A reverse repurchase agreement, although structured as a sale and repurchase obligation, acts as a financing transaction under
which the Fund will effectively pledge certain assets as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in an amount less than the fair value of the pledged collateral. At the maturity of the
reverse repurchase agreement, the Fund will be required to repay the loan and interest and correspondingly receive back its collateral. While used as collateral, the pledged assets continue to pay principal and interest which are for the benefit of
the Fund.
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
NOTE 1.
BASIS OF COMBINATION
Vivaldi Opportunities Fund (the Acquired Fund or VOF), organized as a Maryland corporation on
March 20, 2017, is a non-diversified, closed-end management company registered under the Investment Company Act of 1940 (the 1940 Act), as amended. The
Acquired Fund commenced investment operations on October 2, 2017. Angel Oak Financial Strategies Income Term Trust (the Acquiring Fund or FINS), a Delaware statutory trust organized on June 14, 2018, is a non-diversified closed-end management investment company registered under the 1940 Act, as amended. The Acquiring Fund commenced operations on May 31, 2019 and is listed
on the New York Stock Exchange (NYSE) under the symbol FINS.
The accompanying unaudited pro forma financial statements are
presented to show the effect of the proposed reorganization of the Acquired Fund with and into the Acquiring Fund (the Reorganization) as if the Reorganization had taken place as of January 31, 2020. The Acquiring Fund will be the
accounting survivor of the Reorganization.
The reorganization involves the transfer of all the assets, and all of the liabilities of VOF to FINS in
exchange for shares of common stock of FINS, and the pro rata distribution of such shares of FINS to the shareholders of VOF, as provided in the Agreement and Plan of Reorganization.
The unaudited pro forma schedules of investments, statements of assets and liabilities and statements of operations should be read in conjunction with the
historical financial statements of VOF and FINS. The unaudited pro forma combined financial statements are presented for information only and may not necessarily be representative of what the actual combined financial statements would have been had
the Reorganization occurred on January 31, 2020.
Angel Oak Capital Advisors LLC, the investment adviser of the Acquiring Fund, and Vivaldi Asset
Management, LLC, the investment adviser of the Acquired Fund, will bear expenses incurred in connection with the Reorganization, as agreed to by those parties. Certain expenses of the Reorganization are estimated to be $520,000.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The unaudited
pro forma combined financial statements were prepared in accordance with the generally accepted accounting principles in the United States of America (GAAP) and the investment company accounting and reporting guidance of the Financial
Accounting Standards Board (FASB) Accounting Codification Topic 946 Financial Services-Investment Companies, which may require the use of management estimates and assumptions. Actual results could differ from those estimates.
Securities Valuation and Fair Value Measurements The Acquiring Fund has adopted fair valuation accounting standards that establish
an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a
discussion of changes in valuation techniques and related inputs, if any, during the period. In addition, these standards require expanded disclosure for each major category of assets. These inputs are summarized in the three broad levels listed
below:
|
|
|
Level 1 quoted prices in active markets for identical securities
|
|
|
|
Level 2 other significant observable inputs (including, but not limited to, quoted prices for similar
securities, interest rates, prepayment speeds, credit risk, etc.)
|
|
|
|
Level 3 significant unobservable inputs (including each Funds own assumptions in determining
fair value of investments based on the best information available)
|
F-23
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
The inputs or methodology used for valuing securities are not an indication of the risks associated with
investing in those securities.
Investments in registered open-end management investment companies, including
money market funds, will be valued based upon the NAV of such investments and are categorized as Level 1 of the fair value hierarchy.
The Acquiring
Funds fair values for long-term debt securities, including asset-backed securities, collateralized loan obligations, corporate obligations and trust preferred securities are normally determined on the basis of valuations provided by
independent pricing services. Vendors typically value such securities based on one or more inputs, including but not limited to, benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues, spreads and other
relationships observed in the markets among comparable securities; and pricing models such as yield measurers calculated using factors such as cash flows, financial or collateral performance and other reference data. In addition to these inputs,
asset-backed obligations may utilize cash flows, prepayment information, default rates, delinquency and loss assumptions, collateral characteristics, credit enhancements and specific deal information. Securities that use similar valuation techniques
and inputs are categorized as Level 2 of the fair value hierarchy. To the extent the significant inputs are unobservable; the values generally would be categorized as Level 3.
Equity securities in the Acquiring Fund, including preferred stocks, that are traded on a national securities exchange, except those listed on the Nasdaq
Global Market®, Nasdaq Global Select Market®, and the Nasdaq Capital Market®
exchanges (collectively, Nasdaq), are valued at the last sale price at the close of that exchange. Securities traded on Nasdaq will be valued at the Nasdaq Official Closing Price (NOCP). If, on a particular day, an
exchange-listed or Nasdaq security does not trade, then: (i) the security shall be valued at the mean between the most recent quoted bid and asked prices at the close of the exchange; or (ii) the security shall be valued at the latest
sales price on the Composite Market (defined below) for the day such security is being valued. Composite Market means a consolidation of the trade information provided by national securities and foreign exchanges and over-the-counter markets (OTC) as published by a pricing service. In the event market quotations or Composite Market pricing are not readily available, fair value
will be determined in accordance with the procedures adopted by the Acquiring Funds Board. All equity securities that are not traded on a listed exchange are valued at the last sale price at the close of the
over-the counter market. If a non-exchange listed security does not trade on a particular day, then the mean between the last quoted bid and asked price will be used as
long as it continues to reflect the value of the security. If the mean is not available, then bid price can be used as long as the bid price continues to reflect the value of the security. Otherwise fair value will be determined in accordance with
the procedures adopted by the Acquiring Funds Board. These securities will generally be categorized as Level 3 securities. When using the market quotations or close prices provided by the pricing service and when the market is considered
active, the security will be classified as a Level 1 security. Sometimes, an equity security owned by the Acquiring Fund will be valued by the pricing service with factors other than market quotations or when the market is considered inactive.
When this happens, the security will be classified as a Level 2 security.
Short term debt securities in the Acquiring Fund having a maturity of 60
days or less are generally valued at amortized cost, which approximates fair market value. These investments are categorized as Level 2 of the fair value hierarchy. Reverse repurchase agreements and repurchase agreements are priced at their
acquisition cost, which represents fair value. These securities will generally be categorized as Level 2 securities.
