e497
Filed pursuant to Rule 497
under the Securities Act of 1933,
as amended, File No. 333-140488
PROSPECTUS SUPPLEMENT
(To Prospectus Dated April 16, 2007)
$185,000,000
Auction Rate Senior
Notes
$185,000,000 Series F, due
July 9, 2047
$25,000 Denominations
Kayne Anderson MLP Investment Company is a non-diversified,
closed-end management investment company that began investment
activities on September 28, 2004. Our investment objective
is to obtain a high after-tax total return by investing at least
85% of our net assets plus any borrowings (our total
assets) in energy-related master limited partnerships and
their affiliates (collectively, MLPs), and in other
companies that, as their principal business, operate assets used
in the gathering, transporting, processing, storing, refining,
distributing, mining or marketing natural gas, natural gas
liquids (including propane), crude oil, refined petroleum
products or coal (collectively with MLPs, Midstream Energy
Companies).
We are offering $185,000,000 aggregate principal amount of
auction rate senior notes Series F (Series F
Notes) in this Prospectus Supplement. This Prospectus
Supplement does not constitute a complete prospectus, but should
be read in conjunction with our Base Prospectus dated
April 16, 2007, which accompanies this Prospectus
Supplement. This Prospectus Supplement does not include all
information that you should consider before purchasing any
Series F Notes. You should read this Prospectus Supplement
and our Base Prospectus before purchasing any Series F
Notes.
The Series F Notes offered in this Prospectus Supplement,
together with Series A, B, C and E Notes currently
outstanding, are referred to as Senior Notes.
Individual series of Senior Notes are referred to as a
series. Except as otherwise described in this
Prospectus Supplement, the terms of this series and all other
series are the same.
(continued
on following page)
Investing in Series F Notes involves certain
risks. See Risk Factors beginning on
page 11 of the accompanying Base Prospectus and The
Auction Auction Risk beginning on
page S-14
of this Prospectus Supplement.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this Prospectus Supplement is
truthful or complete. Any representation to the contrary is a
criminal offense.
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Per $25,000
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Principal Amount of
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Series F Notes
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Total
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Public offering price
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$
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25,000
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$
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185,000,000
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Underwriting discounts and
commissions
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$
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250
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$
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1,850,000
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Proceeds, before expenses, to us(1)
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$
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24,750
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$
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183,150,000
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(1) |
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We estimate that we will incur approximately $175,000 in
expenses in connection with this offering. |
The underwriters expect to deliver the Series F Notes in
book-entry form, through the facilities of The Depository
Trust Company, to broker-dealers on or about June 26,
2007.
Stifel Nicolaus
June 22, 2007
(continued from previous page)
Capitalized terms used but not defined in this Prospectus
Supplement shall have the meanings given to such terms in the
Third Supplemental Indenture, dated as of June 26, 2007,
between us and The Bank of New York Trust Company, N.A., as
Trustee, a copy of which is available from us upon request.
We will issue Series F Notes without coupons in $25,000
denominations and any integral multiple thereof. The principal
amount of Series F Notes will be due and payable on
July 9, 2047 (the Stated Maturity). There is no
sinking fund with respect to Series F Notes. Series F
Notes will be our unsecured obligations and, upon our
liquidation, dissolution or winding up, will rank:
(1) senior to all of our outstanding common stock and any
preferred stock (including the ARP Shares referred to below);
(2) on a parity with our obligations to any unsecured
creditors and any unsecured senior securities representing our
indebtedness, including Series A, B, C and E Notes referred
to below, additional Series F Notes and any other series of
our auction rate senior notes; and (3) junior to our
obligations to any secured creditors, including our obligations
under our revolving credit facility. We may redeem Series F
Notes prior to their Stated Maturity in certain circumstances
described in this Prospectus Supplement.
Holders of Series F Notes will be entitled to receive cash
interest payments at an annual rate that may vary for each rate
period. The initial rate period is from the issue date through
July 10, 2007. The annual interest rates for the initial
rate period will be 5.15%. For subsequent rate periods,
Series F Notes will pay interest at a rate determined by an
auction conducted in accordance with the procedures described in
this Prospectus Supplement. The initial Auction Date will be
July 10, 2007. Generally, following the initial rate
period, each rate period for Series F Notes will be seven
(7) days.
Series F Notes will not be listed on any exchange or
automated quotation system. Generally, investors only may buy
and sell Series F Notes through an order placed at an
auction with or through certain broker-dealers or in a secondary
market that those broker-dealers may maintain. These
broker-dealers are not required to maintain a market in
Series F Notes, and a secondary market, in the unlikely
event that one develops, may not provide investors with
liquidity.
We are managed by KA Fund Advisors, LLC, a subsidiary of
Kayne Anderson Capital Advisors, L.P. (together, Kayne
Anderson), a leading investor in MLPs. As of May 31,
2007, Kayne Anderson and its affiliates managed approximately
$8.6 billion, including approximately $4.2 billion in
MLPs and other Midstream Energy Companies.
We invest in equity securities of (1) MLPs, including
preferred, common and subordinated units and general partner
interests, (2) owners of such interests in MLPs, and
(3) other Midstream Energy Companies. Additionally, we may
invest in debt securities of MLPs and other Midstream Energy
Companies. Under normal market conditions, we intend to invest
50% of our total assets in publicly traded securities of MLPs
and other Midstream Energy Companies, and may invest up to 50%
of our total assets in unregistered or otherwise restricted
securities of MLPs and other Midstream Energy Companies,
including securities issued by private companies.
This offering is conditioned upon Series F Notes receiving
a rating of Aaa from Moodys Investors Service
Inc. (Moodys) and AAA from Fitch
Ratings (Fitch). Our common stock is traded on the
New York Stock Exchange under the symbol KYN.
We issued three series of auction rate senior notes due in 2045,
in an aggregate principal amount of $260 million
(Series A, B and C Notes), on March 28,
2005 and one series of auction rate senior notes due in 2045, in
an aggregate principal amount of $60 million
(Series E Notes), on December 14, 2005.
Series A, B, C and E Notes are rated Aaa and
AAA by Moodys and Fitch, respectively. As of
May 31, 2007, the aggregate principal amount of
Series A, B, C and E Notes represented approximately 14.0%
of our total assets. Series A, B, C and E Notes are on a
parity with each other. Series A, B, C and E Notes are
referred to collectively herein as the Senior Notes.
On April 12, 2005, we issued an aggregate amount of
$75 million of Series D Auction Rate Preferred Stock
(ARP Shares). The ARP Shares are rated
Aa and AA by Moodys and Fitch,
respectively. As of May 31, 2007, the aggregate amount of
ARP Shares represented approximately 3.3% of our total assets.
We may issue additional ARP Shares, Senior Notes or other series
of our auction rate preferred stock or auction rate senior notes
in the future. The ARP Shares and Senior Notes, as well as any
other series of our auction rate preferred stock or auction rate
senior notes, are intended to increase funds available for
investment. This practice, which is known as leverage, is
speculative and involves significant risks.
Series F Notes do not represent a deposit or obligation of,
and are not guaranteed or endorsed by, any bank or other insured
depository institution, and are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency.
TABLE OF
CONTENTS
Prospectus Supplement
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Page
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S-1
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S-4
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S-5
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S-6
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S-7
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S-14
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S-21
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S-22
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S-23
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F-1
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Prospectus
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Page
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Prospectus Summary
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1
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Kayne Anderson MLP Investment
Company
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4
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Fees and Expenses
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6
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Financial Highlights
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9
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Market and Net Asset Value
Information
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9
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Use of Proceeds
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10
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Risk Factors
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11
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Forward-Looking Statements
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27
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Dividends
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28
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Dividend Reinvestment Plan
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29
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Investment Objective and Policies
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30
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Use of Leverage
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35
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Management
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38
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Net Asset Value
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43
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Description of Capital Stock
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45
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Description of Preferred Stock
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48
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Description of Debt Securities
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51
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Our Structure; Common Stock
Repurchases and Change in Our Structure
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54
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Tax Matters
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55
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Plan of Distribution
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61
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Rating Agency Guidelines
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65
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Transfer Agent and Dividend-Paying
Agent
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67
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Administrator, Custodian and
Fund Accountant
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67
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Legal Opinions
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67
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Table of Contents of Our Statement
of Additional Information
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68
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S-i
You should rely only on the information contained in this
Prospectus Supplement and the accompanying Base Prospectus,
which we refer to collectively as the Prospectus.
This Prospectus Supplement and the accompanying Base Prospectus
set forth concisely the information about us that a prospective
investor ought to know before investing. This Prospectus
Supplement, which describes the specific terms of this offering,
and also adds to and updates information contained in the
accompanying Base Prospectus and the documents incorporated by
reference in the Base Prospectus. The Base Prospectus gives more
general information, some of which may not apply to this
offering. If the description of this offering varies between
this Prospectus Supplement and the accompanying Base Prospectus,
you should rely on the information contained in this Prospectus
Supplement; provided that if any statement in one of these
documents is inconsistent with a statement in another document
having a later date and incorporated by reference into the Base
Prospectus or Prospectus Supplement, the statement in the
incorporated document having the later date modifies or
supersedes the earlier statement. We have not authorized anyone
to provide you with different information. If anyone provides
you with different or inconsistent information, you should not
rely on it. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
The information contained in or incorporated by reference in
this Prospectus Supplement and the accompanying Base Prospectus
is accurate only as of the respective dates on their front
covers. Our business, financial condition, results of operations
and prospects may have changed since that date.
You should read this Prospectus Supplement and the accompanying
Base Prospectus before deciding whether to invest and retain it
for future reference. A statement of additional information,
dated April 16, 2007 (SAI), as supplemented
from time to time, containing additional information about us,
has been filed with the Securities and Exchange Commission
(SEC) and is incorporated by reference in its
entirety into the Prospectus. You may request a free copy of our
stockholder reports and our SAI, the table of contents of which
is on page 68 of the accompanying Base Prospectus, by
calling
(877) 657-3863,
or by writing to us. Electronic copies of the Prospectus, our
stockholder reports and our SAI are also available on our
website
(http://www.kaynemlp.com).
You may also obtain copies of these documents (and other
information regarding us) from the SECs web site
(http://www.sec.gov).
S-ii
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus Supplement, the accompanying Base Prospectus and
the statement of additional information contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Forward-looking
statements can be identified by the words may,
will, intend, expect,
estimate, continue, plan,
anticipate, and similar terms and the negative of
such terms. Such forward-looking statements may be contained in
this Prospectus Supplement as well as in the accompanying Base
Prospectus. By their nature, all forward-looking statements
involve risks and uncertainties, and actual results could differ
materially from those contemplated by the forward-looking
statements. Several factors that could materially affect our
actual results are the ability of the MLPs and other Midstream
Energy Companies in which we invest to achieve their objectives,
our ability to source favorable private investments, the timing
and amount of distributions and dividends from the MLPs and
other Midstream Energy Companies in which we intend to invest,
the dependence of our future success on the general economy and
its impact on the industries in which we invest and other
factors discussed in our periodic filings with the SEC.
Although we believe that the expectations expressed in our
forward-looking statements are reasonable, actual results could
differ materially from those projected or assumed in our
forward-looking statements. Our future financial condition and
results of operations, as well as any forward-looking
statements, are subject to change and are subject to inherent
risks and uncertainties, such as those disclosed in the
Risk Factors section of the Base Prospectus
accompanying this Prospectus Supplement. All forward-looking
statements contained or incorporated by reference in this
Prospectus Supplement or the accompanying Base Prospectus are
made as of the date of this Prospectus Supplement or the
accompanying Base Prospectus, as the case may be. Except for our
ongoing obligations under the federal securities laws, we do not
intend, and we undertake no obligation, to update any
forward-looking statement. We acknowledge that, notwithstanding
the foregoing statements, the safe harbor for forward-looking
statements under the Private Securities Litigation Reform Act of
1995 does not apply to investment companies such as us.
Currently known risk factors that could cause actual results to
differ materially from our expectations include, but are not
limited to, the factors described in the Risk
Factors section of the Base Prospectus accompanying this
Prospectus Supplement as well as in Auction
Risk and Certain Considerations
Affecting Auction Rate Securities Existing
Holders Ability to Resell Auction Rate Securities May Be
Limited in the section of this Prospectus Supplement
entitled The Auction. We urge you to review
carefully that section for a more complex discussion of the
risks of an investment in our Series F Notes.
S-iii
PROSPECTUS
SUPPLEMENT SUMMARY
This summary contains basic information about us but does not
contain all of the information that is important to your
investment decision. You should read this summary together with
the more detailed information contained elsewhere in this
Prospectus Supplement and accompanying Base Prospectus and in
the statement of additional information, especially the
information set forth under the heading Risk Factors
beginning on page 11 of the accompanying Base Prospectus
and Auction Risk and
Certain Considerations Affecting Auction Rate
Securities Existing Holders Ability to Resell
Auction Rate Securities May Be Limited beginning on pages
S-14 and
S-18,
respectively, of the section of this Prospectus Supplement
entitled The Auction.
The
Company
Kayne Anderson MLP Investment Company, a Maryland corporation,
is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended
(the 1940 Act). Our investment objective is to
obtain a high after-tax total return by investing at least 85%
of our total assets in MLPs and other Midstream Energy
Companies. We also must comply with the SECs rule
regarding investment company names, which requires us, under
normal market conditions, to invest at least 80% of our total
assets in MLPs so long as MLP is in our name. Our currently
outstanding shares of common stock are listed on the New York
Stock Exchange (NYSE) under the symbol
KYN.
We began investment activities in September 2004 following our
initial public offering. After the payment of offering expenses
and underwriting discounts, we received approximately
$711 million from the proceeds of the initial public
offering and after subsequent exercises by the underwriters of
their over allotment option, the aggregate net proceeds were
approximately $786 million. Since that time we have
completed the following capital raising transactions:
(a) four series of auction rate senior notes in an
aggregate principal amount of $320 million, (b) one
series of auction rate preferred stock in an amount of
$75 million, (c) two underwritten public offerings of
our common stock for aggregate proceeds after the payment of
offering expenses and underwriting discounts of approximately
$205 million, and (d) one direct placement of our
common stock to purchasers in a privately negotiated transaction
for proceeds after the payment of offering expenses of
approximately $28 million. As of May 31, 2007, we had
42.9 million shares of common stock outstanding, net assets
applicable to our common stock of $1.5 billion and total
assets of $2.3 billion.
Investment
Adviser
KA Fund Advisors, LLC (KAFA) is our investment
adviser, responsible for implementing and administering our
investment strategy. KAFA is a subsidiary of Kayne Anderson
Capital Advisors, L.P. (KACALP and together with
KAFA, Kayne Anderson), a SEC-registered investment
adviser. As of May 31, 2007, Kayne Anderson and its
affiliates managed approximately $8.6 billion, including
approximately $4.2 billion in MLPs and other Midstream
Energy Companies. Kayne Anderson has invested in MLPs and other
Midstream Energy Companies since 1998. We believe that Kayne
Anderson has developed an understanding of the MLP market that
enables it to identify and take advantage of public MLP
investment opportunities. In addition, Kayne Andersons
senior professionals have developed a strong reputation in the
energy sector and have many long-term relationships with
industry managers, which we believe gives Kayne Anderson an
important advantage in sourcing and structuring private
investments.
S-1
The
Offering
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Series F Notes offered by us |
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Series F Notes in an aggregate principal amount of $185,000,000.
Series F Notes will be sold in denominations of $25,000 and
any integral multiple thereof. The Series F Notes are being
offered by Citigroup Global Markets Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Stifel, Nicolaus &
Company, Incorporated. See Underwriting. |
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Use of proceeds |
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We estimate that our net proceeds from this offering after
expenses will be approximately $183.2 million. We intend to
use a portion of the net proceeds to retire our short-term debt
of approximately $121.5 million as of June 21, 2007,
which we incurred in connection with the acquisition of equity
portfolio securities. We intend to invest the remainder of the
net proceeds of this offering in accordance with our investment
objective as soon as practicable. As of June 22, 2007, we
have two pending investments for an aggregate amount of
$45.8 million. We anticipate completing these investments
in the next 30 days. See Use of Proceeds and
Recent Developments. |
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Trustee |
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The Bank of New York Trust Company, N.A. |
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Auction Agent |
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The Bank of New York |
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Risk factors |
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See Risk Factors and other information included in
the accompanying Base Prospectus, as well as
Auction Risk and
Certain Considerations Affecting Auction Rate
Securities Existing Holders Ability to Resell
Auction Rate Securities May Be Limited under The
Auction in this Prospectus Supplement, for a discussion of
factors you should carefully consider before deciding to invest
in Series F Notes. |
S-2
Recent
Developments
On March 19, 2007, we declared a quarterly dividend of
$0.48 per share to common stockholders of record on
April 4, 2007, which was paid on April 13, 2007.
On April 23, 2007, we issued 3,600,000 shares of our
common stock at a price of $36.70 per share in a public
offering, in which we received $127,780,200 in net proceeds
(before offering expenses and after deducting the underwriting
discount). Net proceeds from the offering were used to repay a
portion of our borrowings under our revolving credit line.
On May 4, 2007, our Board of Directors accepted the
resignation of Terrence J. Quinn from the Board, and elected
Michael C. Morgan to serve the remainder of
Mr. Quinns term. Mr. Morgan, who is not an
interested person as defined in
Section 2(a)(19) of the 1940 Act, was elected by our
stockholders to our Board of Directors for a three-year term on
June 15, 2007 at our annual meeting of stockholders. The
following table sets forth information regarding
Mr. Morgans principal occupation and other
affiliations over the past five years. The addresses for all
Directors are 1800 Avenue of the Stars, Second Floor Los
Angeles, CA 90067 and 717 Texas Avenue, Suite 3100,
Houston, Texas 77002. All of our Directors currently serve on
the Board of Directors of Kayne Anderson Energy Total Return
Fund, Inc., a closed-end investment company registered under the
1940 Act, that is advised by Kayne Anderson.
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Name
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Position Held
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Term of Office/
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Other Directorships
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(Year Born)
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with Registrant
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Time of Service
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Principal Occupations During Past Five Years
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Held by Director
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Michael C. Morgan
(born 1968)
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Director
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3-year term
(until the 2010
Annual Meeting
of Stockholders)/
served since
May 2007
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Since 2004, Mr. Morgan has
served as President and Chief Executive Officer of Portcullis
Partners, LP, a privately owned investment partnership. Since
2003, Mr. Morgan has also served as an Adjunct Professor in
the Practice of Management at the Jones Graduate School of
Management at Rice University. From 2001 to 2004,
Mr. Morgan was President of Kinder Morgan, Inc., an energy
transportation and storage company, and of Kinder Morgan Energy
Partners, L.P., a publicly traded pipeline limited partnership.
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Kayne Anderson
Energy Total
Return Fund, Inc.;
Kinder Morgan, Inc.
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On May 16, 2007, we issued 820,916 shares of our
common stock in a privately negotiated direct placement to
certain purchasers. Net proceeds (approximately $28 million
after deducting offering expenses) from the offering were used
to repay a portion of our borrowings under our revolving credit
line.
On May 18, 2007, we entered into an agreement to purchase
0.4 million Common Units and 0.9 million Class D
Units from Atlas Energy Resources, LLC at a weighted average
price of $25.00 per unit which constitutes an aggregate purchase
price of $32.7 million. Atlas Energy will use the proceeds
from the sale of the Common Units and Class D Units to
partially finance the purchase of DTE Oil & Gas
Company. The acquisition is expected to close within the next
30 days.
On June 15, 2007, we declared a quarterly dividend of $0.49
per share to common stockholders of record on July 5, 2007,
which will be paid on July 12, 2007.
On June 19, 2007 we entered into an agreement to purchase
0.4 million common units from Universal Compression
Partners, L.P. at a price of $34.75 per unit which
constitutes an aggregate purchase price of $13.1 million.
We expect this transaction to close in the next 30 days.
S-3
USE OF
PROCEEDS
We estimate that we will receive net proceeds from this offering
of approximately $183.2 million, after deducting the
underwriting discount and our net estimated offering expenses.
We intend to use the net proceeds of this offering to repay the
indebtedness owed under our existing secured credit facility. As
of June 21, 2007, we had approximately $121.5 million
aggregate principal amount outstanding on our credit facility.
Amounts repaid under our credit facility will remain available
for future borrowings. Outstanding balances under the credit
facility accrue interest at a variable annual rate equal to the
one-month LIBOR rate plus 100 basis points on the
outstanding balance. As of June 21, 2007, the current rate
is 6.32%.
We will invest the remainder of the net proceeds of this
offering in accordance with our investment objective as soon as
practicable. As of June 22, 2007, we have pending
investments in Atlas Energy Resources, LLC for
$32.7 million and Universal Compression Partners, L.P. for
$13.1 million. We anticipate completing these investments
within the next 30 days. See Prospectus Supplement
Summary Recent Developments. Until the
remaining net proceeds are invested, we anticipate investing
such proceeds in short-term securities issued by the
U.S. government or its agencies or instrumentalities or in
high quality, short-term or long-term debt obligations or money
market instruments.
We intend to reborrow under our existing secured credit facility
to make investments in portfolio companies in accordance with
our investment objective.
S-4
CAPITALIZATION
The following table sets forth our capitalization: (i) as
of February 28, 2007, (ii) pro forma to reflect
(a) the outstanding balance under our secured credit
facility as of June 21, 2007, (b) the issuance of
168,885 shares of our common stock on April 13, 2007,
pursuant to our automatic dividend reinvestment plan,
(c) the issuance of 3,600,000 shares of our common
stock on April 23, 2007 in an underwritten public offering,
and (d) the issuance of 820,916 shares of our common
stock on May 16, 2007 in a direct placement to certain
purchasers; and (iii) pro forma as adjusted to give effect
to the issuance of the Series F Notes offered by this
Prospectus Supplement and accompanying Base Prospectus and the
retirement of the outstanding balance under our secured credit
facility with a portion of the net proceeds of such offering.
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Pro Forma
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Actual
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Pro Forma
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As Adjusted
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(dollars in 000s, except share
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and per share data)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Cash and Cash Equivalents
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$
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1,018
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$
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(1)
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$
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61,650
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(1)
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Short-Term Debt:
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Secured credit facility
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$
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107,000
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$
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121,500
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(1)
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$
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(1)
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Long-Term Debt:
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Senior Notes Series A(2)
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$
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85,000
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$
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85,000
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$
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85,000
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Senior Notes Series B(2)
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85,000
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85,000
|
|
|
|
85,000
|
|
Senior Notes Series C(2)
|
|
|
90,000
|
|
|
|
90,000
|
|
|
|
90,000
|
|
Senior Notes Series E(2)
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
60,000
|
|
Senior Notes Series F(2)
|
|
|
|
|
|
|
|
|
|
|
185,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt:
|
|
$
|
427,000
|
|
|
$
|
441,500
|
|
|
$
|
505,000
|
|
Preferred Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series D Auction Rate
Preferred Stock, $0.001 par value per share, liquidation
preference $25,000 per share (3,000 shares issued and
outstanding, 10,000 shares authorized)(2)
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
Common Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value per share, 199,990,000 shares authorized
(38,265,172 shares issued and outstanding;
42,854,973 shares issued and outstanding Pro Forma and Pro
Forma as Adjusted)(2)
|
|
$
|
38
|
|
|
$
|
43
|
(3)
|
|
$
|
43
|
(3)
|
Paid-in capital
|
|
|
916,332
|
|
|
|
1,078,265
|
(4)(5)
|
|
|
1,078,265
|
(4)(5)
|
Net investment loss, net of income
taxes less dividends and distributions
|
|
|
(175,212)
|
|
|
|
(181,008)(5)
|
|
|
|
(181,008)(5)
|
|
Accumulated realized gains on
investments and interest rate swap contracts, net of income taxes
|
|
|
33,912
|
|
|
|
33,912
|
|
|
|
33,912
|
|
Net unrealized gains on
investments, options and interest rate swap contracts, net of
income taxes
|
|
|
409,954
|
|
|
|
409,954
|
|
|
|
409,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common
stockholders
|
|
$
|
1,185,024
|
|
|
$
|
1,341,166
|
|
|
$
|
1,341,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As described under Use of Proceeds, we intend to use
a portion of the net proceeds from this offering to repay the
borrowings outstanding under our secured credit facility.
Pro Forma and Pro Forma as Adjusted
reflect the issuance of 3,600,000 shares of our common
stock on April 23, 2007 and the issuance of
820,916 shares of our common stock on May 16, 2007 and
the outstanding balance under our credit facility as of
June 21, 2007, which was approximately $121.5 million.
As of June 20, 2007 we have pending investments in Atlas
Energy Resources, LLC and Universal Compression Partners, L.P.
for $32.7 million and $13.1 million, respectively. We
anticipate closing these investments within the next
30 days. We intend to reborrow under our credit facility to
make investments in portfolio companies in accordance with our
investment objective. |
|
(2) |
|
We do not hold any of these outstanding securities for our
account. |
|
(3) |
|
Reflects the issuance of 168,885 shares of our common stock
on April 13, 2007 pursuant to our automatic dividend
reinvestment plan, the issuance of 3,600,000 shares of our
common stock (aggregate par value $4) on April 23, 2007 in
an underwritten public offering, and the issuance of
820,916 shares of our common stock (aggregate par value $1)
on May 16, 2007 in a direct placement to certain purchasers. |
|
(4) |
|
Reflects the proceeds of the issuance of shares of common stock
offered: (i) on April 23, 2007 ($127,651), net of
$0.001 par value per share of common stock, the
underwriting discount and the net estimated offering costs borne
by us, and (ii) on May 16, 2007 ($28,448), net of
$0.001 par value per share of common stock and the
estimated offering costs borne by us. |
|
(5) |
|
Reflects the issuance of our common stock on April 13, 2007
pursuant to our automatic dividend reinvestment plan ($5,796). |
S-5
ASSET
COVERAGE REQUIREMENTS
This offering is conditioned upon the Series F Notes
receiving a rating of Aaa from Moodys
Investors Service, Inc. and AAA from Fitch Ratings.
The 1940 Act and the Ratings Agencies impose asset coverage
requirements which may limit our ability to engage in certain
types of transactions and may limit our ability to take certain
actions without confirming with the Rating Agencies that such
action will not impair the ratings.
We are required to satisfy two separate asset maintenance
requirements with respect to outstanding Senior Notes:
(1) we must maintain Eligible Assets having an aggregated
Discounted Value at least equal to the Senior Notes Basic
Maintenance Amount as of each Valuation Date in accordance with
guidelines set forth by each Rating Agency; and (2) we must
satisfy the 1940 Act Senior Notes Asset Coverage.
The Discount Factors and guidelines for calculating the
Discounted Value of our portfolio for purposes of determining
whether the Senior Notes Basic Maintenance Amount has been
satisfied have been established by Moodys and Fitch in
connection with our receipt from Moodys and Fitch of the
Aaa and AAA Credit Ratings and the
Aaa and AAA Credit Ratings,
respectively, with respect to Series A, B, C and E Notes on
their original issue dates and with respect to Series F
Notes on their Original Issue Date. We estimate that on the
Original Issue Date of Series F Notes, the 1940 Act Senior
Notes Asset Coverage (as defined herein), based on the
composition of our portfolio as of February 28, 2007
(adjusted to reflect: (a) the issuance of 168,885,
3,600,000 and 820,916 shares of our common stock on
April 13, 2007, April 23, 2007 and May 16, 2007,
respectively; and (b) the outstanding balance under our
credit facility as of June 21, 2007), and after giving
effect to the issuance of Series F Notes offered by this
Prospectus Supplement and accompanying Base Prospectus
($185,000,000) would be 380%.
The Senior Notes Basic Maintenance Amount is defined in the
Rating Agency Guidelines. Each Rating Agency may amend the
definition of Senior Notes Basic Maintenance Amount from time to
time. A copy of the current Rating Agency Guidelines will be
provided to any holder of Senior Notes promptly upon written
request by such holder to us at 1800 Avenue of the Stars, Second
Floor, Los Angeles, California 90067. See Rating Agency
Guidelines in the Prospectus for a more detailed
description of our asset maintenance requirements.
S-6
DESCRIPTION
OF SERIES F NOTES
Senior Notes of each series, including the Series F Notes,
will rank on a parity with any other series of Senior Notes as
to the payment of interest and distribution of assets upon
liquidation. All Senior Notes rank senior to our common and
preferred stock as to the payment of interest and distribution
of assets upon liquidation. Under the 1940 Act, we may only
issue one class of senior securities representing indebtedness.
Series F Notes will be issued by us pursuant to the terms
of an Indenture, dated as of March 28, 2005, and a Third
Supplemental Indenture (the Supplemental Indenture),
dated as of June 26, 2007 (referred to herein collectively
as the Indenture), between us and The Bank of New
York Trust Company, N.A., as Trustee (the
Trustee). The following summaries of certain
significant provisions of the Indenture are not complete and are
qualified in their entirety by the provisions of the Indenture,
a more detailed summary of which is contained in Appendix A
to the SAI, which is on file with the SEC and is incorporated
herein by reference. Whenever defined terms are used, but not
defined in this Prospectus Supplement, the terms have the
meaning given to them in the Supplemental Indenture, a copy of
which is available from us upon request.
General
Our board of directors (the Board of Directors) has
authorized us to issue notes representing indebtedness pursuant
to the term of the Indenture. Currently, the Indenture provides
for the issuance of up to $185,000,000 aggregate principal
amount of Series F Notes. The principal amount of
Series F Notes are due and payable on July 9, 2047.
Series F Notes, when issued and sold pursuant to the terms
of the Indenture, will be issued in fully registered form
without coupons and in denominations of $25,000 and any integral
multiple thereof, unless otherwise provided in the Indenture.
Series F Notes will be our unsecured obligations and, upon
our liquidation, dissolution or winding, will rank:
(1) senior to our outstanding common stock and any
preferred stock, including the ARP Shares; (2) on a parity
with any of our unsecured creditors and Series A, B, C and
E Notes, any additional Series F Notes and any other series
of our auction rate senior notes; and (3) junior to any of
our secured creditors. Series F Notes will be subject to
optional and mandatory redemption as described below under
Redemption, and acceleration of
maturity, as described in the accompanying Base Prospectus under
Description of Debt Securities Events of
Default and Acceleration of Maturity of Debt Securities;
Remedies.
In addition to serving as the Trustee, The Bank of New York
Trust Company, N.A. will act as the transfer agent,
registrar and paying agent for Series F Notes unless or
until the Board of Directors resolves to enter into an agreement
with another entity.
The Bank of New York, a New York banking corporation, will act
as Auction Agent for Series F Notes in connection with the
Auction Procedures described below. The Auction Agent generally
will serve merely as our agent, acting in accordance with our
instructions.
We have the right, to the extent permitted by applicable law, to
purchase or otherwise acquire any Series F Notes, so long
as we are current in the payment of interest on Series F
Notes and on any other notes of us ranking on a parity with
Series F Notes with respect to the payment of interest.
Series F Notes have no voting rights, except to the extent
required by law or as otherwise provided in the Indenture
relating to the acceleration of maturity upon the occurrence and
during the continuance of an event of default.
Securities
Depository
The nominee of the Securities Depository is expected to be the
sole holder of record of Series F Notes. Accordingly, each
purchaser of Series F Notes must rely on (1) the
procedures of the Securities Depository and, if such purchaser
is not a member of the Securities Depository, such
purchasers Agent Member, to receive interest payments and
notices, and (2) the records of the Securities Depository
and, if such purchaser is not a member of the Securities
Depository, such purchasers Agent Member, to evidence its
ownership of Series F Notes.
S-7
Beneficial Owners will not receive any certificates representing
their ownership interests in Series F Notes. The Depository
Trust Company (DTC) will initially act as
Securities Depository for the Agent Members with respect to
Series F Notes.
Interest
and Rate Periods
General. Series F Notes will bear
interest at the Applicable Rate determined as set forth below
under Determination of Interest Rate.
Interest on Series F Notes shall be payable when due as
described below. If we do not pay interest when due, it will
trigger an event of default under the Indenture (subject to the
cure provisions), and we will be restricted from declaring
dividends and making other distributions with respect to our
common stock and any preferred stock.
On the Business Day next preceding each Interest Payment Date,
we are required to deposit with the Paying Agent sufficient
funds for the payment of interest. We do not intend to establish
any reserves for the payment of interest.
All moneys paid to the Paying Agent for the payment of interest
shall be held in trust for the payment of such interest to the
holders. Interest will be paid by the Paying Agent to the
holders as their names appear on our securities ledger or
securities records, which holder(s) is expected to be the
nominee of the Securities Depository. The Securities Depository
will credit the accounts of the Agent Members of the Beneficial
Owners in accordance with the Securities Depositorys
normal procedures. The Securities Depositorys current
procedures provide for it to distribute interest in
same-day
funds to Agent Members who are, in turn, expected to distribute
such interest to the persons for whom they are acting as agents.
The Agent Member of a Beneficial Owner will be responsible for
holding or disbursing such payments on the applicable Interest
Payment Date to such Beneficial Owner in accordance with the
instructions of such Beneficial Owner.
Interest in arrears for any past rate period may be subject to a
Default Rate of interest (described below) and may be paid at
any time, without reference to any regular Interest Payment
Date, to the holders as their names appear on our securities
ledger or securities records on such date, not exceeding fifteen
(15) days preceding the payment date thereof, as may be
fixed by the Board of Directors. Any interest payment shall
first be credited against the earliest accrued but unpaid
interest. No interest will be payable in respect of any payment
or payments which may be in arrears. See
Default Period below.
The amount of interest payable on each Interest Payment Date of
each rate period of less than one year (or in respect of
interest on another date in connection with a redemption during
such rate period) shall be computed by multiplying the
Applicable Rate (or the Default Rate) for such rate period (or a
portion thereof) by a fraction, the numerator of which will be
the number of days in such rate period (or portion thereof) that
such Series F Notes were outstanding and for which the
Applicable Rate or the Default Rate was applicable and the
denominator of which will be 360, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the
nearest cent. During any rate period of one year or more, the
amount of interest per Series F Note payable on any
Interest Payment Date (or in respect of interest on another date
in connection with a redemption during such rate period) shall
be computed as described in the preceding sentence.
Determination of Interest Rate. The interest
rate for the initial rate period (i.e., the period from
and including the Original Issue Date to and including the
initial Auction Date) and the initial Auction Date are set forth
on the cover page of the Prospectus Supplement. After the
initial rate period, subject to certain exceptions,
Series F Notes will bear interest at the Applicable Rate
that the Auction Agent advises us has resulted from an auction.
The initial rate period for Series F Notes shall be fifteen
(15) days. Rate periods after the initial rate period shall
either be Standard Rate Periods or, subject to certain
conditions and with notice to holders, Special Rate Periods.
A Special Rate Period will not be effective unless Sufficient
Clearing Bids exist at the auction in respect of such Special
Rate Period (that is, in general, the aggregate amount of
Series F Notes subject to Buy
S-8
Orders by Potential Beneficial Owners is at least equal to the
aggregate amount of Series F Notes subject to Sell Orders
by existing Beneficial Owners).
Interest will accrue at the Applicable Rate from the Original
Issue Date and shall be payable on each Interest Payment Date
thereafter. For rate periods of 30 days or less, Interest
Payment Dates shall occur on the first Business Day following
such rate period and, if greater than 30 days, then on a
monthly basis on the first Business Day of each month within
such rate period and on the Business Day following the last day
of such rate period. Interest will be paid through the
Securities Depository on each Interest Payment Date.
Except during a Default Period as described below, the
Applicable Rate resulting from an auction will not be greater
than the Maximum Rate, which is equal to the applicable
percentage of the Reference Rate, subject to upward but not
downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers. The applicable
percentage will be determined based on the lower of the credit
ratings assigned on that date to Series F Notes by
Moodys and Fitch, as follows:
|
|
|
|
|
Moodys Credit
|
|
Fitch Credit
|
|
Applicable
|
Rating
|
|
Rating
|
|
Percentage
|
|
Aa3 or above
|
|
AA- or above
|
|
200%
|
A3 to A1
|
|
A- to A+
|
|
250%
|
Baa3 to Baa1
|
|
BBB- to BBB+
|
|
275%
|
Below Baa3
|
|
Below BBB-
|
|
300%
|
The Reference Rate is the greater of (1) the
applicable AA Composite Commercial Paper Rate (for a rate period
of fewer than 184 days) or the applicable Treasury Index
Rate (for a rate period of 184 days or more), or
(2) the applicable LIBOR. For Standard Rate Periods or less
only, the Applicable Rate resulting from an auction will not be
less than the Minimum Rate, which is 70% of the applicable AA
Composite Commercial Paper Rate. No Minimum Rate is specified
for auctions in respect to rate periods of more than the
Standard Rate Period.
The Maximum Rate for Series F Notes will apply
automatically following an auction for the notes in which
Sufficient Clearing Bids have not been made (other than because
all Series F Notes were subject to Submitted Hold Orders).
If an auction for any subsequent rate period is not held for any
reason, including because there is no Auction Agent or
Broker-Dealer, then the Interest Rate on Series F Notes for
any such rate period shall be the Maximum Rate (except for
circumstances in which the Interest Rate is the Default Rate, as
described below).
The All Hold Rate will apply automatically following an auction
in which all of the outstanding Series F Notes are subject
to (or are deemed to be subject to) Submitted Hold Orders. The
All Hold Rate is 80% of the applicable AA Composite Commercial
Paper Rate.
Prior to each auction, Broker-Dealers will notify Beneficial
Owners and the Trustee of the term of the next succeeding rate
period as soon as commercially reasonable after the
Broker-Dealers have been so advised by us. After each auction,
on the Auction Date, Broker-Dealers will notify Beneficial
Owners of the Applicable Rate for the next succeeding rate
period and of the Auction Date of the next succeeding auction.
Notification of Rate Period. We will designate
the duration of subsequent rate periods of Series F Notes;
provided, however, that no such designation is necessary for a
Standard Rate Period and, provided further, that any designation
of a Special Rate Period shall be effective only if
(1) notice has been given as provided herein, (2) any
failure to pay in a timely manner to the Trustee the full amount
of any interest on, or the redemption price of, Series F
Notes shall have been cured as provided above,
(3) Sufficient Clearing Bids shall have existed in an
auction held on the Auction Date immediately preceding the first
day of such proposed Special Rate Period, (4) if we shall
have mailed a Notice of Redemption with respect to any
Series F Notes, the redemption price with respect to such
Series F Notes shall have been deposited with the Paying
Agent, and (5) we have confirmed that as of the Auction
Date next preceding the first day of such Special Rate Period,
we have Eligible Assets with an aggregate Discounted Value at
least equal to the Series F Notes Basic Maintenance Amount,
and we have consulted with the Broker-Dealers and have provided
notice of such designation and otherwise complied with the
Rating Agency Guidelines.
S-9
Designation of a Special Rate Period. If we
propose to designate any Special Rate Period, not fewer than 7
(or two Business Days in the event the duration of the rate
period prior to such Special Rate Period is fewer than
8 days) nor more than 30 Business Days prior to the first
day of such Special Rate Period, notice shall be (1) made
by press release and (2) communicated by us by telephonic
or other means to the Trustee and the Auction Agent and
confirmed in writing promptly thereafter. Each such notice shall
state (A) that we propose to exercise our option to
designate a succeeding Special Rate Period, specifying the first
and last days thereof and (B) that we will by
3:00 p.m., New York City time, on the second Business Day
next preceding the first day of such Special Rate Period, notify
the Auction Agent and the Trustee, who will promptly notify the
Broker-Dealers, of either (x) our determination, subject to
certain conditions, to proceed with such Special Rate Period,
subject to the terms of any Specific Redemption Provisions,
or (y) our determination not to proceed with such Special
Rate Period, in which latter event the succeeding rate period
shall be a Standard Rate Period.
No later than 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of any proposed
Special Rate Period, we shall deliver to the Trustee and the
Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(1) a notice stating (A) that we have determined to
designate the next succeeding rate period as a Special Rate
Period, specifying the first and last days thereof and
(B) the terms of any Specific
Redemption Provisions; or
(2) a notice stating that we have determined not to
exercise our option to designate a Special Rate Period.
If we fail to deliver either such notice with respect to any
designation of a proposed Special Rate Period to the Auction
Agent or we are unable to make the confirmation described above
by 3:00 p.m., New York City time, on the second Business
Day next preceding the first day of such proposed Special Rate
Period, we shall be deemed to have delivered a notice to the
Auction Agent with respect to such rate period to the effect set
forth in clause (2) above, thereby resulting in a Standard
Rate Period.
Default Period. Subject to cure provisions, a
Default Period with respect to Series F Notes will commence
on any date we fail to deposit irrevocably in trust in
same-day
funds, with the Paying Agent by 3:00 p.m., New York City
time,
(A) the full amount of any accrued interest on
Series F Notes payable on the Interest Payment Date (an
Interest Default), or
(B) the full amount of any redemption price (the
Redemption Price) payable on the date fixed for
redemption (the Redemption Date) (a
Redemption Default and together with an
Interest Default, hereinafter referred to as
Default).
We shall notify the Auction Agent in writing that a Default
Period is in effect. Subject to cure provisions, a Default
Period with respect to an Interest Default or a
Redemption Default shall end on the Business Day on which,
by 3:00 p.m., New York City time, we have deposited
irrevocably in trust in
same-day
funds with the Paying Agent all unpaid interest and any unpaid
Redemption Price. In the case of an Interest Default, the
Applicable Rate for each rate period commencing during a Default
Period will be equal to the Default Rate, and each subsequent
rate period commencing after the beginning of a Default Period
shall be a Standard Rate Period; provided, however, that the
commencement of a Default Period will not by itself cause the
commencement of a new rate period.
No auction shall be held during a Default Period with respect to
an Interest Default applicable to Series F Notes. No
Default Period with respect to an Interest Default or
Redemption Default shall be deemed to commence if the
amount of any interest or any Redemption Price due (if such
default is not solely due to our willful failure) is deposited
irrevocably in trust, in
same-day
funds with the Paying Agent by 3:00 p.m., New York City
time within three Business Days after the applicable Interest
Payment Date or Redemption Date, together with an amount
equal to the Default Rate applied to the amount of such
non-payment
S-10
based on the actual number of days comprising such period
divided by 360. The Default Rate shall be equal to the Reference
Rate multiplied by three.
Redemption
Optional Redemption. To the extent permitted
under the 1940 Act and Maryland law, we may redeem Series F
Notes having a rate period of one year or less, in whole or in
part, out of funds legally available therefor, on the Interest
Payment Date upon not less than 15 days and not more than
40 days notice prior to the date fixed for redemption. This
optional redemption is not available during the initial rate
period or during any period during which we do not otherwise
have the option to redeem Series F Notes. The optional
redemption price shall equal the aggregate principal amount of
Series F Notes to be redeemed, plus an amount equal to
accrued interest to the date fixed for redemption. Series F
Notes having a rate period of more than one year are redeemable
at our option, in whole or in part, out of funds legally
available therefor, prior to the end of the relevant rate
period, upon not less than 15 days, and not more than
40 days, prior notice, subject to any Specific
Redemption Provisions, which may include the payment of a
redemption premium determined by the Board of Directors after
consultation with the Broker Dealers at the time of the
designation of such rate period. We shall not effect any
optional redemption unless (1) we have available on the
date fixed for redemption Deposit Securities with maturity
or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount
(including any applicable premium) due to Holders of
Series F Notes by reason of the redemption of such
Series F Notes and (2) we would have Eligible Assets
with an aggregate Discounted Value at least equal to the Senior
Notes Basic Maintenance Amount immediately subsequent to such
redemption.
Mandatory Redemption. If we fail to maintain
Eligible Assets with an aggregate Discounted Value at least
equal to the Senior Notes Basic Maintenance Amount as of any
Valuation Date or fail to satisfy the 1940 Act Senior Notes
Asset Coverage as of the last Business Day of any month, and
that failure is not cured within ten Business Days following the
Valuation Date in the case of a failure to maintain the Senior
Notes Basic Maintenance Amount or on the last Business Day of
the following month in the case of a failure to maintain the
1940 Act Senior Notes Asset Coverage as of that last Business
Day (each an Asset Coverage Cure Date),
Series F Notes will be subject to mandatory redemption out
of funds legally available therefor. See Asset Coverage
Requirements.
The principal amount of Series F Notes to be redeemed in
such circumstances will be equal to the lesser of (1) the
minimum principal amount of Series F Notes the redemption
of which, if deemed to have occurred immediately prior to the
opening of business on the relevant Asset Coverage Cure Date,
would result in our having Eligible Assets with an aggregated
Discounted Value at least equal to the Senior Notes Basic
Maintenance Amount or sufficient to satisfy the 1940 Act Senior
Notes Asset Coverage, as the case may be, in either case as of
the relevant Asset Coverage Cure Date (provided that, if there
is no such minimum principal amount of Series F Notes the
redemption of which would have such result, we will redeem all
Series F Notes then outstanding), and (2) the maximum
principal amount of Series F Notes that can be redeemed out
of funds expected to be available therefor on the Mandatory
Redemption Date (as defined below) at the Mandatory
Redemption Price (as defined below).
Any redemption of less than all of the outstanding Senior Notes
will be made from Series F Notes that we designate. We
shall designate the principal amount of Series F Notes to
be redeemed on a pro rata basis among the Holders in proportion
to the principal amount of Series F Notes they hold, by lot
or such other method as we deem equitable. We will not make any
optional or mandatory redemption of less than all outstanding
Series F Notes unless the aggregate principal amount of
Series F Notes to be redeemed is equal to $25,000 or
integral multiples thereof. Any redemption of less than all
Series F Notes outstanding will be made in such a manner
that all Series F Notes outstanding after such redemption
are in authorized denominations.
We are required to effect such a mandatory redemption not later
than 40 days after the Asset Coverage Cure Date (the
Mandatory Redemption Date), except that if we
do not have funds legally available for the redemption of, or we
are not otherwise legally permitted to redeem, all of the
outstanding Series F Notes which are subject to mandatory
redemption, or we otherwise are unable to effect such redemption
on or
S-11
prior to such Mandatory Redemption Date, we will redeem
those Series F Notes, and other Senior Notes to be redeemed
on the earliest practicable date on which we will have such
funds available, upon notice to record owners of Series F
Notes and the Paying Agent. Our ability to make a mandatory
redemption may be limited by the provisions of the 1940 Act or
Maryland law. The redemption price per Series F Note in the
event of any mandatory redemption will be the principal amount,
plus an amount equal to accrued but unpaid interest to the date
fixed for redemption, plus (in the case of a rate period of more
than one year) a redemption premium, if any, determined by the
Board of Directors after consultation with the Broker-Dealers
and set forth in any applicable Specific
Redemption Provisions (the Mandatory
Redemption Price).
Redemption Procedure. Pursuant to
Rule 23c-2
under the 1940 Act, we will file a notice of our intention to
redeem with the SEC in order to provide at least the minimum
notice required by such rule or any successor provision (notice
currently must be filed with the SEC generally at least
30 days prior to the redemption date). We will deliver a
notice of redemption to the Auction Agent and the Trustee
containing the information described below one Business Day
prior to the giving of notice to Holders in the case of an
optional redemption and on or prior to the 30th day
preceding the Mandatory Redemption Date in the case of a
mandatory redemption. The Trustee will use its reasonable
efforts to provide notice to each Holder of Series F Notes
called for redemption by electronic or other reasonable means
not later than the close of business on the Business Day
immediately following the day on which the Trustee determines
the Series F Notes to be redeemed (or, during a Default
Period with respect to such Series F Notes, not later than
the close of business on the Business Day immediately following
the day on which the Trustee receives notice of redemption from
us). Such notice will be confirmed promptly by the Trustee in
writing not later than the close of business on the third
Business Day preceding the redemption date by providing a notice
to each Holder of record of Series F Notes called for
redemption, the Paying Agent (if different from the Trustee) and
the Securities Depository (Notice of Redemption).
The Notice of Redemption will be addressed to the registered
owners of Series F Notes at their addresses appearing on
our books or share records. Such notice will set forth
(1) the redemption date, (2) the principal amount and
identity of Series F Notes to be redeemed, (3) the
redemption price (specifying the amount of accrued interest to
be included therein and the amount of the redemption premium, if
any), (4) that interest on Series F Notes to be
redeemed will cease to accrue on such redemption date, and
(5) the provision of the Indenture under which redemption
shall be made. No defect in the Notice of Redemption or in the
transmittal or mailing will affect the validity of the
redemption proceedings, except as required by applicable law.
If less than all of the outstanding Series F Notes are
redeemed on any date, we will select the amount per Holder to be
redeemed on such date on a pro rata basis in proportion to the
principal amount of Series F Notes held by such Holder, by
lot or by such other method we determine to be fair and
equitable, subject to the terms of any Specific
Redemption Provisions and subject to maintaining authorized
denominations as described above. Series F Notes may be
subject to mandatory redemption as described herein
notwithstanding the terms of any Specific
Redemption Provisions. The Trustee will give notice to the
Securities Depository, whose nominee will be the record holder
of all Series F Notes, and the Securities Depository will
determine Series F Notes to be redeemed from the account of
the Agent Member of each Beneficial Owner. Each Agent Member
will determine the principal amount of Series F Notes to be
redeemed from the account of each Beneficial Owner for which it
acts as agent. An Agent Member may select for
redemption Series F Notes from the accounts of some
Beneficial Owners without selecting for redemption any
Series F Notes from the accounts of other Beneficial
Owners. In this case, in selecting Series F Notes to be
redeemed, the Agent Member will select by lot or other fair and
equitable method. Notwithstanding the foregoing, if neither the
Securities Depository nor its nominee is the record Beneficial
Owner of all Series F Notes, we will select the particular
principal amount to be redeemed by lot or by such other method
as we deem fair and equitable, as contemplated above.
If Notice of Redemption has been given, then upon the deposit of
funds with the Paying Agent sufficient to effect such
redemption, interest on such Series F Notes will cease to
accrue and such Series F Notes will no longer be deemed to
be outstanding for any purpose and all rights of the holder of
Series F Notes so called for redemption will cease and
terminate, except the right of the holder of such Series F
Notes to receive the redemption price, but without any interest
or additional amount. We will be entitled to receive
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from the Paying Agent, promptly after the date fixed for
redemption, any cash deposited with the Paying Agent in excess
of (1) the aggregate redemption price of Series F
Notes called for redemption on such date and (2) such other
amounts, if any, to which holders of Series F Notes called
for redemption may be entitled. We will be entitled to receive,
from time to time after the date fixed for redemption, from the
Paying Agent the interest, if any, earned on such funds
deposited with the Paying Agent and the owners of Series F
Notes so redeemed will have no claim to any such interest. Any
funds so deposited which are unclaimed two years after such
redemption date will be paid, to the extent permitted by law, by
the Paying Agent to us. After such payment, Holders of
Series F Notes called for redemption may look only to us
for payment.
So long as any Series F Notes are held of record by the
nominee of the Securities Depository, the redemption price for
those Series F Notes will be paid on the redemption date to
the nominee of the Securities Depository. The Securities
Depositorys normal procedures provide for it to distribute
the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for
whom they are acting as agent.
Notwithstanding the provisions for redemption described above,
no Series F Notes may be redeemed unless all interest in
arrears on the outstanding Series F Notes, and any
indebtedness of ours ranking on a parity with Series F
Notes, have been or are being contemporaneously paid or set
aside for payment, except that the foregoing shall not prevent
the purchase or acquisition of all the outstanding Series F
Notes pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and
accepted by, holders of all outstanding Series F Notes.
Except for the provisions described above, nothing contained in
the Indenture limits any legal right of ours to purchase or
otherwise acquire Series F Notes outside of an auction at
any price, whether higher or lower than the price that would be
paid in connection with an optional or mandatory redemption, so
long as, at the time of any such purchase, there is no arrearage
in the payment of interest on or the mandatory or optional
redemption price with respect to, any Series F Notes for
which Notice of Redemption has been given, and we are in
compliance with the 1940 Act Series F Notes Asset Coverage
and have Eligible Assets with an aggregate Discounted Value at
least equal to Series F Notes Basic Maintenance Amount
after giving effect to such purchase or acquisition on the date
thereof. If less than all outstanding Series F Notes are
redeemed or otherwise acquired by us, we shall give notice of
such transaction to the Trustee, in accordance with the
procedures agreed upon by the Board of Directors.
Payment
Restrictions on Shares
Under the 1940 Act, we may not declare any dividend on common
stock or make any distribution with respect to our common stock
and preferred stock or purchase or redeem any common or
preferred stock if, at the time of such declaration (and after
giving effect thereto), asset coverage with respect to
Series F Notes and any other senior securities representing
indebtedness (as defined in the 1940 Act), would be less than
300% (or such other percentage as may in the future be specified
in or under the 1940 Act as the minimum asset coverage for
senior securities representing indebtedness of a closed-end
investment company as a condition of declaring distributions,
purchases or redemptions of its common or preferred shares).
Dividends may be declared upon any preferred stock, however, if
Series F Notes and any other senior securities representing
indebtedness have an asset coverage of at least 200% at the time
of declaration after deducting the amount of such dividend.
Senior securities representing indebtedness
generally means any bond, debenture, note or similar obligation
or instrument constituting a security (other than shares of
beneficial interest) and evidencing indebtedness and could
include our obligations under the Senior Notes, our revolving
credit facility or any other of our borrowings (collectively
referred to as Borrowings). For purposes of
determining asset coverage for senior securities representing
indebtedness in connection with the payment of dividends or
other distributions on or purchases or redemptions of stock, the
term senior security does not include any promissory
note or other evidence of indebtedness issued in consideration
of any loan, extension or renewal thereof, made by a bank or
other person and privately arranged, and not intended to be
publicly distributed. The term senior security also
does not include any such promissory note or other evidence of
indebtedness
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in any case where such a loan is for temporary purposes only and
in an amount not exceeding 5% of the value of our total assets
at the time when the loan is made; a loan is presumed under the
1940 Act to be for temporary purposes if it is repaid within
60 days and is not extended or renewed; otherwise, it is
presumed not to be for temporary purposes. For purposes of
determining whether the 200% and 300% asset-coverage
requirements described above apply in connection with interest
payments or distributions on or purchases or redemptions of
stock, such asset coverage may be calculated on the basis of
values determined as of a time within 48 hours (not
including Sundays or holidays) next preceding the time of the
applicable determination.
In addition, a declaration of a dividend or other distribution
on, or repurchase or redemption of, common or preferred stock is
restricted (1) at any time that an event of default under
Series F Notes or any other Borrowings has occurred and is
continuing; or (2) if, after giving effect to such
declaration, we would not have eligible portfolio holdings with
an aggregated Discounted Value at least equal to any asset
coverage requirements associated with such Series F Notes
or other Borrowings; or (3) we have not redeemed the full
amount of Series F Notes or other Borrowings, if any,
required to be redeemed by any provision for mandatory
redemption.
THE
AUCTIONS
General
Auction Agency Agreement. We have entered into
an Auction Agency Agreement (the Auction Agency
Agreement) with the Auction Agent (currently, The Bank of
New York) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of
determining the Applicable Rate for Series F Notes so long
as the Applicable Rate for Series F Notes is to be based on
the results of an auction.
The Auction Agent may terminate the Auction Agency Agreement
upon notice to us on a date no earlier than 60 days after
the notice or upon notice to us on a date specified by the
Auction Agent if we fail to pay the amounts due to the Auction
Agent within 30 days of invoice. If the Auction Agent
should resign, we will use our best efforts to enter into an
agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction
Agency Agreement. We may remove the Auction Agent provided that
prior to such removal we have entered into such an agreement
with a successor Auction Agent.
Auction
Risk
You may not be able to sell your Series F Notes at an
auction if the auction fails; that is, if there are more
Series F Notes offered for sale than there are buyers for
those Series F Notes. Also, if you place hold orders
(orders to retain Series F Notes) at an auction only at a
specified rate, and that bid rate exceeds the rate set at the
auction, you will not retain your Series F Notes. Finally,
if you buy Series F Notes or elect to retain Series F
Notes without specifying a rate below which you would not wish
to buy or continue to hold those Series F Notes, and the
auction sets a below-market rate, you may receive a lower rate
of return on your Series F Notes than the market rate.
Auction
Procedures
Prior to the Submission Deadline on each Auction Date for
Series F Notes, each customer of a Broker-Dealer listed on
the records of that Broker-Dealer (or, if applicable, the
Auction Agent) as a holder thereof (a Beneficial
Owner) may submit orders with respect to Series F
Notes that Broker-Dealer as follows:
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Hold Order indicating the Beneficial Owners
desire to hold Series F Notes without regard to the Applicable
Rate for the next rate period.
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Bid to Sell indicating the Beneficial Owners
desire to sell the principal amount of outstanding Series F
Notes, if any, held by such Beneficial Owner if the Applicable
Rate for the next
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succeeding rate period shall be less than the rate per annum
specified by such Beneficial Owner (also known as a hold at rate
order).
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Bid to Purchase a current Beneficial Owner or a
Potential Beneficial Owner may submit bids offering to purchase
a certain amount of outstanding Series F Notes if the
Applicable Rate determined on the Auction Date is higher than
the rate specified in the Bid. A Bid specifying a rate higher
than the Maximum Rate on the Auction Date will not be accepted.
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Sell Order an order by a current Beneficial Owner
desire to sell a specified principal amount of Series F
Notes, regardless of the Applicable Rate for the upcoming rate
period.
