come due
all at once; and (4) many are traded on major exchanges. Corporate bonds are
subject to the same concerns as other debt obligations. (See also Debt
Obligations and High-
-2-
Yield Debt Securities (Junk Bonds) And Their Risks.) Corporate bonds may be either secured or
unsecured. Unsecured corporate bonds are generally referred to as debentures.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with corporate bonds include Credit Risk, Interest Rate
Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk.
COUNTERPARTY RISK. Counterparty risk is the risk that a counterparty to a
financial instrument entered into by the Fund or held by a special purpose or
structured vehicle becomes bankrupt or otherwise fails to perform its
obligations due to financial difficulties. The Fund may experience significant
delays in obtaining any recovery in a bankruptcy or other reorganization
proceeding. The Fund may obtain only limited recovery or may obtain no recovery
in such circumstances.
CREDIT RISK. Credit risk is the risk that the issuer of a security, or the
counterparty to a contract, will default or otherwise become unable or unwilling
to honor a financial obligation, such as payments due on a bond or a note. If
the Fund purchases unrated securities, or if the rating of a security is reduced
after purchase, the Fund will depend on the Investment Managers analysis of
credit risk more heavily than usual.
DEBT OBLIGATIONS AND THEIR RISKS. The Fund may invest in debt obligations. Many
different types of debt obligations exist (for example, bills, bonds, or notes).
Issuers of debt obligations have a contractual obligation to pay interest at a
fixed, variable or floating rate on specified dates and to repay principal on a
specified maturity date. Certain debt obligations (usually intermediate- and
long-term bonds) have provisions that allow the issuer to redeem or call a
bond before its maturity. Issuers are most likely to call these securities
during periods of falling interest rates. When this happens, an investor may
have to replace these securities with lower yielding securities, which could
result in a lower return.
The market value of debt obligations is affected primarily by changes in
prevailing interest rates and the issuers perceived ability to repay the debt.
The market value of a debt obligation generally reacts inversely to interest
rate changes. When prevailing interest rates decline, the price usually rises,
and when prevailing interest rates rise, the price usually declines.
In general, the longer the maturity of a debt obligation, the higher its yield
and the greater the sensitivity to changes in interest rates. Conversely, the
shorter the maturity, the lower the yield but the greater the price stability.
As noted, the values of debt obligations also may be affected by changes in the
credit rating or financial condition of their issuers. Generally, the lower the
quality rating of a security, the higher the degree of risk as to the payment of
interest and repayment of principal. To compensate investors for taking on such
increased risk, those issuers deemed to be less creditworthy generally must
offer their investors higher interest rates than do issuers with better credit
ratings. (See also Agency and Government Securities,
Corporate Bonds, and
High-Yield Debt Securities (Junk Bonds) And Their Risks.)
Generally, debt obligations that are investment grade are those that have been
rated in one of the top four credit quality categories by two out of the three
independent rating agencies. In the event that a debt obligation has been rated
by only two agencies, the most conservative, or lower, rating must be in one of
the top four credit quality categories in order for the security to be
considered investment grade. If only one agency has rated the debt obligation,
that rating must be in one of the top four credit quality categories for the
security to be considered investment grade. See Appendix A for a discussion of
securities ratings.
All ratings limitations are applied at the time of purchase. Subsequent to
purchase, a debt security may cease to be rated or its rating may be reduced
below the minimum required for purchase by a Fund. Neither event will require
the sale of such a security by the Fund, but it will be a factor in considering whether to
continue to hold the security. To the extent that ratings change as a result of
changes in a rating agency or its rating system, the Fund will attempt to use
comparable ratings as standards for selecting investments.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with debt obligations include: Credit Risk, Interest
Rate Risk, Issuer Risk, Prepayment and Extension Risk, and Reinvestment Risk.
-3-
DEPOSITARY RECEIPTS AND THEIR RISKS. The Fund may invest in depositary receipts.
Some foreign securities are traded in the form of American Depositary Receipts
(ADRs). ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities of foreign issuers. European
Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs) are receipts
typically issued by foreign banks or trust companies, evidencing ownership of
underlying securities issued by either a foreign or U.S. issuer. Generally,
depositary receipts in registered form are designed for use in the U.S. and
depositary receipts in bearer form are designed for use in securities markets
outside the U.S. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts involve the risks of other investments in foreign
securities. In addition, ADR holders may not have all the legal rights of
shareholders and may experience difficulty in receiving shareholder
communications. (See also Common Stock and Foreign and Emerging Markets
Securities.) Although one or more of the other risks described in this SAI may
apply, the largest risks associated with depositary receipts include
Foreign Securities Risk and Investment Risk.
DELAYED DELIVERY SECURITIES AND THEIR RISKS. The Fund may purchase or sell
securities for delayed delivery, i.e., for issuance or delivery to or by the
Fund later than a normal settlement date for such securities at a stated price
and yield. The Fund generally would not pay for such securities or start earning
interest on them until they are received. When the Fund undertakes a delayed
delivery obligation, however, it immediately assumes the risks of ownership,
including the risks of price fluctuation. Failure of the issuer to deliver a
security purchased by the Fund on a delayed delivery basis may result in the
Funds incurring a loss or missing an opportunity to make an alternative
investment. The Funds delayed delivery purchase commitments could cause its net
asset value per share to be more volatile. The Fund may sell the right to
acquire the security prior to delivery if the Investment Manager deems it
advantageous to do so, which may result in a gain or loss to the Fund.
DERIVATIVES INSTRUMENTS AND THEIR RISKS. Derivatives are financial instruments
that have a value which depends upon, or is derived from, the value of something
else, such as one or more underlying securities, pools of securities, options,
futures, indexes or currencies. The Fund may use derivative instruments to
maintain cash reserves while remaining fully invested, to offset anticipated
declines in values of investments, to facilitate trading, to reduce transaction
costs, or to pursue higher investment returns. Derivative instruments are
characterized by requiring little or no initial payment. Their value changes
daily based on a security, a currency, a group of securities or currencies, or
an index. A small change in the value of the underlying security, currency, or
index can cause a sizable percentage gain or loss in the price of the derivative
instrument.
Options and forward contracts are considered to be the basic building blocks
of derivatives. For example, forward-based derivatives include forward
contracts, swap contracts, and exchange-traded futures. Forward-based
derivatives are sometimes referred to generically as futures contracts.
Option-based derivatives include privately negotiated, over-the-counter (OTC)
options (including caps, floors, collars, and options on futures) and
exchange-traded options on futures. Diverse types of derivatives may be created
by combining options or futures in different ways, and by applying these
structures to a wide range of underlying assets.
Options. An option is a contract. A person who buys a call option for a security
has the right to buy the security at a set price for the length of the contract.
A person who sells a call option is called a writer. The writer of a call option
agrees to sell the security at the set price when
the buyer wants to exercise the option at a certain time as provided in the option, no matter what the market price of the
security is at that time. A person who buys a put option has the right to sell a
security at a set price at a certain time as provided in the option. A person who writes a
put option agrees to buy the security at the set price if the purchaser wants to
exercise the option at a certain time as provided in the option, no matter what the market
price of the security is at that time. An option is covered if the writer owns
the security (in the case of a call) or sets aside the cash or securities of
equivalent value (in the case of a put) that would be required upon exercise.
The price paid by the buyer for an option is called a premium. In addition to
the premium, the buyer generally pays a broker a commission. The writer receives
a premium, less another commission, at the time the option is written. The
premium received by the writer is retained whether or not the option is
exercised. A writer of a call option may have to sell the security for a
below-market price if the market price rises above the exercise price. A writer
of a put option may have to pay an above-market price for the security if its
market price decreases below the exercise price.
When an option is purchased, the buyer pays a premium and a commission. It then
pays a second commission on the purchase or sale of the underlying security when
the option is exercised. For record keeping and tax purposes,
-4-
the price obtained on the sale of the underlying security is the combination of the exercise price, the premium, and both commissions.
One of the risks an investor assumes when it buys an option is the loss of the
premium. To be beneficial to the investor, the price of the underlying security
must change within the time set by the option contract. Furthermore, the change
must be sufficient to cover the premium paid, the commissions paid both in the
acquisition of the option and in a closing transaction or in the exercise of the
option and sale (in the case of a call) or purchase (in the case of a put) of
the underlying security. Even then, the price change in the underlying security
does not ensure a profit since prices in the option market may not reflect such
a change.
Options on
many securities are listed on options exchanges. When the Fund writes
listed options, it will follow the rules of the options exchange. Options are
valued at the close of the New York Stock Exchange. An option listed on a
national exchange, Chicago Board Options Exchange, or NASDAQ will be valued at
the mean of the last bid and ask prices.
Options on certain securities are not actively traded on any exchange, but may
be entered into directly with a dealer. These options may be more difficult to
close. If an investor is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call written by the
investor expires or is exercised.
Futures
Contracts. The Fund may invest in futures contracts. A futures contract
is a sales contract between a buyer (holding the long position) and a seller
(holding the short position) for an asset with delivery deferred until a
future date. The buyer agrees to pay a fixed price at the agreed future date and
the seller agrees to deliver the asset. The seller hopes that the market price
on the delivery date is less than the agreed upon price, while the buyer hopes
for the contrary. Many futures contracts trade in a manner similar to the way a
stock trades on a stock exchange and the commodity exchanges.
Generally, a futures contract is terminated by entering into an offsetting
transaction. An offsetting transaction is effected by an investor taking an
opposite position. At the time a futures contract is made, a good faith deposit
called initial margin is set up. Daily thereafter, the futures contract is
valued and the payment of variation margin is required so that each day a buyer
would pay out cash in an amount equal to any decline in the contracts value or
receive cash equal to any increase. At the time a futures contract is closed
out, a nominal commission is paid, which is generally lower than the commission
on a comparable transaction in the cash market.
Futures contracts may be based on various securities, securities indexes (such
as the S&P 500 Index), foreign currencies and other financial instruments and
indexes.
The Fund may engage in futures and related options transactions to produce
incremental earnings, to hedge existing positions, and to increase flexibility.
The Fund intends to comply with Rule 4.5 of the Commodity Futures Trading
Commission (CFTC), under which a registered investment company such as the Fund
is exempt from the definition of a commodity pool operator. The Fund,
therefore, is not subject to registration or regulation as a pool operator,
meaning that the Fund may invest in futures contracts without registering with
the CFTC.
Options on
Futures Contracts. The Fund may invest in options on futures
contracts. Options on futures contracts give the holder a right to buy or sell
futures contracts in the future. Unlike a futures contract, which requires the
parties to the contract to buy and sell a security on a set date (some futures
are settled in cash), an option on a futures contract merely entitles its holder
to decide on or before a future date (within nine months of the date of issue)
whether to enter into a contract. If the holder decides not to enter into the
contract, all that is lost is the amount (premium) paid for the option. Further,
because the value of the option is fixed at the point of sale, there are no
daily payments of cash to reflect the change in the value of the underlying
contract. However, since an option gives the buyer the right to enter into a
contract at a set price for a fixed period of time, its value does change daily.
One of the risks in buying an option on a futures contract is the loss of the
premium paid for the option. The risk involved in writing options on futures
contracts an investor owns, or on securities held in its portfolio, is that
there could be an increase in the market value of these contracts or securities.
If that occurred, the option would be exercised and the asset sold at a lower
price than the cash market price. To some extent, the risk of not realizing a
-5-
gain could be reduced by entering into a closing transaction. An investor could
enter into a closing transaction by purchasing an option with the same terms as
the one previously sold. The cost to close the option and terminate the
investors obligation, however, might still result in a loss. Further, the
investor might not be able to close the option because of insufficient activity
in the options market. Purchasing options also limits the use of monies that
might otherwise be available for long-term investments.
Options on
Indexes. The Fund may invest in options on indexes. Options on
indexes are securities traded on national securities exchanges. An option on an
index is similar to an option on a futures contract except all settlements are
in cash. The Fund when exercising a put, for example, would receive the
difference between the exercise price and the current index level. Options may
also be traded with respect to other types of indexes, such as options on
indexes of commodities futures.
Currency
Options. The Fund may invest in currency options. Options on currencies
are contracts that give the buyer the right, but not the obligation, to buy
(call options) or sell (put options) a specified amount of a currency at a
predetermined price (strike rate) on or before the option matures (expiry date).
Conversely, the seller has the obligation to buy or sell a currency option upon
exercise of the option by the purchaser. Currency options are traded either on a
national securities exchange or over-the-counter.
Tax and
Accounting Treatment. If the Fund is using short futures contracts for
hedging purposes, the Fund may be required to defer recognizing losses incurred
on short futures contracts and on underlying securities. Any losses incurred on
securities that are part of a straddle may be deferred to the extent there is
unrealized appreciation on the offsetting position until the offsetting position
is sold. Federal income tax treatment of gains or losses from transactions in
options, options on futures contracts and indexes will depend on whether the
option is a section 1256 contract. If the option is a non-equity option, the
Fund would either make a 1256(d) election and treat the option as a mixed
straddle or mark to market the option at fiscal year end and treat the gain/loss
as 40% short-term and 60% long-term.
The Internal Revenue Service
(IRS) has ruled publicly that an exchange-traded
call option is a security for purposes of the 50%-of-assets test and that its
issuer is the issuer of the underlying security, not the writer of the option,
for purposes of the diversification requirements.
Accounting for futures contracts will be according to generally accepted
accounting principles. Initial margin deposits will be recognized as assets due
from a broker (the Funds agent in acquiring the futures position). During the
period the futures contract is open, changes in value of the contract will be
recognized as unrealized gains or losses by marking to market on a daily basis
to reflect the market value of the contract at the end of each days trading.
Variation margin payments will be made or received depending upon whether gains
or losses are incurred. All contracts and options will be valued at the last
quoted sales price on their primary exchange.
Other
Risks of Derivatives. The primary risk of derivatives is the same as the
risk of the underlying asset, namely that the value of the underlying asset may
go up or down. Adverse movements in the value of an underlying asset can expose
an investor to losses. Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of 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 the
Investment Managers ability to predict movements of the securities, currencies,
and commodity markets, which requires different skills than predicting changes
in the prices of individual securities. There can be no assurance that any
particular strategy will succeed.
Another risk is the risk that a loss may be 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 derivative instruments is generally less
than for privately-negotiated or OTC derivative instruments, 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,
an investor will bear the risk that the counterparty will default, and this
could result in a loss of the expected benefit of the derivative transaction and
possibly other losses.
-6-
When a derivative transaction is used to completely hedge another position, an imperfect correlation between the
price movements of the two instruments will result in changes in the market value of the combined position (the derivative instrument
plus the position being hedged). With a perfect hedge, the value of the
combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the values 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 writing a call option,
buying a put option, or selling a futures contract) increased by less than the
decline in value of the hedged investment, the hedge would not be perfectly
correlated. Such a lack of correlation 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 instruments are traded.
Derivatives also are subject to the risk that they cannot be sold, closed out,
or replaced quickly at or very close to their fundamental value. Generally,
exchange contracts are very 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.
Another risk is caused by the legal unenforceability of a partys obligations
under the derivative. A counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting various legal uncertainties
about certain derivative products. (See also Foreign Currency Transactions.)
Losses involving derivative instruments may be substantial, because a relatively
small price movement in the underlying security(ies), instrument, currency or
index may result in a substantial loss for the Fund. In addition to the
potential for increased losses, the use of derivative instruments may lead to
increased volatility within the Fund. Derivative instruments in which the Fund
invests will typically increase the Funds exposure to its principal risks to
which it is otherwise exposed, and may expose the Fund to additional risks,
including correlation risk, counterparty credit risk, hedging risk, leverage
risk, and liquidity risk.
Correlation risk is related to hedging risk and is the risk that there may be an
incomplete correlation between the hedge and the opposite position, which may
result in increased or unanticipated losses.
Counterparty credit risk is the
risk that a counterparty to the derivative instrument becomes bankrupt or
otherwise fails to perform its obligations due to financial difficulties, and
the Fund may obtain no recovery of its investment or may only obtain a limited
recovery, and any recovery may be delayed.
Hedging risk is the risk that derivative instruments used to hedge against an
opposite position may offset losses, but they may also offset gains. There is no
guarantee that a hedging strategy will eliminate the risk which the hedging
strategy is intended to offset, which may lead to losses within the Fund.
Leverage risk is the risk that losses from the derivative instrument may be greater than the amount invested in the derivative instrument.
Liquidity risk is the risk that the derivative instrument may be difficult or
impossible to sell or terminate, which may cause the Fund to be in a position to
do something the Investment Manager would not otherwise choose, including
accepting a lower price for the derivative instrument, selling other investments
or foregoing another, more appealing investment opportunity. Derivative
instruments which are not traded on an exchange, including, but not limited to,
forward contracts, swaps, and over-the-counter options may have liquidity risk.
Certain derivatives have the potential for unlimited losses regardless of the size of the initial investment.
DIVERSIFICATION RISK. The Fund is a non-diversified fund. A
non-diversified fund may invest more of its assets in fewer companies than if it
were a diversified fund. Because each investment has a greater effect on the
Funds performance, the Fund may be more exposed to the risks of loss and
volatility than a fund that invests more broadly.
EXCHANGE-TRADED FUNDS AND THEIR RISKS. The Fund may invest in exchange-traded
funds (ETFs). ETFs are traded on an exchange like individual stocks, but they
generally represent baskets of securities that seek to track the
-7-
performance of certain indices. The indices include not only broad-market
indices but more specific indices as well, including those relating to
particular sectors, countries and regions.
An ETFs share price may not track its specified market index and may trade
below its net asset value (i.e., at a discount). ETFs generally use a passive
investment strategy and will not attempt to take defensive positions in volatile
or declining markets. An active secondary market in an ETFs shares may not
develop or be maintained and may be halted or interrupted due to actions by its
listing exchange, unusual market conditions or other reasons. There can be no
assurance an ETFs shares will continue to be listed on an active exchange. In
addition, shareholders bear both their proportionate share of the Funds
expenses and similar expenses incurred through the Funds ownership of shares of the ETF. See also
Investments in Other Investment Companies and Related Risks.
FOREIGN CURRENCY TRANSACTIONS AND THEIR RISKS. Investments in foreign countries
usually involve currencies of foreign countries. In addition, the Fund may hold
cash and cash equivalent investments in foreign currencies. As a result, the
value of the Funds assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency exchange rates and exchange control
regulations. Also, the Fund may incur costs in connection with conversions
between various currencies. Currency exchange rates may fluctuate significantly
over short periods of time causing the Funds NAV to fluctuate. Currency
exchange rates are generally determined by the forces of supply and demand in
the foreign exchange markets, actual or anticipated changes in interest rates,
and other complex factors. Currency exchange rates also can be affected by the
intervention of U.S. or foreign governments or central banks, or the failure to
intervene, or by currency controls or political developments.
Spot Rates
and Derivative Instruments. The Fund may conduct its foreign currency
exchange transactions either at the spot (cash) rate prevailing in the foreign
currency exchange market or by entering into forward currency exchange contracts
(forward contracts). (See also Derivative Instruments.) These contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such derivative instruments,
the Fund could be disadvantaged by having to deal in the odd lot market for the
underlying foreign currencies at prices that are less favorable than for round
lots.
The Fund may enter into forward contracts for a variety of reasons, but
primarily it will enter into such contracts for risk management (hedging) or for
investment purposes.
The Fund may enter into forward contracts to settle a security transaction or
handle dividend and interest collection. When the Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency or has
been notified of a dividend or interest payment, it may desire to lock in the
price of the security or the amount of the payment, usually in U.S. dollars,
although it could desire to lock in the price of the security in another
currency. By entering into a forward contract, the Fund would be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between different currencies from the date the security is
purchased or sold to the date on which payment is made or received or when the
dividend or interest is actually received.
The Fund may enter into forward contracts when management of the Fund believes
the currency of a particular foreign country may decline in value relative to
another currency. When selling currencies forward in this fashion, the Fund may
seek to hedge the value of foreign securities it holds against an adverse move
in exchange rates. The precise matching of forward contract amounts and the
value of securities involved generally will not be possible since the future
value of securities in foreign currencies more than likely will change between
the date the forward contract is entered into and the date it matures. The
projection of short-term currency market movements is extremely difficult and
successful execution of a short-term hedging strategy is highly uncertain.
This method of protecting the value of the Funds securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities. It simply establishes a rate of exchange that can be
achieved at some point in time. Although forward contracts tend to minimize the
risk of loss due to a decline in value of hedged currency, they tend to limit
any potential gain that might result should the value of such currency increase.
-8-
The Fund may also enter into forward contracts when the Investment Manager
believes the currency of a particular country will increase in value relative to
another currency. The Fund may buy currencies forward to gain exposure to a
currency without incurring the additional costs of purchasing securities
denominated in that currency.
The Fund may designate cash or securities in an amount equal to the value of the
Funds total assets committed to consummating forward contracts entered into
under the circumstance set forth above. If the value of the securities declines,
additional cash or securities will be designated on a daily basis so that the
value of the cash or securities will equal the amount of the Funds commitments
on such contracts.
At maturity of a forward contract, the Fund may either deliver (if a contract to
sell) or take delivery of (if a contract to buy) the foreign currency or
terminate its contractual obligation by entering into an offsetting contract
with the same currency trader, the same maturity date, and covering the same
amount of foreign currency.
