PROSPECTUS
[LOGO]
$280,000,000
COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
TAXABLE AUCTION MARKET PREFERRED SHARES ('AMPS'r')
2,800 SHARES, SERIES T
2,800 SHARES, SERIES TH
2,800 SHARES, SERIES F
2,800 SHARES, SERIES W
LIQUIDATION PREFERENCE $25,000 PER SHARE
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Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') is
simultaneously offering 2,800 Series T Taxable Auction Market Preferred Shares,
2,800 Series TH Taxable Auction Market Preferred Shares, 2,800 Series F Taxable
Auction Market Preferred Shares and 2,800 Series W Taxable Auction Market
Preferred Shares. The shares are referred to in this prospectus as 'AMPS'. The
Fund is a recently organized, non-diversified, closed-end management investment
company. Our primary investment objective is high current income through
investment in real estate securities and our secondary investment objective is
capital appreciation. Under normal market conditions, we will invest at least
90% of our total assets in common stocks, preferred stocks and other equity
securities issued by real estate companies, such as 'real estate investment
trusts' ('REITs'). At least 80% of our total assets will be invested in income
producing equity
(continued on following page)
INVESTING IN PREFERRED SHARES INVOLVES RISKS. SEE 'RISK FACTORS' BEGINNING ON
PAGE 20 OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF THE AMPS IS $25,000.
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PER SHARE TOTAL
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Public offering price....................................... $25,000 $280,000,000
Sales load.................................................. $250 $2,800,000
Proceeds to the Fund(1)..................................... $24,750 $277,200,000
(1) Not including offering expenses payable by the Fund estimated to be
$542,260
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the AMPS are first
issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the AMPS subject to various conditions. The
AMPS will be ready for delivery in book-entry form only through the facilities
of The Depository Trust Company, on or about April 4, 2002.
-----------------
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
A.G. EDWARDS & SONS, INC.
UBS WARBURG
-----------------
The date of this prospectus is April 1, 2002.
'AMPS' is a registered trademark of Merrill Lynch & Co., Inc.
securities issued by high quality REITs. We may invest up to 10% of our total
assets in debt securities issued or guaranteed by real estate companies. We will
not invest more than 20% of our total assets in non-investment grade preferred
stock or debt securities (commonly known as 'junk bonds'). There can be no
assurance that we will achieve our investment objectives. See 'Investment
Objectives and Policies.' The Fund's investment manager is Cohen & Steers
Capital Management, Inc.
Investors in AMPS will be entitled to receive cash dividends at an annual
rate that may vary for the successive dividend periods for the AMPS. AMPS have a
liquidation preference of $25,000 per share, plus any accumulated, unpaid
dividends. AMPS also have priority over the Fund's common shares as to
distribution of assets as described in this Prospectus. See 'Description of
AMPS.' The dividend rate for the initial dividend period will be 1.95% for
Series T AMPS, 1.95% for Series TH AMPS, 1.95% for Series F AMPS and 2.00% for
Series W AMPS. The initial dividend period is from the date of issuance through
April 16, 2002 for Series T, April 18, 2002 for Series TH and April 21, 2002 for
Series F AMPS, and through May 1, 2002 for Series W AMPS. For subsequent
dividend periods, the AMPS will pay dividends based on a rate set at auction,
usually held every seven days in the case of the Series T, Series TH and
Series F AMPS and 28 days in the case of the Series W AMPS. Prospective
purchasers should note: (1) a buy order (called a 'bid order') or sell order is
a commitment to buy or sell AMPS based on the results of an auction; and
(2) purchases and sales will be settled on the next business day after the
auction. Investors may only buy or sell AMPS through an order placed at an
auction with or through a broker-dealer in accordance with the procedures
specified in this Prospectus. Broker-dealers are not required to maintain a
secondary market in AMPS, and a secondary market may not provide you with
liquidity. The Fund may redeem AMPS as described under 'Description of
AMPS -- Redemption.'
The AMPS 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.
The AMPS will be senior to the Fund's outstanding common shares. AMPS are
not listed on an exchange. The Fund's common shares are traded on the New York
Stock Exchange (the 'NYSE') under the symbol 'RQI.' It is a condition of closing
this offering that the AMPS be offered with a rating of 'AAA' from Standard &
Poor's Ratings Services ('S&P') and of 'Aaa' from Moody's Investors Service,
Inc. ('Moody's').
TABLE OF CONTENTS
PAGE
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Prospectus Summary.......................................... 4
Financial Highlights........................................ 15
The Fund.................................................... 16
Use of Proceeds............................................. 16
Capitalization.............................................. 17
Investment Objectives and Policies.......................... 18
Risk Factors................................................ 20
How the Fund Manages Risk................................... 27
Management of the Fund...................................... 28
Description of AMPS......................................... 30
The Auction................................................. 37
Description of Common Shares................................ 42
Certain Provisions of the Charter and By-Laws............... 42
Conversion to Open-End Fund................................. 44
U.S. Federal Taxation....................................... 44
Underwriting................................................ 48
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 49
Legal Opinions.............................................. 49
Independent Auditors........................................ 49
Further Information......................................... 49
Table of Contents for the Statement of Additional
Information............................................... 50
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITERS HAVE
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. NEITHER THE FUND NOR THE UNDERWRITERS ARE 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 IS ACCURATE AS
OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE FUND'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE FUND YOU SHOULD
KNOW BEFORE INVESTING. YOU SHOULD READ THE PROSPECTUS BEFORE DECIDING WHETHER TO
INVEST AND RETAIN IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL
INFORMATION, DATED APRIL 1, 2002 (THE 'SAI'), CONTAINING ADDITIONAL INFORMATION
ABOUT THE FUND, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
('SEC') AND IS INCORPORATED BY REFERENCE INTO (WHICH MEANS IT IS CONSIDERED PART
OF) THIS PROSPECTUS. YOU CAN REVIEW THE TABLE OF CONTENTS OF THE SAI ON PAGE 50
OF THIS PROSPECTUS. YOU MAY REQUEST A FREE COPY OF THE SAI BY CALLING (800)
437-9912. YOU MAY ALSO OBTAIN THE SAI AND OTHER INFORMATION REGARDING THE FUND
ON THE SEC WEB SITE (HTTP://WWW.SEC.GOV).
THROUGH AND INCLUDING MAY 10, 2002, ALL DEALERS EFFECTING TRANSACTIONS IN
THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the information
that you should consider before investing in AMPS. You should review the more
detailed information contained in this Prospectus and in the Statement of
Additional Information (the 'SAI'), especially the information set forth under
the heading 'Risk Factors.'
THE FUND..................................... The Cohen & Steers Quality Income Realty Fund, Inc.
(the 'Fund') is a recently organized,
non-diversified, closed-end management investment
company. The Fund was organized as a Maryland
corporation on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended
(the '1940 Act'). The Fund commenced investment
operations on February 28, 2002 upon the closing of
an initial public offering of 34,000,000 common
shares, par value $0.001 per share ('Common Shares').
As of March 21, 2002, the Fund had 37,707,000 Common
Shares outstanding and net assets of $563,194,590.
The Fund's principal office is located at 757 Third
Avenue, New York, New York 10017, and its telephone
number is (212) 832-3232.
THE OFFERING................................. We are offering 2,800 Series T AMPS, par value
$0.001, 2,800 Series TH AMPS, par value $0.001, 2,800
Series F AMPS, par value $0.001, and 2,800 Series W
AMPS, par value $0.001, each at a purchase price of
$25,000 per share plus dividends, if any, that have
accumulated from the date the Fund first issues the
AMPS. The AMPS are offered through a group of
underwriters led by Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
The AMPS entitle their holders to receive cash
dividends at an annual rate that may vary for the
successive dividend periods for the AMPS. In general,
except as described under ' -- Dividends and Dividend
Periods' below and 'Description of AMPS -- Dividends
and Dividend Periods,' the dividend period for the
Series T, Series TH and Series F AMPS will be seven
days and the dividend period for the Series W AMPS
will be 28 days. The auction agent will determine the
dividend rate for a particular period by an auction
conducted on the business day immediately prior to
the start of that rate period. See 'The Auction.'