Financial derivative
instruments, such as futures contracts, that are traded on a national securities or commodities exchange are typically valued at the settlement price determined by the relevant exchange. Swaps, such as credit default swaps, interest-rate swaps and
currency swaps, are valued by a Pricing Service. To the extent these
F-24
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
securities are actively traded and valuation adjustments are not applied, they are categorized as Level 1 of the fair value hierarchy. Over-the-counter financial derivative instruments, such as certain futures contracts or swap agreements, derive their values from underlying asset prices, indices, reference rates, other inputs or a
combination of these factors. These instruments are normally valued on the basis of evaluations provided by independent pricing services or broker dealer quotations. Derivatives that use similar valuation techniques as described above are typically
categorized as Level 2 of the fair value hierarchy.
Securities in the Acquiring Fund may be fair valued in accordance with the fair valuation
procedures approved by the Acquiring Funds Board. The Acquiring Funds Valuation and Risk Management Oversight Committee is generally responsible for overseeing the Acquiring Funds valuation processes and reports quarterly to the
Acquiring Funds Board. The Acquiring Funds Valuation and Risk Management Oversight Committee has delegated to the Acquiring Funds Valuation Committee of Angel Oak Capital Advisors, LLC the day to day responsibilities for making all
necessary determinations of the fair value of portfolio securities and other assets for which market quotations are not readily available or if the prices obtained from brokers and dealers or independent pricing services are deemed to be unreliable
indicators of market or fair value. Representatives of the Angel Oak Capital Advisors, LLCs Pricing Committee report quarterly to the Acquiring Funds Valuation and Risk Management Oversight Committee.
The Acquired Funds Valuation Committee oversees the valuation of the Funds investments on behalf of the Acquired Fund. The Board of Directors of
the Acquired Fund has approved valuation procedures for the Acquired Fund (the Valuation Procedures). Securities traded on one or more of the U.S. national securities exchanges, the Nasdaq Stock Market or any foreign stock exchange will
be valued at the last sale price or the official closing price on the exchange or system where such securities are principally traded for the business day as of the relevant determination date. If no sale or official closing price of particular
securities are reported on a particular day, the securities will be valued at the closing bid price for securities held long, or the closing ask price for securities held short, or if a closing bid or ask price, as applicable, is not available, at
either the exchange or system-defined closing price on the exchange or system in which such securities are principally traded. Over-the-counter securities not quoted on
the Nasdaq Stock Market will be valued at the last sale price on the relevant determination date or, if no sale occurs, at the last bid price, in the case of securities held long, or the last ask price, in the case of securities held short, at the
time net asset value is determined. Equity securities for which no prices are obtained under the foregoing procedures, including those for which a pricing service supplies no exchange quotation or a quotation that is believed by Investment Manager
or a Sub-Adviser not to reflect the market value, will be valued at the bid price, in the case of securities held long, or the ask price, in the case of securities held short, supplied by one or more dealers
making a market in those securities or one or more brokers, in accordance with the Valuation Procedures. Futures index options will be valued at the mid-point between the last bid price and the last ask price
on the relevant determination date at the time net asset value is determined. The mid-point of the last bid and the last ask is also known as the mark.
Fixed-income securities with a remaining maturity of sixty (60) days or more for which accurate market quotations are readily available will normally be
valued according to the mean between the last available bid and ask price from a recognized pricing service. Fixed-income securities for which market quotations are not readily available or are believed by the Investment Manager or a Sub-Adviser not to reflect market value will be valued based upon broker-supplied quotations in accordance with the Valuation Procedures, provided that if such quotations are unavailable or are believed by the
Investment Manager or a Sub-Adviser not to reflect market value, such fixed-income securities will be valued at fair value in accordance with the Valuation Procedures, which may include the utilization of
valuation models that take into account spread and daily yield changes on government securities in the appropriate market (e.g., matrix pricing). High quality investment grade debt securities (e.g., treasuries, commercial paper, etc.) with a
remaining maturity of sixty (60) days or less are valued
F-25
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
by the Investment Manager or a Sub-Adviser at amortized cost, which the Acquired Funds Board has determined to approximate fair value. All other
instruments held by the Acquired Fund will be valued in accordance with the Valuation Procedures.
The Acquired Fund will generally value shares of an
exchange traded fund (an ETF and collectively, ETFs) at the last sale price on the exchange on which the ETF is principally traded. The Acquired Fund will generally value shares of
open-end investment companies and closed-end investment companies that do not trade on one or more of the U.S. national securities exchanges at their respective daily
closing net asset values.
The Acquired Fund will generally value private investment funds in accordance with the value determined as of such date by each
private investment fund in accordance with the private investment funds valuation policies and reported at the time of the Acquired Funds valuation.
As a general matter, the fair value of the Acquired Funds interest in a private investment fund will represent the amount that the Acquired Fund could
reasonably expect to receive from the private investment fund if the Acquired Funds interest were redeemed at the time of valuation, based on information reasonably available at the time the valuation is made and that the Acquired Fund
believes is reliable. In the event that the private investment fund does not report a value to the Acquired Fund on a timely basis, the Acquired Fund will determine the fair value of such private investment fund based on the most recent final or
estimated value reported by the private investment fund, as well as any other relevant information available at the time the Acquired Fund values its portfolio. Using the nomenclature of the hedge fund industry, any values reported as
estimated or final values are expected to reasonably reflect market values of securities when available or fair value as of the Acquired Funds valuation date. A substantial amount of time may elapse between the
occurrence of an event necessitating the pricing of Acquired Fund assets and the receipt of valuation information from the underlying manager of a private investment fund.
If no price is obtained for a security in accordance with the foregoing, because either an external price is not readily available or such external price is
believed by the Investment Manager or a Sub-Adviser not to reflect the market value, the Acquired Funds Valuation Committee will make a determination in good faith of the fair value of the security in
accordance with the Acquired Funds Valuation Procedures. In general, fair value represents a good faith approximation of the current value of an asset and will be used when there is no public market or possibly no market at all for the asset.
The fair values of one or more assets may not be the prices at which those assets are ultimately sold and the differences may be significant.