If the Fund engages in an offsetting transaction, it would incur a gain or loss
to the extent there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to buy or sell the foreign currency.
Although the Fund values its assets each business day in terms of U.S. dollars,
it may not intend to convert its foreign currencies into U.S. dollars on a daily
basis. It would do so from time to time, and stockholders should be aware of
currency conversion costs. Although foreign exchange dealers do not charge a fee
for conversion, they do realize a profit based on the difference (spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
Options on
Foreign Currencies. The Fund may buy put and call options and write
covered call and cash-secured put options on foreign currencies for hedging
purposes and to gain exposure to foreign currencies. For example, a decline in
the dollar value of a foreign currency in which securities are denominated will
reduce the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against the diminutions in the
value of securities, the Fund may buy put options on the foreign currency. If
the value of the currency does decline, the Fund would have the right to sell
the currency for a fixed amount in dollars and would offset, in whole or in
part, the adverse effect on its portfolio that otherwise would have resulted.
Conversely, where a change in the dollar value of a currency would increase the
cost of securities the Fund plans to buy, or where the Fund would benefit from
increased exposure to the currency, the Fund may buy call options on the foreign
currency. The purchase of the options could offset, at least partially, the
changes in exchange rates.
As in the case of other types of options, however, the benefit to the Fund
derived from purchases of foreign currency options would be reduced by the
amount of the premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated, the
Fund could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes in
rates.
The Fund may write options on foreign currencies for the same types of purposes.
For example, when the Fund anticipates a decline in the dollar value of
foreign-denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option would most likely not be
exercised and the diminution in value of securities would be fully or partially
offset by the amount of the premium received.
Similarly, instead of purchasing a call option when a foreign currency is
expected to appreciate, the Fund could write a put option on the relevant
currency. If rates move in the manner projected, the put option would expire
unexercised and allow the Fund to hedge the increased cost up to the amount of the
premium.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to buy or sell
the underlying currency at a loss
-9-
that may not be offset by the amount of the premium. Through the writing of
options on foreign currencies, the Fund also may be required to forego all or a
portion of the benefits that might otherwise have been obtained from favorable
movements on exchange rates.
All options written on foreign currencies will be covered. An option written on
foreign currencies is covered if the Fund holds currency sufficient to cover the
option or has an absolute and immediate right to acquire that currency without
additional cash consideration upon conversion of assets denominated in that
currency or exchange of other currency held in its portfolio. An option writer
could lose amounts substantially in excess of its initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies are traded through financial institutions acting
as market-makers, although foreign currency options also are traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost.
Foreign currency option positions entered into on a national securities exchange
are cleared and guaranteed by the Options Clearing Corporation (OCC), thereby
reducing the risk of counterparty default. Further, a liquid secondary market in
options traded on a national securities exchange may be more readily available
than in the over-the-counter market, potentially permitting the Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effects of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in certain foreign countries
for that purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on OCC or
its clearing member, impose special procedures on exercise and settlement, such
as technical changes in the mechanics of delivery of currency, the fixing of
dollar settlement prices or prohibitions on exercise.
Foreign
Currency Futures and Related Options. The Fund may enter into currency
futures contracts to buy or sell currencies. It also may buy put and call
options and write covered call and cash-secured put options on currency futures.
Currency futures contracts are similar to currency forward contracts, except
that they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures call
for payment of delivery in U.S. dollars. The Fund may use currency futures for
the same purposes as currency forward contracts, subject to CFTC limitations.
Currency futures and options on futures values can be expected to correlate with
exchange rates, but will not reflect other factors that may affect the value of
the Funds investments. A currency hedge, for example, should protect a
Yen-denominated bond against a decline in the Yen, but will not protect the Fund
against price decline if the issuers creditworthiness deteriorates. Because the
value of the Funds investments denominated in foreign currency will change in
response to many factors other than exchange rates, it may not be possible to
match the amount of a forward contract to the value of the Funds investments
denominated in that currency over time.
The Fund will hold securities or other options or futures positions whose values
are expected to offset its foreign currency obligations. The Fund would not
enter into a foreign currency option or futures position that exposes the Fund
to an obligation to another party unless it owns either (i) an offsetting
position in securities or (ii) cash, receivables and securities with a value
sufficient to cover its potential obligations. (See also
Derivative Instruments and Foreign and Emerging
Markets Securities.) Although one or more of the other
risks described in this SAI may apply, the largest risks associated with foreign
currency transactions include: Derivatives Risk, Interest Rate Risk and
Liquidity Risk.
-10-
FOREIGN GOVERNMENT OBLIGATIONS AND THEIR RISKS. The Fund may invest in debt
securities issued by foreign governments, which are sovereign debt obligations.
By investing in debt obligations of governmental entities, the Fund will be
exposed to the direct or indirect consequences of political, social and economic
changes in various countries. Political changes in a particular country may
affect the willingness of a particular government to make or provide for timely
payments of its debt obligations. The countrys economic status, as reflected,
among other things, in its inflation rate, the amount of its external debt and
its gross domestic product, will also affect the governments ability to honor
its obligations.
In addition, the Funds investment in debt obligations of supranational entities
is subject to the additional risk that one or more member governments may fail
to make required capital contributions to a particular supranational entity and,
as a result, such supranational entity may be unable to meet its obligations
with respect to its debt obligations held by the Fund.
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt. Certain emerging market countries have experienced difficulty in
servicing their sovereign debt in a timely basis that led to defaults and the
restructuring of certain indebtedness.
FOREIGN AND EMERGING MARKETS SECURITIES AND THEIR RISKS. Foreign securities are
securities of issuers organized outside the United States. Foreign securities are primarily denominated in foreign currencies. In
addition to the risks normally associated with domestic securities of the same
type, foreign securities are subject to country risk, currency risk,
custody risk, and emerging markets risk, each as described below:
Country risk includes the risks associated with the political, economic, social
and other conditions of a foreign country. These conditions include lack of
publicly available information and less government oversight and regulation of
business and industry practices of stock exchanges, brokers and listed companies
than in the U.S. (including lack of uniform accounting, auditing, and financial
reporting standards comparable to those applicable to domestic companies). In
addition, with respect to certain foreign countries, there is the possibility of
nationalization, expropriation, the imposition of additional withholding or
confiscatory taxes, political, social, or economic instability, diplomatic
developments that could affect investments in those countries, or other
unforeseen actions by regulatory bodies (such as changes to settlement or
custody procedures). It may be more difficult for an investors agents to keep
currently informed about corporate actions such as stock dividends or other
matters that may affect the prices of portfolio securities. The liquidity of
foreign investments may be more limited than for most U.S. investments, which
means that, at times it may be difficult to sell foreign securities at desirable
prices. Payment for securities without delivery may be required in certain
foreign markets and, when participating in new issues, some foreign countries
require payment to be made in advance of issuance (at the time of issuance, the
market value of the security may be more or less than the purchase price). Fixed
commissions on some foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Further, the Fund may encounter difficulties or
be unable to pursue legal remedies and obtain judgments in foreign courts. The
introduction of the euro for participating
European nations in the Economic and Monetary Union (EU) presents unique risks.
The most important is the exposure to the economic, political and social
development of the member countries in the EU.
Currency risk results from the constantly changing exchange rates between local
currency and the U.S. dollar. Whenever the Fund holds securities valued in a
foreign currency or holds the currency, changes in the exchange rate add to or
subtract from the value of the investment.
Custody risk refers to the process of clearing and settling trades. It also
covers holding securities with local agents and depositories. Low trading
volumes and volatile prices in less developed markets make trades harder to
complete and settle. The inability of the Fund to make intended security
purchases due to such problems could cause the Fund to miss attractive
investment opportunities. Local agents are held only to the standard of care of
the local market. Governments or trade groups may compel local agents to hold
securities in designated depositories that are not subject to independent
evaluation. The less developed a countrys securities market is, the greater the
likelihood of problems occurring.
-11-
Emerging markets risk includes the risks associated with the dramatic pace of
change (economic, social and political) in these countries as well as the other
considerations listed above. These markets, which may have relatively unstable
governments, economies based on only a few industries and securities markets
that trade a small number of securities, are in early stages of development and
are extremely volatile. They can be marked by extreme inflation, devaluation of
currencies, dependence on trade partners, and hostile relations with neighboring
countries.
HIGH-YIELD DEBT SECURITIES (JUNK BONDS) AND THEIR RISKS. The Fund may invest in
high yield (high-risk) debt securities, sometimes referred to as junk bonds.
They are non-investment grade (lower quality) securities that have speculative
characteristics. Lower quality securities, while generally offering higher
yields than investment grade securities with similar maturities, involve greater
risks, including the possibility of default or bankruptcy of the issuer. They are regarded as
predominantly speculative with respect to the issuers capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. (See also Debt
Obligations.)
All fixed rate interest-bearing securities typically experience appreciation
when interest rates decline and depreciation when interest rates rise. The
market values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to be
more sensitive to economic conditions than are higher-rated securities. As a
result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality securities may
experience financial stress and may not have sufficient revenues to meet their
payment obligations. The issuers ability to service its debt obligations also
may be adversely affected by specific corporate developments, the issuers
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of these
securities is significantly greater than a default by issuers of higher-rated
securities because such securities are generally unsecured and are often
subordinated to other creditors. Further, if the issuer of a lower quality
security defaulted, an investor might incur additional expenses to seek
recovery.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the securities. Consequently, credit ratings are used only as a
preliminary indicator of investment quality.
An investor may have difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower-quality
and comparable unrated securities, there is no established retail secondary
market for many of these securities. To the extent a secondary trading market
does exist, it is generally not as liquid as the secondary market for
higher-rated securities. The lack of a liquid secondary market may have an
adverse impact on the market price of the security. The lack of a liquid
secondary market for certain securities also may make it more difficult for an
investor to obtain accurate market quotations. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with high-yield debt securities include Credit Risk,
Interest Rate Risk, and Prepayment and Extension Risk.
ILLIQUID AND RESTRICTED SECURITIES AND THEIR RISKS. Illiquid securities are
securities that are not readily marketable. These securities may include, but
are not limited to, certain securities that are subject to legal or contractual
restrictions on resale, certain repurchase agreements, and derivative
instruments. To the extent the Fund invests in illiquid or restricted
securities, it may encounter difficulty in determining a market value for the
securities. Disposing of illiquid or restricted securities may involve
time-consuming negotiations and legal expense, and it may be difficult or
impossible for the Fund to sell the investment promptly and at an acceptable
price.
In determining the liquidity of all securities and derivatives, such as Rule
144A securities, which are unregistered securities offered to qualified
institutional buyers, and interest-only and principal-only fixed mortgage-backed
-12-
securities (IOs and POs) issued by the U.S. government or its agencies and
instrumentalities, the Investment Manager, under guidelines established by the
Funds Board of Directors (Board), will consider any relevant factors
including the frequency of trades, the number of dealers willing to purchase or
sell the security and the nature of marketplace trades. Although one or more of
the other risks described in this SAI may apply, the largest risk associated
with illiquid and restricted securities is Liquidity Risk.
INFLATION RISK. Inflation risk is the risk that the value of the Funds holdings
or its distribution will decrease as inflation shrinks the purchasing power of
the U.S. dollar. Inflation causes money to decrease in value at some rate, and
does so whether the money is invested or not.
INITIAL PUBLIC OFFERINGS (IPOs) AND THEIR RISKS. The Fund may invest in IPOs.
IPOs are subject to many of the same risks as investing in companies with
smaller market capitalizations. Companies issuing IPOs generally have limited
operating histories, and their prospects for future profitability are uncertain.
These companies often are engaged in new and evolving businesses and are
particularly vulnerable to competition and to changes in technology, markets and
economic conditions. They may be dependent on certain key managers and third
parties, need more personnel and other resources to manage growth and require
significant additional capital. They may also be dependent on limited product
lines and uncertain property rights and need regulatory approvals. Funds that
invest in IPOs can be affected by sales of additional shares and by
concentration of control in existing management and principal shareholders.
Stock prices of IPOs can also be highly unstable, due to the absence of a prior
public market, the small number of shares available for trading and limited
investor information. Most IPOs involve a high degree of risk not normally
associated with offerings of more seasoned companies.
To the extent the Fund determines to invest in IPOs, it may not be able to
invest to the extent desired because, for example, only a small portion (if
any) of the securities being offered in an IPO may be made available. The
investment performance of the Fund during periods when it is unable to invest
significantly or at all in IPOs may be lower than during periods when the Fund
is able to do so. If the Fund sells its investments in IPOs within 12 months of
purchase, this may result in increased short-term capital gains, which will be
taxable to shareholders as ordinary income. Although one or more risks described
in this SAI may apply, the largest risks associated with IPOs include
Small- and
Mid-Sized Company Risk.
INTEREST RATE RISK. The securities in the portfolio are subject to the risk of
losses attributable to changes in interest rates. Interest rate risk is
generally associated with bond prices: when interest rates rise, bond prices
fall, and vice versa. In general, the longer the maturity or duration of a bond, the greater its
sensitivity to changes in interest rates.
INVESTMENTS IN OTHER INVESTMENT COMPANIES AND RELATED RISKS. The Fund may invest
in securities of other investment companies, such as, among others,
exchange-traded funds, subject to limitations imposed by the Investment Company
Act and exemptive orders
issued by the SEC. The shares of other investment companies are subject to the
management fees and other expenses of those companies, and the purchase of
shares of some investment companies requires the payment of sales loads and (in
the case of closed-end investment companies) sometimes substantial premiums
above the value of such companies portfolio securities or net asset values. The
Fund would continue, at the same time, to pay its own management fees and
expenses with respect to all of its investments, including shares of other
investment companies. Although one or more of the other risks described in this SAI may apply, the largest risk associated with the securities of other
investment companies is Market Risk.
ISSUER RISK. An issuer, or the value of its stocks or bonds, may perform poorly.
Poor performance may be caused by poor management decisions, competitive
pressures, breakthroughs in technology, reliance on suppliers, labor problems or
shortages, corporate restructurings, fraudulent disclosures, or other factors.
LENDING OF PORTFOLIO SECURITIES AND RELATED RISKS. To generate additional
income, the Fund may lend up to one-third of the value of its Managed Assets to
broker-dealers, banks or other institutional borrowers of securities. JPMorgan
Chase Bank, N.A. serves as lending agent (Lending Agent) to the funds in
the RiverSource Family of Funds, which includes the Fund, pursuant to a
securities lending agreement (Securities Lending Agreement) approved by
the Board.
-13-
Under the Securities Lending Agreement, the Lending Agent loans securities to
approved borrowers pursuant to borrower agreements in exchange for collateral
equal to at least 100% of the market value of the loaned securities. Collateral
may consist of cash, securities issued by the U.S. government or its agencies or
instrumentalities (collectively, U.S. government securities) or such other
collateral as may be approved by the Board. For loans secured by cash, the Fund
retains the interest earned on cash collateral investments, but is required to
pay the borrower a rebate for the use of the cash collateral. For loans secured
by U.S. government securities, the borrower pays a borrower fee to the Lending
Agent on behalf of the Fund. If the market value of the loaned securities goes
up, the Lending Agent will request additional collateral from the borrower. If
the market value of the loaned securities goes down, the borrower may request
that some collateral be returned. During the existence of the loan, the lender
will receive from the borrower amounts equivalent to any dividends, interest or
other distributions on the loaned securities, as well as interest on such
amounts.
Loans are subject to termination by the Fund or a borrower at any time. The Fund
may choose to terminate a loan in order to vote in a proxy solicitation if the
Fund has knowledge of a material event to be voted on that would affect the
Funds investment in the loaned security.
Securities lending involves Counterparty Risk (as described above), including
the risk that a borrower may not provide additional collateral when required or
return the loaned securities in a timely manner. Counterparty risk also includes
a potential loss of rights in the collateral if the borrower or the Lending
Agent defaults or fails financially. This risk is increased if the Funds loans
are concentrated with a single or limited number of borrowers. There are no
limits on the number of borrowers the Fund may use and the Fund may lend
securities to only one or a small group of borrowers. Funds participating in
securities lending also bear the risk of loss in connection with investments of
cash collateral received from the borrowers. Cash collateral is invested in
accordance with investment guidelines contained in the Securities Lending
Agreement and approved by the Board. To the extent that the value or return of
the Funds investments of the cash collateral declines below the amount owed to
a borrower, the Fund may incur losses that exceed the amount it earned on
lending the security. The Lending Agent will indemnify the Fund from losses
resulting from a borrowers failure to return a loaned security when due, but
such indemnification does not extend to losses associated with declines in the
value of cash collateral investments.
LEVERAGE RISK. Leverage occurs when the Fund increases its assets available for
investment by issuing shares of preferred stock (Preferred Shares) or using borrowings, short sales, derivatives, or similar instruments or
techniques. The Fund does not currently anticipate issuing Preferred
Shares or borrowing money. Due to the fact that short sales involve borrowing securities and
then selling them, the Funds short sales effectively leverage the Funds
assets. The use of leverage may make any change in the Funds net asset value
even greater and thus result in increased volatility of returns. The Funds
assets that are used as collateral to secure the short sales may decrease in
value while the short positions are outstanding, which may force the Fund to use
its other assets to increase the collateral. Leverage can also create an
interest expense that may lower the Funds overall returns. Lastly, there is no
guarantee that a leveraging strategy will be successful.
LIQUIDITY RISK. The risk associated from a lack of marketability of securities
which may make it difficult or impossible to sell at desirable prices in order
to minimize loss. The Fund may have to lower the selling price, sell other
investments, or forego another, more appealing investment opportunity.
MARKET RISK. The market value of securities may fall or fail to rise. Market
risk may affect a single issuer, sector of the economy, industry, or the market
as a whole. The market value of securities may fluctuate, sometimes rapidly and
unpredictably. This risk is generally greater for small- and mid-sized companies,
which tend to be more vulnerable to adverse developments. In addition, focus on
a particular style, for example, investment in growth securities, may cause the
Fund to underperform other funds if that style falls out of favor with the
market.
PORTFOLIO TRADING AND TURNOVER RISKS. Portfolio trading may be undertaken to
accomplish the investment objectives of the Fund in relation to actual and
anticipated movements in interest rates, securities markets and for other
reasons. In addition, a security may be sold and another of comparable quality
purchased at approximately the same time to take advantage of what the
Investment Manager believes to be a temporary price disparity between the two
securities. Temporary price disparities between two comparable securities may
result from supply and demand imbalances where, for example, a temporary
oversupply of certain securities may cause a temporarily low price for such
security, as compared with other securities of like quality and characteristics.
The Fund may also engage in
-14-
short-term trading consistent with its investment objectives. Securities may be
sold in anticipation of a market decline or purchased in anticipation of a
market rise and later sold, or to recognize a gain.
A change in the securities held by the Fund is known as portfolio turnover.
The Fund is managed without regard generally to restrictions on portfolio
turnover. The use of certain derivative instruments with relatively short
maturities may tend to exaggerate the portfolio turnover rate for the Fund. High
portfolio turnover (e.g., greater than 100%) involves correspondingly greater
expenses to the Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and reinvestments in other
securities. Trading in debt obligations does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. The use
of futures contracts may involve the payment of commissions to futures
commission merchants. The higher the rate of portfolio turnover of the Fund, the
higher the transaction costs borne by the Fund generally will be. Transactions
in the Funds portfolio securities may result in realization of taxable capital
gains (including short-term capital gains which are generally taxed to
stockholders at ordinary income tax rates). The trading costs and tax effects
associated with portfolio turnover may adversely affect the Funds performance.
PREPAYMENT AND EXTENSION RISK. The risk that a bond or other security might be
called, or otherwise converted, prepaid, or redeemed, before maturity. This risk
is primarily associated with asset-backed securities, including mortgage backed
securities. If a security is converted, prepaid, or redeemed, before maturity,
particularly during a time of declining interest rates, the portfolio managers
may not be able to reinvest in securities providing as high a level of income,
resulting in a reduced yield to the Fund. Conversely, as interest rates rise,
the likelihood of prepayment decreases. The portfolio managers may be unable to
capitalize on securities with higher interest rates because the Funds
investments are locked in at a lower rate for a longer period of time.
REINVESTMENT RISK. The risk that an investor will not be able to reinvest income
or principal at the same rate it currently is earning.
REPURCHASE AGREEMENTS AND THEIR RISKS. Repurchase agreements may be entered into
with banks or securities dealers or their affiliates. In a repurchase agreement,
the purchaser buys a security at one price, and at the time of sale, the seller
agrees to repurchase the obligation at a mutually agreed upon time and price
(usually within seven days). The repurchase agreement determines the yield
during the purchasers holding period, while the sellers obligation to
repurchase is secured by the value of the underlying security. Repurchase
agreements could involve certain risks in the event of a default or insolvency
of the other party to the agreement, including possible delays or restrictions
upon the purchasers ability to dispose of the underlying securities.