The AMPS are not listed on an exchange. Instead,
investors may buy or sell AMPS in an auction by
4
submitting orders to broker-dealers that have entered
into an agreement with the auction agent and the
Fund.
Generally, investors in AMPS will not receive
certificates representing ownership of their shares.
The securities depository (The Depository Trust
Company or any successor) or its nominee for the
account of the investor's broker-dealer will maintain
record ownership of AMPS in book-entry form. An
investor's broker-dealer, in turn, will maintain
records of that investor's beneficial ownership of
AMPS.
An investor may consider whether to invest in a
particular series based on the series' rate of
return, the investor's time horizon for investment,
and the investor's liquidity preference. Investors
can choose between four tranches. The Series T, TH
and F AMPS have seven-day dividend periods. The
Series W AMPS have a 28-day dividend period. The
Series W AMPS, or 28-day tranche, may be suited for
investors with a longer investment time horizon. Each
seven-day tranche has approximately the same rate of
return (except to the extent short-term rates may
vary from day-to-day) but varies with respect to the
day of the week the auction is conducted. Moreover,
an investor may choose a particular seven-day tranche
based on their liquidity needs at a particular time
of the week.
RATINGS...................................... The Fund will issue AMPS only if such shares have
received a credit quality rating of 'AAA' from
Standard & Poor's Rating Services ('S&P') and 'Aaa'
from Moody's Investors Service, Inc. ('Moody's').
These ratings are an assessment of the capacity and
willingness of an issuer to pay preferred stock
obligations. The ratings are not a recommendation to
purchase, hold or sell those shares inasmuch as the
rating does not comment as to market price or
suitability for a particular investor. The rating
agency guidelines described above also do not address
the likelihood that an owner of AMPS will be able to
sell such shares in an auction or otherwise. The
ratings are based on current information furnished to
Moody's and S&P by the Fund and the Investment
Manager and information obtained from other sources.
The ratings may be changed, suspended or withdrawn
from other sources in the rating agencies'
5
discretion as a result of changes in, or the
unavailability of, such information.
USE OF PROCEEDS.............................. The net proceeds of AMPS, together with the proceeds
from our initial public offering, will be invested in
accordance with the policies set forth under
'Investment Objectives and Policies.' We estimate
that the net proceeds of both offerings will be fully
invested in accordance with our investment objectives
and policies within four months of the completion of
this offering. We intend to invest in preferred
stocks and equity securities issued by real estate
companies such as REITs. Pending such investment,
those proceeds may be invested in U.S. Government
securities or high quality, short-term money market
instruments.
INVESTMENT OBJECTIVES AND POLICIES........... Our primary investment objective is high current
income through investment in real estate securities.
Capital appreciation is a secondary investment
objective. Our investment objectives and certain
investment policies are considered fundamental and
may not be changed without shareholder approval. See
'Investment Objectives and Policies.'
Under normal market conditions, we will invest at
least 90% of our total assets in common stocks,
preferred stocks and other equity securities issued
by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of our
total assets will be invested in income producing
equity securities issued by high quality REITs, and
substantially all of the equity securities of real
estate companies in which we intend to invest are
traded on a national securities exchange or in the
over-the-counter market. High quality REITs are
companies that, in the opinion of the Investment
Manager, offer excellent prospects for consistent,
above-average revenue and earnings growth. To
determine whether a company is of high quality, the
Investment Manager generally looks to a strong record
of earnings growth, as well as to a company's current
ratio of debt to capital and the quality of its
management. All of the REITs in which the Fund will
invest will have a market capitalization greater than
$100 million. A real estate company generally derives
at least 50% of its revenue from real estate or has
at least 50% of its assets in real estate. A REIT is
a company dedicated to owning, and
6
usually operating, income producing real estate, or
to financing real estate. REITs are generally not
taxed on income distributed to shareholders provided
they distribute to their shareholders substantially
all of their income and otherwise comply with the
requirements of the Internal Revenue Code of 1986, as
amended (the 'Code'). As a result, REITs generally
pay relatively high dividends (as compared to other
types of companies) and the Fund intends to use these
REIT dividends in an effort to meet its objective of
high current income. We may invest up to 10% of our
total assets in debt securities issued or guaranteed
by real estate companies. It is our current intention
to invest approximately 70% of our total assets in
common stocks of real estate companies and
approximately 30% of our total assets in preferred
stocks of real estate companies, although the actual
percentage of common and preferred stocks in our
investment portfolio may vary over time. We will not
invest more than 20% of the Fund's total assets in
preferred stock or debt securities rated below
investment grade (commonly known as 'junk bonds') or
unrated securities of comparable quality. Preferred
stock or debt securities will be considered to be
investment grade if, at the time of investment, such
security has a rating of 'BBB' or higher by S&P,
'Baa' or higher by Moody's or an equivalent rating by
a nationally recognized statistical rating agency.
The Investment Manager may also invest in preferred
stock or debt securities which are unrated but which,
in the opinion of the Investment Manager, are
determined to be of equivalent quality. All of our
investments will be in securities of U.S. issuers and
we will generally not invest more than 10% of our
total assets in the securities of one issuer. There
can be no assurance that our investment objectives
will be achieved. See 'Investment Objectives and
Policies.'
INVESTMENT MANAGER........................... Cohen & Steers Capital Management, Inc. (the
'Investment Manager') is the investment manager
pursuant to an Investment Management Agreement. The
Investment Manager, which was formed in 1986, is a
leading firm specializing in the management of real
estate securities portfolios and as of December 31,
2001 had approximately $5.7 billion in assets under
management. Its clients include pension plans,
7
endowment funds and mutual funds, including the
largest open-end and closed-end real estate funds.
The Investment Manager's client accounts are invested
principally in real estate securities and the
Investment Manager focuses exclusively on real
estate. The Investment Manager, whose principal
business address is 757 Third Avenue, New York, New
York 10017, is also responsible for providing
administrative services, and assisting the Fund with
operational needs pursuant to an administration
agreement (the 'Administration Agreement'). In
accordance with the terms of the Administration
Agreement, the Fund has entered into an agreement
with State Street Bank and Trust Company ('State
Street Bank') to perform certain administrative
functions subject to the supervision of the
Investment Manager (the 'Sub-Administration
Agreement'). See 'Management of the
Fund -- Administration and Sub-Administration
Agreement.'
PRINCIPAL INVESTMENT RISKS................... Risk is inherent in all investing. Therefore, before
investing in AMPS and the Fund you should consider
certain risks carefully. The primary risks of
investing in AMPS are:
the Fund will not be permitted to declare dividends
or other distributions with respect to your AMPS or
redeem your AMPS unless the Fund meets certain asset
coverage requirements;
if an auction fails, you may not be able to sell some
or all of your AMPS;
you may receive less than the price you paid for your
AMPS if you sell them outside of the auction,
especially when market interest rates are rising;
a rating agency could downgrade the rating assigned
to the AMPS, which could affect liquidity;
the Fund may be forced to redeem your AMPS to meet
regulatory or rating agency requirements or may
voluntarily redeem your shares in certain
circumstances;
in certain circumstances the Fund may not earn
sufficient income from its investments to pay
dividends on AMPS;
the value of the Fund's investment portfolio may
decline, reducing the asset coverage for the AMPS;
and
8
if an issuer of a common stock in which the Fund
invests experiences financial difficulties or if an
issuer's preferred stock or debt security is
downgraded or defaults or if an issuer in which the
Fund invests is affected by other adverse market
factors, there may be a negative impact on the
income and/or asset value of the Fund's investment
portfolio.