The
following is a summary of the inputs used to value each Funds net assets as of January 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring Fund
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Collateralized Loan Obligations
|
|
$
|
|
|
|
$
|
220,000
|
|
|
$
|
|
|
|
$
|
220,000
|
|
Corporate Obligations
|
|
|
|
|
|
|
291,094,931
|
|
|
|
|
|
|
|
291,094,931
|
|
Preferred Stocks
|
|
|
19,692,800
|
|
|
|
1,070,600
|
|
|
|
|
|
|
|
20,763,400
|
|
Short-Term Investments
|
|
|
3,066,209
|
|
|
|
|
|
|
|
|
|
|
|
3,066,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,759,009
|
|
|
$
|
292,385,531
|
|
|
|
|
|
|
$
|
315,144,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Instruments*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements
|
|
$
|
|
|
|
$
|
55,614,000
|
|
|
$
|
|
|
|
$
|
55,614,000
|
|
F-26
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Fund
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
N/A
|
|
|
Total
|
|
Asset-Backed Securities
|
|
$
|
|
|
|
$
|
13,202,343
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,202,343
|
|
Bank Loans
|
|
|
|
|
|
|
|
|
|
|
4,841,580
|
|
|
|
|
|
|
|
4,841,580
|
|
Closed-End Funds
|
|
|
22,942,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,942,130
|
|
Collateralized Mortgage Obligations
|
|
|
|
|
|
|
8,348,566
|
|
|
|
|
|
|
|
|
|
|
|
8,348,566
|
|
Common Stocks
|
|
|
19,159,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,159,907
|
|
Corporate Obligations
|
|
|
|
|
|
|
2,132,904
|
|
|
|
|
|
|
|
|
|
|
|
2,132,904
|
|
Exchange-Traded Debt Securities
|
|
|
1,012,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,012,239
|
|
Private Investment Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,651,074
|
|
|
|
11,651,074
|
|
Rights
|
|
|
3,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,471
|
|
U.S. Treasury Bills
|
|
|
|
|
|
|
1,122,192
|
|
|
|
|
|
|
|
|
|
|
|
1,122,192
|
|
Warrants
|
|
|
56,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,457
|
|
Short-Term Investments
|
|
|
662,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
662,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,836,220
|
|
|
$
|
24,806,005
|
|
|
$
|
4,841,580
|
|
|
$
|
11,651,074
|
|
|
|
85,134,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Instruments*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Sold Short
|
|
$
|
15,424,172
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,424,172
|
|
Options Written
|
|
$
|
6,180
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,180
|
|
Futures
|
|
$
|
3,199,258
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,199,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Combined
|
|
Assets
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Asset-Backed Securities
|
|
$
|
|
|
|
$
|
2,181,675
|
|
|
$
|
|
|
|
$
|
2,181,675
|
|
Bank Loans
|
|
|
|
|
|
|
|
|
|
|
4,841,580
|
|
|
|
4,841,580
|
|
Collateralized Loan Obligations
|
|
|
|
|
|
|
220,000
|
|
|
|
|
|
|
|
220,000
|
|
Corporate Obligations
|
|
|
|
|
|
|
291,094,931
|
|
|
|
|
|
|
|
291,094,931
|
|
Preferred Stocks
|
|
|
20,763,400
|
|
|
|
|
|
|
|
|
|
|
|
20,463,400
|
|
Short-Term Investments
|
|
|
3,066,209
|
|
|
|
|
|
|
|
|
|
|
|
3,066,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,829,609
|
|
|
$
|
293,496,606
|
|
|
$
|
4,841,580
|
|
|
$
|
321,867,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Instruments*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase Agreements
|
|
$
|
|
|
|
$
|
9,052,013
|
|
|
$
|
|
|
|
$
|
9,052,013
|
|
*
|
Other Financial Instruments are derivative instruments. Futures are reflected at the unrealized depreciation on
the instrument as reflected in the consolidated Schedule of Investments.
|
See the Schedule of Investments for further disaggregation of
investment categories. During the period ended January 31, 2020, each fund did not recognize any transfers to or from Level 3. See the quantitative information about Level 3 Fair Value Measurements for more information.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
Combined
|
|
Balance as
of
6/01/19
|
|
|
Amortization
|
|
|
Net
Realized
Gain
(Loss)
|
|
|
Change in net
Unrealized
Appreciation
(Depreciation)
|
|
|
Purchases
|
|
|
Paydowns/
Sales
|
|
|
Return of
Capital
Dividends
|
|
|
Transfers
into
Level 3
|
|
|
Transfers
Out of
Level 3
|
|
|
Balance as
of
1/31/20
|
|
Bank Loans
|
|
$
|
4,452,500
|
|
|
|
5,590
|
|
|
|
83,494
|
|
|
|
39,017
|
|
|
|
4,731,665
|
|
|
|
(4,420,727
|
)
|
|
|
(49,959
|
)
|
|
|
|
|
|
|
|
|
|
$
|
4,841,580
|
|
F-27
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
The following is a summary of quantitative information about Level 3 Fair Value Measurements:
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
Combined
|
|
Fair Value as of
January 31, 2020
|
|
|
Valuation
Techniques
|
|
Unobservable
Input
|
|
Impact to
Valuation from an
increase in input*
|
Bank Loans
|
|
$
|
4,841,580
|
|
|
Recent Transaction Price
|
|
Recent Transaction Price
|
|
Increase
|
*
|
This column represents the directional change in the fair value of the Level 3 investments that would
result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the opposite effect.
|
Federal Income Taxes Each Fund intends to elect and continue to qualify to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. If so qualified, each Fund generally will not be subject to federal income tax to the extent they distribute substantially all of its net investment income and capital gains to
shareholders. Each Fund generally intends to operate in a manner such that it will not be liable for federal income or excise taxes.
Each Fund has
adopted financial reporting rules regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. Each Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense
on the Statement of Operations.
Security Transactions and Income Recognition Investment security transactions are accounted for on trade
date. Gains and losses realized on sales of securities are determined on a specific identification basis. Interest income and expense is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized using the
effective yield method, based on each securitys estimated life. Dividend income and corporate actions, if any, are recorded on the ex-date. Paydown gains and losses on mortgage-related and other
asset-backed securities are recorded as components of interest income on the Statement of Operations. Payments received from certain investments held by each Fund may be comprised of dividends, capital gains and return of capital. Each Fund
originally estimates the expected classification of such payments. The amounts may subsequently be reclassified upon receipt of the information from the issuer. The actual character of distributions to each Funds shareholders will be reflected
in the Form 1099 received by shareholders after the end of the calendar year.