Repurchase agreements carry certain risks not associated with direct investments
in securities, including a possible decline in the market value of the
underlying obligations. If their value becomes less than the repurchase price,
plus any agreed-upon additional amount, the counterparty must provide additional
collateral so that at all times the collateral is at least equal to the
repurchase price plus any agreed-upon additional amount. The difference between
the total amount to be received upon repurchase of the obligations and the price
that was paid by the Fund upon acquisition is accrued as interest and included
in its net investment income. Repurchase agreements involving obligations other
than U.S. Government securities (such as commercial paper and corporate bonds)
may be subject to special risks and may not have the benefit of certain
protections in the event of the counterpartys insolvency. If the seller or
guarantor becomes insolvent, the Fund may suffer delays, costs and possible
losses in connection with the disposition of collateral. Although one or more of
the other risks described in this SAI may apply, the largest risk associated
with repurchase agreements is Credit Risk.
REVERSE REPURCHASE AGREEMENTS AND THEIR RISKS. In a reverse repurchase
agreement, an investor sells a security and enters into an agreement to
repurchase the security at a specified future date and price. The investor
generally retains the right to interest and principal payments on the security.
Since the investor receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing.
Reverse repurchase agreements involve the risk that the buyer of the securities
sold by the Fund might be unable to deliver them when the Fund seeks to
repurchase the securities. In the event that the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer, trustee or receiver may receive an extension of time to determine whether
to enforce the Funds obligation to repurchase the securities, and the Funds
use of the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision.
-15-
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with reverse repurchase agreements include Credit Risk
and Interest Rate Risk. See also Derivative Instruments and their Risks.
SECTOR RISK. Investments that are concentrated in a particular issuer,
industry, geographic region or sector will be more susceptible to changes in price. The
more a fund diversifies, the more it spreads risk and potentially reduces the
risks of loss and volatility.
SMALL- AND MID-SIZED COMPANY RISK. Investments in small and medium companies
often involve greater risks than investments in larger, more established
companies because small and medium companies may lack the management experience,
financial resources, product diversification, experience and competitive
strengths of larger companies. Additionally, in many instances, the securities
of small and medium companies are traded only over-the-counter or on regional
securities exchanges and the frequency and volume of their trading is
substantially less and may be more volatile than is typical of larger companies.
In addition, the returns from a specific type of security (for example, mid-cap
stocks) may trail returns from other asset classes or the overall market. Each
type of security will go through cycles of doing better or worse than stocks or
bonds in general. These periods may last for several years.
STRUCTURED INVESTMENTS AND THEIR RISKS. The Fund may invest in structured
investments. A structured investment is a security whose return is tied to an
underlying index or to some other security or pool of assets. Structured
investments generally are individually negotiated agreements and may be traded
over-the-counter. Structured investments are created and operated to restructure
the investment characteristics of the underlying security. This restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments, such as commercial bank loans, and the issuance
by that entity of one or more classes of debt obligations (structured
securities) backed by, or representing interests in, the underlying
instruments. The cash flow on the underlying instruments may be apportioned
among the newly issued structured securities to create securities with different
investment characteristics, such as varying maturities, payment priorities and
interest rate provisions. The extent of the payments made with respect to
structured securities is dependent on the extent of the cash flow on the
underlying instruments. Because structured securities typically involve no
credit enhancement, their credit risk generally will be equivalent to that of
the underlying instruments. Structured securities are often offered in different
classes. As a result, a given class of a structured security may be either
subordinated or unsubordinated to the right of payment of another class.
Subordinated structured securities typically have higher yields and present
greater risks than unsubordinated structured securities. Structured securities
are typically sold in private placement transactions, and at any given time
there may be no active trading market for a particular structured security.
Although one or more of the other risks described in this SAI may apply, the
largest risks associated with structured investments include Credit Risk and
Liquidity Risk.
SWAP AGREEMENTS AND THEIR RISKS. The Fund may engage in swap agreements. Swap
agreements are typically individually negotiated agreements that obligate two
parties to exchange payments based on a reference to a specified asset,
reference rate or index. Swap agreements will tend to shift a partys investment
exposure from one type of investment to another. A swap agreement can increase
or decrease the volatility of the Funds investments and its NAV.
Swap agreements are traded in the over-the-counter market and may be considered
to be illiquid. Swap agreements entail the risk that a party will default on its
payment obligations. The Fund will enter into a swap agreement only if the
claims-paying ability of the other party or its guarantor is considered to be
investment grade by the Investment Manager. Generally, the unsecured senior debt
or the claims-paying ability of the other party or its guarantor must be rated
in one of the three highest rating categories of at least one nationally
recognized statistical rating organization at the time of entering into
the transaction. If there is a default by the other party to such a transaction,
the Fund will have to rely on its contractual remedies (which may be limited by
bankruptcy, insolvency or similar laws) pursuant to the agreements related to
the transaction. In certain circumstances, the Fund may seek to minimize
counterparty risk by requiring the counterparty to post collateral.
Swap agreements are usually entered into without an upfront payment because the
value of each partys position is the same. The market values of the underlying
commitments will change over time resulting in one of the commitments being
worth more than the other and the net market value creating a risk exposure for
one counterparty or the other.
-16-
Interest Rate Swaps. Interest rate swap agreements are often used to obtain or
preserve a desired return or spread at a lower cost than through a direct
investment in an instrument that yields the desired return or spread. They are
financial instruments that involve the exchange of one type of interest rate for
another type of interest rate cash flow on specified dates in the future. In a
standard interest rate swap transaction, two parties agree to exchange their
respective commitments to pay fixed or floating rates on a predetermined
specified (notional) amount. The swap agreement notional amount is the
predetermined basis for calculating the obligations that the swap counterparties
have agreed to exchange. Under most swap agreements, the obligations of the
parties are exchanged on a net basis. The two payment streams are netted out,
with each party receiving or paying, as the case may be, only the net amount of
the two payments. Interest rate swaps can be based on various measures of
interest rates, including LIBOR, swap rates, treasury rates and other foreign
interest rates.
Cross Currency Swaps. Cross currency swaps are similar to interest rate swaps,
except that they involve multiple currencies. The Fund may enter into a currency
swap when it has exposure to one currency and desires exposure to a different
currency. Typically the interest rates that determine the currency swap payments
are fixed, although occasionally one or both parties may pay a floating rate of
interest. Unlike an interest rate swap, however, the principal amounts are
exchanged at the beginning of the contract and returned at the end of the
contract. In addition to paying and receiving amounts at the beginning and
termination of the agreements, both sides will also have to pay in full
periodically based upon the currency they have borrowed. Change in foreign
exchange rates and changes in interest rates, as described above, may negatively
affect currency swaps.
Total Return Swaps. Total return swaps are contracts in which one party agrees
to make periodic payments based on the change in market value of the underlying
assets, which may include a specified security, basket of securities or security
indexes during the specified period, in return for periodic payments based on a
fixed or variable interest rate of the total return from other underlying
assets. Total return swap agreements may be used to obtain exposure to a
security or market without owning or taking physical custody of such security or
market. For example, CMBS total return swaps are bilateral financial contracts
designed to replicate synthetically the total returns of commercial
mortgage-backed securities. In a typical total return equity swap, payments made
by the Fund or the counterparty are based on the total return of a particular
reference asset or assets (such as an equity security, a combination of such
securities, or an index). That is, one party agrees to pay another party the
return on a stock, basket of stocks, or stock index in return for a specified
interest rate. By entering into an equity index swap, for example, the index
receiver can gain exposure to stocks making up the index of securities without
actually purchasing those stocks. Total return swaps involve not only the risk
associated with the investment in the underlying securities, but also the risk
of the counterparty not fulfilling its obligations under the agreement.
Swaption Transaction. A swaption is an option on a swap agreement and a contract
that gives a counterparty the right (but not the obligation) to enter into a new
swap agreement or to shorten, extend, cancel or otherwise modify an existing
swap agreement, at some designated future time on specified terms, in return for
payment of the purchase price (the premium) of the option. The Fund may write
(sell) and purchase put and call swaptions to the same extent it may make use of
standard options on securities or other instruments. The writer of the contract
receives the premium and bears the risk of unfavorable changes in the market
value on the underlying swap agreement.
Swaptions can be bundled and sold as a package. These are commonly called
interest rate caps, floors and collars. In interest rate cap transactions, in
return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or cap. Interest rate floor
transactions require one party, in exchange for a premium to agree to make
payments to the other to the extent that interest rates fall below a specified
level, or floor. In interest rate collar transactions, one party sells a cap and
purchases a floor, or vice versa, in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels or collar
amounts.
Credit Default Swaps. Credit default swaps are contracts in which third party
credit risk is transferred from one party to another party. One party, the
protection buyer, makes payments to the other party, the protection seller, in
return for the ability of the protection buyer to deliver a reference
obligation, or portfolio of reference obligations, to the protection seller upon
the occurrence of certain credit events relating to the issuer of the reference
obligation and receive the notional amount of the reference obligation from the
protection seller. The Fund may use credit default swaps for various purposes
including to increase or decrease its credit exposure to various issuers. For
-17-
example, as a seller in a transaction, the Fund could use credit default swaps
as a way of increasing investment exposure to a particular issuers bonds in
lieu of purchasing such bonds directly. Similarly, as a buyer in a transaction,
the Fund may use credit default swaps to hedge its exposure on bonds that it
owns or in lieu of selling such bonds. A credit default swap agreement may have
as reference obligations one or more securities that are not currently held by
the Fund. The Fund may be either the buyer or seller in the transaction. Credit
default swaps may also be structured based on the debt of a basket of issuers,
rather than a single issuer, and may be customized with respect to the default
event that triggers purchase or other factors. As a seller, the Fund generally
receives an up front payment or a fixed rate of income throughout the term of
the swap, which typically is between six months and three years, provided that
there is no credit event. If a credit event occurs, generally the seller must
pay the buyer the full face amount of deliverable obligations of the reference
obligations that may have little or no value. If the Fund is a buyer and no
credit event occurs, the Fund recovers nothing if the swap is held through its
termination date. However, if a credit event occurs, the buyer may elect to
receive the full notional value of the swap in exchange for an equal face amount
of deliverable obligations of the reference obligation that may have little or
no value.
Credit default swap agreements can involve greater risks than if the Fund had
invested in the reference obligation directly since, in addition to general
market risks, credit default swaps are subject to counterparty credit risk,
leverage risk, hedging risk, correlation risk and liquidity risk. The Fund will
enter into credit default swap agreements only with counterparties that meet
certain standards of creditworthiness. A buyer generally also will lose its
investment and recover nothing should no credit event occur and the swap is held
to its termination date. If a credit event were to occur, the value of any
deliverable obligation received by the seller, coupled with the upfront or
periodic payments previously received, may be less than the full notional value
it pays to the buyer, resulting in a loss of value to the seller. The Funds
obligations under a credit default swap agreement will be accrued daily (offset
against any amounts owing to the Fund). In connection with credit default swaps
in which the Fund is the buyer, the Fund will segregate or earmark cash or
other liquid assets, or enter into certain offsetting positions, with a value at
least equal to the Funds exposure (any accrued but unpaid net amounts owed by
the Fund to any counterparty), on a marked-to-market basis. In connection with
credit default swaps in which the Fund is the seller, the Fund will segregate or
earmark cash or other liquid assets, or enter into offsetting positions, with
a value at least equal to the full notional amount of the swap (minus any
amounts owed to the Fund). Such segregation or earmarking will ensure that the
Fund has assets available to satisfy its obligations with respect to the
transaction. Such segregation or earmarking will not limit the Funds exposure
to loss.
The use of swap agreements by the Fund entails certain risks, which may be
different from, or possibly greater than, the risks associated with investing
directly in the securities and other investments that are the referenced asset
for the swap agreement. Swaps are highly specialized instruments that require
investment techniques, risk analyses and tax planning different from those
associated with stocks, bonds and other traditional investments. The use of a
swap requires an understanding not only of the referenced asset, reference rate
or index, but also of the swap itself, without the benefit of observing the
performance of the swap under all the possible market conditions. Because some
swap agreements have a leverage component, adverse changes in the value or level
of the underlying asset, reference rate, or index can result in a loss
substantially greater than the amount invested in the swap itself. Certain swaps
have the potential for unlimited loss, regardless of the size of the initial
investment. Although one or more of the other risks described in this SAI may
apply, the largest risks associated with swaps include Credit Risk, Liquidity
Risk and Market Risk.
WARRANTS TO PURCHASE SECURITIES AND THEIR RISKS. The Fund may invest in
warrants. Warrants are securities giving the holder the right, but not the
obligation, to buy the stock of an issuer at a given price (generally higher
than the value of the stock at the time of issuance) during a specified period
or perpetually. Warrants may be acquired separately or in connection with the
acquisition of securities. Warrants do not carry with them the right to
dividends or voting rights and they do not represent any rights in the assets of
the issuer. Warrants may be considered to have more speculative characteristics
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date. Although one or more of the other risks described in this SAI may apply,
the largest risks associated with warrants include Market Risk.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS AND THEIR RISKS. When-issued
securities and forward commitments involve a commitment to purchase or sell
specific securities at a predetermined price or yield in which
-18-
payment and delivery take place after the customary settlement period for that
type of security. Normally, the settlement date occurs within 45 days of the
purchase although in some cases settlement may take longer. The investor does
not pay for the securities or receive dividends or interest on them until the
contractual settlement date. Such instruments involve the risk of loss if the
value of the security to be purchased declines prior to the settlement date and
the risk that the security will not be issued as anticipated. If the security is
not issued as anticipated, the Fund may lose the opportunity to obtain a price
and yield considered to be advantageous.
Securities purchased on a when-issued or forward commitment basis are subject to
changes in market value based upon investors perceptions of the
creditworthiness of the issuer and upon changes, real or anticipated, in the
level of interest rates. If the Fund remains substantially fully invested at the
same time that it has purchased securities on a when-issued or forward
commitment basis, the market value of the Funds assets may fluctuate more than
would otherwise be the case. Purchasing a security on a when-issued or forward
commitment basis can involve a risk that the yields available in the market when
the delivery takes place may be higher than those obtained on the security so
purchased. Sales of securities held by the Fund in order to meet obligations
resulting from when-issued or forward commitment securities carries with it a
greater potential for the realization of capital gain or loss. Although one or
more of the other risks described in this SAI may apply, the largest risk
associated with when-issued securities and forward commitments is Credit
Risk.
OTHER INVESTMENT MANAGEMENT TECHNIQUES. The Fund may, subject to the approval of
the Funds Board, use various other investment management techniques that also
involve certain risks and special considerations, including engaging in hedging
and risk management transactions, such as interest rate transactions, options,
futures, swaps and other derivatives transactions, as described above. Strategic
transactions will be entered into to seek to manage the risks of the Funds
portfolio of securities, but may have the effect of limiting the gains from
favorable market movements. Strategic transactions involve risks, including: (1)
that the loss on the strategic transaction position may be larger than the gain
in the portfolio position being hedged and (2) that the derivative instruments
used in strategic transactions may not be liquid and may require the Fund to pay
additional amounts of money. Successful use of strategic transactions depends on
the Investment Managers ability to predict correctly market
movements, which cannot be assured. Losses on strategic transactions may reduce the
Funds net asset value and its ability to pay dividends if they are not offset
by gains on the portfolio positions being hedged.
FUNDAMENTAL RESTRICTIONS
The Fund is subject to fundamental policies that place restrictions on
certain types of investments. The Funds fundamental policies cannot be changed
except by vote of a majority of its outstanding voting securities. Under these
policies, the Fund may not:
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Purchase or sell commodities or commodity contracts, except to the
extent permissible under applicable law and interpretations, as they
may be amended from time to time, and except this shall not prevent
the Fund from buying or selling options, futures contracts and foreign
currency or from entering into forward currency contracts or from
investing in securities or other instruments backed by, or whose value
is derived from, physical commodities; |
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Issue senior securities or borrow money, except as permitted by the
Investment Company Act or any rule thereunder, any SEC or SEC staff
interpretations thereof or any exemptions therefrom which may be
granted by the SEC; |
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Make loans, except as permitted by the Investment Company Act or any
rule thereunder, any SEC or SEC staff interpretations thereof or any
exemptions therefrom which may be granted by the SEC; |
-19-
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Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 (the
Securities Act) in disposing of a portfolio security or in
connection with investments in other investment companies; |
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Buy or sell real estate, unless acquired as a result of ownership of
securities or other instruments, except this shall not prevent the
Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business
or real estate investment trusts; and |
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Invest 25% or more of its Managed Assets (as defined below), at market
value, in the securities of issuers in any particular industry, except
that the Fund will invest at least 25% of the value of its Managed
Assets in technology
and technology-related stocks (in which the Fund intends to concentrate) and may invest
without limit in securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, or government-sponsored
enterprises, as described in the Prospectus, which may be amended
from time to time. |
Managed
Assets means the net asset value of the Funds outstanding
Common Shares plus any liquidation preference of any issued and
outstanding Preferred Shares and the principal amount of any
borrowings used for leverage.
The Funds fundamental policies set forth above prohibit transactions
except as permitted by the Investment Company Act or any rule thereunder, any
SEC or SEC staff interpretations thereof or any exemptions therefrom which may
be granted by the SEC. The following discussion explains the flexibility that
the Fund gains from these exceptions.
Issuing senior securities A senior security is an obligation with
respect to the earnings or assets of a company that takes precedence over the
claims of that companys common stock with respect to the same earnings or
assets. The Investment Company Act limits the ability of a closed-end fund to
issue senior securities, but SEC staff interpretations allow a fund to engage in
certain types of transactions that otherwise might raise senior security
concerns (such as short sales, buying and selling financial futures contracts
and selling put and call options), provided that the Fund maintains segregated
deposits or portfolio securities, or otherwise covers the transaction with
offsetting portfolio securities, in amounts sufficient to offset any liability
associated with the transaction. The exception in the fundamental policy allows
the Fund to operate in reliance upon these staff interpretations.
Borrowing money The Investment Company Act permits the Fund to borrow up
to 33
1/3% of its Managed Assets, plus an additional 5% of its Managed Assets for
temporary purposes.
Making loans The Investment Company Act generally prohibits the Fund from
making loans to affiliated persons but does not otherwise restrict the Funds
ability to make loans.
Under the Investment Company Act, the Funds fundamental policies may not
be changed without the approval of the holders of a majority of the
outstanding Common Shares and, if issued, Preferred Shares voting together as a single class, and of the holders of a
majority of the outstanding Preferred Shares voting as a separate class. When
used with respect to particular shares of the Fund, a majority of the
outstanding shares means the lesser of: (i) 67% or more of the shares present
at a stockholder meeting, if the holders of more than 50% of the outstanding
shares are present at the meeting or represented by proxy, or (ii) more than 50%
of the outstanding shares of the Fund.
The Funds investment objectives are nonfundamental, and may be changed by
the Funds Board without approval of the Funds holders of Common Shares
(Common Stockholders). However, the Fund will provide stockholders at least 60
days notice of any change to its investment objectives.
Under the Investment Company Act, the Fund also may not change its
principal investment strategy of investing at least 80% of its Managed Assets in a portfolio of equity securities of technology and technology-related
-20-
companies
and its policy with respect to the use of the Rules-based Option
Strategy (as defined in the Fund's prospectus) on a month-to-month
basis, without first providing notice to stockholders at least 60 days prior
to such change. If the Board were to approve a change to these Fund
policies,
such a notice will be provided in plain English in a separate written document
and will contain the following prominent statement, in bold-face type:
Important Notice Regarding Change in Investment Policy. This prominent
statement will also appear on the envelope in which the notice is delivered or,
if the notice is delivered separately from other communications to stockholders,
such statement will appear either on the notice or on the envelope in which the
notice is delivered.
For temporary defensive purposes in response to adverse market, economic,
political or other conditions, the Fund may invest up to 100% of its assets in
cash or cash equivalents, including, but not limited to, prime commercial paper,
bank certificates of deposit, bankers acceptances, fixed-time deposits or
repurchase agreements for such securities, and securities of the U.S. Government
and its agencies and instrumentalities, and government-sponsored enterprises, as
well as cash and cash equivalents denominated in foreign currencies. Fixed time
deposits, unlike negotiable certificates of deposit, generally do not have a
market and may be subject to penalties for early withdrawal of funds.
During periods when the Fund has taken such a defensive position, it
may not be achieving its investment objectives.
PORTFOLIO TURNOVER
The Funds portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly average
of the value of the portfolio securities owned during the year. Securities whose
maturity or expiration date at the time of acquisition are one year or less are
excluded from the calculation. The Funds portfolio turnover rate will not be a
limiting factor when the Fund deems it desirable to sell or purchase securities.
-21-
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The
business and affairs of the Fund are managed under the direction of the Funds
Board. Subject to the provisions of the Funds charter, its
Bylaws and Maryland law (where the Fund is organized), all
powers of the Fund may be exercised by or under the authority of the
Board necessary and convenient to carry out their responsibilities, including
the election and removal of the Funds officers.
Stockholders of the Fund elect a Board that oversees the Funds operations.
The Board annually elects officers who are responsible for day-to-day business
decisions based on policies set by the Board. In addition to serving on the
Funds Board, each Board member serves on the boards
of directors/trustees of the other funds in the RiverSource Family of Funds,
which consists of 133 funds, including 100 RiverSource funds,
RiverSource Partners funds, Threadneedle funds and 33 Seligman funds. The
Board is divided into three classes, each of which consists of four
Directors. Members of each class typically hold office for a term of 3
years and until their successors are elected and qualify or until he or she
reaches the mandatory retirement age established by the Board. The term of one
class expires in each year.