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Orders submitted (or the failure to submit orders) by Beneficial
Owners under certain circumstances will have the effects
described below. A Beneficial Owner of Series F Notes that
submits a Bid with respect thereto to its Broker-Dealer having a
rate higher than the Maximum Rate for Series F Notes on the
Auction Date will be treated as having submitted a Sell Order
with respect to such Series F Notes. A Beneficial Owner
that fails to submit an order with respect to Series F
Notes to its Broker-Dealer will be deemed to have submitted a
Hold Order with respect to Series F Notes; provided,
however, that if a Beneficial Owner fails to submit an order
with respect to Series F Notes to its Broker-Dealer for an
auction relating to a Special Rate Period of more than
twenty-eight (28) days, the Beneficial Owner will be deemed
to have submitted a Sell Order with respect to such
Series F Notes. A Sell Order constitutes an irrevocable
offer to sell Series F Notes subject thereto. A Beneficial
Owner that offers to become the Beneficial Owner of additional
Series F Notes is, for purposes of such offer, a Potential
Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of
Series F Notes but that wishes to purchase Series F
Notes, or that is a Beneficial Owner of Series F Notes that
wishes to purchase additional Series F Notes (in each case,
a Potential Beneficial Owner), may submit bids to
its Broker-Dealer in which it offers to purchase such principal
amount of outstanding Series F Notes specified in such bid
if the Applicable Rate therefor determined on such Auction Date
shall not be less than the rate specified in such Bid. A Bid
placed by a Potential Beneficial Owner of Series F Notes
specifying a rate higher than the Maximum Rate for Series F
Notes on the Auction Date therefor will not be accepted.
Each Broker-Dealer shall submit in writing, which shall include
a writing delivered via
e-mail or
other electronic means to the Auction Agent, prior to the
submission deadline on each Auction Date, all orders for
Series F Notes subject to an auction on such Auction Date
accepted by such Broker-Dealer, designating itself (unless
otherwise permitted by us) as an existing Beneficial Owner in
respect of Series F Notes subject to orders submitted or
deemed submitted to it by Beneficial Owners and as a Potential
Beneficial Owner in respect of Series F Notes subject to
orders submitted to it by Potential Beneficial Owners. However,
neither we nor the Auction Agent will be responsible for a
Broker-Dealers failure to comply with these procedures.
Any order placed with the Auction Agent by a Broker-Dealer as or
on behalf of an Existing Beneficial Owner or a Potential
Beneficial Owner will be treated in the same manner as an order
placed with a Broker-Dealer by a Beneficial Owner or Potential
Beneficial Owner. Similarly, any failure by a Broker-Dealer to
submit to the Auction Agent an order in respect of Series F
Notes held by it or by its customers who are Beneficial Owners
will be treated in the same manner as a Beneficial Owners
failure to submit to its Broker-Dealer an order in respect of
Series F Notes held by it. A Broker-Dealer also may submit
orders to the Auction Agent for its own account as an Existing
Beneficial Owner or Potential Beneficial Owner, provided it is
not an affiliate of us.
If Sufficient Clearing Bids for Series F Notes exist (that
is, the aggregate principal amount of outstanding Series F
Notes subject to submitted bids of Potential Beneficial Owners
specifying one or more rates between the Minimum Rate (for
Standard Rate Periods or shorter periods, only) and the Maximum
Rate (for all rate periods) exceeds or is equal to the sum of
the aggregate principal amount of outstanding Series F
Notes subject to submitted Sell Orders), the Applicable Rate for
the next succeeding rate period will be the lowest rate
specified in the submitted bids which, taking into account such
rate and all lower rates bid by Broker-Dealers as or on behalf
of Existing Beneficial Owners and Potential Beneficial Owners,
would result in Existing Beneficial Owners and Potential
Beneficial Owners owning the aggregate principal amount of
Series F Notes for purchase in the auction. If Sufficient
Clearing Bids of Series F Notes do not exist (other than
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because all of the outstanding Series F Notes subject to
Submitted Hold Orders), then the Applicable Rate for all
Series F Notes for the next succeeding rate period thereof
will be equal to the Maximum Rate. In such event, Beneficial
Owners that have submitted or are deemed to have submitted Sell
Orders may not be able to sell in such auction all aggregate
principal amount subject to such Sell Orders. In any particular
auction, if all outstanding Series F Notes are the subject
of Submitted Hold Orders, the Applicable Rate for such
Series F Notes for the next succeeding rate period will be
the All Hold Rate (such a situation is called an All Hold
Auction).
The Auction Procedures include a pro rata allocation of
Series F Notes for purchase and sale, which may result in
an Existing Beneficial Owner continuing to hold or selling, or a
Potential Beneficial Owner purchasing, a number of Series F
Notes that is less than the number of Series F Notes
specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves
as Existing Beneficial Owners or Potential Beneficial Owners in
respect of customer orders will be required to make appropriate
pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next
Business Day (also an Interest Payment Date) after the Auction
Date through the Securities Depository. Purchasers will make
payment through their Agent Members in
same-day
funds to the Securities Depository against delivery to their
respective Agent Members. The Securities Depository will make
payment to the sellers Agent Members in accordance with
the Securities Depositorys normal procedures, which now
provide for payment against delivery by their Agent Members in
same-day
funds.
Certain
Considerations Affecting Auction Rate Securities
Role of Broker-Dealers. Citigroup Global
Markets Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Stifel, Nicolaus & Company,
Incorporated (the Broker-Dealers) have been
appointed by the issuers or obligors of various auction rate
securities to serve as a dealer in the auctions for those
securities and are paid by the issuers or obligors for their
services. The Broker-Dealers receive broker-dealer fees from
such issuers or obligors at an agreed upon annual rate that is
applied to the principal amount of securities sold or
successfully placed through them in such auctions.
The Broker-Dealers are designated in the Broker-Dealer
Agreements as the Broker-Dealers to contact Existing Holders and
Potential Holders and solicit Bids for Series F Notes.
After each auction for Series F Notes the Auction Agent
will pay a service charge to each Broker-Dealer. We will provide
the Auction Agent with the funds to pay the service charges. The
service charge will be in an amount equal to: (i) in the
case of any auction immediately preceding a rate period of less
than one year, the product of (A) a fraction the numerator
of which is the number of days in the rate period (calculated by
counting the first day of such rate period but excluding the
last day thereof) and the denominator of which is 360, times
(B) 1/4
of 1%, times (C) $25,000, times (D) the sum of the
aggregate number of Series F Notes placed by such
Broker-Dealer, or (ii) the amount mutually agreed upon by
us and the Broker-Dealers in the case of any auction immediately
preceding a rate period of one year or longer. For purposes of
the preceding sentence, Series F Notes will be placed by a
Broker-Dealer if such Series F Notes were (a) the
subject of Hold Orders deemed to have been submitted to the
Auction Agent by the Broker-Dealer and were acquired by such
Broker-Dealer for its own account or were acquired by such
Broker-Dealer for its customers who are Beneficial Owners, or
(b) the subject of an order submitted by such Broker-Dealer
that is (1) a submitted Bid of an Existing Beneficial Owner
that resulted in such existing Beneficial Owner continuing to
hold such Series F Notes as a result of the auction or
(2) a submitted Bid of a Potential Beneficial Owner that
resulted in such Potential Beneficial Owner purchasing such
Series F Notes as a result of the auction or (3) a
valid Hold Order. The Broker-Dealers may share a portion of such
service charges with other dealers that submit Orders through it
that are filled in the auction.
Bidding by Broker-Dealers. A Broker-Dealer is
permitted, but not obligated, to submit Orders in auctions for
Series F Notes for its own account either as a buyer or
seller and routinely does so in the auction rate securities
market in its sole discretion. If the Broker-Dealer submits an
Order for its own account, it would have an advantage over other
Bidders because a Broker-Dealer would have knowledge of the
other
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Orders placed through it in that auction for Series F Notes
and thus could determine the rate and size of its Order so as to
increase the likelihood that (i) its Order will be accepted
in the auction for Series F Notes and (ii) the auction
for Series F Notes will clear at a particular rate. For
this reason, and because the Broker-Dealers are appointed and
paid by us to serve as a Broker-Dealer in the auction for
Series F Notes, a Broker-Dealers interests in serving
as a Broker-Dealer in an auction may differ from those of
Existing Holders and Potential Holders who participate in
auctions for Series F Notes. See Role of
Broker-Dealers. A Broker-Dealer would not have knowledge
of Orders submitted to the Auction Agent by any other firm that
is, or may in the future be, appointed to accept Orders pursuant
to a Broker-Dealer Agreement.
The Broker-Dealers are the only Broker-Dealers appointed by us
to serve as a Broker-Dealer in the auctions for Series F
Notes, and as long as that remains the case, they will be the
only Broker-Dealers that submit Orders to the Auction Agent in
the auctions for Series F Notes. As a result, in such
circumstances, the Broker-Dealers may discern the clearing rate
before the Orders are submitted to the Auction Agent and set the
clearing rate with their respective Orders.
A Broker-Dealer may place one or more bids in an auction for
Series F Notes for its own account to acquire securities
for its inventory, to prevent an Auction Failure
(which occurs if there are insufficient clearing bids and
results in the auction rate being set at the Maximum Rate) or to
prevent an auction from clearing at a rate that the
Broker-Dealer believes does not reflect the market for
Series F Notes. A Broker-Dealer may place such Bids even
after obtaining knowledge of some or all of the other Orders
submitted through it. When bidding in an auction for
Series F Notes for its own account, a Broker-Dealer also
may Bid inside or outside the range of rates that it posts in
its Price Talk (as defined herein). See Price
Talk.
A Broker-Dealer also may encourage bidding by others in auctions
for Series F Notes, including to prevent an Auction Failure
or to prevent an auction for Series F Notes from clearing
at a rate that a Broker-Dealer believes does not reflect the
market for Series F Notes. A Broker-Dealer may encourage
such Bids even after obtaining knowledge of some or all of the
other Orders submitted through it.
Bids by a Broker-Dealer or by those it may encourage to place
Bids are likely to affect (i) the Applicable
Rate including preventing the Applicable Rate from
being set at the Maximum Rate or otherwise causing Potential
Beneficial Owners to receive a lower rate than they might have
received had a Broker-Dealer not Bid (or not encouraged others
to Bid) and (ii) the allocation of Series F Notes
being auctioned, including displacing some Potential Beneficial
Owners who may have their Bids rejected or receive fewer
Series F Notes than they would have received if a
Broker-Dealer had not Bid (or encouraged others to Bid). Because
of these practices, the fact that an auction for Series F
Notes clears successfully does not mean that an investment in
Series F Notes involves no significant liquidity or credit
risk. A Broker-Dealer is not obligated to continue to place such
Bids (or to continue to encourage other Bidders to do so) in any
particular auction for Series F Notes to prevent an Auction
Failure or an auction for Series F Notes from clearing at a
rate a Broker-Dealer believes does not reflect the market for
Series F Notes. Investors should not assume that a
Broker-Dealer will place Bids or encourage others to do so or
that Auction Failures will not occur. Investors should also be
aware that Bids by a Broker-Dealer (or by those it may encourage
to place Bids) may cause lower Applicable Rates to occur.
The statements herein regarding Bidding by a Broker-Dealer apply
only to a Broker-Dealers auction desk and any other
business units of a Broker-Dealer that are not separated from
the auction desk by an information barrier designed to limit
inappropriate dissemination of bidding information.
In any particular auction for Series F Notes, if all
outstanding Series F Notes are the subject of Submitted
Hold Orders, the Applicable Rate for the next succeeding Auction
Period will be the All Hold Rate, which situation is an All Hold
Auction. If a Broker-Dealer holds any Series F Notes for
its own account on an Auction Date, a Broker-Dealer may, but is
not obligated to submit a Sell Order into the auction for
Series F Notes with respect to such Series F Notes,
which would prevent that auction for Series F Notes from
being an All Hold Auction. A Broker-Dealer may, but is not
obligated to, submit Bids for its own account in that same
auction for Series F Notes, as set forth above.
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Price Talk. Before the start of an auction for
Series F Notes, a Broker-Dealer, in its discretion, may
make available to its customers who are Existing Holders and
Potential Holders a Broker-Dealers good faith judgment of
the range of likely clearing rates for the auction for
Series F Notes based on market and other information. This
is known as Price Talk. Price Talk is not a guaranty
that the Applicable Rate established through the auction for
Series F Notes will be within the Price Talk, and Existing
Holders and Potential Holders are free to use it or ignore it. A
Broker-Dealer occasionally may update and change the Price Talk
based on changes in our credit quality or macroeconomic factors
that are likely to result in a change in interest rate levels,
such as an announcement by the Federal Reserve Board of a change
in the Federal Funds rate or an announcement by the Bureau of
Labor Statistics of unemployment numbers. Potential Holders
should confirm with a Broker-Dealer the manner by which such
Broker-Dealer will communicate Price Talk and any changes to
Price Talk.
All-or-Nothing Bids. The
Broker-Dealers will not accept all-or-nothing Bids
(i.e., Bids whereby the bidder proposes to reject an
allocation smaller than the entire quantity Bid) or any other
type of Bid that allows the bidder to avoid Auction Procedures
that require the pro rata allocation of Series F Notes
where there are not sufficient Sell Orders to fill all Bids at
the Winning Bid Rate.
No Assurances Regarding Auction Outcomes. The
Broker-Dealers provide no assurance as to the outcome of any
auction. The Broker-Dealers also do not provide any assurance
that any Bid will be successful, in whole or in part, or that
the auction for Series F Notes will clear at a rate that a
bidder considers acceptable. Bids may be only partially filled,
or not filled at all, and the Applicable Rate on any
Series F Notes purchased or retained in the auction may be
lower than the market rate for similar investments.
The Broker-Dealers will not agree before an auction to buy
Series F Notes from, or sell Series F Notes to, a
customer after the auction.
Deadlines. Each particular auction for
Series F Notes has a formal deadline by which all Bids must
be submitted by the Broker-Dealers to the Auction Agent. This
deadline is called the Submission Deadline. To
provide sufficient time to process and submit customer Bids to
the Auction Agent before the Submission Deadline, each
Broker-Dealer imposes an earlier deadline for all customers,
called the Broker-Dealer Deadline, by which bidders
must submit Bids to a Broker-Dealer. The Broker-Dealer Deadline
is subject to change by a Broker-Dealer. Potential Beneficial
Owners should consult with their Broker-Dealer as to its
Broker-Dealer Deadline. A Broker-Dealer may allow for correction
of clerical errors after the Broker-Dealer Deadline and prior to
the Submission Deadline. A Broker-Dealer may submit Bids for its
own account at any time until the Submission Deadline and may
change Bids it has submitted for its own account at any time
until the Submission Deadline.
Existing Holders Ability to Resell Auction Rate
Securities May Be Limited. An Existing Holder may sell,
transfer or dispose of a Series F Note only: (i) in an
auction for Series F Notes, only pursuant to a Bid or Sell
Order in accordance with the Auction Procedures,
(ii) outside an auction, only to or through a
Broker-Dealer, or (iii) by transferring Series F Notes
to us or any affiliate; provided, however, that (a) a sale,
transfer or other disposition of an aggregate principal amount
of Series F Notes from a customer of a Broker-Dealer listed
on the records of that Broker-Dealer as the holder of such
Series F Notes to that Broker-Dealer or another customer of
that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of the foregoing if such
Broker-Dealer remains the Existing Beneficial Owner of
Series F Notes so sold, transferred or disposed of
immediately after such sale, transfer or disposition and
(b) in the case of all transfers other than pursuant to
auctions, the Broker-Dealer (or other person, if permitted by
us) to whom such transfer is made shall advise the Auction Agent
of such transfer.
Existing Holders will be able to sell all of the Series F
Notes that are the subject of their Submitted Sell Orders only
if there are bidders willing to purchase all those Series F
Notes in the auction for Series F Notes. If Sufficient
Clearing Bids have not been made, Existing Holders that have
submitted Sell Orders will not be able to sell in the auction
for Series F Notes all, and may not be able to sell any, of
Series F Notes subject to such Submitted Sell Orders. As
discussed above (See Bidding by
Broker-Dealers), a Broker-Dealer may submit a Bid in an
auction for Series F Notes to avoid an Auction Failure, but
it is not obligated to do so. There may not always be enough
bidders to prevent an Auction Failure in the absence of bidding
by
S-18
a Broker-Dealer in the auction for Series F Notes for its
own account or encouraging others to Bid. Therefore, Auction
Failures are possible, especially if our credit were to
deteriorate, if a market disruption were to occur or if, for any
reason, a Broker-Dealer were unable or unwilling to Bid.
Between auctions for Series F Notes, there can be no
assurance that a secondary market for Series F Notes will
develop or, if it does develop, that it will provide Existing
Holders the ability to resell Series F Notes on the terms
or at the times desired by an Existing Holder. A Broker-Dealer,
in its own discretion, may decide to buy or sell Series F
Notes in the secondary market for its own account from or to
investors at any time and at any price, including at prices
equivalent to, below, or above par for Series F Notes.
However, a Broker-Dealer is not obligated to make a market in
Series F Notes and may discontinue trading in Series F
Notes without notice for any reason at any time. Existing
Holders who resell between auctions for Series F Notes may
receive an amount less than par, depending on market conditions.
We can provide no assurance that any secondary trading market of
Series F Notes will provide owners with liquidity of
investment. Series F Notes are not listed on any exchange
or automated quotation system. Investors who purchase
Series F Notes in an auction for Series F Notes for a
Special Rate Period should note that, because the interest rate
on such Series F Notes will be fixed for the length of such
rate period, the value of Series F Notes may fluctuate in
response to changes in interest rates, and may be more or less
than their original cost if sold on the open market in advance
of the next auction for Series F Notes, depending upon
market conditions.
If an Existing Holder purchased Series F Notes through a
dealer which is not a Broker-Dealer for the securities, such
Existing Holders ability to sell its securities may be
affected by the continued ability of its dealer to transact
trades for Series F Notes through a Broker-Dealer.
The ability to resell Series F Notes will depend on various
factors affecting the market for Series F Notes, including
news relating to us, the attractiveness of alternative
investments, investor demand for short term securities, the
perceived risk of owning Series F Notes (whether related to
credit, liquidity or any other risk), the tax or accounting
treatment accorded Series F Notes (including
U.S. generally accepted accounting principles as they apply
to the accounting treatment of auction rate securities),
reactions of market participants to regulatory actions (such as
those described in Securities and Exchange
Commission Settlements below) or press reports, financial
reporting cycles and market conditions generally. Demand for
Series F Notes may change without warning, and declines in
demand may be short-lived or continue for longer periods.
Resignation of the Auction Agent or a Broker-Dealer Could
Impact the Ability to Hold Auctions. The Auction Agent
Agreement provides that the Auction Agent may resign from its
duties as Auction Agent by giving us at least 60 days
notice and does not require, as a condition to the effectiveness
of such resignation, that a replacement Auction Agent be in
place. The Broker-Dealer Agreement provides that a Broker-Dealer
thereunder may resign upon five days notice and does not
require, as a condition to the effectiveness of such
resignation, that a replacement Broker-Dealer be in place. For
any auction period during which there is no duly appointed
Auction Agent or Broker-Dealer, it will not be possible to hold
auctions for Series F Notes, with the result that the
interest rate on Series F Notes will be determined as
described in the supplemental indenture.
Securities and Exchange Commission
Settlements. On May 31, 2006, the SEC
announced that it had settled its investigation of 15 firms,
including Citigroup Global Markets Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the
Settling Broker-Dealers), that participate in the
auction rate securities market, regarding their respective
practices and procedures in this market. The SEC alleged in the
settlement that the firms had managed auctions for auction rate
securities in which they participated in ways that were not
adequately disclosed or that did not conform to disclosed
auction procedures. As part of the settlement, the Settling
Broker-Dealers agreed to pay a civil penalty. In addition, the
Settling Broker-Dealers, without admitting or denying the
SECs allegations, agreed to provide to customers written
descriptions of its material auction practices and procedures,
and to implement procedures reasonably designed to detect and
prevent any failures by that Settling Broker-Dealer to conduct
the auction process in accordance with disclosed procedures. No
assurance can be offered as to how the settlement may affect the
market for auction rate securities or Series F Notes. The
SECs investigation is continuing as to other entities that
participate in the auction rate securities market.
S-19
In addition, on January 9, 2007, the SEC announced that it
had settled its investigation of three banks, including The Bank
of New York (the Settling Auction Agents), that
participate as auction agents in the auction rate securities
market, regarding their respective practices and procedures in
this market. The SEC alleged in the settlement that the Settling
Auction Agents allowed broker-dealers in auctions to submit bids
or revise bids after the submission deadlines and allowed
broker-dealers to intervene in auctions in ways that affected
the rates paid on the auction rate securities. As part of the
settlement, the Settling Auction Agents agreed to pay civil
penalties. In addition, each Settling Auction Agent, without
admitting or denying the SECs allegations, agreed to
provide to broker-dealers and issuers written descriptions of
its material auction practices and procedures and to implement
procedures reasonably designed to detect and prevent any
failures by that Settling Auction Agent to conduct the auction
process in accordance with disclosed procedures. No assurance
can be offered as to how the settlement may affect the market
for auction rate securities or Series F Notes.
Additional
Information
Securities Depository. DTC will act as the
Securities Depository for the Agent Members with respect to
Series F Notes. One certificate for Series F Notes
will be registered in the name of Cede & Co., as
nominee of the Securities Depository. Such certificate will bear
a legend to the effect that such certificate is issued subject
to the provisions restricting transfers of Series F Notes
contained in the Indenture. We also will issue stop-transfer
instructions to the transfer agent for Series F Notes.
Cede & Co. will be the holder of record of each series
of all Senior Notes and beneficial owners of such Series F
Notes will not be entitled to receive certificates representing
their ownership interest in such Series F Notes.
DTC, a New York-chartered limited purpose trust company,
performs services for its participants (including the Agent
Members), some of whom (and/or their representatives) own DTC.
DTC maintains lists of its participants and will maintain the
positions (ownership interests) held by each such participant
(the Agent Member) in Series F Notes, whether
for its own account or as a nominee for another person.
Concerning
The Auction Agent
The Auction Agent is acting as non-fiduciary agent for us in
connection with Auctions. In the absence of bad faith or
negligence on its part, the Auction Agent will not be liable for
any action taken, suffered, or omitted or for any error of
judgment made by it in the performance of its duties under the
Auction Agency Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have
been negligent in ascertaining the pertinent facts.
The Auction Agent may rely upon, as evidence of the identities
of the Existing Holders of Series F Notes, the Auction
Agents registry of Existing Holders, the results of
auctions and notices from any Broker-Dealer (or other Person, if
permitted by us) with respect to transfers described under
The Auctions in the Prospectus Supplement and
notices from us. The Auction Agent is not required to accept any
such notice for an Auction unless it is received by the Auction
Agent by 3:00 p.m., New York City time, on the Business Day
preceding such auction.
S-20
UNDERWRITING
Citigroup Global Markets Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Stifel,
Nicolaus & Company, Incorporated are acting as the
underwriters in this offering. Subject to the terms and
conditions stated in the underwriting agreement dated the date
of this Prospectus Supplement, each underwriter named below has
agreed to purchase, and we have agreed to sell to that
underwriter, the principal amount of Series F Notes set
forth opposite the underwriters name.
|
|
|
|
|
|
|
Series F
|
|
Underwriter
|
|
Notes
|
|
|
Citigroup Global Markets Inc.
|
|
$
|
87,500,000
|
|
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated
|
|
|
87,500,000
|
|
Stifel, Nicolaus &
Company, Incorporated
|
|
|
10,000,000
|
|
|
|
|
|
|
Total
|
|
$
|
185,000,000
|
|
|
|
|
|
|
The underwriting agreement provides that the obligations of the
underwriters to purchase the Series F Notes 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 Series F Notes if they purchase any of
the Series F Notes. Each underwriter or an affiliate
thereof intends to participate in future auctions as a
Broker-Dealer for the Series F Notes.
After the auction, which includes the newly issued Series F
Notes, payment by each purchaser of Series F Notes sold
through the auction will be made in accordance with the
procedures described under The Auctions.
The underwriters propose to offer some of the Series F
Notes directly to the public at the public offering price set
forth on the cover page of this Prospectus Supplement and some
of the Series F Notes to dealers at the public offering
price less a concession not to exceed 0.55% of the principal
amount of the Series F Notes. The underwriters may allow,
and dealers may reallow, a concession not to exceed 0.15% of the
principal amount of the Series F Notes on sales to other
dealers. Investors must pay for any Series F Notes on or
before June 26, 2007. After the initial offering of the
Series F Notes to the public, the representatives may
change the public offering price and concessions.
The following table shows the underwriting discounts and
commissions that we are to pay to the underwriters in connection
with this offering (expressed as a percentage of the principal
amount of the Series F Notes).
|
|
|
|
|
|
|
Paid by Us
|
|
|
Per Series F Note
|
|
|
1.00
|
%
|
We estimate that we will incur approximately $175,000 in
expenses in connection with this offering. Merrill Lynch,
Pierce, Fenner & Smith Incorporated has agreed to
reimburse us for certain expenses in connection with the
offering.
We and Kayne Anderson have agreed that, for a period of
90 days from the date of this Prospectus Supplement, we and
they will not, without the prior written consent of Citigroup
Global Markets Inc., on behalf of the underwriters, sell,
contract to sell, or otherwise dispose of any of our auction
rate senior notes or auction rate preferred stock (Senior
Securities), or any securities convertible into or
exchangeable for Senior Securities or grant any options or
warrants to purchase our Senior Securities, other than the sale
of Series F Notes to the underwriters pursuant to the
underwriting agreement and the issuance and sale of up to
$150,000,000 of other Senior Securities. Citigroup Global
Markets Inc., on behalf of the underwriters, in its sole
discretion, may release any of the securities subject to this
lock-up
agreement at any time without notice.
The underwriters and their affiliates have performed investment
banking and advisory services for us from time to time for which
they have received customary fees and expenses. The underwriters
and their
S-21
affiliates may, from time to time, engage in transactions with
and perform services for us in the ordinary course of their
business. Citigroup Global Markets Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated have acted and may
act in the future as
co-lead
managers and joint book-running managers of initial public
offerings of other funds managed by Kayne Anderson.
We anticipate that the underwriters may from time to time act as
brokers or dealers and receive fees in connection with the
execution of our portfolio transactions after the underwriters
have ceased to be underwriters and, subject to certain
restrictions, each may act as a broker while it is an
underwriter. We anticipate that the underwriters or one of their
affiliates may from time to time act in auctions as a
Broker-Dealer or dealer and receive fees as described under
Description of Senior F Notes.
A prospectus in electronic format may be made available by one
or more of the underwriters. In those cases, prospective
investors may view offering terms online and prospective
investors may be allowed to place orders online. The
underwriters may agree to allocate a number of Series F
Notes for sale to their online brokerage account holders. The
underwriters will make such allocations on the same basis as
other allocations. In addition, Series F Notes may be sold
by the underwriters to securities dealers who resell
Series F Notes to online brokerage account holders.
We and Kayne Anderson have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments
the underwriters may be required to make because of any of those
liabilities.
The respective addresses of the underwriters are: Citigroup
Global Markets Inc., 388 Greenwich Street, New York, New
York 10013; Merrill Lynch, Pierce, Fenner & Smith
Incorporated, 4 World Financial Center, 250 Vesey
Street, New York, New York 10080; and Stifel,
Nicolaus & Company, Incorporated, 501 North Broadway,
St. Louis, Missouri 63102.
As of June 18, 2007, our Independent Directors, excluding
Ms. Costin, and their immediate family members do not
beneficially own securities in entities directly or indirectly
controlling, controlled by, or under common control with, our
underwriters. Due to her ownership of securities issued by one
of the underwriters in this offering, Ms. Costin is
expected to be treated as an interested person of
us, as defined in the 1940 Act, during and until the completion
of this offering, and, in the future, may be treated as an
interested person during subsequent offerings of our
securities if the relevant offering is underwritten by the
underwriter in which Ms. Costin owns securities.
LEGAL
MATTERS
Certain legal matters in connection with Series F Notes
will be passed upon for us by Paul, Hastings,
Janofsky & Walker
llp, Los Angeles,
California, and for the underwriters by Sidley Austin
llp, New York, New
York. Paul, Hastings, Janofsky & Walker
llp and Sidley
Austin llp may
rely as to certain matters of Maryland law on the opinion of
Venable llp,
Baltimore, Maryland.
S-22
WHERE YOU
CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Exchange
Act and the 1940 Act, and are required to file reports,
including annual and semi-annual reports, proxy statements and
other information with the SEC. We voluntarily file quarterly
shareholder reports. Our most recent shareholder report filed
with the SEC is for the period ended February 28, 2007.
These documents are available on the SECs EDGAR system and
can be inspected and copied for a fee at the SECs public
reference room, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Additional information about the
operation of the public reference room facilities may be
obtained by calling the SEC at
(202) 551-5850.
This Prospectus Supplement and the accompanying Base Prospectus
do not contain all of the information in our registration
statement, including amendments, exhibits, and schedules.
Statements in this Prospectus Supplement and the accompanying
Base Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance
reference is made to the copy of the contract or other document
filed as an exhibit to the registration statement, each such
statement being qualified in all respects by this reference.
Additional information about us can be found in our Registration
Statement (including amendments, exhibits, and schedules) on
Form N-2
filed with the SEC. The SEC maintains a web site
(http://www.sec.gov)
that contains our Registration Statement, other documents
incorporated by reference, and other information we have filed
electronically with the SEC, including proxy statements and
reports filed under the Exchange Act.
S-23
UNAUDITED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED FEBRUARY 28,
2007
CONTENTS
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Page
|
|
|
|
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F-2
|
|
|
|
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F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
|
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F-12
|
|
F-1
KAYNE
ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 2007
(amounts in 000s)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Description
|
|
Shares/Units
|
|
|
Value
|
|
|
Long-Term
Investments 163.0%
|
|
|
|
|
|
|
|
|
Equity
Investments(a) 163.0%
|
|
|
|
|
|
|
|
|
Pipeline MLP(b)
134.7%
|
|
|
|
|
|
|
|
|
Atlas Pipeline Partners, L.P.
|
|
|
401
|
|
|
$
|
19,273
|
|
Boardwalk Pipeline Partners, LP
|
|
|
522
|
|
|
|
19,146
|
|
Buckeye Partners, L.P.
|
|
|
157
|
|
|
|
7,702
|
|
Copano Energy, L.L.C.
|
|
|
1,959
|
|
|
|
129,474
|
|
Crosstex Energy, L.P.
|
|
|
2,586
|
|
|
|
97,174
|
|
Crosstex Energy, L.P.
Senior Subordinated Units, Unregistered(c)(d)
|
|
|
356
|
|
|
|
11,911
|
|
DCP Midstream Partners, LP
|
|
|
138
|
|
|
|
5,103
|
|
Duncan Energy Partners L.P.(d)
|
|
|
124
|
|
|
|
2,981
|
|
Eagle Rock Energy Partners,
L.P.
|
|
|
10
|
|
|
|
195
|
|
Enbridge Energy Management,
L.L.C.(e)
|
|
|
399
|
|
|
|
20,363
|
|
Enbridge Energy Partners,
L.P.
|
|
|
1,608
|
|
|
|
84,924
|
|
Energy Transfer Partners,
L.P.
|
|
|
4,262
|
|
|
|
235,116
|
|
Enterprise Products Partners
L.P.
|
|
|
5,359
|
|
|
|
163,511
|
|
Global Partners LP
|
|
|
385
|
|
|
|
11,142
|
|
Hiland Partners, LP
|
|
|
156
|
|
|
|
8,483
|
|
Holly Energy Partners, L.P.
|
|
|
226
|
|
|
|
10,437
|
|
Kinder Morgan Management, LLC(e)
|
|
|
2,907
|
|
|
|
145,377
|
|
Magellan Midstream Partners,
L.P.
|
|
|
3,920
|
|
|
|
165,026
|
|
MarkWest Energy Partners,
L.P.
|
|
|
908
|
|
|
|
58,915
|
|
Martin Midstream Partners
L.P.
|
|
|
202
|
|
|
|
7,328
|
|
ONEOK Partners, L.P.
|
|
|
833
|
|
|
|
53,951
|
|
Plains All American Pipeline,
L.P.
|
|
|
2,547
|
|
|
|
141,344
|
|
Plains All American Pipeline,
L.P.(c)
|
|
|
565
|
|
|
|
31,062
|
|
Regency Energy Partners LP
|
|
|
663
|
|
|
|
18,244
|
|
Regency Energy Partners
LP Unregistered(c)
|
|
|
905
|
|
|
|
23,680
|
|
Sunoco Logistics Partners
L.P.
|
|
|
72
|
|
|
|
4,039
|
|
Targa Resources Partners LP(d)
|
|
|
380
|
|
|
|
9,158
|
|
TC PipeLines, LP
|
|
|
228
|
|
|
|
8,269
|
|
TC PipeLines, LP
Unregistered(c)
|
|
|
868
|
|
|
|
29,935
|
|
TEPPCO Partners, L.P.
|
|
|
473
|
|
|
|
20,233
|
|
TransMontaigne Partners L.P.
|
|
|
71
|
|
|
|
2,300
|
|
Valero L.P.
|
|
|
481
|
|
|
|
30,296
|
|
Williams Partners L.P.
|
|
|
224
|
|
|
|
9,694
|
|
Williams Partners L.P.
Class B, Unregistered(c)
|
|
|
183
|
|
|
|
7,556
|
|
Williams Partners L.P.
Unregistered(c)
|
|
|
64
|
|
|
|
2,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,596,062
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-2
KAYNE
ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007
(amounts in 000s)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Description
|
|
Shares/Units
|
|
|
Value
|
|
|
Propane MLP
9.1%
|
|
|
|
|
|
|
|
|
Ferrellgas Partners, L.P.
|
|
|
877
|
|
|
$
|
20,149
|
|
Inergy, L.P.
|
|
|
2,839
|
|
|
|
88,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,255
|
|
|
|
|
|
|
|
|
|
|
Shipping MLP
2.0%
|
|
|
|
|
|
|
|
|
K-Sea Transportation Partners
L.P.
|
|
|
140
|
|
|
|
5,518
|
|
Teekay LNG Partners L.P.
|
|
|
355
|
|
|
|
13,064
|
|
Teekay Offshore Partners L.P.
|
|
|
173
|
|
|
|
5,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,734
|
|
|
|
|
|
|
|
|
|
|
Coal MLP
6.0%
|
|
|
|
|
|
|
|
|
Clearwater Natural Resources,
LP Unregistered(c)(f)
|
|
|
3,889
|
|
|
|
58,334
|
|
Natural Resource Partners
L.P. Subordinated Units
|
|
|
103
|
|
|
|
6,511
|
|
Penn Virginia Resource Partners,
L.P.
|
|
|
230
|
|
|
|
6,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,072
|
|
|
|
|
|
|
|
|
|
|
Upstream MLP(b)
1.6%
|
|
|
|
|
|
|
|
|
Atlas Energy Resources, LLC
|
|
|
209
|
|
|
|
5,089
|
|
BreitBurn Energy Partners
L.P.
|
|
|
97
|
|
|
|
2,677
|
|
Constellation Energy Partners LLC
|
|
|
215
|
|
|
|
6,114
|
|
Legacy Reserves LP(d)
|
|
|
193
|
|
|
|
4,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,551
|
|
|
|
|
|
|
|
|
|
|
MLP Affiliates
6.8%
|
|
|
|
|
|
|
|
|
Atlas Pipeline Holdings, L.P.
|
|
|
73
|
|
|
|
1,868
|
|
Buckeye GP Holdings L.P.
|
|
|
290
|
|
|
|
5,614
|
|
Crosstex Energy, Inc.
|
|
|
209
|
|
|
|
6,784
|
|
Energy Transfer Equity, L.P.
|
|
|
237
|
|
|
|
7,970
|
|
Energy Transfer Equity,
L.P. Unregistered(c)
|
|
|
365
|
|
|
|
12,057
|
|
Hiland Holdings GP, LP
|
|
|
161
|
|
|
|
4,576
|
|
Kinder Morgan, Inc.
|
|
|
187
|
|
|
|
19,724
|
|
Magellan Midstream Holdings,
L.P.
|
|
|
259
|
|
|
|
6,325
|
|
MarkWest Hydrocarbon, Inc.
|
|
|
249
|
|
|
|
15,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,525
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-3
KAYNE
ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2007
(amounts in 000s, except number of option contracts
written)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
Description
|
|
Shares/Units
|
|
|
Value
|
|
|
Other MLP
2.8%
|
|
|
|
|
|
|
|
|
Calumet Specialty Products
Partners, L.P.
|
|
|
559
|
|
|
$
|
22,986
|
|
Universal Compression Partners,
L.P.
|
|
|
356
|
|
|
|
10,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,570
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Investments
(Cost $1,283,574)
|
|
|
|
|
|
|
1,931,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Maturity
|
|
|
|
|
|
|
Rate
|
|
|
Date
|
|
|
|
|
|
Short-Term
Investment 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase
Agreement 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
Bear, Stearns & Co. Inc.
(Agreement dated
2/28/07 to
be repurchased at $1,018), collateralized by $1,049 in
U.S. Treasury Bond Strips (Cost $1,018)
|
|
|
5.270
|
%
|
|
|
3/01/07
|
|
|
|
1,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
163.1% (Cost $1,284,592)
|
|
|
|
|
|
|
|
|
|
|
1,932,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
|
|
|
|
Contracts
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Option Contracts
Written(g)
|
|
|
|
|
|
|
|
|
MLP Affiliate
|
|
|
|
|
|
|
|
|
Kinder Morgan Inc., call option
expiring
3/17/07 @
$105.00
|
|
|
|
|
|
|
|
|
(Premiums received $115)
|
|
|
1,000
|
|
|
|
(125
|
)
|
Auction Rate Senior
Notes
|
|
|
|
|
|
|
(320,000
|
)
|
Deferred Taxes
|
|
|
|
|
|
|
(238,513
|
)
|
Revolving Credit Line
|
|
|
|
|
|
|
(107,000
|
)
|
Other Liabilities
|
|
|
|
|
|
|
(20,982
|
)
|
Unrealized Depreciation on
Interest Rate Swap Contracts
|
|
|
|
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
|
|
|
|
(686,937
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized Appreciation on
Interest Rate Swap Contracts
|
|
|
|
|
|
|
2,993
|
|
Income Tax Receivable
|
|
|
|
|
|
|
2,448
|
|
Other Assets
|
|
|
|
|
|
|
8,733
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities in Excess of
Other Assets
|
|
|
|
|
|
|
(672,763
|
)
|
Preferred Stock at
Redemption Value
|
|
|
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Assets Applicable to Common
Stockholders
|
|
|
|
|
|
$
|
1,185,024
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-4
KAYNE
ANDERSON MLP INVESTMENT COMPANY
SCHEDULE OF INVESTMENTS (CONCLUDED)
FEBRUARY 28, 2007
(amounts in 000)
(UNAUDITED)
|
|
|
(a) |
|
Unless otherwise noted, equity investments are common
units/common shares. |
|
(b) |
|
Includes Limited Liability Companies. |
|
(c) |
|
Fair valued securities, restricted from public sale (See
Notes 2 and 6). |
|
(d) |
|
Security is currently not paying cash distributions but is
expected to pay cash distributions or convert to securities
which pay cash distributions within the next 12 months. |
|
(e) |
|
Distributions are paid in-kind. |
|
(f) |
|
Clearwater Natural Resources, LP is a privately-held MLP that
the Company believes is a controlled affiliate. (See
Note 4.B). |
|
(g) |
|
Security is non-income producing. |
See accompanying notes to financial statements.
F-5
|
|
|
|
|
ASSETS
|
Investments at fair value,
non-controlled (Cost $1,210,596)
|
|
$
|
1,873,435
|
|
Investment at fair value,
controlled (Cost $72,978)
|
|
|
58,334
|
|
Repurchase agreement
(Cost $1,018)
|
|
|
1,018
|
|
|
|
|
|
|
Total investments
(Cost $1,284,592)
|
|
|
1,932,787
|
|
Deposits with brokers
|
|
|
719
|
|
Receivable for securities sold
|
|
|
4,034
|
|
Interest, dividends and
distributions receivable
|
|
|
20
|
|
Income tax receivable
|
|
|
2,448
|
|
Deferred debt issuance costs and
other, net
|
|
|
3,960
|
|
Unrealized appreciation on
interest rate swap contracts
|
|
|
2,993
|
|
|
|
|
|
|
Total Assets
|
|
|
1,946,961
|
|
|
|
|
|
|
|
LIABILITIES
|
Revolving credit line
|
|
|
107,000
|
|
Payable for securities purchased
|
|
|
12,147
|
|
Investment management fee payable
|
|
|
6,788
|
|
Call options written, at fair
value (premiums received $115)
|
|
|
125
|
|
Accrued directors fees and
expenses
|
|
|
50
|
|
Accrued expenses and other
liabilities
|
|
|
1,997
|
|
Deferred tax liability
|
|
|
238,513
|
|
Unrealized depreciation on
interest rate swap contracts
|
|
|
317
|
|
|
|
|
|
|
Total Liabilities before Senior
Notes
|
|
|
366,937
|
|
|
|
|
|
|
Auction Rate Senior Notes:
|
|
|
|
|
Series A, due April 3,
2045
|
|
|
85,000
|
|
Series B, due April 5,
2045
|
|
|
85,000
|
|
Series C, due March 31,
2045
|
|
|
90,000
|
|
Series E, due
December 21, 2045
|
|
|
60,000
|
|
|
|
|
|
|
Total Senior Notes
|
|
|
320,000
|
|
|
|
|
|
|
Total Liabilities
|
|
|
686,937
|
|
|
|
|
|
|
PREFERRED STOCK
|
|
|
|
|
$25,000 liquidation value per
share applicable to 3,000 outstanding shares (10,000 shares
authorized)
|
|
|
75,000
|
|
|
|
|
|
|
NET ASSETS APPLICABLE TO COMMON
STOCKHOLDERS
|
|
$
|
1,185,024
|
|
|
|
|
|
|
NET ASSETS APPLICABLE TO COMMON
STOCKHOLDERS CONSIST OF
|
|
|
|
|
Common stock, $0.001 par
value (38,265,172 shares issued and outstanding,
199,990,000 shares authorized)
|
|
$
|
38
|
|
Paid-in capital
|
|
|
916,332
|
|
Net investment loss, net of income
taxes less dividends and distributions
|
|
|
(175,212
|
)
|
Accumulated realized gains on
investments and interest rate swap contracts, net of income taxes
|
|
|
33,912
|
|
Net unrealized gains on
investments, options and interest rate swap contracts, net of
income taxes
|
|
|
409,954
|
|
|
|
|
|
|
NET ASSETS APPLICABLE TO COMMON
STOCKHOLDERS
|
|
$
|
1,185,024
|
|
|
|
|
|
|
NET ASSET VALUE PER COMMON
SHARE
|
|
|
$30.97
|
|
See accompanying notes to financial statements.
F-6
KAYNE
ANDERSON MLP INVESTMENT COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 2007
(amounts in 000s)
(UNAUDITED)
|
|
|
|
|
INVESTMENT INCOME
|
|
|
|
|
Income
|
|
|
|
|
Dividends and distributions
|
|
$
|
23,428
|
|
Return of capital
|
|
|
(20,839
|
)
|
|
|
|
|
|
Net dividends and distributions
|
|
|
2,589
|
|
Interest and other fees
|
|
|
16
|
|
|
|
|
|
|
Total Investment Income
|
|
|
2,605
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Investment management fees
|
|
|
6,789
|
|
Administration fees
|
|
|
208
|
|
Professional fees
|
|
|
177
|
|
Reports to stockholders
|
|
|
52
|
|
Custodian fees
|
|
|
51
|
|
Directors fees
|
|
|
50
|
|
Insurance
|
|
|
42
|
|
Other expenses
|
|
|
124
|
|
|
|
|
|
|
Total Expenses Before
Interest Expense, Auction Agent Fees and Taxes
|
|
|
7,493
|
|
Interest expense
|
|
|
5,302
|
|
Auction agent fees
|
|
|
248
|
|
|
|
|
|
|
Total Expenses Before
Taxes
|
|
|
13,043
|
|
|
|
|
|
|
Net Investment Loss
Before Taxes
|
|
|
(10,438
|
)
|
Deferred tax benefit
|
|
|
3,862
|
|
|
|
|
|
|
Net Investment Loss
|
|
|
(6,576
|
)
|
|
|
|
|
|
REALIZED AND UNREALIZED
GAINS/(LOSSES)
|
|
|
|
|
Net Realized
Gains/(Losses)
|
|
|
|
|
Investments
|
|
|
8,450
|
|
Payments on interest rate swap
contracts
|
|
|
603
|
|
Deferred tax expense
|
|
|
(3,350
|
)
|
|
|
|
|
|
Net Realized Gains
|
|
|
5,703
|
|
|
|
|
|
|
Net Change in Unrealized
Gains/(Losses)
|
|
|
|
|
Investments
|
|
|
139,435
|
|
Options
|
|
|
(10
|
)
|
Interest rate swap contracts
|
|
|
354
|
|
Deferred tax expense
|
|
|
(44,125
|
)
|
|
|
|
|
|
Net Change in Unrealized Gains
|
|
|
95,654
|
|
|
|
|
|
|
Net Realized and Unrealized
Gains
|
|
|
101,357
|
|
|
|
|
|
|
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS
|
|
|
94,781
|
|
DIVIDENDS TO PREFERRED
STOCKHOLDERS
|
|
|
(977
|
)
|
|
|
|
|
|
NET INCREASE IN NET ASSETS
APPLICABLE TO COMMON STOCKHOLDERS RESULTING FROM
OPERATIONS
|
|
$
|
93,804
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-7
KAYNE
ANDERSON MLP INVESTMENT COMPANY
STATEMENT
OF CHANGES IN NET ASSETS APPLICABLE TO COMMON STOCKHOLDERS
(amounts
in 000s, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
|
|
Months Ended
|
|
|
For the Fiscal
|
|
|
|
February 28, 2007
|
|
|
Year Ended
|
|
|
|
(Unaudited)
|
|
|
November 30, 2006
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
|
Net investment loss
|
|
$
|
(6,576
|
)
|
|
$
|
(23,356
|
)
|
Net realized gains
|
|
|
5,703
|
|
|
|
14,152
|
|
Net change in unrealized gains
|
|
|
95,654
|
|
|
|
226,725
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Net Assets
Resulting from Operations
|
|
|
94,781
|
|
|
|
217,521
|
|
|
|
|
|
|
|
|
|
|
DISTRIBUTIONS TO PREFERRED
STOCKHOLDERS
|
|
|
|
|
|
|
|
|
Distributions return
of capital
|
|
|
(977
|
)(1)
|
|
|
(3,732
|
)(2)
|
|
|
|
|
|
|
|
|
|
DISTRIBUTIONS TO COMMON
STOCKHOLDERS
|
|
|
|
|
|
|
|
|
Distributions return
of capital
|
|
|
(17,890
|
)(1)
|
|
|
(65,492
|
)(2)
|
|
|
|
|
|
|
|
|
|
CAPITAL STOCK
TRANSACTIONS
|
|
|
|
|
|
|
|
|
Issuance of 200,336 and
889,285 shares of common stock from reinvestment of
distributions, respectively
|
|
|
5,718
|
|
|
|
23,005
|
|
|
|
|
|
|
|
|
|
|
Total Increase in Net Assets
Applicable to Common Stockholders
|
|
|
81,632
|
|
|
|
171,302
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
1,103,392
|
|
|
|
932,090
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
1,185,024
|
|
|
$
|
1,103,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The information presented in each of these items is a current
estimate of the characterization of a portion of the total
dividends paid to preferred stockholders and common stockholders
for the three months ended February 28, 2007 as either a
dividend (ordinary income) or a distribution (return of
capital). This estimate is based on the Companys operating
results during the period. |
|
(2) |
|
The information presented in each of these items is a
characterization of a portion of the total dividends paid to
preferred stockholders and common stockholders for the fiscal
year ended November 30, 2006 as either a dividend (ordinary
income) or a distribution (return of capital). This
characterization is based on the Companys earnings and
profits. |
See accompanying notes to financial statements.
F-8
KAYNE
ANDERSON MLP INVESTMENT COMPANY
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED FEBRUARY 28, 2007
(amounts in 000s)
(UNAUDITED)
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
Net increase in net assets
resulting from operations
|
|
$
|
94,781
|
|
Adjustments to reconcile net
increase in net assets resulting from operations to net cash
used in operating activities:
|
|
|
|
|
Purchase of investments
|
|
|
(116,107
|
)
|
Proceeds from sale of investments
|
|
|
21,649
|
|
Purchase of short-term
investments, net
|
|
|
(69
|
)
|
Realized gains
|
|
|
(9,053
|
)
|
Return of capital distributions
|
|
|
20,839
|
|
Unrealized gains on investments
and interest rate swap contracts
|
|
|
(139,789
|
)
|
Increase in deposits with brokers
|
|
|
(601
|
)
|
Increase in receivable for
securities sold
|
|
|
(358
|
)
|
Decrease in interest, dividend and
distributions receivables
|
|
|
586
|
|
Increase in income tax receivable
|
|
|
(339
|
)
|
Decrease in deferred debt issuance
costs and other
|
|
|
4
|
|
Increase in payable for securities
purchased
|
|
|
10,658
|
|
Decrease in investment management
fee payable
|
|
|
(3,507
|
)
|
Increase in option contracts
written
|
|
|
125
|
|
Decrease in accrued
directors fees and expenses
|
|
|
(2
|
)
|
Increase in accrued expenses and
other liabilities
|
|
|
719
|
|
Increase in deferred tax liability
|
|
|
43,613
|
|
|
|
|
|
|
Net Cash Used in Operating
Activities
|
|
|
(76,851
|
)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
Proceeds from revolving credit line
|
|
|
90,000
|
|
Cash distributions paid to
preferred stockholders
|
|
|
(977
|
)
|
Cash distributions paid to common
stockholders
|
|
|
(12,172
|
)
|
|
|
|
|
|
Net Cash Provided by Financing
Activities
|
|
|
76,851
|
|
NET DECREASE IN CASH
|
|
|
|
|
CASH BEGINNING OF
PERIOD
|
|
|
|
|
|
|
|
|
|
CASH END OF
PERIOD
|
|
$
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
Noncash financing activities not included herein consist of
reinvestment of distributions of $5,718 pursuant to the
Companys dividend reinvestment plan.
During the three months ended February 28, 2007, federal
and state taxes paid were $339 and interest paid was $4,342.
See accompanying notes to financial statements.
F-9
KAYNE
ANDERSON MLP INVESTMENT COMPANY
FINANCIAL
HIGHLIGHTS
(amounts
in 000s, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
|
September 28,
|
|
|
|
Months Ended
|
|
|
For the Fiscal Year Ended
|
|
|
2004(1)
|
|
|
|
February 28, 2007
|
|
|
November 30,
|
|
|
through
|
|
|
|
(Unaudited)
|
|
|
2006
|
|
|
2005
|
|
|
November 30, 2004
|
|
|
Per Share of Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
28.99
|
|
|
$
|
25.07
|
|
|
$
|
23.91
|
|
|
$
|
23.70
|
(2)
|
Income from
Operations(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income/(loss)
|
|
|
(0.17)
|
|
|
|
(0.62)
|
|
|
|
(0.17)
|
|
|
|
0.02
|
|
Net realized and unrealized gain on
investments, securities sold short, options and interest rate
swap contracts
|
|
|
2.65
|
|
|
|
6.39
|
|
|
|
2.80
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from investment
operations
|
|
|
2.48
|
|
|
|
5.77
|
|
|
|
2.63
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends/Distributions
Preferred
Stockholders(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
(4)
|
|
|
|
(5)
|
|
|
(0.05)
|
(5)
|
|
|
|
|
Distributions
|
|
|
(0.03)
|
(4)
|
|
|
(0.10)
|
(5)
|
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
dividends/distributions Preferred Stockholders
|
|
|
(0.03)
|
|
|
|
(0.10)
|
|
|
|
(0.05)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends/Distributions
Common Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
(4)
|
|
|
|
(5)
|
|
|
(0.13)
|
(5)
|
|
|
|
|
Distributions
|
|
|
(0.47)
|
(4)
|
|
|
(1.75)
|
(5)
|
|
|
(1.37)
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
dividends/distributions Common Stockholders
|
|
|
(0.47)
|
|
|
|
(1.75)
|
|
|
|
(1.50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock
Transactions(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and offering
costs on the issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
(0.03)
|
|
|
|
|
|
Secondary issuance of common stock,
net of underwriting discounts and offering costs
|
|
|
|
|
|
|
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital stock transactions
|
|
|
|
|
|
|
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
30.97
|
|
|
$
|
28.99
|
|
|
$
|
25.07
|
|
|
$
|
23.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value per share of common
stock, end of period
|
|
$
|
32.91
|
|
|
$
|
31.39
|
|
|
$
|
24.33
|
|
|
$
|
24.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment return based on
common stock market
value(6)
|
|
|
6.57
|
%
|
|
|
37.93
|
%
|
|
|
3.66
|
%
|
|
|
(0.40)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data and
Ratios(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to common
stockholders, end of period
|
|
$
|
1,185,024
|
|
|
$
|
1,103,392
|
|
|
$
|
932,090
|
|
|
$
|
792,836
|
|
Ratio of expenses to average net
assets, including current and deferred income tax expense
|
|
|
20.44
|
%(8)
|
|
|
18.85
|
%(8)
|
|
|
8.73
|
%(8)
|
|
|
4.73
|
%(8)
|
Ratio of expenses to average net
assets, excluding current and deferred income taxes
|
|
|
4.70
|
%(8)
|
|
|
5.10
|
%(8)
|
|
|
2.32
|
%(8)
|
|
|
1.20
|
%(8)
|
Ratio of expenses, excluding taxes
and non-recurring organizational expenses, to average net assets
|
|
|
4.70
|
%
|
|
|
5.10
|
%
|
|
|
2.32
|
%
|
|
|
1.08
|
%
|
Ratio of expenses, excluding taxes
and interest expenses, to average net assets
|
|
|
2.70
|
%
|
|
|
3.42
|
%
|
|
|
1.52
|
%
|
|
|
|
|
Ratio of net investment
income/(loss) to average net assets
|
|
|
(2.37)
|
%
|
|
|
(2.37)
|
%
|
|
|
(0.68)
|
%
|
|
|
0.50
|
%
|
Net increase in net assets to
common stockholders resulting from operations to average net
assets
|
|
|
33.83
|
%
|
|
|
21.66
|
%
|
|
|
10.09
|
%
|
|
|
5.30
|
%
|
Portfolio turnover rate
|
|
|
1.19
|
%(9)
|
|
|
9.95
|
%(9)
|
|
|
25.59
|
%(9)
|
|
|
11.78
|
%(9)
|
Auction Rate Senior Notes
outstanding, end of period
|
|
$
|
320,000
|
|
|
$
|
320,000
|
|
|
$
|
260,000
|
|
|
|
|
|
Auction Rate Preferred Stock, end
of period
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
|
|
|
Asset coverage of Auction Rate
Senior Notes
|
|
|
493.76
|
%
|
|
|
468.25
|
%
|
|
|
487.34
|
%
|
|
|
|
|
Asset coverage of Auction Rate
Preferred Stock
|
|
|
400.01
|
%
|
|
|
379.34
|
%
|
|
|
378.24
|
%
|
|
|
|
|
Average amount of borrowings
outstanding per share of common stock during the period
|
|
$
|
8.36
|
(3)
|
|
$
|
8.53
|
(3)
|
|
$
|
5.57
|
(3)
|
|
|
|
|
See accompanying notes to financial statements.
F-10
KAYNE ANDERSON MLP INVESTMENT COMPANY
FINANCIAL HIGHLIGHTS (CONCLUDED)
(amounts in 000s, except share and per share amounts)
|
|
|
(1) |
|
Commencement of operations. |
|
(2) |
|
Initial public offering price of $25.00 per share less
underwriting discounts of $1.25 per share and offering
costs of $0.05 per share. |
|
(3) |
|
Based on average shares of common stock outstanding of
38,171,682; 37,638,314; 34,077,731 and 33,165,900, for the three
months ended February 28, 2007, fiscal year ended
November 30, 2006, the fiscal year ended November 30,
2005 and the period September 28, 2004 through
November 30, 2004, respectively. |
|
(4) |
|
The information presented in each of these items is a current
estimate of the characterization of a portion of the total
dividends paid to preferred stockholders and common stockholders
for the three months ended February 28, 2007 as either a
dividend (ordinary income) or a distribution (return of
capital). This estimate is based on the Companys operating
results during the period. |
|
(5) |
|
The information presented in each of these items is a
characterization of a portion of the total dividends paid to
preferred stockholders and common stockholders for the fiscal
years ended November 30, 2006 and November 30, 2005 as
either a dividend (ordinary income) or a distribution (return of
capital). This characterization is based on the Companys
earnings and profits. |
|
(6) |
|
Not annualized for the three months ended February 28, 2007
and the period September 28, 2004 through November 30,
2004. Total investment return is calculated assuming a purchase
of common stock at the market price on the first day and a sale
at the current market price on the last day of the period
reported. The calculation also assumes reinvestment of
dividends, if any, at actual prices pursuant to the
Companys dividend reinvestment plan. |
|
(7) |
|
Unless otherwise noted, ratios are annualized for periods of
less than one full year. |
|
(8) |
|
For the three months ended February 28, 2007, the
Companys deferred tax benefit was $3,862 and deferred tax
expense was $47,475. For the fiscal year ended November 30,
2006, the Companys current tax benefit was $65 and
deferred tax expense was $135,738. For the fiscal year ended
November 30, 2005, its current tax expense was $3,669 and
deferred tax expense was $52,179. For the period
September 28, 2004 through November 30, 2004, its
current income tax expense was $763 and deferred tax expense was
$3,755. |
|
(9) |
|
Amount not annualized for the three months ended
February 28, 2007 and the period September 28, 2004
through November 30, 2004. For the three months ended
February 28, 2007, and fiscal years ended November 30,
2006 and November 30, 2005, and the period
September 28, 2004 through November 30, 2004,
calculated based on the sales of $21,649; $144,884; $263,296 and
$16,880, respectively of long-term investments dividend by the
average long-term investment balance of $1,817,282; $1,456,695;
$1,029,035 and $143,328, respectively. |
See accompanying notes to financial statements.