Distributions to Shareholders Distributions from the
Acquiring Funds net investment income are declared and paid monthly. The Acquiring Fund intends to distribute its net realized long term capital gains and net realized short term capital gains, if any, at least annually. Distributions to
shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. The treatment for financial reporting purposes of distributions made to shareholders during
the period from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes. These differences are caused primarily by differences in the timing of the recognition of certain
components of income, expense or realized capital gain for federal income tax purposes. Where such differences are permanent in nature, they are reclassified in the components of the net assets based on their ultimate characterization for federal
income tax purposes. Any such reclassifications will have no effect on net assets, results of operations or net asset values per share of each Fund.
The
Acquired Fund intends to make monthly distributions to its shareholders equal to 10% annually of the Acquired Funds net asset value per Share (the Distribution Policy). This predetermined dividend rate may be modified by the
Acquired Funds Board from time to time. The amount and timing of distributions are
F-28
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
determined in accordance with federal income tax regulations, which may differ from GAAP. The character of distributions made during the year from net investment income or net realized gains may
differ from the characterization for federal income tax purposes due to differences in the recognition of income expense and gain (loss) items for financial statement and tax purposes. investment company taxable income and net tax-exempt income undistributed during the year, as well as the remaining net capital gain realized during the year. If the total distributions made in any calendar year exceed investment company taxable income, net
tax-exempt income and net capital gain, such excess distributed amount would be treated as ordinary dividend income to the extent of the Acquired Funds current and accumulated earnings and profits.
Payments in excess of the earnings and profits would first be a tax-free return of capital to the extent of the adjusted tax basis in the Shares. After such adjusted tax basis is reduced to zero, the payment
would constitute capital gain (assuming the Shares are held as capital assets). This Acquired Funds Distribution Policy may, under certain circumstances, have certain adverse consequences to the Acquired Fund and its shareholders because it
may result in a return of capital resulting in less of a shareholders assets being invested in the Acquired Fund and, over time, increase the Acquired Funds expense ratio. The Acquired Funds Distribution Policy also may cause the
Acquired Fund to sell a security at a time it would not otherwise do so in order to manage the distribution of income and gain. If, for any distribution, investment company taxable income (which term includes net short-term capital gain), if any,
and net tax-exempt income, if any, is less than the amount of this predetermined dividend rate, then assets of the Acquired Fund will be sold and the difference will generally be a tax-free return of capital from the Acquired Funds assets. The Acquired Funds final distribution for each calendar year will include any remaining
Capital Share Shelf Offering During the current reporting period, the Acquired Fund was authorized by the Securities and Exchange Commission to
issue additional shares through a shelf offering (Shelf Offering), in which the aggregate offering amount is not to exceed $250,000,000. Under this Shelf Offering, the Acquired Fund, subject to market conditions, may raise additional
capital from time to time in varying amounts and offering methods at a net price at or above the Acquired Funds net asset value per common share and also through rights offerings and at-the-market offerings. As of January 31, 2020, no additional shares were sold in connection with the Shelf Offering.
Costs incurred by the Acquired Fund in connection with the Shelf Offering were recorded as a prepaid expense and recognized as prepaid offering costs on the
Statement of Assets and Liabilities. These costs will be amortized pro rata as shares are sold and will be recognized as a component of capital. Any deferred offering costs remaining one year after effectiveness of the Shelf Offering will be
expensed. Costs incurred by the Acquired Fund to keep the Shelf Offering current will be expensed as incurred and recognized as a component of Other expenses on the Statement of Operations. As of January 31, 2020, no amounts of offering
costs were amortized in connection with the Shelf Offering because no shares had been sold in connection with the Shelf Offering.
Share Valuation
The NAV per share of each Fund is calculated by dividing the sum of the value of the securities held by each Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares
outstanding, rounded to the nearest cent. Each Funds NAV will not be calculated on the days on which the New York Stock Exchange is closed for trading.
Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. Actual results could
differ from those estimates.
Indemnifications Under the Acquiring Funds organizational documents, the Acquiring Fund will indemnify
its officers and trustees for certain liabilities that may arise from performance of their duties to the Acquiring Fund.
F-29
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
Additionally, in the normal course of business, the Acquiring Fund enters into contracts that contain a variety of representatives and warranties which provide general indemnifications. The
Acquiring Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Acquiring Fund that have not yet occurred.
In the normal course of business, the Acquired Fund enters into contracts that contain a variety of representations which provide general indemnifications.
The Acquired Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Acquired Fund that have not yet occurred. However, the Acquired Fund expects the risk of loss to be
remote.
Cash and Cash Equivalents Cash and cash equivalents are highly liquid assets including coin, currency and short-term investments
that typically mature in 30-90 days. Short-term investments can include U.S. government securities and government agency securities, investment grade money market instruments, investment grade
fixed-income securities, repurchase agreements, commercial paper and cash equivalents. Cash equivalents are extremely low risk assets that are liquid and easily converted into cash. These investments are only considered equivalents if they are
readily available and are not restricted by some agreement. When the Advisers believe market, economic or political conditions are unfavorable for investors, the Advisers may invest up to 100% of a Funds net assets in cash, cash equivalents or
other short-term investments. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, or the U.S. economy. The Adviser also may invest in these types of securities or hold
cash while looking for suitable investment opportunities or to maintain liquidity.
Repurchase Agreements Repurchase agreements are
transactions by which the Acquiring Fund purchases a security and simultaneously commits to resell that security to the seller (a bank or securities dealer) at an agreed upon price on an agreed upon date. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon rate or the date of maturity of the purchased security. A repurchase agreement is accounted for as an investment by each Fund, collateralized by securities, which are
delivered to Acquiring Funds custodian or to an agent bank under a tri-party agreement. The securities are marked-to-market
daily and additional securities are acquired as needed, to ensure that their value equals or exceeds the repurchase price plus accrued interest. Repurchase agreements involve certain risks not associated with direct investments in the underlying
securities. In the event of a default or bankruptcy by the seller, the Acquiring Fund will seek to liquidate such collateral. The exercise of the Acquiring Funds right to liquidate such collateral could involve certain costs or delays, and, to
the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, each Fund could suffer a loss.