The table below lists the names of the Directors of the Fund, their address
and age, the position(s) they hold with the Fund, their term of office and
length of time served, a description of their principal occupations during the
past five years, any other directorships held by the Director and their Fund
committee memberships.
-22-
INDEPENDENT DIRECTORS(a)
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Position with |
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Fund, |
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Length of |
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Principal Occupation |
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Time Served |
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During Last |
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Other |
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Committee |
Name, Address, Age |
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and Term of Office |
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Five Years |
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Directorships |
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Memberships |
Kathleen
Blatz
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 55
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Board member since
October 2009 Term expiring 2012
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Chief
Justice, Minnesota
Supreme Court,
1998-2006; attorney
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Other funds in the
RiverSource Family
of Funds
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Board Governance,
Compliance,
Investment Review,
Audit |
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Arne
H. Carlson*
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 75
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Board member since
October 2009 Term expiring 2013
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Chair, RiverSource
Funds, 1999-2006;
former Governor of
Minnesota
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Other funds in the
RiverSource Family
of Funds
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Board Governance,
Compliance,
Contracts,
Executive,
Investment Review |
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Pamela G. Carlton
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 54
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Board member since
October 2009 Term expiring 2012
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President, Springboard-Partners
in Cross Cultural
Leadership
(consulting company)
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Other funds in the
RiverSource Family
of Funds
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Distribution,
Investment Review,
Audit |
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Patricia
M. Flynn
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 58
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Board member since
October 2009 Term expiring 2011
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Trustee Professor
of Economics and
Management, Bentley
University; former
Dean, McCallum
Graduate School of
Business, Bentley
University
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Other funds in the
RiverSource Family
of Funds
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Board Governance,
Contracts,
Investment Review |
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Anne P. Jones
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 74
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Board member since
October 2009 Term expiring 2012
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Attorney and
Consultant
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Other funds in the
RiverSource Family
of Funds
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Board Governance,
Compliance,
Executive,
Investment Review,
Audit |
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Jeffrey Laikind, CFA
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 73
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Board member since
October 2009 Term expiring 2011
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Former Managing
Director, Shikiar Asset Management
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American
Progressive
Insurance; other
funds in the
RiverSource Family
of Funds
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Distribution,
Executive,
Investment Review,
Audit |
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Stephen R. Lewis, Jr.
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 70
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Board member and
Chair of Board
since October 2009 Term expiring 2011
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President Emeritus
and Professor of
Economics, Carleton
College
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Valmont Industries,
Inc. (manufactures
irrigation
systems); other
funds in the
RiverSource Family
of Funds
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Board Governance,
Compliance,
Contracts,
Executive,
Investment Review |
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John F. Maher
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 66
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Board member since
October 2009 Term expiring 2013
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Retired President
and Chief Executive
Officer and former
Director, Great
Western Financial
Corporation
(financial
services),
1986-1997.
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Other funds in the
RiverSource Family
of Funds
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Distribution,
Investment Review,
Audit |
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Catherine James Paglia
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 57
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Board member since
October 2009 Term expiring 2011
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Director,
Enterprise Asset
Management, Inc.
(private real
estate and asset
management company)
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Other funds in the
RiverSource Family
of Funds
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Board Governance,
Compliance,
Contracts,
Executive,
Investment Review |
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Leroy C. Richie
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 68
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Board member since
October 2009 Term expiring 2013
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Counsel, Lewis &
Munday, P.C. (law
firm) since 1987;
Vice President
and General
Counsel, Automotive
Legal Affairs,
Chrysler
Corporation,
1990-1997
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Digital Ally, Inc.,
(digital imaging);
Infinity, Inc. (oil
and gas exploration
and production);
and OGE Energy
Corp. (energy and
energy services);
other funds in the
RiverSource Family
of Funds
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Contracts,
Distribution,
Investment Review |
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Alison Taunton-Rigby
901 S. Marquette Ave.
Minneapolis, MN 55402
Age 65
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Board member since
October 2009 Term expiring 2012
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Chief Executive
Officer and
Director,
RiboNovix, Inc.
since 2003
(biotechnology);
former President,
Forester Biotech
|
|
Idera
Pharmaceuticals,
Inc.
(biotechnology);
Healthways, Inc.
(health management
programs); other
funds in the
RiverSource Family
of Funds
|
|
Contracts,
Distribution,
Executive,
Investment Review |
|
|
|
* |
|
As a technical matter, Mr. Carlson may be deemed an
interested person of the Fund due to his ownership of an immaterial amount of securities issued by
one of the Funds principal underwriters. It is expected that immediately following the
Funds initial offering, he would qualify as a non-interested
director of the Fund. |
INTERESTED
DIRECTORS(a)
|
|
|
|
|
|
|
|
|
|
|
Position with |
|
|
|
|
|
|
|
|
Fund |
|
Principal Occupation |
|
|
|
|
|
|
and Length of |
|
During Last |
|
Other |
|
Committee |
Name, Address, Age |
|
Time Served |
|
Five Years |
|
Directorships |
|
Memberships |
William F. Truscott
53600 Ameriprise
Financial Center
Minneapolis, MN 55474
Age 49
|
|
Board member since October 2009 and
Vice President
since September 2009 Term expiring 2013
|
|
President U.S.
Asset Management
and Chief
Investment Officer,
Ameriprise
Financial, Inc.
since 2005;
President, Chairman
of the Board and
Chief Investment
Officer,
RiverSource
Investments, LLC
since 2001;
Director, President
and Chief Executive
Officer, Ameriprise
Certificate Company
since 2006;
Chairman of the
Board and Chief
Executive Officer,
RiverSource
Distributors, Inc.
since 2006 and of
RiverSource Fund
Distributors, Inc.
since 2008; and
Senior Vice
President Chief
Investment Officer,
Ameriprise
Financial, Inc.,
2001-2005
|
|
Other funds in the
RiverSource Family
of Funds
|
|
None |
|
|
|
|
(a) |
|
Independent Directors are those Directors who are not Interested
Persons (as defined in Section 2(a)(19) of the Investment Company Act),
and Interested Directors are those Directors who are Interested Persons
of the Fund. |
|
The Board has elected officers who are responsible for day-to-day
business decisions based on policies it has established. The officers are elected annually and serve at
the pleasure of the Board. In addition to Mr. Truscott, who is a Vice President, the other
officers are:
FUND OFFICERS
|
|
|
|
|
|
|
Position With |
|
|
|
|
the Fund and Length Of |
|
|
Name, Address, Age |
|
Time Served |
|
Principal Occupation During Last Five Years |
Patrick T. Bannigan
172 Ameriprise Financial Center
Minneapolis, MN 55474
Age 43
|
|
President since September 2009
|
|
Director and Senior Vice President Asset Management,
Products and Marketing, RiverSource Investments, LLC and
Director and Vice President Asset Management, Products
and Marketing, RiverSource Distributors, Inc. since 2006
and of RiverSource Fund Distributors, Inc. since 2008;
Managing Director and Global Head of Product, Morgan
Stanley Investment Management, 2004-2006; President,
Touchstone Investments, 2002-2004 |
|
|
|
|
|
Michelle M. Keeley
172 Ameriprise Financial Center
Minneapolis, MN 55474
Age 45
|
|
Vice President since September 2009
|
|
Executive Vice President Equity and Fixed Income,
Ameriprise Financial, Inc. and RiverSource Investments,
LLC since 2006, Vice President Investments, Ameriprise
Certificate Company since 2003; Senior Vice President Fixed Income, Ameriprise Financial, Inc., 2002-2006 and
RiverSource Investments, LLC, 2004-2006 |
|
|
|
|
|
Amy K. Johnson
172 Ameriprise Financial Center
Minneapolis, MN 55474
Age 43
|
|
Vice President since September 2009
|
|
Chief Administrative Officer, RiverSource Investments,
LLC since 2009; Vice President Asset Management and
Trust Company Services, RiverSource Investments, LLC,
Vice President Operations and Compliance, RiverSource Investments, LLC, 2004-2006; Director of
Product Development Mutual Funds, Ameriprise Financial, Inc., 2001-2004 |
-24-
|
|
|
|
|
|
|
Position With |
|
|
|
|
the Fund and Length Of |
|
|
Name, Address, Age |
|
Time Served |
|
Principal Occupation During Last Five Years |
Scott R. Plummer
172 Ameriprise Financial Center
Minneapolis, MN 55474 Age 50 |
|
Vice President, General Counsel and
Secretary since September 2009
|
|
Vice President and Chief Counsel Asset Management,
Ameriprise Financial, Inc. since 2005; Chief Counsel,
RiverSource Distributors, Inc. and Chief Legal Officer
and Assistant Secretary, RiverSource Investments, LLC
since 2006, Chief Counsel, RiverSource Fund Distributors, Inc. since 2008; Vice President, General
Counsel and Secretary, Ameriprise Certificate Company since 2005; Vice President Asset Management
Compliance, Ameriprise Financial, Inc., 2004-2005; Senior Vice President and Chief Compliance Officer,
US Bancorp Asset Management, 2002-2004 |
|
|
|
|
|
Jeffrey P. Fox 105 Ameriprise Financial Center
Minneapolis, MN 55474
Age 54 |
|
Treasurer since September 2009 |
|
Vice President Investment Accounting, Ameriprise
Financial, Inc. since 2002; Chief Financial Officer,
RiverSource Distributors, Inc. since 2006 and
RiverSource Fund Distributors, Inc. since 2008 |
|
|
|
|
|
|
Eleanor T.M. Hoagland
100 Park Avenue,
New York, NY 10017
Age 58
|
|
Chief Compliance Officer
since September 2009 |
|
Chief Compliance Officer, RiverSource Investments, LLC,
Kenwood Capital Management LLC, Ameriprise Certificate
Company, RiverSource Service Corporation since 2009; Chief Compliance Officer for each
of the Seligman funds since 2004 and all funds in the
RiverSource Family of Funds since 2009; Anti Money
Laundering Prevention Officer and Identity Theft
Prevention Officer for each of the Seligman funds since
2008; Managing Director, J. & W. Seligman & Co.
Incorporated and Vice President of each of the Seligman funds, 2004-2008 |
|
|
|
|
|
|
Neysa M. Alecu 2934 Ameriprise
Financial Center Minneapolis, MN 55474 Age 45
|
|
Money Laundering
Prevention Officer
since September 2009
|
|
Vice President
Compliance,
Ameriprise Financial,
Inc. since
2008; Anti-Money
Laundering Officer, Ameriprise Financial,
Inc. since 2004; Compliance Director, Ameriprise Financial,
Inc., 2004-2008. |
All officers are elected annually by the Funds Board and serve at the pleasure of the Board until their
successors are elected and qualify or their earlier resignation.
The
Investment Management Services Agreement dated November 12, 2009 (Management Agreement) between RiverSource Investments and the Fund was
initially approved by the Funds Board in respect of the Fund at a meeting held
on November 12, 2009 and by the sole Common Stockholder on
November 19, 2009. The Funds
Board initially approves other contracts with the Investment Manager and its
affiliates, and other service providers. Once the contracts are approved, the
Board monitors the level and quality of services including commitments of
service providers to achieve expected levels of investment performance and
stockholder services. In addition, the Board oversees that processes are in
place to assure compliance with applicable rules, regulations and investment
policies and addresses possible conflicts of interest. Annually, the Board
evaluates the services received under the contracts by receiving reports
covering investment performance, stockholder services, marketing and the
Investment Managers profitability in order to determine whether to continue
existing contracts or negotiate new contracts.
COMMITTEES OF THE FUNDS BOARD
The Board has organized the following standing committees to facilitate its
work: Board Governance Committee, Compliance Committee, Contracts Committee,
Distribution Committee, Executive Committee, Investment Review Committee and
Audit Committee. These Committees are comprised solely of Directors who are not
interested persons of the Fund as that term is defined in the
Investment Company Act (i.e., they are independent directors). The table above
describing each Director also includes their respective committee memberships.
The duties of these committees are described below.
Mr. Lewis, as Chair of the Board, acts as a point of contact between the
independent Directors and the Investment Manager between Board
meetings in respect of general matters.
Board Governance Committee. Recommends to the Board the size, structure and
composition of the Board and its committees; the compensation to be paid to
members of the Board; and a process for evaluating the Boards performance. The
committee also makes recommendations to the Board regarding responsibilities and
duties of the Board, oversees proxy voting and supports the work of the Chair of
the Board in relation to furthering the interests of the Fund and other funds in
the RiverSource Family of Funds and their shareholders on external matters. The
-25-
committee, which operates pursuant to a written charter, also reviews candidates for Board membership, including candidates recommended by stockholders.
To be considered as a candidate for director, recommendations must include
a curriculum vitae and be mailed to the Chair of the Board, RiverSource Family
of Funds, 901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402-3268. To
be timely for consideration by the committee, the submission, including all
required information, must, in the case of the Funds first
annual meeting of stockholders, be submitted in writing via first
class mail to the attention of the Secretary of the Fund at 50606
Ameriprise Financial Center, Minneapolis, MN 55474 and received on
the tenth day following the day on which public announcement of the date of such
meeting is first made, and, for subsequent annual meetings of the
Funds stockholders, must be submitted in writing not less than 120 days before
the date of the proxy statement for the previous years annual meeting of
stockholders. The committee will consider only one candidate submitted by such a
stockholder or group for nomination for election at an annual meeting of
stockholders. The committee will not consider self-nominated candidates or
candidates nominated by members of a candidates family, including such
candidates spouse, children, parents, uncles, aunts, grandparents, nieces and
nephews. Stockholders who wish to submit a candidate for nomination directly to
the Funds stockholders must follow the procedures described in the Funds
Bylaws, a copy of which is available at www.seligman.com.
The committee will consider and evaluate candidates submitted by the
nominating stockholder or group on the basis of the same criteria as those used
to consider and evaluate candidates submitted from other sources. The committee
may take into account a wide variety of factors in considering Director
candidates, including (but not limited to): (i) the candidates knowledge in
matters relating to the investment company industry; (ii) any experience
possessed by the candidate as a director or senior officer of other public or
private companies; (iii) the candidates educational background; (iv) the
candidates reputation for high ethical standards and personal and professional
integrity; (v) any specific financial, technical or other expertise possessed by
the candidate, and the extent to which such expertise would complement the
Boards existing mix of skills and qualifications; (vi) the candidates
perceived ability to contribute to the ongoing functions of the Board, including
the candidates ability and commitment to attend meetings regularly, work
collaboratively with other members of the Board and carry out his or her duties
in the best interests of the Fund; (vii) the candidates ability to qualify as
an independent director; and (viii) such other criteria as the committee
determines to be relevant in light of the existing composition of the Board and
any anticipated vacancies or other factors.
Compliance Committee. This committee supports the Funds maintenance of a
strong compliance program by providing a forum for independent Board members to
consider compliance matters impacting the Fund or its key service providers;
developing and implementing, in coordination with the Funds Chief Compliance
Officer (CCO), a process for the review and consideration of compliance reports
that are provided to the Board; and providing a designated forum for the Funds
CCO to meet with independent Board members on a regular basis to discuss compliance matters.
Contracts Committee. This committee reviews and oversees the contractual
relationships with service providers and receives and analyzes reports covering
the level and quality of services provided under contracts with the Fund. It
also advises the Board regarding actions taken on these contracts during the
annual review process.
Distribution Committee. This committee reviews and supports product
development and related activities to the Fund, and reports to the Board as appropriate.
Executive Committee. This committee acts for the Board between meetings of
the Board.
Investment Review Committee. This committee reviews and oversees the
management of the Funds assets and considers investment management policies and
strategies, investment performance, risk management techniques and securities
trading practices and reports areas of concern to the Board.
Audit Committee. This committee oversees the accounting and financial
reporting processes of the Fund and internal controls over financial reporting
and oversees the quality and integrity of the Funds financial statements and
independent audits, as well as the Funds compliance with legal and regulatory
requirements relating to the Funds accounting and financial reporting, internal
controls over financial reporting and independent audits. The committee also
makes recommendations regarding the selection of the Funds independent
registered public accounting firm and reviews and evaluates the qualifications,
independence and performance of such firm. This committee operates pursuant to a
written charter, a copy of which is available at
www.seligman.com.
-26-
The
members of this committee are independent as required by
applicable listing standards of the NYSE.
Since this is the first year of the Funds operations, none of the
committees held meetings during the last fiscal year.
PROCEDURES FOR COMMUNICATIONS TO THE BOARD
The Funds Board has adopted a process for stockholders to send
communications to the Board. To communicate with the Board or an individual
Director, a stockholder must send written communications to Board
Services Corporation, 901 Marquette Avenue South, Minneapolis, MN
55402,
addressed to the Board of Directors of Seligman Premium Technology Growth Fund,
Inc. or the individual Director. All stockholder communications received in
accordance with this process will be forwarded to the Board or the individual
Director.
BENEFICIAL OWNERSHIP OF SHARES
For each Director, the following table discloses the dollar range of equity
securities beneficially owned by the Director in the Fund and, on an aggregate
basis, in any registered investment companies overseen by the Director within
the RiverSource Family of Funds (which includes the Fund) as of
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of Shares Owned By |
|
|
|
Dollar Range of Fund Shares |
|
|
Director/trustee in the Riversource Family |
|
Name |
|
Owned by Director |
|
|
of Funds(*) |
|
|
|
|
|
|
|
|
|
|
INDEPENDENT DIRECTORS |
|
|
|
|
|
|
|
|
Kathleen Blatz |
|
None |
|
Over $100,000 |
Arne H. Carlson |
|
None |
|
Over $100,000 |
Pamela G. Carlton |
|
None |
|
|
$50,001 - $100,000 |
|
Patricia M. Flynn |
|
None |
|
Over $100,000 |
Anne P. Jones |
|
None |
|
Over $100,000 |
Jeffrey Laikind |
|
None |
|
Over $100,000 |
Stephen R. Lewis, Jr. |
|
None |
|
Over $100,000 |
John F. Maher |
|
None |
|
Over $100,000 |
Catherine James Paglia |
|
None |
|
Over $100,000 |
Leroy C. Richie |
|
None |
|
Over $100,000 |
Alison Taunton-Rigby |
|
None |
|
Over $100,000 |
|
|
|
|
|
|
|
|
|
INTERESTED DIRECTOR |
|
|
|
|
|
|
|
|
William F. Truscott |
|
None |
|
Over $100,000 |
|
|
|
* |
|
Total includes deferred compensation invested in share equivalents. |
No director who is not an interested person of the Fund, nor any family member of such director,
owns beneficially or of record any security of the Investment Manager or principal underwriter of
the Fund, nor is any such director or any family member of such director a person (other than a
registered investment company) directly or indirectly controlling, or controlled by, or under
common control with the Investment Manager or principal underwriter of the Fund.
As
of October 22, 2009, the Funds officers and Directors as a group owned
none of the Funds Common Shares.
As
of October 22, 2009, the following persons owned of record the number of
Common Shares noted below, representing the indicated percentage of the Funds
outstanding equity securities as of such date. To the knowledge of the Fund, no
other person owned of record or beneficially 5% or more of the Funds
outstanding equity securities on such date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of the Funds |
|
|
|
Number of Common |
|
|
Outstanding Shares as Of |
|
Shareholder |
|
Shares |
|
|
October 22, 2009 |
|
RiverSource Investments, LLC |
|
|
5,250 |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
COMPENSATION |
|
|
|
|
|
|
|
|
No compensation is paid by the Fund or any fund in the RiverSource Family
of Funds to Directors or officers of the Fund or any fund in the RiverSource
Family of Funds who are employees of the Investment Manager or its affiliates.
Compensation of the other Directors who are not interested persons of the
Fund, as that term is defined in the Investment Company Act, is estimated as
follows for the fiscal year ending December 31, 2009:
-27-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Compensation |
|
|
|
|
|
|
|
Pension or |
|
From Fund And |
|
|
Aggregate |
|
Retirement Benefits |
|
Riversource Family |
|
|
Compensation |
|
Accrued as Part of |
|
of Funds Paid To |
Name |
|
From the Fund(1) |
|
Fund Expenses |
|
Directors(2) |
Kathleen
Blatz |
|
$ |
128.16 |
|
|
|
N/A |
|
|
$ |
38,333.34 |
|
Arne H.
Carlson |
|
|
128.16 |
|
|
|
N/A |
|
|
|
38,333.34 |
|
Pamela G.
Carlton(3) |
|
|
119.80 |
|
|
|
N/A |
|
|
|
35,833.34 |
|
Patricia M.
Flynn(3) |
|
|
119.80 |
|
|
|
N/A |
|
|
|
35,833.34 |
|
Anne P. Jones |
|
|
128.16 |
|
|
|
N/A |
|
|
|
38,333.34 |
|
Jeffrey Laikind, CFA |
|
|
119.80 |
|
|
|
N/A |
|
|
|
35,833.34 |
|
Stephen R.
Lewis, Jr.(3) |
|
|
222.89 |
|
|
|
N/A |
|
|
|
66,666.66 |
|
John F. Maher(3) |
|
|
119.80 |
|
|
|
N/A |
|
|
|
35,833.34 |
|
Catherine
James Paglia |
|
|
128.16 |
|
|
|
N/A |
|
|
|
38,333.34 |
|
Leroy C.