F-11
KAYNE
ANDERSON MLP INVESTMENT COMPANY
FEBRUARY 28, 2007
(amounts in 000s, except share and per share amounts)
(UNAUDITED)
Kayne Anderson MLP Investment Company (the Company)
was organized as a Maryland corporation on June 4, 2004,
and is a non-diversified closed-end management investment
company registered under the Investment Company Act of 1940, as
amended (the 1940 Act). The Companys
investment objective is to obtain a high after-tax total return
by investing at least 85% of its net assets plus any borrowings
(total assets) in energy-related master limited
partnerships and their affiliates (collectively,
MLPs), and in other companies that, as their
principal business, operate assets used in the gathering,
transporting, processing, storing, refining, distributing,
mining or marketing of natural gas, natural gas liquids
(including propane), crude oil, refined petroleum products or
coal (collectively with MLPs, Midstream Energy
Companies). The Company commenced operations on
September 28, 2004. The Companys shares of common
stock are listed on the New York Stock Exchange, Inc.
(NYSE) under the symbol KYN.
|
|
2.
|
Significant
Accounting Policies
|
A. Use of Estimates The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the period. Actual results could
differ materially from those estimates.
B. Calculation of Net Asset Value
The Fund determines its net asset value as of the close of
regular session trading on the NYSE (normally 4:00 p.m.
Eastern time) no less frequently than the last business day of
each month, and makes its net asset value available for
publication monthly. Net asset value is computed by dividing the
value of the Companys assets (including accrued interest
and dividends), less all of its liabilities (including accrued
expenses, dividends payable, current and deferred and other
accrued income taxes, and any borrowings) and the liquidation
value of any outstanding preferred stock, by the total number of
common shares outstanding.
C. Investment Valuation Readily
marketable portfolio securities listed on any exchange other
than the NASDAQ Stock Market, Inc. (NASDAQ) are
valued, except as indicated below, at the last sale price on the
business day as of which such value is being determined. If
there has been no sale on such day, the securities are valued at
the mean of the most recent bid and asked prices on such day,
except for short sales and call options contracts written, for
which the last quoted asked price is used. Securities admitted
to trade on the NASDAQ are valued at the NASDAQ official closing
price. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day
as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
Equity securities traded in the
over-the-counter
market, but excluding securities admitted to trading on the
NASDAQ, are valued at the closing bid prices. Fixed income
securities with a remaining maturity of 60 days or more are
valued by the Company using a pricing service. Fixed income
securities maturing within 60 days will be valued on an
amortized cost basis.
The Company holds securities that are privately issued or
otherwise restricted as to resale. For these securities, as well
as any other portfolio security held by the Company for which
reliable market quotations are not readily available, valuations
are determined in a manner that most fairly reflects fair value
of the
F-12
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
security on the valuation date. Unless otherwise determined by
the Board of Directors, the following valuation process is used
for such securities:
|
|
|
|
|
Investment Team Valuation. The
applicable investments are initially valued by KA
Fund Advisors, LLC (Kayne Anderson or the
Adviser) investment professionals responsible for
the portfolio investments;
|
|
|
|
Investment Team Valuation
Documentation. Preliminary valuation
conclusions are documented and discussed with senior management
of Kayne Anderson. Such valuations generally are submitted to
the Valuation Committee (a committee of the Companys Board
of Directors) or the Board of Directors on a monthly basis, and
stand for intervening periods of time.
|
|
|
|
Valuation Committee. The Valuation
Committee meets on or about the end of each month to consider
new valuations presented by Kayne Anderson, if any, which were
made in accordance with the Valuation Procedures in such month.
Between meetings of the Valuation Committee, a senior officer of
Kayne Anderson is authorized to make valuation determinations.
The Valuation Committees valuations stand for intervening
periods of time unless the Valuation Committee meets again at
the request of Kayne Anderson, the Board of Directors, or the
Committee itself. All valuation determinations of the Valuation
Committee are subject to ratification by the Board at its next
regular meeting.
|
|
|
|
Valuation Firm. No less than quarterly,
a third-party valuation firm engaged by the Board of Directors
reviews the valuation methodologies and calculations employed
for these securities.
|
|
|
|
Board of Directors Determination. The
Board of Directors meets quarterly to consider the valuations
provided by Kayne Anderson and the Valuation Committee, if
applicable, and ratify valuations for the applicable securities.
The Board of Directors considers the report provided by the
third-party valuation firm in reviewing and determining in good
faith the fair value of the applicable portfolio securities.
|
Unless otherwise determined by the Board of Directors,
securities that are convertible into or otherwise will become
publicly traded (e.g., through subsequent registration or
expiration of a restriction on trading) are valued through the
process described above, using a valuation based on the market
value of the publicly traded security less a discount. The
discount is initially equal in amount to the discount negotiated
at the time the purchase price is agreed to. To the extent that
such securities are convertible or otherwise become publicly
traded within a time frame that may be reasonably determined,
Kayne Anderson may determine an amortization schedule for the
discount in accordance with a methodology approved by the
Valuation Committee.
At February 28, 2007, the Company held 15.0% of its net
assets applicable to common stockholders (9.1% of total assets)
in securities valued at fair value as determined pursuant to
procedures adopted by the Board of Directors, with an aggregate
cost of $177,784 and fair value of $177,255. Although these
securities may be resold in privately negotiated transactions
(subject to certain
lock-up
restrictions), these values may differ from the values that
would have been used had a ready market for these securities
existed, and the differences could be material.
Any option transaction that the Company enters into may,
depending on the applicable market environment have no value or
a positive/negative value. Exchange traded options and futures
contracts are valued at the closing price in the market where
such contracts are principally traded.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements. This standard
establishes a single authoritative definition of fair value,
sets out a framework for measuring fair value and requires
additional disclosures about fair value measurements.
SFAS No. 157 applies to fair value measurements
already required
F-13
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
or permitted by existing standards. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. The changes to current generally
accepted accounting principles from the application of this
Statement relate to the definition of fair value, the methods
used to measure fair value, and the expanded disclosures about
fair value measurements. As of February 28, 2007, the
Company does not believe the adoption of SFAS No. 157
will impact the financial statement amounts, however, additional
disclosures may be required about the inputs used to develop the
measurements and the effect of certain of the measurements on
changes in net assets for the period.
D. Repurchase Agreements The
Company has agreed to purchase securities from financial
institutions subject to the sellers agreement to
repurchase them at an
agreed-upon
time and price (repurchase agreements). The
financial institutions with whom the Company enters into
repurchase agreements are banks and broker/ dealers which Kayne
Anderson considers creditworthy. The seller under a repurchase
agreement is required to maintain the value of the securities as
collateral, subject to the agreement, at not less than the
repurchase price plus accrued interest. Kayne Anderson monitors
daily the
mark-to-market
of the value of the collateral, and, if necessary, requires the
seller to maintain additional securities, so that the value of
the collateral is not less than the repurchase price. Default by
or bankruptcy of the seller would, however, expose the Company
to possible loss because of adverse market action or delays in
connection with the disposition of the underlying securities.
E. Short Sales A short sale is a
transaction in which the Company sells securities it does not
own (but has borrowed) in anticipation of or to hedge against a
decline in the market price of the securities. To complete a
short sale, the Company may arrange through a broker to borrow
the securities to be delivered to the buyer. The proceeds
received by the Company for the short sale are retained by the
broker until the Company replaces the borrowed securities. In
borrowing the securities to be delivered to the buyer, the
Company becomes obligated to replace the securities borrowed at
their market price at the time of replacement, whatever the
price may be.
All short sales are fully collateralized. The Company maintains
assets consisting of cash or liquid securities equal in amount
to the liability created by the short sale. These assets are
adjusted daily to reflect changes in the value of the securities
sold short. The Company is liable for any dividends or
distributions paid on securities sold short.
The Company may also sell short against the box
(i.e., the Company enters into a short sale as described
above while holding an offsetting long position in the security
which it sold short). If the Company enters into a short sale
against the box, the Company segregates an
equivalent amount of securities owned as collateral while the
short sale is outstanding. At February 28, 2007, the
Company had no open short sales.
F. Option Writing When the Company
writes an option, an amount equal to the premium received by the
Company is recorded as a liability and is subsequently adjusted
to the current fair value of the option written. Premiums
received from writing options that expire unexercised are
treated by the Company on the expiration date as realized gains
from investments. The difference between the premium and the
amount paid on effecting a closing purchase transaction,
including brokerage commissions, is also treated as a realized
gain, or if the premium is less than the amount paid for the
closing purchase transaction, as a realized loss. If a call
option is exercised, the premium is added to the proceeds from
the sale of the underlying security in determining whether the
Company has realized a gain or loss. If a put option is
exercised, the premium reduces the cost basis of the securities
purchased by the Company. The Company, as the writer of an
option, bears the market risk of an unfavorable change in the
price of the security underlying the written option. See
Note 7 for more detail on option contracts written.
G. Security Transactions and Investment
Income Security transactions are accounted for
on the date the securities are purchased or sold (trade date).
Realized gains and losses are reported on an identified cost
basis. Dividend and distribution income is recorded on the
ex-dividend date. Distributions received from
F-14
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
the Companys investments in MLPs generally are comprised
of income and return of capital. For the three months ended
February 28, 2007, the Company estimated that 90% of the
MLP distributions received would be treated as a return of
capital. The Company recorded as return of capital the amount of
$20,839 of dividends and distributions received from MLPs. The
return of capital of $20,839, resulted in an equivalent
reduction in the cost basis of the associated MLP investments.
Net Realized Gains and Net Change in Unrealized Gains in the
accompanying Statement of Operations were increased by $809 and
$20,030, respectively, attributable to the recording of such
dividends and distributions as reductions in the cost basis of
investments. The Company records investment income and return of
capital based on estimates made at the time such distributions
are received. Such estimates are based on historical information
available from each MLP and other industry sources. These
estimates may subsequently be revised based on information
received from MLPs after their tax reporting periods are
concluded. Interest income is recognized on the accrual basis,
including amortization of premiums and accretion of discounts.
H. Dividends and Distributions to
Stockholders Dividends to common stockholders
are recorded on the ex-dividend date. The character of dividends
made during the year may differ from their ultimate
characterization for federal income tax purposes. Distributions
to stockholders of the Companys Auction Rate Preferred
Stock, Series D are accrued on a daily basis and are
determined as described in Note 11 Preferred
Stock. The Companys dividends will be comprised of return
of capital and ordinary income, which is based on the earnings
and profits of the Company. The Company is unable to make final
determinations as to the character of the dividend until after
the end of the calendar year. The Company informed its common
stockholders in January 2007 of the character of dividends paid
during fiscal year 2006. Prospectively, the Company will inform
its common stockholders of the character of dividends during
that fiscal year in January following such fiscal year.
I. Partnership Accounting Policy
The Company records its pro-rata share of the income/(loss) and
capital gains/(losses), to the extent of dividends it has
received, allocated from the underlying partnerships and adjusts
the cost of the underlying partnerships accordingly. These
amounts are included in the Companys Statement of
Operations.
J. Federal and State Income
Taxation The Company, as a corporation, is
obligated to pay federal and state income tax on its taxable
income. The Company invests its assets primarily in MLPs, which
generally are treated as partnerships for federal income tax
purposes. As a limited partner in the MLPs, the Company includes
its allocable share of the MLPs taxable income in
computing its own taxable income. Deferred income taxes reflect
(i) taxes on unrealized gains/(losses), which are
attributable to the temporary difference between fair market
value and book basis and (ii) the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. To the extent the Company has a
net deferred tax asset, a valuation allowance is recognized if,
based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred income tax
asset will not be realized. Future realization of deferred tax
assets ultimately depends on the existence of sufficient taxable
income of the appropriate character in either the carryback or
carryforward period under the tax law.
The Company may rely to some extent on information provided by
the MLPs, which may not necessarily be timely, to estimate
taxable income allocable to the MLP units held in the portfolio
and to estimate the associated deferred tax liability. Such
estimates are made in good faith and reviewed in accordance with
the valuation process approved by the Board of Directors. From
time to time the Company modifies its estimates or assumptions
regarding the deferred tax liability as new information become
available.
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation 48
(FIN 48), Accounting for Uncertainty in
Income Taxes. This standard defines the threshold for
recognizing the benefits of tax-return positions in the
financial statements as more-likely-than-not to be
sustained by the taxing authority and requires measurement of a
tax position meeting the more-likely-than-not criterion, based
F-15
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
on the largest benefit that is more than 50 percent likely
to be realized. FIN 48 is effective as of the beginning of
the first fiscal year beginning after December 15, 2006. At
adoption, companies must adjust their financial statements to
reflect only those tax positions that are more-likely-than-not
to be sustained as of the adoption date. As of February 28,
2007, the company has not evaluated the impact that will result
from adopting FIN 48.
K. Organization Expenses, Offering and Debt
Issuance Costs The Company was responsible for
paying all organization expenses, which were expensed when the
shares of common stock were issued in the Companys IPO.
Offering costs (including underwriting discount) related to the
Companys two issuances of common stock and issuance of
Series D preferred stock were charged to additional paid-in
capital when the shares were issued. Debt issuance costs
(including underwriting discount) related to the auction rate
senior notes payable are being capitalized and amortized over
the period the notes are outstanding.
L. Derivative Financial
Instruments The Company uses derivative
financial instruments (principally interest rate swap contracts)
to manage interest rate risk. The Company has established
policies and procedures for risk assessment and the approval,
reporting and monitoring of derivative financial instrument
activities. The Company does not hold or issue derivative
financial instruments for speculative purposes. All derivative
financial instruments are recorded at fair value with changes in
value during the reporting period, and amounts accrued under the
agreements, included as unrealized gains or losses in the
Statement of Operations. Monthly cash settlements under the
terms of the interest rate swap agreements are recorded as
realized gains or losses in the Statement of Operations. The
Company generally values its interest rate swap contracts based
on dealer quotations, if available, or by discounting the future
cash flows from the stated terms of the interest rate swap
agreement by using interest rates currently available in the
market.
M. Indemnifications Under the
Companys organizational documents, its officers and
directors are indemnified against certain liabilities arising
out of the performance of their duties to the Company. In
addition, in the normal course of business, the Company enters
into contracts that provide general indemnification to other
parties. The Companys maximum exposure under these
arrangements is unknown, as this would involve future claims
that may be made against the Company that have not yet occurred,
and may not occur. However, the Company has not had prior claims
or losses pursuant to these contracts and expects the risk of
loss to be remote.
The Companys investment objective is to seek a high level
of total return with an emphasis on current income paid to its
stockholders. Under normal circumstances, the Company intends to
invest at least 85% of its total assets in securities of MLPs
and other Midstream Energy Companies, and to invest at least 80%
of its total assets in MLPs, which are subject to certain risks,
such as supply and demand risk, depletion and exploration risk,
commodity pricing risk, acquisition risk, and the risk
associated with the hazards inherent in midstream energy
industry activities. A substantial portion of the cash flow
received by the Company is derived from investment in equity
securities of MLPs. The amount of cash that an MLP has available
for distributions and the tax character of such distributions
are dependent upon the amount of cash generated by the
MLPs operations. The Company may invest up to 15% of its
total assets in any single issuer and a decline in value of the
securities of such an issuer could significantly impact the net
asset value of the Company. The Company may invest up to 20% of
its total assets in debt securities, which may include below
investment grade securities. The Company may, for defensive
purposes, temporarily invest all or a significant portion of its
assets in investment grade securities, short-term debt
securities and cash or cash equivalents. To the extent the
Company uses this strategy, it may not achieve its investment
objectives.
F-16
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
|
|
4.
|
Agreements
and Affiliations
|
A. Investment Management Agreement
The Company has entered into an investment management agreement
with Kayne Anderson under which the Adviser, subject to the
overall supervision of the Companys Board of Directors,
manages the
day-to-day
operations of, and provides investment advisory services to, the
Company. For providing these services, the Adviser receives a
management fee from the Company.
On December 12, 2006, the Company held a special meeting of
stockholders at which stockholders approved a new investment
management agreement. As a result of the vote on this matter,
the new investment management agreement replaced the previous
performance-based fee structure with a fixed investment
management fee at an annual rate of 1.375% of average total
assets.
Pursuant to the previous investment management agreement, which
was in effect through December 11, 2006, the Company agreed
to pay Kayne Anderson Capital Advisors, L.P., the Advisers
parent company and the Companys former adviser, a basic
management fee at an annual rate of 1.75% of the Companys
average total assets, adjusting upward or downward (by up to
1.00% of the Companys average total assets, as defined),
depending on to what extent, if any, the Companys
investment performance for the relevant performance period
exceeded or trailed the Companys Benchmark
over the same period. The Companys Benchmark was the total
return (capital appreciation and reinvested dividends) of the
Standard & Poors 400 Utilities Index plus
600 basis points (6.00%). The basic management fee and the
performance fee adjustment were calculated and paid quarterly,
using a rolling
12-month
performance period.
During the period December 1, 2006 through
December 11, 2006, the Company paid and accrued management
fees at an annual rate of 2.75% of average total assets based on
the Companys investment performance. During the remainder
of the three months ended February 28, 2007, the Company
paid and accrued management fees at an annual rate of 1.375% of
average total assets.
For purposes of calculating the management fee, the
Companys total assets are equal to the Companys
gross asset value (which includes assets attributable to or
proceeds from the Companys use of preferred stock,
commercial paper or notes issuances and other borrowings), minus
the sum of the Companys accrued and unpaid dividends on
any outstanding common stock and accrued and unpaid dividends on
any outstanding preferred stock and accrued liabilities (other
than liabilities associated with borrowing or leverage by the
Company and any accrued taxes). Liabilities associated with
borrowing or leverage by the Company include the principal
amount of any borrowings, commercial paper or notes issued by
the Company, the liquidation preference of any outstanding
preferred stock, and other liabilities from other forms of
borrowing or leverage such as short positions and put or call
options held or written by the Company.
B. Portfolio Companies From time
to time, the Company may control or may be an
affiliate of one or more portfolio companies, each
as defined in the 1940 Act. In general, under the 1940 Act, the
Company would control a portfolio company if the
Company owned 25% or more of its outstanding voting securities
and would be an affiliate of a portfolio company if
the Company owned 5% or more of its outstanding voting
securities. The 1940 Act contains prohibitions and restrictions
relating to transactions between investment companies and their
affiliates (including the Companys investment adviser),
principal underwriters and affiliates of those affiliates or
underwriters.
The Company believes that there is significant ambiguity in the
application of existing SEC staff interpretations of the term
voting security to complex structures such as
privately negotiated limited partnership interests of the kind
in which the Company invests. As a result, it is possible that
the SEC staff may consider that certain securities investments
in private limited partnerships are voting securities under the
staffs prevailing interpretations of this term. If such
determination is made, the Company may be regarded as a person
affiliated with and controlling the issuer(s) of those
securities for purposes of Section 17 of the 1940 Act.
F-17
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
In light of the ambiguity of the definition of voting
securities, the Company does not intend to treat any class of
securities that it holds as voting securities unless
the security holders of such class have the ability, under the
partnership agreement, to remove the general partner (assuming a
sufficient vote of such securities, other than securities held
by the general partner, in favor of such removal) or the Company
has an economic interest of sufficient size that otherwise gives
it the de facto power to exercise a controlling influence over
the partnership. The Company believes this treatment is
appropriate given that the general partner controls the
partnership, and without the ability to remove the general
partner or the power to otherwise exercise a controlling
influence over the partnership due to the size of an economic
interest, the security holders have no control over the
partnership.
At February 28, 2007, the Company held approximately 42.5%
of the partnership interests of Clearwater Natural Resources, LP
(Clearwater). The Companys Chief Executive
Officer serves as a director on the board of the general partner
of Clearwater. The Company may be deemed to control
and be an affiliate of Clearwater, each as defined
in the Investment Company Act of 1940 (the 1940
Act), because the Company has an economic interest in
Clearwater of size that may give it the power to exercise a
controlling influence over Clearwater, notwithstanding the
limited scope and character of the rights of such securities
that the Company holds, which power effectively makes such
securities the equivalent of voting securities.
Based on the totality of the facts and circumstances as they
exist as of February 28, 2007, the Company believes that it
controls and is an affiliate of
Clearwater. During the period there were no purchases or sales
of this security.
C. Other Affiliations For the
three months ended February 28, 2007, KA Associates,
Inc., an affiliate of Kayne Anderson, earned approximately $1 in
brokerage commissions from portfolio transactions executed on
behalf of the Company.
Deferred income taxes reflect (i) taxes on unrealized
gains/(losses), which are attributable to the difference between
fair market value and book basis and (ii) the net tax
effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Components of the
Companys deferred tax assets and liabilities as of
February 28, 2007 are as follows:
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
Organizational costs
|
|
$
|
(30
|
)
|
Net operating loss carryforwards
|
|
|
(20,209
|
)
|
Deferred tax liabilities:
|
|
|
|
|
Unrealized gains on investment
securities
|
|
|
257,766
|
|
Other
|
|
|
986
|
|
|
|
|
|
|
Total net deferred tax liability
|
|
$
|
238,513
|
|
|
|
|
|
|
At February 28, 2007, the Company did not record a
valuation allowance against its deferred tax assets.
F-18
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
At February 28, 2007, the cost basis of investments for
Federal income tax purposes was $1,236,124 and the cash received
on option contracts written was $115. The cost basis of
investments includes a $48,468 reduction in basis attributable
to the Companys portion of the allocated losses from its
MLP investments. At February 28, 2007, gross unrealized
appreciation and depreciation of investments for Federal income
tax purposes were as follows:
|
|
|
|
|
Gross unrealized appreciation of
investments (including options)
|
|
$
|
708,637
|
|
Gross unrealized depreciation of
investments (including options)
|
|
|
(11,984
|
)
|
|
|
|
|
|
Net unrealized appreciation before
tax and interest rate swap contracts
|
|
|
696,653
|
|
Unrealized appreciation on
interest rate swap contracts
|
|
|
2,676
|
|
|
|
|
|
|
Net unrealized appreciation before
tax
|
|
$
|
699,329
|
|
|
|
|
|
|
Net unrealized appreciation after
tax
|
|
$
|
440,577
|
|
|
|
|
|
|
For the three months ended February 28, 2007, the
components of income tax expense include $48,438 and $2,768 for
deferred federal income taxes and state income taxes (net of the
federal tax benefit), respectively. Income tax expense also
includes a $7,593 benefit related to certain state tax changes
which impacted the Companys deferred tax liabilities on
its net unrealized gains. Total income taxes have been computed
by applying the Federal statutory income tax rate plus a blended
state income tax rate totaling 37.0% to net investment income
and realized and unrealized gains on investments before taxes.
From time to time certain of the Companys investments are
restricted as to resale. Such restricted investments are valued
in accordance with procedures established by the board of
directors and more fully described in Note 2
Significant Accounting Policies. The table below shows the
number of shares/units held, the acquisition date, purchase
price, aggregate cost, and fair value as of February 28,
2007, value per share/unit of such security, percent of net
assets applicable to common stockholders and percent of total
assets which the security comprises:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
Percent
|
|
|
Percent
|
|
|
|
|
|
Number
|
|
|
Acquisition
|
|
Purchase
|
|
|
|
|
|
Fair
|
|
|
Per
|
|
|
of Net
|
|
|
of Total
|
|
Investment
|
|
Security
|
|
of Units
|
|
|
Date
|
|
Price
|
|
|
Cost
|
|
|
Value
|
|
|
Unit
|
|
|
Assets(1)
|
|
|
Assets
|
|
|
Clearwater Natural
Resources, L.P.
|
|
Common
Units(2)
|
|
|
3,889
|
|
|
(3)
|
|
$
|
77,855
|
|
|
$
|
72,978
|
|
|
$
|
58,334
|
|
|
$
|
15.00
|
|
|
|
4.9
|
%
|
|
|
3.0
|
%
|
Crosstex Energy, L.P.
|
|
Senior Subordinated
Units(2)
|
|
|
356
|
|
|
6/29/06
|
|
|
10,022
|
|
|
|
10,022
|
|
|
|
11,911
|
|
|
|
33.42
|
|
|
|
1.0
|
|
|
|
0.6
|
|
Energy Transfer Equity, L.P.
|
|
Common
Units(2)
|
|
|
365
|
|
|
11/27/06
|
|
|
10,007
|
|
|
|
9,895
|
|
|
|
12,057
|
|
|
|
33.05
|
|
|
|
1.0
|
|
|
|
0.6
|
|
Plains All America Pipeline, L.P.
|
|
Common Units
|
|
|
565
|
|
|
12/19/06
|
|
|
27,500
|
|
|
|
27,093
|
|
|
|
31,062
|
|
|
|
54.97
|
|
|
|
2.6
|
|
|
|
1.6
|
|
Regency Energy Partners LP
|
|
Common
Units(2)
|
|
|
905
|
|
|
9/21/06
|
|
|
19,012
|
|
|
|
19,012
|
|
|
|
23,680
|
|
|
|
26.17
|
|
|
|
2.0
|
|
|
|
1.2
|
|
TC PipeLines, LP
|
|
Common
Units(2)
|
|
|
868
|
|
|
2/22/07
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
29,935
|
|
|
|
34.50
|
|
|
|
2.5
|
|
|
|
1.5
|
|
Williams Partners L.P.
|
|
Common
Units(2)
|
|
|
64
|
|
|
12/13/06
|
|
|
2,324
|
|
|
|
2,297
|
|
|
|
2,720
|
|
|
|
42.83
|
|
|
|
0.3
|
|
|
|
0.2
|
|
Williams Partners L.P.
|
|
Class B
Units(2)
|
|
|
183
|
|
|
12/13/06
|
|
|
6,564
|
|
|
|
6,487
|
|
|
|
7,556
|
|
|
|
41.22
|
|
|
|
0.7
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
183,284
|
|
|
$
|
177,784
|
|
|
$
|
177,255
|
|
|
|
|
|
|
|
15.0
|
%
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Applicable to common stockholders. |
|
(2) |
|
Unregistered security. |
|
(3) |
|
The Company purchased common units on
8/1/05 and
10/2/06. |
F-19
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
Transactions in written call options for the three months ended
February 28, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Premiums
|
|
|
|
Contracts
|
|
|
Received
|
|
|
Options outstanding at beginning
of period
|
|
|
|
|
|
|
|
|
Call options written
|
|
|
1,000
|
|
|
$
|
115
|
|
Options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of
period
|
|
|
1,000
|
|
|
$
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Investment
Transactions
|
For the three months ended February 28, 2007, the Company
purchased and sold securities in the amount of $116,107 and
$21,649 (excluding short-term investments, securities sold
short, and interest rate swaps), respectively.
The Company has an uncommitted revolving credit line with
Custodial Trust Company (an affiliate of the administrator, Bear
Stearns Funds Management Inc.), under which the Company may
borrow from Custodial Trust Company an aggregate amount of up to
the lesser of $200,000 or the maximum amount the Company is
permitted to borrow under the 1940 Act, subject to certain
limitations imposed by the lender. The credit line is secured by
Company assets held in custody by Custodial Trust Company.
During the three months ended February 28, 2007, the
average amount outstanding was $73,167 with a weighted average
interest rate of 6.33%. As of February 28, 2007, the
Company had outstanding borrowings on the revolving credit line
of $107,000, and the interest rate was 6.32%. Any loans under
this line are repayable on demand by the lender at any time.
|
|
10.
|
Auction
Rate Senior Notes
|
The Company issued four series of auction rate senior notes,
each with a maturity of 40 years from the date of original
issuance, having an aggregate principal amount of $320,000
(Senior Notes). The Senior Notes were issued in
denominations of $25. The fair value of those notes approximates
carrying amount because the interest rate fluctuates with
changes in interest rates available in the current market.
Holders of the Senior Notes are entitled to receive cash
interest payments at an annual rate that may vary for each rate
period. Interest rates for Series A, Series B,
Series C and Series E as of February 28, 2007
were 5.05%, 5.05%, 5.25% and 5.10%, respectively. The weighted
average interest rates for Series A, Series B,
Series C and Series E for the three months ended
February 28, 2007, were 5.07%, 5.07%, 5.26%, and 5.10%
respectively. These rates include the applicable rate based on
the latest results of the auction and do not include commissions
paid to the auction agent in the amount of 0.25%. For each
subsequent rate period, the interest rate will be determined by
an auction conducted in accordance with the procedures described
in the Senior Notes prospectus. The reset rate period for
Series A, Series B and Series E Senior Notes is
seven days, while Series C Senior Notes reset every
28 days. The Senior Notes are not listed on any exchange or
automated quotation system.
F-20
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONTINUED)
The Senior Notes are redeemable in certain circumstances at the
option of the Company. The Senior Notes are also subject to a
mandatory redemption if the Company fails to meet an asset
coverage ratio required by law, or fails to cure deficiency as
stated in the Companys rating agency guidelines in a
timely manner.
The Senior Notes are unsecured obligations of the Company and,
upon liquidation, dissolution or winding up of the Company, will
rank: (1) senior to all the Companys outstanding
preferred shares; (2) senior to all of the Companys
outstanding common shares; (3) on a parity with any
unsecured creditors of the Company and any unsecured senior
securities representing indebtedness of the Company; and
(4) junior to any secured creditors of the Company.
The Company issued 3,000 shares of Series D auction
rate preferred stock totaling $75,000. The Company has
10,000 shares of authorized preferred stock. The preferred
stock has rights determined by the Board of Directors. The
preferred stock has a liquidation value of $25,000 per
share plus any accumulated, but unpaid dividends, whether or not
declared.
Holders of preferred stock are entitled to receive cash dividend
payments at an annual rate that may vary for each rate period.
The dividend rate as of February 28, 2007 was 5.15%. The
weighted average dividend rate for the three months ended
February 28, 2007 was 5.22%. This rate includes the
applicable rate based on the latest results of the auction and
does not include commissions paid to the auction agent in the
amount of 0.25%. Under the 1940 Act, the Company may not declare
dividends or make other distribution on shares of common stock
or purchases of such shares if, at any time of the declaration,
distribution or purchase, asset coverage with respect to the
outstanding preferred stock would be less than 200%.
The preferred stock is redeemable in certain circumstances at
the option of the Company. The preferred stock is also subject
to a mandatory redemption if the Company fails to meet an asset
coverage ratio required by law, or fails to cure deficiency as
stated in the Companys rating agency guidelines in a
timely manner.
The holders of the preferred stock have voting rights equal to
the holders of common stock (one vote per share) and will vote
together with the holders of shares of common stock as a single
class except on matters affecting only the holders of preferred
stock or the holders of common stock.
|
|
12.
|
Interest
Rate Swap Contracts
|
The Company has entered into interest rate swap contracts to
partially hedge itself from increasing interest expense on its
leverage resulting from increasing short-term interest rates. A
decline in interest rates may result in a decline in the value
of the swap contracts, which, everything else being held
constant, would result in a decline in the net assets of the
Company. In addition, if the counterparty to the interest rate
swap contracts defaults, the Company would not be able to use
the anticipated receipts under the swap contracts to offset the
interest payments on the Companys leverage. At the time
the interest rate swap contracts reach their scheduled
termination, there is a risk that the Company would not be able
to obtain a replacement transaction or that the terms of the
replacement transaction would not be as favorable as on the
expiring transaction. In addition, if the Company is required to
terminate any swap contract early, then the Company could be
required to make a termination payment. As of February 28,
2007, the Company has entered into twelve interest rate
F-21
KAYNE
ANDERSON MLP INVESTMENT COMPANY
NOTES TO FINANCIAL
STATEMENTS (UNAUDITED) (CONCLUDED)
swap contracts with UBS AG as summarized below. For all twelve
swaps, the Company receives a floating rate, based on one-month
LIBOR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Fixed Rate
|
|
|
Unrealized
|
|
Termination
|
|
Notional
|
|
|
Paid by the
|
|
|
Appreciation/
|
|
Date
|
|
Amount
|
|
|
Company
|
|
|
Depreciation
|
|
|
3/25/2008
|
|
$
|
35,000
|
|
|
|
4.31
|
%
|
|
$
|
293
|
|
3/25/2008
|
|
|
25,000
|
|
|
|
4.40
|
%
|
|
|
182
|
|
4/7/2008
|
|
|
25,000
|
|
|
|
4.35
|
%
|
|
|
212
|
|
3/24/2010
|
|
|
25,000
|
|
|
|
4.65
|
%
|
|
|
140
|
|
4/8/2010
|
|
|
25,000
|
|
|
|
4.55
|
%
|
|
|
224
|
|
4/15/2010
|
|
|
35,000
|
|
|
|
4.45
|
%
|
|
|
414
|
|
6/2/2010
|
|
|
30,000
|
|
|
|
4.12
|
%
|
|
|
685
|
|
2/28/2012
|
|
|
40,000
|
|
|
|
4.99
|
%
|
|
|
(232
|
)
|
4/16/2012
|
|
|
25,000
|
|
|
|
4.65
|
%
|
|
|
252
|
|
5/9/2012
|
|
|
25,000
|
|
|
|
4.37
|
%
|
|
|
588
|
|
11/14/2013
|
|
|
10,000
|
|
|
|
5.00
|
%
|
|
|
(56
|
)
|
11/18/2013
|
|
|
10,000
|
|
|
|
4.95
|
%
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
310,000
|
|
|
|
|
|
|
$
|
2,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 28, 2007, the weighted average duration of the
interest rate swap contracts was 3.4 years and the weighted
average fixed rate was 4.53%. The Company is exposed to credit
risk on the interest rate swap contracts if the counterparty
should fail to perform under the terms of the interest rate swap
contracts.
The Company has 199,990,000 shares of common stock
authorized and 38,265,172 shares outstanding at
February 28, 2007. As of that date, Kayne Anderson Capital
Advisors, L.P. owned 4,000 shares. Transactions in common
shares for the three months ended February 28, 2007 were as
follows:
|
|
|
|
|
Shares at November 30, 2006
|
|
|
38,064,836
|
|
Shares issued through reinvestment
of distributions
|
|
|
200,336
|
|
|
|
|
|
|
Shares at February 28, 2007
|
|
|
38,265,172
|
|
|
|
|
|
|
On April 18, 2007 the Company issued 3,600,000 shares of
common stock in a public offering at $36.70 per share, raising
approximately an additional $132,120 of gross proceeds
(excluding the underwriting discount and offering expenses).
Proceeds from the offering were used to repay a portion of the
Companys borrowings under its revolving credit line.
On April 13, 2007, the Company paid a dividend to its
common stockholders in the amount of $0.48 per share, for a
total of $18,367. Of this total, pursuant to the Companys
dividend reinvestment plan, $5,796 was reinvested into the
Company for 168,885 newly issued shares of common stock.
F-22
BASE PROSPECTUS
$500,000,000
Common Stock
Preferred Stock
Debt Securities
We are a non-diversified, closed-end management investment
company that began investment activities on September 28,
2004. Our investment objective is to obtain a high after-tax
total return by investing at least 85% of our net assets plus
any borrowings (our total assets) in energy-related
master limited partnerships and their affiliates (collectively,
MLPs), and in other companies that, as their
principal business, operate assets used in the gathering,
transporting, processing, storing, refining, distributing,
mining or marketing natural gas, natural gas liquids (including
propane), crude oil, refined petroleum products or coal
(collectively with MLPs, Midstream Energy
Companies). We invest in equity securities of
(i) master limited partnerships, including preferred,
common and subordinated units and general partner interests,
(ii) owners of such interests in master limited
partnerships, and (iii) other Midstream Energy Companies.
Additionally, we may invest in debt securities of MLPs and other
Midstream Energy Companies. We intend to invest at least 50% of
our total assets in publicly traded securities of MLPs and other
Midstream Energy Companies, and we may invest up to 50% of our
total assets in unregistered or otherwise restricted securities
of MLPs and other Midstream Energy Companies, including
securities issued by private companies.
We may offer, from time to time, up to an aggregate of
$500,000,000 of our common stock ($0.001 par value per
share), preferred stock ($0.001 par value per share) or
debt securities, which we refer to in this prospectus
collectively as our securities, in one or more offerings. We may
offer our common stock, preferred stock or debt securities
separately or together, in amounts, at prices and on terms set
forth in a prospectus supplement to this prospectus. You should
read this prospectus and the related prospectus supplement
carefully before you decide to invest in any of our securities.
We may offer and sell our securities to or through underwriters,
through dealers or agents that we designate from time to time,
directly to purchasers or through a combination of these
methods. If an offering of securities involves any underwriters,
dealers or agents, then the applicable prospectus supplement
will name the underwriters, dealers or agents and will provide
information regarding any applicable purchase price, fee,
commission or discount arrangements made with those
underwriters, dealers or agents or the basis upon which such
amount may be calculated. For more information about the manners
in which we may offer our securities, see Plan of
Distribution. We may not sell any of our securities
through agents, underwriters or dealers without delivery of a
prospectus supplement.
(continued on following page)
Investing in our securities may be speculative and involve a
high degree of risk and should not constitute a complete
investment program. Before buying any securities, you should
read the discussion of the material risks of investing in our
securities in Risk Factors beginning on page 11
of this prospectus. You should consider carefully these risks
together with all of the other information contained in this
prospectus and any prospectus supplement before making a
decision to purchase our securities.
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.
April 16, 2007
(continued from previous page)
We are managed by KA Fund Advisors, LLC, a subsidiary of
Kayne Anderson Capital Advisors, L.P. (together, Kayne
Anderson), a leading investor in MLPs. As of
November 30, 2006, Kayne Anderson and its affiliates
managed approximately $7.0 billion, including approximately
$3.3 billion in MLPs and other Midstream Energy Companies.
Our currently outstanding shares of common stock are listed on
the New York Stock Exchange (NYSE) under the symbol
KYN. The net asset value of our common stock at the
close of business on February 28, 2007 was $30.97 per
share, and the last sale price per share of our common stock on
the NYSE on such date was $32.91. See Market and Net Asset
Value Information.
Shares of common stock of closed-end investment companies
frequently trade at discounts to their net asset values. If our
common stock trades at a discount to our net asset value, the
risk of loss may increase for purchasers in this offering,
especially for those investors who expect to sell their common
stock in a relatively short period after purchasing shares in
this offering. See Risk Factors Risks Related
to Our Common Stock Market Discount From Net Asset
Value Risk at page 14.
We issued three series of auction rate senior notes due in 2045,
in an aggregate principal amount of $260 million
(Series A, B and C Notes), on March 28,
2005, and one series of auction rate senior notes due in 2045,
in an aggregate principal amount of $60 million
(Series E Notes), on December 14, 2005.
Series A, B, C and E Notes are rated Aaa and
AAA by Moodys Investors Service Inc.
(Moodys) and Fitch Ratings
(Fitch), respectively. As of November 30, 2006,
the aggregate principal amount of Series A, B, C and E
Notes represented approximately 18.6% of our total assets.
Series A, B, C and E Notes are on a parity with each other,
and are referred to collectively herein as the Senior
Notes.
On April 12, 2005, we issued an aggregate amount of
$75 million of Series D Auction Rate Preferred Stock
(ARP Shares). The ARP Shares are rated
Aa and AA by Moodys and Fitch,
respectively. As of November 30, 2006, the aggregate amount
of ARP Shares represented approximately 4.4% of our total
assets. ARP Shares pay adjustable rate dividends, which are
redetermined periodically by an auction process. The adjustment
period for dividends on ARP Shares could be as short as one day
or as long as a year or more.
Our common stock is junior in liquidation and distribution
rights to our debt securities and preferred stock. The issuance
of our debt securities and preferred stock represents the
leveraging of our common stock. See Use of
Leverage Effects of Leverage at page 36,
Risk Factors Risks Related to Our Common
Stock Leverage Risk to Common Stockholders at
page 14, and Description of Capital Stock at
page 45. The issuance of any additional common stock
offered by this prospectus will enable us to increase the
aggregate amount of our leverage. Our preferred stock will be
senior in liquidation and distribution rights to our common
stock and will be junior in liquidation and distribution rights
to our debt securities. Investors in our preferred stock will be
entitled to receive cash dividends at an annual rate that may
vary for each dividend period. Our debt securities will be our
unsecured obligations and, upon our liquidation, dissolution or
winding up, rank: (1) senior to all of our outstanding
common stock and any preferred stock (including the ARP Shares);
(2) on a parity with our obligations to any unsecured
creditors and any unsecured senior securities representing our
indebtedness, including the Senior Notes and any other series of
our auction rate senior notes; and (3) junior to our
obligations to any secured creditors. Holders of our debt
securities will be entitled to receive cash interest payments at
an annual rate that may vary for each rate period. We may redeem
our debt securities prior to their stated maturity in certain
circumstances described in this prospectus and any related
prospectus supplement.
You should rely only on the information contained or
incorporated by reference in this prospectus and any related
prospectus supplement. We 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. We are not making an offer to sell these securities
in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this
prospectus and any prospectus supplement is accurate only as of
the respective dates on their front covers. Our business,
financial condition, results of operations and prospects may
have changed since that date.
TABLE OF
CONTENTS
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Page
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1
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4
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6
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9
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9
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10
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11
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27
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28
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29
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30
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35
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38
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43
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45
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48
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51
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54
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55
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61
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65
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67
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67
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67
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68
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i
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission, or the SEC,
using the shelf registration process. Under the
shelf registration process, we may offer, from time to time,
separately or together in one or more offerings, up to
$500,000,000 of our common stock, preferred stock or debt
securities on the terms to be determined at the time of the
offering. The securities may be offered at prices and on terms
described in one or more supplements to this prospectus. This
prospectus provides you with a general description of the
securities that we may offer. Each time we use this prospectus
to offer securities, we will provide a prospectus supplement
that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or
change information contained in this prospectus. This
prospectus, together with any prospectus supplement, sets forth
concisely the information about us that a prospective investor
ought to know before investing. You should read this prospectus
and the related prospectus supplement before deciding whether to
invest and retain them for future reference. A statement of
additional information, dated April 16, 2007
(SAI), containing additional information about us,
has been filed with the SEC and is incorporated by reference in
its entirety into this prospectus. You may request a free copy
of our stockholder reports and our SAI, the table of contents of
which is on page 68 of this prospectus, by calling
(877) 657-3863/MLP-FUND,
by accessing our web site (http://www.kaynemlp.com), or by
writing to us. You may also obtain copies of these documents
(and other information regarding us) from the SECs web
site
(http://www.sec.gov).
ii
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 our
securities offered by this prospectus. You should carefully read
the entire prospectus, any related prospectus supplement and the
SAI, including the documents incorporated by reference into
them, particularly the section entitled Risk Factors
beginning on page 11. Except where the context suggests
otherwise, the terms we, us, and
our refer to Kayne Anderson MLP Investment Company;
Kayne Anderson refers to KA Fund Advisors, LLC
and its managing member, Kayne Anderson Capital Advisors, L.P.
and its predecessor; midstream energy assets refers
to assets used in the gathering, transporting, processing,
storing, refining, distributing, mining or marketing natural
gas, natural gas liquids (including propane), crude oil, refined
petroleum products or coal; MLPs refers to
energy-related master limited partnerships, limited liability
companies treated as partnerships, and their affiliates; and
Midstream Energy Companies means (i) MLPs and
(ii) other companies that, as their principal business,
operate midstream energy assets.
About
Kayne Anderson MLP Investment Company
We are a non-diversified, closed-end investment company
registered under the Investment Company Act of 1940, as amended
(the 1940 Act), which commenced investment
activities on September 28, 2004. Our common stock is
traded on the New York Stock Exchange (the NYSE)
under the symbol KYN. See Description of
Capital Stock on page 45. Our investment objective is
to obtain a high after-tax total return by investing at least
85% of our total assets in MLPs and other Midstream Energy
Companies. We also must comply with the SECs rule
regarding investment company names, which requires us, under
normal market conditions, to invest at least 80% of our total
assets in MLPs so long as MLP is in our name.
We completed our initial public offering of common stock on
September 28, 2004. After the payment of offering expenses
and underwriting discounts, we received approximately
$711 million from the proceeds of the initial public
offering and after subsequent exercises by the underwriters of
their over allotment option, the aggregate net proceeds were
approximately $786 million. We completed a secondary public
offering of our common stock on October 17, 2005. After the
payment of offering expenses and underwriting discounts, we
received approximately $77 million from the proceeds of the
secondary public offering. As of November 30, 2006, we had
38,064,836 shares of common stock outstanding and net
assets applicable to our common stock of $1.1 billion.
We issued three series of auction rate senior notes due in 2045,
in an aggregate principal amount of $260 million
(Series A, B and C Notes), on March 28,
2005, and one series of auction rate senior notes due in 2045,
in an aggregate principal amount of $60 million
(Series E Notes), on December 14, 2005.
Series A, B, C and E Notes are rated Aaa and
AAA by Moodys Investors Service Inc.
(Moodys) and Fitch Ratings
(Fitch), respectively. As of November 30, 2006,
the aggregate principal amount of Series A, B, C and E
Notes represented approximately 18.6% of our total assets.
Series A, B, C and E Notes are on a parity with each other,
and are referred to collectively herein as the Senior
Notes.
On April 12, 2005, we issued an aggregate amount of
$75 million of Series D Auction Rate Preferred Stock
(ARP Shares). The ARP Shares are rated
Aa and AA by Moodys and Fitch,
respectively. As of November 30, 2006, the aggregate amount
of ARP Shares represented approximately 4.4% of our total assets.
After the payment of offering expenses and underwriting
discounts, we received a total of approximately
$390 million in net proceeds from the issuance of the
Senior Notes and the ARP Shares.
The
Offering
We may offer, from time to time, up to $500,000,000 of our
securities, on terms to be determined at the time of the
offering. We will offer our securities at prices and on terms to
be set forth in one or more supplements to this prospectus.
Preferred stock and debt securities (collectively, senior
securities) may be auction rate securities, in which case
the senior securities will not be listed on any exchange or
automated quotation system. Rather, investors generally may only
buy and sell senior securities through an auction conducted by
an auction agent and participating broker-dealers.
1
While the aggregate number and amount of securities we may issue
pursuant to this registration statement is limited to
$500,000,000 of securities, our Board of Directors (the
Board of Directors or the Board) may,
without any action by the stockholders, amend our 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 we have authority to issue. The securities may be
sold from time to time in one or more transactions at fixed
prices, at prevailing market prices at the time of sale, prices
related to prevailing market prices, at varying prices
determined at the time of sale or at negotiated prices.
We may offer and sell our securities to or through underwriters,
through dealers or agents that we designate from time to time,
directly to purchasers or through a combination of these
methods. If an offering of securities involves any underwriters,
dealers or agents, then the applicable prospectus supplement
will name the underwriters, dealers or agents and will provide
information regarding any applicable purchase price, fee,
commission or discount arrangements made with those
underwriters, dealers or agents or the basis upon which such
amount may be calculated. See Plan of Distribution.
We may not sell any of our securities through agents,
underwriters or dealers without delivery of a prospectus
supplement describing the method and terms of the offering of
our securities.
Our
Portfolio Investments
Our investments in the securities of MLPs and other Midstream
Energy Companies are principally in equity securities issued by
MLPs. Generally, we invest in equity securities of
(i) master limited partnerships, including preferred,
common and subordinated units and general partner interests,
(ii) owners of such interests in master limited
partnerships, and (iii) other Midstream Energy Companies.
Finally, we may also, from time to time, invest in debt
securities of MLPs and other Midstream Energy Companies with
varying maturities of up to 30 years.
We intend to invest at least 50% of our total assets in publicly
traded (i.e., freely tradable) securities of MLPs and other
Midstream Energy Companies and may invest up to 50% of our total
assets in unregistered or otherwise restricted securities of
MLPs and other Midstream Energy Companies, including securities
issued by private companies. We may invest up to 15% of our
total assets in any single issuer.
We may invest up to 20% of our total assets in debt securities
of MLPs and other Midstream Energy Companies, including below
investment grade debt securities rated, at the time of
investment, at least B3 by Moodys Investors Service, Inc.,
B− by Standard & Poors or Fitch Ratings,
or, if unrated, determined by Kayne Anderson to be of comparable
quality. In addition, up to one-quarter of our permitted
investments in debt securities (or up to 5% of our total assets)
may include unrated debt securities of private companies.
On a limited basis, we may also use derivative investments to
hedge against interest rate and market risks. We may also
utilize short sales to hedge such risks and as part of short
sale investment strategies.
About Our
Investment Adviser
KA Fund Advisors, LLC (KAFA) is our investment
adviser, responsible for implementing and administering our
investment strategy. KAFA is a subsidiary of Kayne Anderson
Capital Advisors, L.P. (KACALP and together with
KAFA, Kayne Anderson), a SEC-registered investment
adviser. As of November 30, 2006, Kayne Anderson and its
affiliates managed approximately $7.0 billion, including
approximately $3.3 billion in MLPs and other Midstream
Energy Companies. Kayne Anderson has invested in MLPs and other
Midstream Energy Companies since 1998. We believe that Kayne
Anderson has developed an understanding of the MLP market that
enables it to identify and take advantage of public MLP
investment opportunities. In addition, Kayne Andersons
senior professionals have developed a strong reputation in the
energy sector and have many long-term relationships with
industry managers, which we believe gives Kayne Anderson an
important advantage in sourcing and structuring private
investments.
Use of
Financial Leverage
The issuance of our debt securities and preferred stock
represents the leveraging of our common stock. The issuance of
additional common stock offered by this prospectus will enable
us to increase the aggregate amount of our leverage. The net
asset value of our common stock will be reduced by the fees and
issuance costs of any preferred stock we issue.
2
We may leverage through the issuance of debt and preferred
securities offered hereby, our revolving credit facility or
other borrowings. The timing and terms of any leverage
transactions will be determined by our Board of Directors. The
use of leverage involves significant risks and creates a greater
risk of loss, as well as potential for more gain, for holders of
our common stock than if leverage is not used. Throughout this
prospectus, our debt securities, including Senior Notes, our
revolving credit facility or other borrowings are collectively
referred to as Borrowings. See Risk
Factors Risks Related to Our Common
Stock Leverage Risk to Common Stockholders at
page 14.
Our Borrowings and our preferred stock, including the ARP Shares
(each a Leverage Instrument and collectively, the
Leverage Instruments) may constitute, in the
aggregate, up to 30% of our total assets, which includes assets
obtained through such financial leverage. Leverage Instruments
have seniority in liquidation and distribution rights over our
common stock. Costs associated with any issuance of preferred
stock are borne immediately by common stockholders and result in
a reduction of the net asset value of our common stock. See
Use of Leverage at page 35.
Because Kayne Andersons fee is based upon a percentage of
our average total assets, Kayne Andersons fee is likely to
be higher since we employ leverage. Therefore, Kayne Anderson
has a financial incentive to use leverage, which may create a
conflict of interest between Kayne Anderson and our common
stockholders. There can be no assurance that our leveraging
strategy will be successful during any period in which it is
used. The use of leverage involves significant risks. See
Risk Factors Risks Related to Our Common
Stock Leverage Risk to Common Stockholders at
page 14 and Risks Related to Our Senior
Securities Senior Leverage Risk to Preferred
Stockholders at page 18.
Dividends
and Interest
As of the date of this prospectus, we have paid dividends to
common stockholders every fiscal quarter since inception,
significant portions of which have been characterized as returns
of capital for federal income tax purposes. We expect that a
significant portion of our future dividends will be treated as a
return of capital to stockholders for tax purposes. We intend to
continue to pay quarterly dividends to our common stockholders.
Our quarterly dividends, if any, will be determined by our Board
of Directors. We will pay dividends and interest on our
preferred stock and debt securities, respectively, in accordance
with their terms. For more information, see
Dividends and Tax Matters at
pages 28 and 55.
Use of
Proceeds
Unless otherwise specified in a prospectus supplement, we will
invest the net proceeds of any sales of securities in accordance
with our investment objective and policies within approximately
3 months of receipt of such proceeds. See Use of
Proceeds at page 10.
Taxation
We are treated as a corporation for federal income tax purposes
and, as a result, unlike most investment companies, we are
subject to corporate income tax to the extent we recognize
taxable income. As a partner in MLPs, we have to report our
allocable share of each MLPs taxable income or loss in
computing our taxable income or loss, whether or not we actually
receive any cash from such MLP. See Tax Matters at
page 55.
Risk
Management Techniques
We may, but are not required to, use various hedging and other
transactions to seek to manage interest rate and market risks.
See Risk Factors Risks Related to Our Common
Stock Leverage Risk to Common Stockholders at
page 14, Risks Related to Our Senior
Securities Senior Leverage Risk to Preferred
Stockholders at page 18, Risks
Related to Our Investments and Investment Techniques
Derivatives Risk at page 25, and Investment
Objective and Policies Investment
Practices Hedging and Other Risk Management
Transactions at page 33 in this prospectus and
Our Investments Our Use of Derivatives,
Options and Hedging Transactions, in our SAI. There is no
guarantee we will use these risk management techniques.
3
KAYNE
ANDERSON MLP INVESTMENT COMPANY
We are a non-diversified, closed-end management investment
company registered under the 1940 Act, and formed as a Maryland
corporation in June 2004. Our common stock is listed on the New
York Stock Exchange (NYSE) under the symbol
KYN. On September 28, 2004, we issued
30,000,000 shares of common stock, par value
$0.001 per share, in an initial public offering. On
October 22, 2004 and November 16, 2004, we issued an
additional 1,500,000 and 1,661,900 shares of common stock,
respectively, in connection with partial exercises by the
underwriters of their over allotment option. The proceeds of the
initial public offering and subsequent exercises of the over
allotment option of common stock were approximately
$786 million after the payment of offering expenses and
underwriting discounts. We completed a secondary public offering
of our common stock on October 17, 2005. After the payment
of offering expenses and underwriting discounts, we received
approximately $77 million from the proceeds of the
secondary public offering. On April 12, 2005, we issued an
aggregate amount of $75 million of ARP Shares. The ARP
Shares are rated Aa and AA by
Moodys and Fitch, respectively. After the payment of
offering expenses and underwriting discounts, we received a
total of approximately $74 million in net proceeds from the
issuance of the ARP Shares. As of November 30, 2006, the
aggregate amount of ARP Shares represented approximately 4.4% of
our total assets. We issued Series A, B and C Notes, in an
aggregate principal amount of $260 million, on
March 28, 2005 and Series E Notes, in an aggregate
principal amount of $60 million, on December 14, 2005.
Our Senior Notes are rated Aaa and AAA
by Moodys and Fitch, respectively. After the payment of
offering expenses and underwriting discounts, we received a
total of approximately $316 million in net proceeds from
the issuance of Senior Notes. As of November 30, 2006, the
aggregate principal amount of Senior Notes represented
approximately 18.6% of our total assets. Our Senior Notes are on
a parity with each other.