Reverse Repurchase Agreements A reverse repurchase agreement is the sale by the Acquiring Fund of a security to a party for a specified price,
with the simultaneous agreement by Acquiring Fund to repurchase that security from that party on a future date at a higher price.
Securities sold under
reverse repurchase agreements are reflected as a liability on the Statement of Assets and Liabilities. Interest payments made are recorded as a component of interest expense on the Statement of Operations. Reverse repurchase agreements involve the
risk that the counterparty will become subject to bankruptcy or other insolvency proceedings or fail to return a security to the Acquiring Fund. In such situations, the Acquiring Fund may incur losses as a result of a possible decline in the value
of the underlying security during the period while Acquiring Fund seeks to enforce its rights, a possible lack of access to income on the underlying security during this period, or expenses of enforcing its rights. The Acquiring Fund will segregate
assets determined to be liquid by Angel Oak Capital Advisors, LLC or otherwise covered its obligations under reverse repurchase agreement.
F-30
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
The gross obligations for secured borrowing by the type of collateral pledged and remaining time to maturity
on reverse repurchase contracts in the combined fund is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse Repurchase
Agreements
|
|
Overnight
and
Continuous
|
|
|
Up to 30
Days
|
|
|
30-90
Days
|
|
|
Greater
than 90
Days
|
|
|
Total
|
|
Corporate Obligations
|
|
$
|
|
|
|
$
|
55,614,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,614,000
|
|
Total
|
|
$
|
|
|
|
$
|
55,614,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,614,000
|
|
Gross amount of reverse repurchase agreements in Balance Sheet
Offsetting
Information Table
|
|
|
$
|
55,614,000
|
|
Amounts related to agreements not included in offsetting disclosure in Balance
Sheet
Offsetting Information Table
|
|
|
$
|
|
|
Subordinated Debt of Banks and Diversified Financial Companies The Acquiring Fund may invest in subordinated
debt securities, sometimes also called junior debt, which are debt securities for which the issuers obligations to make principal and interest payment are secondary to the issuers payment obligations to more senior debt
securities. Such investments will consist primarily of debt issued by community banks or savings intuitions (or their holding companies), which are subordinated to senior debt issued by the banks and depots held by the bank, but are senior to trust
preferred obligations, preferred stock and common stock issued by the bank.
High Yield Securities The Acquiring Fund may invest in below
investment grade securities, including certain securities issued by U.S. community banks and other financial institutions. These high-yield securities, also known as junk bonds, will generally be rated BB or lower by S&P
or will be of equivalent quality rating from another Nationally Recognized Statistical Ratings Organization, or if unrated, considered by Angel Oak Capital Advisors, LLC to be of comparable quality.
Structured Products The Acquiring Fund may invest in certain structured products, including community bank debt securitizations. Normally,
structured products are privately offered and sold (that is, they are not registered under the securities laws); however, an active dealer market may exist for structured products that qualify for Rule 144A transactions. The risks of an investment
in a structured product depend largely on the type of the collateral securities and the class of the structured product in which the Acquiring Fund invests. In addition to the normal interest rate, default and other risks of fixed income securities,
structured products carry additional risks, including the collateral may decline in value or default, the Acquiring Fund may invest in Structured Products that are not subordinate to other classes, values may be volatile and disputes with the issuer
may produce unexpected investment results.
Common and Preferred Stocks Each Fund may invest in common and preferred stock. Common stock
represents an equity (ownership) interest in a company, and usually possesses voting rights and earns dividends. Dividends on common stock are not fixed but are declared at the discretion of the issuer. Preferred stock is a class of stock having a
preference over common stock as to the payment of dividends and the recovery of investment should a company be liquidated, although preferred stock is usually junior to the debt securities of the issuer. Preferred stock typically does not possess
voting rights and its market value may change based on changes in interest rates. The fundamental risk of investing in preferred stock is the risk that the value of the stock might decrease.
Closed-End Funds (CEFs) The Acquired Fund may invest in shares of CEFs. A CEF is a pooled
investment vehicle that is registered under the Investment Company Act and whose shares are listed and traded on U.S. national securities exchanges. Investments in CEFs are subject to various risks, including reliance on
F-31
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
managements ability to meet a CEFs investment objective and to manage a CEFs portfolio, and fluctuation in the market value of a CEFs shares compared to the changes in the
value of the underlying securities that the CEF owns. In addition, the Acquired Fund bears a pro rata share of the management fees and expenses of each underlying CEF in addition to the Acquired Funds management fees and expenses, which
results in the Acquired Funds shareholders being subject to higher expenses than if they invested directly in the CEFs.
Exchange Traded Funds
(ETFs) ETFs typically trade on securities exchanges and their shares may, at times, trade at a premium or discount to their net asset values. In addition, an ETF may not replicate exactly the performance of the benchmark index
it seeks to track for a number of reasons, including transaction costs incurred by the ETF, the temporary unavailability of certain index securities in the secondary market or discrepancies between the ETF and the index with respect to the weighting
of securities or the number of securities held. Investing in ETFs, which are investment companies, may involve duplication of advisory fees and certain other expenses. As a result, the Acquired Fund shareholders indirectly bear their proportionate
share of these expenses. Therefore, the cost of investing in the Acquired Fund will be higher than the cost of investing directly in ETFs and may be higher than other funds that invest directly in securities. Each ETF in which the Acquired Fund
invests is subject to specific risks, depending on the nature of the ETF. Each ETF is subject to the risks associated with direct ownership of the securities comprising the index on which the ETF is based. These risks could include liquidity risk,
sector risk, and risks associated with fixed-income securities.