Richie |
|
|
119.80 |
|
|
|
N/A |
|
|
|
35,833.34 |
|
Alison
Taunton-Rigby |
|
|
119.80 |
|
|
|
N/A |
|
|
|
35,833.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Since the Fund has not completed its first full fiscal year, compensation
is estimated based upon future payments to be made by the Fund during the
current fiscal year and upon estimated relative Managed Assets of
$250,000,000. |
|
(2) |
|
At October 15, 2009, the Directors had oversight
responsibilities for 133 investment companies, including the Fund. |
|
(3) |
|
Ms. Carlton, Ms. Flynn, Mr. Lewis and
Mr. Maher elected to defer a
portion of the total compensation payable during the period in the amount
of $14,333.14, $10,750, $10,000 and $35,833.34, respectively. |
The independent Board members determine the amount of compensation that
they receive, including the amount paid to the Chair of the Board. In
determining compensation for the independent Board members, the independent
Board members take into account a variety of factors including, among other
things, their collective significant work experience (e.g., in business and
finance, government or academia). The independent Board members also recognize
that these individuals advice and counsel are in demand by other organizations,
that these individuals may reject other opportunities because the time demands
of their duties as independent Board members, and that they undertake
significant legal responsibilities. The independent Board members also consider
the compensation paid to independent board members of other fund complexes of
comparable size. In determining the compensation paid to the Chair, the
independent Board members take into account, among other things, the Chairs
significant additional responsibilities (e.g., setting the agenda for Board
meetings, communicating or meeting regularly with the Funds CCO, counsel to the
independent Board members, and the Funds service providers) which result in a
significantly greater time commitment required of the Chair. The Chairs
compensation, therefore, has generally been set at a level between 2.5 and 3
times the level of compensation paid to other independent Board members.
The independent Board members are paid an annual retainer of $95,000.
Committee and subcommittee chairs each receive an additional annual retainer of
$5,000. In addition, independent Board members are paid the following fees for
attending Board and committee meetings: $5,000 per day of in-person Board
meetings and $2,500 per day of in-person committee or sub-committee meetings (if
such meetings are not held on the same day as a Board meeting). Independent
Board members are not paid for special meetings conducted by telephone. The
Boards Chair will receive total annual cash compensation of $400,000. The fees
payable to the Chair as well as the other fees described above that are payable
to the other independent directors are the aggregate fees paid by all of the
funds (other than any fund of funds) in the RiverSource Family of Funds,
including the Fund. These fees are accrued monthly based upon the relative net
assets (or Managed Assets, as the case may be) of these funds.
The independent Board members may elect to defer payment of up to 100% of
the compensation they receive in accordance with a Deferred Compensation Plan
(Deferred Plan). Under the Deferred Plan, a Board member may elect to have
his or her deferred compensation treated as if they had been invested in shares
of one or more RiverSource Family of Funds, and the amount paid to the Board
member under the Deferred Plan will be determined based on the performance of
such investments. Distributions may be taken in a lump sum or over a period of
years. The Deferred Plan will remain unfunded for federal income tax purposes
under the Internal Revenue Code of 1986, as amended (IRC). It is anticipated that deferral of Board member compensation in
accordance with the Deferred Plan will have, at most, a negligible impact on the
Funds assets and liabilities.
-28-
CODE OF ETHICS
The funds in the RiverSource Family of Funds (which includes the Fund) and
RiverSource Investments have each adopted a Code of Ethics (collectively, Codes) and related procedures reasonably designed to prevent violations of
Rule 204A-1 under the Investment Advisers Act of 1940 and Rule 17j-1 under the
Investment Company Act. The Codes contain provisions reasonably necessary to
prevent a funds access persons from engaging in any conduct prohibited by
paragraph (b) of Rule 17j-1, which indicates that it is unlawful for any
affiliated person of or principal underwriter for a fund, or any affiliated
person of an investment adviser of or principal underwriter for a fund, in
connection with the purchase or sale, directly or indirectly, by the person of a
security held or to be acquired by a fund (i) to employ any device, scheme or
artifice to defraud a fund; (ii) to make any untrue statement of a material fact
to a fund or omit to state a material fact necessary in order to make the
statements made to a fund, in light of the circumstances under which they are
made, not misleading; (iii) to engage in any act, practice or course of business
that operates or would operate as a fraud or deceit on a fund; or (iv) to engage
in any manipulative practice with respect to a fund. The Codes prohibit
affiliated personnel from engaging in personal investment activities that
compete with or attempt to take advantage of planned portfolio transactions for
the fund.
Copies
of the Codes are on public file with the SEC and can be
reviewed and copied at the SECs Public Reference Room in Washington, DC. The
information on the operation of the SECs Public Reference Room may be obtained
by calling the SEC at 1-202-942-8090. Copies of the Codes are also
available on the EDGAR Database on the SECs Internet site at www.sec.gov.
Copies of the Codes may also be obtained, after paying a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov,
or by writing the SECs Public Reference Section, Washington, DC 20549-0102.
PROXY VOTING
GENERAL GUIDELINES, POLICIES AND PROCEDURES
The funds in the RiverSource Family of Funds, which include the Fund,
uphold a long tradition of supporting sound and principled corporate governance.
For over 30 years, the boards of directors/trustees of the RiverSource Family of
Funds, which consists of a majority of independent Board members, has determined
policies and voted proxies. RiverSource Investments, and the funds
administrator, Ameriprise Financial, provide support to the Board in connection
with the proxy voting process.
GENERAL GUIDELINES
CORPORATE GOVERNANCE MATTERS The Board supports proxy proposals that it
believes are tied to the interests of shareholders and votes against proxy
proposals that appear to entrench management. For example:
|
|
|
The Board generally votes in favor of proposals for an independent
chairman or, if the chairman is not independent, in favor of a lead
independent director. |
|
|
|
|
The Board supports annual election of all directors and proposals to
eliminate classes of directors. |
|
|
|
|
In a routine election of directors, the Board will generally vote with
managements recommendations because the Board believes that
management and nominating committees of independent directors are in
the best position to know what qualifications are required of
directors to form an effective board. However, the Board will
generally vote against a nominee who has been assigned to the audit,
compensation or nominating committee if the nominee is not independent
of management based on established criteria. The Board will also
withhold support for any director who fails to attend 75% of meetings
or has other activities that appear to interfere with his or her
ability to commit sufficient attention to the company and, in general,
will vote against nominees who are determined to have been involved in
options backdating. |
-29-
|
|
|
The Board generally supports proposals requiring director nominees to
receive a majority of affirmative votes cast in order to be elected to
the board, and opposes cumulative voting based on the view that each
director elected should represent the interests of all shareholders. |
|
|
|
|
Votes in a contested election of directors are evaluated on a
case-by-case basis. In general, the Board believes that incumbent
management and nominating committees, with access to more and better
information, are in the best position to make strategic business
decisions. However, the Board will consider an opposing slate if it
makes a compelling business case for leading the company in a new
direction. |
SHAREHOLDER RIGHTS PLANS The Board generally supports shareholder rights
plans based on a belief that such plans force uninvited bidders to negotiate
with a companys board. The Board believes these negotiations allow time for the
company to maximize value for shareholders by forcing a higher premium from a
bidder, attracting a better bid from a competing bidder or allowing the company
to pursue its own strategy for enhancing shareholder value. The Board supports
proposals to submit shareholder rights plans to shareholders and supports
limiting the vote required for approval of such plans to a majority of the votes
cast.
AUDITORS The Board values the independence of auditors based on
established criteria. The Board supports a reasonable review of matters that may
raise concerns regarding an auditors service that may cause the Board to vote
against a management recommendation, including, for example, auditor involvement
in significant financial restatements, options backdating, material weaknesses
in control, attempts to limit auditor liability or situations where independence
has been compromised.
STOCK OPTION PLANS AND OTHER MANAGEMENT COMPENSATION ISSUES The Board
expects company management to give thoughtful consideration to providing
competitive long-term employee incentives directly tied to the interest of
shareholders. The Board votes against proxy proposals that it believes dilute
shareholder value excessively.
The Board believes that equity compensation awards can be a useful tool,
when not abused, for retaining employees and giving them incentives to engage in
conduct that will improve the performance of the company. In this regard, the
Board generally favors minimum holding periods of stock obtained by senior
management pursuant to an option plan and will vote against compensation plans
for executives that it deems excessive.
SOCIAL AND CORPORATE POLICY ISSUES The Board believes proxy proposals
should address the business interests of the corporation. Shareholder proposals
sometime seek to have the company disclose or amend certain business practices
based purely on social or environmental issues rather than compelling business
arguments. In general, the Board recognizes our fund shareholders are likely to
have differing views of social and environmental issues and believes that these
matters are primarily the responsibility of a companys management and its board
of directors.
POLICIES AND PROCEDURES
The policy of the Board is to vote all proxies of the companies in which a
fund holds investments. Because of the volume and complexity of the proxy voting
process, including inherent inefficiencies in the process that are outside the
control of the Board or the Proxy Team (below), not all proxies may be voted.
The Board has implemented policies and procedures that have been reasonably
designed to vote proxies and to ensure that there are no conflicts between
interests of a funds shareholders and those of the funds principal
underwriters, RiverSource Investments, or other affiliated persons. In
exercising its proxy voting responsibilities, the Board may rely upon the
research or recommendations of one or more third party service providers.
The administration of the proxy voting process is handled by the
RiverSource Proxy Administration Team (Proxy Team). In exercising its
responsibilities, the Proxy Team may rely upon one or more third party service
providers. The Proxy Team assists the Board in identifying situations where its
guidelines do not clearly require a vote in a particular manner and assists in
researching matters and making voting recommendations. RiverSource Investments
may recommend that a proxy be voted in a manner contrary to the Boards
guidelines. In making
-30-
recommendations to the Board about voting on a proposal, the Investment Manager
relies on its own investment personnel (or the investment personnel of a funds
subadviser(s)) and information obtained from an independent research firm. The
Investment Manager makes the recommendation in writing. The process requires
that Board members who are independent from the Investment Manager consider the
recommendation and decide how to vote the proxy proposal or establish a protocol
for voting the proposal.
On an annual basis, or more frequently as determined necessary, the Board
reviews recommendations to revise the existing guidelines or add new guidelines.
Recommendations are based on, among other things, industry trends and the
frequency that similar proposals appear on company ballots.
The Board considers managements recommendations as set out in the
companys proxy statement. In each instance in which a fund votes against
managements recommendation (except when withholding votes from a nominated
director), the Board sends a letter to senior management of the company
explaining the basis for its vote. This permits both the companys management
and the Board to have an opportunity to gain better insight into issues
presented by the proxy proposal(s).
VOTING IN COUNTRIES OUTSIDE THE UNITED STATES (NON-U.S. COUNTRIES)
Voting proxies for companies not domiciled in the United States may involve
greater effort and cost due to the variety of regulatory schemes and corporate
practices. For example, certain non-U.S. countries require securities to be
blocked prior to a vote, which means that the securities to be voted may not be
traded within a specified number of days before the shareholder meeting. The
Board typically will not vote securities in non-U.S. countries that require
securities to be blocked as the need for liquidity of the securities in the
funds will typically outweigh the benefit of voting. There may be additional
costs associated with voting in non-U.S. countries such that the Board may
determine that the cost of voting outweighs the potential benefit.
SECURITIES ON LOAN The Board will generally refrain from recalling
securities on loan based upon its determination that the costs and lost revenue
to the funds, combined with the administrative effects of recalling the
securities, generally outweigh the benefit of voting the proxy. While neither
the Board nor the funds administrator assesses the economic impact and benefits
of voting loaned securities on a case-by-case basis, situations may arise where
the Board requests that loaned securities be recalled in order to vote a proxy.
In this regard, if a proxy relates to matters that may impact the nature of a
company, such as a proposed merger or acquisition, and the funds ownership
position is more significant, the Board has established a guideline to direct
the funds administrator to use its best efforts to recall such securities based
upon its determination that, in these situations, the benefits of voting such
proxies generally outweigh the costs or lost revenue to the funds, or any
potential adverse administrative effects to the funds, of not recalling such
securities.
INVESTMENT IN AFFILIATED FUNDS Certain funds may invest in shares of
other funds in the RiverSource Family of Funds (referred to in this context as
underlying funds) and may own substantial portions of these underlying funds.
The proxy policy of the funds is to ensure that direct public shareholders of
underlying funds control the outcome of any shareholder vote. To help manage
this potential conflict of interest, recognizing that the direct public
shareholders of these underlying funds may represent only a minority interest,
the policy of the funds is to vote proxies of the underlying funds in the same
proportion as the vote of the direct public shareholders. If there are no direct
public shareholders of an underlying fund, the policy is to cast votes in
accordance with instructions from the independent members of the Board.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available (i)
without charge through www.seligman.com or (ii) on the SECs website at www.sec.gov.
Information for each new 12-month period ending June 30 will be available no
later than August 31 of that year.
THE INVESTMENT MANAGER
RiverSource Investments, LLC is the investment manager of the Fund. See
Management of the Fund in the Prospectus.
-31-
RiverSource
Investments, 50606 Ameriprise Financial Center, Minneapolis,
Minnesota 55474, is also the investment manager of the other funds in
the RiverSource Family of
Funds, which includes the RiverSource funds, RiverSource Partners funds,
Threadneedle funds and the Seligman funds, and is a wholly owned subsidiary
of Ameriprise Financial. In addition to managing investments
for the RiverSource Family of Funds, RiverSource Investments manages investments
for itself and its affiliates. For institutional clients, RiverSource
Investments and its affiliates provide investment management and related
services, such as separate account asset management and institutional trust and
custody, as well as other investment products.
The Management Agreement between RiverSource Investments and the Fund was
initially approved by the Funds Board in respect of the Fund at a meeting held
on November 12, 2009 and by the Funds sole Common
Stockholder on November 19, 2009. The
Management Agreement provides that it is effective on
November 12, 2009 and shall continue
in full force and effect until November 12, 2011, and from year to year thereafter if such
continuance is approved in the manner required by the Investment Company Act
(i.e., by a vote of a majority of the Board of Directors or of the outstanding
voting securities of the Fund and by a vote of a majority of Directors who are
not parties to the Management Agreement or interested persons of any such
party). The Management Agreement may be terminated by either the Fund or
RiverSource Investments at any time by giving the other party 60 days written
notice of such intention to terminate, provided that any termination shall be
made without the payment of any penalty, and provided further that termination
may be effected either by the Board or by a vote of the majority of the
outstanding voting shares of the Fund. The Management Agreement will terminate
automatically in the event of its assignment, as such term is defined in the
Investment Company Act.
Except for bad faith, intentional misconduct or negligence in regard to the
performance of its duties under the Management Agreement, neither RiverSource
Investments, nor any of its respective directors, officers, partners,
principals, employees or agents will be liable for any acts or omissions or for
any loss suffered by the Fund or its stockholders or creditors. Each of
RiverSource Investments, and its respective directors, officers, partners,
principals, employees and agents, will be entitled to rely, and will be
protected from liability in reasonably relying, upon any information or
instructions furnished to it (or any of them as individuals) by the Fund or its
agents which is believed in good faith to be accurate and reliable. RiverSource
Investments does not warrant any rate of return, market value or performance of
any assets in the Fund. Notwithstanding the foregoing, the federal securities
laws impose liabilities under certain circumstances on persons who act in good
faith and, therefore, the Fund does not waive any right which it may have under
such laws or regulations.
The
Fund pays RiverSource Investments a fee for managing its assets.
The
fee to be paid to RiverSource Investments is equal to an annual rate
of 1.00% of the
Funds average daily Managed Assets, as disclosed in the fee table in the
Prospectus. Under the Management Agreement, the Fund also pays taxes, brokerage
commissions and nonadvisory expenses, which include custodian fees and charges;
fidelity bond premiums; certain legal fees; registration fees for shares;
consultants fees; compensation of Board members, officers and employees not
employed by the Investment Manager or its affiliates; corporate
filing fees; expenses incurred in connection with lending
securities; and expenses properly payable by the Fund, approved by the Board.
ADMINISTRATIVE SERVICES AGENT
Ameriprise
Financial is a financial planning and financial services company that has been
offering solutions for clients asset accumulation, income management and
protection needs for more than 110 years.
Ameriprise Financial provides certain services to the Fund, including
administrative, accounting, treasury and other services, and charges the Fund a
fee for providing such services, which is
0.06% of the Funds average daily
Managed Assets.
An estimate of the Funds administrative services fees for the current
fiscal year is included in the Funds Other Expenses in the fee table in the
Prospectus.
PORTFOLIO MANAGERS
The following table sets forth certain additional information from that
discussed in the Prospectus with respect to the portfolio managers of the Fund.
Unless noted otherwise, all information is provided as of
September 30, 2009.
-32-
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS
Table A below identifies, for each of the portfolio managers, the number of
accounts managed (other than the Fund) and the total assets in such accounts
within each of the following categories: registered investment companies, other
pooled investment vehicles and other accounts. Table B identifies, for each of
the portfolio managers, only those accounts that have an advisory fee based on
the performance of the account. For the purposes of the tables below, each
series or portfolio of a registered investment company is treated as a separate
registered investment company. Account information is as of
August 31, 2009.
Table A
|
|
|
|
|
|
|
|
|
Registered Investment |
|
Other Pooled Investment |
|
|
Portfolio Manager |
|
Companies |
|
Vehicles |
|
Other Accounts |
Paul H. Wick
|
|
5 Registered
Investment
Companies with
approximately $3.6
billion in net
assets under
management.
|
|
5 Other Pooled
Investment
Vehicles with
approximately $1.5
billion
in net assets under
management.
|
|
6 Other Accounts
with approximately
$249 million in
total assets under
management. |
Ajay Diwan
|
|
5 Registered
Investment
Companies with
approximately $3.6
billion in net
assets under
management.
|
|
5 Other Pooled
Investment
Vehicles with
approximately $1.5
billion
in net assets under
management.
|
|
8 Other Accounts
with approximately
$251 million in
total assets under
management. |
John K. Schonberg
|
|
7 Registered
Investment
Companies with
approximately $1.2
billion in net
assets under
management.
|
|
2 Other Pooled
Investment
Vehicles with
approximately $19.3
million
in net assets under
management.
|
|
7 Other Accounts
with approximately
$1.1 million in
total assets under
management. |
Table B
|
|
|
|
|
|
|
|
|
Registered Investment |
|
Other Pooled Investment |
|
|
Portfolio Manager |
|
Companies |
|
Vehicles |
|
Other Accounts |
Paul H. Wick
|
|
0 Registered
Investment
Companies.
|
|
3 Other Pooled
Investment
Vehicles with
approximately $1.4
billion
in net assets under
management.
|
|
3 Other Accounts
with approximately
$245 million in
total assets under
management. |
Ajay Diwan
|
|
0 Registered
Investment
Companies.
|
|
3 Other Pooled
Investment
Vehicles with
approximately $1.4
billion
in net assets under
management.
|
|
3 Other Accounts
with approximately
$2.45 million in
total assets under
management. |
John K. Schonberg
|
|
0 Registered
Investment
Companies.
|
|
0 Other Pooled
Investment
Vehicles.
|
|
0 Other Accounts. |
COMPENSATION/MATERIAL CONFLICTS OF INTEREST
Set forth below is an explanation of the structure of, and method(s) used
to determine portfolio manager compensation. Also set forth below is an
explanation of material conflicts of interest that may arise between the
portfolio managers management of the Funds investments and investments in
other accounts.
COMPENSATION
Portfolio manager compensation is typically comprised of (i) a base salary,
(ii) an annual cash bonus, a portion of which may be subject to a mandatory
deferral program, and may include (iii) an equity incentive award in the form of
stock options and/or restricted stock. The annual bonus is paid from a team
bonus pool that is based on the performance of the accounts managed by the
portfolio management team, which might include mutual funds, wrap accounts,
institutional portfolios and hedge funds. Funding for the bonus pool is
determined by a percentage of the aggregate assets under management in the
accounts managed by the portfolio managers, including the Fund, and by the short
term (typically one-year) and long-term (typically three-year) performance of
those accounts in relation to the relevant peer group universe. With respect to
hedge funds and separately managed accounts that follow a hedge fund mandate,
funding for the bonus pool is a percentage of performance fees earned on the
hedge funds or accounts managed by the portfolio managers.
Senior management of RiverSource Investments has the discretion to increase
or decrease the size of the part of the bonus pool and to determine the exact
amount of each portfolio managers bonus paid from this portion of the bonus
pool based on his/her performance as an employee. In addition, where portfolio
managers invest in a hedge fund managed by the Investment Manager, they receive
a cash reimbursement for the investment management fees charged on their hedge
fund investments.
RiverSource Investments portfolio managers are provided with a benefits
package, including life insurance, health insurance, and participation in a
company 401(k) plan, comparable to that received by other RiverSource
Investments employees. Certain investment personnel are also eligible to defer a
portion of their compensation. An individual making this type of election can
allocate the deferral to the returns associated with one or more products they
manage or support or to certain other products managed by their investment team.
Depending upon their job level, RiverSource Investments portfolio managers may
also be eligible for other benefits or perquisites that are available to all
RiverSource Investments employees at the same job level.