As of the date of this prospectus, we have paid dividends to
common stockholders every fiscal quarter since inception. The
following table sets forth information about dividends we paid
to our common stockholders, percentage participation by common
stockholders in our dividend reinvestment program and
reinvestments and related issuances of additional shares of
common stock as a result of such participation (the information
in the table is unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
Additional Shares
|
|
|
|
|
|
Percentage of Common
|
|
|
Corresponding
|
|
|
of Common Stock
|
|
|
|
|
|
Stockholders Electing
|
|
|
Reinvestment
|
|
|
Issued through
|
|
Dividend Payment
|
|
Amount of
|
|
to Participate in
|
|
|
through Dividend
|
|
|
Dividend
|
|
Date to Common
|
|
Dividend
|
|
Dividend Reinvestment
|
|
|
Reinvestment
|
|
|
Reinvestment
|
|
Stockholders
|
|
Per Share
|
|
Program for Dividend
|
|
|
Program
|
|
|
Program
|
|
|
January 14, 2005
|
|
$
|
0
|
.25
|
|
|
65
|
%
|
|
$
|
5,400,602
|
|
|
|
222,522
|
|
April 15, 2005
|
|
|
0
|
.41
|
|
|
51
|
%
|
|
|
7,042,073
|
|
|
|
288,020
|
|
July 15, 2005
|
|
|
0
|
.415
|
|
|
47
|
%
|
|
|
6,570,925
|
|
|
|
249,656
|
|
October 14, 2005
|
|
|
0
|
.42
|
|
|
47
|
%
|
|
|
6,251,280
|
|
|
|
249,453
|
|
January 12, 2006
|
|
|
0
|
.425
|
|
|
42
|
%
|
|
|
6,627,404
|
|
|
|
263,620
|
|
April 13, 2006
|
|
|
0
|
.43
|
|
|
39
|
%
|
|
|
6,312,557
|
|
|
|
203,318
|
|
July 13, 2006
|
|
|
0
|
.44
|
|
|
37
|
%
|
|
|
6,183,973
|
|
|
|
204,423
|
|
October 13, 2006
|
|
|
0
|
.45
|
|
|
34
|
%
|
|
|
5,864,353
|
|
|
|
217,924
|
|
January 12, 2007
|
|
|
0
|
.47
|
|
|
32
|
%
|
|
|
5,717,595
|
|
|
|
200,336
|
|
4
The following table sets forth information about our outstanding
securities as of November 30, 2006 (the information in the
table is unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Shares/
|
|
|
Amount Held
|
|
|
|
|
|
|
Aggregate Principal
|
|
|
by Us or
|
|
|
Amount
|
|
Title of Class
|
|
Amount Authorized
|
|
|
for Our Account
|
|
|
Outstanding
|
|
|
Common Stock
|
|
|
199,990,000
|
|
|
|
0
|
|
|
|
38,064,836
|
|
Series D Auction Rate
Preferred Stock(1)
|
|
|
10,000
|
|
|
|
0
|
|
|
|
3,000
|
|
Auction Rate Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
$85,000,000
|
|
|
|
0
|
|
|
$
|
85,000,000
|
|
Series B
|
|
|
85,000,000
|
|
|
|
0
|
|
|
|
85,000,000
|
|
Series C
|
|
|
90,000,000
|
|
|
|
0
|
|
|
|
90,000,000
|
|
Series E
|
|
|
60,000,000
|
|
|
|
0
|
|
|
|
60,000,000
|
|
|
|
|
(1) |
|
Each share has a liquidation preference of $25,000 ($75,000,000
aggregate liquidation preference for outstanding shares). |
We issued 4,000 shares of our common stock in a private
placement to provide us with seed capital prior to our initial
public offering of common stock. Those shares are held by an
affiliate of Kayne Anderson.
Our principal office is located at 1800 Avenue of the Stars,
Second Floor Los Angeles, CA 90067, and our telephone number is
(877) 657-3863/MLP-FUND.
5
FEES AND
EXPENSES
The following table contains information about the costs and
expenses that common stockholders will bear directly or
indirectly. The table assumes that we use leverage representing
30% of our total assets. The Annual Expense table below assumes
that leverage is increased from its level of 23.9% on
November 30, 2006 to an assumed level of 30% by increasing
its outstanding Senior Notes.
|
|
|
|
|
Stockholder Transaction
Expenses:
|
|
|
|
|
Sales Load Paid by You (as a
percentage of offering price)(1)
|
|
|
|
%
|
Offering Expenses Borne by Us (as
a percentage of offering price)(2)
|
|
|
|
%
|
Dividend Reinvestment Plan Fees(3)
|
|
|
None
|
|
Total stockholder transaction
expenses (as a percentage of offering price)(4)
|
|
|
|
%
|
Percentage
of Net Assets Attributable to Common Stock
(assumes leverage is increased to 30%)(5)
|
|
|
|
|
Annual Expenses:
|
|
|
|
|
Management Fees(6)
|
|
|
2.07
|
%
|
Interest Payments on Borrowed
Funds(7)(8)(12)
|
|
|
2.38
|
%
|
Dividend Payments on Preferred
Stock(8)(9)(12)
|
|
|
0.38
|
%
|
Other Expenses (exclusive of
current and deferred income tax expenses)
|
|
|
0.22
|
%
|
Annual Expenses (exclusive of
current and deferred income tax expenses)
|
|
|
5.05
|
%
|
Current Income Tax Expense
(Benefit)(10)
|
|
|
(0.01
|
)%
|
Deferred Income Tax Expense(11)
|
|
|
12.30
|
%
|
Total Annual Expenses (including
current and deferred income tax expenses)
|
|
|
17.34
|
%
|
|
|
|
(1) |
|
The sales load will apply only if the securities to which this
prospectus relates are sold to or through underwriters. In such
case, a corresponding prospectus supplement will disclose the
applicable sales load. |
|
(2) |
|
The related prospectus supplement will disclose the estimated
amount of offering expenses, the offering price and the offering
expenses borne by us as a percentage of the offering price. |
|
(3) |
|
The expenses of administering our dividend reinvestment plan are
included in Other Expenses. You will pay brokerage charges if
you direct American Stock Transfer &
Trust Company, as agent for our common stockholders (the
Plan Administrator), to sell your common stock held
in a dividend reinvestment account. See Dividend
Reinvestment Plan. |
|
(4) |
|
The related prospectus supplement will disclose the offering
price and the total stockholder transaction expenses as a
percentage of the offering price. |
|
(5) |
|
Leverage representing 23.9% of our total assets at
November 30, 2006 is assumed to increase to 30% for
purposes of calculating annual expenses in the table. The
increased leverage is assumed to be from the issuance of
additional Senior Notes. The annual expenses in the table assume
no additional issuances of ARP Shares or common stock and no
interest rate swap agreements. |
|
(6) |
|
Under the Investment Management Agreement, effective for periods
commencing on or after December 12, 2006, the management
fee is calculated at an annual rate of 1.375% of our average
total assets. In the table above, management fees are calculated
based on average total assets for the fiscal year ended
November 30, 2006, as adjusted for assumed additional
leverage equal to 30%. Annual expenses of 2.07% are calculated
as a percentage of net assets attributable to common stock as of
November 30, 2006, which results in a higher percentage
than the percentage attributable to average total assets. See
Management Investment Management
Agreement at page 42. |
|
(7) |
|
Interest Payments on Borrowed Funds in the table reflect the
interest and offering expense borne by us in connection with the
issuance of Borrowings as a percentage of our net assets, based
on interest rates in effect as of November 30, 2006, which
rates were as follows: Senior Notes Series A, 5.05%;
Senior Notes Series B, 5.05%; Senior
Notes Series C, 5.24%; Senior
Notes Series E, 5.05%; and revolving credit line,
6.32%. |
6
|
|
|
(8) |
|
Interest payment obligations on our Borrowings and dividend
payment obligations on our ARP Shares have been hedged in part
by interest rate swap agreements. These estimated payments made
or received on our interest rate swap agreements are not
included in annual expenses. As of November 30, 2006, we
had interest rate swap agreements with a notional amount of
$270 million. The average interest rate payable under these
agreements was 4.46% as compared to the variable benchmark
(1-month
London Interbank Offered Rate) rate of 5.35%. As of
November 30, 2006, our interest rate swap agreements would
decrease Annual Expenses by 0.22% of net assets attributable to
common stock. |
|
(9) |
|
Dividend Payments on Preferred Stock in the table reflect the
dividends paid by us in connection with our ARP Shares as a
percentage of our net assets, based on the dividend rate of
5.28% in effect as of November 30, 2006. |
|
(10) |
|
The current tax benefit related to our net investment loss was
$0.1 million for the fiscal year ended November 30,
2006. |
|
(11) |
|
For the fiscal year ended November 30, 2006, we accrued
$135.7 million in net deferred tax expense on our net
investment loss, realized gains and unrealized gains. |
|
(12) |
|
As of November 30, 2006, we had $412 million in
Leverage Instruments outstanding (Senior Notes in an aggregate
principal amount of $320 million; $17 million
aggregate principal amount borrowed under our revolving credit
line; and ARP Shares with an aggregate liquidation preference of
$75 million). Such Leverage Instruments represent 23.9% of
total assets as of November 30, 2006. In accordance with
these leverage assumptions, our expenses would be estimated as
follows: |
Percentage
of Net Assets Attributable to Common Stock
(assumes actual leverage as of November 30, 2006)
|
|
|
|
|
Annual Expenses:
|
|
|
|
|
Management Fees(a)
|
|
|
1.88
|
%
|
Interest Payments on Borrowed
Funds(b)(d)
|
|
|
1.66
|
%
|
Dividend Payments on Preferred
Stock(c)(d)
|
|
|
0.38
|
%
|
Other Expenses (exclusive of
current and deferred income tax expenses)
|
|
|
0.22
|
%
|
Annual Expenses (exclusive of
current and deferred income tax expenses)
|
|
|
4.14
|
%
|
Current Income Tax Expense
(Benefit)(e)
|
|
|
(0.01
|
)%
|
Deferred Income Tax Expense(f)
|
|
|
12.30
|
%
|
Total Annual Expenses (including
current and deferred income tax expenses)
|
|
|
16.43
|
%
|
|
|
|
(a)
|
|
Under the Investment Management
Agreement, effective for periods commencing on or after
December 12, 2006, the management fee is calculated at an
annual rate of 1.375% of our average total assets. In the table
above, estimated management fees are calculated at the annual
rate of 1.375% multiplied by our average total assets for the
fiscal year ended November 30, 2006. Annual expenses of
1.88% are calculated as a percentage of net assets attributable
to common stock as of November 30, 2006, which results in a
higher percentage than the percentage attributable to average
total assets. See Management Investment
Management Agreement at page 42.
|
|
(b)
|
|
Interest Payments on Borrowed Funds
in the table reflect the interest and offering expense borne by
us in connection with the issuance of Borrowings as a percentage
of our net assets, based on interest rates in effect as of
November 30, 2006, which rates were as follows: Senior
Notes Series A, 5.05%; Senior
Notes Series B, 5.05%; Senior
Notes Series C, 5.24%; Senior
Notes Series E, 5.05%; and revolving credit line,
6.32%.
|
|
(c)
|
|
Dividend Payments on Preferred
Stock in the table reflect the dividends paid by us in
connection with our ARP Shares as a percentage of our net
assets, based on the dividend rate of 5.28% in effect as of
November 30, 2006.
|
|
(d)
|
|
Interest payment obligations on our
Borrowings and dividend payment obligations on our ARP Shares
have been hedged in part by interest rate swap agreements. These
estimated payments made or received on our interest rate swap
agreements are not included in annual expenses. As of
November 30, 2006, we had interest rate swap agreements
with a notional amount of $270 million. The average
interest rate payable under these agreements was 4.46% as
compared to the variable benchmark
(1-month
London
|
7
|
|
|
|
|
Interbank Offered Rate) rate of
5.35%. As of November 30, 2006, our interest rate swap
agreements would decrease Annual Expenses by 0.22% of net assets
attributable to common stock.
|
|
(e)
|
|
The current tax benefit related to
our net investment loss was $0.1 million for the fiscal
year ended November 30, 2006.
|
|
(f)
|
|
For the fiscal year ended
November 30, 2006, we accrued $135.7 million in net
deferred tax expense on our net investment loss, realized gains
and unrealized gains.
|
The purpose of the first table above and the example below is to
help you understand all fees and expenses that you would bear
directly or indirectly as a holder of our common stock. See
Management at page 38 and Dividend
Reinvestment Plan at page 29.
Example
The following example illustrates the expenses that common
stockholders would pay on a $1,000 investment in our common
stock, assuming a 6.20% interest and dividend yield on total
assets, a 5% annual appreciation in net assets (prior to
reinvestment of dividends and distributions) and expenses based
on a management fee of 1.375% of average total assets and a
37.0% tax rate. Based on these assumptions, annual expenses
before tax are 4.37% of net assets attributable to our common
stock in year 1 and total annual expenses after tax are 6.68% of
net assets attributable to our common stock in year 1. The
following example also assumes that all dividends and
distributions are reinvested at net asset value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
|
Before tax(1)
|
|
$
|
48
|
|
|
$
|
145
|
|
|
$
|
247
|
|
|
$
|
535
|
|
After tax(1)(2)
|
|
$
|
74
|
|
|
$
|
223
|
|
|
$
|
381
|
|
|
$
|
825
|
|
|
|
|
(1) |
|
Expenses include the 1.375% annual management fee payable to
KAFA as a percentage of average total assets. |
|
(2) |
|
Taxes calculated based on an assumed 5% annual appreciation in
net assets (prior to reinvestment of dividends and
distributions). |
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. The example assumes that the estimated Other
Expenses set forth in the Annual Expenses table are
accurate and that all dividends and distributions are reinvested
at net asset value and that we are engaged in leverage of 30% of
total assets, assuming a 5.41% cost of leverage. The example
above assumes that leverage is increased from its level of 23.9%
on November 30, 2006 to an assumed level of 30% by
increasing its outstanding Senior Notes. The cost of leverage is
expressed as a blended interest/dividend rate and represents the
weighted average cost on our Leverage Instruments, excluding the
impacts of our interest rate swap agreements at
November 30, 2006, plus the weighted average cost of
additional Senior Notes. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN. Moreover, our actual rate of return may be
greater or less than the hypothetical 5% return shown in the
example.
8
FINANCIAL
HIGHLIGHTS
The Financial Highlights for the period September 28, 2004
through November 30, 2004 and for the fiscal years ended
November 30, 2005 and 2006, including accompanying notes
thereto and the report of PricewaterhouseCoopers LLP thereon,
contained in the following document filed by us with the SEC are
hereby incorporated by reference into, and are made part of,
this prospectus: Our Annual Report to Stockholders for the year
ended November 30, 2006 contained in its
Form N-CSR
filed with the SEC on February 7, 2007). A copy of such
Annual Report to Stockholders must accompany the delivery of
this prospectus.
MARKET
AND NET ASSET VALUE INFORMATION
Our currently outstanding shares of common stock are listed on
the NYSE under the symbol KYN. Our common stock
commenced trading on the NYSE on September 28, 2004.
Our common stock has traded both at a premium and at a discount
in relation to its net asset value. Although our common stock
recently has been trading at a premium to net asset value, there
can be no assurance that this will continue after the offering
or that our common stock will not trade at a discount in the
future. Our issuance of common stock may have an adverse effect
on prices in the secondary market for our common stock by
increasing the number of shares of common stock available, which
may put downward pressure on the market price for our common
stock. The continued development of alternatives to us as a
vehicle for investment in a portfolio of MLPs, including other
publicly traded investment companies and private funds, may
reduce or eliminate any tendency of our common stock to trade at
a premium in the future. Shares of closed-end investment
companies frequently trade at a discount to net asset value. See
Risk Factors Risks Related to Our Common
Stock Market Discount From Net Asset Value
Risk on page 14.
The following table sets forth for each of the dates indicated
the closing market prices for our shares on the NYSE, the net
asset value per share of common stock and the premium or
discount to net asset value per share at which our shares were
trading. Net asset value is generally determined on the last
business day of each calendar month. See Net Asset
Value on page 43 for information as to the
determination of our net asset value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing
|
|
|
Net Asset Value Per Share
|
|
|
Premium/(Discount) to
|
|
Month Ended
|
|
Market Price
|
|
|
of Common Stock(1)
|
|
|
Net Asset Value
|
|
|
September 28, 2004
|
|
$
|
25.00
|
|
|
$
|
23.70
|
|
|
|
5.5
|
%
|
October 31, 2004
|
|
|
25.08
|
|
|
|
23.73
|
|
|
|
5.7
|
|
November 30, 2004
|
|
|
24.90
|
|
|
|
23.91
|
|
|
|
4.1
|
|
December 31, 2004
|
|
|
25.00
|
|
|
|
24.25
|
|
|
|
3.1
|
|
January 31, 2005
|
|
|
25.00
|
|
|
|
25.03
|
|
|
|
(0.1
|
)
|
February 28, 2005
|
|
|
26.05
|
|
|
|
25.27
|
|
|
|
3.1
|
|
March 31, 2005
|
|
|
26.22
|
|
|
|
24.90
|
|
|
|
5.3
|
|
April 30, 2005
|
|
|
26.00
|
|
|
|
24.92
|
|
|
|
4.3
|
|
May 31, 2005
|
|
|
26.00
|
|
|
|
25.19
|
|
|
|
3.2
|
|
June 30, 2005
|
|
|
26.75
|
|
|
|
26.01
|
|
|
|
2.8
|
|
July 31, 2005
|
|
|
27.97
|
|
|
|
26.86
|
|
|
|
4.1
|
|
August 31, 2005
|
|
|
27.60
|
|
|
|
26.63
|
|
|
|
3.6
|
|
September 30, 2005
|
|
|
28.06
|
|
|
|
26.74
|
|
|
|
4.9
|
|
October 31, 2005
|
|
|
25.91
|
|
|
|
25.98
|
|
|
|
(0.3
|
)
|
November 30, 2005
|
|
|
24.33
|
|
|
|
25.07
|
|
|
|
(3.0
|
)
|
December 30, 2005
|
|
|
24.34
|
|
|
|
24.87
|
|
|
|
(2.1
|
)
|
January 31, 2006
|
|
|
25.40
|
|
|
|
25.67
|
|
|
|
(1.1
|
)
|
February 28, 2006
|
|
|
25.43
|
|
|
|
25.48
|
|
|
|
(0.2
|
)
|
March 31, 2006
|
|
|
25.98
|
|
|
|
25.93
|
|
|
|
0.2
|
|
April 30, 2006
|
|
|
25.68
|
|
|
|
25.85
|
|
|
|
(0.7
|
)
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing
|
|
|
Net Asset Value Per Share
|
|
|
Premium/(Discount) to
|
|
Month Ended
|
|
Market Price
|
|
|
of Common Stock(1)
|
|
|
Net Asset Value
|
|
|
May 31, 2006
|
|
|
25.78
|
|
|
|
26.48
|
|
|
|
(2.6
|
)
|
June 30, 2006
|
|
|
25.65
|
|
|
|
26.29
|
|
|
|
(2.4
|
)
|
July 31, 2006
|
|
|
26.55
|
|
|
|
26.73
|
|
|
|
(0.7
|
)
|
August 31, 2006
|
|
|
27.68
|
|
|
|
27.37
|
|
|
|
1.1
|
|
September 30, 2006
|
|
|
27.84
|
|
|
|
27.13
|
|
|
|
2.6
|
|
October 31, 2006
|
|
|
28.89
|
|
|
|
28.05
|
|
|
|
3.0
|
|
November 30, 2006
|
|
|
31.39
|
|
|
|
28.99
|
|
|
|
8.3
|
|
December 31, 2006
|
|
|
32.98
|
|
|
|
29.38
|
|
|
|
12.3
|
|
January 31, 2007
|
|
|
32.55
|
|
|
|
30.17
|
|
|
|
7.9
|
|
February 28, 2007
|
|
|
32.91
|
|
|
|
30.97
|
|
|
|
6.3
|
|
Source of market prices: Reuters Group PLC.
|
|
|
(1) |
|
Based on our net asset value calculated on the close of business
on the last day of each calendar month. |
As of November 30, 2006, we had 38,064,836 shares of
common stock outstanding and our net assets applicable to common
stockholders were $1,103,392.
USE OF
PROCEEDS
Unless otherwise specified in a prospectus supplement, we will
invest the net proceeds of any sales of securities in accordance
with our investment objective and policies within approximately
three months of receipt of such proceeds. Pending such
investment, we anticipate investing the proceeds in short-term
securities issued by the U.S. government or its agencies or
instrumentalities or in high quality, short-term or long-term
debt obligations or money market instruments. A delay in the
anticipated use of proceeds could lower returns, reduce our
distribution to common stockholders and reduce the amount of
cash available to make dividend and interest payments on
preferred stock and debt securities, respectively.
10
RISK
FACTORS
Risk is inherent in all investing. The following discussion
summarizes some of the risks that a potential common stockholder
should consider before deciding whether to invest in our common
stock offered hereby. For additional information about the risks
associated with investing in our common stock, see Our
Investments in our SAI.
Risks
Related to Our Business and Structure
Competition
Risk
At the time we completed our initial public offering in
September 2004, we were one of the few publicly traded
investment companies offering access to a portfolio of MLPs and
other Midstream Energy Companies. There are now a limited number
of other companies, including other publicly traded investment
companies and private funds, which may serve as alternatives to
us for investment in a portfolio of MLPs and other Midstream
Energy Companies. In addition, tax law changes have increased,
and future tax law changes may again increase, the ability of
mutual funds and other regulated investment companies or other
institutions to invest in MLPs. These competitive conditions may
positively impact MLPs in which we invest, but may also
adversely impact our ability to make desired investments in the
MLP market.
Management
Risk; Dependence on Key Personnel of Kayne
Anderson
Our portfolio is subject to management risk because it is
actively managed. Kayne Anderson applies investment techniques
and risk analyses in making investment decisions for us, but
there can be no guarantee that they will produce the desired
results.
We depend upon Kayne Andersons key personnel for our
future success and upon their access to certain individuals and
investments in the midstream energy industry. In particular, we
depend on the diligence, skill and network of business contacts
of our portfolio managers, who evaluate, negotiate, structure,
close and monitor our investments. These individuals do not have
long-term employment contracts with Kayne Anderson, although
they do have equity interests and other financial incentives to
remain with Kayne Anderson. For a description of Kayne Anderson,
see Management Investment Adviser at
page 40. We also depend on the senior management of Kayne
Anderson. The departure of any of our portfolio managers or the
senior management of Kayne Anderson could have a material
adverse effect on our ability to achieve our investment
objective. In addition, we can offer no assurance that Kayne
Anderson will remain our investment adviser or that we will
continue to have access to Kayne Andersons industry
contacts and deal flow.
Conflicts
of Interest of Kayne Anderson
Conflicts of interest may arise because Kayne Anderson and its
affiliates generally carry on substantial investment activities
for other clients, in which we will have no interest. Kayne
Anderson or its affiliates may have financial incentives to
favor certain of such accounts over us. Any of their proprietary
accounts and other customer accounts may compete with us for
specific trades. Kayne Anderson or its affiliates may buy or
sell securities for us which differ from securities bought or
sold for other accounts and customers, even though their
investment objectives and policies may be similar to ours.
Situations may occur when we could be disadvantaged because of
the investment activities conducted by Kayne Anderson and its
affiliates for their other accounts. Such situations may be
based on, among other things, legal or internal restrictions on
the combined size of positions that may be taken for us and the
other accounts, thereby limiting the size of our position, or
the difficulty of liquidating an investment for us and the other
accounts where the market cannot absorb the sale of the combined
position.
Our investment opportunities may be limited by affiliations of
Kayne Anderson or its affiliates with MLPs or other Midstream
Energy Companies. Additionally, to the extent that Kayne
Anderson sources and structures private investments in MLPs,
certain employees of Kayne Anderson may become aware of actions
planned by MLPs, such as acquisitions, that may not be announced
to the public. It is possible that we could be precluded from
investing in an MLP about which Kayne Anderson has material
non-public information; however, it is Kayne Andersons
11
intention to ensure that any material non-public information
available to certain Kayne Anderson employees not be shared with
those employees responsible for the purchase and sale of
publicly traded MLP securities.
KAFA also manages Kayne Anderson Energy Total Return Fund, Inc.,
a closed end investment company listed on the New York Stock
Exchange under the ticker KYE, and Kayne Anderson
Energy Development Company, a business development company
listed on the New York Stock Exchange under the ticker
KED, and KACALP manages several private investment
funds (collectively, Affiliated Funds). Some of the
Affiliated Funds have investment objectives that are similar to
or overlap with ours. In particular, certain Affiliated Funds
invest in MLPs and other Midstream Energy Companies. Further,
Kayne Anderson may at some time in the future, manage other
investment funds with the same investment objective as ours.
Investment decisions for us are made independently from those of
Kayne Andersons other clients; however, from time to time,
the same investment decision may be made for more than one fund
or account. When two or more clients advised by Kayne Anderson
or its affiliates seek to purchase or sell the same publicly
traded securities, the securities actually purchased or sold are
allocated among the clients on a good faith equitable basis by
Kayne Anderson in its discretion in accordance with the
clients various investment objectives and procedures
adopted by Kayne Anderson and approved by our Board of
Directors. In some cases, this system may adversely affect the
price or size of the position we may obtain. In other cases,
however, our ability to participate in volume transactions may
produce better execution for us.
From time to time, we may control or may be an
affiliate of one or more of our portfolio companies,
each as defined in the 1940 Act. In general, under the 1940 Act,
we would control a portfolio company if we owned 25%
or more of its outstanding voting securities and would be an
affiliate of a portfolio company if we owned 5% or
more of its outstanding voting securities. The 1940 Act contains
prohibitions and restrictions relating to transactions between
investment companies and their affiliates (including our
investment adviser), principal underwriters and affiliates of
those affiliates or underwriters. Under these restrictions, we
and any portfolio company that we control are generally
prohibited from knowingly participating in a joint transaction,
including co-investments in a portfolio company, with an
affiliated person, including any of our directors or officers,
our investment adviser or any entity controlled or advised by
any of them. These restrictions also generally prohibit our
affiliates, principal underwriters and affiliates of those
affiliates or underwriters from knowingly purchasing from or
selling to us or any portfolio company that we control certain
securities or other property and from lending to and borrowing
from us or any portfolio company that we control monies or other
properties.
We believe that there is significant ambiguity in the
application of existing SEC staff interpretations of the term
voting security to complex structures such as
privately negotiated limited partnership interests of the kind
in which we invest. As a result, it is possible that the SEC
staff may consider that the certain securities investments in
private limited partnerships are voting securities under the
staffs prevailing interpretations of this term. If such
determination is made, we may be regarded as a person affiliated
with and controlling the issuer(s) of those securities for
purposes of Section 17 of the 1940 Act.
In light of the ambiguity of the definition of voting
securities, we do not intend to treat any class of securities we
hold as voting securities unless the security
holders of such class have the ability, under the partnership
agreement, to remove the general partner (assuming a sufficient
vote of such securities, other than securities held by the
general partner, in favor of such removal) or we have an
economic interest of sufficient size that otherwise gives us the
de facto power to exercise a controlling influence over the
partnership. We believe this treatment is appropriate given that
the general partner controls the partnership, and without the
ability to remove the general partner or the power to otherwise
exercise a controlling influence over the partnership due to the
size of an economic interest, the security holders have no
control over the partnership.
There is no assurance that the SEC staff will not consider that
other limited partnership securities that we own and do not
treat as voting securities are, in fact, voting securities for
the purposes of Section 17 of the 1940 Act. If such
determination were made, we will be required to abide by the
restrictions on control or affiliate
transactions as proscribed in the 1940 Act. We or any portfolio
company that we control, and our affiliates, may from time to
time engage in certain of such joint transactions, purchases,
sales and loans in reliance upon and in compliance with the
conditions of certain exemptive rules promulgated by the SEC. We
cannot assure you, however, that we would be able to satisfy the
conditions of these rules with respect to any particular
eligible transaction, or
12
even if we were allowed to engage in such a transaction that the
terms would be more or as favorable to us or any company that we
control as those that could be obtained in arms length
transaction. As a result of these prohibitions, restrictions may
be imposed on the size of positions that may be taken for us or
on the type of investments that we could make.
As discussed above, under the 1940 Act, we and our affiliates,
including Affiliated Funds, may be precluded from co-investing
in private placements of securities, including in any portfolio
companies that we control. Except as permitted by law, Kayne
Anderson will not co-invest its other clients assets in
the private transactions in which we invest. Kayne Anderson will
allocate private investment opportunities among its clients,
including us, based on allocation policies that take into
account several suitability factors, including the size of the
investment opportunity, the amount each client has available for
investment and the clients investment objectives. These
allocation policies may result in the allocation of investment
opportunities to an Affiliated Fund rather than to us. The
policies contemplate that Kayne Anderson will exercise
discretion, based on several factors relevant to the
determination, in allocating the entirety, or a portion, of such
investment opportunities to an Affiliated Fund, in priority to
other prospectively interested advisory clients, including us.
In this regard, when applied to specified investment
opportunities that would normally be suitable for us, the
allocation policies may result in certain Affiliated Funds
having greater priority than us to participate in such
opportunities depending on the totality of the considerations,
including, among other things, our available capital for
investment, our existing holdings, applicable tax and
diversification standards to which we may then be subject and
the ability to efficiently liquidate a portion of our existing
portfolio in a timely and prudent fashion in the time period
required to fund the transaction.
The investment management fee paid to Kayne Anderson is based on
the value of our assets, as periodically determined. A
significant percentage of our assets may be illiquid securities
acquired in private transactions for which market quotations
will not be readily available. Although we will adopt valuation
procedures designed to determine valuations of illiquid
securities in a manner that reflects their fair value, there
typically is a range of prices that may be established for each
individual security. Senior management of Kayne Anderson, our
Board of Directors and its Valuation Committee, and a
third-party valuation firm will participate in the valuation of
our securities. See Net Asset Value at page 43.
Certain
Affiliations
We are affiliated with KA Associates, Inc., an NASD member
broker-dealer. Absent an exemption from the SEC or other
regulatory relief, we are generally precluded from effecting
certain principal transactions with affiliated brokers, and our
ability to utilize affiliated brokers for agency transactions is
subject to restrictions. This could limit our ability to engage
in securities transactions and take advantage of market
opportunities. In addition, until completion of this offering,
we will be precluded from effecting principal transactions with
brokers who are members of the syndicate. Unless stated
otherwise in the related prospectus supplement, KA Associates,
Inc. may be a member of a selling group for an offering of our
securities.
Valuation
Risk
Market prices may not be readily available for subordinated
units, direct ownership of general partner interests, restricted
or unregistered securities of certain MLPs or interests in
private companies, and the value of such investments will
ordinarily be determined based on fair valuations determined by
the Board of Directors or its designee pursuant to procedures
adopted by the Board of Directors. Restrictions on resale or the
absence of a liquid secondary market may adversely affect our
ability to determine our net asset value. The sale price of
securities that are not readily marketable may be lower or
higher than our most recent determination of their fair value.
Additionally, the value of these securities typically requires
more reliance on the judgment of Kayne Anderson than that
required for securities for which there is an active trading
market. Due to the difficulty in valuing these securities and
the absence of an active trading market for these investments,
we may not be able to realize these securities true value
or may have to delay their sale in order to do so. In addition,
we will rely to some extent on information provided by the MLPs,
which may not necessarily be timely, to estimate taxable income
allocable to the MLP units held in our portfolio and to estimate
associated deferred tax liability for purposes of financial
statement reporting and determining our net asset value. From
time to time, we will modify our estimates or assumptions
13
regarding our deferred tax liability as new information becomes
available. To the extent we modify our estimates or assumptions,
our net asset value would likely fluctuate. See Net Asset
Value at page 43.
Inflation
Risk
Inflation risk is the risk that the value of assets or income
from investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real
value of our securities, dividends and interest that we pay can
decline.
Anti-Takeover
Provisions
Our Charter, Bylaws and the Maryland General Corporation Law
include provisions that could limit the ability of other
entities or persons to acquire control of us, to convert us to
open-end status, or to change the composition of our Board of
Directors. We have also adopted other measures that may make it
difficult for a third party to obtain control of us, including
provisions of our Charter classifying our Board of Directors in
three classes serving staggered three-year terms, and provisions
authorizing our Board of Directors to classify or reclassify
shares of our stock in one or more classes or series, to cause
the issuance of additional shares of our stock, and to amend our
Charter, without stockholder approval, to increase or decrease
the number of shares of stock that we have authority to issue.
These provisions, as well as other provisions of our Charter and
Bylaws, could have the effect of discouraging, delaying,
deferring or preventing a transaction or a change in control
that might otherwise be in the best interests of our
stockholders. As a result, these provisions may deprive our
common stockholders of opportunities to sell their common stock
at a premium over the then current market price of our common
stock. See Description of Capital Stock at
page 45.
Risks
Related to Our Common Stock
Market
Discount From Net Asset Value Risk
Our common stock has traded both at a premium and at a discount
to our net asset value. The last reported sale price, net asset
value per share and percentage premium to net asset value per
share of our common stock on February 28, 2007 were $32.91,
$30.97 and 6.3%, respectively. There is no assurance that this
premium will continue after the date of this prospectus or that
our common stock will not again trade at a discount. Shares of
closed-end investment companies frequently trade at a discount
to their net asset value. This characteristic is a risk separate
and distinct from the risk that our net asset value could
decrease as a result of our investment activities and may be
greater for investors expecting to sell their shares in a
relatively short period following completion of this offering.
Although the value of our net assets is generally considered by
market participants in determining whether to purchase or sell
shares, whether investors will realize gains or losses upon the
sale of our common stock will depend entirely upon whether the
market price of our common stock at the time of sale is above or
below the investors purchase price for our common stock.
Because the market price of our common stock is affected by
factors such as net asset value, dividend or distribution levels
(which are dependent, in part, on expenses), supply of and
demand for our common stock, stability of dividends or
distributions, trading volume of our common stock, general
market and economic conditions, and other factors beyond our
control, we cannot predict whether our common stock will trade
at, below or above net asset value or at, below or above the
offering price.
Leverage
Risk to Common Stockholders
The issuance of Leverage Instruments, including those offered by
this prospectus and any related prospectus supplement, represent
the leveraging of our common stock. Leverage is a technique that
could adversely affect our common stockholders. Unless the
income and capital appreciation, if any, on securities acquired
with the proceeds from Leverage Instruments exceed the costs of
the leverage, the use of leverage could cause us to lose money.
When leverage is used, the net asset value and market value of
our common stock will be more volatile. There is no assurance
that our use of leverage will be successful.
Our common stockholders bear the costs of leverage through
higher operating expenses. Our common stockholders also bear
management fees, whereas, holders of Senior Notes or any
preferred stock that we may issue, do not bear management fees.
Because management fees are based on our total assets, our use
of leverage increases
14
the effective management fee borne by our common stockholders.
In addition, the issuance of additional senior debt securities
or preferred stock by us would result in offering expenses and
other costs, which would ultimately be borne by our common
stockholders. Fluctuations in interest rates could increase our
interest or dividend payments on Leverage Instruments and could
reduce cash available for distributions on common stock. Certain
Leverage Instruments are subject to covenants regarding asset
coverage, portfolio composition and other matters, which may
affect our ability to pay distributions to our common
stockholders in certain instances. We may also be required to
pledge our assets to the lenders in connection with certain
other types of borrowing.
Leverage involves other risks and special considerations for
common stockholders including: the likelihood of greater
volatility of net asset value and market price of our common
stock than a comparable portfolio without leverage; the risk of
fluctuations in dividend rates or interest rates on Leverage
Instruments; that the dividends or interest paid on Leverage
Instruments may reduce the returns to our common stockholders or
result in fluctuations in the dividends paid on our common
stock; the effect of leverage in a declining market, which is
likely to cause a greater decline in the net asset value of our
common stock than if we were not leveraged, which may result in
a greater decline in the market price of our common stock; and
when we use financial leverage, the investment management fee
payable to Kayne Anderson may be higher than if we did not use
leverage.
Leverage Instruments constitute a substantial lien and burden by
reason of their prior claim against our income and against our
net assets in liquidation. The rights of lenders to receive
payments of interest on and repayments of principal of any
Borrowings are senior to the rights of holders of common stock
and preferred stock, with respect to the payment of dividends or
upon liquidation. We may not be permitted to declare dividends
or other distributions, including dividends and distributions
with respect to common stock or preferred stock or purchase
common stock or preferred stock unless at such time, we meet
certain asset coverage requirements and no event of default
exists under any Borrowing. In addition, we may not be permitted
to pay dividends on common stock unless all dividends on the
preferred stock
and/or
accrued interest on Borrowings have been paid, or set aside for
payment. In an event of default under any Borrowing, the lenders
have the right to cause a liquidation of collateral
(i.e., sell MLP units and other of our assets) and, if
any such default is not cured, the lenders may be able to
control the liquidation as well. Certain types of leverage may
result in our being subject to covenants relating to asset
coverage and our portfolio composition and may impose special
restrictions on our use of various investment techniques or
strategies or in our ability to pay dividends and other
distributions on common stock in certain instances. We may be
subject to certain restrictions on investments imposed by
guidelines of one or more rating agencies, which may issue
ratings for Leverage Instruments issued by us. These guidelines
may impose asset coverage or portfolio composition requirements
that are more stringent than those imposed by the 1940 Act.
Kayne Anderson does not believe that these covenants or
guidelines will impede it from managing our portfolio in
accordance with our investment objective and policies.
While we may from time to time consider reducing leverage in
response to actual or anticipated changes in interest rates in
an effort to mitigate the increased volatility of current income
and net asset value associated with leverage, there can be no
assurance that we will actually reduce leverage in the future or
that any reduction, if undertaken, will benefit our common
stockholders. Changes in the future direction of interest rates
are very difficult to predict accurately. If we were to reduce
leverage based on a prediction about future changes to interest
rates, and that prediction turned out to be incorrect, the
reduction in leverage would likely operate to reduce the income
and/or total
returns to common stockholders relative to the circumstance if
we had not reduced leverage. We may decide that this risk
outweighs the likelihood of achieving the desired reduction to
volatility in income and the price of our common stock if the
prediction were to turn out to be correct, and determine not to
reduce leverage as described above.
Finally, the 1940 Act provides certain rights and protections
for preferred stockholders which may adversely affect the
interests of our common stockholders. See Description of
Preferred Stock at page 48.
15
Risks
Related to Our Senior Securities
An investment in our preferred stock or debt securities
(collectively, senior securities) is subject to the
following additional risks:
Interest
Rate Risk
Interest rate risk is the risk that equity and debt securities
will decline in value because of changes in market interest
rates. Our auction rate senior securities pay dividends or
interest based on short-term interest rates. If short-term
interest rates rise, dividend or interest rates on our auction
rate senior securities may rise so that the amount of dividends
or interest payable to holders of our auction rate senior
securities would exceed the amount of income from our portfolio
securities. This might require us to sell portfolio securities
at a time when we otherwise would not do so, which may affect
adversely our future earnings ability. While we intend to manage
this risk through interest rate transactions, there is no
guarantee that we will implement these strategies or that we
will be successful in reducing or eliminating interest rate
risk. In addition, rising market interest rates could impact
negatively the value of our investment portfolio, reducing the
amount of assets serving as asset coverage for our senior
securities.
MLP yields are susceptible in the short-term to fluctuations in
interest rates and, like treasury bonds, the prices of MLP
securities typically increase when interest rates fall and
decline when interest rates rise. Because we will principally
invest in MLP equity securities, the net asset value and market
price of our common stock may decline if interest rates rise.
See Risks Related to Our Investments and
Investment Techniques Energy Sector Risk. A
material decline in the net asset value of our common stock may
impair our ability to maintain required levels of asset coverage
for our senior securities.
Certain debt instruments, particularly below-investment-grade
securities, may contain call or redemption provisions which
would allow the issuer of the securities to prepay principal
prior to the debt instruments stated maturity. This is
known as prepayment risk. Prepayment risk is greater during a
falling interest rate environment as issuers can reduce their
cost of capital by refinancing higher yielding debt instruments
with lower yielding debt instruments. An issuer also may elect
to refinance its debt instruments with lower yielding debt
instruments if the credit standing of the issuer improves. To
the extent debt securities in our portfolio are called or
redeemed, we may be forced to reinvest in lower yielding
securities.
Auction
Risk
To the extent that senior securities trade through an auction,
you may not be able to sell your senior securities at an auction
if the auction fails; that is, if there are more senior
securities offered for sale than there are buyers for those
securities. Also, if you place a bid order to retain senior
securities at an auction only at a specified rate, and that
specified bid rate exceeds the rate set at the auction, you will
not retain your senior securities. Finally, if you buy senior
securities or elect to retain senior securities without
specifying a rate below which you would not wish to continue to
hold those senior securities, and the auction sets a
below-market rate, you may receive a lower rate of return on
your senior securities than the market rate. See
Description of Preferred Stock and Description
of Debt Securities.
As noted above, if there are more senior securities offered for
sale than there are buyers for those senior securities in any
auction, the auction will fail and you may not be able to sell
some or all of your senior securities at that time. The relative
buying and selling interest of market participants in your
senior securities and in the auction rate securities market as a
whole will vary over time, and such variations may be affected
by, among other things, news relating to the issuer, the
attractiveness of alternative investments, the perceived risk of
owning the security (whether related to credit, liquidity or any
other risk), the tax treatment accorded the instruments, the
accounting treatment accorded auction rate securities, including
recent clarifications of U.S. generally accepted accounting
principles relating to the treatment of auction rate securities,
reactions to regulatory actions or press reports, financial
reporting cycles and market sentiment generally. Shifts of
demand in response to any one or simultaneous particular events
cannot be predicted and may be short-lived or exist for longer
periods.
A broker-dealer may submit orders in auctions for its own
account. Any broker-dealer submitting an order for its own
account in any auction will have an advantage over other bidders
in that it would have knowledge of other
16
orders placed through it in that auction (but it would not have
knowledge of orders submitted by other broker dealers, if any).
As a result of the broker-dealer bidding, the auction clearing
rate may be higher or lower than the rate that would have
prevailed if the broker-dealer had not bid. A broker dealer may
also bid in order to prevent what would otherwise be a failed
auction, an all-hold auction or an auction clearing
at a rate that the broker-dealer believes does not reflect the
market for such securities at the time of the auction.
Broker-dealers may, but are not obligated to, advise holders of
our senior securities that the rate that will apply in an
all hold auction is often a lower rate than would
apply if holders submit bids, and such advice, if given, may
facilitate the submission of bids by existing holders that would
avoid the occurrence of an all hold auction. A
broker dealer may, but is not obligated to, encourage additional
or revised investor bidding in order to prevent an
all-hold auction.
Underwriters and various other broker-dealers and other firms
that participate in the auction rate securities market received
letters from the staff of the Securities and Exchange Commission
(the SEC) in the spring of 2004. The letters
requested that each of these firms voluntarily conduct an
investigation regarding its respective practices and procedures
in that market. Pursuant to these requests, certain of these
firms conducted voluntary reviews and reported findings to the
SEC staff. At the SEC staffs request, certain of these
firms are engaging in discussions with the SEC staff concerning
its inquiry. We can not predict the ultimate outcome of the
inquiry or how that outcome will affect the market for our
senior securities or the auctions.
Ratings
and Asset Coverage Risk
Moodys and Fitch have assigned ratings of Aa
and AA respectively, to outstanding ARP Shares and
ratings of Aaa and AAA, respectively, to
outstanding Senior Notes. To the extent that senior securities
offered hereby are rated of similar or the same ratings as those
respectively assigned to outstanding ARP Shares and Senior Notes
or at all, the ratings do not eliminate or necessarily mitigate
the risks of investing in our senior securities. A rating may
not fully or accurately reflect all of the credit and market
risks associated with a senior security. A rating agency could
downgrade our senior securities, which may make your securities
less liquid at an auction or in the secondary market, though
probably with higher resulting dividend or interest rates. If a
rating agency downgrades the ratings assigned to our senior
securities, we may be required to alter our portfolio or redeem
our senior securities. We may voluntarily redeem our senior
securities under certain circumstances to the extent permitted
under the terms of such securities, which may require that we
meet specified asset maintenance tests and other requirements.
We have issued Senior Notes and may offer and issue additional
debt securities hereby, which constitute or will constitute
senior securities representing indebtedness, as defined in the
1940 Act. Accordingly, the value of our total assets, less all
our liabilities and indebtedness not represented by such Senior
Notes and debt securities, must be at least equal to 300% of the
aggregate principal value of such Senior Notes and debt
securities. Upon the issuance of our preferred stock, the value
of our total assets, less all our liabilities and indebtedness
not represented by senior securities must be at least equal,
immediately after the issuance of preferred stock, to 200% of
the aggregate principal value of any Senior Notes and debt
securities and our preferred stock and the ARP Shares.
To the extent that senior securities offered hereby are rated of
investment grade quality, asset coverage or
portfolio composition provisions in addition to, and more
stringent than, those required by the 1940 Act may be imposed in
connection with the issuance of such ratings. In addition,
restrictions have been and may be imposed by the rating agencies
on certain investment practices in which we may otherwise
engage. Any lender with respect to any additional Borrowings by
us may require additional asset coverage and portfolio
composition provisions as well as restrictions on our investment
practices.
Inflation
Risk
Inflation is the reduction in the purchasing power of money
resulting from the increase in the price of goods and services.
Inflation risk is the risk that the inflation adjusted or
real value of your investment in our senior
securities or the income from that investment will be worthless
in the future than the amount you originally paid. As inflation
occurs, the real value of our senior securities and dividends
payable to holders of our preferred stock or interest payable to
holders of our debt securities declines.
17
Trading
Market Risk
Our senior securities will not be listed on an exchange or
quoted on any automated quotation system. Instead, to the extent
that senior securities trade through an auction, you may buy or
sell senior securities at an auction by submitting orders to a
broker-dealer that has entered into an agreement with an auction
agent, or to a broker-dealer that has entered into a separate
agreement with a broker-dealer. Auctions will be held
periodically in accordance with the terms of our senior
securities. Broker-dealers may maintain a secondary trading
market in our senior securities outside of auctions, if any, but
may discontinue this activity at any time. There is no assurance
that any secondary market that may develop will provide holders
of our senior securities with liquidity. We are not required to
redeem our senior securities either if an auction or an
attempted secondary market sale fails. You may transfer our
senior securities outside of auctions only to or through a
broker-dealer or to us or any of our affiliates, in certain
cases. If you try to sell your senior securities between
auctions, if any, you may not be able to sell any or all of your
senior securities, or you may not be able to sell preferred
stock for the liquidation preference plus accumulated dividends
or you may not be able to sell debt securities in the $25,000
increments for which they were purchased plus accrued and unpaid
interest. You may receive less than the price you paid for them,
especially when market interest rates have risen since the last
auction, if any.
Decline
in Net Asset Value Risk
A material decline in the net asset value of our common stock
may impair our ability to maintain required levels of asset
coverage for our senior securities.
Senior
Leverage Risk to Preferred Stockholders
Because we have outstanding Borrowings and may issue additional
debt securities hereby, which are senior to our preferred stock,
we are prohibited from declaring, paying or making any dividends
or distributions on our preferred stock unless we satisfy
certain conditions. We are also prohibited from declaring,
paying or making any dividends or distributions on common stock
unless we satisfy certain conditions. See Description of
Preferred Stock Limitations on Dividends,
Distributions and Redemptions.
Our Borrowings may constitute a substantial burden on our
preferred stock by reason of their prior claim against our
income and against our net assets in liquidation. We may not be
permitted to declare dividends or other distributions, including
with respect to our preferred stock, or purchase or redeem
shares, including preferred stock, unless (1) at the time
thereof we meet certain asset coverage requirements and
(2) there is no event of default under our Borrowings that
is continuing. See Description of Preferred
Stock Limitations on Dividends, Distributions and
Redemptions. In the event of a default under our
Borrowings, the holders of our debt securities have the right to
accelerate the maturity of debt securities and the trustee may
institute judicial proceedings against us to enforce the rights
of holders of debt securities.
Unsecured
Investment Risk to Holders of Our Debt Securities
Our debt securities represent our unsecured obligation to pay
interest and principal, when due. We cannot assure you that we
will have sufficient funds or that we will be able to arrange
for additional financing to pay interest on our debt securities
when due or to repay our debt securities at their stated
maturity. Our failure to pay interest on our debt securities
when due or to repay our debt securities upon their stated
maturity would, subject to the cure provisions under the
indenture pursuant to which they are issued, constitute an event
of default under the indenture and could cause a default under
other agreements that we may enter into from time to time. There
is no sinking fund with respect to our debt securities, and at
their stated maturity, the entire outstanding principal amount
of our debt securities will become due and payable. See
Description of Debt Securities Events of
Default and Acceleration of Maturity of Debt Securities;
Remedies at page 52.
Holders
of Our Debt Securities May Be Subordinated to Other
Debt
The indenture for our debt securities permits us, in certain
circumstances, to incur additional indebtedness, including
secured indebtedness. Our debt securities are effectively
subordinated in right of payment to any of our secured
indebtedness or other secured obligations to the extent of the
value of the assets that secure the indebtedness
18
or obligation. The full amount of any borrowings incurred under
our revolving credit line with Custodial Trust Company (our
custodian and an affiliate of our administrator) would be
effectively senior to our debt securities because we are
required to pledge as collateral, and the lender would have a
higher priority perfected lien upon, certain portfolio
securities having an aggregate value of not less than our total
obligations owed on these borrowings. In the event of our
bankruptcy, liquidation or reorganization or upon acceleration
of our debt securities, payment on our debt securities could be
later or less, ratably, than on any of our secured indebtedness.
In these circumstances, holders of obligations secured by liens
on collateral will be entitled to receive proceeds from any
realization of the collateral to repay their obligations in full
before holders of our debt securities, who will only have an
unsecured claim against our remaining assets, if any. As of
November 30, 2006, we had $17 million aggregate
principal amount borrowed under our revolving credit line (all
of which was secured and is effectively senior to our debt
securities), and we anticipate that from time to time we will
incur additional secured indebtedness in the future. Our secured
indebtedness is combined with our other indebtedness for
purposes of determining our compliance with regulatory limits on
total leverage.
Risks
Related to Our Investments and Investment Techniques
Investment
and Market Risk
An investment in our securities is subject to investment risk,
including the possible loss of the entire amount that you
invest. Your investment in our securities represents an indirect
investment in the securities owned by us, some of which will be
traded on a national securities exchange or in the
over-the-counter
markets. An investment in our securities is not intended to
constitute a complete investment program and should not be
viewed as such. The value of these publicly traded securities,
like other market investments, may move up or down, sometimes
rapidly and unpredictably. The value of the securities in which
we invest may affect the value of our securities. Your
securities at any point in time may be worth less than your
original investment, even after taking into account the
reinvestment of our dividends. We are primarily a long-term
investment vehicle and should not be used for short-term trading.
Energy
Sector Risk
Certain risks inherent in investing in MLPs and other Midstream
Energy Companies include the following:
Supply and Demand Risk. A decrease in the
production of natural gas, natural gas liquids, crude oil, coal
or other energy commodities or a decrease in the volume of such
commodities available for transportation, mining, processing,
storage or distribution may adversely impact the financial
performance of MLPs and other Midstream Energy Companies.
Production declines and volume decreases could be caused by
various factors, including catastrophic events affecting
production, depletion of resources, labor difficulties,
environmental proceedings, increased regulations, equipment
failures and unexpected maintenance problems, import supply
disruption, increased competition from alternative energy
sources or commodity prices. Alternatively, a sustained decline
in demand for such commodities could also adversely affect the
financial performance of MLPs and other Midstream Energy
Companies. Factors which could lead to a decline in demand
include economic recession or other adverse economic conditions,
higher fuel taxes or governmental regulations, increases in fuel
economy, consumer shifts to the use of alternative fuel sources,
changes in commodity prices, or weather.
Depletion and Exploration Risk. Many MLPs and
other Midstream Energy Companies are either engaged in the
production of natural gas, natural gas liquids, crude oil,
refined petroleum products or coal, or are engaged in
transporting, storing, distributing and processing these items
on behalf of shippers. To maintain or grow their revenues, these
companies or their customers need to maintain or expand their
reserves through exploration of new sources of supply, through
the development of existing sources, through acquisitions, or
through long-term contracts to acquire reserves. The financial
performance of MLPs and other Midstream Energy Companies may be
adversely affected if they, or the companies to whom they
provide the service, are unable to cost-effectively acquire
additional reserves sufficient to replace the natural decline.
Regulatory Risk. MLPs and other Midstream
Energy Companies are subject to significant federal, state and
local government regulation in virtually every aspect of their
operations, including how facilities are constructed, maintained
and operated, environmental and safety controls, and the prices
they may charge for the products and
19
services they provide. Various governmental authorities have the
power to enforce compliance with these regulations and the
permits issued under them, and violators are subject to
administrative, civil and criminal penalties, including civil
fines, injunctions or both. Stricter laws, regulations or
enforcement policies could be enacted in the future which would
likely increase compliance costs and may adversely affect the
financial performance of MLPs and other Midstream Energy
Companies.
Commodity Pricing Risk. The operations and
financial performance of MLPs and other Midstream Energy
Companies may be directly affected by energy commodity prices,
especially those MLPs and other Midstream Energy Companies which
own the underlying energy commodity. Commodity prices fluctuate
for several reasons, including changes in market and economic
conditions, the impact of weather on demand, levels of domestic
production and imported commodities, energy conservation,
domestic and foreign governmental regulation and taxation and
the availability of local, intrastate and interstate
transportation systems. Volatility of commodity prices, which
may lead to a reduction in production or supply, may also
negatively impact the performance of MLPs and other Midstream
Energy Companies which are solely involved in the
transportation, processing, storing, distribution or marketing
of commodities. Volatility of commodity prices may also make it
more difficult for MLPs and other Midstream Energy Companies to
raise capital to the extent the market perceives that their
performance may be directly or indirectly tied to commodity
prices.
Acquisition Risk. The abilities of MLPs to
grow and to increase distributions to unitholders can be highly
dependent on their ability to make acquisitions that result in
an increase in adjusted operating surplus per unit. In the event
that MLPs are unable to make such accretive acquisitions because
they are unable to identify attractive acquisition candidates,
negotiate acceptable purchase contracts, because they are unable
to raise financing for such acquisitions on economically
acceptable terms, or because they are outbid by competitors,
their future growth and ability to raise distributions will be
limited. Furthermore, even if MLPs do consummate acquisitions
that they believe will be accretive, the acquisitions may
instead result in a decrease in adjusted operating surplus per
unit. Any acquisition involves risks, including, among other
things: mistaken assumptions about revenues and costs, including
synergies; the assumption of unknown liabilities; limitations on
rights to indemnity from the seller; the diversion of
managements attention from other business concerns;
unforeseen difficulties operating in new product or geographic
areas; and customer or key employee losses at the acquired
businesses.
Interest Rate Risk. Rising interest rates
could adversely impact the financial performance of MLPs and
other Midstream Energy Companies by increasing their costs of
capital. This may reduce their ability to execute acquisitions
or expansion projects in a cost-effective manner.
MLP valuations are based on numerous factors, including sector
and business fundamentals, management expertise, and
expectations of future operating results. However, MLP yields
are also susceptible in the short-term to fluctuations in
interest rates and like Treasury bonds, the prices of MLP
securities typically decline when interest rates rise. Because
we will principally invest in MLP equity securities, our
investment in such securities means that the net asset value and
market price of our common stock may decline if interest rates
rise.
Affiliated Party Risk. Certain MLPs are
dependent on their parents or sponsors for a majority of their
revenues. Any failure by an MLPs parents or sponsors to
satisfy their payments or obligations would impact the
MLPs revenues and cash flows and ability to make
distributions.
Catastrophe Risk. The operations of MLPs and
other Midstream Energy Companies are subject to many hazards
inherent in the transporting, processing, storing, distributing,
mining or marketing of natural gas, natural gas liquids, crude
oil, coal, refined petroleum products or other hydrocarbons, or
in the exploring, managing or producing of such commodities,
including: damage to pipelines, storage tanks or related
equipment and surrounding properties caused by hurricanes,
tornadoes, floods, fires and other natural disasters or by acts
of terrorism; inadvertent damage from construction and farm
equipment; leaks of natural gas, natural gas liquids, crude oil,
refined petroleum products or other hydrocarbons; fires and
explosions. These risks could result in substantial losses due
to personal injury or loss of life, severe damage to and
destruction of property and equipment and pollution or other
environmental damage and may result in the curtailment or
suspension of their related operations. Not all MLPs and other
Midstream Energy Companies are fully insured against all risks
inherent to their businesses. If a significant accident or event
occurs that is not fully insured, it could adversely affect
their operations and financial condition.
20
Terrorism/Market Disruption Risk. The
terrorist attacks in the United States on September 11,
2001 had a disruptive effect on the economy and the securities
markets. United States military and related action in Iraq is
ongoing and events in the Middle East could have significant
adverse effects on the U.S. economy and the stock market.
Uncertainty surrounding retaliatory military strikes or a
sustained military campaign may affect MLP and other Midstream
Energy Company operations in unpredictable ways, including
disruptions of fuel supplies and markets, and transmission and
distribution facilities could be direct targets, or indirect
casualties, of an act of terror. The U.S. government has
issued warnings that energy assets, specifically the United
States pipeline infrastructure, may be the future target
of terrorist organizations. In addition, changes in the
insurance markets have made certain types of insurance more
difficult, if not impossible, to obtain and have generally
resulted in increased premium costs.
MLP Risks. An investment in MLP units involves
some risks which differ from an investment in the common stock
of a corporation. Holders of MLP units have limited control and
voting rights on matters affecting the partnership. In addition,
there are certain tax risks associated with an investment in MLP
units and conflicts of interest exist between common unit
holders and the general partner, including those arising from
incentive distribution payments.
MLPs
and Other Midstream Energy Company Risk
MLPs and other Midstream Energy Companies are also subject to
risks that are specific to the industry they serve.
MLPs and other Midstream Energy Companies that provide crude
oil, refined product and natural gas services are subject to
supply and demand fluctuations in the markets they serve which
will be impacted by a wide range of factors, including
fluctuating commodity prices, weather, increased conservation or
use of alternative fuel sources, increased governmental or
environmental regulation, depletion, rising interest rates,
declines in domestic or foreign production, accidents or
catastrophic events, and economic conditions, among others.
MLPs and other Midstream Energy Companies with propane assets
are subject to earnings variability based upon weather
conditions in the markets they serve, fluctuating commodity
prices, increased use of alternative fuels, increased
governmental or environmental regulation, and accidents or
catastrophic events, among others.