In addition, although the offering of AMPS is
conditioned upon receipt of ratings of 'AAA' from S&P
and 'Aaa' from Moody's for the AMPS, there are
additional risks related to the investment policies
of the Fund, such as:
Real Estate Risks. Since we concentrate our assets in
the real estate industry, the Fund's investments will
be closely linked to the performance of the real
estate markets. Property values may fall due to
increasing vacancies or declining rents resulting
from economic, legal, cultural or technological
developments. REIT prices also may drop because of
the failure of borrowers to pay their loans and poor
management. Many REITs utilize leverage, which
increases investment risk and could adversely affect
a REIT's operations and market value in periods of
rising interest rates as well as risks normally
associated with debt financing. In addition, there
are specific risks associated with particular sectors
of real estate investments such as retail, office,
hotel, healthcare, and multifamily properties.
We may also invest in preferred stocks and debt
securities of real estate companies. These securities
also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the
value of preferred stocks and debt securities may
fall.
Lower-Rated Securities Risk. Lower-rated preferred
stock or debt securities, or equivalent unrated
securities, which are commonly known as 'junk bonds,'
generally involve greater volatility of price and
risk of loss of income and principal, and may be more
susceptible to real or perceived adverse economic and
competitive industry conditions than higher grade
securities. It is reasonable to expect that any
adverse economic conditions could disrupt the market
for lower-rated securities, have an adverse impact on
the value of those securities, and adversely affect
the ability of the issuers of those
9
securities to repay principal and interest on those
securities.
Recent Developments. As a result of the terrorist
attacks on the World Trade Center and the Pentagon on
September 11, 2001, some of the U.S. securities
markets were closed for a four-day period. These
terrorist attacks and related events have led to
increased short-term market volatility and may have
long-term effects on U.S. and world economies and
markets. A similar disruption of the financial
markets could impact interest rates, auctions,
secondary trading, ratings, credit risk, inflation
and other factors relating to the Common Shares and
the AMPS.
For further discussion of the risks associated with
investing in the AMPS and the Fund, see 'Risk
Factors.'
DIVIDENDS AND RATE PERIODS................... The table below shows the dividend rates, the
dividend payment dates and the number of days for the
initial rate periods on AMPS offered in this
Prospectus. For subsequent dividend periods, AMPS
will pay dividends based on a rate set at auctions
normally held every seven days in the case of the
Series T, Series TH and Series F AMPS, and 28 days in
the case of the Series W AMPS. In most instances,
dividends are payable on the first business day
following the end of the rate period. The rate set at
auction will not exceed the applicable maximum rate.
The dividend payment date for special rate periods
will be set out in the notice designating a special
rate period. Dividends on AMPS will be cumulative
from the date the shares are first issued and will be
paid out of legally available funds.
DIVIDEND
INITIAL PAYMENT DATE NUMBER OF
DIVIDEND FOR INITIAL DAYS OF INITIAL
RATE RATE PERIOD RATE PERIOD
---- ----------- -----------
Series T............. 1.95% April 17, 2002 13
Series TH............ 1.95% April 19, 2002 15
Series F............. 1.95% April 22, 2002 18
Series W............. 2.00% May 2, 2002 28
The Fund may, subject to certain conditions,
designate special rate periods of more than seven
days in the case of the Series T, TH and F AMPS, and
more than 28 days in the case of the Series W AMPS.
10
The Fund may not designate a special rate period
unless sufficient clearing bids were made in the most
recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory
redemptions and any additional dividends payable
prior to such date must be paid in full. The Fund
also must have received confirmation from Moody's and
S&P or any substitute rating agency that the proposed
special rate period will not adversely affect such
agency's then-current rating on the AMPS and the lead
Broker-Dealer designated by the Fund, initially
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
must not have objected to declaration of a special
rate period.
See 'Description of AMPS -- Dividends and Rate
Periods' and ' -- Designation of Special Rate
Periods' and 'The Auction.'
SECONDARY MARKET TRADING..................... Broker-dealers may, but are not obligated to,
maintain a secondary trading market in AMPS outside
of auctions. There can be no assurance that a
secondary market will provide owners with liquidity.
You may transfer shares outside of auctions only to
or through a broker-dealer that has entered into an
agreement with the auction agent and the Fund, or
other persons as the Fund permits.
INTEREST RATE TRANSACTIONS................... In order to reduce the interest rate risk inherent in
our underlying investments and capital structure, we
may enter into interest rate swap or cap
transactions. The use of interest rate swaps and caps
is a highly specialized activity that involves
investment techniques and risks different from those
associated with ordinary portfolio security
transactions. In an interest rate swap, the Fund
would agree to pay to the other party to the interest
rate swap (which is known as the 'counterparty') a
fixed rate payment in exchange for the counterparty
agreeing to pay to the Fund a variable rate payment
that is intended to approximate the Fund's variable
rate payment obligation on the AMPS. The payment
would be based on the notional amount of the swap. In
an interest rate cap, the Fund would pay a premium to
the counterparty to the interest rate cap and, to the
extent that a specified variable rate index exceeds a
predetermined fixed rate, would receive from the
counterparty payments of the difference based on the
notional amount of such cap. If the counterparty to
an
11
interest rate swap or cap defaults, the Fund would be
obligated to make the payments that it had intended
to avoid. Depending on the general state of
short-term interest rates and the returns on the
Fund's portfolio securities at that point in time,
this default could negatively impact the Fund's
ability to make dividend payments on the AMPS. In
addition, at the time an interest rate swap or cap
transaction reaches its scheduled termination date,
there is a risk that the Fund will not be able to
obtain a replacement transaction or that the terms of
the replacement will not be as favorable as on the
expiring transaction. If this occurs, it could have a
negative impact on the Fund's ability to make
dividend payments on the AMPS. If the Fund fails to
maintain the required asset coverage on the
outstanding AMPS or fails to comply with other
covenants, the Fund may be required to redeem some or
all of these shares. Such redemption likely would
result in the Fund seeking to terminate early all or
a portion of any swap or cap transaction. Early
termination of the swap could result in a termination
payment by or to the Fund. Early termination of a cap
could result in a termination payment to the Fund. We
would not enter into interest rate swap or cap
transactions having a notional amount that exceeded
the outstanding amount of the AMPS. See 'How the Fund
Manages Risk -- Interest Rate Transactions' for
additional information.
ASSET MAINTENANCE............................ Under the Fund's Articles Supplementary for AMPS,
which establishes and fixes the rights and
preferences of the shares of each series of AMPS, the
Fund must maintain:
asset coverage of the AMPS as required by the rating
agency or agencies rating the AMPS, and
asset coverage of at least 200% with respect to
senior securities that are stock, including the AMPS.
In the event that the Fund does not maintain or cure
these coverage tests, some or all of the AMPS will be
subject to mandatory redemption. See 'Description of
AMPS -- Redemption.'
Based on the composition of the Fund's portfolio as
of March 21, 2002, the asset coverage of the AMPS as
measured pursuant to the 1940 Act would be
approximately 300% if the Fund were to issue all of
the AMPS offered in this Prospectus, representing
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approximately 33 1/3% of the Fund's managed assets
(as defined below).
REDEMPTION................................... The Fund does not expect to and ordinarily will not
redeem AMPS. However, under the Articles
Supplementary, it may be required to redeem AMPS in
order, for example, to meet an asset coverage ratio
or to correct a failure to meet a rating agency
guideline in a timely manner. The Fund may also
voluntarily redeem AMPS without the consent of
holders of the AMPS under certain conditions. See
'Description of AMPS -- Redemption.'
LIQUIDATION PREFERENCE....................... The liquidation preference (that is, the amount the
Fund must pay to holders of AMPS if the Fund is
liquidated) for AMPS will be $25,000 per share plus
accumulated but unpaid dividends, if any, whether or
not earned or declared.