Futures Contracts The Acquired Fund may enter into futures contracts
(including contracts relating to foreign currencies, interest rates, commodities securities and other financial indexes and other commodities), and purchase and write (sell) related options traded on exchanges designated by the Commodity Futures
Trading Commission (CFTC) or, consistent with CFTC regulations, on foreign exchanges. A futures contract provides for the future sale by one party and the purchase by the other party of a specified amount of a commodity, such as an
energy, financial, agricultural or metal commodity, at a specified price, date, time and place. For example, a foreign currency futures contract provides for the future sale by one party and the purchase by the other party of a certain amount of a
specified non-U.S. currency at a specified price, date, time and place. Similarly, an interest rate futures contract provides for the future sale by one party and the purchase by the other party of a certain
amount of a specific interest rate sensitive financial instrument (e.g., a debt security) at a specified price, date, time and place. Securities, commodities and other financial indexes are capitalization weighted indexes that reflect the market
value of the securities, commodities or other financial instruments, respectively, represented in the indexes. A futures contract on an index is an agreement to be settled by delivery of an amount of cash equal to a specified multiplier times the
difference between the value of the index at the close of the last trading day on the contract and the price at which the agreement is made. The clearing house of the exchange on which a futures contract is entered into becomes the counterparty to
each purchaser and seller of the futures contract.
A futures contract held by the Acquired Fund is valued daily at the official settlement price on the
exchange on which it is traded. In computing daily net asset value, the Acquired Fund will mark to market its open futures positions. The Acquired Fund also is required to deposit and to maintain margin with respect to put and call options on
futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option and other futures positions held by the
Acquired Fund. Although some futures contracts call for making or taking delivery of the underlying assets, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (involving the
same exchange, underlying security or index and delivery month). If an offsetting purchase price is less than the original sale price, the Acquired Fund realizes a capital gain, or if it is more, the Acquired Fund realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase price, the Acquired Fund realizes a capital gain, or if it is less, the Acquired Fund realizes a capital loss. The transaction costs also must be included in these
calculations. As discussed below,
F-32
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
however, the Acquired Fund may not always be able to make an offsetting purchase or sale. In the case of a physically settled futures contract, this could result in the Acquired Fund being
required to deliver, or receive, the underlying physical commodity, which could be adverse to the Acquired Fund.
At any time prior to the expiration of a
futures contract, the Acquired Fund may seek to close the position by seeking to take an opposite position, which would operate to terminate the Acquired Funds existing position in the contract. Positions in futures contracts and options on
futures contracts may be closed out only on the exchange on which they were entered into (or through a linked exchange). No secondary market for such contracts exists. Although the Acquired Fund may enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market will exist at any particular time. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the day. It is possible that futures contract prices could move to the daily limit
for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions at an advantageous price and subjecting the Acquired Fund to substantial losses. In such event, and in the event of adverse
price movements, the Acquired Fund would be required to make daily cash payments of variation margin. In such situations, if the Acquired Fund had insufficient cash, it might have to sell assets to meet daily variation margin requirements at a time
when it would be disadvantageous to do so. In addition, if the transaction is entered into for hedging purposes, in such circumstances the Acquired Fund may realize a loss on a futures contract or option that is not offset by an increase in the
value of the hedged position. Losses incurred in futures transactions and the costs of these transactions will affect the Acquired Funds performance.
Options The Acquired Fund may write or purchase call and put options on specific securities and may write and sell covered or uncovered call and
put options for hedging purposes in pursuing its investment objectives. A put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at a stated exercise price, typically at any time
prior to the expiration of the option for American options or only at expiration for European options. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at a stated exercise
price, typically at any time prior to the expiration of the option. A covered call option is a call option with respect to which the seller of the option owns the underlying security. The sale of such an option exposes the seller during the term of
the option to possible loss of opportunity to realize appreciation in the market price of the underlying security 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. A covered put option is a put option with respect to which cash or liquid securities have been placed in a segregated account on the books of the Acquired Fund or with a custodian to fulfill the obligation undertaken. The sale of
such an option exposes the seller during the term of the option to a decline in price of the underlying security while depriving the seller of the opportunity to invest the segregated assets.
The Acquired Fund may close out a position when writing options by purchasing an option on the same underlying security with the same exercise price and
expiration date as the option that it has previously written on the security. In such a case, the Acquired Fund will realize a profit or loss if the amount paid to purchase an option is less or more than the amount received from the sale of the
option.
Private Investment Funds The Acquired Fund may also invest in private investment funds (i.e., investment funds that would be
investment companies but for the exemptions under Section 3(c)(1) or 3(c)(7) of the Investment Company Act) that invest or trade in a wide range of securities. When the Acquired Fund invests in securities issued by private investment funds, it
will bear its pro rata portion of the private funds expenses. These expenses are in addition to the direct expenses of the Acquired Funds own operations, thereby increasing
F-33
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
indirect Acquired Fund costs and potentially reducing returns to shareholders. A private investment fund in which the Acquired Fund invests has its own investment risks, and those risks can
affect the value of the private investment funds shares and, therefore, the value of the Acquired Funds investments. There can be no assurance that the investment objective of a private investment fund will be achieved. A private
investment fund may change its investment objective or policies without the Acquired Funds approval, which could force the Acquired Fund to withdraw its investment from such private investment fund at a time that is unfavorable to the Acquired
Fund. In addition, one private investment fund may buy the same securities that another private investment fund sells. Therefore, the Acquired Fund would indirectly bear the costs of these trades without accomplishing any investment purpose.
Securities Sold Short Short sales are transactions in which the Acquired Fund sells a security it does not own in anticipation of a decline in
the value of that security. To complete such a transaction, the Acquired Fund must borrow the security to make delivery to the buyer. The Acquired Fund then is obligated to replace the security borrowed by purchasing the security at market price at
the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Acquired Fund. When a security is sold short, a decrease in the value of the security will be recognized as a gain and an
increase in the value of the security will be recognized as a loss, which is potentially limitless. Until the security is replaced, the Acquired Fund is required to pay the lender amounts equal to dividend or interest that accrue during the period
of the loan, which is recorded as an expense. To borrow the security, the Acquired Fund also may be required to pay a premium or an interest fee, which are recorded as interest expense. Cash or securities are segregated for the broker to meet the
necessary margin requirements. The Acquired Fund is subject to the risk that it may not always be able to close out a short position at a particular time or at an acceptable price.