MLPs and other Midstream Energy Companies with coal assets are
subject to supply and demand fluctuations in the markets they
serve, which will be impacted by a wide range of factors
including, fluctuating commodity prices, the level of their
customers coal stockpiles, weather, increased conservation
or use of alternative fuel sources, increased governmental or
environmental regulation, depletion, rising interest rates,
declines in domestic or foreign production, mining accidents or
catastrophic events, health claims and economic conditions,
among others.
MLPs and other Energy Companies engaged in the exploration and
production business are subject to overstatement of the
quantities of their reserves based upon any reserve estimates
that prove to be inaccurate, that no commercially productive
oil, natural gas or other energy reservoirs will be discovered
as a result of drilling or other exploration activities, the
curtailment, delay or cancellation of exploration activities are
as a result of a unexpected conditions or miscalculations, title
problems, pressure or irregularities in formations, equipment
failures or accidents, adverse weather conditions, compliance
with environmental and other governmental requirements and cost
of, or shortages or delays in the availability of, drilling rigs
and other exploration equipment, and operational risks and
hazards associated with the development of the underlying
properties, including natural disasters, blowouts, explosions,
fires, leakage of crude oil, natural gas or other resources,
mechanical failures, cratering, and pollution.
Cash
Flow Risk
A substantial portion of the cash flow received by us is derived
from our investment in equity securities of MLPs. The amount of
cash that an MLP has available for distributions and the tax
character of such distributions are dependent upon the amount of
cash generated by the MLPs operations. Cash available for
distribution will vary from quarter to quarter and is largely
dependent on factors affecting the MLPs operations and
factors affecting the
21
energy industry in general. In addition to the risk factors
described above, other factors which may reduce the amount of
cash an MLP has available for distribution include increased
operating costs, maintenance capital expenditures, acquisition
costs, expansion, construction or exploration costs and
borrowing costs.
Tax
Risks
Tax Risk of MLPs. Our ability to meet our
investment objective will depend on the level of taxable income
and distributions and dividends we receive from the MLP and
other Midstream Energy Company securities in which we invest, a
factor over which we have no control. The benefit we derive from
our investment in MLPs is largely dependent on the MLPs being
treated as partnerships for federal income tax purposes. As a
partnership, an MLP has no tax liability at the entity level.
If, as a result of a change in current law or a change in an
MLPs business, an MLP were treated as a corporation for
federal income tax purposes, such MLP would be obligated to pay
federal income tax on its income at the corporate tax rate. If
an MLP were classified as a corporation for federal income tax
purposes, the amount of cash available for distribution would be
reduced and distributions received by us would be taxed under
federal income tax laws applicable to corporate distributions
(as dividend income, return of capital, or capital gain).
Therefore, treatment of an MLP as a corporation for federal
income tax purposes would result in a reduction in the after-tax
return to us, likely causing a reduction in the value of our
common stock.
Tax Law Change Risk. Changes in tax laws or
regulations, or interpretations thereof in the future, could
adversely affect us or the MLPs in which we invest. Any such
changes could negatively impact our common stockholders.
Legislation could also negatively impact the amount and tax
characterization of dividends received by our common
stockholders. Legislation reduces the tax rate on qualified
dividend income to the rate applicable to long-term capital
gains, which is generally 15% for individuals, provided a
holding period requirement and certain other requirements are
met. This reduced rate of tax on dividends is currently
scheduled to revert to ordinary income rates for taxable years
beginning after December 31, 2010 and the 15% federal
income tax rate for long-term capital gain is scheduled to
revert to 20% for such taxable years.
Deferred Tax Risks of MLPs. As a limited
partner in the MLPs in which we invest, we will receive our
distributive share of income, gains, losses, deductions, and
credits from those MLPs. Historically, a significant portion of
income from such MLPs has been offset by tax deductions. We will
incur a current tax liability on our distributive share of an
MLPs income and gains that is not offset by tax
deductions, losses, and credits, or our net operating loss
carryforwards, if any. The percentage of an MLPs income
and gains which is offset by tax deductions, losses, and credits
will fluctuate over time for various reasons. A significant
slowdown in acquisition activity or capital spending by MLPs
held in our portfolio could result in a reduction of accelerated
depreciation generated by new acquisitions, which may result in
increased current tax liability to us.
We will accrue deferred income taxes for our future tax
liability associated with that portion of MLP distributions
considered to be a tax-deferred return of capital as well as
capital appreciation of our investments. Upon our sale of an MLP
security, we may be liable for previously deferred taxes. We
will rely to some extent on information provided by MLPs, which
is not necessarily timely, to estimate deferred tax liability
for purposes of financial statement reporting and determining
our net asset value. From time to time we will modify our
estimates or assumptions regarding our deferred tax liability as
new information becomes available.
Deferred Tax Risks of Investing in our Common
Stock. A reduction in the percentage of a
distribution offset by tax deductions, losses, or credits or an
increase in our portfolio turnover will reduce that portion of
our common stock dividend treated as a tax-deferred return of
capital and increase that portion treated as dividend income,
resulting in lower after-tax dividends to our common
stockholders. See the Tax Matters section at
page 55 in this prospectus and also in our SAI.
Delay
in Use of Proceeds
Although we intend to invest the proceeds of this offering in
accordance with our investment objective as soon as practicable,
such investments may be delayed if suitable investments are
unavailable at the time or if we are unable to secure firm
commitments for direct placements. Prior to the time we are
fully invested, the proceeds of the offering may temporarily be
invested in cash, cash equivalents or other securities. Income
we received from these
22
securities would likely be less than returns sought pursuant to
our investment objective and policies. See Use of
Proceeds at page 10.
Equity
Securities Risk
MLP common units and other equity securities may be subject to
general movements in the stock market, and a significant drop in
the stock market may depress the price of securities to which we
have exposure. MLP units and other equity securities prices
fluctuate for several reasons, including changes in the
financial condition of a particular issuer (generally measured
in terms of distributable cash flow in the case of MLPs),
investors perceptions of MLPs and other Midstream Energy
Companies, the general condition of the relevant stock market,
or when political or economic events affecting the issuers
occur. In addition, the prices of MLP units and other Midstream
Energy Company equity securities may be sensitive to rising
interest rates given their yield-based nature. Also, while not
precise, the price of I-Shares and their volatility tend to
correlate to the price of common units.
Certain of the MLPs and other Midstream Energy Companies in
which we invest have comparatively smaller capitalizations than
other companies. Investing in the securities of smaller MLPs and
other Midstream Energy Companies presents some unique investment
risks. These MLPs and other Midstream Energy Companies may have
limited product lines and markets, as well as shorter operating
histories, less experienced management and more limited
financial resources than larger MLPs and other Midstream Energy
Companies and may be more vulnerable to adverse general market
or economic developments. Stocks of smaller MLPs and other
Midstream Energy Companies may be less liquid than those of
larger MLPs and other Midstream Energy Companies and may
experience greater price fluctuations than larger MLPs and other
Midstream Energy Companies. In addition, small-cap securities
may not be widely followed by the investment community, which
may result in reduced demand.
Liquidity
Risk
Although common units of MLPs and common stocks of other
Midstream Energy Companies trade on the New York Stock Exchange
(NYSE), American Stock Exchange (AMEX),
and the NASDAQ Stock Market (NASDAQ), certain
securities may trade less frequently, particularly those with
smaller capitalizations. Securities with limited trading volumes
may display volatile or erratic price movements. Also, Kayne
Anderson is one of the largest investors in our investment
sector. Thus, it may be more difficult for us to buy and sell
significant amounts of such securities without an unfavorable
impact on prevailing market prices. Larger purchases or sales of
these securities by us in a short period of time may cause
abnormal movements in the market price of these securities. As a
result, these securities may be difficult to dispose of at a
fair price at the times when we believe it is desirable to do
so. These securities are also more difficult to value, and Kayne
Andersons judgment as to value will often be given greater
weight than market quotations, if any exist. Investment of our
capital in securities that are less actively traded or over time
experience decreased trading volume may restrict our ability to
take advantage of other market opportunities.
We also invest in unregistered or otherwise restricted
securities. The term restricted securities refers to
securities that are unregistered or are held by control persons
of the issuer and securities that are subject to contractual
restrictions on their resale. Unregistered securities are
securities that cannot be sold publicly in the United States
without registration under the Securities Act of 1933, as
amended (the Securities Act), unless an exemption
from such registration is available. Restricted securities may
be more difficult to value and we may have difficulty disposing
of such assets either in a timely manner or for a reasonable
price. In order to dispose of an unregistered security, we,
where we have contractual rights to do so, may have to cause
such security to be registered. A considerable period may elapse
between the time the decision is made to sell the security and
the time the security is registered so that we could sell it.
Contractual restrictions on the resale of securities vary in
length and scope and are generally the result of a negotiation
between the issuer and acquiror of the securities. We would, in
either case, bear the risks of any downward price fluctuation
during that period. The difficulties and delays associated with
selling restricted securities could result in our inability to
realize a favorable price upon disposition of such securities,
and at times might make disposition of such securities
impossible.
Our investments in restricted securities may include investments
in private companies. Such securities are not registered under
the Securities Act until the company becomes a public company.
Accordingly, in addition to the
23
risks described above, our ability to dispose of such securities
on favorable terms would be limited until the portfolio company
becomes a public company.
Non-Diversification
Risk
We are a non-diversified, closed-end investment company under
the 1940 Act and will not be treated as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the
Code). Accordingly, there are no regulatory
requirements under the 1940 Act or the Code on the minimum
number or size of securities we hold. As of November 30,
2006, we held investments in 47 issuers.
Under normal market conditions, we intend to invest at least 50%
of our total assets in publicly traded securities of MLPs and
other Midstream Energy Companies. As of November 30, 2006,
there were 51 publicly traded MLPs (partnerships) which manage
and operate energy assets. We primarily select our investments
in publicly traded securities from securities issued by MLPs in
this small pool, together with securities issued by newly public
MLPs, if any. We also invest in publicly traded securities
issued by other Midstream Energy Companies.
As a result of selecting our investments from this small pool of
publicly traded securities, a change in the value of the
securities of any one of these publicly traded MLPs could have a
significant impact on our portfolio. In addition, as there can
be a correlation in the valuation of the securities of publicly
traded MLPs, a change in value of the securities of one such MLP
could negatively influence the valuations of the securities of
other publicly traded MLPs that we may hold in our portfolio.
As we may invest up to 15% of our total assets in any single
issuer, a decline in value of the securities of such an issuer
could significantly impact the value of our portfolio.
Interest
Rate Risk
Interest rate risk is the risk that securities will decline in
value because of changes in market interest rates. The yields of
equity and debt securities of MLPs are susceptible in the
short-term to fluctuations in interest rates and, like Treasury
bonds, the prices of these securities typically decline when
interest rates rise. Accordingly, our net asset value and the
market price of our common stock may decline when interest rates
rise. Further, rising interest rates could adversely impact the
financial performance of Energy Companies by increasing their
costs of capital. This may reduce their ability to execute
acquisitions or expansion projects in a cost-effective manner.
Certain debt instruments, particularly below investment grade
securities, may contain call or redemption provisions which
would allow the issuer thereof to prepay principal prior to the
debt instruments stated maturity. This is known as
prepayment risk. Prepayment risk is greater during a falling
interest rate environment as issuers can reduce their cost of
capital by refinancing higher yielding debt instruments with
lower yielding debt instruments. An issuer may also elect to
refinance their debt instruments with lower yielding debt
instruments if the credit standing of the issuer improves. To
the extent debt securities in our portfolio are called or
redeemed, we may be forced to reinvest in lower yielding
securities.
Portfolio
Turnover Risk
We anticipate that our annual portfolio turnover rate will range
between 10%-25%, but the rate may vary greatly from year to
year. Portfolio turnover rate is not considered a limiting
factor in Kayne Andersons execution of investment
decisions. The types of MLPs in which we intend to invest have
historically made cash distributions to limited partners, the
substantial portion of which would not be taxed as income to us
in that tax year but rather would be treated as a non-taxable
return of capital to the extent of our basis. As a result, most
of the tax related to such distribution would be deferred until
subsequent sale of our MLP units, at which time we would pay any
required tax on gains. Therefore, the sooner we sell such MLP
units, the sooner we would be required to pay tax on resulting
gains, and the cash available to us to pay dividends to our
common stockholders in the year of such tax payment would be
less than if such taxes were deferred until a later year. These
taxable gains may increase our current and accumulated earnings
and profits, resulting in a greater portion of our common stock
dividends being treated as income to our common stockholders. In
addition, a higher portfolio turnover rate results in
correspondingly greater
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brokerage commissions and other transactional expenses that are
borne by us. See Investment Objective and
Policies Investment Practices Portfolio
Turnover at page 34 and Tax Matters at
page 55.
Derivatives
Risk
We may purchase and sell derivative investments such as
exchange-listed and
over-the-counter
put and call options on securities, equity, fixed income and
interest rate indices, and other financial instruments, enter
into various interest rate transactions such as swaps, caps,
floors or collars or credit transactions and credit default
swaps. We also may purchase derivative investments that combine
features of these instruments. The use of derivatives has risks,
including the imperfect correlation between the value of such
instruments and the underlying assets, the possible default of
the other party to the transaction or illiquidity of the
derivative investments. Furthermore, the ability to successfully
use these techniques depends on our ability to predict pertinent
market movements, which cannot be assured. Thus, their use may
result in losses greater than if they had not been used, may
require us to sell or purchase portfolio securities at
inopportune times or for prices other than current market
values, may limit the amount of appreciation we can realize on
an investment or may cause us to hold a security that we might
otherwise sell. Additionally, amounts paid by us as premiums and
cash or other assets held in margin accounts with respect to
derivative transactions are not otherwise available to us for
investment purposes.
Depending on whether we would be entitled to receive net
payments from the counterparty on a swap or cap, which in turn
would depend on the general state of short-term interest rates
at that point in time, a default by a counterparty could
negatively impact the performance of our common stock. In
addition, at the time an interest rate or commodity swap or cap
transaction reaches its scheduled termination date, there is a
risk that we would not be able to obtain a replacement
transaction or that the terms of the replacement would not be as
favorable as on the expiring transaction. If this occurs, it
could have a negative impact on the performance of our common
stock. If we fail to maintain any required asset coverage ratios
in connection with any use by us of Leverage Instruments, we may
be required to redeem or prepay some or all of the Leverage
Instruments. Such redemption or prepayment would likely result
in our seeking to terminate early all or a portion of any swap
or cap transactions. Early termination of a swap could result in
a termination payment by or to us. Early termination of a cap
could result in a termination payment to us.
We segregate liquid assets against or otherwise cover our future
obligations under such swap or cap transactions, in order to
provide that our future commitments for which we have not
segregated liquid assets against or otherwise covered, together
with any outstanding Leverage Instruments, do not exceed 30% of
our total assets. In addition, such transactions and other use
of Leverage Instruments by us are subject to the asset coverage
requirements of the 1940 Act, which generally restrict us from
engaging in such transactions unless the value of our total
assets less liabilities (other than the amount of such Leverage
Instruments) is at least 300% of the principal amount of such
Leverage Instruments. In other words, the principal amount of
such Leverage Instruments may not exceed
331/3%
of our total assets.
The use of interest rate and commodity swaps and caps is a
highly specialized activity that involves investment techniques
and risks different from those associated with ordinary
portfolio security transactions. Depending on market conditions
in general, our use of swaps or caps could enhance or harm the
overall performance of our common stock. For example, we may use
interest rate swaps and caps in connection with any use by us of
Leverage Instruments. Under the terms of the outstanding
interest rate swap agreements as of November 30, 2006, we
are obligated to pay a weighted average rate of 4.46% on a
notional amount of $270 million. To the extent there is a
decline in interest rates, the value of the interest rate swap
or cap could decline, and could result in a decline in the net
asset value of our common stock. In addition, if short-term
interest rates are lower than our fixed rate of payment on the
interest rate swap, the swap will reduce common stock net
earnings. Buying interest rate caps could decrease the net
earnings of our common stock in the event that the premium paid
by us to the counterparty exceeds the additional amount we would
have been required to pay had we not entered into the cap
agreement.
Interest rate and commodity swaps and caps do not involve the
delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and
commodity swaps is limited to the net amount of interest
payments that we are contractually obligated to make. If the
counterparty defaults, we would not be able to use the
anticipated net receipts under the swap or cap to offset any
declines in the value of our portfolio
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assets being hedged or the increase in our cost of financial
leverage. Depending on whether we would be entitled to receive
net payments from the counterparty on the swap or cap, which in
turn would depend on the general state of the market rates at
that point in time, such a default could negatively impact the
performance of our common stock.
Short
Sales Risk
Short selling involves selling securities which may or may not
be owned and borrowing the same securities for delivery to the
purchaser, with an obligation to replace the borrowed securities
at a later date. Short selling allows the short seller to profit
from declines in market prices to the extent such declines
exceed the transaction costs and the costs of borrowing the
securities. A short sale creates the risk of an unlimited loss,
in that the price of the underlying security could theoretically
increase without limit, thus increasing the cost of buying those
securities to cover the short position. There can be no
assurance that the securities necessary to cover a short
position will be available for purchase. Purchasing securities
to close out the short position can itself cause the price of
the securities to rise further, thereby exacerbating the loss.
Our obligation to replace a borrowed security is secured by
collateral deposited with the broker-dealer, usually cash,
U.S. government securities or other liquid securities
similar to those borrowed. We also are required to segregate
similar collateral to the extent, if any, necessary so that the
value of both collateral amounts in the aggregate is at all
times equal to at least 100% of the current market value of the
security sold short. Depending on arrangements made with the
broker-dealer from which we borrowed the security regarding
payment over of any payments received by us on such security, we
may not receive any payments (including interest) on the
collateral deposited with such broker-dealer.
Debt
Securities Risks
Debt securities in which we invest are subject to many of the
risks described elsewhere in this section. In addition, they are
subject to credit risk, prepayment risk and, depending on their
quality, other special risks.
Credit Risk. An issuer of a debt
security may be unable to make interest payments and repay
principal. We could lose money if the issuer of a debt
obligation is, or is perceived to be, unable or unwilling to
make timely principal
and/or
interest payments, or to otherwise honor its obligations. The
downgrade of a security may further decrease its value.
Prepayment Risk. Certain debt
instruments, particularly below investment grade securities, may
contain call or redemption provisions which would allow the
issuer thereof to prepay principal prior to the debt
instruments stated maturity. This is known as prepayment
risk. Prepayment risk is greater during a falling interest rate
environment as issuers can reduce their cost of capital by
refinancing higher yielding debt instruments with lower yielding
debt instruments. An issuer may also elect to refinance their
debt instruments with lower yielding debt instruments if the
credit standing of the issuer improves. To the extent debt
securities in our portfolio are called or redeemed, we may be
forced to reinvest in lower yielding securities.
Below Investment Grade and Unrated Debt Securities
Risk. Below investment grade debt securities in
which we may invest are rated from B3 to Ba1 by Moodys,
from B− to BB+ by Fitch or Standard &
Poors, or comparably rated by another rating agency. Below
investment grade and unrated debt securities generally pay a
premium above the yields of U.S. government securities or
debt securities of investment grade issuers because they are
subject to greater risks than these securities. These risks,
which reflect their speculative character, include the
following: greater yield and price volatility; greater credit
risk and risk of default; potentially greater sensitivity to
general economic or industry conditions; potential lack of
attractive resale opportunities (illiquidity); and additional
expenses to seek recovery from issuers who default.
In addition, the prices of these below investment grade and
unrated debt securities are more sensitive to negative
developments, such as a decline in the issuers revenues,
downturns in profitability in the energy industry or a general
economic downturn, than are the prices of higher grade
securities. Below investment grade and unrated debt securities
tend to be less liquid than investment grade securities and the
market for below investment grade and unrated debt securities
could contract further under adverse market or economic
conditions. In such a scenario, it may be more difficult for us
to sell these securities in a timely manner or for as high a
price as could be realized if such securities were more widely
traded. The market value of below investment grade and unrated
debt securities
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may be more volatile than the market value of investment grade
securities and generally tends to reflect the markets
perception of the creditworthiness of the issuer and short-term
market developments to a greater extent than investment grade
securities, which primarily reflect fluctuations in general
levels of interest rates. In the event of a default by a below
investment grade or unrated debt security held in our portfolio
in the payment of principal or interest, we may incur additional
expense to the extent we are required to seek recovery of such
principal or interest. For a further description of below
investment grade and unrated debt securities and the risks
associated therewith, see Investment Policies in our
SAI.
For a description of the ratings categories of certain rating
agencies, see Appendix C to our SAI.
FORWARD-LOOKING
STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements. Such factors include, among others, those listed
under Risk Factors in this prospectus and our SAI.
In this prospectus, we use words such as
anticipates, believes,
expects, intends and similar expressions
to identify forward-looking statements.
The forward-looking statements contained in this prospectus
include statements as to:
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our operating results;
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our business prospects;
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the impact of investments that we expect to make;
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our contractual arrangements and relationships with third
parties;
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the dependence of our future success on the general economy and
its impact on the industries in which we invest;
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our ability to source favorable private investments;
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the ability of the MLPs and other Midstream Energy Companies in
which we invest to achieve their objectives;
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our expected financings and investments;
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our use of financial leverage;
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our tax status;
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the tax status of the MLPs in which we intend to invest;
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the adequacy of our cash resources and working capital; and
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the timing and amount of distributions and dividends from the
MLPs and other Midstream Energy Companies in which we intend to
invest.
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We have based the forward-looking statements included in this
prospectus on information available to us on the date of this
prospectus, and we assume no obligation to update any such
forward-looking statements. Although we undertake no obligation
to revise or update any forward-looking statements, whether as a
result of new information, future events or otherwise, you are
advised to consult any additional disclosures that we may make
directly to you or through reports that we in the future may
file with the SEC, including our annual reports. We acknowledge
that, notwithstanding the foregoing statement, the safe harbor
for forward-looking statements under the Private Securities
Litigation Reform Act of 1995 does not apply to investment
companies such as us.
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DIVIDENDS
As of the date of this prospectus, we have paid dividends to
common stockholders every full fiscal quarter since inception,
on the dates and in the respective amounts set forth below:
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Dividend Payment Date to Common Stockholders
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Amount
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January 14, 2005
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$
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0.25
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April 15, 2005
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0.41
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July 15, 2005
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0.415
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October 14, 2005
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0.42
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January 12, 2006
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0.425
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April 13, 2006
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0.43
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July 13, 2006
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0.44
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October 13, 2006
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0.45
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January 12, 2007
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0.47
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We intend to continue to pay quarterly dividends to our common
stockholders, funded in part by our distributable cash flow. Our
distributable cash flow is the amount received by us as cash or
paid-in-kind
distributions from MLPs or other Midstream Energy Companies,
interest payments received on debt securities owned by us, other
payments on securities owned by us and income tax benefits, if
any, less current or anticipated operating expenses, taxes on
our taxable income, if any, and our leverage costs. We expect
that a significant portion of our future dividends will be
treated as a return of capital to stockholders for tax purposes.
Our quarterly dividends to common stockholder are authorized by
our Board of Directors out of funds legally available therefor.
There is no assurance we will continue to pay regular dividends
or that we will do so at a particular rate.
We pay dividends on ARP Shares in accordance with the terms
thereof. ARP Shares pay adjustable rate dividends, which are
redetermined periodically by an auction process. The adjustment
period for dividends on ARP Shares could be as short as one day
or as long as a year or more. As of November 30, 2006, the
dividend rate on the ARP Shares was 5.28%. These dividend rate
does not include commissions paid to the auction agent in the
amount of 0.25% or the effect of our outstanding interest rate
swap agreement as of November 30, 2006 (weighted average
fixed rate of 4.46% on a notional amount of $270 million).
All of our realized capital gains, if any, net of applicable
taxes, and any cash and other income from investments not
distributed as a dividend will be retained by us. Unless you
elect to receive your common stock dividends in cash, they will
automatically be reinvested into additional common stock
pursuant to our Dividend Reinvestment Plan.
The 1940 Act generally limits our long-term capital gain
distributions to one per year. This limitation does not apply to
that portion of our distributions that is not characterized as
long-term capital gain (e.g., return of capital or
distribution of interest income). Although we have no current
plans to do so, we may in the future apply to the SEC for an
exemption from Section 19(b) of the 1940 Act and
Rule 19b-1
thereunder permitting us to make periodic distributions of
long-term capital gains provided that our distribution policy
with respect to our common stock calls for periodic
(e.g., quarterly) distributions in an amount equal to a
fixed percentage of our average net asset value over a specified
period of time or market price per common share at or about the
time of distribution or pay-out of a level dollar amount. The
exemption also would permit us to make distributions with
respect to the ARP Shares and any shares of preferred stock that
we may offer hereby in accordance with such shares terms.
We cannot assure you that if we apply for this exemption, the
requested relief will be granted by the SEC in a timely manner,
if at all.
Because the cash distributions received from the MLPs in our
portfolio are expected to exceed the earnings and profits
associated with owning such MLPs, we expect that a significant
portion of our dividends will be paid from sources other than
our current or accumulated earnings, income or profits. The
portion of the dividend which exceeds our current or accumulated
earnings and profits will be treated as a return of capital to
the extent of a stockholders basis in our common stock,
then as capital gain. See Tax Matters at
page 55.
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DIVIDEND
REINVESTMENT PLAN
We have adopted a Dividend Reinvestment Plan (the
Plan) that provides that unless you elect to receive
your dividends or other distributions in cash, they will be
automatically reinvested by the Plan Administrator, American
Stock Transfer & Trust Company, in additional shares of
our common stock. If you elect to receive your dividends or
other distributions in cash, you will receive them in cash paid
by check mailed directly to you by the Plan Administrator.
No action is required on the part of a registered stockholder to
have their cash dividend reinvested share of our common stock.
Unless you or your brokerage firm decides to opt out of the
Plan, the number of shares of common stock you will receive will
be determined as follows:
(1) If our common stock is trading at or above net asset
value at the time of valuation, we will issue new shares at a
price equal to the greater of (i) our common stocks
net asset value on that date or (ii) 95% of the market
price of our common stock on that date.
(2) If our common stock is trading below net asset value at
the time of valuation, the Plan Administrator will receive the
dividend or distribution in cash and will purchase common stock
in the open market, on the NYSE or elsewhere, for the
participants accounts, except that the Plan Administrator
will endeavor to terminate purchases in the open market and
cause us to issue the remaining shares if, following the
commencement of the purchases, the market value of the shares,
including brokerage commissions, exceeds the net asset value at
the time of valuation. Provided the Plan Administrator can
terminate purchases on the open market, the remaining shares
will be issued by us at a price equal to the greater of
(i) the net asset value at the time of valuation or
(ii) 95% of the then current market price. It is possible
that the average purchase price per share paid by the Plan
Administrator may exceed the market price at the time of
valuation, resulting in the purchase of fewer shares than if the
dividend or distribution had been paid entirely in common stock
issued by us.
You may withdraw from the Plan at any time by giving written
notice to the Plan Administrator, or by telephone in accordance
with such reasonable requirements as we and the Plan
Administrator may agree upon. If you withdraw or the Plan is
terminated, you will receive a certificate for each whole share
in your account under the Plan and you will receive a cash
payment for any fraction of a share in your account. If you
wish, the Plan Administrator will sell your shares and send you
the proceeds, minus brokerage commissions. The Plan
Administrator is authorized to deduct a $15 transaction fee plus
a $0.10 per share brokerage commission from the proceeds.
The Plan Administrator maintains all common stockholders
accounts in the Plan and gives written confirmation of all
transactions in the accounts, including information you may need
for tax records. Common stock in your account will be held by
the Plan Administrator in non-certificated form. The Plan
Administrator will forward to each participant any proxy
solicitation material and will vote any shares so held only in
accordance with proxies returned to us. Any proxy you receive
will include all common stock you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends
or distributions in common stock. However, all participants will
pay a pro rata share of brokerage commissions incurred by the
Plan Administrator when it makes open market purchases.
Automatically reinvesting dividends and distributions does not
mean that you do not have to pay income taxes due upon receiving
dividends and distributions. See Tax Matters at
page 55.
If you hold your common stock with a brokerage firm that does
not participate in the Plan, you will not be able to participate
in the Plan and any dividend reinvestment may be effected on
different terms than those described above. Consult your
financial advisor for more information.
The Plan Administrators fees under the Plan will be borne
by us. There is no direct service charge to participants in the
Plan; however, we reserve the right to amend or terminate the
Plan, including amending the Plan to include a service charge
payable by the participants, if in the judgment of the Board of
Directors the change is warranted. Any amendment to the Plan,
except amendments necessary or appropriate to comply with
applicable law or the rules and policies of the SEC or any other
regulatory authority, require us to provide at least
30 days written
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notice to each participant. Additional information about the
Plan may be obtained from American Stock Transfer &
Trust Company at 59 Maiden Lane, New York, New York 10038.
INVESTMENT
OBJECTIVE AND POLICIES
Our investment objective is to obtain high after-tax total
return by investing at least 85% of our total assets in public
and private investments in MLPs and other Midstream Energy
Companies. Our investment objective is considered a fundamental
policy and therefore may not be changed without the approval of
the holders of a majority of the outstanding voting
securities. When used with respect to our voting securities, a
majority of the outstanding voting securities means
(i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares,
whichever is less. There can be no assurance that we will
achieve our investment objective.
The following investment policies are considered non-fundamental
and may be changed by the Board of Directors without the
approval of the holders of a majority of the
outstanding voting securities, provided that the holders
of such voting securities receive at least 60 days
prior written notice of any change:
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For as long as the word MLP is in our name, it shall
be our policy, under normal market conditions, to invest at
least 80% of our total assets in MLPs.
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We intend to invest at least 50% of our total assets in publicly
traded securities of MLPs and other Midstream Energy Companies.
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Under normal market conditions, we may invest up to 50% of our
total assets in unregistered or otherwise restricted securities
of MLPs and other Midstream Energy Companies. The types of
unregistered or otherwise restricted securities that we may
purchase include common units, subordinated units, preferred
units, and convertible units of, and general partner interests
in, MLPs, and securities of other public and private Midstream
Energy Companies.
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We may invest up to 15% of our total assets in any single issuer.
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We may invest up to 20% of our total assets in debt securities
of MLPs and other Midstream Energy Companies, including below
investment grade debt securities rated, at the time of
investment, at least B3 by Moodys, B− by
Standard & Poors or Fitch, comparably rated by
another rating agency or, if unrated, determined by Kayne
Anderson to be of comparable quality. In addition, up to
one-quarter of our permitted investments in debt securities (or
up to 5% of our total assets) may include unrated debt
securities of private companies.
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We may issue or use Leverage Instruments in an aggregate amount
up to 30% of our total assets inclusive of such Leverage
Instruments.
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We may, but are not required to, use derivative investments and
engage in short sales to hedge against interest rate and market
risks.
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Unless otherwise stated, all investment restrictions apply at
the time of purchase and we will not be required to reduce a
position due solely to market value fluctuations.
Description
of MLPs
Master Limited Partnerships. MLPs are limited
partnerships, the partnership units of which are listed and
traded on a U.S. securities exchange. To qualify as an MLP,
a partnership must receive at least 90% of its income from
qualifying sources as set forth in Section 7704(d) of the
Code. These qualifying sources include natural resource-based
activities such as the exploration, development, mining,
production, processing, refining, transportation, storage and
marketing of mineral or natural resources. MLPs generally have
two classes of owners, the general partner and limited partners.
The general partner is typically owned by a major energy
company, an investment fund, the direct management of the MLP or
is an entity owned by one or more of such parties. The general
partner may be structured as a private or publicly traded
corporation or other entity. The general partner typically
controls the operations and management of the MLP through an up
to 2% equity interest in the MLP plus, in many cases, ownership
of common units and subordinated units. Limited partners own the
remainder of the
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partnership, through ownership of common units, and have a
limited role in the partnerships operations and management.
MLPs are typically structured such that common units and general
partner interests have first priority to receive quarterly cash
distributions up to an established minimum amount (minimum
quarterly distributions or MQD). Common and
general partner interests also accrue arrearages in
distributions to the extent the MQD is not paid. Once common and
general partner interests have been paid, subordinated units
receive distributions of up to the MQD; however, subordinated
units do not accrue arrearages. Distributable cash in excess of
the MQD paid to both common and subordinated units is
distributed to both common and subordinated units generally on a
pro rata basis. The general partner is also eligible to receive
incentive distributions if the general partner operates the
business in a manner which results in distributions paid per
common unit surpassing specified target levels. As the general
partner increases cash distributions to the limited partners,
the general partner receives an increasingly higher percentage
of the incremental cash distributions. A common arrangement
provides that the general partner can reach a tier where it
receives 50% of every incremental dollar paid to common and
subordinated unit holders. These incentive distributions
encourage the general partner to streamline costs, increase
capital expenditures and acquire assets in order to increase the
partnerships cash flow and raise the quarterly cash
distribution in order to reach higher tiers. Such results
benefit all security holders of the MLP.
MLPs in which we invest are currently classified by us as
pipeline MLPs, propane MLPs, coal MLPs and upstream MLPs.
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Pipeline MLPs are engaged in (a) the treating, gathering,
compression, processing, transmission and storage of natural gas
and the transportation, fractionation and storage of natural gas
liquids (primarily propane, ethane, butane and natural
gasoline); (b) the gathering, transportation, storage and
terminalling of crude oil; and (c) the transportation
(usually via pipelines, barges, rail cars and trucks), storage
and terminalling of refined petroleum products (primarily
gasoline, diesel fuel and jet fuel) and other hydrocarbon
by-products. MLPs may also operate ancillary businesses
including the marketing of the products and logistical services.
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Propane MLPs are engaged in the distribution of propane to
homeowners for space and water heating and to commercial,
industrial and agricultural customers. Propane serves
approximately 3% of the household energy needs in the United
States, largely for homes beyond the geographic reach of natural
gas distribution pipelines. Volumes are weather dependent and a
majority of annual cash flow is earned during the winter heating
season (October through March).
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Coal MLPs are engaged in the owning, leasing, managing,
production and sale of coal and coal reserves. Electricity
generation is the primary use of coal in the United States.
Demand for electricity and supply of alternative fuels to
generators are the primary drivers of coal demand.
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Upstream MLPs are businesses engaged in the exploration,
extraction, production and acquisition of natural gas and crude
oil, from geological reservoirs. An Upstream MLPs cash
flow and distributions are driven by the amount of oil and
natural gas produced and the demand for and price of crude oil
and natural gas.
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For purposes of our investment objective, the term
MLPs includes affiliates of MLPs that own general
partner interests or, in some cases, subordinated units,
registered or unregistered common units, or other limited
partner units in an MLP.
Our
Portfolio
At any given time, we expect that our portfolio will have some
or all of the types of investments described below. A
description of our investment policies and restrictions and more
information about our portfolio investments are contained in
this prospectus and our SAI.
Equity Securities of MLPs. Equity securities
of MLPs include common units, subordinated units, I-Shares and
general partner interests of such companies.
MLP common units represent a limited partnership interest in the
MLP. Common units are listed and traded on U.S. securities
exchanges or
over-the-counter,
with their value fluctuating predominantly based on prevailing
market conditions and the success of the MLP. We intend to
purchase common units in market transactions as well
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as directly from the MLP or other parties in private placements.
Unlike owners of common stock of a corporation, owners of common
units have limited voting rights and have no ability to annually
elect directors. MLPs generally distribute all available cash
flow (cash flow from operations less maintenance capital
expenditures) in the form of quarterly distributions. Common
units along with general partner units, have first priority to
receive quarterly cash distributions up to the MQD and have
arrearage rights. In the event of liquidation, common units have
preference over subordinated units, but not debt or preferred
units, to the remaining assets of the MLP.
MLP subordinated units are typically issued by MLPs to their
original sponsors, such as their founders, corporate general
partners of MLPs, entities that sell assets to the MLP, and
investors such as us. We expect to purchase subordinated units
directly from these persons as well as newly-issued subordinated
units from MLPs themselves. Subordinated units have similar
voting rights as common units and are generally not publicly
traded. Once the MQD on the common units, including any
arrearages, has been paid, subordinated units receive cash
distributions up to the MQD prior to any incentive payments to
the MLPs general partner. Unlike common units,
subordinated units do not have arrearage rights. In the event of
liquidation, common units and general partner interests have
priority over subordinated units. Subordinated units are
typically converted into common units on a
one-to-one
basis after certain time periods
and/or
performance targets have been satisfied. Subordinated units are
generally valued based on the price of the common units,
discounted to reflect the timing or likelihood of their
conversion to common units.
MLP subordinated units in which we may invest generally convert
to common units at a
one-to-one
ratio. The purchase or sale price of subordinated units is
generally tied to the common unit price less a discount. The
size of the discount varies depending on the likelihood of
conversion, the length of time remaining to conversion, the size
of the block purchased relative to trading volumes, and other
factors, including smaller capitalization partnerships or
companies potentially having limited product lines, markets or
financial resources, lacking management depth or experience, and
being more vulnerable to adverse general market or economic
development than larger more established companies.
I-Shares represent an ownership interest issued by an affiliated
party of an MLP. The MLP affiliate uses the proceeds from the
sale of I-Shares to purchase limited partnership interests in
the MLP in the form of
i-units.
I-units have
similar features as MLP common units in terms of voting rights,
liquidation preference and distributions. However, rather than
receiving cash, the MLP affiliate receives additional
i-units in
an amount equal to the cash distributions received by MLP common
units. Similarly, holders of I-Shares will receive additional
I-Shares, in the same proportion as the MLP affiliates receipt
of i-units,
rather than cash distributions. I-Shares themselves have limited
voting rights which are similar to those applicable to MLP
common units. The MLP affiliate issuing the
I-Shares is
structured as a corporation for federal income tax purposes. The
two existing I-Shares are traded on the NYSE.
General partner interests of MLPs are typically retained by an
MLPs original sponsors, such as its founders, corporate
partners, entities that sell assets to the MLP and investors
such as us. A holder of general partner interests can be liable
under certain circumstances for amounts greater than the amount
of the holders investment in the general partner interest.
General partner interests often confer direct board
participation rights and in many cases, operating control, over
the MLP. These interests themselves are not publicly traded,
although they may be owned by publicly traded entities. General
partner interests receive cash distributions, typically 2% of
the MLPs aggregate cash distributions, which are
contractually defined in the partnership agreement. In addition,
holders of general partner interests typically hold incentive
distribution rights (IDRs), which provide them with
a larger share of the aggregate MLP cash distributions as the
distributions to limited partner unit holders are increased to
prescribed levels. General partner interests generally cannot be
converted into common units. The general partner interest can be
redeemed by the MLP if the MLP unitholders choose to remove the
general partner, typically with a supermajority vote by limited
partner unitholders.
Equity Securities of Publicly Traded Midstream Energy
Companies. Equity securities of publicly traded
Midstream Energy Companies consist of common equity, preferred
equity and other securities convertible into equity securities
of such companies. Holders of common stock are typically
entitled to one vote per share on all matters to be voted on by
stockholders. Holders of preferred equity can be entitled to a
wide range of voting and other rights, depending on the
structure of each separate security. Securities convertible into
equity securities of
32
Midstream Energy Companies generally convert according to set
ratios into common stock and are, like preferred equity,
entitled to a wide range of voting and other rights. We intend
to invest in equity securities of publicly traded Midstream
Energy Companies primarily through market transactions. We
intend to invest in securities of MLP affiliates as part of our
investment in Midstream Energy Companies. MLP affiliates include
entities that own general partner interests or, in some cases,
subordinated units, registered or unregistered common units or
other limited partner interests in an MLP.
Securities of Private Companies. Our
investments in the debt or equity securities of private
companies operating midstream energy assets will typically be
made with the expectation that such assets will be contributed
to a newly-formed MLP or sold to or merged with, an existing MLP
within approximately one to two years.
Debt Securities. The debt securities in which
we invest provide for fixed or variable principal payments and
various types of interest rate and reset terms, including fixed
rate, adjustable rate, zero coupon, contingent, deferred,
payment-in-kind
and auction rate features. Certain debt securities are
perpetual in that they have no maturity date.
Certain debt securities are zero coupon bonds. A zero coupon
bond is a bond that does not pay interest either for the entire
life of the obligations or for an initial period after the
issuance of the obligation. To the extent that we invest in
below investment grade or unrated debt securities, such
securities will be rated, at the time of investment, at least
B− by Standard & Poors or Fitch Ratings, B3
by Moodys Investors Service, Inc., a comparable rating by
at least one other rating agency or, if unrated, determined by
Kayne Anderson to be of comparable quality. If a security
satisfies our minimum rating criteria at the time of purchase
and is subsequently downgraded below such rating, we will not be
required to dispose of such security.
Because the risk of default is higher for below investment grade
and unrated debt securities than for investment grade
securities, Kayne Andersons research and credit analysis
is a particularly important part of managing securities of this
type. Kayne Anderson will attempt to identify those issuers of
below investment grade and unrated debt securities whose
financial condition Kayne Anderson believes is sufficient to
meet future obligations or has improved or is expected to
improve in the future. Kayne Andersons analysis focuses on
relative values based on such factors as interest or dividend
coverage, asset coverage, operating history, financial
resources, earnings prospects and the experience and managerial
strength of the issuer.
Temporary Defensive Position. During periods
in which Kayne Anderson determines that it is temporarily unable
to follow our investment strategy or that it is impractical to
do so, we may deviate from our investment strategy and invest
all or any portion of our net assets in cash or cash
equivalents. Kayne Andersons determination that it is
temporarily unable to follow our investment strategy or that it
is impractical to do so will generally occur only in situations
in which a market disruption event has occurred and where
trading in the securities selected through application of our
investment strategy is extremely limited or absent. In such a
case, our shares may be adversely affected and we may not pursue
or achieve our investment objective.
Investment
Practices
Hedging and Other Risk Management
Transactions. We may, but are not required to,
use various hedging and other risk management transactions to
seek to manage interest rate and market risks.
We may purchase and sell derivative investments such as
exchange-listed and
over-the-counter
put and call options on securities, equity, fixed income and
interest rate indices, and other financial instruments, and
enter into various interest rate transactions, such as swaps,
caps, floors or collars, or credit transactions and credit
default swaps. We also may purchase derivative investments that
combine features of these instruments. We generally seek to use
these instruments as hedging strategies to seek to manage our
effective interest rate exposure, including the dividends and
interest paid on any Leverage Instruments issued or used by us,
protect against possible adverse changes in the market value of
securities held in or to be purchased for our portfolio, or
otherwise protect the value of our portfolio. See Risk
Factors Risks Related to Our Investments and
Investment Techniques Derivatives Risk at
page 24 in the prospectus and Investment
Policies in our SAI for a more complete discussion of
these transactions and their risks.
We may also short sell Treasury securities to hedge our interest
rate exposure. When shorting Treasury securities, the loss is
limited to the principal amount that is contractually required
to be repaid at maturity and the
33
interest expense that must be paid at the specified times. See
Risk Factors Risks Related to Our Investments
and Investment Techniques Short Sales Risk at
page 26.
Use of Arbitrage and Other Strategies. We may
use various arbitrage and other strategies to try to generate
additional return. As part of such strategies, we may engage in
paired long-short trades to arbitrage pricing disparities in
securities issued by MLPs or between MLPs and their affiliates;
write (or sell) covered call options on the securities of MLPs
or other securities held in our portfolio; or, purchase call
options or enter into swap contracts to increase our exposure to
MLPs; or sell securities short. Paired trading consists of
taking a long position in one security and concurrently taking a
short position in another security within the same company. With
a long position, we purchase a stock outright; whereas with a
short position, we would sell a security that we do not own and
must borrow to meet our settlement obligations. We will realize
a profit or incur a loss from a short position depending on
whether the value of the underlying stock decreases or
increases, respectively, between the time the stock is sold and
when we replace the borrowed security. See Risk
Factors Risks Related to Our Investments and
Investment Techniques Short Sales Risk at
page 26.
We may write (or sell) covered call options on the securities of
MLPs or other securities held in our portfolio. We will not
write uncovered calls. To increase our exposure to certain
issuers, we may purchase call options or use swap agreements. We
do not anticipate that these strategies will comprise a
substantial portion of our investments. See Risk
Factors Risks Related to Our Investments and
Investment Techniques Derivatives Risk at
page 25.
We may engage in short sales. Our use of naked short
sales of equity securities (i.e., where we have no
opposing long position in the securities of the same issuer)
will be limited, so that, (i) measured on a daily basis,
the market value of all such short sale positions does not
exceed 10% of our total assets, and (ii) at the time of
entering into any such short sales, the market value of all such
short sale positions immediately following such transaction
shall not exceed 5% of our total assets. See Risk
Factors Risks Related to Our Investments and
Investment Techniques Short Sales Risk at
page 26.
Portfolio Turnover. We anticipate that our
annual portfolio turnover rate will range between 10%-25%, but
the rate may vary greatly from year to year. Portfolio turnover
rate is not considered a limiting factor in Kayne
Andersons execution of investment decisions. The types of
MLPs in which we intend to invest historically have made cash
distributions to limited partners that would not be taxed as
income to us in that tax year but rather would be treated as a
non-taxable return of capital to the extent of our basis. As a
result, the tax related to such distribution would be deferred
until subsequent sale of our MLP units, at which time we would
pay any required tax on capital gain. Therefore, the sooner we
sell such MLP units, the sooner we would be required to pay tax
on resulting capital gains, and the cash available to us to pay
dividends to our common stockholders in the year of such tax
payment would be less than if such taxes were deferred until a
later year. In addition, the greater the number of such MLP
units that we sell in any year, i.e., the higher our
turnover rate, the greater our potential tax liability for that
year. These taxable gains may increase our current and
accumulated earnings and profits, resulting in a greater portion
of our common stock dividends being treated as income to our
common stockholders. In addition, a higher portfolio turnover
rate results in correspondingly greater brokerage commissions
and other transactional expenses that are borne by us. See
Tax Matters at page 55.
34
USE OF
LEVERAGE
We generally will seek to enhance our total returns through the
use of financial leverage, which may include the issuance of
Leverage Instruments, in an aggregate amount that is not
expected to exceed 30% of our total assets, inclusive of such
financial leverage. Depending on the type of Leverage
Instruments involved, our use of financial leverage may require
the approval of our Board of Directors. Leverage creates a
greater risk of loss, as well as potential for more gain, for
our common stock than if leverage is not used. Our common stock
is junior in liquidation and distribution rights to our Leverage
Instruments. We expect to invest the net proceeds derived from
any use or issuance of Leverage Instruments according to the
investment objective and policies described in this prospectus.
Leverage creates risk for our common stockholders, including the
likelihood of greater volatility of net asset value and market
price of the shares, and the risk of fluctuations in dividend
rates or interest rates on Leverage Instruments which may affect
the return to the holders of our common stock or will result in
fluctuations in the dividends paid by us on our common stock. To
the extent the return on securities purchased with funds
received from Leverage Instruments exceeds their cost (including
increased expenses to us), our total return will be greater than
if Leverage Instruments had not been used. Conversely, if the
return derived from such securities is less than the cost of
Leverage Instruments (including increased expenses to us), our
total return will be less than if Leverage Instruments had not
been used, and therefore, the amount available for distribution
to our common stockholders will be reduced. In the latter case,
Kayne Anderson in its best judgment nevertheless may determine
to maintain our leveraged position if it expects that the
benefits to our common stockholders of so doing will outweigh
the current reduced return.
The fees paid to Kayne Anderson will be calculated on the basis
of our total assets including proceeds from Leverage
Instruments. During periods in which we use financial leverage,
the investment management fee payable to Kayne Anderson may be
higher than if we did not use a leveraged capital structure.
Consequently, we and Kayne Anderson may have differing interests
in determining whether to leverage our assets. Our Board of
Directors monitors our use of Leverage Instruments and this
potential conflict. The use of leverage creates risks and
involves special considerations. See Risk
Factors Risks Related to Our Common
Stock Leverage Risk to Common Stockholders at
page 14 and Risks Related to Our Senior
Securities Senior Leverage Risk to Preferred
Stockholders at page 18.
The Maryland General Corporation Law authorizes us, without
prior approval of our common stockholders, to borrow money. In
this regard, we may obtain proceeds through Borrowings and may
secure any such Borrowings by mortgaging, pledging or otherwise
subjecting as security our assets. In connection with such
Borrowings, we may be required to maintain minimum average
balances with the lender or to pay a commitment or other fee to
maintain a line of credit. Any such requirements will increase
the cost of Borrowing over the stated interest rate.
Under the requirements of the 1940 Act, we, immediately after
issuing any senior securities representing indebtedness, must
have an asset coverage of at least 300%
(331/3%
of our total assets after such issuance). With respect to such
issuance, asset coverage means the ratio which the value of our
total assets, less all liabilities and indebtedness not
represented by senior securities (as defined in the 1940 Act),
bears to the aggregate amount of senior securities representing
indebtedness issued by us.
The rights of our lenders to receive interest on and repayment
of principal of any Borrowings will be senior to those of our
common stockholders, and the terms of any such Borrowings may
contain provisions which limit certain of our activities,
including the payment of dividends to our common stockholders in
certain circumstances. Under the 1940 Act, we may not declare
any dividend or other distribution on any class of our capital
stock, or purchase any such capital stock, unless our aggregate
indebtedness has, at the time of the declaration of any such
dividend or distribution, or at the time of any such purchase,
an asset coverage of at least 300% after declaring the amount of
such dividend, distribution or purchase price, as the case may
be. Further, the 1940 Act does (in certain circumstances) grant
our lenders certain voting rights in the event of default in the
payment of interest on or repayment of principal. In the event
that we elect to be treated as a regulated investment company,
such provisions would impair our status as a regulated
investment company under the Code. Subject to our ability to
liquidate our relatively illiquid portfolio, we intend to repay
the Borrowings.
35
Certain types of Borrowings may result in our being subject to
covenants in credit agreements relating to asset coverage and
portfolio composition requirements. We may be subject to certain
restrictions on investments imposed by guidelines of one or more
rating agencies, which may issue ratings for the Leverage
Instruments issued by us. These guidelines may impose asset
coverage or portfolio composition requirements that are more
stringent than those imposed by the 1940 Act. It is not
anticipated that these covenants or guidelines will impede Kayne
Anderson from managing our portfolio in accordance with our
investment objective and policies.
Under the 1940 Act, we are not permitted to issue preferred
stock unless immediately after such issuance the value of our
total assets less all liabilities and indebtedness not
represented by senior securities is at least 200% of the sum of
the liquidation value of the outstanding preferred stock plus
the aggregate amount of senior securities representing
indebtedness. In addition, we are not permitted to declare any
cash dividend or other distribution on our common stock unless,
at the time of such declaration, our preferred stock has an
asset coverage of at least 200%. If we issue preferred stock, we
intend, to the extent possible, to purchase or redeem it from
time to time to the extent necessary in order to maintain asset
coverage on such preferred stock of at least 200%. In addition,
as a condition to obtaining ratings on the preferred stock, the
terms of any preferred stock issued are expected to include
asset coverage maintenance provisions which will require the
redemption of the preferred stock in the event of non-compliance
by us and may also prohibit dividends and other distributions on
our common stock in such circumstances. In order to meet
redemption requirements, we may have to liquidate portfolio
securities. Such liquidations and redemptions would cause us to
incur related transaction costs and could result in capital
losses to us. If we have preferred stock outstanding, two of our
Directors will be elected by the holders of preferred stock as a
class. Our remaining Directors will be elected by holders of our
common stock and preferred stock voting together as a single
class. In the event we fail to pay dividends on our preferred
stock for two years, holders of preferred stock would be
entitled to elect a majority of our Directors.
We may also borrow money as a temporary measure for
extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of our securities.
See Investment Objective and Policies Our
Portfolio Temporary Defensive Position at
page 33.
Effects
of Leverage
The interest rates payable by us on Senior Notes vary based on
auctions normally held every seven (7) days for Senior
Notes Series A, Series B and Series E and
every twenty-eight (28) days for Senior
Notes Series C. As of November 30, 2006, the
interest rates payable on Senior Notes were as follows: Senior
Notes Series A, 5.05%; Senior
Notes Series B, 5.05%; Senior
Notes Series C, 5.24%; and Senior
Notes Series E, 5.05%. The interest rates payable by
us on our borrowings made under our revolving credit line with
Custodial Trust Company (an affiliate of our administrator) are
variable based upon the London Interbank Offered Rate plus a
spread. As of November 30, 2006, the interest rate payable
on our borrowings under our revolving credit line was 6.32%. As
of November 30, 2006, the dividend rate for the ARP Shares
was 5.28%. These interest rates payable on Senior Notes and
dividend rate for the ARP Shares do not include commissions paid
to the auction agent in the amount of 0.25%. Assuming that our
leverage costs remain as described above excluding the effect of
the outstanding interest rate swaps (an average annual cost of
5.43%), the income generated by our portfolio as of
November 30, 2006 (net of our estimated related expenses)
must exceed 2.97% in order to cover such payments. These
numbers, which do not include the impacts of our interest rate
swap agreements as of November 30, 2006, are merely
estimates used for illustration; actual dividend or interest
rates on the Leverage Instruments will vary frequently and may
be significantly higher or lower than the rate estimated above.
The following table is furnished in response to requirements of
the SEC. It is designed to illustrate the effect of leverage on
common stock total return, assuming investment portfolio total
returns (comprised of income and changes in the value of
securities held in our portfolio) of minus 10% to plus 10%.
These assumed investment portfolio returns are hypothetical
figures and are not necessarily indicative of the investment
portfolio returns experienced or expected to be experienced by
us. See Risk Factors at page 11. The table
further reflects the issuance of Leverage Instruments
representing 30% of our total assets, net of expenses, and our
estimated leverage costs of 5.41%. For the purposes of this
table it is assumed that leverage is increased from its level of
23.9% on November 30, 2006 to an assumed level of 30% by
increasing its outstanding Senior Notes. The cost of leverage is
36
expressed as a blended interest/dividend rate and represents
the weighted average cost on our Leverage Instruments, excluding
the impacts of our interest rate swap agreements at
November 30, 2006, plus the weighted average cost of
additional Senior Notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return
(Net of Expenses)
|
|
|
(10
|
)%
|
|
|
(5
|
)%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
Common Stock Total Return
|
|
|
(20.6
|
)%
|
|
|
(12.1
|
)%
|
|
|
(3.6
|
)%
|
|
|
4.8
|
%
|
|
|
13.3
|
%
|
Common stock total return is composed of two elements: common
stock dividends paid by us (the amount of which is largely
determined by our net investment income after paying dividends
or interest on our Leverage Instruments) and gains or losses on
the value of the securities we own. As required by SEC rules,
the table above assumes that we are more likely to suffer
capital losses than to enjoy capital appreciation. For example,
to assume a total return of 0% we must assume that the
distributions we receive on our investments is entirely offset
by losses in the value of those securities.
37
MANAGEMENT
Directors
and Officers
Our business and affairs are managed under the direction of our
Board of Directors, including supervision of the duties
performed by KA Fund Advisors, LLC. Our Board currently
consists of five Directors. As indicated, a majority of our
Board consists of Directors that are not interested
persons as defined in Section 2(a)(19) of the 1940
Act. We refer to these individuals as our Independent
Directors. The Board of Directors elects our officers, who
serve at the Boards discretion. The following table
includes information regarding our Directors and officers, and
their principal occupations and other affiliations during the
past five years. The addresses for all Directors are 1800 Avenue
of the Stars, Second Floor Los Angeles, CA 90067 and 1100
Louisiana Street, Suite 4550, Houston, Texas 77002. All of
our Directors currently serve on the Board of Directors of Kayne
Anderson Energy Total Return Fund, Inc., a closed-end investment
company registered under the 1940 Act, that is advised by Kayne
Anderson.
Independent
Directors
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Other Directorships
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Name
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Position(s) Held
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|
Term of Office/
|
|
|
|
Held by
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(Year Born)
|
|
with Registrant
|
|
Time of Service
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|
Principal Occupations During Past Five Years
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|
Director/Officer
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Anne K. Costin
(born 1950)
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|
Director
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3-year
term (until the 2007 Annual Meeting of Stockholders)/served
since July 2004
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|
Ms. Costin is currently an Adjunct
Professor in the Finance and Economics Department of Columbia
University Graduate School of Business in New York. As of
March 1, 2005, Ms. Costin retired after a
28-year
career at Citigroup. During the last five years she was Managing
Director and Global Deputy Head of the Project &
Structured Trade Finance product group within Citigroups
Investment Banking Division.
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|
Kayne Anderson Energy Total Return
Fund, Inc.
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Steven C. Good
(born 1942)
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|
Director
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3-year
term (until the 2009 Annual Meeting of Stockholders)/served
since July 2004
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|
Mr. Good is a senior partner at
Good Swartz Brown & Berns LLP, which offers accounting,
tax and business advisory services to middle market private and
publicly-traded companies, their owners and their management.
Mr. Good founded Block, Good and Gagerman in 1976, which
later evolved in stages into Good Swartz Brown & Berns
LLP.
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Kayne Anderson Energy Total Return
Fund, Inc.; OSI Systems, Inc.; Big Dog Holdings, Inc.; and
California Pizza Kitchen, Inc.
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Gerald I. Isenberg
(born 1940)
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Director
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3-year
term (until the 2008 Annual Meeting of Stockholders)/served
since June 2005
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Since 1995, Mr. Isenberg has
served as a Professor at the University of Southern California
School of Cinema-Television. Since 2004 he has been a member of
the board of trustees of Partners for Development, a
non-governmental organization dedicated to developmental work in
third-world countries. From 1998 to 2002, Mr. Isenberg was
a board member of Kayne Anderson Rudnick Mutual Funds. From 1989
to 1995, he was President of Hearst Entertainment Productions, a
producer of television movies and programming for major
broadcast and cable networks.