VOTING RIGHTS................................ The 1940 Act requires that the holders of AMPS, and
the holders of any other series of preferred stock of
the Fund, voting as a separate class, have the right
to:
elect at least two directors at all times, and
elect a majority of the directors if at any time the
Fund fails to pay dividends on either series of
AMPS, or any other series of preferred stock of the
Fund, for two full years and will continue to be so
represented until all dividends in arrears have been
paid or otherwise provided for.
The holders of AMPS, and the holders of any other
series of preferred stock of the Fund, will vote as a
separate class or series on other matters as required
under the Fund's Articles of Incorporation (which, as
hereafter amended, restated or supplemented from time
to time, is together with the Articles Supplementary,
referred to as the 'Charter'), the 1940 Act and
Maryland law. Each Common Share, each Preferred
Share, and each share of any other series of
preferred stock of the Fund is entitled to one vote
per share.
FEDERAL INCOME TAXATION...................... The distributions with respect to AMPS (other than
distributions in redemption of AMPS subject to
Section 302(b) of the Code) will constitute dividends
to the extent of the Fund's current or accumulated
earnings and profits, as calculated for federal
income tax purposes. Such dividends generally will be
taxable as ordinary income to holders. Distributions
of net capital gain that
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are designated by the Fund as capital gain dividends
will be treated as long-term capital gains in the
hands of holders receiving such distributions. The
Internal Revenue Service ('IRS') currently requires
that a regulated investment company that has two or
more classes of stock allocate to each such class
proportionate amounts of each type of its income
(such as ordinary income and capital gains) based
upon the percentage of total dividends distributed to
each class for the tax year. Accordingly, the Fund
intends each year to allocate capital gain dividends
among its Common Shares, Series T, Series TH, Series
F, and Series W AMPS in proportion to the total
dividends paid to each class during or with respect
to such year. See 'U.S. Federal Taxation.'
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR.......... State Street Bank serves as the Fund's custodian. The
Bank of New York serves as auction agent, transfer
agent, dividend paying agent and registrar for the
AMPS.
14
FINANCIAL HIGHLIGHTS (UNAUDITED)
Information contained in the table below under the headings 'Per Share
Operating Performance' and 'Ratios/Supplemental Data' shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on February 28, 2002 through March 21, 2002. Because the Fund was
recently organized and commenced investment operations on February 28, 2002, the
table covers less than three weeks of operations, during which a substantial
portion of the Fund's portfolio was held in temporary investments pending
investment in real estate securities that meet the Fund's investment objectives
and policies. Accordingly, the information presented may not provide a
meaningful picture of the Fund's operating performance.
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the Fund's
Unaudited Financial Statements included in the Statement of Additional
Information dated April 1, 2002. It should be read in conjunction with the
Unaudited Financial Statements and notes thereto.
FOR THE PERIOD
FEBRUARY 28, 2002*
THROUGH MARCH 21, 2002
(UNAUDITED)
-----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $14.57**
------
Less: Offering costs charged to paid-in capital on common
shares.................................................. (0.03)
Dilutive effect of common share offering............. (0.03)
------
Total offering and organization costs................ (0.06)
------
Income from investment operations:
Net investment income.................................... 0.03
Net realized and unrealized gain/(loss) on investments... 0.40
------
Total from investment operations...................... 0.43
------
Less dividends and distributions to shareholders from:
Net investment income.................................... 0.00
Net realized gain on investments......................... 0.00
Tax return of capital.................................... 0.00
------
Total dividends and distributions to shareholders..... 0.00
------
Net increase/(decrease) in net assets....................... 0.37
------
Net asset value, end of period.............................. $14.94
------
------
Per Share Market Value, End of Period....................... 15.19
------
Total Return on NAV......................................... 2.73%(1)
------
Total Investment Return on Market Value..................... 1.27%(1)
------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (In millions)..................... $563.2
------
------
Ratio of expenses to average daily net assets (before
expense reduction)......................................... 0.97%(2)(3)
------
------
Ratio of expenses to average daily net assets (net of
expense reduction)......................................... 0.65%(2)
------
------
Ratio of net investment income to average daily net assets
(before expense reduction)................................. 2.88%(2)
------
------
Ratio of net investment income to average daily net assets
(net of expense reduction)................................. 3.20%(2)(3)
------
------
Portfolio turnover rate (%)................................. 0.03%(1)
------
------
---------
* Commencement of operations.
** Prior to February 28, 2002 (Commencement of Operations), 7,000 shares were
sold to Cohen & Steers Capital Management, Inc. (the 'Investment Manager')
for $100,275. Includes the effect of a capital contribution by the
Investment Manager of $1,701 on February 26, 2002.
(1) Not annualized.
(2) Annualized.
(3) The Investment Manager has agreed to waive a portion of its investment
management fees in the amount of 0.32% of average daily managed assets for
the first 5 fiscal years of the Fund's operations, 0.26% of average daily
managed assets in year 6, 0.20% of average daily managed assets in year 7,
0.14% in year 8, 0.08% of average daily managed assets in year 9 and 0.02%
of average daily managed assets in year 10.
See accompanying notes to unaudited financial statements
15
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company. We were organized as a Maryland corporation on August 22,
2001 and are registered as an investment company with the SEC under the
Investment Company Act of 1940 (the '1940 Act'). The Fund issued an aggregate of
34,000,000 Common Shares, par value $.001 per share, pursuant to the initial
public offering thereof and commenced its operations with the closing of this
initial public offering on February 28, 2002. On March 8, 2002 and March 21,
2002, the Fund issued 2,000,000 and 1,700,000 additional Common Shares,
respectively, in connection with a partial exercise by the underwriters of the
over-allotment option. The Fund's Common Shares are traded on the NYSE under the
symbol 'RQI.' The Fund's principal office is located at 757 Third Avenue, New
York, New York 10017, and our telephone number is (212) 832-3232.
The following provides information about the Fund's outstanding shares as of
April 1, 2002:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common......................................... 99,988,800 -0- 37,707,000
Preferred......................................
Series T................................... 2,800 -0- -0-
Series TH.................................. 2,800 -0- -0-
Series F................................... 2,800 -0- -0-
Series W................................... 2,800 -0- -0-
USE OF PROCEEDS
We estimate the net proceeds of this offering of AMPS, after payment of the
sales load and offering expenses, will be $276,657,740. The net proceeds of this
offering, together with the proceeds from our initial public offering, will be
invested in accordance with the policies set forth under 'Investment Objectives
and Policies.' We estimate that the net proceeds of both offerings will be fully
invested in accordance with our investment objectives and policies within four
months of the completion of this offering. Pending such investment, those
proceeds may be invested in U.S. Government securities or high quality,
short-term money market instruments. See 'Investment Objectives and Policies.'
16
CAPITALIZATION (UNAUDITED)
The following table sets forth the unaudited capitalization of the Fund as
of March 21, 2002, and as adjusted to give effect to the issuance of the AMPS
offered in this Prospectus.