Swaps Each Fund may enter into swap contracts to hedge various investments for risk management or to pursue its investment objective. Each Fund
may invest in credit default swaps, total return swaps, interest rate swaps, equity swaps, currency swaps, options on foregoing swaps, and other types of swaps. Such transactions are subject to market risk, liquidity risk, risk of default by the
other party to the transaction, known as counterparty risk, regulatory risk and risk of imperfect correlation between the value of such instruments and the underlying assets and may involve commissions or other costs. Swap agreements are
valued by a pricing service and unrealized appreciation or depreciation is recorded daily as the difference between the prior day and current day closing price.
Trust Preferred Securities The Acquiring Fund may invest in trust preferred securities, or TruPS, which are securities that are
typically issued by banks and other financial institutions that combine the features of corporate debt securities and preferred securities as well as certain features of equity securities. TruPS are typically issued by banks and other financial
institutions, generally in the form of beneficial interest-bearing notes with preferred securities characteristics, or by an affiliated business trust, generally in the form of beneficial interests in subordinated debentures or similarly structured
securities. Many TruPS are issued by trusts or other special purpose entities established by banks and other financial institutions and are not a direct obligation of those banks and other financial institutions. The TruPS market consists of both
fixed and adjustable coupon rate securities that are either perpetual in nature of have stated maturity dates. TruPS are typically issued with a final maturity date, although some (usually those of foreign issuers) are perpetual in nature. TruPS are
typically junior and fully subordinated liabilities of an issuer and benefit from a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. In addition, TruPS typically per permit an issuer to defer the payment of
income for five years or more without triggering an event of default. Because of their subordinated position in the capital structure of an issuer the ability to defer payments for extended periods of time without default consequences to the issuer,
and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on the TruPS have not been made), TruPS are often
F-34
NOTES TO THE PRO FORMA FINANCIAL STATEMENTS
Notes to the Pro Forma Condensed Combined Financial Statements
January 31, 2020 (Unaudited)
deemed to be a close substitute for traditional preferred securities. TruPS also possess many of the typical characteristics of equity securities due to their subordinated position in an
issuers capital structure and because their quality and value are heavily dependent on the issuers profitability as opposed to any legal claims to specific assets or cash flows.
NOTE 4. DERIVATIVE AND HEDGING DISCLOSURE
The Acquired
Fund has adopted the disclosure provisions of FASB Standard Codification 815, Derivatives and Hedging, which requires enhanced disclosures about the Acquired Funds derivative and hedging activities, including how such activities are
accounted for and their effects on the Funds financial position, performance and cash flows.
For either investment or hedging purposes, the
Acquired Fund may invest substantially in a broad range of derivative instruments, including structured products, swaps (including credit default swaps), futures and forward contracts, and options. Such derivatives may trade over-the-counter or on an exchange and may principally be used for one or more of the following purposes: speculation, currency hedging, duration management, or to pursue the
Acquired Funds investment objective. The Acquired Funds derivative investments have risks, including the imperfect correlation between the value of such instruments and the underlying asset, rate or index, which creates the possibility
that the loss on such instruments may be greater than the gain in the value of the underlying asset, rate or index; the loss of principal; the possible default of the other party to the transaction; and illiquidity of the derivative investments. The
Acquired Fund invested in options contracts, futures contracts, and swap contracts during the period ended January 31, 2020, which did not have a material impact on the Acquired Funds performance.
The effects of these derivative instruments on the Acquired Funds financial position and financial performance as reflected in the Statement of Assets
and Liabilities and Statement of Operations are presented in the tables below. The fair values of derivative instruments as of January 31, 2020 by risk category are as follows:
The effects of derivative instruments on the Statement of Operations for the period ended January 31, 2020 are as
follows:
The number of contracts are included on the Schedule of Investments. The quarterly average volumes of derivative instruments
as of January 31, 2020 are as follows:
On September 17, 2019, the Acquiring Fund entered into a $30 million line of credit agreement (the Facility) with IBERIABANK, which
matures September 17, 2022. Under the Facility, interest is charged on a floating rate based on one-month LIBOR plus 2.40% and is payable on the last day of the interest period, which was 4.06% as of
January 31, 2020. The Acquiring Fund is required to pay IBERIABANK a commitment fee of 0.50% on the unused portion of the Facility if the Acquiring Fund does not achieve a 75% utilization rate in each year. This committee fee is waived for the
first year. The Fund paid an origination fee of $120,000 and other expenses on September 17, 2019, which were paid upfront and are being accrued for daily over the life of the loan. For the period ended January 31, 2020, the average
principal balance and interest rate was $14,965,672 and 4.19%. The maximum loan outstanding during the period was $25,900,000. As of January 31, 2020, the outstanding principal balance under the Facility was $25,900,000.
The Acquired Fund has entered into a borrowing agreement with BNP Paribas. The Acquired Fund may borrow
amounts up to one-third of the value of its assets. The Acquired Fund is charged interest of one-month LIBOR plus 0.75% for borrowing under this agreement. The average
interest rate, average daily loan balance, maximum outstanding and amount recoded as interest expense for the period ended January 31, 2020 were 2.75%, $20,089,379, $22,569,846, and $373,051, respectively. The Fund had outstanding borrowings
for 245 days during the period ended January 31, 2020. At January 31, 2020, the balance was $21,345,383 and the interest rate was 2.41%.
The Acquiring Fund is listed
for trading on the NYSE and has filed with the NYSE its annual chief executive officer certification regarding compliance with the NYSEs listing standards. The Acquiring Fund filed with the SEC the certification of its chief executive officer
and principal financial officer required by section 302 of the Sarbanes-Oxley Act.