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|
Kayne Anderson Energy Total Return
Fund, Inc.; Partners for Development
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Terrence J. Quinn
(born 1951)
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|
Director
|
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3-year
term (until the 2007 Annual Meeting of Stockholders)/served
since July 2004
|
|
Mr. Quinn has served as President
of Private Equity Capital Corp., a private equity investment
firm, since 2005. He has also served as Chairman of the
Healthcare Group of Triton Pacific Capital Partners, LLC, a
private equity investment firm, since 2005. Mr. Quinn has
also served as President of The Eden Club, a private membership
golf club, since 2005. From 2000 to 2003, Mr. Quinn was a
co-founder and managing partner of MTS Health Partners, a
private merchant bank providing services to publicly traded and
privately held small to mid-sized companies in the healthcare
industry.
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Kayne Anderson Energy Total Return
Fund, Inc.; Midland Container Corp.; Home Physicians, Inc.; and
Safe Sedation, Inc.
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38
Interested
Director
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Other Directorships
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Name
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Position(s) Held
|
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Term of Office/
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|
|
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Held by
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(Year Born)
|
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with Registrant
|
|
Time of Service
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|
Principal Occupations During Past Five Years
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Director/Officer
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Kevin S. McCarthy*
(born 1959)
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Chairman of the Board of Directors;
President and Chief Executive Officer
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3-year
term as a director (until the 2009 Annual Meeting of
Stockholders), elected annually as an officer/served since July
2004
|
|
Mr. McCarthy has served as a Senior
Managing Director of Kayne Anderson since June 2004. From
November 2000 to May 2004, Mr. McCarthy was at UBS
Securities LLC where he was Global Head of Energy. In this role,
he had senior responsibility for all of UBS energy
investment banking activities, including direct responsibility
for securities underwriting and mergers and acquisitions in the
MLP industry. From July 1997 to November 2000, Mr. McCarthy
led the energy investment banking activities of PaineWebber
Incorporated. From July 1995 to March 1997, he was head of the
Energy Group at Dean Witter Reynolds.
|
|
Kayne Anderson Energy Total Return
Fund, Inc.; Kayne Anderson Energy Development Company; Range
Resources Corporation; Clearwater Natural Resources, LLC.
|
|
|
|
* |
|
Mr. McCarthy is an interested person of Kayne
Anderson MLP Investment Company by virtue of his employment
relationship with KAFA, our investment adviser. |
Officers
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Other Directorships
|
Name
|
|
Position(s) Held
|
|
Term of Office/
|
|
|
|
Held by
|
(Year Born)
|
|
with Registrant
|
|
Time of Service
|
|
Principal Occupations During Past Five Years
|
|
Director/Officer
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Terry A. Hart
(born 1969)
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Chief Financial Officer and
Treasurer
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Elected annually/served since
December 2005
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|
Mr. Hart has served as our Chief
Financial Officer since December 2005. Prior to that,
Mr. Hart was with Dynegy, Inc. since its merger with
Illinova Corp. in early 2000, where he served as the Director of
Structured Finance, Assistant Treasurer and most recently as
Senior Vice President and Controller.
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None.
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David J. Shladovsky
(born 1960)
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Secretary and Chief Compliance
Officer
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Elected annually/served since
inception
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Mr. Shladovsky has served as a
Managing Director and General Counsel of Kayne Anderson since
1997.
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None.
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J.C. Frey
(born 1968)
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|
Vice President, Assistant
Treasurer, Assistant Secretary
|
|
Elected annually/served since June
2005
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Mr. Frey has served as a Senior
Managing Director of Kayne Anderson since 2004 and as a Managing
Director since 2001. Mr. Frey has served as a Portfolio
Manager of Kayne Anderson since 2000 and of Kayne Anderson MLP
Investment Company since 2004. From 1998 to 2000, Mr. Frey
was a Research Analyst at Kayne Anderson.
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None.
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James C. Baker
(born 1972)
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Vice President
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Elected annually/served since June
2005
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Mr. Baker has been a Managing
Director of Kayne Anderson since December 2004. From April 2004
to December 2004, he was a Director in Planning and Analysis at
El Paso Corporation. Prior to that, Mr. Baker worked in the
energy investment banking group at UBS Securities LLC as a
Director from 2002 to 2004 and as an Associate Director from
2000 to 2002. Prior to joining UBS in 2000, Mr. Baker was
an Associate in the energy investment banking group at
PaineWebber Incorporated.
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None.
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Under our Charter, our Directors are divided into three classes.
Each class of Directors hold office for a three year term. At
each annual meeting of our stockholders, the successors to the
class of Directors whose terms expire at such meeting will be
elected to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of
their election. Each Director will hold office for the term to
which he or she is elected and until his or her successor is
duly elected and qualifies. Additional information regarding our
Board and its committees, is set forth under
Management in our SAI.
39
Investment
Adviser
KAFA is our investment adviser and is registered with the SEC
under the Investment Advisers Act of 1940, as amended
(Advisers Act). KAFA also is responsible for
managing our business affairs and providing certain clerical,
bookkeeping and other administrative services. KAFA is a
Delaware limited liability company. The managing member of KAFA
is Kayne Anderson Capital Advisors, L.P., which is a California
limited partnership and an investment adviser registered with
the SEC under the Advisers Act. Kayne Anderson has one general
partner, Kayne Anderson Investment Management, Inc., and a
number of individual limited partners. Kayne Anderson Investment
Management, Inc. is a Nevada corporation controlled by Richard
A. Kayne and John E. Anderson. Kayne Andersons predecessor
was established as an independent investment advisory firm in
1984.
Kayne Andersons management of our portfolio is led by two
of its Senior Managing Directors, Kevin S. McCarthy and J.C.
Frey. Our portfolio managers draw on the research and analytical
support of David L. LaBonte, a Senior Managing Director of Kayne
Anderson, as well as the experience and expertise of other
professionals at Kayne Anderson, including its Chief Executive
Officer, Richard Kayne, and its President and Chief Investment
Officer, Robert V. Sinnott, as well as Richard J. Farber, James
C. Baker, Jody C. Meraz, Marc A. Minikes and Ian S. Sinnott.
Kevin S. McCarthy is our Chief Executive Officer and he
has served as the Chief Executive Officer and co-portfolio
manager of Kayne Anderson Energy Total Return Fund since May
2005 and of Kayne Anderson Energy Development Company since
September 2006. Mr. McCarthy has served as a Senior
Managing Director at KACALP since June 2004 and of KAFA since
2006. Prior to that, he was Global Head of Energy at UBS
Securities LLC. In this role, he had senior responsibility for
all of UBS energy investment banking activities.
Mr. McCarthy was with UBS Securities from 2000 to 2004.
From 1995 to 2000, Mr. McCarthy led the energy investment
banking activities of Dean Witter Reynolds and then PaineWebber
Incorporated. He began his investment banking career in 1984. He
earned a BA degree in Economics and Geology from Amherst College
in 1981, and an MBA degree in Finance from the University of
Pennsylvanias Wharton School in 1984.
J.C. Frey is a Senior Managing Director of Kayne
Anderson. He serves as portfolio manager of Kayne
Andersons funds investing in MLP securities, including
service as a co-portfolio manager, Vice President, Assistant
Secretary and Assistant Treasurer of Kayne Anderson Energy Total
Return Fund and Kayne Anderson Energy Development Company.
Mr. Frey began investing in MLPs on behalf of Kayne
Anderson in 1998 and has served as portfolio manager of Kayne
Andersons MLP funds since their inception in 2000. Prior
to joining Kayne Anderson in 1997, Mr. Frey was a CPA and
audit manager in KPMG Peat Marwicks financial services
group, specializing in banking and finance clients, and loan
securitizations. Mr. Frey graduated from Loyola Marymount
University with a BS degree in Accounting in 1990. In 1991, he
received a Masters degree in Taxation from the University
of Southern California.
Richard A. Kayne is Chief Executive Officer of Kayne
Anderson and its affiliated broker-dealer, KA Associates,
Inc. He began his career in 1966 as an analyst with Loeb,
Rhodes & Co. in New York. Prior to forming Kayne
Andersons predecessor in 1984, Mr. Kayne was a
principal of Cantor Fitzgerald & Co., Inc., where he
managed private accounts, a hedge fund and a portion of firm
capital. Mr. Kayne is a trustee of and the former Chairman
of the Investment Committee of the University of California at
Los Angeles Foundation, and is a trustee and Co-Chairman of the
Investment Committee of the Jewish Community Foundation of Los
Angeles. He earned a BS degree in Statistics from Stanford
University in 1966 and an MBA degree from UCLAs Anderson
School of Management in 1968.
Robert V. Sinnott is President, Chief Investment Officer
and Senior Managing Director of Energy Investments of Kayne
Anderson. Mr. Sinnott is a member of the Board of Directors
of Plains All American Pipeline, LP and Kayne Anderson Energy
Development Company. He joined Kayne Anderson in 1992. From 1986
to 1992, Mr. Sinnott was vice president and senior
securities officer of Citibanks Investment Banking
Division, concentrating in high-yield corporate buyouts and
restructuring opportunities. From 1981 to 1986, he served as
director of corporate finance for United Energy Resources, a
pipeline company. Mr. Sinnott began his career in the
financial industry in 1976 as a vice president and debt analyst
for Bank of America in its oil and gas finance department.
Mr. Sinnott graduated from the University of Virginia in
1971 with a BA degree in Economics. In 1976, he received an MBA
degree in Finance from Harvard University.
40
David L. LaBonte is a Senior Managing Director of Kayne
Anderson, responsible for coordinating and providing research
and analytical support in the areas of MLPs and other Midstream
Energy Company investments. Mr. LaBonte joined Kayne
Anderson from Citigroups Smith Barney unit, where he was a
Managing Director in the U.S. Equity Research Division
responsible for providing research coverage of MLPs and other
Midstream Energy Companies. Mr. LaBonte worked at Smith
Barney from 1998 until March 2005. Prior thereto, he was a vice
president in the Investment Management Group of Wells Fargo
Bank, where he was responsible for research coverage of the
natural gas pipeline industry and managing equity and
fixed-income portfolios. In 1993, Mr. LaBonte received his
BS degree in Corporate Finance from California Polytechnic
University-Pomona.
Richard J. Farber is a Senior Managing Director of Kayne
Anderson. Mr. Farber is responsible for proprietary trading
and hedging, and serves as Portfolio Manager for arbitrage
strategies. He also provides analytical support in the MLP area.
Mr. Farber joined Kayne Anderson in 1994. From 1990 to
1994, Mr. Farber was vice president of Lehman
Brothers Commodity Risk Management Group, specializing in
energy trading. He also worked at Lehman Brothers as an
institutional equity trader from 1988 to 1990. From 1985 to
1986, Mr. Farber was employed by Salomon Brothers, Inc. as
a mortgage bond analyst. Mr. Farber graduated from Franklin
and Marshall College in 1982 with a BA degree in Economics. In
1988, he received his MBA degree in Finance from UCLAs
Anderson School of Management.
James C. Baker is a Managing Director of Kayne Anderson,
providing analytical support in the MLP area. He also serves as
our Vice President and as Vice President of Kayne Anderson
Energy Total Return Fund and Kayne Anderson Energy Development
Company. Prior to joining Kayne Anderson in 2004, Mr. Baker
was a Director in the energy investment banking group at UBS
Securities LLC. At UBS, he focused on securities underwriting
and mergers and acquisitions in the MLP industry. Prior to
joining UBS in 2000, Mr. Baker was an Associate in the
energy investment banking group at PaineWebber Incorporated. He
received a BBA degree in Finance from the University of Texas at
Austin in 1995 and an MBA degree in Finance from Southern
Methodist University in 1997.
Jody C. Meraz is a Vice President for Kayne Anderson. He
is responsible for providing analytical support for energy
investments. Prior to joining Kayne Anderson in 2005,
Mr. Meraz was an analyst in the energy investment banking
group at Credit Suisse First Boston, where he focused on
securities underwriting transactions and mergers and
acquisitions. From 2001 to 2003, Mr. Meraz was in the
Merchant Energy group at El Paso Corporation.
Mr. Meraz earned a B.A. in Economics from the University of
Texas at Austin in 2001.
Marc A. Minikes is a research analyst for KACALP. He is
responsible for providing research coverage of the electric
utility, power generation, and marine transportation industries.
Prior to joining Kayne Anderson in 2006, Mr. Minikes was a
member of the electric utility equity research team at Citigroup
Investment Research. Between 2002 and 2004 he worked as a
research analyst at GE Asset Management where he focused on
high-yield securities in the utility, merchant power and
pipeline sectors. Mr. Minikes earned a B.A. in History from
the University of Michigan in 1992, an M.A. in Latin American
Studies from the University of California at Los Angeles in 1996
and an M.B.A. in Finance and Economics from the University of
Chicago in 2002. Mr. Minikes is a Chartered Financial
Analyst charterholder.
Ian S. Sinnott is a research analyst for KACALP. He is
responsible for providing research coverage in royalty and
income trusts and MLPs. Prior to joining Kayne Anderson in 2005,
Mr. Sinnott was an associate with Citigroup Asset
Management in the Equity Research group, responsible for the
software and services sectors. Mr. Sinnott earned a B.A. in
Economics from Harvard University in 2001. He is a Chartered
Financial Analyst charterholder and is a member of the CFA
Institute and the New York Society of Security Analysts. Ian S.
Sinnott is a nephew of Robert V. Sinnott.
Our SAI provides information about our portfolio managers
compensation, other accounts managed by them, and their
ownership of securities issued by us.
The principal office of our investment adviser is located at
1100 Louisiana Street, Suite 4550, Houston, Texas 77002.
KACALPs principal office is located at 1800 Avenue of the
Stars, Second Floor, Los Angeles, California 90067. For
additional information concerning Kayne Anderson, including a
description of the services to be provided by Kayne Anderson,
see Investment Management Agreement
below.
41
Investment
Management Agreement
Pursuant to an investment management agreement (the
Investment Management Agreement) between us and
KAFA, effective for periods commencing on or after
December 12, 2006, we pay a management fee, computed and
paid quarterly at an annual rate of 1.375% of our average total
assets.
For purposes of calculation of the management fee, the
average total assets shall be determined on the
basis of the average of our total assets for each quarter in
such period. Total assets for each quarterly period are
determined by averaging the total assets at the last day of that
quarter with the total assets at the last day of the prior
quarter . Our total assets shall be equal to our average
quarterly gross asset value (which includes assets attributable
to or proceeds from our use of Leverage Instruments), minus the
sum of our accrued and unpaid dividends on any outstanding
common stock and accrued and unpaid dividends on any outstanding
preferred stock and accrued liabilities (other than liabilities
associated with Leverage Instruments issued by us and any
accrued taxes). Liabilities associated with Leverage Instruments
include the principal amount of any Borrowings that we issue,
the liquidation preference of any outstanding preferred stock,
and other liabilities from other forms of borrowing or leverage
such as short positions and put or call options held or written
by us.
In addition to KAFAs management fee, we pay all other
costs and expenses of our operations, such as compensation of
our directors (other than those affiliated with Kayne Anderson),
custodian, transfer agency, administrative, accounting and
dividend disbursing expenses, legal fees, leverage expenses,
expenses of independent auditors, expenses of personnel
including those who are affiliates of Kayne Anderson reasonably
incurred in connection with arranging or structuring portfolio
transactions for us, expenses of repurchasing our securities,
expenses of preparing, printing and distributing stockholder
reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
The Investment Management Agreement will continue in effect from
year to year after an initial two-year term commencing on
December 12, 2006, so long as its continuation is approved
at least annually by our Directors including a majority of
Independent Directors or the vote of a majority of our
outstanding voting securities. The Investment Management
Agreement may be terminated at any time without the payment of
any penalty upon 60 days written notice by either
party, or by action of the Board of Directors or by a vote of a
majority of our outstanding voting securities (accompanied by
appropriate notice). It also provides that it will automatically
terminate in the event of its assignment, within the meaning of
the 1940 Act. This means that an assignment of the Investment
Management Agreement to an affiliate of Kayne Anderson would
normally not cause a termination of the Investment Management
Agreement.
Because Kayne Andersons fee is based upon a percentage of
our total assets, KAFAs fee will be higher to the extent
we employ financial leverage. As noted, we have issued Leverage
Instruments in a combined amount equal to approximately 23.9% of
our total assets as of November 30, 2006.
For periods ending on or before December 11, 2006, we paid
KACALP, the investment adviser originally party to the contract,
a basic management fee at an annual rate of 1.75% of our average
total assets, adjusted upward or downward (by up to 1.00% of our
average total assets), depending on the extent to which, if any,
our investment performance for the relevant performance period
exceeded or trailed the performance of the Standard and
Poors (S&P) 400 Utilities Index plus 6.00%
over the same period. At a special meeting of stockholders held
on December 12, 2006, stockholders approved the Investment
Management Agreement with Kayne Anderson described above.
Effective December 31, 2006, KACALP assigned the Investment
Management Agreement to KAFA. That assignment occurred only for
internal organizational purposes and did not result in any
change of management, control or portfolio management personnel
and did not cause a termination of the Investment Management
Agreement.
A discussion regarding the basis for approval by the Board of
Directors of our Investment Management Agreement with Kayne
Anderson is available in our November 30, 2006 annual
report to stockholders.
42
NET ASSET
VALUE
We determine our net asset value as of the close of regular
session trading on the NYSE (normally 4:00 p.m. Eastern
time) no less frequently than the last business day of each
month, and make our net asset value available for publication
monthly. Net asset value is computed by dividing the value of
all of our assets (including accrued interest and dividends),
less all of our liabilities (including accrued expenses,
dividends payable, current and deferred and other accrued income
taxes, and any Borrowings) and the liquidation value of any
outstanding preferred stock, by the total number of shares
outstanding.
We may hold a substantial amount of securities that are
privately issued or illiquid. For these securities, as well as
any other portfolio security held by us for which, in the
judgment of Kayne Anderson, reliable market quotations are not
readily available, the pricing service does not provide a
valuation, or provides a valuation that in the judgment of Kayne
Anderson is stale or does not represent fair value, valuations
will be determined in a manner that most fairly reflects fair
value of the security on the valuation date. Unless otherwise
determined by our Board of Directors, the following valuation
process is used for such securities:
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Investment Team Valuation. The applicable
investments are initially valued by Kayne Andersons
investment professionals responsible for the portfolio
investments.
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Investment Team Valuation
Documentation. Preliminary valuation conclusions
are documented and discussed with senior management of Kayne
Anderson. Such valuations generally are submitted to the
Valuation Committee (a committee of our Board of Directors) or
our Board of Directors on a monthly basis, and stand for
intervening periods of time.
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Valuation Committee. The Valuation Committee
meets on or about the end of each month to consider new
valuations presented by Kayne Anderson, if any, which were made
in accordance with the Valuation Procedures in such month.
Between meetings of the Valuation Committee, a senior officer of
Kayne Anderson is authorized to make valuation determinations.
The Valuation Committees valuations stand for intervening
periods of time unless the Valuation Committee meets again at
the request of Kayne Anderson, our Board of Directors or the
Committee itself. The Valuation Committees valuation
determinations are subject to ratification by our Board at its
next regular meeting.
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Valuation Firm. No less than quarterly, a
third-party valuation firm engaged by our Board of Directors
reviews the valuation methodologies and calculations employed
for these securities.
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Board of Directors Determination. Our Board of
Directors meets quarterly to consider the valuations provided by
Kayne Anderson and the Valuation Committee, if applicable, and
ratify valuations for the applicable securities. Our Board of
Directors considers the reports, if any, provided by the
third-party valuation firm in reviewing and determining in good
faith the fair value of the applicable portfolio securities.
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Unless otherwise determined by our Board of Directors,
securities that are convertible into or otherwise will become
publicly traded (e.g., through subsequent registration or
expiration of a restriction on trading) are valued through the
process described above, using a valuation based on the market
value of the publicly traded security less a discount. The
discount is initially equal in amount to the discount negotiated
at the time the purchase price is agreed to. To the extent that
such securities are convertible or otherwise become publicly
traded within a time frame that may be reasonably determined,
Kayne Anderson may determine an amortization schedule for the
discount in accordance with a methodology approved by the
Valuation Committee.
We may rely to some extent on information provided by the MLPs,
which may not necessarily be timely, to estimate taxable income
allocable to the MLP units held in our portfolio and to estimate
the associated deferred tax liability. Such estimates will be
made in good faith and reviewed in accordance with the valuation
process approved by our Board of Directors. From time to time we
will modify our estimates
and/or
assumptions regarding our deferred tax liability as new
information becomes available. To the extent we modify our
estimates
and/or
assumptions, our net asset value would likely fluctuate.
For publicly traded securities with a readily available market
price, the valuation procedure is as described below. Readily
marketable portfolio securities listed on any exchange other
than the NASDAQ are valued, except as indicated below, at the
last sale price on the business day as of which such value is
being determined. If there has
43
been no sale on such day, the securities are valued at the mean
of the most recent bid and asked prices on such day. Securities
admitted to trade on the NASDAQ are valued at the NASDAQ
official closing price. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the
close of the exchange representing the principal market for such
securities.
Equity securities traded in the
over-the-counter
market, but excluding securities admitted to trading on the
NASDAQ, are valued at the closing bid prices. Fixed income
securities with a remaining maturity of 60 days or more are
valued by us using a pricing service. When price quotes are not
available, fair market value will be based on prices of
comparable securities. Fixed income securities maturing within
60 days are valued on an amortized cost basis.
Any derivative transaction that we enter into may, depending on
the applicable market environment, have a positive or negative
value for purposes of calculating our net asset value. Any
option transaction that we enter into may, depending on the
applicable market environment, have no value or a positive
value. Exchange traded options and futures contracts will be
valued at the closing price in the market where such contracts
are principally traded.
Because we are obligated to pay corporate income taxes, we
accrue tax liability. As with any other liability, our net asset
value is reduced by the accruals of our current and deferred tax
liabilities (and any tax payments required in excess of such
accruals.) The allocation between current and deferred income
taxes is determined based upon the value of assets reported for
book purposes compared to the respective net tax bases of assets
recognized for federal income tax purposes and our net operating
loss carryforwards, if any. It is anticipated that cash
distributions from MLPs in which we invest will not equal the
amount of our taxable income because of the depreciation and
amortization recorded by the MLPs in our portfolio. As a result,
a portion of such cash distributions may not be treated by us as
income for federal income tax purposes. The relative portion of
such distributions not treated as income for tax purposes will
vary among the MLPs, and also will vary year by year for each
MLP. We will be able to confirm the portion of each distribution
recognized as taxable income as we receive annual tax reporting
information from each MLP.
44
DESCRIPTION
OF CAPITAL STOCK
The following description is based on relevant portions of the
Maryland General Corporation Law and on our Charter and Bylaws.
This summary is not necessarily complete, and we refer you to
the Maryland General Corporation Law and our Charter and Bylaws
for a more detailed description of the provisions summarized
below.
Capital
Stock
Our authorized capital stock consists of 200,000,000 shares
of stock, par value $0.001 per share, 199,990,000 of which
are classified as common stock and 10,000 of which are
classified and designated as Series D Auction Rate
Preferred Stock. There are no outstanding options or warrants to
purchase our stock. No stock has been authorized for issuance
under any equity compensation plans. Under Maryland law, our
stockholders generally are not personally liable for our debts
or obligations.
Under our Charter, our Board of Directors is authorized to
classify and reclassify any unissued shares of stock into other
classes or series of stock and authorize the issuance of shares
of stock without obtaining stockholder approval. As permitted by
the Maryland General Corporation Law, our Charter provides that
the Board of Directors, without any action by our stockholders,
may 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 we have authority to issue.
Common
Stock
As of November 30, 2006, we had 38,064,836 shares of
common stock outstanding and 199,990,000 shares of common
stock authorized. Our currently outstanding shares of common
stock are listed on the New York Stock Exchange under the symbol
KYN.
All shares of our common stock have equal rights as to earnings,
assets, dividends and voting and, when they are issued, will be
duly authorized, validly issued, fully paid and nonassessable.
Dividends may be paid to the holders of our common stock if, as
and when authorized by our Board of Directors and declared by us
out of funds legally available therefor. Shares of our common
stock have no preemptive, appraisal, exchange, conversion or
redemption rights and are freely transferable, except where
their transfer is restricted by federal and state securities
laws or by contract. In the event of our liquidation,
dissolution or winding up, each share of our common stock would
be entitled to share ratably in all of our assets that are
legally available for distribution after we pay all debts and
other liabilities and subject to any preferential rights of
holders of our preferred stock, if any preferred stock is
outstanding at such time. Each share of our common stock is
entitled to one vote on all matters submitted to a vote of
stockholders, including the election of directors. Except as
provided with respect to any other class or series of stock, the
holders of our common stock will possess exclusive voting power.
There is no cumulative voting in the election of directors,
which means that holders of a majority of the outstanding shares
of common stock can elect all of our directors, and holders of
less than a majority of such shares will be unable to elect any
director.
So long as Senior Notes or other senior securities representing
indebtedness are outstanding, our common stockholders will not
be entitled to receive any distributions from us unless all
accrued interest on such senior indebtedness has been paid, and
unless our asset coverage (as defined in the 1940 Act) with
respect to any outstanding senior indebtedness would be at least
300% after giving effect to such distributions.
For so long as any ARP Shares or other series of our preferred
stock are outstanding, except as contemplated by our articles
supplementary, we will not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights
to subscribe for or purchase, common stock or other shares of
stock, if any, ranking junior to ARP Shares or other series of
our preferred stock as to dividends or upon liquidation) with
respect to common stock or any other of our shares ranking
junior to or on a parity with ARP Shares or other series of our
preferred stock as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for
consideration any common stock or any other such junior shares
(except by conversion into or exchange for our shares ranking
junior to ARP Shares or other series of our preferred stock as
to dividends and upon liquidation) or any such parity shares
(except by conversion into or exchange for our shares ranking
junior to or on a parity with ARP Shares or other series of our
preferred stock as to
45
dividends and upon liquidation), unless (1) there is no
event of default under the Senior Notes or other senior
securities representing indebtedness that is continuing;
(2) immediately after such transaction, we would have
eligible assets with an aggregate discounted
value at least equal to the basic maintenance
amount (as each of these terms are defined in the articles
supplementary) and we would maintain asset coverage of at least
200% with respect to all outstanding senior securities of the
Company which are stock (or such other percentage as may in the
future be specified in or under the 1940 Act as the minimum
asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring
dividends on its common stock); (3) immediately after the
transaction, we would have eligible portfolio holdings with an
aggregated discounted value at least equal to the asset coverage
requirements, if any, under the Senior Notes or other senior
securities representing indebtedness, (4) full cumulative
dividends on ARP Shares or other series of our preferred stock
due on or prior to the date of the transaction have been
declared and paid; and (5) we have redeemed the full number
of required to be redeemed by any provision for mandatory
redemption contained in the articles supplementary.
The offering of common stock hereby, if made, has been approved
by the Board of Directors and, any sale of common stock by us
will be subject to the requirement of the 1940 Act that common
stock may not be sold at a price below the then-current net
asset value, exclusive of underwriting discounts and
commissions, except in limited circumstances including in
connection with an offering to existing stockholders.
Certain
Provisions of the Maryland General Corporation Law and our
Charter and Bylaws
The Maryland General Corporation Law and our Charter and Bylaws
contain provisions that could make it more difficult for a
potential acquiror to acquire us by means of a tender offer,
proxy contest or otherwise. These provisions are expected to
discourage certain coercive takeover practices and inadequate
takeover bids and to encourage persons seeking to acquire
control of us to negotiate first with our Board of Directors. We
believe the benefits of these provisions outweigh the potential
disadvantages of discouraging any such acquisition proposals
because, among other things, the negotiation of such proposals
may improve their terms.
Classified Board of Directors. Our Board of
Directors is divided into three classes of directors serving
staggered three-year terms. The initial term of the third class
will expire in 2007, and the current terms for the first and
second classes will expire in 2008 and 2009, respectively. Upon
expiration of their current terms, directors of each class will
be elected to serve for three-year terms and until their
successors are duly elected and qualify and each year one class
of directors will be elected by the stockholders. A classified
board may render a change in control of us or removal of our
incumbent management more difficult. We believe, however, that
the longer time required to elect a majority of a classified
Board of Directors will help to ensure the continuity and
stability of our management and policies.
Election of Directors. Our Charter and Bylaws
provide that the affirmative vote of the holders of a majority
of the outstanding shares of stock entitled to vote in the
election of directors will be required to elect a director.
Pursuant to our Charter, our Board of Directors may amend the
Bylaws to alter the vote required to elect directors.
Number of Directors; Vacancies; Removal. Our
Charter provides that the number of directors will be set only
by the Board of Directors in accordance with our Bylaws. Our
Bylaws provide that a majority of our entire Board of Directors
may at any time increase or decrease the number of directors.
However, unless our Bylaws are amended, the number of directors
may never be less than the minimum number required by the
Maryland General Corporation Law nor more than fifteen. Our
Charter provides that, at such time as we have at least three
independent directors and our common stock is registered under
the Securities Exchange Act of 1934, we elect to be subject to
the provision of Subtitle 8 of Title 3 of the Maryland
General Corporation Law regarding the filling of vacancies on
the Board of Directors. Accordingly, except as may be provided
by the Board of Directors in setting the terms of any class or
series of preferred stock, any and all vacancies on the Board of
Directors 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, subject to any
applicable requirements of the 1940 Act.
Our Charter provides that a director may be removed only for
cause, as defined in the Charter, and then only by the
affirmative vote of at least two-thirds of the votes entitled to
be cast in the election of directors.
46
Action by Stockholders. Under the Maryland
General Corporation Law, stockholder action can be taken only at
an annual or special meeting of stockholders or, unless the
charter provides for stockholder action by less than unanimous
written consent (which is not the case for our Charter), by
unanimous written consent in lieu of a meeting. These
provisions, combined with the requirements of our Bylaws
regarding the calling of a stockholder-requested special meeting
of stockholders discussed below, may have the effect of delaying
consideration of a stockholder proposal until the next annual
meeting.
Advance Notice Provisions for Stockholder Nominations and
Stockholder Proposals. Our Bylaws provide that
with respect to an annual meeting of stockholders, nominations
of persons for election to the Board of Directors and the
proposal of business to be considered by stockholders may be
made only (1) pursuant to our notice of the meeting,
(2) by the Board of Directors or (3) 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
our notice of the meeting may be brought before the meeting.
Nominations of persons for election to the Board of Directors at
a special meeting may be made only (1) pursuant to our
notice of the meeting, (2) by the Board of Directors or
(3) provided that the Board of Directors has determined
that directors will be elected at the meeting, by a 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. Our Bylaws provide that special
meetings of stockholders may be called by our Board of Directors
and certain of our officers. Additionally, our 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 corporation 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.
Approval of Extraordinary Corporate Action; Amendment of
Charter and Bylaws. Under Maryland law, a
Maryland corporation 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 approved by the
affirmative vote of stockholders entitled to cast at least
two-thirds of the votes entitled to be cast on the matter.
However, a Maryland corporation may provide in its charter for
approval of these matters by a lesser percentage, but not less
than a majority of all of the votes entitled to be cast on the
matter. Our Charter generally provides for approval of Charter
amendments and extraordinary transactions by the stockholders
entitled to cast at least a majority of the votes entitled to be
cast on the matter. Our Charter also provides that certain
Charter amendments and any proposal for our conversion, whether
by merger or otherwise, from a closed-end company to an open-end
company or any proposal for our liquidation or dissolution
requires the approval of the stockholders entitled to cast at
least 80 percent of the votes entitled to be cast on such
matter. However, if such amendment or proposal is approved by at
least 80 percent of our continuing directors (in addition
to approval by our Board of Directors), such amendment or
proposal may be approved by a majority of the votes entitled to
be cast on such a matter. The continuing directors
are defined in our Charter as our current directors as well as
those 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 on the Board of Directors. Our Charter and Bylaws provide
that the Board of Directors will have the exclusive power to
adopt, alter or repeal any provision of our Bylaws and to make
new Bylaws.
47
DESCRIPTION
OF PREFERRED STOCK
As of November 30, 2006, we had 3,000 shares of
preferred stock outstanding, and 10,000 shares of preferred
stock authorized, all of which were classified and designated as
Series D Auction Rate Preferred Stock. Our currently
outstanding ARP Shares are not listed on any exchange or quoted
on any automated quotation system. ARP Shares generally may only
be bought or sold through an auction process. The auctions for
our outstanding ARP Shares generally occur every seven
(7) days, and determine the dividend rate to be paid for
each dividend period.
Our Charter authorizes our Board of Directors to classify and
reclassify any unissued shares of stock into other classes or
series of stock, including preferred stock, without the approval
of the holders of our common stock. Our common stockholders have
no preemptive right to purchase any preferred stock that might
be issued. We may elect to issue preferred stock as part of our
leverage strategy.
Prior to the issuance of shares of any other class or series,
our Board of Directors is required by Maryland law and by our
Charter to set the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions
of redemption for each class or series. Thus, the Board of
Directors could authorize the issuance of shares of preferred
stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in
control that might involve a premium price for holders of our
common stock or otherwise be in their best interest. You should
note, however, that any issuance of preferred stock must comply
with the requirements of the 1940 Act.
Preferred stock (including outstanding ARP Shares) ranks senior
in liquidation and distribution rights to our common stock and
junior in liquidation and distribution rights to debt securities.
Under the 1940 Act, we may only issue one class of senior equity
securities, which in the aggregate may represent no more than
50% of our total assets. So long as ARP Shares are outstanding,
additional issuances of our preferred stock, including any
shares of preferred stock offered hereby, must be considered to
be of the same class as ARP Shares under the 1940 Act and
interpretations thereunder and must rank on a parity with ARP
Shares with respect to the payment of dividends and upon the
distribution of our assets in liquidation. It is currently
expected that any issuance of preferred stock would be
additional ARP Shares or an additional series of our auction
rate preferred stock. Unless otherwise stated in a prospectus
supplement, any preferred stock will be issued pursuant to
articles supplementary (a form of which is attached as
Appendix B to the SAI) in substantially the same form as
outstanding preferred stock and will be subject to the
provisions therein. The terms to be stated in a prospectus
supplement will include the following:
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the form and title of the security;
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the aggregate liquidation preference of preferred stock;
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the dividend rate of the preferred stock;
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the frequency with which auctions will be held;
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any optional or mandatory redemption provisions;
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any changes in auction agents, paying agents or security
registrar; and
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any other terms of the preferred stock.
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Dividends. Holders of preferred stock will be
entitled to receive cash dividends, when, as and if authorized
by the Board of Directors and declared by us, out of funds
legally available therefor. Unless the prospectus supplement
states otherwise, dividend rates with respect to each dividend
period will generally be determined by the results of an auction
process, as more fully described in the related prospectus
supplement. Dividends so declared and payable shall be paid to
the extent permitted under Maryland law, to the extent available
and in preference to and priority over any distribution
declared, payable or set apart for payment on our common stock.
Dividends shall be payable from our earnings and profits.
Because of our emphasis on investments in MLPs, there is a
possibility that earnings and profits would not be sufficient to
pay dividends on preferred stock. In such a case, dividends
would be paid from cash flow in excess of earnings and profits
and would be treated as return of capital.
48
Limitations on Dividends, Distributions and
Redemptions. Under the 1940 Act, we may not
(1) declare any dividend with respect to preferred stock
if, at the time of such declaration (and after giving effect
thereto), asset coverage with respect to our Borrowings, that
are senior securities representing indebtedness (as defined in
the 1940 Act), would be less than 200% (or such other percentage
as may in the future be specified in or under the 1940 Act as
the minimum asset coverage for senior securities representing
stock of a closed-end investment company as a condition of
declaring dividends on its preferred stock) or (2) declare
any other distribution on preferred stock or purchase or redeem
preferred stock if at the time of the declaration (and after
giving effect thereto), asset coverage with respect to our
senior securities representing indebtedness would be less than
300% (or such other percentage as may in the future be specified
in or under the 1940 Act as the minimum asset coverage for
senior securities representing stock of a closed-end investment
company as a condition of declaring distributions, purchases or
redemptions of its shares of capital stock). In addition, a
declaration of a dividend or other distribution on, or
repurchase or redemption of, preferred stock may be prohibited
(1) at any time that an event of default under our
Borrowings has occurred and is continuing; (2) if, after
giving effect to such declaration, we would not have eligible
portfolio holdings with an aggregated discounted value at least
equal to any asset coverage requirements associated with our
Borrowings; or (3) we have not redeemed the full amount of
our Borrowings required to be redeemed by any provision for
mandatory redemption.
Liquidation Rights. In the event of our
liquidation, dissolution or winding up of our the affairs,
whether voluntary or involuntary, the holders of preferred stock
then outstanding, in preference to the holders of common stock,
will be entitled to payment out of our assets, or the proceeds
thereof, available for distribution to stockholders after
satisfaction of claims of our creditors, including the holders
of our debt securities, of a liquidation preference in the
amount equal to $25,000 per share of the preferred stock,
plus an amount equal to accumulated dividends (whether or not
earned or declared but without interest) to the date that
payment of such preference is made in full or a sum sufficient
for the payment thereof is set apart with the paying agent.
After payment of the full amount of a liquidating distribution,
the holders of preferred stock will not be entitled to any
further right or claim to our remaining assets. If, upon any
such liquidation, dissolution or winding up of our affairs,
whether voluntary or involuntary, our assets available for
distribution among the holders of all outstanding preferred
stock shall be insufficient to permit the payment in full to
such holders of the amounts to which they are entitled, then
available assets shall be distributed among the holders of all
outstanding preferred stock ratably in that distribution of
assets according to the respective amounts which would be
payable on all such shares if all amounts thereon were paid in
full. Preferred stock ranks junior to our debt securities upon
our liquidation, dissolution or winding up of our the affairs.
Voting Rights. Except as otherwise indicated
in the Charter or Bylaws, or as otherwise required by applicable
law, holders of preferred stock have one vote per share held on
each matter submitted to a vote of our stockholders and vote
together with holders of common stock and other preferred
stockholders, if any, as a single class. Under applicable rules
of the NYSE, we are currently required to hold annual meetings
of stockholders.
In connection with the election of the Board of Directors, the
holders of preferred stock shall be entitled, as a class, to the
exclusion of the holders of all other securities and classes of
stock, to elect two directors. The holders of outstanding common
stock and preferred stock voting together as a single class,
shall elect the balance of the directors. In addition, subject
to the prior rights, if any, of the holders of any other class
of senior securities outstanding, in the event we fail to pay
dividends on our preferred stock for two years, holders of
preferred stock would be entitled to elect a majority of our
Directors.
The affirmative vote of the holders of a majority of the
outstanding preferred stock voting as a separate class,
determined with reference to a vote of a majority of
outstanding voting securities as that term is defined in
Section 2(a)(42) of the 1940 Act, shall be required to
approve any plan of reorganization (as such term is used in the
1940 Act) adversely affecting such shares or any action
requiring a vote of our security holders under
Section 13(a) of the 1940 Act. The affirmative vote of the
holders of a majority of the outstanding preferred stock, voting
as a separate class, will be required to, among other things,
amend, alter or repeal any of the preferences, rights or powers
of holders of such class so as to affect materially and
adversely such preferences, rights or powers. The affirmative
vote of the holders of a majority of the outstanding shares of
any series of preferred stock, voting separately from any other
series, will be required to approve any matter that materially
and adversely affects the rights, preferences, or powers of such
series in a manner different from that of other series or
classes of our shares of
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stock. The vote of holders of any shares described in the
immediately preceding sentence will in each case be in addition
to a separate vote of the requisite percentage of common stock
and/or
preferred stock, if any, necessary to authorize the matter
presented to the stockholders.
Market. Unless otherwise stated in a
prospectus supplement, our preferred stock may be bought or sold
at an auction that normally will be held periodically by
submitting orders through a broker-dealer who has entered into
an agreement with the auction agent (a
Broker-Dealer) or through a broker-dealer that has
entered into a separate agreement with a Broker-Dealer. Our
preferred stock is not listed on an exchange or automated
quotation system. Preferred stock may be transferred outside of
an auction through a Broker-Dealer or other broker-dealer, but
we cannot assure you that any such secondary market will exist
or whether it will provide preferred stockholders with
liquidity. The details of the auction process will be further
described in the related prospectus supplement.
Auction Agent, Transfer Agent, Registrar, Dividend Paying
Agent and Redemption Agent. Unless otherwise
stated in a prospectus supplement, The Bank of New York, 101
Barclay Street, New York, New York 10286, serves as the auction
agent, transfer agent, registrar, dividend paying agent and
redemption agent with respect to our preferred stock.
50
DESCRIPTION
OF DEBT SECURITIES
Our Charter authorizes us to borrow money without the prior
approval of our stockholders. We may issue additional Borrowings
and may secure any such notes or Borrowings by mortgaging,
pledging or otherwise subjecting as security our assets to the
extent permitted by the 1940 Act or rating agency guidelines.
Any Borrowings will rank senior to our common stock, and any
preferred stock that we issue.
On March 28, 2005, we issued three series of Senior
Notes Series A, Series B and Series C in an
aggregate principal amount of $260 million and on
December 14, 2005 we issued one series of Senior
Notes Series E in an aggregate principal amount of
$60 million, each pursuant to the provisions of an
indenture. The Bank of New York Trust Company, N.A. serves as
trustee and transfer agent and The Bank of New York serves as
auction agent for Senior Notes. Senior Notes Series A,
Series B and Series E pay interest at rates that vary
based on auctions normally held every seven (7) days.
Senior Notes Series C pay interest at rates that vary
based on auctions normally held every twenty-eight
(28) days. Senior Notes rank senior in liquidation and
distribution rights to our common stock and preferred stock.
Senior Notes are effectively subordinated in right of payment to
any of our secured indebtedness (including the full amount of
any borrowings incurred under our revolving credit line with
Custodial Trust Company) or other secured obligations to
the extent of the value of the assets that secure the
indebtedness or obligation. Senior Notes may be redeemed prior
to their maturity at our option, in whole or in part, under
certain circumstances and are subject to mandatory redemption
upon our failure to maintain asset coverage requirements with
respect to the Senior Notes.
Under the 1940 Act, we may only issue one class of senior
securities representing indebtedness. So long as Senior Notes
are outstanding, additional debt securities, including any debt
securities offered hereby, must rank on a parity with Senior
Notes with respect to the payment of interest and upon the
distribution of our assets. It is currently expected that any
issuance of our debt securities would be additional Senior Notes
or additional series of our auction rate senior notes. Unless
otherwise stated in a prospectus supplement, any additional debt
securities offered hereby will be issued pursuant to the
indenture dated as of March 28, 2005 (the
Indenture) and will be subject to the provisions
therein. A prospectus supplement and a supplemental indenture (a
summary of which is attached as Appendix A to the SAI)
relating to any additional debt securities will include specific
terms relating to the offering. These terms will include the
following:
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the form and title of the security;
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the aggregate principal amount of the securities;
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the interest rate of the securities;
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the maturity dates on which the principal of the securities will
be payable;
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the frequency with which auctions will be held;
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any changes to or additional events of default or covenants;
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any optional or mandatory redemption provisions;
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any changes in trustees, auction agents, paying agents or
security registrar; and
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any other terms of the securities.
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Interest. Unless otherwise stated in a
prospectus supplement, debt securities will bear interest as
generally determined by the results of an auction for such
securities
and/or by
the Board of Directors, as more fully described in the related
prospectus supplement. Interest on debt securities will be
payable when due as described in the related prospectus
supplement. If we do not pay interest when due, it will trigger
an event of default and we will be restricted from declaring
dividends and making other distributions with respect to our
common stock and preferred stock.
Limitations. Under the requirements of the
1940 Act, immediately after issuing any senior securities
representing indebtedness, including our debt securities offered
hereby, we must have an asset coverage of at least 300%. With
respect to our debt securities or other senior securities
representing indebtedness, asset coverage means the ratio which
the value of our total assets, less all liabilities and
indebtedness not represented by senior
51
securities, bears to the aggregate amount of senior securities
representing indebtedness. We are subject to certain
restrictions imposed by guidelines of two rating agencies that
issued ratings for the Leverage Instruments, including
restrictions related to asset coverage and portfolio
composition, and to the extent that rating agencies also issue
ratings for our securities offered hereby, certain similar
restrictions may also be imposed on us. Such restrictions may be
more stringent than those imposed by the 1940 Act. Other types
of Borrowings also may result our being subject to similar
covenants in credit agreements.
Events of Default and Acceleration of Maturity of Debt
Securities; Remedies. Unless stated otherwise in
the related prospectus supplement, any one of the following
events will constitute an event of default for that
series under the Indenture:
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default in the payment of any interest upon a series of debt
securities when it becomes due and payable and the continuance
of such default for 30 days;
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default in the payment of the principal of, or premium on, a
series of debt securities at its stated maturity;
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default in the performance, or breach, of any covenant or
warranty of ours in the Indenture, and continuance of such
default or breach for a period of 90 days after written
notice has been given to us by the trustee;
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certain voluntary or involuntary proceedings involving us and
relating to bankruptcy, insolvency or other similar laws;
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if, on the last business day of each of twenty-four consecutive
calendar months, the debt securities have a 1940 Act asset
coverage of less than 100%; or
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any other event of default provided with respect to
a series, including failure to deposit irrevocably in trust with
the paying agent the full amount of any redemption price payable
on the redemption date.
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Unless stated otherwise in the related prospectus supplement,
our debt securities will provide for the following:
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Upon the occurrence and continuance of an event of default, the
holders of a majority in principal amount of a series of
outstanding debt securities or the trustee may declare the
principal amount of that series of debt securities immediately
due and payable upon written notice to us;
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Upon an event of default relating to bankruptcy, insolvency or
other similar laws, acceleration of maturity occurs
automatically; and
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At any time after a declaration of acceleration with respect to
any debt securities or series of Senior Notes has been made, and
before a judgment or decree for payment of the money due has
been obtained, the holders of a majority in principal amount of
the outstanding debt securities of that series, by written
notice to us and the trustee, may rescind and annul the
declaration of acceleration and its consequences if all events
of default with respect to that series of debt securities, other
than the non-payment of the principal of that series of debt
securities which has become due solely by such declaration of
acceleration, have been cured or waived and other conditions
have been met.
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Payment of Proceeds Upon Dissolution, or Other Similar
Events. Unless stated otherwise in the related
prospectus supplement, in the event of (a) any insolvency
or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization or other similar case or proceeding
in connection therewith, relative to us or to our creditors, as
such, or to our assets, or (b) any liquidation, dissolution
or other winding up of our business, whether voluntary or
involuntary and whether or not involving insolvency or
bankruptcy, or (c) any assignment for the benefit of
creditors or any other marshalling of our assets and
liabilities, then (after any payments outstanding at such time
with respect to any of our secured creditors) and in any such
event the holders of debt securities and other Senior Notes
shall be entitled to receive payment in full of all amounts due
or to become due on or in respect of all debt securities and
other Senior Notes (including any interest accruing thereon
after the commencement of any such case or proceeding), or
provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders
of the debt securities and other Senior Notes, before any of our
common or preferred stockholders are entitled to receive any
payment on account of any principal (premium, if any), interest,
liquidation preference or dividends from such securities, and to
that end the holders of debt securities and other Senior Notes
shall be entitled to receive, for application to the payment
thereof, any payment or distribution of any
52
kind or character, whether in cash, property or securities,
including any such payment or distribution which may be payable
or deliverable by reason of the payment of any other
indebtedness of ours being subordinated to the payment of the
debt securities and other Senior Notes, which may be payable or
deliverable in respect of the debt securities and other Senior
Notes in any such case, proceeding, dissolution, liquidation or
other winding up event.
Unsecured creditors of ours may include, without limitation, our
service providers including Kayne Anderson, our custodian, the
auction agent, broker-dealers and the trustee, pursuant to the
terms of various contracts with us. Secured creditors of ours
may include without limitation parties entering into any
interest rate swap, floor or cap transactions, or other similar
transactions with us that create liens, pledges, charges,
security interests, security agreements or other encumbrances on
our assets.
A consolidation, reorganization or merger by us with or into any
other company, or a sale, lease or exchange of all or
substantially all of our assets in consideration for the
issuance of equity securities of another company shall not be
deemed to be a liquidation, dissolution or winding up.
Voting Rights. Unless stated otherwise in the
related prospectus supplement, our debt securities will have no
voting rights, except to the extent required by law or as
otherwise provided in the indenture relating to the acceleration
of maturity upon the occurrence and continuance of an event of
default. The 1940 Act does (in certain circumstances) grant our
lenders certain voting rights in the event of default in the
payment of interest on or repayment of principal.
Market. Unless otherwise stated in a
prospectus supplement, our debt securities may be bought or sold
at an auction held periodically by submitting orders through a
broker-dealer who has entered into an agreement with the auction
agent (a Broker-Dealer) or through a broker-dealer
that has entered into a separate agreement with a Broker-Dealer.
Our debt securities are not listed on an exchange or automated
quotation system. Debt securities may be transferred outside of
an auction through a Broker-Dealer or other broker-dealer, but
we cannot assure you that any such secondary market will exist
or whether it will provide holders of debt securities with
liquidity. The details of the auction process are further
described in the related prospectus supplement.
Trustee, Transfer Agent, Registrar, Paying Agent,
Redemption Agent and Auction Agent. Unless
otherwise stated in a prospectus supplement, The Bank of New
York Trust Company, N.A, 700 S. Flower Street, Los
Angeles, California 90017, will be the trustee under the
Indenture and act as transfer agent, registrar, paying agent and
redemption agent with respect to our debt securities, and the
Bank of New York, 101 Barclay Street, New York, New York 10286,
will serve as the auction agent with respect to our debt
securities.
Distribution Preference. Unless otherwise
stated in a prospectus supplement, a declaration of a dividend
or other distribution on or purchase or redemption of common or
preferred stock, will be restricted: (i) at any time that
an event of default under our Borrowings has occurred and is
continuing; or (ii) if after giving effect to such
declaration, we would not have eligible portfolio holdings with
an aggregated discounted value (as defined in the
supplemental indenture) at least equal to any asset coverage
requirements associated with such Borrowings; or (iii) if
we have not redeemed the full amount of Borrowings, if any,
required to be redeemed by any provision for mandatory
redemption. In addition, the terms of any other Borrowings may
contain provisions that limit certain of our activities,
including the payment of dividends to holders of common and
preferred stock, in certain circumstances.
53
OUR
STRUCTURE; COMMON STOCK REPURCHASES
AND CHANGE IN OUR STRUCTURE
Closed-End
Structure
Closed-end funds differ from open-end management investment
companies (commonly referred to as mutual funds).
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. In contrast, mutual funds issue securities
redeemable at net asset value at the option of the stockholder
and typically engage in a continuous offering of their shares.
Mutual funds are subject to continuous asset in-flows and
out-flows that can complicate portfolio management, whereas
closed-end funds generally can stay more fully invested in
securities consistent with the closed-end funds investment
objective and policies. Accordingly, closed-end funds have
greater flexibility than open-end funds to make certain types of
investments, including investments in illiquid securities.
Shares of closed-end investment companies listed for trading on
a securities exchange frequently trade at a discount to their
net asset value, but in some cases trade at a premium. The
market price may be affected by net asset value, dividend or
distribution levels (which are dependent, in part, on expenses),
supply of and demand for the shares, stability of dividends or
distributions, trading volume of the shares, general market and
economic conditions and other factors beyond the control of the
closed-end fund. The foregoing factors may result in the market
price of our common stock being greater than, less than or equal
to net asset value. The Board of Directors has reviewed our
structure in light of our investment objective and policies and
has determined that the closed-end structure is in the best
interests of our stockholders. However, the Board of Directors
may review periodically the trading range and activity of our
shares with respect to our net asset value and may take certain
actions to seek to reduce or eliminate any such discount. Such
actions may include open market repurchases or tender offers for
our common stock at net asset value or our possible conversion
to an open-end mutual fund. There can be no assurance that the
Board will decide to undertake any of these actions or that, if
undertaken, such actions would result in our common stock
trading at a price equal to or close to net asset value per
share of our common stock. Based on the determination of the
Board of Directors in connection with our initial public
offering of our common stock that the closed-end structure is
desirable in light of our investment objective and policies, it
is highly unlikely that the Board would vote to convert us to an
open-end investment company.
Repurchase
of Common Stock and Tender Offers
In recognition of the possibility that our common stock might
trade at a discount to net asset value and that any such
discount may not be in the interest of our common stockholders,
the Board of Directors, in consultation with Kayne Anderson,
from time to time may, but is not required to, review possible
actions to reduce any such discount. The Board of Directors also
may, but is not required to, consider from time to time open
market repurchases of
and/or
tender offers for our common stock, as well as other potential
actions, to seek to reduce any market discount from net asset
value that may develop. After any consideration of potential
actions to seek to reduce any significant market discount, the
Board may, subject to its applicable duties and compliance with
applicable state and federal laws, authorize the commencement of
a share-repurchase program or tender offer. The size and timing
of any such share repurchase program or tender offer will be
determined by the Board of Directors in light of the market
discount of our common stock, trading volume of our common
stock, information presented to the Board of Directors regarding
the potential impact of any such share repurchase program or
tender offer, general market and economic conditions and
applicable law. There can be no assurance that we will in fact
effect repurchases of or tender offers for any of our common
stock. We may, subject to our investment limitation with respect
to Borrowings, incur debt to finance such repurchases or a
tender offer or for other valid purposes. Interest on any such
Borrowings would increase our expenses and reduce our net income.
There can be no assurance that repurchases of our common stock
or tender offers, if any, will cause our common stock to trade
at a price equal to or in excess of its net asset value.
Nevertheless, the possibility that a portion of our outstanding
common stock may be the subject of repurchases or tender offers
may reduce the spread between market price and net asset value
that might otherwise exist. Sellers may be less inclined to
accept a significant discount in the sale of their common stock
if they have a reasonable expectation of being able to receive a
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price of net asset value for a portion of their common stock in
conjunction with an announced repurchase program or tender offer
for our common stock.
Although the Board of Directors believes that repurchases or
tender offers generally would have a favorable effect on the
market price of our common stock, the acquisition of common
stock by us will decrease our total assets and therefore will
have the effect of increasing our expense ratio and decreasing
the asset coverage with respect to any preferred stock
outstanding. Because of the nature of our investment objective,
policies and portfolio, particularly our investment in illiquid
or otherwise restricted securities, it is possible that
repurchases of common stock or tender offers could interfere
with our ability to manage our investments in order to seek our
investment objective. Further, it is possible that we could
experience difficulty in borrowing money or be required to
dispose of portfolio securities to consummate repurchases of or
tender offers for common stock.
Possible
Conversion to Open-End Fund Status
Our Charter provides that any proposal for our conversion from a
closed-end company to an open-end company requires the approval
of our Board of Directors and the stockholders entitled to cast
at least 80 percent of the votes entitled to be cast on
such matter. However, if such proposal is also approved by at
least 80 percent of our continuing directors (in addition
to the approval by our Board of Directors), such proposal may be
approved by a majority of the votes entitled to be cast on the
matter. See Description of Capital Stock for a
discussion of voting requirements applicable to our conversion
to an open-end investment company. If we converted to an
open-end investment company, we would be required to redeem all
preferred stock then outstanding (requiring in turn that we
liquidate a portion of our investment portfolio) and our common
stock would no longer be listed on the NYSE. Conversion to
open-end status could also require us to modify certain
investment restrictions and policies. Stockholders of an
open-end investment company may require the investment company
to redeem their shares at any time (except in certain
circumstances as authorized by or permitted under the 1940 Act)
at their net asset value, less such redemption charge, if any,
as might be in effect at the time of redemption. In order to
avoid maintaining large cash positions or liquidating favorable
investments to meet redemptions, open-end investment companies
typically engage in a continuous offering of their shares.
Open-end investment companies are thus subject to periodic asset
in-flows and out-flows that can complicate portfolio management.
Our Board of Directors may at any time propose our conversion to
open-end status, depending upon its judgment regarding the
advisability of such action in light of circumstances then
prevailing.
TAX
MATTERS
The following discussion of federal income tax matters is based
on the advice of our counsel, Paul, Hastings,
Janofsky & Walker LLP.
This section and the discussion in our SAI summarize the
material U.S. federal income tax consequences of owning our
securities for U.S. taxpayers. This section is current as
of the date of this prospectus. Tax laws and interpretations
change frequently, and this summary does not describe all of the
tax consequences to all taxpayers. For example, this summary
generally does not describe your situation if you are a
non-U.S. person,
a broker-dealer, or other investor with special circumstances.
In addition, this section does not describe your state, local or
foreign taxes. As with any investment, you should consult your
own tax professional about your particular consequences.
Investors should consult their own tax advisors regarding the
tax consequences of investing in us.
Federal
Income Taxation of Kayne Anderson MLP Investment
Company
We are treated as a corporation for federal income tax purposes.
Thus, we are obligated to pay federal income tax on our taxable
income. We are also obligated to pay state income tax on our
taxable income, either because the states follow the federal
treatment or because the states separately impose a tax on us.