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
SHAREHOLDERS' EQUITY:
AMPS, $0.001 par value, $25,000 liquidation value;
11,200 shares authorized (no shares issued and
2,800 Series T AMPS, 2,800 Series TH AMPS, 2,800
Series F AMPS, and 2,800 Series W AMPS issued, as
adjusted, respectively)............................ $ -- $280,000,000
Common Shares, $.001 par value per share; 99,988,800
shares authorized, 37,707,000 shares outstanding... $ 37,707 $ 37,707
Paid-in surplus...................................... $548,146,869 $544,804,609
Balance of undistributed net investment income....... $ 1,000,964 $ 1,000,964
Accumulated net realized gain (loss) from investment
transactions....................................... $ 26,854 $ 26,854
Net unrealized appreciation (depreciation) of
investments........................................ 13,982,196 13,982,196
Net assets........................................... $563,194,590 $839,852,330
17
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Our primary investment objective is high current income through investment
in real estate securities. Capital appreciation is a secondary investment
objective. The Fund's investment objectives and certain other policies are
fundamental and may not be changed without the approval of shareholders. Unless
otherwise indicated, the Fund's investment policies are not fundamental and may
be changed by the Board of Directors without the approval of shareholders,
although we have no current intention of doing so. The Fund has a policy of
concentrating its investments in the U.S. real estate industry and not in any
other industry. This investment policy is fundamental and cannot be changed
without the approval of a majority of the Fund's outstanding voting securities,
as defined in the 1940 Act, as amended. Under normal market conditions, we will
invest at least 90% of our total assets in common stocks, preferred stocks and
other equity securities issued by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of our total assets will be invested
in income producing equity securities issued by high quality REITs and
substantially all of the equity securities of real estate companies in which we
intend to invest are traded on a national securities exchange or in the
over-the-counter market. High quality REITs are companies that, in the opinion
of the Investment Manager, offer excellent prospects for consistent,
above-average revenue and earnings growth. To determine whether a company is of
high quality, the Investment Manager generally looks to a strong record of
earnings growth, as well as to a company's current ratio of debt to capital and
the quality of its management. All of the REITs in which the Fund will invest
will have a market capitalization greater than $100 million. We may invest up to
10% of our total assets in debt securities issued or guaranteed by real estate
companies. We will not invest more than 20% of our total assets in preferred
stock or debt securities rated below investment grade (commonly known as 'junk
bonds') or unrated securities of comparable quality. Preferred stock or debt
securities will be considered to be investment grade if, at the time of
investment, such security has a rating of 'BBB' or higher by S&P, 'Baa' or
higher by Moody's or an equivalent rating by a nationally recognized statistical
rating agency. The Investment Manager may also invest in preferred stock or debt
securities which are unrated but which, in the opinion of the Investment
Manager, are determined to be of equivalent quality. See Appendix A in the SAI
for a description of bond ratings. These two policies are fundamental and cannot
be changed without the approval of a majority of the Fund's voting securities,
as defined in the 1940 Act, as amended. We will invest only in securities of
U.S. issuers and generally will not invest more than 10% of our total assets in
the securities of one issuer.
We will not enter into short sales or invest in derivatives, except as
described in this Prospectus in connection with the interest rate swap or
interest rate cap transactions. See 'How the Fund Manages Risk -- Interest Rate
Transactions.' There can be no assurance that our investment objectives will be
achieved.
INVESTMENT STRATEGIES
In making investment decisions on behalf of the Fund, the Investment Manager
relies on a fundamental analysis of each company. The Investment Manager reviews
each company's potential for success in light of the company's current financial
condition, its industry and sector position,
18
and economic and market conditions. The Investment Manager also evaluates a
number of factors, including growth potential, earnings estimates and the
quality of management.
PORTFOLIO COMPOSITION
Our portfolio will be composed principally of the following investments. A
more detailed description of our investment policies and restrictions and more
detailed information about our portfolio investments are contained in the SAI.
Real Estate Companies. For purposes of our investment policies, a real
estate company is one that:
derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential
real estate; or
has at least 50% of its assets in such real estate.
Under normal market conditions, we will invest at least 90% of our total
assets in the equity securities of real estate companies. These equity
securities can consist of:
common stocks (including REIT shares);
preferred stocks;
rights or warrants to purchase common and preferred stocks; and
securities convertible into common and preferred stocks where the
conversion feature represents, in the Investment Manager's view, a
significant element of the securities' value.
Real Estate Investment Trusts. We invest at least 80% of our total assets in
income producing equity securities of REITs. A REIT is a company dedicated to
owning, and usually operating, income producing real estate, or to financing
real estate. REITs pool investors' funds for investment primarily in income
producing real estate or real estate-related loans or interests. A REIT is not
taxed on income distributed to shareholders if, among other things, it
distributes to its shareholders substantially all of its taxable income (other
than net capital gains) for each taxable year. As a result, REITs tend to pay
relatively higher dividends than other types of companies and we intend to use
these REIT dividends in an effort to meet the current income goal of our
investment objectives.
REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. We do not
currently intend to invest more than 10% of our total assets in Mortgage REITs
or Hybrid REITs.
Preferred Stocks. Preferred stocks pay fixed or floating dividends to
investors, and have a 'preference' over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Under current market conditions, the Investment Manager
expects to invest approximately 70% of our total assets in common shares of real
estate companies and approximately 30% in preferred shares of REITs. The actual
percentage of common and preferred
19
shares in our investment portfolio may vary over time based on the Investment
Manager's assessment of market conditions.
Debt Securities. We may invest a maximum of 10% of our total assets in
investment grade and non-investment grade debt securities issued or guaranteed
by real estate companies.
Lower-rated Securities. We will not invest more than 20% of our total assets
in preferred stock and debt securities rated below investment grade (commonly
known as 'junk bonds') and equivalent unrated securities of comparable quality.
Securities rated non-investment grade (lower than 'BBB' by S&P or lower than
'Baa' by Moody's, are sometimes referred to as 'high yield' or 'junk' bonds. We
may only invest in high yield securities that are rated 'CCC' or higher by S&P,
or rated 'Caa' or higher by Moody's, or unrated securities determined by the
Investment Manager to be of comparable quality. The issuers of these securities
have a currently identifiable vulnerability to default and such issues may be in
default or there may be present elements of danger with respect to principal or
interest. We will not invest in securities that are in default at the time of
purchase. For a description of bond ratings, see Appendix A of the SAI.
Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, we may
deviate from our investment objectives and invest all or any portion of our
assets in investment grade debt securities, without regard to whether the issuer
is a real estate company. When and to the extent we assume a temporary defensive
position, we may not pursue or achieve our investment objectives.
OTHER INVESTMENTS
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which we may
invest our cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and such
obligations that are subject to repurchase agreements and commercial paper. See
'Additional Information about Fund Investment Objectives and Policies' in the
SAI.
RISK FACTORS
Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in AMPS.
RISKS OF INVESTING IN AMPS
Leverage Risk. The Fund uses financial leverage for investment purposes by
issuing AMPS. It is currently anticipated that, taking into account the AMPS
being offered in this Prospectus, the amount of leverage will represent
approximately 33 1/3% of the Fund's managed assets (as defined below).
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the Fund
and the AMPS' asset coverage. As long as the AMPS are outstanding, the Fund does
not intend to utilize other forms of leverage.
Because the fee paid to the Investment Manager will be calculated on the
basis of the Fund's managed assets (which equals the aggregate net asset value
('NAV') of the Common Shares plus
20
the liquidation preference of the AMPS), the fee will be higher when leverage is
utilized, giving the Investment Manager an incentive to utilize leverage.
Interest Rate Risk. The Fund issues AMPS, which pay dividends based on
short-term interest rates. The Fund purchases real estate equity securities that
pay dividends that are based on the performance of the issuing companies. The
Fund also may buy real estate debt securities that pay interest based on
longer-term yields. These dividends and interest payments are typically,
although not always, higher than short-term interest rates. Real estate company
dividends, as well as long-term and short-term interest rates, fluctuate. If
short-term interest rates rise, dividend rates on the AMPS may rise so that the
amount of dividends to be paid to stockholders of AMPS exceeds the income from
the portfolio securities. Because income from the Fund's entire investment
portfolio (not just the portion of the portfolio purchased with the proceeds of
the AMPS offering) is available to pay dividends on the AMPS, however, dividend
rates on the AMPS would need to greatly exceed the Fund's net portfolio income
before the Fund's ability to pay dividends on the AMPS would be jeopardized. If
long-term interest rates rise, this could negatively impact the value of the
Fund's investment portfolio, reducing the amount of assets serving as asset
coverage for the AMPS. The Fund anticipates entering into interest rate swap or
cap transactions with the intent to reduce or eliminate the risk posed by an
increase in short-term interest rates. There is no guarantee that the Fund will
engage in these transactions or that these transactions will be successful in
reducing or eliminating interest rate risk. See 'How the Fund Manages Risk.'