-33-
CONFLICTS OF INTEREST
RiverSource Investments portfolio managers may manage one or more funds as well as other types of accounts, including closed-end funds, hedge
funds, proprietary accounts, separate accounts for institutions and individuals,
and other pooled investment vehicles. Portfolio managers make investment
decisions for an account or portfolio based on its investment objectives and
policies, and other relevant investment considerations. A portfolio manager may
manage another account whose fees may be materially greater than the management
fees paid by the Fund and may include a performance-based fee. Management of
multiple funds and accounts may create potential conflicts of interest relating
to the allocation of investment opportunities, competing investment decisions
made for different accounts and the aggregation and allocation of trades. In
addition, RiverSource Investments monitors a variety of areas (e.g., allocation
of investment opportunities) and compliance with the firms Code of Ethics, and
places additional investment restrictions on portfolio managers who manage hedge
funds and certain other accounts. RiverSource Investments has a fiduciary
responsibility to all of the clients for which it manages accounts. RiverSource
Investments seeks to provide best execution of all securities transactions and
to aggregate securities transactions and then allocate securities to client
accounts in a fair and equitable basis over time. RiverSource Investments has
developed policies and procedures, including brokerage and trade allocation
policies and procedures, designed to mitigate and manage the potential conflicts
of interest that may arise from the management of multiple types of accounts for
multiple clients.
In addition to the accounts above, portfolio managers may manage accounts
in a personal capacity that may include holdings that are similar to, or the
same as, those of the Fund. The Investment Managers Code of Ethics is designed
to address conflicts and, among other things, imposes restrictions on the
ability of the portfolio managers and other investment access persons to
invest in securities that may be recommended or traded in the Fund and other
client accounts.
SECURITIES OWNERSHIP
Since the
Fund is newly formed, currently, none of the Funds portfolio
managers beneficially owns shares of the Fund.
SECURITIES TRANSACTIONS
Subject to policies set by the Board, as well as the terms of the
Management Agreement, the Investment Manager is authorized to determine,
consistent with the Funds investment objectives and policies, which securities
will be purchased, held or sold. In determining where the buy and sell orders
are to be placed, the Investment Manager has been directed to use its best
efforts to obtain the best available price and the most favorable execution
except where otherwise authorized by the Board.
The
Fund and the Investment Manager each have a strict Code of Ethics that
prohibits affiliated personnel from engaging in personal investment activities
that compete with or attempt to take advantage of planned portfolio transactions
for the Fund. The Funds securities may be traded on an agency basis with
brokers or dealers or on a principal basis with dealers. In an agency trade, the
broker-dealer generally is paid a commission. In a principal trade, the
Investment Manager will trade directly with the issuer or with a dealer who buys
or sells for its own account, rather than acting on behalf of another client.
The Investment Manager may pay the dealer a commission or instead, the dealers
profit, if any, is the difference, or spread, between the dealers purchase and
sale price for the security.
BROKER-DEALER SELECTION
In selecting broker-dealers to execute transactions on behalf of the Fund,
the Investment Manager will consider from among such factors as the ability to
minimize trading costs, trading expertise, infrastructure, ability to provide
information or services, financial condition, confidentiality, competitiveness
of commission rates, evaluations of execution quality, promptness of execution,
past history, ability to prospect for and find liquidity, difficulty of trade,
securitys trading characteristics, size of order, liquidity of market, block
trading capabilities, quality of settlement, specialized expertise, overall
responsiveness, willingness to commit capital and research services provided.
-34-
The Board has adopted a policy prohibiting the Investment Manager from
considering the sales of the Funds Common Shares in the offering as a factor in
the selection of broker-dealers through which to execute securities
transactions.
On a periodic basis, the Investment Manager makes a comprehensive review of
the broker-dealers and the overall reasonableness of their commissions,
including review by an independent third-party evaluator. The review evaluates
execution, operational efficiency, and research services.
COMMISSION DOLLARS
Broker-dealers typically provide a bundle of services including research
and execution of transactions. The research provided can be either proprietary
(created and provided by the broker-dealer) or third party (created by a third
party but provided by the broker-dealer). Consistent with the interests of the
Fund, the Investment Manager may use broker-dealers who provide both types of
research products and services in exchange for commissions, known as soft
dollars, generated by transactions in portfolio securities for the Fund.
The receipt of research and brokerage products and services is used by the
Investment Manager, to the extent it engages in such transactions, to supplement
its own research and analysis activities, by receiving the views and information
of individuals and research staffs of other securities firms, and by gaining
access to specialized expertise on individual companies, industries, areas of
the economy and market factors. Research and brokerage products and services may
include reports on the economy, industries, sectors and individual companies or
issuers; statistical information; accounting and tax law interpretations;
political analyses; reports on legal developments affecting portfolio
securities; information on technical market actions; credit analyses; on-line
quotation systems; risk measurement; analyses of corporate responsibility
issues; on-line news services; and financial and market database services.
Research services may be used by the Investment Manager in providing advice to
multiple RiverSource Investments accounts, including the Fund even though it is
not possible to relate the benefits to any particular account or to the Fund.
On occasion, it may be desirable to compensate a broker for research
services or for brokerage services by paying a commission that might not
otherwise be charged or a commission in excess of the amount another broker
might charge. The Board has adopted a policy authorizing the Investment Manager
to do so, to the extent authorized by law, if the Investment Manager determines,
in good faith, that such commission is reasonable in relation to the value of
the brokerage or research services provided by a broker or dealer, viewed either
in the light of that transaction or the Investment Managers overall
responsibilities with respect to the Fund and other funds or accounts for which
it acts as investment manager.
As a result of these arrangements, some portfolio transactions may not be
effected at the lowest commission, but overall execution may be better. The
Investment Manager has represented that under its procedures the amount of
commission paid will be reasonable and competitive in relation to the value of
the brokerage services and research products and services provided.
The Investment Manager may use step-out transactions. A step-out is an
arrangement in which the Investment Manager executes a trade through one
broker-dealer but instructs that broker-dealer to step-out all or a part of the
trade to another broker-dealer. The second broker-dealer will clear and settle,
and receive commissions for, the stepped-out portion. The Investment Manager may
receive research products and services in connection with step-out transactions.
Use of Fund commissions may create potential conflicts of interest between
the Investment Manager and the Fund. However, the Investment Manager has
policies and procedures in place intended to mitigate these conflicts and ensure
that the use of Fund commissions falls within the safe harbor of Section 28(e)
of the 1934 Act. Some products and
services may be used for both investment decision-making and non-investment
decision-making purposes (mixed use items). The Investment Manager, to the
extent it has mixed use items, has procedures in place to assure that Fund
commissions pay only for the investment decision-making portion of a mixed-use
item.
-35-
TRADE AGGREGATION AND ALLOCATION
Generally, orders are processed and executed in the order received. When
the Fund buys or sells the same security as another portfolio, fund, or account,
the Investment Manager carries out the purchase or sale pursuant to policies and
procedures designed in such a way believed to be fair to the Fund. Purchase and
sale orders may be combined or aggregated for more than one account if it is
believed it would be consistent with best execution. Aggregation may reduce
commission costs or market impact on a per-share and per-dollar basis, although
aggregation may have the opposite effect. There may be times when not enough
securities are received to fill an aggregated order, including in an initial
public offering, involving multiple accounts. In that event, the Investment
Manager has policies and procedures designed in such a way believed to result in
a fair allocation among accounts, including the Fund.
From time to time, different portfolio managers with the Investment Manager
may make differing investment decisions related to the same security. However,
with certain exceptions for funds managed using strictly quantitative methods, a
portfolio manager or portfolio management team may not sell a security short if
the security is owned in another portfolio managed by that portfolio manager or
portfolio management team. On occasion, the Fund may purchase and sell a
security simultaneously in order to profit from short-term price disparities.
The Investment Manager has portfolio management teams in its Minneapolis
and Los Angeles offices that may share research information regarding leveraged
loans. The Investment Manager operates separate and independent trading desks in
these locations for the purpose of purchasing and selling leveraged loans. As a
result, the Investment Manager does not aggregate orders in leveraged loans
across portfolio management teams. For example, funds and other client accounts
being managed by these portfolio management teams may purchase and sell the same
leveraged loan in the secondary market on the same day at different times and at
different prices. There is also the potential for a particular account or group
of accounts, including the Fund, to forego an opportunity or to receive a
different allocation (either larger or smaller) than might otherwise be obtained
if the Investment Manager were to aggregate trades in leveraged loans across the
portfolio management teams. Although the Investment Manager does not aggregate
orders in leveraged loans across its portfolio management teams in Minneapolis
and Los Angeles, it operates in this structure subject to its duty to seek best
execution.
BROKERAGE COMMISSIONS PAID TO BROKERS AFFILIATED WITH THE INVESTMENT MANAGER
Affiliates of the Investment Manager may engage in brokerage and other
securities transactions on behalf of the Fund according to procedures adopted by
the Board and to the extent consistent with applicable provisions of the federal
securities laws. The Investment Manager will use an affiliate only if (i) the
Investment Manager determines that the Fund will receive prices and executions
at least as favorable as those offered by qualified independent brokers
performing similar brokerage and other services for the Fund and (ii) the
affiliate charges the Fund commission rates consistent with those the affiliate
charges comparable unaffiliated customers in similar transactions and if such
use is consistent with terms of the Management Agreement.
Because the Fund is newly organized and as of the date hereof has not
commenced investment operations, it has not paid brokerage commissions during
its last fiscal year.
CERTAIN
PROVISIONS OF THE FUNDS CHARTER AND BYLAWS
Certain
provisions of the Funds charter, including those relating to the
election of directors, classification of the Board,
removal of directors, the Funds ability to engage in certain extraordinary
transactions, amendments to the Funds charter and Amended and
Restated Bylaws (Bylaws), quorum and notice of
director nominations and new business are described in the Prospectus. The
descriptions below are intended to supplement the disclosure in the Prospectus
and, together with the descriptions in the Prospectus, are intended only as a
summary and are qualified in their entirety by reference to the full text of the
Funds charter and Bylaws and Maryland law.
-36-
ANTI-TAKEOVER PROVISIONS
The
Funds charter includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund, to cause it to engage
in certain transactions or to modify its structure.
Under Maryland law, a Maryland corporation such as the Fund generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage
in similar transactions outside the ordinary course of business, unless advised by the Board of
Directors and approved by the affirmative vote of stockholders entitled to cast at least two-thirds
of the votes entitled to be cast on the matter. A Maryland corporation may, however, provide in its
charter for approval of these matters by a different percentage, but not less than a majority of
all of the votes entitled to be cast on the matter. Subject to certain exceptions described below,
the Funds charter provides for approval of charter amendments by the holders of a majority of the
votes entitled to be cast on the matter.
The Funds charter provides that the liquidation or dissolution of the Fund, any merger,
consolidation, share exchange or sale or exchange of all or substantially all of the assets of the
Fund that requires the approval of the Funds stockholders under
the Maryland General Corporation Law (MGCL), certain transactions
between the Fund and any person or group of persons acting together and any person controlling,
controlled by or under common control with any such person or member of such group, that may
exercise or direct the exercise of 10% or more of the voting power of the Fund, any amendment to
the Funds charter that would convert the Fund from a closed-end investment company to an open end
investment company or otherwise make the Funds Common Shares a redeemable security and any
amendment to certain provisions of the Funds charter, including the provisions relating to the
Funds business as a closed-end management investment company and the number, qualifications,
classification, election and removal of directors, requires the
approval of the stockholders
entitled to cast at least 80% of the votes entitled to be cast on such matter. If such a proposal
is approved by at least two-thirds of the Funds Continuing Directors (in addition to approval by
the full Board of Directors), however, such proposal may be approved by the Stockholders entitled
to cast a majority of the votes entitled to be cast on such matter. The Continuing Directors are
defined in the Funds charter as (i) the Funds current Directors, (ii) those Directors whose
nomination for election by the Stockholders or whose election by the Directors to fill vacancies is
approved by a majority of Continuing Directors then on the Board of Directors and (iii) any
successor directors whose nomination for election by the stockholders or whose election by the
directors to fill vacancies is approved by a majority of the Continuing Directors then in office.
This provision could make it more difficult for certain extraordinary transactions to be approved
if they are opposed by the Continuing Directors, and discourage proxy contests for control of the
Funds Board by persons wishing to cause such transactions to take place.
The Funds charter and Bylaws provide that the Board of Directors will have the exclusive power to
adopt, alter or repeal any provision of the Funds Bylaws or to make new Bylaws.
-37-
NUMBER OF DIRECTORS; VACANCIES
Together,
the Funds charter and Bylaws provide that the number of the Funds
directors may be established only by the Funds Board but may not be fewer than
one (as required under Maryland law) nor more than 20. The
Funds charter provides that, subject to any
applicable requirements of the Investment Company Act and except as may be
provided by the Funds Board in setting the terms of any class or series of
preferred stock, at such time as the Fund has at least three independent
directors and a class of the Funds stock is registered under the 1934 Act, the
Fund will be subject to the provision of Subtitle 8 of Title 3 of the
MGCL regarding the filling of vacancies on the Board and, at
such time, any and all vacancies on the Board may be filled only by the
affirmative vote of a majority of the remaining Directors in office, even if the
remaining Directors do not constitute a quorum, and any Director elected to fill
a vacancy will serve for the remainder of the full term of the directorship in
which the vacancy occurred and until a successor is elected and qualifies.
CALLING OF SPECIAL MEETINGS OF STOCKHOLDERS
The Funds Bylaws provide that special meetings of stockholders may be
called by the Funds Board and certain officers. The Bylaws also provide that,
subject to the satisfaction of certain procedural and informational requirements
by the stockholders requesting the meeting, a special meeting of stockholders
will be called by the Secretary of the Fund upon the written request of
stockholders entitled to cast not less than a majority of all the votes entitled
to be cast at such meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Maryland law permits a Maryland corporation to include in its charter a provision limiting the
liability of its directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a final judgment as
being material to the cause of action. The Funds charter contains such a provision which
eliminates directors and officers liability to the maximum extent permitted by Maryland law,
subject to the requirements of the Investment Company Act.
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The
Funds charter authorizes it, to the maximum extent permitted by
Maryland law, to obligate the Fund, and the Funds Bylaws so obligate the Fund,
to indemnify any present or former Director or officer or any individual who,
while a Director or officer of the Fund and at the request of the Fund, serves
or has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or other enterprise as a director,
officer, partner or trustee and who is made, or threatened to be made, a party to the proceeding by reason
of his service in that capacity, from and against any claim or liability to
which that individual may become subject or which that individual may incur by
reason of his or her service in that capacity and to pay or reimburse his or her reasonable expenses in advance of final
disposition of a proceeding. The charter and Bylaws also permit the Fund to
indemnify and advance expenses to any individual who served a predecessor of the
Fund in any of the capacities described above and any employee or agent of the
Fund or a predecessor of the Fund. In accordance with the Investment
Company Act, the Fund will not indemnify any person for any liability to which
such person would be subject by reason of such persons willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or her office.
Maryland
law requires a corporation (unless its charter
provides otherwise, which the Funds charter does not) to indemnify a director or
officer who has been successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is
made, or threatened to be made, a party by reason of his or her service in that
capacity. Maryland law permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made, or threatened to be made, a party by
reason of their service in those or other capacities unless it is established
that (a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad faith or (ii)
was the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services or
(c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under Maryland law, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation or for a judgment of
liability on the basis that personal benefit was improperly received, unless in
either case a court orders indemnification and then only for expenses. In
addition, Maryland law permits a corporation to advance reasonable expenses to a
director or officer upon the corporations receipt of (a) a written affirmation
by the director or officer of his or her good faith belief that he or she has
met the standard of conduct necessary for indemnification by the corporation and
(b) a written undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it is ultimately determined that
the standard of conduct was not met.
Reference
should be made to the Funds charter on file with the SEC for the full
text of these provisions.
REPURCHASE OF COMMON SHARES; TENDER OFFERS; CONVERSION TO OPEN-END FUND
The Fund is a closed-end management investment company and as such its
stockholders will not have the right to cause the Fund to redeem their shares.
Instead, the Funds Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which in turn
are 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. Shares of a closed-end management
investment company may frequently trade at prices lower than NAV (i.e., at a
discount). The Funds Board regularly monitors the relationship between the
market price and NAV of the Common Shares. If the Common Shares were to trade at
a substantial discount to NAV for an extended period of time, the Funds Board
may consider the repurchase of its Common Shares on the open market or in
private transactions, or the making of a tender offer for such shares, or the
conversion of the Fund to an open-end management investment company (or mutual
fund). There can be no assurance, however, that the Board will decide to take or
propose any of these actions, or that share repurchases or tender offers, if
undertaken, will actually reduce market discount.
Notwithstanding the foregoing, if at any time Preferred Shares are
outstanding, the Fund may not purchase or otherwise acquire any of its Common
Shares unless: (1) all accrued dividends on Preferred Shares have been paid and
(2) at the time of such purchase or acquisition, the NAV of the Funds portfolio
(determined after deducting the acquisition price of the Common Shares) is at
least 200% of the liquidation value of the outstanding Preferred Shares
(expected to equal the original purchase price per share plus any accrued and
unpaid dividends thereon).
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Subject to its investment limitations, the Fund may borrow to finance the
repurchase of its Common 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 tender offers will reduce
the Funds net income. Any share repurchase, tender offer or borrowing that
might be approved by the Funds Board would have to comply with the 1934 Act and
the Investment Company Act and the rules and regulations thereunder.
The Funds Board may also from time to time consider submitting to the
holders of the shares of stock of the Fund a proposal to convert the Fund to an
open-end management investment company. In determining whether to exercise its
sole discretion to submit this issue to stockholders, the Funds Board would
consider all factors then relevant, including but not limited to the
relationship of the market price of the Common Shares to its NAV, the extent to
which the Funds capital structure is leveraged and the possibility of
re-leveraging, the spread, if any, between the yields on securities in the
Funds portfolio and interest and dividend charges on Preferred Shares issued by
the Fund, if any, and general market and economic conditions.
See Anti-Takeover and Other Provisions of the Maryland General Corporation Law
and the Funds Charter and Bylaws
in the Prospectus and Certain Provisions of the Funds Charter and Bylaws in
this SAI for a discussion of voting requirements applicable to conversion of the
Fund to an open-end management investment company. If the Fund converted to an
open-end management investment company, it would be required to redeem all
Preferred Shares then outstanding, if any, and the Funds Common Shares would be
de-listed from the New York Stock Exchange. Holders of common stock of an
open-end management investment company may require the company to redeem their
shares on any business day (except in certain circumstances as authorized by or
under the Investment Company Act) at their NAV, 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 management investment companies typically engage in a
continuous offering of their common stock. These companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio
management. The Funds policies and features, however, have been
designed to suit a closed-end structure. Investors should assume,
therefore, that it is highly unlikely that the Fund would convert to
an open-end management investment company.
The repurchase by the Fund of its Common Shares at prices below its 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 tender offers at or
below NAV will result in the Funds Common Shares trading at a price equal to
their NAV. Nevertheless, the fact that the Funds Common Shares may be the
subject of repurchase or tender offers at NAV from time to time, or that the
Fund may be converted to a mutual fund, 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
Funds total assets. This would likely have the effect of increasing the Funds
expenses, which are borne by the Funds Common Stockholders. Any purchase by the
Fund of its Common Shares at a time when Preferred Shares are outstanding will
increase the leverage applicable to the outstanding Common Shares then
remaining. See the Funds Prospectus under RisksLeverage Risk.
Before deciding whether to take any action if the Funds Common Shares
trade below NAV, the Funds Board would consider all relevant factors, including
the extent and duration of the discount, the liquidity of the Funds portfolio,
the impact of any action that might be taken on the Fund or its stockholders and
market considerations. Based on these and other considerations, even if the
Funds Common Shares should trade at a discount, the Board may determine that,
in the interest of the Fund and its stockholders, no action should be taken.
TAX MATTERS
Set
forth below is a discussion of the material U.S. federal income and excise
tax aspects concerning the Fund and the purchase, ownership and disposition of
Common Shares. This discussion does not purport to be complete or to deal with
all aspects of U.S. federal taxation that may be relevant to U.S. stockholders in light of
their particular circumstances. In addition, it does not represent a detailed description of
the U.S. federal income tax consequences applicable to stockholders who are subject to special
treatment under the U.S. federal income tax laws (including stockholders who are financial institutions,
insurance companies, investors in pass-through entities, U.S. stockholders whose functional currency
is not the United States dollar, tax-exempt organizations, dealers in securities or currencies, traders in
securities or commodities that elect mark to market treatment, or persons that will hold Common Shares as
a position in a straddle, hedge or as part of a constructive sale
for U.S. federal income tax purposes). In addition, this discussion does not address the application
of the U.S. federal alternative minimum tax. Unless otherwise noted, this discussion assumes
that you are a U.S. stockholder and hold your Common Shares as capital assets.
You will be a U.S. stockholder if you are an individual who is a citizen or resident of the United States,
a U.S. domestic corporation, or any other person that is subject to U.S. federal income tax on a net income
basis in respect of an investment in Common Shares.
This discussion is based on present provisions of the IRC and the Treasury regulations promulgated thereunder and
existing judicial decisions and administrative pronouncements, all of which are
subject to change or differing interpretations (possibly with retroactive
effect). Prospective investors should consult their own tax advisers with regard
to the federal tax
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consequences of the purchase, ownership or disposition of Common Shares, as well
as the tax consequences arising under the laws of any state, locality, foreign
country or other taxing jurisdiction.