We invest our assets principally in MLPs, which generally are
treated as partnerships for federal income tax purposes. As a
partner in the MLPs, we have to report our allocable share of
the MLPs taxable income in computing our taxable income.
Based upon our review of the historic results of the type of
MLPs in which we invest, we expect that the cash flow received
by us with respect to our MLP investments will exceed the
taxable income allocated to us. There is no assurance that our
expectation regarding the tax character of MLP distributions
will be realized. If this expectation is not realized,
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there will be greater tax expense borne by us and less cash
available to make required interest, principal and redemption
payments to holders of Senior Notes and to distribute to
stockholders. In addition, we will take into account in our
taxable income amounts of gain or loss recognized on the sale of
MLP units. Currently, the maximum regular federal income tax
rate for a corporation is generally 35%, but we may be subject
to a 20% alternative minimum tax on our alternative minimum
taxable income to the extent that the alternative minimum tax
exceeds our regular income tax. We will accrue deferred tax
liabilities associated with unrealized capital gains on our
investments.
As a corporation for tax purposes, our earnings and profits are
calculated using accounting methods that are different from tax
calculation methods. For instance, to calculate our earnings and
profits we will use the straight-line depreciation method rather
than the accelerated depreciation method. This treatment may,
for example, affect our earnings and profits if an MLP in which
we invest calculates its income using accelerated depreciation.
Our earnings and profits would not be increased solely by the
income passed through from the MLP, but we would also have to
include in our earnings and profits the amount by which the
accelerated depreciation exceeded straight-line depreciation.
Because of the differences in the manner in which earnings and
profits and taxable income are calculated, we may make
distributions out of earnings and profits, treated as dividends,
in years in which we have no taxable income.
In addition, in calculating our alternative minimum taxable
income, certain percentage depletion deductions and intangible
drilling costs may be treated as items of tax preference. Items
of tax preference increase alternative minimum taxable income
and increase the likelihood that we may be subject to
alternative minimum tax.
We have not, and we will not, elect to be treated as a regulated
investment company under the Code. The Code generally provides
that a regulated investment company does not pay an entity level
income tax, provided that it distributes all or substantially
all of its income. Thus, the regulated investment company
taxation rules have no current application to us or to our
stockholders.
Federal
Income Taxation of Holders of Our Common Stock
Unlike a holder of a direct interest in MLPs, a stockholder will
not include its allocable share of our income, gains, losses or
deductions in computing its own taxable income. Our
distributions are treated as a taxable dividend to the
stockholder to the extent of our current or accumulated earnings
and profits. If the distribution exceeds our earnings and
profits, the distribution will be treated as a return of capital
to our common stockholder to the extent of the
stockholders basis in our common stock, and then as
capital gain. Common stockholders will receive a Form 1099
from us (rather than a
Schedule K-1
from each MLP if the stockholder had invested directly in the
MLPs) and will recognize dividend income only to the extent of
our current and accumulated earnings and profits.
Generally, a corporations earnings and profits are
computed based upon taxable income, with certain specified
adjustments. As explained above, based upon the historic
performance of the MLPs, we anticipate that the distributed cash
from an MLP will exceed our share of such MLPs income.
Thus, we anticipate that only a portion of distributions of cash
and other income from investments will be treated as dividend
income to our common stockholders. As a corporation for tax
purposes, our earnings and profits will be calculated using
(i) straight-line depreciation rather than accelerated
depreciation, and cost rather than a percentage depletion
method, and (ii) intangible drilling costs and exploration
and development costs are amortized over a five-year and
ten-year period, respectively. Because of the differences in the
manner in which earnings and profits and taxable income are
calculated, we may make distributions out of earnings and
profits, treated as dividends, in years in which we have no
taxable income. To the extent that distributions to a
stockholder exceed our earnings and profits, a
stockholders basis in our common stock will be reduced
and, if a stockholder has no further basis in our shares, a
stockholder will report any excess as capital gain.
The Jobs and Growth Tax Relief Reconciliation Act of 2003
amended the federal income tax law generally to reduce the
maximum federal income tax rate of qualified dividend income to
the rate applicable to long-term capital gains, which is
generally 15% for individuals, provided a holding period
requirement and certain other requirements are met. The portion
of our distributions of cash and other income from investments
treated as a dividend for federal
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income tax purposes should be treated as qualified dividend
income for federal income tax purposes if the stockholder
satisfies applicable holding period requirements for our common
stock. This reduced rate of tax on dividends is currently
scheduled to revert to ordinary income rates for taxable years
beginning after December 31, 2010 and the 15% federal
income tax rate for long-term capital gain is scheduled to
revert to 20% for such taxable years.
If a holder of our common stock participates in our automatic
dividend reinvestment plan, such stockholder will be taxed upon
the amount of distributions as if such amount had been received
by the participating stockholder and the participating
stockholder reinvested such amount in additional common stock.
Investment
by Tax-Exempt Investors and Regulated Investment
Companies
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
UBTI. Because we are a corporation for federal income tax
purposes, an owner of our common stock will not report on its
federal income tax return any of our items of income, gain, loss
and deduction. Therefore, a tax-exempt investor will not have
UBTI attributable to its ownership or sale of our common stock
unless its ownership of our common stock is debt-financed. In
general, common stock would be debt-financed if the tax-exempt
owner of common stock incurs debt to acquire common stock or
otherwise incurs or maintains a debt that would not have been
incurred or maintained if that common stock had not been
acquired.
As stated above, an owner of our common stock will not report on
its federal income tax return any of our items of income, gain,
loss and deduction. Instead, the owner will simply report income
with respect to our distributions or gain with respect to the
sale of our common stock. Thus, ownership of our common stock
will only result in income that is qualifying income for a
regulated investment company. Furthermore, any gain from the
sale or other disposition of our common stock will constitute
gain from the sale of stock or securities and will qualify for
purposes of the 90% income test applicable to regulated
investment companies. Finally, our common stock will constitute
qualifying assets to regulated investment companies, which
generally must own at least 50% in qualifying assets at the end
of each quarter.
Backup
Withholding and Information Reporting
Backup withholding of U.S. federal income tax may apply to
the distributions on our common stock to be made by us if you
fail to timely provide taxpayer identification numbers or if we
are so instructed by the Internal Revenue Service
(IRS). Any amounts withheld from a payment to a
U.S. holder under the backup withholding rules are
allowable as a refund or credit against the holders
U.S. federal income tax liability, provided that the
required information is furnished to the IRS in a timely manner.
Other
Taxation
Foreign stockholders, including stockholders who are nonresident
alien individuals, may be subject to U.S. withholding tax
on certain distributions at a rate of 30% or such lower rates as
may be prescribed by any applicable treaty.
Federal
Income Tax Treatment of Holders of Our Preferred Stock
Under present law, we are of the opinion that ARP Shares
constitute our equity, and thus distributions with respect to
ARP Shares (other than distributions in redemption of ARP Shares
subject to Section 302(b) of the Code) will generally
constitute dividends to the extent of our allocable current or
accumulated earnings and profits, as calculated for federal
income tax purposes. Such dividends generally will be taxable as
ordinary income to holders but are expected to be treated as
qualified dividend income that is generally subject
to reduced rates of federal income taxation for noncorporate
investors and may be eligible for the dividends received
deduction available to corporate stockholders under
Section 243 of the Code.
Qualified dividend income received by individual and other
noncorporate stockholders currently is taxed at long-term
capital gain rates of 15%. Qualified dividend income generally
includes dividends from domestic
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corporations and dividends from
non-U.S. corporations
that meet certain criteria. To be treated as qualified dividend
income, the stockholder must hold the shares paying otherwise
qualifying dividend income more than 60 days during the
121-day
period beginning 60 days before the ex-dividend date (or
more than 90 days during the
181-day
period beginning 90 days before the ex-dividend date in the
case of certain preferred stock dividends). This holding period
is tolled for periods during which the taxpayers risk of
loss with respect to the stock is diminished. Eligibility for
treatment as qualified dividend income may be affected by a
Holders securities lending transactions, short sales and
other similar transactions. The provisions of the Code
applicable to qualified dividend income are effective through
2010. Thereafter, higher tax rates will apply unless further
legislative action is taken.
Corporate holders should be aware that certain limitations apply
to the availability of the dividends received deduction,
including limitations on the aggregate amount of the deduction
that may be claimed and limitations based on the holding period
of the ARP Shares, which holding period may be reduced if the
holder engages in risk reduction transactions with respect to
its ARP Shares. Corporate holders should consult their own tax
advisors regarding the application of these limitations to their
particular situation.
If our distribution exceeds our current and accumulated earnings
and profits, the distribution will be treated as a non-taxable
adjustment to the basis of the preferred stock to the extent of
such basis, and then as capital gain to the extent of the excess
distribution. Such gain will be long-term capital gain if the
holding period for the preferred stock is more than one year.
Individuals are currently subject to a maximum tax rate of 15%
on long-term capital gains. This rate is currently scheduled to
increase to 20% for tax years beginning after December 31,
2010. Corporations are taxed on capital gains at their ordinary
graduated rates.
A corporations earnings and profits are generally
calculated by making certain adjustments to the
corporations reported taxable income. Based upon the
historic performance of similar MLPs, we anticipate that the
distributed cash from the MLPs in our portfolio will exceed our
earnings and profits. Thus, it is possible that only a portion
of our distributions will be treated as dividends to our
preferred stockholders for federal income tax purposes. We will
notify stockholders annually as to the federal income tax status
of our distributions to them.
Special rules apply to the calculation of earnings and profits
for corporations invested in energy ventures. Our earnings and
profits will be calculated using (1) straight-line
depreciation rather than a percentage depletion method and
(2) five-year and ten-year amortization of drilling costs
and exploration and development costs, respectively. Thus, these
deductions may be significantly lower for purposes of
calculating earnings and profits than they are for purposes of
calculating taxable income. Because of these differences, we may
make distributions out of earnings and profits, treated as
dividends, in years in which our distributions exceed our
taxable income.
Sale
of Our Preferred Stock
The sale of our preferred stock by holders will generally be a
taxable transaction for federal income tax purposes. Holders of
our preferred stock who sell such shares will generally
recognize gain or loss in an amount equal to the difference
between the net proceeds of the sale and their adjusted tax
basis in the shares sold. If such shares of preferred stock are
held as a capital asset at the time of the sale, the gain or
loss will generally be a capital gain or loss. Similarly, a
redemption by us (including a redemption resulting from our
liquidation), if any, of all our preferred stock actually and
constructively held by a stockholder generally will give rise to
capital gain or loss under Section 302(b) of the Code if
the stockholder does not own (and is not regarded under certain
tax law rules of constructive ownership as owning) any of our
common stock, and provided that the redemption proceeds do not
represent declared but unpaid dividends. Other redemptions may
also give rise to capital gain or loss, but certain conditions
imposed by Section 302(b) of the Code must be satisfied to
achieve such treatment, and Holders should consult their own tax
advisors regarding such conditions.
Capital gain or loss will generally be long-term capital gain or
loss if our preferred stock were held for more than one year and
will be short-term capital gain or loss if the disposed
preferred stock were held for one year or less. Net long-term
capital gain recognized by a noncorporate U.S. holder
generally will be subject to tax at a lower rate (currently a
maximum rate of 15%) than net short-term capital gain or
ordinary income (currently a maximum rate of 35%). Under current
law, the maximum tax rate on capital gain for noncorporate
holders is scheduled to increase to 20% for taxable years after
2010. For corporate holders, capital gain is generally taxed at
the same rate as
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ordinary income, that is, currently at a maximum rate of 35%. A
holders ability to deduct capital losses may be limited.
Backup
Withholding
We may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable distributions (including
redemption proceeds) payable to stockholders who fail to provide
us with their correct taxpayer identification number, who fail
to make required certifications or who have been notified by the
IRS that they are subject to backup withholding (or if we have
been so notified). Certain corporate and other stockholders
specified in the Code and the regulations thereunder are exempt
from backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the
stockholders U.S. federal income tax liability
provided the appropriate information is furnished to the IRS.
Other
Taxation
Foreign stockholders, including stockholders who are nonresident
alien individuals, may be subject to U.S. withholding tax
on certain distributions at a rate of 30% or such lower rates as
may be prescribed by any applicable treaty.
Federal
Income Taxation of Debt Securities
Federal
Income Tax Classification of Our Debt Securities
Under present law, we are of the opinion that our debt
securities constitute indebtedness of ours for federal income
tax purposes, which the below discussion assumes. We intend to
treat all payments made with respect to our debt securities
consistent with this characterization.
Taxation
of Interest on Our Debt Securities
Payments or accruals of interest on our debt securities will
generally be taxable to you as ordinary income at the time such
interest is received (actually or constructively) or accrued, in
accordance with your regular method of accounting for federal
income tax purposes.
Purchase,
Sale and Redemption of Our Debt Securities
Initially, your tax basis in our debt securities acquired will
generally be equal to your cost to acquire such debt securities.
This basis will increase by the amount, if any, that you are
required or elect to include in income under the rules governing
market discount, and will decrease by the amount of any
amortized premium on such debt securities, as discussed below.
When you sell or exchange any of our debt securities, or if any
of our debt securities are redeemed, you generally will
recognize gain or loss equal to the difference between the
amount you realize on the transaction (less any accrued and
unpaid interest, which will be subject to tax in the manner
described above under Taxation of Interest) and your
tax basis in our debt securities relinquished.
Except as discussed below with respect to market discount, the
gain or loss that you recognize on the sale, exchange or
redemption of any of our debt securities generally will be
capital gain or loss. Such gain or loss will generally be
long-term capital gain or loss if the disposed debt securities
were held for more than one year and will be short-term capital
gain or loss if held for one year or less. Net long-term capital
gain recognized by a noncorporate U.S. holder generally
will be subject to tax at a lower rate (currently a maximum rate
of 15%, although this rate will increase to 20% for taxable
years beginning after 2010) than net short-term capital
gain or ordinary income (currently a maximum rate of 35%). A
holders ability to deduct capital losses may be limited.
Amortizable
Premium
If you purchase our debt securities at a cost greater than the
stated principal amount, plus accrued interest, you will be
considered to have purchased our debt securities at a premium,
and you may generally elect to amortize this premium as an
offset to interest income, using a constant yield method, over
the remaining term of our debt securities. If you make the
election to amortize the premium, the election generally will
apply to all debt instruments
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that you hold at the time of the election, as well as any debt
instruments that you subsequently acquire. In addition, you may
not revoke the election without the consent of the IRS. If you
elect to amortize the premium, you will be required to reduce
your tax basis in our debt securities by the amount of the
premium amortized during your holding period. If you do not
elect to amortize premium, the amount of premium will be
included in your tax basis in our debt securities. Therefore, if
you do not elect to amortize the premium and you hold our debt
securities to maturity, you generally will be required to treat
the premium as a capital loss when our debt securities are
redeemed.
Market
Discount
If you purchase our debt securities at a price that reflects a
market discount, any principal payments on, or any
gain that you realize on the disposition of, our debt securities
generally will be treated as ordinary interest income to the
extent of the market discount that accrued on our debt
securities during the time you held such debt securities.
Market discount is defined under the Code as the
excess of the stated redemption price at maturity over the
purchase price of the note, except that if market discount is
less than 0.0025% of the stated redemption price at maturity,
multiplied by the number of complete years to maturity, the
market discount is considered to be zero. In addition, you may
be required to defer the deduction of all or a portion of any
interest paid on any indebtedness that you incurred or continued
to purchase or carry our debt securities that were acquired at a
market discount. In general, market discount will be treated as
accruing ratably over the term of our debt securities, or, at
your election, under a constant yield method.
You may elect to include market discount in gross income
currently as it accrues (on either a ratable or constant yield
basis), in lieu of treating a portion of any gain realized on a
sale of our debt securities as ordinary income. If you elect to
include market discount on a current basis, the interest
deduction deferral rule described above will not apply. If you
do make such an election, it will apply to all market discount
debt instruments that you acquire on or after the first day of
the first taxable year to which the election applies. This
election may not be revoked without the consent of the IRS.
Taxation
of
Non-U.S. Beneficial
Owners
If you are a non-resident alien individual or a foreign
corporation (a
non-U.S. holder),
the payment of interest on our debt securities generally will be
considered portfolio interest and thus will
generally be exempt from United States federal withholding tax.
This exemption will apply to you provided that (1) interest
paid on our debt securities is not effectively connected with
your conduct of a trade or business in the United States,
(2) you are not a bank whose receipt of interest on our
debt securities is described in Section 881(c)(3)(A) of the
Code, (3) you do not actually or constructively own
10 percent or more of the combined voting power of all
classes of our stock entitled to vote, (4) you are not a
controlled foreign corporation that is related, directly or
indirectly to us through stock ownership and (5) you
satisfy the certification requirements described below.
To satisfy the certification requirements, either (1) the
beneficial owner of any of our debt securities must certify,
under penalties of perjury, that such holder is a
non-U.S. person
and must provide such owners name, address and taxpayer
identification number, if any, on IRS
Form W-8BEN,
or (2) a securities clearing organization, bank or other
financial institution that holds customer securities in the
ordinary course of its trade or business and holds our debt
securities on behalf of the beneficial owner thereof must
certify, under penalties of perjury, that it has received a
valid and properly executed IRS
Form W-8BEN
from the beneficial holder and comply with certain other
requirements. Special certification rules apply for our debt
securities held by a foreign partnership and other
intermediaries.
Interest on our debt securities received by a
non-U.S. holder
which is not excluded from U.S. federal withholding tax
under the portfolio interest exemption as described above
generally will be subject to withholding at a 30% rate, except
where a
non-U.S. holder
can claim the benefits of an applicable tax treaty to reduce or
eliminate such withholding tax and such
non-U.S. holder
provides us with a properly executed IRS
Form W-8BEN
claiming such exemption or reduction.
Any capital gain that a
non-U.S. holder
realizes on a sale, exchange or other taxable disposition
(including a redemption) of our debt securities generally will
be exempt from United States federal income tax, including
withholding tax. This exemption will not apply to you if your
gain is effectively connected with your conduct of a
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trade or business in the U.S. or you are an individual
holder and are present in the U.S. for a period or periods
aggregating 183 days or more in the taxable year of the
disposition and either your gain is attributable to an office or
other fixed place of business that you maintain in the
U.S. or you have a tax home in the United States.
Investors are encouraged to consult their own tax advisers
regarding the specific tax consequences that may affect them.
Information
Reporting and Backup Withholding
In general, information reporting requirements will apply to
payments of principal, interest, and premium, if any, paid on
our debt securities and to the proceeds of the sale of our debt
securities (including redemption proceeds) paid to
U.S. holders other than certain exempt recipients (such as
corporations). Information reporting will generally apply to
interest payments on our debt securities to
non-U.S. holders
and the amount of tax, if any, withheld with respect to such
payments. Copies of the information returns reporting such
interest payments and any withholding may also be made available
to the tax authorities in the country in which the
non-U.S. holder
resides under the provisions of an applicable income tax treaty.
In addition, for
non-U.S. holders,
information reporting will apply to the proceeds of the sale of
our debt securities within the United States or conducted
through United States-related financial intermediaries unless
the certification requirements described above have been
complied with and the statement described above in
Taxation of
Non-U.S. Beneficial
Owners has been received (and the payor does not have
actual knowledge or reason to know that the beneficial owner is
a United States person) or the holder otherwise establishes an
exemption.
We may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable payments (including
redemption proceeds) payable to holders of our debt securities
who fail to provide us with their correct taxpayer
identification number, who fail to make required certifications
or who have been notified by the IRS that they are subject to
backup withholding (or if we have been so notified). Certain
corporate and other stockholders specified in the Code and the
regulations thereunder are exempt from backup withholding.
Backup withholding is not an additional tax. Any amounts
withheld may be credited against the holders
U.S. federal income tax liability provided the appropriate
information is furnished to the IRS. If you are a
non-U.S. holder,
you may have to comply with certification procedures to
establish your
non-U.S. status
in order to avoid backup withholding tax requirements. The
certification procedures required to claim the exemption from
withholding tax on interest income described above will satisfy
these requirements.
State and
Local Taxes
Our common and preferred stock dividends and interest payments
on our debt securities also may be subject to state and local
taxes. Tax matters are very complicated, and the federal, state
and local tax consequences of an investment in and holding of
our securities will depend on the facts of each investors
situation. Investors are encouraged to consult their own tax
advisers regarding the specific tax consequences that may affect
them.
Tax
Risks
Investing in our securities involves certain tax risks, which
are more fully described in the section Risk
Factors Tax Risks at page 22.
PLAN OF
DISTRIBUTION
We may sell up to $500,000,000 in aggregate initial offering
price of our common stock, preferred stock and debt securities
from time to time under this prospectus and any related
prospectus supplement in any one or more of the following ways:
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directly to one or more purchasers;
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through agents for the period of their appointment;
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to underwriters as principals for resale to the public;
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to dealers as principals for resale to the public; or
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pursuant to our Dividend Reinvestment Plan.
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The securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the
time of sale, prices related to prevailing market prices, at
varying prices determined at the time of sale or at negotiated
prices. Each prospectus supplement will describe the method of
distribution of the securities offered therein.
Each prospectus supplement relating to an offering of securities
will state the terms of the offering, including:
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the names of any agents, underwriters or dealers;
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any sales loads, underwriting discounts and commissions or
agency fees and other items constituting underwriters or
agents compensation;
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any discounts, commissions, fees or concessions allowed or
reallowed or paid to dealers or agents;
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the public offering or purchase price of the offered securities
and the estimated net proceeds we will receive from the
sale; and
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any securities exchange on which the offered securities may be
listed.
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Any public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time
to time.
Direct
Sales
We may sell our common stock, preferred stock and debt
securities directly to, and solicit offers from, purchasers,
including institutional investors or others who may be deemed to
be underwriters as defined in the Securities Act, for any
resales of the securities. In this case, no underwriters or
agents would be involved. We may use electronic media, including
the Internet, to sell offered securities directly. We will
describe the terms of any of those sales in a prospectus
supplement.
Distribution
Through Agents
We may offer and sell our common stock, preferred stock and debt
securities on a continuous basis through agents that we
designate. We will name any agent involved in the offer and sale
and describe any commissions payable by us in the prospectus
supplement. Unless otherwise indicated in the prospectus
supplement, the agents will be acting on a best efforts basis
for the period of their appointment.
Offers to purchase securities may be solicited directly by the
issuer or by agents designated by the issuer from time to time.
Any such agent, who may be deemed to be an underwriter as the
term is defined in the Securities Act, involved in the offer or
sale of the offered securities in respect of which this
prospectus is delivered will be named, and any commissions
payable by the issuer to such agent set forth, in a prospectus
supplement.
Distribution
Through Underwriters
We may offer and sell securities from time to time to one or
more underwriters who would purchase the securities as principal
for resale to the public either on a firm commitment or best
efforts basis. If we sell securities to underwriters, we will
execute an underwriting agreement with them at the time of the
sale and will name them in the prospectus supplement. In
connection with these sales, the underwriters may be deemed to
have received compensation from us in the form of underwriting
discounts and commissions. The underwriters also may receive
commissions from purchasers of securities for whom they may act
as agent. Unless otherwise stated in the prospectus supplement,
the underwriters will not be obligated to purchase the
securities unless the conditions set forth in the underwriting
agreement are satisfied, and if the underwriters purchase any of
the securities, they will be required to purchase all of the
offered securities. In the event of default by any underwriter,
in certain circumstances, the purchase commitments may be
increased or the Underwriting Agreement may be terminated. The
underwriters may sell the offered securities to or through
dealers, and those dealers may receive discounts, concessions or
62
commissions from the underwriters as well as from the purchasers
for whom they may act as agent. Sales of the offered securities
by underwriters may be in one or more transactions, including
negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The prospectus
supplement describes the method of reoffering by the
underwriters. The prospectus supplement also describes the
discounts and commissions to be allowed or paid to the
underwriters, if any, all other items constituting underwriting
compensation, and the discounts and commissions to be allowed or
paid to dealers, if any. If a prospectus supplement so
indicates, we may grant the underwriters an option to purchase
additional shares of common stock at the public offering price,
less the underwriting discounts and commissions, within a
specified number of days from the date of the prospectus
supplement, to cover any overallotments.
Distribution
Through Dealers
We may offer and sell securities from time to time to one or
more dealers who would purchase the securities as principal. The
dealers then may resell the offered securities to the public at
fixed or varying prices to be determined by those dealers at the
time of resale. We will set forth the names of the dealers and
the terms of the transaction in the prospectus supplement.
Distribution
Through Remarketing Firms
One or more dealers, referred to as remarketing
firms, may also offer or sell the securities, if the
prospectus supplement so indicates, in connection with a
remarketing arrangement contemplated by the terms of the
securities. Remarketing firms will act as principals for their
own account or as agents. These remarketing firms will offer or
sell the securities in accordance with the terms of the
securities. The prospectus supplement will identify any
remarketing firm and the terms of its agreement, if any, with us
and will describe the remarketing firms compensation.
Remarketing firms may be deemed to be underwriters in connection
with the securities they remarket.
General
Information
Agents, underwriters, or dealers participating in an offering of
securities and remarketing firms participating in a remarketing
of securities may be deemed to be underwriters, and any
discounts and commission received by them and any profit
realized by them on resale of the offered securities for whom
they may act as agent, may be deemed to be underwriting
discounts and commissions under the Securities Act.
We may offer to sell securities either at a fixed price or at
prices that may vary, at market prices prevailing at the time of
sale, at prices related to prevailing market prices, or at
negotiated prices.
If indicated in the applicable prospectus supplement, we may
authorize underwriters or other persons acting as our agents to
solicit offers by certain institutions to purchase securities
from us pursuant to contracts providing for payment and delivery
on a future date. Institutions with which these contracts may be
made include: commercial and savings banks, insurance companies,
pension funds, educational and charitable institutions and
others, but in all cases these institutions must be approved by
us. The obligations of any purchaser under any contract will be
subject only to those conditions described in the applicable
prospectus supplement. The underwriters and the other agents
will not have any responsibility for the validity or performance
of the contracts. The applicable prospectus supplement will
describe the commission payable for solicitation of those
contracts.
We may enter into derivative transactions with third parties, or
sell securities not covered by this prospectus to third parties
in privately negotiated transactions. If the applicable
prospectus supplement indicates, in connection with those
derivatives, the third parties may sell securities covered by
this prospectus and the applicable prospectus supplement,
including in short sale transactions. If so, the third parties
may use securities pledged by us or borrowed from us or others
to settle those sales or to close out any related open
borrowings of stock, and may use securities received from us in
settlement of those derivatives to close out any related open
borrowings of stock. The third parties in such sale transactions
will be underwriters and will be identified in the applicable
prospectus supplement (or a post-effective amendment).
63
We may loan or pledge securities to a financial institution or
other third party that in turn may sell the securities using
this prospectus. Such financial institution or third party may
transfer its short position to investors in our securities or in
connection with a simultaneous offering of other securities
offered by this prospectus.
In connection with any offering of the securities in an
underwritten transaction, the underwriters may engage in
transactions that stabilize, maintain, or otherwise affect the
market price of the offered securities or any other securities.
Those transactions may include overallotment, entering
stabilizing bids, effecting syndicate covering transactions, and
reclaiming selling concessions allowed to an underwriter or a
dealer.
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An overallotment in connection with an offering creates a short
position in the offered securities for the underwriters
own account.
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An underwriter may place a stabilizing bid to purchase an
offered security for the purpose of pegging, fixing, or
maintaining the price of that security.
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Underwriters may engage in syndicate covering transactions to
cover overallotments or to stabilize the price of the offered
securities by bidding for, and purchasing, the offered
securities or any other securities in the open market in order
to reduce a short position created in connection with the
offering.
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The managing underwriter may impose a penalty bid on a syndicate
member to reclaim a selling concession in connection with an
offering when offered securities originally sold by the
syndicate member are purchased in syndicate covering
transactions or otherwise.
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Any of these activities may stabilize or maintain the market
price of the securities above independent market levels. The
underwriters are not required to engage in these activities, and
may end any of these activities at any time.
We will not require underwriters or dealers to make a market in
the securities. Any underwriters to whom the offered securities
are sold for offering and sale may make a market in the offered
securities, but the underwriters will not be obligated to do so
and may discontinue any market-making at any time without
notice. The offered securities may or may not be listed on a
securities exchange. Unless we indicate otherwise in the
applicable prospectus supplement, we do not expect to list the
securities on a securities exchange, except for the common
stock, which is listed on the NYSE under the symbol
KYN. We cannot assure you that there will be a
liquid trading market for the offered securities.
Under agreements entered into with us, underwriters and agents
may be entitled to indemnification by us against certain civil
liabilities, including liabilities under the Securities Act, or
to contribution for payments the underwriters or agents may be
required to make. The underwriters, agents, and their affiliates
may engage in financial or other business transactions with us
and our subsidiaries, if any, in the ordinary course of business.
In compliance with the guidelines of the National Association of
Securities Dealers, Inc., the maximum commission or discount to
be received by any member of the National Association of
Securities Dealers, Inc. or independent broker-dealer will not
be greater than eight percent of the initial gross proceeds from
the sale of any security being sold.
The aggregate offering price specified on the cover of this
prospectus relates to the offering of the securities not yet
issued as of the date of this prospectus. The place and time of
delivery for the offered securities in respect of which this
prospectus is delivered are set forth in the accompanying
prospectus supplement.
To the extent permitted under the 1940 Act and the rules and
regulations promulgated thereunder, the underwriters may from
time to time act as a broker or dealer and receive fees in
connection with the execution of our portfolio transactions
after the underwriters have ceased to be underwriters and,
subject to certain restrictions, each may act as a broker while
it is an underwriter.
A prospectus and accompanying prospectus supplement in
electronic form may be made available on the websites maintained
by the underwriters. The underwriters may agree to allocate a
number of securities for sale to their online brokerage account
holders. Such allocations of securities for internet
distributions will be made on the same basis as other
allocations. In addition, securities may be sold by the
underwriters to securities dealers who resell securities to
online brokerage account holders.
64
Automatic
Dividend Reinvestment Plan
We may issue and sell shares of common stock pursuant to our
Automatic Dividend Reinvestment Plan.
RATING
AGENCY GUIDELINES
Senior Notes are currently rated Aaa and
AAA and ARP Shares are currently rated
Aa and AA by Moodys and Fitch,
respectively. Moodys and Fitch, and any other agency that
may rate our debt securities or preferred stock from time to
time, are collectively referred to as the Rating
Agencies. The Rating Agencies impose asset coverage
requirements, which are briefly described below. The asset
coverage requirements are set forth in more detail in each
Rating Agencys guidelines (Rating Agency
Guidelines), a copy of which will be provided to any
holder of senior securities promptly upon request. These
requirements may limit our ability to engage in certain types of
transactions and may limit our ability to take certain actions
without confirming that such actions will not impair the ratings.
We may, but are not required to, adopt any modifications to the
guidelines that may hereafter be established by any Rating
Agency. Failure to adopt any modifications, however, may result
in a change in the ratings described above or a withdrawal of
ratings altogether. In addition, any Rating Agency may, at any
time, change or withdraw any rating. The Board of Directors may,
without stockholder approval, modify, alter or repeal certain of
the definitions and related provisions which we may have adopted
pursuant to a Rating Agencys guidelines (as they may be
amended from time to time, Rating Agency Guidelines)
only in the event we receive written confirmation from the
Rating Agency that any amendment, alteration or repeal would not
impair the ratings then assigned to the senior securities.
We are required to satisfy two separate asset maintenance
requirements with respect to outstanding debt securities and
with respect to outstanding preferred stock: (1) we must
maintain assets in our portfolio that have a value, discounted
in accordance with set forth by each Rating Agency, at least
equal to amounts specified in Rating Agency Guidelines with
respect to our senior securities (the Basic Maintenance
Amount); and (2) we must satisfy the 1940 Act asset
coverage requirements.
Basic
Maintenance Amounts
We must maintain, as of each valuation date on which senior
securities are outstanding, eligible assets having an aggregate
discounted value at least equal to the applicable Basic
Maintenance Amount, which is calculated separately for debt
securities and preferred stock for each Rating Agency that is
then rating the senior securities and so requires. If we fail to
maintain eligible assets having an aggregated discounted value
at least equal to the applicable Basic Maintenance Amount as of
any valuation date and such failure is not cured by the
applicable related asset coverage cured date, we will be
required in certain circumstances to redeem certain of the
senior securities. The prospectus supplement describes the terms
of any such required redemption.
The applicable Basic Maintenance Amount is defined in the Rating
Agencies Guidelines. Each Rating Agency may amend the
definition of the applicable Basic Maintenance Amount from time
to time. The market value of our portfolio securities (used in
calculating the discounted value of eligible assets) is
calculated using readily available market quotations when
appropriate, and in any event, consistent with our valuation
procedures. For the purpose of calculating the applicable Basic
Maintenance Amount, portfolio securities are valued in the same
manner as we calculate our net asset value. See Net Asset
Value.
Each Rating Agencys discount factors, the criteria used to
determine whether the assets held in our portfolio are eligible
assets, and the guidelines for determining the discounted value
of our portfolio holdings for purposes of determining compliance
with the applicable Basic Maintenance Amount are based on Rating
Agency Guidelines established in connection with rating the
senior securities. The discount factor relating to any asset,
the applicable Basic Maintenance Amount requirement, the assets
eligible for inclusion in the calculation of the discounted
value of our portfolio and certain definitions and methods of
calculation relating thereto may be changed from time to time by
the applicable Rating Agency, without our approval, or the
approval of our Board of Directors or stockholders.
65
A Rating Agencys Guidelines will apply to us only so long
as that Rating Agency is rating such senior securities. We will
pay certain fees to Moodys, Fitch and any other Rating
Agency that may provide a rating for the senior securities. The
ratings assigned to the senior securities are not
recommendations to buy, sell or hold the senior securities. Such
ratings may be revised or withdrawn by the assigning Rating
Agency at any time.
1940 Act
Asset Coverage
We are also required to maintain, with respect to senior
securities, as of the last business day on any month in which
any senior securities are outstanding, asset coverage of at
least 300% for debt securities and 200% for preferred stock (or
such other percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior
securities representing shares of a closed-end investment
company as a condition of declaring dividends on its common
stock). If we fail to maintain the applicable 1940 Act asset
coverage as of the last business day of any month and such
failure is not cured as of the last business day of the
following month, we will be required to redeem certain senior
securities.
Notices
Under the current Rating Agency Guidelines, in certain other
circumstances, we are required to deliver to any Rating Agencies
then rating the senior securities (1) a certificate with
respect to the calculation of the applicable Basic Maintenance
Amount; (2) a certificate with respect to the calculation
of the 1940 Act asset coverage and the value of our portfolio
holdings; and (3) a letter prepared by our independent
accountants regarding the accuracy of such calculations.
Notwithstanding anything herein to the contrary, the Rating
Agency Guidelines, as they may be amended from time to time by
each Rating Agency will be reflected in a written document and
may be amended by each Rating Agency without our vote, consent
or approval, and without the approval of our Board of Directors
or any of our stockholders.
A copy of the current Rating Agency Guidelines will be provided
to any holder of senior securities promptly upon request made by
such holder by writing to us at 1800 Avenue of the Stars, Second
Floor, Los Angeles, CA 90067.
66
TRANSFER
AGENT AND DIVIDEND-PAYING AGENT
American Stock Transfer & Trust Company
(AST) acts as our transfer agent and dividend-paying
agent. Please send all correspondence to American Stock
Transfer & Trust Company, which is located at 59
Maiden Lane, New York, New York 10038. For its services, AST
receives a fixed fee per account. We will reimburse AST for
certain
out-of-pocket
expenses, which may include payments by AST to entities,
including affiliated entities, that provide
sub-stockholder
services, recordkeeping
and/or
transfer agency services to our beneficial owners. The amount of
reimbursements for these services per benefit plan participant
fund account per year will not exceed the per account fee
payable by us to AST in connection with maintaining common
stockholder accounts.
ADMINISTRATOR,
CUSTODIAN AND FUND ACCOUNTANT
Bear Stearns Funds Management Inc. (Administrator)
provides certain administrative services for us, including but
not limited to preparing and maintaining books, records, and tax
and financial reports, and monitoring compliance with regulatory
requirements. The Administrator is located at 383 Madison
Avenue, 23rd Floor, New York, New York 10179.
The Custodial Trust Company, 101 Carnegie Center, Princeton, New
Jersey
08540-6231,
an affiliate of our Administrator, is the custodian of our
securities and other assets.
Ultimus Fund Solutions, LLC (Ultimus), 225
Pictoria Drive, Suite 450, Cincinnati, Ohio 45246, is our
fund accountant. Ultimus assists in the calculation of our net
asset value and maintains and keeps current the accounts, books,
records and other documents relating to our financial and
portfolio transactions.
LEGAL
OPINIONS
Certain legal matters in connection with the securities offered
hereby will be passed upon for us by Paul, Hastings,
Janofsky & Walker LLP (Paul Hastings), Los
Angeles, California. Paul Hastings may rely as to certain
matters of Maryland law on the opinion of Venable LLP,
Baltimore, Maryland. If certain legal matters in connection with
an offering of securities are passed upon by counsel for the
underwriters of such offering, that counsel will be named in the
prospectus supplement related to that offering.
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TABLE OF
CONTENTS OF OUR STATEMENT OF ADDITIONAL INFORMATION
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FINANCIAL STATEMENTS AND REPORT OF
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APPENDIX A SUMMARY OF
CERTAIN PROVISIONS OF THE INDENTURE
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APPENDIX B
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APPENDIX C DESCRIPTION
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$185,000,000
Auction Rate Senior Notes
$185,000,000 Series F, due July 9, 2047
PROSPECTUS SUPPLEMENT
June 22, 2007
Merrill Lynch &
Co.
Stifel Nicolaus
KAYNE ANDERSON MLP INVESTMENT COMPANY
STATEMENT OF ADDITIONAL INFORMATION
Kayne Anderson MLP Investment Company (referred to herein as we, our, us, or the
Company), a Maryland corporation, is a non-diversified closed-end management investment company.
KA Fund Advisors, LLC (referred to herein as Kayne Anderson or Adviser) is our investment
adviser.
This statement of additional information relates to the offering, from time to time, of up to
$500,000,000 aggregate initial offering price of our common stock, preferred stock and debt
securities in one or more offerings. This statement of additional information does not constitute
a prospectus, but should be read in conjunction with our prospectus relating thereto dated
April 16, 2007 and any related prospectus supplement. This statement of additional information
does not include all information that a prospective investor should consider before purchasing any
of our securities. Investors should obtain and read our prospectus and any related prospectus
supplement prior to purchasing any of our securities. A copy of our prospectus and any related
prospectus supplement may be obtained from us without charge by calling (877) 657-3863/MLP-FUND or
on the SECs web site (http://www.sec.gov). Capitalized terms used but not defined in this
statement of additional information have the meanings ascribed to them in the prospectus and any
related prospectus supplement.
This
statement of additional information is dated April 16, 2007.
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INVESTMENT OBJECTIVE
Our investment objective is to obtain a high after-tax total return by investing at least 85%
of our total assets in public and private investments in energy-related master limited
partnerships, limited liability companies and their affiliates (collectively, MLPs), and in other
companies that, as their principal business, operate assets used in the gathering, transporting,
processing, storing, refining, distributing, mining or marketing natural gas, natural gas liquids
(including propane), crude oil, refined petroleum products or coal (collectively with MLPs,
Midstream Energy Companies). There can be no assurance that we will achieve our investment
objective. Midstream energy assets refers to assets used in the gathering, transporting,
processing, storing, refining, distributing, mining or marketing natural gas, natural gas liquids
(including propane), crude oil, refined petroleum products or coal.
Our investment objective is considered fundamental and may not be changed without the approval
of the holders of a majority of our voting securities. When used with respect to our particular
voting securities, a majority of the outstanding voting securities means (i) 67% or more of the
outstanding voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities, whichever is less.
INVESTMENT POLICIES
Except as described below, we, as a fundamental policy, may not, without the approval of the
holders of a majority of the outstanding voting securities:
(1) Purchase or sell real estate unless acquired as a result of ownership of securities or
other instruments and provided that this restriction does not prevent us from investing in
issuers which invest, deal, or otherwise engage in transactions in real estate or interests
therein, or investing in securities that are secured by real estate or interests therein.
(2) Purchase or sell commodities as defined in the Commodity Exchange Act, as amended, and
the rules and regulations thereunder, unless acquired as a result of ownership of securities or
other instruments and provided that this restriction does not prevent us from engaging in
transactions involving futures contracts and options thereon or investing in securities that are
secured by physical commodities.
(3) Borrow money or issue senior securities, except to the extent permitted by the
Investment Company Act of 1940 (the 1940 Act), or any rules, exemptions or interpretations
thereunder that may be adopted, granted or issued by the SEC. See Use of Financial Leverage and
Risk Factors Leverage Risk in the prospectus.
(4) Make loans to other persons except (a) through the lending of our portfolio securities,
(b) through the purchase of debt obligations, loan participations and/or engaging in direct
corporate loans in accordance with our investment objectives and policies, and (c) to the extent
the entry into a repurchase agreement is deemed to be a loan. We may also make loans to other
investment companies to the extent permitted by the 1940 Act or any exemptions therefrom which
may be granted by the SEC.
(5) Act as an underwriter except to the extent that, in connection with the disposition of
portfolio securities, we may be deemed to be an underwriter under applicable securities laws.
(6) Concentrate our investments in a particular industry, as that term is used in the 1940
Act and as interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time; provided, however, that this concentration limitation does not
apply to (a) our investments in MLPs and other Midstream Energy Companies, which will be
concentrated in the midstream energy industry in particular, and the energy industry in general,
and (b) our investments in securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities.
The remainder of our investment policies, including our investment strategy, are considered
non-fundamental and may be changed by the Board of Directors without the approval of the holders of
a majority of our voting securities, provided that our securities holders receive at least 60 days
prior written notice of any change. We have adopted the following non-fundamental investment
policies:
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For as long as the word MLP is in our name, it shall be our policy,
under normal market conditions, to invest at least 80% of our total
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We intend to invest at least 50% of
our total assets in publicly traded securities of MLPs and other
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We may invest up to 50% of our total assets in unregistered or otherwise
restricted securities of MLPs and other Midstream Energy Companies.
The types of unregistered or otherwise restricted securities that we
may purchase include common units, subordinated units, preferred
units, and convertible units of, and general partner interests in,
MLPs, and securities of other public and private Midstream Energy
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We may invest up to 20% of our total assets in debt securities of MLPs
and other Midstream Energy Companies, including below investment grade
debt securities rated, at the time of investment, at least B3 by
Moodys Investors Service, Inc., B- by Standard & Poors or Fitch
Ratings, comparably rated by another rating agency or, if unrated,
determined by Kayne Anderson to be of comparable quality. In addition,
up to one-quarter of our permitted investments in debt securities (or
up to 5% of our total assets) may include unrated debt securities of
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in short sales to hedge against interest rate, market and issuer
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Unless otherwise stated, all investment restrictions apply at the time of purchase and we will
not be required to reduce a position due solely to market value fluctuations.
For purposes of the temporary investment positions that we take (see Investment Objective and
Policies Our Portfolio Temporary Defensive Position in our prospectus), and in general (unless
otherwise noted), cash and cash equivalents are defined to include, without limitation, the
following:
(1) U.S. Government securities, which are obligations of, or securities guaranteed by, the
U.S. Government, its agencies or instrumentalities.
(2) Certificates of Deposit issued against funds deposited in a bank or a savings and loan
association. Such certificates are for a definite period of time, earn a specified rate of
return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the
amount deposited plus interest to the bearer of the certificate on the date specified thereon.
Under current FDIC regulations, the maximum insurance payable as to any one certificate of
deposit is $100,000, therefore, certificates of deposit we purchased may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt securities. At the time we
purchase securities pursuant to a repurchase agreement, we simultaneously agree to resell and
redeliver such securities to the seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures us a predetermined yield during the holding
period, since the resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for us to invest temporarily
available cash.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including
variable rate master demand notes issued by corporations to finance their current operations.
Master demand notes are direct lending arrangements between us and a corporation. There is no
secondary market for such notes. However, they are redeemable by us at any time. The Adviser will
consider the financial condition of the corporation (e.g., earning power, cash flow, and other
liquidity measures) and will
S-2
continuously monitor the corporations ability to meet all its financial obligations,
because our liquidity might be impaired if the corporation were unable to pay principal and
interest on demand. To be characterized by us as cash or cash equivalents, investments in
commercial paper will be limited to commercial paper rated in the highest categories by a rating
agency and which mature within one year of the date of purchase or carry a variable or floating
rate of interest.
(5) Bankers acceptances, which are short-term credit instruments used to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an
importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then
accepted by a bank that, in effect, unconditionally guarantees to pay the face value of the
instrument on its maturity date. The acceptance may then be held by the accepting bank as an
asset or it may be sold in the secondary market at the going rate of interest for a specific
maturity.
(6) Bank time deposits, which are monies kept on deposit with banks or savings and loan
associations for a stated period of time at a fixed rate of interest. There may be penalties for
the early withdrawal of such time deposits, in which case the yields of these investments will be
reduced.
(7) Shares of money market funds in accordance with the applicable provisions of the 1940
Act.
OUR INVESTMENTS
Some Midstream Energy Companies operate as public utilities or local distribution
companies, and are therefore subject to rate regulation by state or federal utility commissions.
However, Midstream Energy Companies may be subject to greater competitive factors than utility
companies, including competitive pricing in the absence of regulated tariff rates, which could
cause a reduction in revenue and which could adversely affect profitability. Most MLPs and other
Midstream Energy Companies with pipeline assets are subjected to government regulation concerning
the construction, pricing and operation of pipelines. In many cases, the rates and tariffs charged
by these pipelines are monitored by the Federal Energy Regulatory Commission (FERC) or various
state regulatory agencies.
MLPs and other Midstream Energy Companies typically achieve distribution growth by internal
and external means. MLPs achieve growth internally by experiencing higher commodity volume driven
by the economy and population, and through the expansion of existing operations, including
increasing the use of underutilized capacity, pursuing projects that can leverage and gain
synergies with existing operations and pursuing so called greenfield projects, which involve
building and operating facilities on undeveloped land that is generally cheaper and more flexible
in its use than developed urban properties. External growth is achieved by making accretive
acquisitions.
MLPs and other Midstream Energy Companies operating interstate pipelines and storage
facilities are subject to substantial regulation by the FERC, which regulates interstate
transportation rates, services and other matters regarding natural gas pipelines including: the
establishment of rates for service; regulation of pipeline storage and liquified natural gas
facility construction; issuing certificates of need for companies intending to provide energy
services or constructing and operating interstate pipeline and storage facilities; and certain
other matters. FERC also regulates the interstate transportation of crude oil, including:
regulation of rates and practices of oil pipeline companies; establishing equal service conditions
to provide shippers with equal access to pipeline transportation; and establishment of reasonable
rates for transporting petroleum and petroleum products by pipeline.
MLPs and other Midstream Energy Companies may be subject to liability relating to the release
of substances into the environment, including liability under federal Superfund and similar state
laws for investigation and remediation of releases and threatened releases of hazardous materials,
as well as liability for injury and property damage for accidental events, such as explosions or
discharges of materials causing personal injury and damage to property. Such potential liabilities
could have a material adverse effect upon the financial condition and results of operations of
MLPs.
MLPs and other Midstream Energy Companies are subject to numerous business related risks,
including: deterioration of business fundamentals reducing profitability due to development of
alternative energy sources, changing demographics in the markets served, unexpectedly prolonged and
precipitous changes in commodity prices and increased competition which takes market share; the
lack of
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growth of markets requiring growth through acquisitions; disruptions in transportation
systems; the dependence of certain MLPs upon the energy exploration and development activities of
unrelated third parties; availability of capital for expansion and construction of needed
facilities; a significant decrease in natural gas production due to depressed commodity prices or
otherwise; the inability of MLPs to successfully integrate recent or future acquisitions; and the
general level of the economy.
Additional Information About MLPs
An MLP is structured as a limited partnership, the interests in which (known as units) are
traded on securities exchanges or over-the-counter. Organization as a partnership eliminates tax at
the entity level.
An MLP has one or more general partners (who may be individuals, corporations, or other
partnerships) which manage the partnership, and limited partners, which provide capital to the
partnership but have no role in its management. Typically, the general partner is owned by company
management or another publicly traded sponsoring corporation. When an investor buys units in a MLP,
the investor becomes a limited partner.
MLPs are formed in several ways. A nontraded partnership may decide to offer its securities to
the public. Several nontraded partnerships may roll up into a single MLP. A corporation may
spin-off a group of assets or part of its business into a MLP of which it is the general partner in
order to realize the assets full value on the marketplace by selling the assets and use the cash
proceeds received from the MLP to address debt obligations or to invest in higher growth
opportunities, while retaining control of the MLP. A corporation may fully convert to a MLP,
although since 1986 the tax consequences have made this an unappealing option for most
corporations. Also, a newly formed company may operate as a MLP from its inception.
The sponsor or general partner of MLPs, Midstream Energy Companies, and utilities may sell
assets to MLPs in order to generate cash to fund expansion projects or repay debt. The MLP
structure essentially transfers cash flows generated from these acquired assets directly to MLP
limited partner unit holders.
In the case of an MLP buying assets from its sponsor or general partner the transaction is
intended to be based upon comparable terms in the acquisition market for similar assets. To help
insure that appropriate protections are in place, the board of the MLP generally creates an
independent committee to review and approve the terms of the transaction. The committee often
obtains a fairness opinion and can retain counsel or other experts to assist its evaluation. Since
both parties normally have a significant equity stake in the MLP, both parties generally have an
incentive to see that the transaction is accretive and fair to the MLP.
As a motivation for the general partner to successfully manage the MLP and increase cash
flows, the terms of MLPs typically provide that the general partner receives a larger portion of
the net income as distributions reach higher target levels. As cash flow grows, the general partner
receives a greater interest in the incremental income compared to the interest of limited partners.
Although the percentages vary among MLPs, the general partners marginal interest in distributions
generally increases from 2% to 15% at the first designated distribution target level moving up to
25% and ultimately 50% as pre-established distribution per unit thresholds are met. Nevertheless,
the aggregate amount distributed to limited partners will increase as MLP distributions reach
higher target levels. Given this incentive structure, the general partner has an incentive to
streamline operations and undertake acquisitions and growth projects in order to increase
distributions to all partners.
Because the MLP itself does not pay tax, its income or loss is allocated to its investors,
irrespective of whether the investors receive any cash payment from the MLP. An MLP typically makes
quarterly cash distributions. Although they resemble corporate dividends, MLP distributions are
treated differently for tax purposes. The MLP distribution is treated as a return of capital to the
extent of the investors basis in his MLP interest and, to the extent the distribution exceeds the
investors basis in the MLP, capital gain. The investors original basis is the price paid for the
units. The basis is adjusted downwards with each distribution and allocation of deductions (such as
depreciation) and losses, and upwards with each allocation of taxable income.
When the units are sold, the differences between the sales price and the investors adjusted
basis equals taxable gain. The limited partner will not be taxed on distributions until (1) the
limited partner sells the MLP units and pays tax on the gain, which gain is increased due to the
basis decrease due to prior distributions; or (2) the limited partners basis reaches zero.
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For a further discussion and a description of MLP-related tax matters, see Tax Matters.
Below Investment Grade and Unrated Debt Securities
The below investment grade debt securities in which we may invest are rated from B3 to Ba1 by
Moodys Investors Service, Inc., from B- to BB+ by Standard & Poors or Fitch Ratings, comparably
rated by another rating agency or, if unrated, determined by Kayne Anderson to be of comparable
quality.
Investment in below investment grade and unrated debt securities involves substantial risk of
loss. Below investment grade debt securities or comparable unrated securities are commonly referred
to as junk bonds and are considered predominantly speculative with respect to the issuers
ability to pay interest and principal and are susceptible to default or decline in market value due
to adverse economic and business developments. The market values for high yield securities tend to
be very volatile, and these securities are less liquid than investment grade debt securities. For
these reasons, to the extent we invest in below investment grade and unrated debt securities, an
investment us is subject to the following specific risks: increased price sensitivity to changing
interest rates and to a deteriorating economic environment; greater risk of loss due to default or
declining credit quality; adverse company specific events are more likely to render the issuer
unable to make interest and/or principal payments; and if a negative perception of the below
investment grade debt market develops, the price and liquidity of below investment grade debt
securities may be depressed. This negative perception could last for a significant period of time.
Adverse changes in economic conditions are more likely to lead to a weakened capacity of a
below investment grade or unrated debt issuer to make principal payments and interest payments than
an investment grade issuer. The principal amount of below investment grade or unrated debt
securities outstanding has proliferated in the past decade as an increasing number of issuers have
used below investment grade or unrated debt securities for corporate financing. An economic
downturn could severely affect the ability of highly leveraged issuers to service their debt
obligations or to repay their obligations upon maturity. Similarly, downturns in profitability in
specific industries, such as the Midstream Energy Company industry, could adversely affect the
ability of below investment grade or unrated debt issuers in that industry to meet their
obligations. The market values of lower quality debt securities tend to reflect individual
developments of the issuer to a greater extent than do higher quality securities, which react
primarily to fluctuations in the general level of interest rates. Factors having an adverse impact
on the market value of lower quality securities may have an adverse effect on our net asset value
and the market value of our common stock. In addition, we may incur additional expenses to the
extent we are required to seek recovery upon a default in payment or principal or interest on our
portfolio holdings. In certain circumstances, we may be required to foreclose on an issuers assets
and take possession of its property or operations. In such circumstances, we would incur additional
costs in disposing of such assets and potential liabilities from operating any business acquired.
The secondary market for below investment grade and unrated debt securities may not be as
liquid as the secondary market for investment grade debt securities, a factor which may have an
adverse effect on our ability to dispose of a particular security when necessary to meet our
liquidity needs. There are fewer dealers in the market for below investment grade and unrated debt
securities than investment grade obligations. The prices quoted by different dealers may vary
significantly and the spread between the bid and asked price is generally much larger than higher
quality instruments. Under adverse market or economic conditions, the secondary market for below
investment grade and unrated debt securities could contract further, independent of any specific
adverse changes in the conditions of a particular issuer, and these instruments may become
illiquid. As a result, we could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely traded.
We will not invest in distressed, below investment grade securities (those that are in default
or the issuers of which are in bankruptcy). If a debt security becomes distressed while in our
possession, we may be required to bear certain extraordinary expenses in order to protect and
recover our investment if it is recoverable at all.
See Appendix B to this statement of additional information for a description of the ratings
used by Moodys Investors Service, Inc., Fitch Ratings and Standard & Poors.
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Thinly-Traded Securities
We may also invest in securities that may not be restricted, but are thinly-traded. Although
common units of MLPs and common stock of energy companies trade on the New York Stock Exchange
(NYSE), the American Stock Exchange (AMEX), the NASDAQ Stock Market (NASDAQ) or other
securities exchanges or markets, such securities may trade less than those of larger companies due
to their relatively smaller capitalizations. Such securities may be difficult to dispose of at a
fair price during times when we believe it is desirable to do so. Thinly-traded securities are also
more difficult to value and the Advisers judgment as to value will often be given greater weight
than market quotations, if any exist. If market quotations are not available, thinly-traded
securities will be valued in accordance with procedures established by the Board of Directors.
Investment of our capital in thinly-traded securities may restrict our ability to take advantage of
market opportunities. The risks associated with thinly-traded securities may be particularly acute
in situations in which our operations require cash and could result in borrowing to meet our
short-term needs or incurring losses on the sale of thinly-traded securities.
Margin Borrowing
We may in the future use margin borrowing of up to 30% of total assets for investment purposes
when the Adviser believes it will enhance returns. Our margin borrowings create certain additional
risks. For example, should the securities that are pledged to brokers to secure margin accounts
decline in value, or should brokers from which we borrowed increase their maintenance margin
requirements (i.e., reduce the percentage of a position that can be financed), then we could be
subject to a margin call, pursuant to which we must either deposit additional funds with the
broker or suffer mandatory liquidation of the pledged securities to compensate for the decline in
value. In the event of a precipitous drop in the value of our assets, we might not be able to
liquidate assets quickly enough to pay off the margin debt and might suffer mandatory liquidation
of positions in a declining market at relatively low prices, thereby incurring substantial losses.
For these reasons, the use of borrowings for investment purposes is considered a speculative
investment practice.
Our Use of Derivatives, Options and Hedging Transactions
We may, but are not required to, use various hedging and other risk management transactions to
seek to manage interest rate and market risks.
Certain of these hedging and risk management transactions involve derivative instruments. A
derivative is a financial instrument whose performance is derived at least in part from the
performance of an underlying index, security or asset. The specific derivative instruments to be
used, or other transactions to be entered into, for such hedging purposes may include options on
common equities, energy-related commodities, equity, fixed income and interest rate indices, swap
agreements and related instruments.
Hedging or derivative instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that we own or intend to acquire. Such
instruments may also be used to lock-in recognized but unrealized gains in the value of portfolio
securities. Hedging strategies, if successful, can reduce the risk of loss by wholly or partially
offsetting the negative effect of unfavorable price movements in the investments being hedged.