Auction Risk. You may not be able to sell your AMPS at an auction if the
auction fails, i.e., if there are more AMPS offered for sale than there are
buyers for those shares. Also, if you place hold orders (orders to retain AMPS)
at an auction only at a specified rate, and that bid rate exceeds the rate set
at the auction, you will not retain your AMPS. Additionally, if you buy shares
or elect to retain shares without specifying a rate below which you would not
wish to continue to hold those shares, and the auction sets a below-market rate,
you may receive a lower rate of return on your shares than the market rate.
Finally, the dividend period may be changed, subject to certain conditions and
with notice to the holders of the AMPS, which could also affect the liquidity of
your investment. See 'Description of AMPS' and 'The Auction.'
Secondary Market Risk. If you try to sell your AMPS between auctions, you
may not be able to sell any or all of your shares, or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated dividends.
If the Fund has designated a special rate period (a dividend period of more than
seven days in the case of the Series T, Series TH, and Series F AMPS, and 28
days in the case of the Series W AMPS), changes in interest rates could affect
the price you would receive if you sold your shares in the secondary market. You
may transfer shares outside of auctions only to or through a broker-dealer that
has entered into an agreement with the auction agent and the Fund or other
person as the Fund permits. The Fund does not anticipate imposing significant
restrictions on transfers to other persons. However, unless any such other
person has entered into a relationship with a broker-dealer that has entered
into a broker-dealer agreement with the Auction Agent, that person will not be
able to submit bids at auctions with respect to AMPS. Broker-dealers that
maintain a secondary trading market for AMPS are not required to maintain this
market, and the Fund is not required to redeem shares either if an auction or an
attempted secondary market sale fails because of a lack of buyers. AMPS are not
registered on a stock exchange or the National Association of Securities Dealers
Automated Quotations, Inc. ('NASDAQ') stock market. If you sell your AMPS to a
broker-
21
dealer between auctions, you may receive less than the price you paid for them,
especially when market interest rates have risen since the last auction and
during a special rate period.
Ratings and Asset Coverage Risk. While it is a condition to the closing of
the offering that S&P assigns a rating of 'AAA' and Moody's assigns a rating of
'Aaa' to the AMPS, the ratings do not eliminate or necessarily mitigate the
risks of investing in AMPS. In addition, Moody's, S&P or another rating agency
then rating the AMPS could downgrade the AMPS, which may make your shares less
liquid at an auction or in the secondary market. If a rating agency downgrades
the AMPS, the dividend rate on the AMPS will be the applicable maximum rate
based on the credit rating of the AMPS, which will be a rate higher than is
payable currently on the AMPS. See 'Description of AMPS -- Rating Agency
Guidelines' for a description of the asset maintenance tests the Fund must meet.
Portfolio Security Risk. Portfolio security risk is the risk that an issuer
of a security in which the Fund invests will not be able, in the case of common
stocks, to make dividend distributions at the level forecast by the Fund's
Investment Manager, or that the issuer becomes unable to meet its obligation to
pay fixed dividends at the specified rate, in the case of preferred stock, or to
make interest and principal payments in the case of debt securities. Common
stock is not rated by rating agencies and it is incumbent on the Investment
Manager to select securities of real estate companies that it believes have the
ability to pay dividends at the forecasted level. Preferred stock and debt
securities may be rated. The Fund may invest up to 20% of its total assets in
preferred stock or debt securities rated below investment grade (commonly known
as 'junk bonds') by S&P or Moody's, or unrated securities considered to be of
comparable quality by the Investment Manager. In general, lower-rated securities
carry a greater degree of risk. If rating agencies lower their ratings of
securities held in the Fund's portfolio, the value of those securities could
decline, which could jeopardize the rating agencies' ratings of the AMPS. The
failure of a company to pay common stock or preferred stock dividends, or
interest payments, at forecasted or contractual rates, could have a negative
impact on the Fund's ability to pay dividends on the AMPS and could result in
the redemption of some or all of the AMPS.
Restrictions on Dividends and other Distributions. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Fund's Common Shares and AMPS, both by the 1940 Act and by requirements
imposed by rating agencies, might impair the Fund's ability to maintain its
qualification as a regulated investment company for federal income tax purposes.
While the Fund intends to redeem AMPS to enable the Fund to distribute its
income as required to maintain its qualification as a regulated investment
company under the Code, there can be no assurance that such actions can be
effected in time to meet the Code requirements. See 'U.S. Federal Taxation.'
GENERAL RISKS OF INVESTING IN THE FUND
We are a non-diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that we will achieve our
investment objectives.
Limited Operating History. We are a recently organized, non-diversified,
closed-end management investment company with a limited operating history.
22
Stock Market Risk. Because prices of equity securities fluctuate from
day-to-day, the value of our portfolio will vary based upon general market
conditions.
General Risks of Securities Linked to the Real Estate Market. We will not
invest in real estate directly, but only in securities issued by real estate
companies, including REITs. However, because of our policy of concentration in
the securities of companies in the real estate industry, we are also subject to
the risks associated with the direct ownership of real estate. These risks
include:
declines in the value of real estate
risks related to general and local economic conditions
possible lack of availability of mortgage funds
overbuilding
extended vacancies of properties
increased competition
increases in property taxes and operating expenses
changes in zoning laws
losses due to costs resulting from the clean-up of environmental problems
liability to third parties for damages resulting from environmental
problems
casualty or condemnation losses
limitations on rents
changes in neighborhood values and the appeal of properties to tenants
changes in interest rates
Thus, the value of our portfolio securities may change at different rates
compared to the value of portfolio securities of a registered investment company
with investments in a mix of different industries and will depend on the general
condition of the economy. An economic downturn could have a material adverse
effect on the real estate markets and on real estate companies in which the Fund
invests, which in turn could result in the Fund not achieving its investment
objectives.
General Real Estate Risks. Real property investments are subject to varying
degrees of risk. The yields available from investments in real estate depend on
the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., Americans with Disabilities Act and tax laws),
interest rate levels, and the availability of financing. If the properties do
not generate sufficient income to meet operating expenses, including, where
applicable, debt service, ground lease payments, tenant improvements,
third-party leasing commissions and other capital expenditures, the income and
ability of the real estate company to make payments of any interest and
principal on its debt securities will be adversely affected. In addition, real
property may be subject to the quality of credit extended and defaults by
borrowers and tenants. The performance of the economy in each of the regions in
which the real estate owned by the portfolio company is located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the income from such properties and their underlying values. The financial
results of major local employers also may have an impact on the cash flow and
value of certain properties. In addition, real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions is
limited. A
23
real estate company may also have joint venture investments in certain of its
properties, and, consequently, its ability to control decisions relating to such
properties may be limited.
Real property investments are also subject to risks which are specific to
the investment sector or type of property in which the real estate companies are
investing.
Retail Properties. Retail properties are affected by the overall health of
the applicable economy. A retail property may be adversely affected by the
growth of alternative forms of retailing, bankruptcy, decline in drawing power,
departure or cessation of operations of an anchor tenant, a shift in consumer
demand due to demographic changes, and/or changes in consumer preference (for
example, to discount retailers) and spending patterns. A retail property may
also be adversely affected if a significant tenant ceases operation at such
location, voluntarily or otherwise. Certain tenants at retail properties may be
entitled to terminate their leases if an anchor tenant ceases operations at such
property.