TAXATION OF THE FUND
The Fund intends to elect to be treated and to qualify each taxable year
for treatment as a regulated investment company under the IRC. To qualify for
that treatment, the Fund must, among other things:
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(a) |
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derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to certain securities loans
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing
in such stock, securities or currencies, or net income derived from
interests in qualified publicly traded partnerships
(Income Requirement); |
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(b) |
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distribute with respect to each taxable year at least 90% of its
investment company taxable income (consisting generally of net
investment income, the excess of net short-term capital gains over net
long-term capital losses and net gains and losses from certain foreign
currency transactions, if any, all determined without regard to any
deduction for dividends paid) for that year (Distribution
Requirement); and |
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(c) |
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diversify its holdings so that, at the end of each quarter of its
taxable year, (1) at least 50% of the value of its total assets is
represented by cash and cash items, U.S. Government securities,
securities of other regulated investment companies and other
securities limited in respect of any one issuer to a value not greater
than 5% of the value of the Funds total assets and to not more than
10% of the issuers outstanding voting securities, and (2) not more
than 25% of the value of the Funds total assets is invested in the
securities (other than those of the U.S. Government or other regulated
investment companies) of any one issuer or of two or more issuers that
the Fund controls and are engaged in the same, similar or related
trades or businesses or the securities of one or more qualified
publicly traded partnerships. |
If the Fund qualifies for treatment as a regulated investment company, it
generally will not be subject to federal income tax on income and gains it
timely distributes to its stockholders (including Capital Gain Dividends, as
defined below). If the Fund failed to qualify for treatment as a regulated
investment company for any taxable year, it would be taxed as an ordinary
corporation on the full amount of its taxable income for that year without being
able to deduct the distributions it makes to its stockholders, and the
stockholders would treat all those distributions, including distributions of net
capital gain (i.e., the excess of net long-term capital gain over net short-term
capital loss), as dividends to the
extent of the Funds earnings and profits. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying for treatment as a regulated
investment company.
To the extent the Fund fails to distribute in a calendar year at least an
amount equal to the sum of (1) 98% of its ordinary income for that year plus (2)
98% of its capital gain net income for the one-year period ending October 31 of
that year, plus 100% of any retained amount of either from the prior year, it
will be subject to a nondeductible 4% excise tax (Excise Tax). For these
purposes, the Fund will be treated as having distributed any amount with respect
to which it pays income tax. A distribution the Fund pays to stockholders in
January of any year generally will be deemed to have been paid on December 31 of
the preceding year if the distribution is declared and payable to stockholders
of record on a date in October, November or December of that preceding year. The
Fund intends generally to make distributions sufficient to avoid imposition of
the Excise Tax.
If the Fund issues Preferred Shares, then, at any time when Preferred
Shares are outstanding, and its assets are insufficient to satisfy certain
requirements, it will be required to suspend distributions to the Common
Stockholders until such requirements are satisfied. Doing so may prevent the
Fund from satisfying the Distribution Requirement and may therefore jeopardize
its qualification for treatment as a regulated investment company or cause it to
incur an income tax or Excise Tax liability or both.
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TAXATION OF THE COMMON STOCKHOLDERS
DISTRIBUTIONS. As long as the Fund qualifies for treatment as a regulated
investment company, distributions it makes to Common Stockholders from its
investment company taxable income will be taxable to them as ordinary income to
the extent paid out of its current and accumulated earnings and
profits. Because the Fund does not expect to receive significant
amounts of dividends from the technology and technology-related companies in which
it invests, the Fund
currently expects that most dividends it pays will not be eligible for the
dividends-received deduction available to corporations or the reduced maximum
federal income tax rate (currently, 15%) on qualified dividend income received
by individuals. Distributions of net capital gain that are properly designated
as such (Capital Gain Dividends) will be taxable to each stockholder as
long-term capital gain, regardless of how long the Common Stockholder has held
Common Shares. Capital Gain Dividends the Fund pays to individuals with respect
to gains it recognizes on sales or exchanges of capital assets in taxable years
beginning on or before December 31, 2010, also will be subject to a maximum
federal income tax rate of 15%.
Distributions (including Capital Gain Dividends) will be taxable as
described above whether received in cash or reinvested in additional Common
Shares through the Dividend Investment Plan. A Common Stockholder whose
distributions are so reinvested will be treated as having received a
distribution equal to either (1) the fair market value of the newly issued
Common Shares or (2) if the Common Shares are trading below their NAV, the
amount of cash allocated to the stockholder for the purchase of Common Shares on
its behalf in the open market.
The Fund may lend portfolio securities to institutional investors and,
during the time securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividends the borrower receives on the securities. If
securities are on loan over their ex-dividend date, the equivalent payments
will not be treated as qualified dividend income eligible for the reduced tax
rate on individuals dividends mentioned above.
Distributions on the Funds Common Shares are generally subject to federal
income tax as described herein, even though those distributions may economically
represent a return of a particular Common Stockholders investment. Those
distributions are likely to occur in respect of Common Shares purchased when the
Funds NAV reflects gains that are either unrealized or realized but not
distributed or income that is not distributed. Those realized gains may be
required to be distributed even when the Funds NAV also reflects unrealized
losses. Distributions are taxable to a Common Stockholder even if they are paid
from income or gains the Fund earned before the Common Stockholder makes an
investment (and thus included in the price the Common Stockholder paid).
If the Fund makes a distribution to a Common Stockholder in excess of its
current and accumulated earnings and profits, the excess distribution will be
treated as a return of capital to the extent of the Common Stockholders tax
basis in its Common Shares and thereafter as capital gain. A return of capital
is not taxable, but it reduces a Common Stockholders tax basis in its Common
Shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition by the Common Stockholder of its Common Shares.
The Fund may elect to retain its net capital gain or a
portion thereof for investment and be taxed at corporate rates on the amount retained. In such case, it may designate
the retained amount as undistributed capital gains in a notice to its stockholders, who will be treated as if each
received a distribution of his or her pro rata share of such gain, with the result that each stockholder will (i) be required
to report his or her pro rata share of such gain on his or her tax return as long-term capital gain, (ii) receive a refundable tax
credit for his or her pro rata share of tax paid by the Fund on the gain and (iii) increase the tax basis for his or her shares by
an amount equal to the deemed distribution less the tax credit.
The Fund will notify stockholders annually as to the federal tax status of
Fund distributions to them.
Common Stockholders who
are not citizens or residents of the United States and certain foreign entities may be subject to withholding of U.S.
tax on distributions made by the Fund of investment income and short-term capital gains. For distributions with respect to
taxable years beginning before January 1, 2010, the Fund is not required to withhold any
amounts with respect to distributions to foreign Common Stockholders that are properly designated by the Fund as interest-related
dividends or short-term capital gain dividends, provided that the income would not be subject to federal income tax if
earned directly by the foreign Common Stockholder. However, the Fund may withhold on some of these amounts regardless of the fact that it
is not required to do so. If such amounts are withheld from payments made to a Common Stockholder, the withheld amounts may be refunded
or credited against the Common Stockholders U.S. federal income tax liability, if any, provided that the required information is
furnished to the Internal Revenue Service (IRS).
SALE OF SHARES. A Common Stockholders sale or other taxable disposition of
Common Shares will generally give rise to a taxable gain or loss in an amount
equal to the difference between the amount of cash and the fair market value of
other property realized and the Common Stockholders basis in those shares. In
general, any gain or loss realized on a taxable disposition of Common Shares
will be treated as long-term capital gain or loss (and thus eligible, in the
case of individuals, for the 15% maximum U.S. federal income tax rate on net capital
gain, as described above) if the Common Shares have been held for more than 12
months; otherwise, any such gain or loss will be treated as short-term capital
gain or loss. However, if a Common Stockholder sells Common Shares at a loss
within six months of their purchase, such loss will be treated as long-term,
rather than short-term, to the extent of any Capital Gain Dividends the Common
Stockholder received (or the Common Stockholders share of any undistributed
capital gains designated) with respect to the Common Shares. A loss realized on
a sale or exchange of Common Shares of the Fund may be disallowed if other
substantially identical shares are acquired within a 61 day period beginning 30
days before and ending 30 days after the date on which the Common Shares are
disposed. In that case, the basis in the newly purchased shares will be adjusted
to reflect the disallowed loss.
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From time to time the Fund may make a tender offer for some of its Common
Shares. A tender of Common Shares pursuant to such an offer would be a taxable
event. If the Fund decides to make a tender offer, the tax consequences thereof
will be disclosed in the documents relating to the offer.
Under promulgated U.S. Treasury regulations, if a Common Stockholder
recognizes a loss with respect to shares of $2 million or more in any single
taxable year (or $4 million or more in the taxable year in which the loss is
recognized and the five succeeding taxable years) for an individual Common
Stockholder, or five times those amounts for a corporate Common Stockholder, the
Common Stockholder must file with the IRS a
disclosure statement on Form 8886. Direct stockholders of portfolio securities
are in many cases excepted from this reporting requirement, but under current
guidance, stockholders of a regulated investment company are not excepted.
Future guidance may extend the current exception from this reporting requirement
to stockholders of most or all regulated investment companies. The fact that a
loss is reportable under these regulations does not affect the legal
determination of whether the taxpayers treatment of the loss is proper. Common
Stockholders should consult their own tax advisers to determine the
applicability of these regulations in light of their individual circumstances.
A
foreign Common Stockholder will generally be exempt from
U.S. federal income tax on gains realized on the sale or other
disposition of Common Shares, provided such gains are not effectively
connected with the foreign Common Stockholders conduct of a
U.S. trade or business.
BACKUP WITHHOLDING. The Fund is required in certain circumstances to backup
withhold on reportable payments, including dividends, capital gains
distributions, and proceeds of sales or other dispositions of the Funds Common
Shares paid to certain holders of the Funds Common Shares who do not furnish
the Fund with their correct social security number or other taxpayer
identification number and make certain other certifications, or who are
otherwise subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld from payments made to a stockholder may be refunded or
credited against such stockholders U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
HEDGING TRANSACTIONS. The use of hedging strategies, such as writing
(selling) and purchasing options and futures contracts and entering into forward
currency contracts, involves complex rules that will determine for income tax
purposes the amount, character and timing of recognition of the gains and losses
the Fund realizes in connection therewith. Gains from the disposition of foreign
currencies (except certain gains that may be excluded by future regulations),
and gains from options, futures and forward currency contracts the Fund derives
with respect to its business of investing in securities or foreign currencies,
will be treated as qualifying income under the Income Requirement.
The Fund expects to take the position that the NASDAQ 100 Index call
options it sells should be, to the extent that they are exchange listed, treated
as section 1256 contracts for U.S. federal income tax purposes and will be
marked to market (i.e., the NASDAQ 100 Index call options will be treated as
sold for their fair market value at the end of
the Funds taxable year). The gain or loss attributable to the NASDAQ 100 Index
call options will be treated as 60% long-term and 40% short-term capital gain or
loss.
Certain adverse tax consequences could result if the Funds ownership of
the stock holdings and sale of the NASDAQ 100 Index call options constituted
straddles (generally, offsetting positions with respect to personal property)
under section 1092 of the IRC. If the straddle rules applied to the Funds
ownership of the stock holdings and sale of the NASDAQ 100 Index call options, such
positions would constitute a mixed straddle (i.e., a straddle consisting of
section 1256 contract positions (the NASDAQ 100 Index call options) and non-section
1256 contract positions (the stock holdings) that was not identified as a mixed
straddle under section 1092 of the IRC). In such case, the straddle rules would
defer recognition of realized losses and require the capitalization of certain
interest expense and carrying charges. In addition, the modified short sale
rules would apply such that any losses attributable to the non-section 1256
contract position would be treated as 60% long-term and 40% short-term capital
losses and any gains on such position would constitute short-term capital gain.
Accordingly, this treatment would restrict the Funds ability to recognize
long-term capital gains from a sale or disposition of the stock holdings.
Furthermore, dividends, if any, on the stock holdings would not qualify for the
lower rate generally applicable to qualified dividend income. It is expected,
however, that the stock holdings and the NASDAQ 100 Index call options generally
will not be considered a straddle because the Funds stock holdings (and any
subset thereof) and the NASDAQ 100 Index on which it has outstanding option
positions are not expected to overlap sufficiently to
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cause the option to be treated as a straddle. Therefore, the adverse tax
consequences described above generally will not apply. However, there can be no
assurance that the Funds investments will not constitute straddles. Prospective
investors should consult their tax advisers regarding the potential application
of the straddle provisions to the Fund.
Certain other of the Funds investment practices are also subject to
special and complex federal income tax provisions that may, among other things,
(1) disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (2) convert lower taxed long-term capital gain to higher taxed
short-term capital gain or ordinary income, (3) convert an ordinary loss or a
deduction to a capital loss (the deductibility of which is more limited), (4)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (5) adversely affect the timing as to when a purchase or sale of
securities is deemed to occur, (6) adversely alter the characterization of
certain complex financial transactions and (7) produce income that will not qualify as good income for purposes
of the 90% Income Requirement.
The Fund will monitor its transactions
and may make certain tax elections to mitigate the effect of these rules and
prevent its disqualification as a regulated investment company.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. The Fund may acquire zero
coupon or other securities issued with original issue discount (OID). As a
holder of those securities, the Fund must include in gross income the OID that
accrues on them during the taxable year, even if it receives no corresponding
payment on them during the year. Because the Fund annually must distribute
substantially all of its investment company taxable income, including any OID,
to satisfy the Distribution Requirement and avoid imposition of the Excise Tax,
it may be required in a particular year to distribute as a dividend an amount
that is greater than the total amount of cash it actually receives. Those
distributions will be made from the Funds cash assets or from the proceeds of
sales of its portfolio securities, if necessary. The Fund may realize capital
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
CURRENCY FLUCTUATIONS.
Under Section 988 of the IRC, gains or losses attributable to fluctuations in exchange rates
between the time the Fund accrues income or receivables or expenses or other liabilities denominated
in a foreign currency and the time the Fund actually collects such income or receivables or pays such
liabilities are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency,
foreign currency forward contracts, certain foreign currency options or futures contracts and the disposition of debt
securities denominated in foreign currency, to the extent attributable to fluctuations in exchange rates between the
acquisition and disposition dates, are also treated as ordinary income or loss.
FOREIGN TAXES. The Funds
investment in non-U.S. securities may be subject to non-U.S.
withholding taxes. In that case, the Funds yield on those securities would be decreased.
Stockholders will generally not be entitled to claim a credit or deduction with respect to foreign taxes paid by the Fund.
* * *
The foregoing is a general summary of the provisions of the IRC and
regulations thereunder currently in effect as they directly govern the taxation
of the Fund and its stockholders. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive.
Stockholders are advised to consult their own tax advisers for more detailed
information concerning the federal (as well as state, local and foreign) income
and other tax consequences of purchasing, holding and disposing of Fund shares.
REPORT TO STOCKHOLDERS
Stockholders of the Fund will receive, when available, unaudited
semi-annual financial statements, as well as year-end financial statements
audited by the independent registered public accounting firm for the Fund. The
Funds statements will show the investments owned by it and the market values
thereof and provide other information about the Fund and its operations.
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CUSTODIAN
The
Funds portfolio securities and cash are held pursuant to a custodian agreement
with JPMorgan Chase Bank, N.A. (JPMorgan). The custodian is permitted to deposit some or all of the Funds
securities in central depository systems as allowed by federal law. For its
services, the Fund pays the custodian a maintenance charge and a charge per
transaction in addition to reimbursing the custodians out-of-pocket expenses.
As part of this arrangement, securities purchased outside the United States are
maintained in the custody of various foreign branches of JPMorgan or in other
financial institutions as permitted by law and by the Funds
custodian agreement.
ADMINISTRATIVE SERVICES AGENT
Ameriprise
Financial, Inc., 50606 Ameriprise Financial Center, Minneapolis,
Minnesota 55474, provides or compensates others to provide administrative
services to the Fund. These services include administrative, accounting,
treasury, and other services. Fees paid by the Fund for these services are
included under Other expenses in the fees table in the Prospectus.
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BOARD SERVICES CORPORATION
The Fund, as well as the other funds in the RiverSource Family of Funds,
has an agreement with Board Services Corporation (Board Services) located at
901 Marquette Avenue South, Suite 2810, Minneapolis, MN 55402. This agreement sets forth the terms of Board Services responsibility
to serve as an agent of the funds for purposes of administering the payment of
compensation to each independent Board member, to provide office space for use
by the funds and their boards, and to provide any other services to the boards
or the independent members, as may be reasonably requested.
-46-
TRANSFER AGENT, STOCKHOLDER SERVICE AGENT AND DIVIDEND PAYING AGENT
American Stock Transfer & Trust Company, LLC acts as the stockholder service agent and dividend paying agent, as
well as agent for the Dividend Investment Plan relating to the Common Shares.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young
LLP will serve as independent registered public accounting firm for the
Fund. Ernst & Young
LLP provides audit and tax
services for the Fund, as well as the other funds in the RiverSource Family of
Funds.
COUNSEL
Clifford Chance US LLP, 31 West 52nd Street, New York, New York 10019, will
pass upon certain legal matters in connection with shares offered by the Fund and also acts as counsel to the Fund.
-47-
OTHER MATTERS
INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In June 2004, an action captioned John E. Gallus et al. v. American Express
Financial Corp. and American Express Financial Advisors Inc. was filed in the
United States District Court for the District of Arizona. The Plaintiffs allege
that they are investors in several American Express Company (now known as
RiverSource) mutual funds and they purport to bring the action derivatively on
behalf of those funds under the Investment Company Act. The plaintiffs
allege that fees allegedly paid to the defendants by the funds for investment
advisory and administrative services are excessive. The plaintiffs seek remedies
including restitution and rescission of investment advisory and distribution
agreements. The plaintiffs voluntarily agreed to transfer this case to the
United States District Court for the District of Minnesota (District
Court). In response to defendants motion to dismiss the complaint, the
District Court dismissed one of plaintiffs four claims and granted plaintiffs
limited discovery. Defendants moved for summary judgment in April 2007. Summary
judgment was granted in the defendants favor on July 9, 2007. The plaintiffs
filed a notice of appeal with the Eighth Circuit Court of Appeals (the Eighth
Circuit) on Aug. 8, 2007. On April 8, 2009, the Eighth Circuit reversed summary
judgment and remanded to the District Court for further proceedings. On August 6, 2009, defendants filed a writ of certiorari with the U.S. Supreme Court, asking the
U.S. Supreme Court to stay the District Court proceedings while the U.S. Supreme Court considers
and rules in a case captioned Jones v. Harris Associates, which involves issues of law similar to
those presented in the Gallus case.
In December 2005, without admitting or denying the allegations, American
Express Financial Corporation (AEFC, which is now known as Ameriprise Financial,
Inc. (Ameriprise Financial)), entered into settlement agreements with the
SEC and Minnesota Department of Commerce
(MDOC) related to market timing activities. As a result, AEFC was censured and
ordered to cease and desist from committing or causing any violations of certain
provisions of the Investment Advisers Act of 1940, the Investment Company Act, and various Minnesota laws. AEFC agreed to pay disgorgement of $10 million
and civil money penalties of $7 million. AEFC also agreed to retain an
independent distribution consultant to assist in developing a plan for
distribution of all disgorgement and civil penalties ordered by the SEC in
accordance with various undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and its
affiliates have cooperated with the SEC and the MDOC in these legal proceedings
and have made regular reports to the RiverSource Family of Funds Boards of
Directors/Trustees.
On November 7, 2008, RiverSource Investments, LLC, a subsidiary of
Ameriprise Financial, Inc., acquired J. & W. Seligman & Co. Incorporated
(Seligman). In late 2003, Seligman conducted an extensive internal review
concerning mutual fund trading practices. Seligmans review, which covered the
period 2001-2003, noted one arrangement that permitted frequent trading in
certain open-end registered investment companies managed by Seligman (the
Seligman Funds); this arrangement was in the process of being closed down by
Seligman before September 2003. Seligman identified three other arrangements
that permitted frequent trading, all of which had been terminated by September
2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these
four arrangements to its clients and to shareholders of the Seligman Funds.
Seligman also provided information concerning mutual fund trading practices to
the SEC and the Office of the Attorney General of the State of New York
(NYAG).
In September 2006, the NYAG commenced a civil action in New York State
Supreme Court against Seligman, Seligman Advisors, Inc. (which is now known as
RiverSource Fund Distributors, Inc.), Seligman Data Corp. and Brian T. Zino
(collectively, Seligman Parties), alleging, in substance, that the
Seligman Parties permitted various persons to engage in frequent trading and, as
a result, the prospectus disclosure used by the registered investment companies
then managed by Seligman was and had been misleading. The NYAG included other
related claims and also claimed that the fees charged by Seligman to the
Seligman Funds were excessive. On March 13, 2009, without admitting or denying
any violations of law or wrongdoing, the Seligman Parties entered into a
stipulation of settlement with the NYAG and settled the claims made by the NYAG.