However, hedging strategies can also reduce the opportunity for gain by offsetting the positive
effect of favorable price movements in the hedged investments. In addition, hedging transactions
have other risks, including the imperfect correlation between the value of such instruments and the
underlying assets, the possible default of the other party to the transactions or illiquidity of
the derivative investments. Further, the ability to successfully employ these transactions depends
on our ability to predict pertinent market movements. Thus, their use may result in losses greater
than if they had not been used, may require us to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit the amount of
appreciation we can realize on an investment, or may cause us to hold a security that we might
otherwise sell. Additionally, amounts paid by us as premiums and cash or other assets held in
margin accounts with respect to these transactions are not otherwise available to us for investment
purposes.
The use of hedging instruments is subject to applicable regulations of the SEC, the several
options and futures exchanges upon which they are traded, the CFTC and various state regulatory
authorities. In addition, our ability to use hedging instruments may be
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limited by tax considerations. Market conditions will determine whether and in what
circumstances we would employ any of the hedging and techniques described below. We will incur
brokerage and other costs in connection with our hedging transactions.
Options on Securities and Securities Indices. We may purchase and write (sell) call and put
options on any securities and securities indices.
An option on a security (or an index) is a contract that gives the holder of the option, in
return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a
put) the writer of the option the security underlying the option (or the cash value of the index)
at a specified exercise price at any time during the term of the option. The writer of an option on
a security has the obligation upon exercise of the option to deliver the underlying security upon
payment of the exercise price or to pay the exercise price upon delivery of the underlying
security. Upon exercise, the writer of an option on an index is obligated to pay the difference
between the cash value of the index and the exercise price multiplied by the specified multiplier
for the index option. A put option is in the money if the exercise price exceeds the value of the
futures contract that is the subject of the option.
Call options are contracts representing the right to purchase a common stock at a specified
price (the strike price) at a specified future date (the expiration date). The price of the
option is determined from trading activity in the broad options market, and generally reflects the
relationship between the current market price for the underlying common stock and the strike price,
as well as the time remaining until the expiration date. We will write call options only if they
are covered. A covered call option is a call option with respect to which we own the underlying
security. When a covered call option is sold by us, we receive a fee for the option, but it exposes
us during the term of the option to the possible loss of opportunity to realize appreciation in the
market price of the underlying security beyond the strike price of that option or to possible
continued holding of a security that might otherwise have been sold to protect against depreciation
in the market price of the security.
Options on securities indices are similar to options on securities, except that the exercise
of securities index options requires cash settlement payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather than price
fluctuations in a single security. These options may be listed on national domestic securities
exchanges or foreign securities exchanges or traded in the over-the-counter market.
All call and put options we will write will be covered. A written call option or put option
may be covered by (i) maintaining cash or liquid securities in a segregated account with a value at
least equal to our obligation under the option, (ii) entering into an offsetting forward commitment
and/or (iii) purchasing an offsetting option or any other option which, by virtue of its exercise
price or otherwise, reduces our net exposure on our written option position. A written call option
on securities is typically covered by maintaining the securities that are subject to the option in
a segregated account. We may cover call options on a securities index by owning securities whose
price changes are expected to be similar to those of the underlying index.
We may terminate our obligations under an exchange traded call or put option by purchasing an
option identical to the one we have written. Obligations under over-the-counter options may be
terminated only by entering into an offsetting transaction with the counterparty to such option.
Our ability to enter into a closing sale transaction depends on the existence of a liquid secondary
market. There can be no assurance that a closing purchase or sale transaction can be effected when
we so desire.
We would normally purchase call options in anticipation of an increase, or put options in
anticipation of a decrease (protective puts), in the market value of securities of the type in
which we may invest. We may also sell call and put options to close out our purchased options.
Our 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 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
we may write or purchase may be affected by options written or
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purchased by other investment advisory clients of the Adviser. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in excess of these
limits, and it may impose certain other sanctions.
The hours of trading for options may not conform to the hours during which the underlying
securities are traded. To the extent that the options markets close before the markets for the
underlying securities, significant price and rate movements can take place in the underlying
markets that cannot be reflected in the options markets.
There is no assurance that a liquid secondary market on a domestic or foreign options exchange
will exist for any particular exchange-traded option or at any particular time. If we are unable to
effect a closing purchase transaction with respect to covered options we have written, we will not
be able to sell the underlying securities or dispose of assets held in a segregated account until
the options expire or are exercised. Similarly, if we are unable to effect a closing sale
transaction with respect to options we have purchased, we would have to exercise the options in
order to realize any profit and will incur transaction costs upon the purchase or sale of
underlying securities or currencies. 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 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 at some future date to
discontinue the trading of options (or a particular class or series of options). 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 Options
Clearing Corporation as a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The writing and purchase of options is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio securities
transactions. The successful use of options depends in part on the Advisers ability to predict
future price fluctuations and, for hedging transactions, the degree of correlation between the
options and securities or currency markets.
Swap Agreements. Swap agreements are two-party contracts entered into for periods ranging from
a few weeks to more than one year. A swap agreement is a financial instrument that typically
involves the exchange of cash flows between two parties on specified dates (settlement dates),
where the cash flows are based on agreed-upon prices, rates, indices, etc. The nominal amount on
which the cash flows are calculated is called the notional amount. Swaps are individually
negotiated and structured to include exposure to a variety of different types of investments or
market factors, such as interest rates, commodity prices, non-U.S. currency rates, mortgage
securities, corporate borrowing rates, security prices, indexes or inflation rates.
The gross returns to be exchanged or swapped between the parties are generally calculated
with respect to a notional amount, i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate or in a basket of securities representing a
particular index.
Swap agreements may increase or decrease the overall volatility of our investments and share
price. The performance of swap agreements may be affected by a change in the specific interest
rate, currency, or other factors that determine the amounts of payments due to and from us. If a
swap agreement calls for payments by us, we must be prepared to make such payments when due. In
addition, if the counterpartys creditworthiness declines, the value of a swap agreement would be
likely to decline, potentially resulting in losses.
Generally, swap agreements have fixed maturity dates that are agreed upon by the parties to
the swap. The agreement can be terminated before the maturity date only under limited
circumstances, such as default by one of the parties or insolvency, among others, and can be
transferred by a party only with the prior written consent of the other party. We may be able to
eliminate our exposure under a swap agreement either by assignment or by other disposition, or by
entering into an offsetting swap agreement with the same party or a similarly creditworthy party.
If the counterparty is unable to meet its obligations under the contract, declares bankruptcy,
defaults or becomes insolvent, we may not be able to recover the money we expected to receive under
the contract.
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A swap agreement can be a form of leverage, which can magnify our gains or losses. In order to
reduce the risk associated with leveraging, we may cover our current obligations under swap
agreements according to guidelines established by the SEC. If we enter into a swap agreement on a
net basis, we will be required to segregate assets with a daily value at least equal to the excess,
if any, of our accrued obligations under the swap agreement over the accrued amount we are entitled
to receive under the agreement. If we enter into a swap agreement on other than a net basis, we
will be required to segregate assets with a value equal to the full amount of our accrued
obligations under the agreement.
Equity Index Swap Agreements. In a typical equity swap agreement, one party agrees to pay
another party the return on a security, security index or basket of securities in return for a
specified interest rate. By entering into an equity index swap agreement, for example, the index
receiver can gain exposure to securities making up the index of securities without actually
purchasing those securities. Equity index swap agreements involve not only the risk associated with
investment in the securities represented in the index, but also the risk that the performance of
such securities, including dividends, will not exceed the interest that we will be committed to pay
under the swap agreement.
Credit Default Swap Agreements. We may enter into credit default swap agreements. The buyer
in a credit default contract is obligated to pay the seller a periodic stream of payments over
the term of the contract provided that no event of default on an underlying reference obligation
has occurred. If an event of default occurs, the seller must pay the buyer the par value (full
notional value) of the reference obligation in exchange for the reference obligation. We may be
either the buyer or seller in the transaction. If we are a buyer and no event of default occurs, we
lose our investment and recover nothing. However, if an event of default occurs, the buyer receives
full notional value for a reference obligation that may have little or no value. As a seller, we
receive a fixed rate of income throughout the term of the contract, which typically is between six
months and three years, provided that there is no default event. If an event of default occurs, the
seller must pay the buyer the full notional value of the reference obligation.
Credit default swaps involve greater risks than if we had invested in the reference obligation
directly. In addition to general market risks, credit default swaps are subject to illiquidity
risk, counterparty risk and credit risks. We will enter into swap agreements only with
counterparties who are rated investment grade quality by at least one rating agency at the time of
entering into such transaction or whose creditworthiness is believed by the Adviser to be
equivalent to such rating. A buyer also will lose its investment and recover nothing should no
event of default occur. If an event of default were to occur, the value of the reference obligation
received by the seller, coupled with the periodic payments previously received, may be less than
the full notional value we pay to the buyer, resulting in a loss of value to us. When we act as a
seller of a credit default swap agreement we are exposed to the risks of leverage, since if an
event of default occurs the seller must pay the buyer the full notional value of the reference
obligation.
If we enter into a credit default swap, we may be required to report the swap as a listed
transaction for tax shelter reporting purposes on our federal income tax return. If the Internal
Revenue Service (the IRS) were to determine that the credit default swap is a tax shelter, we
could be subject to penalties under the Internal Revenue Code.
We may in the future employ new or additional investment strategies and hedging instruments if
those strategies and instruments are consistent with our investment objective and are permissible
under applicable regulations governing us.
Additional Risks and Special Considerations Concerning Derivatives. In addition to the risks
described above and in our prospectus, the use of derivative instruments involves certain general
risks and considerations as described below.
Market Risk. Market risk is the risk that the value of the underlying assets may go up
or down. Adverse movements in the value of an underlying asset can expose us to losses. Market risk
is the primary risk associated with derivative transactions. Derivative instruments may include
elements of leverage and, accordingly, fluctuations in the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of derivative instruments
depends upon a variety of factors, particularly the Advisers ability to predict correctly changes
in the relationships of such hedge instruments to our portfolio holdings, and there can be no
assurance the Advisers judgment in this respect will be accurate. Consequently, the use of
derivatives for hedging purposes might result in a poorer overall performance for us, whether or
not adjusted for risk, than if we had not hedged our portfolio holdings.
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Credit Risk. Credit risk is the risk that a loss is sustained as a result of the
failure of a counterparty to comply with the terms of a derivative instrument. The counterparty
risk for exchange-traded derivatives is generally less than for privately-negotiated or
over-the-counter derivatives, since generally a clearing agency, which is the issuer or
counterparty to each exchange-traded instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar clearing agency guarantee. In all
transactions, we will bear the risk that the counterparty will default, and this could result in a
loss of the expected benefit of the derivative transactions and possibly other losses to us. We
will enter into transactions in derivative instruments only with counterparties that the Adviser
reasonably believes are capable of performing under the contract.
Correlation Risk. Correlation risk is the risk that there might be an imperfect
correlation, or even no correlation, between price movements of a derivative instrument and price
movements of investments being hedged. When a derivative transaction is used to completely hedge
another position, changes in the market value of the combined position (the derivative instrument
plus the position being hedged) result from an imperfect correlation between the price movements of
the two instruments. With a perfect hedge, the value of the combined position remains unchanged
with any change in the price of the underlying asset. With an imperfect hedge, the value of the
derivative instrument and its hedge are not perfectly correlated. For example, if the value of a
derivative instrument used in a short hedge (such as buying a put option or selling a futures
contract) increased by less than the decline in value of the hedged investments, the hedge would
not be perfectly correlated. This might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures on the markets in which these
instruments are traded. In addition, our success in using hedging instruments is subject to the
Advisers ability to correctly predict changes in relationships of such hedge instruments to our
portfolio holdings, and there can be no assurance that the Advisers judgment in this respect will
be accurate. An imperfect correlation may prevent us from achieving the intended hedge or expose us
to a risk of loss.
Liquidity Risk. Liquidity risk is the risk that a derivative instrument cannot be
sold, closed out, or replaced quickly at or very close to its fundamental value. Generally,
exchange contracts are liquid because the exchange clearinghouse is the counterparty of every
contract. OTC transactions are less liquid than exchange-traded derivatives since they often can
only be closed out with the other party to the transaction. We might be required by applicable
regulatory requirements to maintain assets as cover, maintain segregated accounts and/or make
margin payments when we take positions in derivative instruments involving obligations to third
parties (i.e., instruments other than purchase options). If we are unable to close out our
positions in such instruments, we might be required to continue to maintain such accounts or make
such payments until the position expires, matures, or is closed out. These requirements might
impair our ability to sell a security or make an investment at a time when it would otherwise be
favorable to do so, or require that we sell a portfolio security at a disadvantageous time. Our
ability to sell or close out a position in an instrument prior to expiration or maturity depends
upon the existence of a liquid secondary market or, in the absence of such a market, the ability
and willingness of the counterparty to enter into a transaction closing out the position. Due to
liquidity risk, there is no assurance that any derivatives position can be sold or closed out at a
time and price that is favorable to us.
Legal Risk. Legal risk is the risk of loss caused by the unenforceability of a partys
obligations under the derivative. While a party seeking price certainty agrees to surrender the
potential upside in exchange for downside protection, the party taking the risk is looking for a
positive payoff. Despite this voluntary assumption of risk, a counterparty that has lost money in a
derivative transaction may try to avoid payment by exploiting various legal uncertainties about
certain derivative products.
Systemic or Interconnection Risk. Systemic or interconnection risk is the risk that
a disruption in the financial markets will cause difficulties for all market participants. In other
words, a disruption in one market will spill over into other markets, perhaps creating a chain
reaction. Much of the OTC derivatives market takes place among the OTC dealers themselves, thus
creating a large interconnected web of financial obligations. This interconnectedness raises the
possibility that a default by one large dealer could create losses for other dealers and
destabilize the entire market for OTC derivative instruments.
Legislation and Regulatory Risk
At any time after the date of the prospectus and this statement of additional information,
legislation may be enacted that could negatively affect our assets or the issuers of such assets.
Changing approaches to regulation may have a negative impact on entities in which we invest. There
can be no assurance that future legislation, regulation or deregulation will not have a material
adverse effect
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on us or will not impair the ability of the issuers of the assets we hold to achieve their
business goals, and hence, for us to achieve our investment objective.
When-Issued and Delayed Delivery Transactions
We may buy and sell securities on a when-issued or delayed delivery basis, making payment or
taking delivery at a later date, normally within 15 to 45 days of the trade date. On such
transactions, the payment obligation and the interest rate are fixed at the time the buyer enters
into the commitment. Beginning on the date we enter into a commitment to purchase securities on a
when-issued or delayed delivery basis, we are required under rules of the SEC to maintain in a
separate account liquid assets, consisting of cash, cash equivalents or liquid securities having a
market value at all times of at least equal to the amount of the commitment. Income generated by
any such assets which provide taxable income for U.S. federal income tax purposes is includable in
our taxable income. We may enter into contracts to purchase securities on a forward basis (i.e.,
where settlement will occur more than 60 days from the date of the transaction) only to the extent
that we specifically collateralize such obligations with a security that is expected to be called
or mature within sixty days before or after the settlement date of the forward transaction. The
commitment to purchase securities on a when-issued, delayed delivery or forward basis may involve
an element of risk because at the time of delivery the market value may be less than cost.
Repurchase Agreements
As temporary investments, we may invest in repurchase agreements. A repurchase agreement is a
contractual agreement whereby the seller of securities agrees to repurchase the same security at a
specified price on a future date agreed upon by the parties. The agreed-upon repurchase price
determines the yield during our holding period. Repurchase agreements are considered to be loans
collateralized by the underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. We will only enter into
repurchase agreements with registered securities dealers or domestic banks that, in the opinion of
the Adviser (as defined below), present minimal credit risk. Our risk is limited to the ability of
the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the
value of the underlying collateral at the time the transaction is entered into always equals or
exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk
of loss of both principal and interest. In the event of default, the collateral may be sold, but we
may incur a loss if the value of the collateral declines, and may incur disposition costs or
experience delays in connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security, realization upon the
collateral by us may be delayed or limited. The Adviser (as defined below) will monitor the value
of the collateral at the time the transaction is entered into and at all times subsequent during
the term of the repurchase agreement in an effort to determine that such value always equals or
exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below
the repurchase price, we will demand additional collateral from the issuer to increase the value of
the collateral to at least that of the repurchase price, including interest.
Lending of Portfolio Securities
We may lend our portfolio securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by us. We would continue to
receive the equivalent of the interest or dividends paid by the issuer on the securities loaned,
and would also receive an additional return that may be in the form of a fixed fee or a percentage
of the collateral. We may pay reasonable fees for services in arranging these loans. We would have
the right to call the loan and obtain the securities loaned at any time on notice of not more than
five (5) business days. We would not have the right to vote the securities during the existence of
the loan but would call the loan to permit voting of the securities, if, in the Advisers judgment,
a material event requiring a stockholder vote would otherwise occur before the loan was repaid. In
the event of bankruptcy or other default of the borrower, we could experience both delays in
liquidating the loan collateral or recovering the loaned securities and losses, including (a)
possible decline in the value of the collateral or in the value of the securities loaned during the
period while we seek to enforce its rights thereto, (b) possible subnormal levels of income and
lack of access to income during this period, and (c) expenses of enforcing its rights.
S-11
MANAGEMENT
Directors and Officers
Our business and affairs are managed under the direction of our Board of Directors, including
the duties performed for us under the Investment Management Agreement. The Directors set broad
policies for us and choose our officers. The members of our Board of Directors are as follows: Anne
K. Costin, Steven C. Good, Gerald I. Isenberg, Terrence J. Quinn and Kevin S. McCarthy. The
Directors who are not interested persons of Kayne Anderson or our underwriters as defined in the
1940 Act are referred to herein as Independent Directors. Due to her ownership of securities
issued by one of the underwriters in our previous offerings, Ms. Costin, in the future, may be
treated as an interested person during subsequent offerings of our securities if the relevant
offering is underwritten by the underwriter in which Ms. Costin owns securities. Unless noted
otherwise, references to our Independent Directors include Ms. Costin.
Our Board of Directors has three standing committees, the Nominating Committee, the Valuation
Committee and the Audit Committee. The Nominating Committee is responsible for appointing and
nominating independent persons to our Board of Directors. Ms. Costin and Messrs. Good, Quinn, and
Isenberg are members of the Nominating Committee. If there is no vacancy on the Board, the Board of
Directors will not actively seek recommendations from other parties, including stockholders. When a
vacancy on the Board of Directors occurs and nominations are sought to fill such vacancy, the
Nominating Committee may seek nominations from those sources it deems appropriate in its
discretion, including our stockholders. To submit a recommendation for nomination as a candidate
for a position on the Board, stockholders shall mail such recommendation to David Shladovsky,
Secretary, at our address, 1800 Avenue of the Stars, Second Floor, Los Angeles, California 90067.
Such recommendation shall include the following information: (a) evidence of stock ownership of the
person or entity recommending the candidate (if submitted by one of our stockholders), (b) a full
description of the proposed candidates background, including their education, experience, current
employment, and date of birth, (c) names and addresses of at least three professional references
for the candidate, (d) information as to whether the candidate is an interested person in
relation to us, as such term is defined in the 1940 Act and such other information that may be
considered to impair the candidates independence and (e) any other information that may be helpful
to the Committee in evaluating the candidate. If a recommendation is received with satisfactorily
completed information regarding a candidate during a time when a vacancy exists on the Board of
Directors or during such other time as the Nominating Committee is accepting recommendations, the
recommendation will be forwarded to the Chair of the Nominating Committee and counsel to the
Independent Directors. Recommendations received at any other time will be kept on file until such
time as the Nominating Committee is accepting recommendations, at which point they may be
considered for nomination. The Valuation Committee is responsible for the oversight of our pricing
procedures and the valuation of our securities in accordance with such procedures. Ms. Costin and
Messrs. McCarthy and Quinn are members of the Valuation Committee. The Audit Committee is
responsible for overseeing our accounting and financial reporting process, our system of internal
controls, audit process and evaluating and appointing our independent auditors (subject also to
Board of Director approval). Messrs. Good, Quinn, and Isenberg serve on the Audit Committee. The
Audit Committee met four times during the fiscal year ended November 30, 2006.
Our Directors and officers who are interested persons by virtue of their employment by Kayne
Anderson serve without any compensation from us. Each of our Independent Directors receives a
$25,000 annual retainer for serving as a Director. In addition, our Independent Directors receive
fees for each meeting attended, as follows: $2,500 per Board meeting; $1,500 per Audit Committee
meeting; and $500 for other committee meetings. Committee meeting fees are not paid unless the
meeting is held on a day when there is not a Board meeting and the meeting is more than 15 minutes
in length. The Independent Directors are reimbursed for expenses incurred as a result of attendance
at meetings of the Board and its committees.
The
following table sets forth compensation by us for the fiscal year
ended November 30, 2006 to
the Independent Directors. We have no retirement or pension plans.
S-12
|
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|
|
|
|
|
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|
Total |
|
|
Aggregate |
|
Compensation From Us |
Director |
|
Compensation From Us |
|
and Fund Complex(1) |
Anne K. Costin |
|
|
$37,500 |
|
|
|
$88,000 |
|
Steven C. Good |
|
|
$49,000 |
|
|
|
$95,500 |
|
Gerald I. Isenberg |
|
|
$48,000 |
|
|
|
$96,500 |
|
Terrence J. Quinn |
|
|
$46,000 |
|
|
|
$100,000 |
|
|
|
|
(1) |
|
The Directors also oversee Kayne Anderson Energy Total Return Fund, Inc., an investment
company managed by our Adviser. |
None of our Independent Directors (other than Mr. Isenberg) nor any of their immediate family
members, has ever been a director, officer or employee of Kayne Anderson or its affiliates. From
1998 to 2002, Mr. Isenberg was a board member of the Kayne Anderson Rudnick Mutual Funds, whose
investment adviser, Kayne Anderson Rudnick Investment Management, LLC, formerly may have been
deemed an affiliate of Kayne Anderson. We have no employees. Our officers are compensated by our
Adviser. Our Board of Directors is divided into three classes of directors serving staggered
three-year terms. The initial term of the first and second classes expired in 2005 and 2006,
respectively. The initial term of the third class will expire in 2007. Upon expiration of their
current terms, directors of each class will be elected to serve for three-year terms and until
their successors are duly elected and qualify and each year one class of directors will be elected
by our stockholders.
Certain officers of Kayne Anderson, including all of our officers, own, in the aggregate,
approximately $5 million of our common stock.
The following table sets forth the dollar range of our equity securities beneficially owned by
our Directors as of November 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of |
|
|
Dollar Range of |
|
Equity Securities in All Registered |
|
|
Our Equity Securities |
|
Investment Companies Overseen by |
Director |
|
Owned by Director |
|
Director in Fund Complex(1) |
Anne K. Costin |
|
|
$50,001-$100,000 |
|
|
|
Over $100,000 |
|
Steven C. Good |
|
|
$50,001-$100,000 |
|
|
|
Over $100,000 |
|
Gerald I. Isenberg |
|
$10,000-$50,000 |
|
$50,001-$100,000 |
Terrence J. Quinn |
|
|
$10,000-$50,000 |
|
|
|
$50,001-$100,000 |
|
Kevin S. McCarthy |
|
Over $100,000 |
|
Over $100,000 |
|
|
|
(1) |
|
The Directors also oversee Kayne Anderson Energy Total Return Fund, Inc., an investment
company managed by our Adviser. |
Except as described in the table below, as of the date of this Statement of Additional
Information, our Independent Directors (and their immediate family members) do not beneficially own
securities in entities directly or indirectly controlling, controlled by, or under common control
with, our Adviser. The information in the table is as of
November 30, 2006.
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|
|
|
|
|
|
Name of Owners and |
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|
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|
|
|
|
|
|
|
Relationships to |
|
|
|
Title of |
|
Value of |
|
Percent of |
Director |
|
Director |
|
Company |
|
Class |
|
Securities |
|
Class |
Gerald I. Isenberg
|
|
Self
|
|
Kayne Anderson
Capital Income
Partners (QP),
L.P.(1)
|
|
Partnership units
|
|
$1,313,048
|
|
0.2% |
|
|
|
(1) |
|
Kayne Anderson may be deemed to control this fund by virtue of its role as the funds
general partner. |
S-13
INVESTMENT ADVISER
KA
Fund Advisors, LLC, (KAFA) 1100 Louisiana Street, Suite 4550, Houston, Texas 77002, our investment
adviser, is registered with the SEC under the Investment Advisers Act of 1940, as amended. Our
Adviser provides us with professional investment supervision and management and permits any of its
officers or employees to serve without compensation as our Directors or officers if elected to such
positions.
KAFA acts as our investment adviser pursuant to an Investment Management Agreement.
The Investment Management Agreement will continue in effect from year to year after its initial
two-year term so long as its continuation is approved at least annually by our Directors including
a majority of Independent Directors or the vote of a majority of our outstanding voting securities.
The Investment Management Agreement may be terminated at any time without the payment of any
penalty upon 60 days written notice by either party, or by action of the Board of Directors or by
a majority vote of our outstanding voting securities (accompanied by appropriate notice), and will
terminate automatically upon assignment. The Investment Management Agreement may also be
terminated, at any time, without payment of any penalty, by the Board of Directors or by vote of a
majority of our outstanding voting securities (as defined under the 1940 Act), in the event that it
shall have been established by a court of competent jurisdiction that the Adviser or any officer or
director of the Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth in the Investment Management Agreement. The Investment Management Agreement
provides that the Adviser shall not be liable for any loss sustained by reason of the purchase,
sale or retention of any security, whether or not such purchase, sale or retention shall have been
based upon the investigation and research made by any other individual, firm or corporation, if
such recommendation shall have been selected with due care and in good faith, except loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the Adviser in performance
of its obligations and duties, or by reason of its reckless disregard of its obligations and duties
under the Investment Management Agreement. As compensation for the Advisers services, we pay the
Adviser a fee as described in our prospectus. See Management Investment Management Agreement in
our prospectus.
In addition to Kayne Andersons fee, we pay all other costs and expenses of our operations,
such as compensation of our Directors (other than those affiliated with Kayne Anderson), custodian,
transfer agency, administrative, accounting and dividend disbursing expenses, legal fees, leverage
expenses, expenses of independent auditors, expenses of personnel including those who are
affiliates of Kayne Anderson reasonably incurred in connection with arranging or structuring
portfolio transactions for us, expenses of repurchasing our securities, expenses of preparing,
printing and distributing stockholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any. All fees and expenses are accrued and deducted before
payment of dividends to investors.
On September 14, 2006, at an in-person meeting of the Board of Directors, the Board considered
the approval of an Investment Management Agreement with Kayne Anderson Capital Advisors, L.P.
(KACALP). Following the recommendation of the Board, the Investment Management Agreement was
approved by our shareholders on December 12, 2006, and became effective on that date, replacing and
superseding our previous investment advisory agreement with KACALP. On December 31, 2006,
the Investment Management Agreement was assigned by KACALP to our Adviser, a subsidiary of KACALP.
That assignment occurred only for internal organizational purposes and did not result in any change
of corporate officers, portfolio management personnel or control.
A discussion regarding the basis for approval by the board of directors of our investment
management agreement with KACALP during the fiscal year ended November 30, 2006 is available in our
report to stockholders for that period.
CODE OF ETHICS
We and Kayne Anderson have each adopted a code of ethics, as required by federal securities
laws. Under both codes of ethics, employees who are designated as access persons may engage in
personal securities transactions, including transactions involving securities that are currently
held by us or, in limited circumstances, that are being considered for purchase or sale by us,
subject to certain general restrictions and procedures set forth in our code of ethics. The
personal securities transactions of our access persons and those of Kayne Anderson will be governed
by the applicable code of ethics.
Kayne Anderson and its affiliates manage other investment companies and accounts. Kayne
Anderson may give advice and take action with respect to any of the other funds it manages, or for
its own account, that may differ from action taken by Kayne Anderson on our behalf. Similarly, with
respect to our portfolio, Kayne Anderson is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that Kayne Anderson and access persons, as
defined by applicable federal securities
S-14
laws, may buy or sell for its or their own account or for the accounts of any other fund. The
Adviser is not obligated to refrain from investing in securities held by us or other funds it
manages.
We and Kayne Anderson have text-only versions of the codes of ethics that will be available on
the EDGAR Database on the SECs internet web site at www.sec.gov. You may also review and copy
those documents by visiting the SECs Public Reference Room in Washington, DC. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at 202-551-8090. In
addition, copies of the codes of ethics may be obtained from us free of charge at (877)
657-3863/MLP-FUND, or by mailing the appropriate duplicating fee and writing to the SECs Public
Reference Section, 100 F Street, N.E., Washington, DC 20549 or submitting an e-mail request at
publicinfo@sec.gov.
PROXY VOTING PROCEDURES
SEC-registered advisers that have the authority to vote (client) proxies (which authority may
be implied from a general grant of investment discretion) are required to adopt policies and
procedures reasonably designed to ensure that the adviser votes proxies in the best interests of
its clients. Registered advisers also must maintain certain records on proxy voting. In many cases,
we will invest in securities that do not generally entitle us to voting rights in our portfolio
companies. When we do have voting rights, we will delegate the exercise of such rights to our
Adviser, to whom our Board has delegated the authority to develop policies and procedures relating
to proxy voting. Our Advisers proxy voting policies and procedures are summarized below.
In determining how to vote, officers of our Adviser will consult with each other and our other
investment professionals, taking into account the interests of us and our investors as well as any
potential conflicts of interest. When Kayne Andersons investment professionals identify a
potentially material conflict of interest regarding a vote, the vote and the potential conflict
will be presented to Kayne Andersons Proxy Voting Committee for a final decision. If Kayne
Anderson determines that such conflict prevents Kayne Anderson from determining how to vote on the
proxy proposal in the best interests of the Company, Kayne Anderson shall either (1) vote in
accordance with a predetermined specific policy to the extent that Kayne Andersons policies and
procedures include a pre-determined voting policy for such proposal or (2) disclose the conflict to
our Board and obtain the Boards consent prior to voting on such proposal.
An officer of our Adviser will keep a written record of how all such proxies are voted. Our
Adviser will retain records of (1) its proxy voting policies and procedures, (2) all proxy
statements received regarding investors securities (or it may rely on proxy statements filed on
the SECs EDGAR system in lieu thereof), (3) all votes cast on behalf of investors, (4) investor
written requests for information regarding how Kayne Anderson voted proxies of that investor and
any written response to any (written or oral) investor requests for such information, and (5) any
documents prepared by Kayne Anderson that are material to making a decision on a proxy vote or that
memorialized such decision. The aforementioned proxy voting records will be maintained, preserved
and easily accessible for a period of not less than five years. The Adviser may rely on one or more
third parties to make and retain the records of proxy statements and votes cast.
Information regarding how proxies relating to our portfolio securities are voted during the
12-month period ended June 30th of any year will be made available on or around August 30th of that
year, (i) without charge, upon request, by calling (877) 657-3863/MLP-FUND (toll-free/collect); and
(ii) on the SECs website at http://www.sec.gov.
Our Adviser has adopted proxy voting guidelines that provide general direction regarding how
Kayne Anderson will vote on a number of significant and recurring ballot proposals. These
guidelines are not mandatory voting policies, but rather are an indication of general voting
preferences. The following are a few examples of these guidelines:
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|
The Adviser generally votes against proposals to classify the board and for proposals
to repeal classified boards and to elect directors annually. |
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|
The Adviser generally votes against proposals to ratify a poison pill and for
proposals that ask a company to submit its poison pill for shareholder ratification. |
S-15
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The Adviser generally votes against proposals to require a supermajority shareholder
vote to approve charter and bylaw amendments and for proposals to lower such supermajority
shareholder vote requirements. |
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|
The Adviser generally votes for management proposals to increase the number of shares of
common stock authorized for issue provided management demonstrated a satisfactory reason for
the potential issuance of the additionally authorized shares. |
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|
The Adviser generally votes for proposals to increase common share authorization for a
stock split provided management demonstrates a reasonable basis for the split and for
proposals to implement a reverse stock split provided management demonstrates a reasonable
basis for the reverse split. |
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|
Absent special circumstances (e.g., actions taken in the context of a hostile takeover
attempt) indicating an abusive purpose, the Adviser, on a case-by-case basis, votes
proposals that would authorize the creation of new classes of preferred stock with
unspecified voting, conversion, dividend and distribution, and other rights. |
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|
Proposals to change a companys state of incorporation area examined on a case-by-case basis. |
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|
The Adviser, on a case-by-case basis, votes on mergers and acquisitions taking into account at least the following: |
|
|
|
anticipated financial and operating benefits; |
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|
offer price (cost vs. premium); |
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prospects of the combined companies, |
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how the deal was negotiated; and |
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changes in corporate governance and their impact on shareholder rights. |
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|
The Adviser generally supports shareholder social and environmental proposals, and votes
such matters, on a case-by-case basis, where the proposal enhances the long-term value of
the shareholder and does not diminish the return on investment. |
PORTFOLIO MANAGER INFORMATION
The following section discusses the accounts managed by our portfolio managers, the structure
and method of our portfolio managers compensation, and their ownership of our securities. This
information is current as of November 30, 2006. We and Kayne Anderson Energy Total Return Fund,
Inc. are the registered investment companies managed by our portfolio managers, Kevin McCarthy and
J.C. Frey. Messrs. McCarthy and Frey serve as portfolio manager of Kayne Anderson Energy
Development Company (KED), a closed-end management investment company that has elected to be
treated as a business development company. We pay Kayne Anderson a management fee at an annual rate
of 1.375% of our average total assets.
Messrs. McCarthy and Frey are compensated by the Adviser through distributions based on the
amount of assets they manage and receive a portion of the advisory fees applicable to those
accounts, which, with respect to certain accounts, are based in part, on the performance of those
accounts. Some of the other accounts managed by Mr. Frey may have investment strategies that are
similar to ours. However, Kayne Anderson manages potential conflicts of interest by allocating
investment opportunities in accordance with its allocation policies and procedures.
Other Accounts Managed by Portfolio Managers
The following table reflects information regarding accounts for which the portfolio managers
have day-to-day management responsibilities (other than us). Accounts are grouped into three
categories: (i) registered investment companies, (ii) other pooled investment accounts, and (iii)
other accounts. To the extent that any of these accounts pay advisory fees that are based on
account
S-16
performance, this information will be reflected in a separate table below. Information is
shown as of November 30, 2006. Asset amounts are approximate and have been rounded.
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Registered (1) |
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|
|
Investment Companies |
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Other Pooled |
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|
(excluding us) |
|
Investment Vehicles |
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Other Accounts |
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Number of |
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Total Assets in the |
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Number of |
|
Total Assets in the |
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Number of |
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Total Assets in the |
Portfolio Manager |
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Accounts |
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Accounts ($ in billions) |
|
Accounts |
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Accounts ($ in billions) |
|
Accounts |
|
Accounts ($ in billions) |
Kevin McCarthy |
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2 |
|
|
$ |
1.4 |
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0 |
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N/A |
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|
0 |
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N/A |
|
J.C. Frey |
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2 |
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$ |
1.4 |
|
|
|
9 |
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|
$ |
1.3 |
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|
|
2 |
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|
$ |
0.1 |
|
|
|
|
(1) |
|
Messrs. McCarthy and Frey serve as portfolio manager of Kayne Anderson Energy Development
Company (KED), a closed-end management investment company that has elected to be treated as a
business development company. For purposes of this table, KED is included in the information
contained in this column, even though it is not a registered investment company. |
Other Accounts That Pay Performance-Based Advisory Fees Managed by Portfolio Managers
The following table reflects information regarding accounts for which the portfolio managers
have day-to-day management responsibilities (other than us) and with respect to which the advisory
fee is based on account performance. Information is shown as of November 30, 2006. Asset amounts
are approximate and have been rounded.
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|
Registered (1) |
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|
|
|
|
|
Investment Companies |
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Other Pooled |
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|
|
|
(excluding us) |
|
Investment Vehicles |
|
Other Accounts |
|
|
Number of |
|
Total Assets in the |
|
Number of |
|
Total Assets in the |
|
Number of |
|
Total Assets in the |
Portfolio Manager |
|
Accounts |
|
Accounts ($ in billions) |
|
Accounts |
|
Accounts ($ in billions) |
|
Accounts |
|
Accounts ($ in billions) |
Kevin McCarthy |
|
|
1 |
|
|
$ |
0.2 |
|
|
|
0 |
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|
N/A |
|
|
|
0 |
|
|
|
N/A |
|
J.C. Frey |
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|
1 |
|
|
$ |
0.2 |
|
|
|
9 |
|
|
$ |
1.3 |
|
|
|
2 |
|
|
$ |
0.1 |
|
|
|
|
(1) |
|
Messrs. McCarthy and Frey serve as portfolio manager of Kayne Anderson Energy Development
Company (KED), a closed-end management investment company that has elected to be treated as a
business development company. For purposes of this table, KED is included in the information
contained in this column, even though it is not a registered investment company. |
Messrs. McCarthy and Frey are compensated by the Adviser through partnership distributions
from KACALP based on the amount of assets they manage and they receive a portion of the advisory
fees applicable to those accounts, which, with respect to certain amounts, as noted above, are
based in part on the performance of those accounts. Some of the other accounts managed by Messrs.
McCarthy and Frey, have investment strategies that are similar to ours. However, Kayne Anderson
manages potential conflicts of interest by allocating investment opportunities in accordance with
its allocation policies and procedures. At November 30, 2006, Messrs. McCarthy and Frey owned over
$750,000 and $400,000 of our equity, respectively, prior to this offering, and through their
limited partnership interests in the parent company of the Adviser, which owns 4,000 shares of our
common stock (with a value of approximately $125,000), Messrs. McCarthy and Frey could be deemed to
also indirectly own a portion of our securities.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the oversight of the Board of Directors, Kayne Anderson is responsible for
decisions to buy and sell securities for us and for the placement of our securities business, the
negotiation of the commissions to be paid on brokered transactions, the prices for principal trades
in securities, and the allocation of portfolio brokerage and principal business. It is the policy
of Kayne Anderson to seek the best execution at the best security price available with respect to
each transaction, and with respect to brokered transactions in light of the overall quality of
brokerage and research services provided to Kayne Anderson and its advisees. The best price to the
us means the best net price without regard to the mix between purchase or sale price and
commission, if any. Purchases may be made from underwriters, dealers, and, on occasion, the
issuers. Commissions will be paid on our futures and options transactions, if any. The purchase
price of portfolio securities purchased from an underwriter or dealer may include underwriting
commissions and dealer spreads. We may pay mark-ups on principal transactions. In selecting
broker/dealers and in negotiating commissions, Kayne Anderson considers, among other things, the
firms reliability, the quality of its execution services on a continuing basis and its financial
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condition. The selection of a broker-dealer may take into account the sale of products
sponsored or advised by Kayne Anderson and/or its affiliates. If approved by our Board, Kayne
Anderson may select an affiliated broker-dealer to effect transactions in our fund, so long as such
transactions are consistent with Rule 17e-1 under the 1940 Act.
Section 28(e) of the Securities Exchange Act of 1934, as amended (Section 28(e)), permits an
investment adviser, under certain circumstances, to cause an account to pay a broker or dealer who
supplies brokerage and research services a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting the transaction.
Brokerage and research services include (a) furnishing advice as to the value of securities, the
advisability of investing, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions incidental thereto
(such as clearance, settlement, and custody).
In light of the above, in selecting brokers, Kayne Anderson may consider investment and market
information and other research, such as economic, securities and performance measurement research,
provided by such brokers, and the quality and reliability of brokerage services, including
execution capability, performance, and financial responsibility. Accordingly, the commissions
charged by any such broker may be greater than the amount another firm might charge if Kayne
Anderson determines in good faith that the amount of such commissions is reasonable in relation to
the value of the research information and brokerage services provided by such broker to Kayne
Anderson or to us. The Adviser believes that the research information received in this manner
provides us with benefits by supplementing the research otherwise available to us. The investment
advisory fees paid by us to Kayne Anderson under the Investment Management Agreement are not
reduced as a result of receipt by Kayne Anderson of research services.
The Adviser may place portfolio transactions for other advisory accounts that it advises, and
research services furnished by firms through which we effect our securities transactions may be
used by Kayne Anderson in servicing some or all of its accounts; not all of such services may be
used by Kayne Anderson in connection with us. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in excess of those charged by
another broker paid by each account for brokerage and research services will vary. However, Kayne
Anderson believes such costs to us will not be disproportionate to the benefits received by us on a
continuing basis. The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by us and another advisory account. In
some cases, this procedure could have an adverse effect on the price or the amount of securities
available to us. In making such allocations between the us and other advisory accounts, the main
factors considered by Kayne Anderson are the investment objective, the relative size of portfolio
holding of the same or comparable securities, the availability of cash for investment and the size
of investment commitments generally held, and the opinions of the persons responsible for
recommending investments to us and such other accounts and funds.
We paid approximately $120,000 in brokerage commissions during the fiscal year ended November
30, 2006, of which approximately $50,000, or approximately 42%, were paid to our affiliate KA
Associates, Inc.
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
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. Our 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 1940 Act.
Our Charter authorizes us, to the maximum extent permitted by Maryland law and subject to the
requirements of the 1940 Act, to obligate us to indemnify any present or former Director or officer
or any individual who, while serving as our Director or officer and, at our request, 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, 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 any such capacity and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a proceeding.
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Our Bylaws obligate us, to the maximum extent permitted by Maryland law and subject to the
requirements of the 1940 Act, to indemnify any present or former Director or officer or any
individual who, while serving as our Director or officer and, at our request, 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 or her service in any such
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 any such capacity and to pay or
reimburse his or her reasonable expenses in advance of final disposition of a proceeding. Our
Charter and Bylaws also permit us to indemnify and advance expenses to any individual who served
any predecessor of us in any of the capacities described above and any employee or agent of ours or
our predecessor, if any.
Maryland law requires a corporation (unless its charter provide otherwise, which is not the
case for our Charter) 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 (1) was committed
in bad faith or (2) 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 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 a 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 pay
or reimburse reasonable expenses to a director or officer in advance of final disposition of a
proceeding 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.
In accordance with the 1940 Act, we 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.
NET ASSET VALUE
We determine our net asset value as of the close of regular session trading on the NYSE
(normally 4:00 p.m. Eastern time) no less frequently than the last business day of each month, and
make our net asset value available for publication monthly. Net asset value is computed by dividing
the value of all of our assets (including accrued interest and dividends), less all of our
liabilities (including accrued expenses, dividends payable, current and deferred and other accrued
income taxes, and any borrowings) and the liquidation value of any outstanding preferred stock, by
the total number of shares outstanding.
We may hold a substantial amount of securities that are privately issued or illiquid. For
these securities, as well as any other portfolio security held by us for which, in the judgment of
Kayne Anderson, reliable market quotations are not readily available, the pricing service does not
provide a valuation, or provides a valuation that in the judgment of Kayne Anderson is stale or
does not represent fair value, valuations will be determined in a manner that most fairly reflects
fair value of the security on the valuation date. Unless otherwise determined by our Board of
Directors, the following valuation process is used for such securities:
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Investment Team Valuation. The applicable investments are initially valued by Kayne
Andersons investment professionals responsible for the portfolio investments. |
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Investment Team Valuation Documentation. Preliminary valuation conclusions are
documented and discussed with senior management of Kayne Anderson. Such valuations generally
are submitted to the Valuation Committee (a committee of our Board of Directors) or our
Board of Directors on a monthly basis, and stand for intervening periods of time. |
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Valuation Committee. The Valuation Committee meets on or about the end of each month to
consider new valuations presented by Kayne Anderson, if any, which were made in accordance
with the Valuation Procedures in such month. Between meetings of the Valuation Committee, a
senior officer of Kayne Anderson is authorized to make valuation determinations. The
Valuation Committees valuations stand for intervening periods of time unless the Valuation
Committee meets again at the request of Kayne Anderson, our Board of Directors or the
Committee itself. The Valuation Committees valuation determinations are subject to
ratification by our Board at its next regular meeting. |
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Valuation Firm. No less than quarterly, a third-party valuation firm engaged by our
Board of Directors reviews the valuation methodologies and calculations employed for these
securities. |
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Board of Directors Determination. Our Board of Directors meets quarterly to consider the
valuations provided by Kayne Anderson and the Valuation Committee, if applicable, and ratify
valuations for the applicable securities. Our Board of Directors considers the reports, if
any, provided by the third-party valuation firm in reviewing and determining in good faith
the fair value of the applicable portfolio securities. |
Unless otherwise determined by our Board of Directors, securities that are convertible into or
otherwise will become publicly traded (e.g., through subsequent registration or expiration of a
restriction on trading) are valued through the process described above, using a valuation based on
the market value of the publicly traded security less a discount. The discount is initially equal
in amount to the discount negotiated at the time the purchase price is agreed to. To the extent
that such securities are convertible or otherwise become publicly traded within a time frame that
may be reasonably determined, Kayne Anderson may determine an amortization schedule for the
discount in accordance with a methodology approved by the Valuation Committee.
In addition, in fair valuing our investments, consideration is given to several factors, which
may include, among others, the following:
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the projected cash flows for the issuer or borrower; |
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the fundamental business data relating to the issuer or borrower; |
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an evaluation of the forces which influence the market in which these securities are purchased and sold; |
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the type, size and cost of holding; |
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the financial statements of the issuer or borrower; |
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the credit quality and cash flow of issuer, based on the Advisers or external analysis; |
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the information as to any transactions in or offers for the holding; |
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the price extent of public trading in similar securities (or equity securities) of
the issuer/borrower, or comparable companies; |
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the distributions and coupon payments; |
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the quality, value and saleability of collateral securing the security or loan; |
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the business prospects of the issuer/borrower, including any ability to obtain
money or resources from a parent or affiliate and an assessment of the issuers or
borrowers management; |
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any decline in value over time due to the nature of the assets for example, an
entity that has a finite-life concession |
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agreement with a government agency to provide a service (e.g., toll roads and airports); |
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the liquidity or illiquidity of the market for the particular portfolio instrument; and |
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other factors deemed relevant. |
Although a trading discount will not normally be applied to freely tradable securities, Kayne
Anderson may recommend to the Valuation Committee that such a discount be applied when the relevant
trading market is unusually illiquid or limited, or the size of our position is large compared to
normal trading volumes over time.
We may rely to some extent on information provided by the MLPs, which may not necessarily be
timely, to estimate taxable income allocable to the MLP units held in our portfolio and to estimate
the associated deferred tax liability. Such estimates will be made in good faith and reviewed in
accordance with the Valuation Procedures approved by our Board of Directors. From time to time we
will modify our estimates and/or assumptions regarding our deferred tax liability as new
information becomes available. To the extent we modify our estimates and/or assumptions, our net
asset value would likely fluctuate.
Publicly traded securities with a readily available market price are valued as described
below. Readily marketable portfolio securities listed on any exchange other than the NASDAQ are
valued, except as indicated below, at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such day, the securities are valued at the
mean of the most recent bid and asked prices on such day. Securities admitted to trade on the
NASDAQ are valued at the NASDAQ official closing price. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as of which such
value is being determined at the close of the exchange representing the principal market for such
securities.
Equity securities traded in the over-the-counter market, but excluding securities admitted to
trading on the NASDAQ, are valued at the closing bid prices. Fixed income securities with a
remaining maturity of 60 days or more are valued by us using a pricing service. When price quotes
are not available, fair market value is based on prices of comparable securities. Fixed income
securities maturing within 60 days are valued on an amortized cost basis.
Any derivative transaction that we enter into may, depending on the applicable market
environment, have a positive or negative value for purposes of calculating our net asset value. Any
option transaction that we enter into may, depending on the applicable market environment, have no
value or a positive value. Exchange traded options and futures contracts are valued at the closing
price in the market where such contracts are principally traded.
Because we are obligated to pay corporate income taxes, we accrue tax liability. As with any
other liability, our net asset value is reduced by the accruals of our current and deferred tax
liabilities (and any tax payments required in excess of such accruals). The allocation between
current and deferred income taxes is determined based upon the value of assets reported for book
purposes compared to the respective net tax bases of assets recognized for federal income tax
purposes. It is anticipated that cash distributions from MLPs in which we invest will not equal the
amount of our taxable income because of the depreciation and amortization recorded by the MLPs in
our portfolio. As a result, a portion of such cash distributions may not be treated by us as income
for federal income tax purposes. The relative portion of such distributions not treated as income
for tax purposes will vary among the MLPs, and also will vary year by year for each MLP. We will be
able to confirm the portion of each distribution recognized as taxable income as we receive annual
tax reporting information from each MLP.
TAX MATTERS
The following discussion of federal income tax matters is based on the advice of Paul,
Hastings, Janofsky & Walker LLP, our counsel.
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Matters Addressed
This section and the discussion in our prospectus (see Tax Matters) provide a general
summary of the material U.S. federal income tax consequences to the persons who purchase, own and
dispose of our securities. It does not address all federal income tax consequences that may apply
to an investment in our securities or to particular categories of investors, some of which may be
subject to special rules. Unless otherwise indicated, this discussion is limited to taxpayers who
are U.S. persons, as defined herein. The discussion that follows is based on the provisions of the
Internal Revenue Code of 1986, as amended (the Code) and Treasury regulations promulgated
thereunder as in effect on the date hereof and on existing judicial and administrative
interpretations thereof. These authorities are subject to change and to differing interpretations,
which could apply retroactively. Potential investors should consult their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of our securities. This discussion does not address all tax
consequences that may be applicable to a U.S. person that is a beneficial owner of our securities,
nor does it address, unless specifically indicated, the tax consequences to, among others, (i)
persons that may be subject to special treatment under U.S. federal income tax law, including, but
not limited to, banks, insurance companies, thrift institutions, regulated investment companies,
real estate investment trusts, tax-exempt organizations and dealers in securities or currencies,
(ii) persons that will hold our securities as part of a position in a straddle or as part of a
hedging, conversion or other integrated investment transaction for U.S. federal income tax
purposes, (iii) persons whose functional currency is not the United States dollar or (iv) persons
that do not hold our securities as capital assets within the meaning of Section 1221 of the Code.
For purposes of this discussion, a U.S. person is (i) an individual citizen or resident of
the United States, (ii) a corporation or partnership organized in or under the laws of the United
States or any state thereof or the District of Columbia (other than a partnership that is not
treated as a United States person under any applicable Treasury regulations), (iii) an estate the
income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a
trust if a court within the United States is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the authority to control all the
substantial decisions of such trust. Notwithstanding clause (iv) above, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and treated as U.S. persons prior to
such date that elect to continue to be so treated also shall be considered U.S. persons.
Tax Characterization for U.S. Federal Income Tax Purposes
We are treated as a corporation for U.S. federal income tax purposes. Thus, we are subject to
U.S. corporate income tax on our taxable income. Such taxable income would generally include all of
our net income from our limited partner investments in MLPs. The current U.S. federal maximum
graduated income tax rate for corporations is 35%. In addition, the United States also imposes a
20% alternative minimum tax on the recalculated alternative minimum taxable income of an entity
treated as a corporation. Any such U.S. corporate income tax or alternative minimum tax could
materially reduce cash available to make interest payments on our securities. We are also obligated
to pay state income tax on our taxable income, either because the states follow our federal
classification as a corporation or because the states separately impose a tax on us.
The MLPs in which we invest are generally treated as partnerships for U.S. federal income tax
purposes. As a partner in the MLPs, we will be required to report our allocable share of
partnership income, gain, loss, deduction and expense, whether or not any cash is distributed from
the MLPs.
The MLPs in which we invest are in the energy sector, primarily operating midstream energy
assets; therefore, we anticipate that the majority of our items of income, gain, loss, deduction
and expense is related to energy ventures. However, some items are likely to relate to the
temporary investment of our capital, which may be unrelated to energy ventures.
In general, energy ventures have historically generated taxable income less than the amount of
cash distributions that they produced, at least for periods of the investments life cycle. We
anticipate that we will not incur U.S. federal income tax on a significant portion of our cash flow
received, particularly after taking into account our current operating expenses. However, our
particular investments may not perform consistently with historical patterns in the industry, and
additional tax may be incurred by us.
Although we hold our interests in MLPs for investment purposes, we are likely to sell
interests in a particular MLP from time to time. On any such sale, we will recognize gain or loss
based upon the difference between the consideration received for tax purposes on the sale and our
tax basis in the interest sold. The consideration received is generally the amount paid by the
purchaser plus any
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debt of the MLP allocated to us that will shift to the purchaser on the sale. Our tax basis in
an MLP starts with the amount paid for the interest, but is decreased for any distributions of cash
received by us in excess of our allocable share of taxable income and decreased by our allocable
share of net losses. Thus, although cash in excess of taxable income and net tax losses may create
a temporary economic benefit to us, they will increase the amount of gain (or decrease the amount
of loss) on the sale of an interest in an MLP. Favorable federal income tax rates do not apply to
our long-term capital gains. Thus, we are subject to federal income tax on our long-term capital
gains at ordinary income rates of up to 35%.
In calculating our alternative minimum taxable income, certain percentage depletion deductions
and intangible drilling costs may be treated as items of tax preference. Items of tax preference
increase alternative minimum taxable income and increase the likelihood that we may be subject to
the alternative minimum tax.
We have not elected, and we do not expect to elect, to be treated as a regulated investment
company for federal income tax purposes. In order to qualify as a regulated investment company, the
income and assets of the company must meet certain minimum threshold tests. Because we invest
principally in MLPs, we cannot meet such tests. In contrast to the tax rules that will apply to us,
a regulated investment company generally does not pay corporate income tax, taking into
consideration a deduction for dividends paid to its stockholders. At the present time, the
regulated investment company taxation rules have no application to us.
Tax Consequences to Investors
The owners of our securities will be viewed for federal income tax purposes as having income
or loss on their investment in our securities rather than in the underlying MLPs. The owners of our
securities will receive a Form 1099 from us based upon the distributions made (or deemed to have
been made) rather than based upon the income, gain, loss or deductions of the MLPs.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
We may quote certain performance-related information and may compare certain aspects of our
portfolio and structure to other substantially similar closed-end funds. In reports or other
communications to our stockholders or in advertising materials, we may compare our performance with
that of (i) other investment companies listed in the rankings prepared by Lipper, Inc. (Lipper),
Morningstar Inc. or other independent services; publications such as Barrons, Business Week,
Forbes, Fortune, Institutional Investor, Kiplingers Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today; or other industry or
financial publications or (ii) the Standard and Poors Index of 500 Stocks, the Dow Jones
Industrial Average, NASDAQ Composite Index and other relevant indices and industry publications.
Comparison of ourselves to an alternative investment should be made with consideration of
differences in features and expected performance. We may obtain data from sources or reporting
services, such as Bloomberg Financial and Lipper, that we believe to be generally accurate.
Our performance will vary depending upon market conditions, the composition of our portfolio
and our operating expenses. Consequently any given performance quotation should not be considered
representative of our performance in the future. In addition, because performance will fluctuate,
it may not provide a basis for comparing an investment in our portfolio with certain bank deposits
or other investments that pay a fixed yield for a stated period of time. Investors comparing our
performance with that of other investment companies should give consideration to the quality and
type of the respective investment companies portfolio securities.
Past performance is not indicative of future results. At the time owners of our securities
sell our securities, they may be worth more or less than the original investment.
EXPERTS
Our financial statements dated November 30, 2006, incorporated by reference into this
statement of additional information has been audited by PricewaterhouseCoopers, LLP, independent
registered public accounting firm, as set forth in their report thereon incorporated by reference
herein, and is included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing. PricewaterhouseCoopers, LLP provides auditing services to us.
The principal business address of PricewaterhouseCoopers, LLP is 350 South Grand Avenue, Los
Angeles, California 90071.
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TRUSTEE, TRANSFER AGENT, REGISTRAR, PAYING AGENT AND REDEMPTION AGENT FOR SENIOR NOTES
The Bank of New York Trust Company, N.A. will be the Trustee under the Indenture and act as
transfer agent, registrar, paying agent and redemption agent with respect to the Senior Notes. Its
principal business address is 700 S. Flower Street, Los Angeles, California 90017.
AUCTION AGENT FOR SENIOR NOTES AND AUCTION AGENT, TRANSFER AGENT, REGISTRAR, DIVIDEND PAYING AGENT
AND REDEMPTION AGENT FOR ARP SHARES
The Bank of New York, 101 Barclay Street, New York, New York 10286, serves as the Auction
Agent with respect to the Senior Notes and as the Auction Agent, transfer agent, registrar,
dividend paying agent and redemption agent with respect to ARP Shares.
OTHER SERVICE PROVIDERS
The Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, acts as our
custodian. Bear Stearns Funds Management Inc., located at 383 Madison Avenue, 23rd Floor, New York,
New York 10179, provides certain administrative services for us. Ultimus Fund Solutions, LLC, 225
Pictoria Drive, Suite 450, Cincinnati, Ohio 45246, acts as our fund accountant providing accounting
services.
REGISTRATION STATEMENT
A Registration Statement on Form N-2, including amendments thereto, relating to our common
stock, preferred stock and debt securities offered hereby, has been filed by us with the SEC,
Washington, D.C. Our prospectus, prospectus supplement and this statement of additional information
do not contain all of the information set forth in the Registration Statement, including any
exhibits and schedules thereto. For further information with respect to us and our common stock,
preferred stock and debt securities offered hereby, reference is made to our Registration
Statement. Statements contained in our prospectus, prospectus supplement and this statement of
additional information as to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement may be inspected without
charge at the 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.
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