Office Properties. Office properties generally require their owners to
expend significant amounts for general capital improvements, tenant improvements
and costs of reletting space. In addition, office properties that are not
equipped to accommodate the needs of modern businesses may become functionally
obsolete and thus non-competitive. Office properties may also be adversely
affected if there is an economic decline in the businesses operated by their
tenants. The risks of such an adverse effect is increased if the property
revenue is dependent on a single tenant or if there is a significant
concentration of tenants in a particular business or industry.
Hotel Properties. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.
Also, hotels may be operated pursuant to franchise, management and operating
agreements that may be terminable by the franchiser, the manager or the
operator. Contrarily, it may be difficult to terminate an ineffective operator
of a hotel property subsequent to a foreclosure of such property.
Healthcare Properties. Healthcare properties and healthcare providers are
affected by several significant factors including federal, state and local laws
governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); and competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis.
These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursement. In addition, in the event that a tenant is in default
on its lease, a new operator or
24
purchaser at a foreclosure sale will have to apply in its own right for all
relevant licenses if such new operator does not already hold such licenses.
There can be no assurance that such new licenses could be obtained, and
consequently, there can be no assurance that any healthcare property subject to
foreclosure will be disposed of in a timely manner.
Multifamily Properties. The value and successful operation of a multifamily
property may be affected by a number of factors such as the location of the
property, the ability of management to provide adequate maintenance and
insurance, types of services provided by the property, the level of mortgage
rates, presence of competing properties, the relocation of tenants to new
projects with better amenities, adverse economic conditions in the locale, the
amount of rent charged, and oversupply of units due to new construction. In
addition, multifamily properties may be subject to rent control laws or other
laws affecting such properties, which could impact the future cash flows of such
properties.
Insurance Issues. Certain of the portfolio companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. However such insurance is not uniform among the portfolio companies.
Moreover, there are certain types of extraordinary losses that may be
uninsurable, or not economically insurable. Certain of the properties may be
located in areas that are subject to earthquake activity for which insurance may
not be maintained. Should a property sustain damage as a result of an
earthquake, even if the portfolio company maintains earthquake insurance, the
portfolio company may incur substantial losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should any type of uninsured
loss occur, the portfolio company could lose its investment in, and anticipated
profits and cash flows from, a number of properties and, as a result, impact the
Fund's investment performance.
Credit Risk. REITs may be highly leveraged and financial covenants may
affect the ability of REITs to operate effectively. The portfolio companies are
subject to risks normally associated with debt financing. If the principal
payments of a real estate company's debt cannot be refinanced, extended or paid
with proceeds from other capital transactions, such as new equity capital, the
real estate company's cash flow may not be sufficient to repay all maturing debt
outstanding.
In addition, a portfolio company's obligation to comply with financial
covenants, such as debt-to-asset ratios, secured debt-to-total asset ratios and
other contractual obligations, may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.
Environmental Issues. In connection with the ownership (direct or indirect),
operation, management and development of real properties that may contain
hazardous or toxic substances, a portfolio company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and liabilities for injuries to persons and property. The
existence of any such material environmental liability could have a material
adverse effect on the results of operations and cash flow of any such portfolio
company and, as a result, the amount available to make distributions on the
shares could be reduced.
25
Smaller Companies. Even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole. There may
be less trading in a smaller company's stock, which means that buy and sell
transactions in that stock could have a larger impact on the stock's price than
is the case with larger company stocks. Smaller companies also may have fewer
lines of business so that changes in any one line of business may have a greater
impact on a smaller company's stock price than is the case for a larger company.
Further, smaller company stocks may perform in different cycles than larger
company stocks. Accordingly, REIT shares can be more volatile than -- and at
times will perform differently from -- large company stocks such as those found
in the Dow Jones Industrial Average.
Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. It is possible that the Fund may invest in a real estate
company which purports to be a REIT and that the company could fail to qualify
as a REIT. In the event of any such unexpected failure to qualify as a REIT, the
company would be subject to corporate-level taxation, significantly reducing the
return to the Fund on its investment in such company. REITs could possibly fail
to qualify for tax free pass-through of income under the Code, or to maintain
their exemptions from registration under the 1940 Act. The above factors may
also adversely affect a borrower's or a lessee's ability to meet its obligations
to the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
Preferred Stocks and Debt Securities Risk. In addition to the risks of
equity securities and securities linked to the real estate market, preferred
stocks and debt securities also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the value of preferred stocks and
debt securities may fall.
Lower-Rated Securities. Lower-rated securities may be considered speculative
with respect to the issuer's continuing ability to make principal and interest
payments. Analysis of the creditworthiness of issuers of lower-rated securities
may be more complex than for issuers of higher quality debt securities, and our
ability to achieve our investment objectives may, to the extent we are invested
in lower-rated debt securities, be more dependent upon such creditworthiness
analysis than would be the case if we were investing in higher quality
securities. We may invest in high yield securities that are rated 'CCC' or
higher by S&P or 'Caa' or higher by Moody's or unrated securities that are
determined by the Investment Manager to be of comparable quality. An issuer of
these securities has a currently identifiable vulnerability to default and the
issues may be in default or there may be present elements of danger with respect
to principal or interest. We will not invest in securities which are in default
at the time of purchase.
Lower-rated securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of lower-rated securities have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. Yields on
lower-rated securities will fluctuate. If the issuer of lower-rated securities
defaults, the Fund may incur additional expenses to seek recovery.
The secondary markets in which lower-rated securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which we could
sell a particular lower-rated security when necessary to meet liquidity needs or
in response to a specific economic event, such as a deterioration in the
26
creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the NAV of our shares. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities, and adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon. New laws and
proposed new laws may adversely impact the market for lower-rated securities.
Recent Developments. As a result of the terrorist attacks on the World Trade
Center and the Pentagon on September 11, 2001, some of the U.S. securities
markets were closed for a four-day period. These terrorist attacks and related
events have led to increased short-term market volatility and may have long-term
effects on U.S. and world economies and markets. A similar disruption of the
financial markets could impact interest rates, auctions, secondary trading,
ratings, credit risk, inflation and other factors relating to the Common Shares
and the AMPS.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding Common Shares and AMPS
voting together as a single class, and the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding AMPS voting as a
separate class. The Fund will not invest more than 20% of its total assets in
preferred stock or debt securities rated below investment grade (commonly known
as 'junk bonds') or unrated securities of comparable quality. All of our
investments will be in securities of U.S. issuers and we will generally not
invest more than 10% of our total assets in the securities of one issuer. The
Fund may become subject to guidelines that are more limiting than the investment
restrictions set forth above in order to obtain and maintain ratings from S&P or
Moody's on the AMPS. See 'Investment Restrictions' in the SAI for a complete
list of the fundamental and non-fundamental investment policies of the Fund.
INTEREST RATE TRANSACTIONS
In order to reduce the interest rate risk inherent in our underlying
investments and capital structure, we may enter into interest rate swap or cap
transactions.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. In an interest rate swap, the
Fund would agree to pay to the other party to the interest rate swap (which is
known as the 'counterparty') a fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a variable rate payment that is
intended to approximate the Fund's variable rate payment obligation on the AMPS
or any variable rate borrowing. The payment would be based on the notional
amount of the swap. In an interest rate cap, the Fund would pay a premium to the
counterparty to the interest rate cap and, to the extent that a specified
variable rate index exceeds a predetermined fixed rate, would receive from the
counterparty payments of the difference based on the notional amount of such
cap. If the counterparty to an interest rate
27
swap or cap defaults, the Fund would be obligated to make the payments that it
had intended to avoid. Depending on the general state of short-term interest
rates and the returns on the Fund's portfolio securities at that point in time,
a default could negatively impact the Fund's ability to make dividend payments
on the AMPS. In addition, at the time an interest rate swap or cap transaction
reaches its scheduled termination date, there is a risk that the Fund will not
be able to obtain a replacement transaction or that the terms of the replacement
will not be as favorable as on the expiring transaction. If this occurs, it
could have a negative impact on the Fund's ability to make dividend payments on
the AMPS. To the extent there is a decline in interest rates, the value of the
interest rate swap or cap could decline, resulting in a decline in the asset
coverage for the AMPS. A sudden and dramatic decline in interest rates may
result in a significant decline in the asset coverage. Under the terms of the
AMPS, if the Fund fails to maintain the required asset coverage on the
outstanding AMPS or fails to comply with other covenants, the Fund may be
required to redeem some or all of these shares. The Fund may also choose to
redeem some or all of the AMPS. Such redemption would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction.