Under the terms of the settlement, Seligman paid $11.3 million to four Seligman
Funds. This settlement resolved all outstanding matters between the Seligman
Parties and the NYAG. In addition to the foregoing matter, the New York staff of
the SEC indicated in September 2005 that it was considering recommending to the
Commissioners of the SEC the instituting of a formal action against Seligman and
Seligman Advisors, Inc. relating to frequent trading in the Seligman Funds.
-48-
Seligman responded to the staff in October 2005 that it believed that any
action would be both inappropriate and unnecessary, especially in light of the
fact that Seligman had previously resolved the underlying issue with the
Independent Directors of the Seligman Funds and made recompense to the affected
Seligman Funds. There have been no further developments with the SEC on this
matter.
Ameriprise Financial and certain of its affiliates have historically been
involved in a number of legal, arbitration and regulatory proceedings, including
routine litigation, class actions, and governmental actions, concerning matters
arising in connection with the conduct of their business activities. Ameriprise
Financial believes that the Funds are not currently the subject of, and that
neither Ameriprise Financial nor any of its affiliates are the subject of, any
pending legal, arbitration or regulatory proceedings that are likely to have a
material adverse effect on the Funds or the ability of Ameriprise Financial or
its affiliates to perform under their contracts with the Funds. Ameriprise
Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings with the
Securities and Exchange Commission on legal and regulatory matters that relate
to Ameriprise Financial and its affiliates. Copies of these filings may be
obtained by accessing the SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity
associated with them, will not result in increased fund redemptions, reduced
sale of fund shares or other adverse consequences to the Funds managed by
Ameriprise Financial. Further, although we believe proceedings are not likely to
have a material adverse effect on those Funds or the ability of Ameriprise
Financial or its affiliates to perform under their contracts with the Funds,
these proceedings are subject to uncertainties and, as such, we are unable to
estimate the possible loss or range of loss that may result. An adverse outcome
in one or more of these proceedings could result in adverse judgments,
settlements, fines, penalties or other relief that could have a material adverse
effect on the consolidated financial condition or results of operations of
Ameriprise Financial.
-49-
REGISTRATION STATEMENT
A
Registration Statement on Form N-2, including any amendments thereto, relating to the shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Funds Prospectus and this
SAI are parts of but do not contain
all of the information set forth in the Registration Statement, including any
exhibits and schedules thereto. For further information with respect to the Fund
and the shares offered or to be offered hereby, reference is made to the Funds
Registration Statement. Statements contained in the Funds Prospectus and this
SAI 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 SECs
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.
-50-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Seligman Premium Technology Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Seligman Premium Technology
Growth Fund, Inc. (the Fund) as of October 14, 2009. This financial statement is the responsibility
of the Funds management. Our responsibility is to express an opinion on this financial statement
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material misstatement. We
were not engaged to perform an audit of the Funds internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Funds internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above presents fairly, in all material
respects, the financial position of Seligman Premium Technology Growth Fund, Inc. at October 14,
2009, in conformity with U.S. generally accepted accounting principles.
Minneapolis, Minnesota
October 20, 2009
-51-
SELIGMAN PREMIUM TECHNOLOGY GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
October 14, 2009
|
|
|
|
|
Assets |
|
|
|
|
Cash |
|
$ |
100,275 |
|
Deferred offering costs |
|
|
500,000 |
|
|
|
|
|
Total assets |
|
|
600,275 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
Accrued offering costs |
|
|
500,000 |
|
|
|
|
|
Total liabilities |
|
|
500,000 |
|
|
|
|
|
Net assets applicable to outstanding Common Stock |
|
$ |
100,275 |
|
|
|
|
|
|
|
|
|
|
Represented by |
|
|
|
|
Common Stock $.01 par value |
|
$ |
53 |
|
Additional paid-in capital |
|
|
100,222 |
|
|
|
|
|
Total representing net assets applicable to outstanding Common Stock |
|
$ |
100,275 |
|
|
|
|
|
Shares outstanding |
|
|
5,250 |
|
|
|
|
|
Net asset value per share of outstanding Common Stock |
|
$ |
19.10 |
|
|
|
|
|
Offering price per share |
|
$ |
20.00 |
|
|
|
|
|
The
accompanying Notes to Financial Statement are an integral part of
this statement. See Notes to Financial Statement.
-52-
SELIGMAN PREMIUM TECHNOLOGY GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENT
October 14, 2009
1. ORGANIZATION
Seligman Premium Technology Growth Fund, Inc. (the Fund) was organized as a Maryland corporation on
Sept. 3, 2009, and has been inactive since that date except for matters relating to its
organization and registration as a non-diversified, closed-end management investment company under
the Investment Company Act of 1940, as amended (1940 Act), the registration of the shares of the
Funds common stock (Common Shares) to be offered to the public under the Securities Act of 1933,
as amended, and the sale of 5,250 Common Shares to RiverSource Investments, LLC (the Investment
Manager). The Fund has one billion authorized Common
Shares.
The
Funds investment objectives are to seek growth of capital and current income. Under normal market
conditions, the Funds investment program will consist primarily of (1) investing in a portfolio of
equity securities of technology and technology-related companies that seeks to exceed the total
return, before fees and expenses, of the S&P North America Technology Sector Index® and (2) writing
call options on the NASDAQ 100 Index, an unmanaged index that includes the largest and most active
nonfinancial domestic and international companies listed on the Nasdaq Stock Market, or its
exchange-traded fund equivalent (the NASDAQ 100) on a
month-to-month basis, with an aggregate notional
amount typically ranging from 25% to 90% of the underlying value of the Funds holdings of common
stock.
Although the Fund has no current intention to do so, the Fund is authorized and reserves the
flexibility to use leverage through the issuance of preferred shares and/or borrowings, including
the issuance of debt securities. The costs of issuing preferred shares and/or a borrowing program
would be borne by holders of Common Shares (Common Stockholders) and consequently would result in
a reduction of net asset value of Common Shares. In addition, the fee paid to the Investment
Manager for investment management services will be calculated on the basis of the Funds average
daily Managed Assets (as defined herein) so the fees will be higher when leverage is utilized.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
Preparing financial statements that conform to U.S. generally accepted accounting principles
requires management to make estimates (e.g., on assets, liabilities and contingent assets and
liabilities) that could differ from actual results.
Guarantees and indemnifications
Under the Funds organizational documents, its officers and directors are indemnified against
certain liabilities arising out of the performance of their duties to the Fund. In addition,
certain of the Funds contracts with its service providers contain general indemnification clauses.
The Funds maximum exposure under these arrangements is unknown since the amount of any future
claims that may be made against the Fund cannot be determined and the Fund has no historical basis
for predicting the likelihood of any such claims.
Federal taxes
The Funds intends to comply with Subchapter M of the Internal Revenue Code that applies to
regulated investment companies and to distribute substantially all of its net investment income and
realized capital gains to Common Stockholders. No provision for income or excise taxes is thus
required.
3. EXPENSES
Investment management services fees
Under an Investment Management Services Agreement between the Investment Manager and the Fund (the
Management Agreement), the Investment Manager will determine on behalf of the Fund which
securities will be purchased, held or sold. Under the Management Agreement, subject to approval by
the Funds Board of Directors, the Fund will pay the Investment Manager a management fee, payable
on a monthly basis, at an annual rate equal to
-53-
1.00% of the Funds average daily Managed Assets. Managed Assets means the net asset value of the
Funds outstanding Common Shares plus the liquidation preference of any issued and outstanding
preferred stock of the Fund and the principal amount of any borrowings used for leverage.
Administrative services fees
Subject to the Board of Directors approval, under an Administrative Services Agreement, the Fund
will pay Ameriprise Financial, Inc., the parent company of the Investment Manager, a fee for
administration, accounting, treasury and other services at an annual rate equal to 0.06% of the
Funds average daily Managed Assets.
Organization expenses and offering costs
The Investment Manager has agreed to pay all organization expenses of the Fund.
Based on an estimated Fund offering of 12,500,000 Common Shares, offering costs are estimated to be
$571,000. The Investment Manager has agreed to pay the amount by which the aggregate of all of the
Funds offering costs (other than sales load) exceeds $0.04 per Common Share. Such amount to be
paid by the Investment Manager is estimated to be $71,000. The Fund will pay offering costs
estimated at $500,000 from the proceeds of the offering. Offering costs paid by the Fund will be
charged as a reduction of paid-in capital at the completion of the Fund offering.
4. SUBSEQUENT EVENTS
Management has evaluated Fund-related events and transactions that occurred during the period from
the date of the Statement of Assets and Liabilities through Oct. 20, 2009, the date of issuance of
the Funds financial statement. There were no events or transactions that occurred during the
period that materially impacted the amounts or disclosures in the Funds financial statement.
5. INFORMATION REGARDING PENDING AND SETTLED LEGAL PROCEEDINGS
In June 2004, an action captioned John E. Gallus et al. v. American Express Financial Corp. and
American Express Financial Advisors Inc. was filed in the United States District Court for the
District of Arizona. The plaintiffs allege that they are investors in several American Express
Company (now known as RiverSource) mutual funds and they purport to bring the action derivatively
on behalf of those funds under the Investment Company Act of 1940. The plaintiffs allege that fees
allegedly paid to the defendants by the funds for investment advisory and administrative services
are excessive. The plaintiffs seek remedies including restitution and rescission of investment
advisory and distribution agreements. The plaintiffs voluntarily agreed to transfer this case to
the United States District Court for the District of Minnesota (the District Court). In response to
defendants motion to dismiss the complaint, the District Court dismissed one of plaintiffs four
claims and granted plaintiffs limited discovery. Defendants moved for summary judgment in April
2007. Summary judgment was granted in the defendants favor on July 9, 2007. The plaintiffs filed a
notice of appeal with the Eighth Circuit Court of Appeals (the Eighth Circuit) on August 8, 2007.
On April 8, 2009, the Eighth Circuit reversed summary judgment and remanded to the District Court
for further proceedings. On August 6, 2009, defendants filed a writ of certiorari with the U.S.
Supreme Court, asking the U.S. Supreme Court to stay the District Court proceedings while the U.S.
Supreme Court considers and rules in a case captioned Jones v. Harris Associates, which involves
issues of law similar to those presented in the Gallus case.
In December 2005, without admitting or denying the allegations, American Express Financial
Corporation (AEFC, which is now known as Ameriprise Financial, Inc. (Ameriprise Financial)),
entered into settlement agreements with the Securities and Exchange Commission (SEC) and Minnesota
Department of Commerce (MDOC) related to market timing activities. As a result, AEFC was censured
and ordered to cease and desist from committing or causing any violations of certain provisions of
the Investment Advisers Act of 1940, the Investment Company Act of 1940, and various Minnesota
laws. AEFC agreed to pay disgorgement of $10 million and civil money penalties of $7 million. AEFC
also agreed to retain an independent distribution consultant to assist in developing a plan for
distribution of all disgorgement and civil penalties ordered by the SEC in accordance with various
undertakings detailed at http://www.sec.gov/litigation/admin/ia-2451.pdf. Ameriprise Financial and
its affiliates have cooperated
-54-
with the SEC and the MDOC in these legal proceedings, and have made regular reports to the
RiverSource Funds Boards of Directors/Trustees.
On November 7, 2008, RiverSource Investments, LLC, a subsidiary of Ameriprise Financial, Inc.,
acquired J. & W. Seligman & Co. Incorporated (Seligman). In late 2003, Seligman conducted an
extensive internal review concerning mutual fund trading practices. Seligmans review, which
covered the period 2001-2003, noted one arrangement that permitted frequent trading in certain
open-end registered investment companies managed by Seligman (the Seligman Funds); this arrangement
was in the process of being closed down by Seligman before September 2003. Seligman identified
three other arrangements that permitted frequent trading, all of which had been terminated by
September 2002. In January 2004, Seligman, on a voluntary basis, publicly disclosed these four
arrangements to its clients and to shareholders of the Seligman Funds. Seligman also provided
information concerning mutual fund trading practices to the SEC and the Office of the Attorney
General of the State of New York (NYAG).
In September 2006, the NYAG commenced a civil action in New York State Supreme Court against
Seligman, Seligman Advisors, Inc. (now known as RiverSource Fund Distributors, Inc.), Seligman Data
Corp. and Brian T. Zino (collectively, the Seligman Parties), alleging, in substance, that the
Seligman Parties permitted various persons to engage in frequent trading and, as a result, the
prospectus disclosure used by the registered investment companies then managed by Seligman was and
had been misleading. The NYAG included other related claims and also claimed that the fees charged
by Seligman to the Seligman Funds were excessive. On March 13, 2009, without admitting or denying
any violations of law or wrongdoing, the Seligman Parties entered into a stipulation of settlement
with the NYAG and settled the claims made by the NYAG. Under the terms of the settlement, Seligman
paid $11.3 million to four Seligman Funds. This settlement resolved all outstanding matters between
the Seligman Parties and the NYAG. In addition to the foregoing matter, the New York staff of the
SEC indicated in September 2005 that it was considering recommending to the Commissioners of the
SEC the instituting of a formal action against Seligman and Seligman Advisors, Inc. relating to
frequent trading in the Seligman Funds. Seligman responded to the staff in October 2005 that it
believed that any action would be both inappropriate and unnecessary, especially in light of the
fact that Seligman had previously resolved the underlying issue with the Independent Directors of
the Seligman Funds and made recompense to the affected Seligman Funds. There have been no further
developments with the SEC on this matter.
Ameriprise Financial and certain of its affiliates have historically been involved in a number of
legal, arbitration and regulatory proceedings, including routine litigation, class actions, and
governmental actions, concerning matters arising in connection with the conduct of their business
activities. Ameriprise Financial believes that the Funds are not currently the subject of, and that
neither Ameriprise Financial nor any of its affiliates are the subject of, any pending legal,
arbitration or regulatory proceedings that are likely to have a material adverse effect on the
Funds or the ability of Ameriprise Financial or its affiliates to perform under their contracts
with the Funds. Ameriprise Financial is required to make 10-Q, 10-K and, as necessary, 8-K filings
with the Securities and Exchange Commission on legal and regulatory matters that relate to
Ameriprise Financial and its affiliates. Copies of these filings may be obtained by accessing the
SEC website at www.sec.gov.
There can be no assurance that these matters, or the adverse publicity associated with them, will
not result in increased fund redemptions, reduced sale of fund shares or other adverse consequences
to the Funds. Further, although we believe proceedings are not likely to have a material adverse
effect on the Funds or the ability of Ameriprise Financial or its affiliates to perform under their
contracts with the Funds, these proceedings are subject to uncertainties and, as such, we are
unable to estimate the possible loss or range of loss that may result. An adverse outcome in one or
more of these proceedings could result in adverse judgments, settlements, fines, penalties or other
relief that could have a material adverse effect on the consolidated financial condition or results
of operations of Ameriprise Financial.
-55-
APPENDIX A
RATINGS OF CORPORATE BONDS AND COMMERCIAL PAPER
LONG-TERM RATINGS
Standard & Poors Long-Term Debt Ratings.
A Standard & Poors corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection with any rating and may,
on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of such information or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
|
|
Likelihood of default capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of the
obligation. |
|
|
Nature of and provisions of the obligation. |
|
|
Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting
creditors rights. |
Investment Grade
Debt rated AAA has the highest rating assigned by Standard & Poors. Capacity to pay interest and
repay principal is extremely strong.
Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the
highest rated issues only in a small degree.
Debt rated A has a strong capacity to pay interest and repay principal, although it is somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. BB indicates the least degree of
speculation and C the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures to adverse
conditions.
Debt rated BB has less near-term vulnerability to default than other speculative issues. However,
it faces major ongoing uncertainties or exposure to adverse business, financial, or economic
conditions that could lead to inadequate capacity to meet timely interest and principal payments.
The BB rating category also is used for debt subordinated to senior debt that is assigned an actual
or implied BBB- rating.
Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The B rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating.
A-1
Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon
favorable business, financial, and economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The CCC rating category also
is used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
Debt rated CC typically is applied to debt subordinated to senior debt that is assigned an actual
or implied CCC rating.
Debt rated C typically is applied to debt subordinated to senior debt that is assigned an actual or
implied CCC rating.
The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
The rating CI is reserved for income bonds on which no interest is being paid.
Debt rated D is in payment default. The D rating category is used when interest payments or
principal payments are not made on the date due, even if the applicable grace period has not
expired, unless S&P 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 if debt service payments are
jeopardized.
Moodys Long-Term Debt Ratings
Aaa Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest
degree of investment risk. Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds that are rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements present that make
the long-term risk appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and are to be considered
as upper-medium grade obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present that suggest a susceptibility to impairment some time in the
future.
Baa Bonds that are rated Baa are considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds that are rated Ba are judged to have speculative elements their future cannot be
considered as well- assured. Often the protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of a desirable investment. Assurance of
interest and principal payments or maintenance of other terms of the contract over any long period
of time may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
Ca Bonds that are rated Ca represent obligations that are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
A-2
C Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real investment standing.
Fitchs Long-Term Debt Ratings
Fitchs bond ratings provide a guide to investors in determining the credit risk associated with a
particular security. The ratings represent Fitchs assessment of the issuers ability to meet the
obligations of a specific debt issue in a timely manner.
The rating takes into consideration special features of the issue, its relationship to other
obligations of the issuer, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and political environment that
might affect the issuers future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies or
financial guaranties unless otherwise indicated.
Fitch ratings are not recommendations to buy, sell or hold any security. Ratings do not comment on
the adequacy of market price, the suitability of any security for a particular investor, or the
tax-exempt nature of taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors, underwriters, their
experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the truth
or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
Investment Grade
AAA: Bonds considered to be investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected
by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The obligors ability
to pay interest and repay principal is very strong, although not quite as strong as bonds rated
AAA. Because bonds rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally rated F-1+.
A: Bonds considered to be investment grade and of high credit quality. The obligors ability to pay
interest and repay principal is considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality. The obligors
ability to pay interest and repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of these bonds will
fall below investment grade is higher than for bonds with higher ratings.
Speculative Grade
BB: Bonds are considered speculative. The obligors ability to pay interest and repay principal may
be affected over time by adverse economic changes. However, business and financial alternatives can
be identified, which could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are currently meeting debt
service requirements, the probability of continued timely payment of principal and interest
reflects the obligors limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not remedied, may lead to default.
The ability to meet obligations requires an advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or principal seems probable
over time.
A-3
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. DDD represents the highest potential for recovery on
these bonds, and D represents the lowest potential for recovery.
SHORT-TERM RATINGS
Standard & Poors Commercial Paper Ratings
A Standard & Poors commercial paper rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market. 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:
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A-1
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This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus sign (+) designation. |
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A-2
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Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not
as high as for issues designated A-1. |
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A-3
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Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher designations. |
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B
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Issues are regarded as having only speculative capacity for timely payment. |
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C
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This rating is assigned to short-term debt obligations with doubtful capacity for payment. |
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D
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Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made
on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made
during such grace period. |
Standard & Poors Muni Bond and Note Ratings
An S&P municipal bond or note rating reflects the liquidity factors and market-access risks unique
to these instruments. Notes maturing 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.
Note rating symbols and definitions are as follows:
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SP-1
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Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation. |
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SP-2
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Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes. |
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SP-3
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Speculative capacity to pay principal and interest. |
Municipal bond rating symbols and definitions are as follows:
Standard & Poors rating SP-1 indicates very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
Standard & Poors rating SP-2 indicates satisfactory capacity to pay principal and interest.
Standard & Poors rating SP-3 indicates speculative capacity to pay principal and interest.
Moodys Short-Term Ratings
Moodys short-term debt ratings are opinions of the ability of issuers to repay punctually senior
debt obligations. These obligations have an original maturity not exceeding one year, unless
explicitly noted.
A-4
Moodys employs the following three designations, all judged to be investment grade, to indicate
the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior
short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the
following characteristics: (i) leading market positions in well-established industries, (ii) high
rates of return on funds employed, (iii) conservative capitalization structure with moderate
reliance on debt and ample asset protection, (iv) broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and (v) well established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior
short-term debt obligations. This will normally be evidenced by many of the characteristics cited
above, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of
senior short-term obligations. The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage. Adequate alternate
liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Moodys Short-Term Muni Bonds and Notes
Short-term municipal bonds and notes are rated by Moodys. The ratings reflect the liquidity
concerns and market access risks unique to notes.
Moodys MIG 1/VMIG 1 indicates the best quality. There is present strong protection by established
cash flows, superior liquidity support or demonstrated broad-based access to the market for
refinancing.
Moodys MIG 2/VMIG 2 indicates high quality. Margins of protection are ample although not so large
as in the preceding group.
Moodys MIG 3/VMIG 3 indicates favorable quality. All security elements are accounted for but there
is lacking the
undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
Moodys MIG 4/VMIG 4 indicates adequate quality. Protection commonly regarded as required of an
investment security is present and although not distinctly or predominantly speculative, there is
specific risk.
Fitchs Short-Term Ratings
Fitchs short-term ratings apply to debt obligations that are payable on demand or have original
maturities of generally up to three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes. The short-term rating places greater
emphasis than a long-term rating on the existence of liquidity necessary to meet the issuers
obligations in a timely manner.
Fitch short-term ratings are as follows:
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are regarded as having the
strongest degree of
assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for issues assigned F-1+ and F-1
ratings.
A-5
F-3: Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
D: Default. Issues assigned this rating are in actual or imminent payment default.
A-6