Under the terms of the investment advisory agreement, on behalf of the Acquiring Fund (the Agreement), the Angel Oak Capital Advisors LLC manages
the Acquiring Funds investments subject to oversight of the Trustees. As compensation for its management services, the Acquiring Fund is obligated to pay the Angel Oak Capital Advisors LLC a fee computed and accrued daily and paid monthly at
an annual rate of 1.35% of the average daily Managed Assets (as defined below) of the Acquiring Fund. Managed Assets includes total assets (including any assets attributable to borrowing for investment purposes) minus the sum of the Acquiring
Funds accrued liabilities (other than liabilities representing borrowings for investment purposes) (Managed Assets). The Angel Oak Capital Advisors LLC has voluntarily agreed to waive its management fee to 1.00% of the Funds
Managed Assets for the first year of the Acquiring Funds operation. The Angel Oak Capital Advisors LLC may not recoup from the Acquiring Fund any waived amount or reimbursed expenses pursuant to this arrangement. The Angel Oak Capital Advisors
LLC may amend or discontinue this voluntary waiver at any time without advance notice
The Angel Oak Capital Advisors LLC has contractually agreed to
waive its fees and/or reimburse certain expenses (exclusive of any management fees, taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any
merger or reorganization and extraordinary expenses) to limit the Acquiring Funds Total Annual Fund Operating Expenses to 0.25% of the Funds Managed Assets (the Expense Limit) through at least May 31, 2020 (the
Limitation Period). The Expense Limit may be eliminated at any time by the Acquiring Funds Board, on behalf of the Acquiring Fund, upon 60 days written notice to the Angel Oak Capital Advisors LLC. Prior to the end of the
Limitation Period, the Expense Limit may not be terminated by the Angel Oak Capital Advisors LLC without the consent of the Acquiring Funds Board. The contractual waiver and/or reimbursement by the Angel Oak Capital Advisors LLC with respect
to the Fund is subject to repayment by the Fund within 36 months following the month in which that particular waiver and/or reimbursement occurred, provided that the Acquiring Fund is able to make the repayment without exceeding the expense
limitations described above or the expense limitation in effect at the time of the reimbursement (whichever is lower). The amount subject to repayment by the Fund, pursuant to the aforementioned conditions at January 31, 2020, is $154,748 and is
recoverable through January 31, 2023.
The Acquired Fund has agreed to pay the Investment Manager a management fee payable on a monthly basis at the
annual rate of 1.40% of the Acquired Funds average daily Managed Assets (as defined below) in consideration of the advisory and other services it provides. Managed Assets means the total assets of the
Fund, including leverage, minus liabilities (other than debt representing leverage and any preferred stock that may be outstanding). As a result, the Investment Manager is paid more if the
Acquired Fund uses leverage, which creates a conflict of interest for the Investment Manager. The Investment Manager seeks to manage that potential conflict by utilizing leverage only when it determines such action is in the best interests of the
Fund.
Destra Capital Investments LLC (Destra) provides investor support services in connection with the ongoing operation of the Acquiring
Fund. Such services include providing ongoing contact with respect to the Acquiring Fund and its performance with financial advisors that are representatives of financial intermediaries, communicating with the NYSE specialist for the Shares, and
with the closed-end fund analyst community regarding the Acquiring Fund on a regular basis. The Acquiring Fund pays Destra a service fee in an annual amount equal to 0.12% of the average aggregate daily value
of the Acquiring Funds Managed Assets during the Acquiring Funds first year of operations and 0.10% of the average daily value of the Acquiring Funds Managed Assets if the Acquiring Funds average Managed Assets is less than
$500 million, otherwise the Acquiring Fund will pay 0.07% of the average daily value of the Acquiring Funds Managed Assets from the end of the Acquiring Funds first year of operations through the Termination Date.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (Fund Services), an indirect wholly-owned subsidiary of U.S.
Bancorp, serves as the Funds Administrator (Administrator) and, in that capacity, performs various administrative and accounting services for the Acquiring Fund. Fund Services also serves as the Acquiring Funds fund
accountant and transfer agent. The Administrator prepares various federal and state regulatory filings, reports and returns for the Acquiring Fund; prepares reports and materials to be supplied to the trustees; monitors the activities of the
Acquiring Funds custodian; coordinates the preparation and payment of the Acquiring Funds expenses and reviews the Acquiring Funds expense accruals. As compensation for its services, the Administrator is entitled to a monthly fee
at an annual rate based upon the average daily net assets of the Acquiring Fund. U.S. Bank, N.A. (the Custodian) serves as custodian to the Acquiring Fund.
Vigilant Compliance, LLC provides Chief Compliance Officer (CCO) services to the Acquired Fund. The Acquired Funds allocated fees incurred
for CCO services for the period ended December 31, 2019, are reported on the Statement of Operations.
Foreside Fund Services, LLC serves as the
Acquired Funds distributor; UMB Fund Services, Inc. (UMBFS) serves as the Acquired Funds fund accountant, transfer agent and administrator; UMB Bank, n.a., an affiliate of UMBFS, serves as the Acquired Funds
custodian.
Certain officers of the Acquired Fund are employees of UMBFS. The Acquired Fund does not compensate officers affiliated with the Acquired
Funds administrator. For the period ended December 31, 2019, the Acquired Funds allocated fees incurred for directors are reported on the Statement of Operations.
Certain officers, Trustees and shareholders of Acquiring Fund are also owners or employees of Angel Oak Capital Advisors, LLC.
For the period ended January 31, 2020, there were no purchases or sales of U.S. Government securities for the Funds.
During the period ended January 31, 2020, the Acquiring Fund purchased securities from an affiliated fund of Angel Oak Capital Advisors, in accordance
with the Rule 17a-7 procedures adopted by the Trust, at a value of $95,484,673.
The combined pro forma net asset values per share assume that the issuance of FINS shares to VOF shareholders would have occurred at January 31, 2020
in connection with the proposed reorganization. The number of shares assumed to be received is equal to the net asset value of shares of VOF as of January 31, 2020, divided by the net asset value of FINS as of January 31, 2020. The pro forma number
of shares outstanding, for the combined fund consists of the following:
The pro forma condensed combined statement of operations for the eight-month period ended January 31, 2020 as adjusted, giving effect to the Reorganization
reflects the changes in expense of the Acquiring Fund as if the Reorganization were consummated on January 31, 2020. Although it is anticipated that here will be an elimination of certain duplicative expenses because of the Reorganization, the
actual amount of such expenses cannot be determined because it is not possible to predict the cost of future operations.
Management of the Funds has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date these financial
statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.
Management of the Funds
has considered the effects the global COVID-19 pandemic crisis has had on financial markets around the world. The U.S. Federal Reserve Bank and other central banks have taken aggressive action to support worldwide markets, which Management believes
will help restore confidence and improve liquidity over time. Management has concluded that the fundamental credit characteristics of the assets traded by the Funds continue to be sound and expects attractive relative-value investment opportunities
in the future.