Early termination of the swap could result in the termination payment by or to
the Fund. Early termination of a cap could result in the termination payment to
the Fund.
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily. We would not enter into interest rate
swap or cap transactions having a notional amount that exceeded the outstanding
amount of the Fund's leverage.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreement with its Investment Manager, administrator, custodian and transfer
agent. The management of the Fund's day-to-day operations is delegated to its
officers, the Investment Manager and the Fund's administrator, subject always to
the investment objectives and policies of the Fund and to the general
supervision of the Directors. The names and business addresses of the Directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under 'Management of the Fund' in the
SAI.
INVESTMENT MANAGER
Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, has been retained to provide investment
advice, and, in general, to conduct the management and investment program of the
Fund under the overall supervision and control of the Directors of the Fund.
Cohen & Steers Capital Management, Inc., a registered investment adviser, was
formed in 1986 and is a leading U.S. manager of portfolios dedicated to
investments primarily in REITs with more than $5.7 billion of assets under
management. Its
28
current clients include pension plans, endowment funds and registered investment
companies, including the Fund, Cohen & Steers Advantage Income Realty Fund, Inc.
and Cohen & Steers Total Return Realty Fund, Inc., which are closed-end
investment companies, and Cohen & Steers Institutional Realty Shares, Inc.,
Cohen & Steers Realty Shares, Inc., Cohen & Steers Special Equity Fund, Inc. and
Cohen & Steers Equity Income Fund, Inc., which are open-end investment
companies. Cohen & Steers Realty Shares, Inc. is currently the largest
registered investment company that invests primarily in real estate securities.
Cohen & Steers' client accounts are invested principally in real estate
securities.
INVESTMENT MANAGEMENT AGREEMENT
Under its Investment Management Agreement with the Fund (the 'Investment
Management Agreement'), the Investment Manager furnishes a continuous investment
program for the Fund's portfolio, makes the day-to-day investment decisions for
the Fund, and generally manages the Fund's investments in accordance with the
stated policies of the Fund, subject to the general supervision of the Board of
Directors of the Fund. The Investment Manager also performs certain
administrative services for the Fund and provides persons satisfactory to the
directors of the Fund to serve as officers of the Fund. Such officers, as well
as certain other employees and directors of the Fund, may be directors,
officers, or employees of the Investment Manager.
For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
0.85% of the average daily managed asset value of the Fund. Managed asset value
is the net asset value of the Common Shares plus the liquidation preference of
any AMPS. This fee is higher than the fees incurred by many other investment
companies but is comparable to fees paid by many registered management
investment companies that invest primarily in real estate securities. In
addition to the monthly management fee, the Fund pays all other costs and
expenses of its operations, including compensation of its directors, custodian,
transfer agency and dividend disbursing expenses, legal fees, expenses of
independent auditors, expenses of repurchasing shares, expenses of issuing any
AMPS, expenses of preparing, printing and distributing stockholder reports,
notices, proxy statements and reports to governmental agencies, and taxes, if
any.
When the Fund is utilizing leverage, the fees paid to the Investment Manager
for investment advisory and management services will be higher than if the Fund
did not utilize leverage because the fees paid will be calculated based on the
Fund's managed assets, which includes the liquidation preference of any AMPS for
leverage.
The Fund's portfolio managers are:
Martin Cohen -- Mr. Cohen is a Director, President and Treasurer of the
Fund. He is, and has been since its inception, President of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager. Mr. Cohen is a
'controlling person' of the Investment Manager on the basis of his ownership
of the Investment Manager's stock.
Robert H. Steers -- Mr. Steers is a Director, Chairman and Secretary of
the Fund. He is, and has been since their inception, Chairman of Cohen &
Steers Capital Management, Inc., the Fund's Investment Manager. Mr. Steers
is a 'controlling person' of the Investment Manager on the basis of his
ownership of the Investment Manager's stock.
Greg E. Brooks -- Mr. Brooks joined Cohen & Steers Capital Management,
Inc., the Fund's investment adviser, as a Vice President in April 2000 and
has been a Senior Vice
29
President since January 2002. Prior to joining Cohen & Steers, Mr. Brooks
was an investment analyst with another real estate securities investment
manager. Mr. Brooks is a Certified Financial Analyst.
ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT
Under its Administration Agreement with the Fund, the Investment Manager
provides certain administrative and accounting functions for the Fund, including
providing administrative services necessary for the operations of the Fund and
furnishing office space and facilities required for conducting the business of
the Fund.
In accordance with the Administration Agreement and with the approval of the
Board of Directors of the Fund, the Fund has entered into an agreement with
State Street Bank as sub-administrator under a fund accounting and
administration agreement (the 'Sub-Administration Agreement'). Under the
Sub-Administration Agreement, State Street Bank has assumed responsibility for
certain fund administration services.
Under the Administration Agreement, the Fund pays the Investment Manager an
amount equal to on an annual basis 0.02% of the Fund's managed assets. Under the
Sub-Administration agreement, the Fund pays State Street Bank a monthly
administration fee. The sub-administration fee paid by the Fund to State Street
Bank is computed on the basis of the net assets in the Fund at an annual rate
equal to 0.030% of the first $200 million in assets, 0.020% of the next $200
million, and 0.013% of assets in excess of $400 million, with a minimum fee of
$120,000. The aggregate fee paid by the Fund and the other funds advised by the
Investment Manager to State Street Bank is computed by multiplying the total
number of funds by each break point in the above schedule in order to determine
the aggregate break points to be used in calculating the total fee paid by the
Cohen & Steers family of funds (i.e., 6 funds at $200 million or $1.2 billion at
0.030%, etc.). The Fund is then responsible for its pro rata amount of the
aggregate sub-administration fee. State Street Bank also serves as the Fund's
custodian and The Bank of New York has been retained to serve as the Fund's
auction agent, transfer agent, dividend paying agent and registrar for the
Fund's AMPS. See 'Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar.'
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. For the
complete terms of the AMPS, please refer to the detailed description of the AMPS
in the Fund's Articles Supplementary attached as Appendix B to the SAI.
GENERAL
Under its Charter, the Fund is authorized to issue shares of preferred
stock, with rights as determined by the Board of Directors, without the approval
of holders of Common Shares. Each Series of AMPS will have a liquidation
preference of $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared). The AMPS of each series will rank
on a parity with shares of any other series of AMPS, and with shares of any
other series of preferred stock of the Fund, as to the payment of dividends and
the distribution of assets upon liquidation. The AMPS carry one vote per share
on all matters on which such shares are entitled to vote. The AMPS, when issued
by the Fund and paid for pursuant to the terms of this Prospectus, will be fully
paid and non-assessable and will have no preemptive, exchange or
30
conversion rights. Any AMPS repurchased or redeemed by the Fund will be
classified as authorized and unissued AMPS. The Board of Directors may by
resolution classify or reclassify any authorized and unissued AMPS from time to
time by setting or changing the preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares. The AMPS will not be subject to any sinking fund,
but will be subject to mandatory redemption under certain circumstances
described below.
DIVIDENDS AND RATE PERIODS
General. The following is a general description of dividends and rate
periods for the AMPS. The initial rate period for the Series T AMPS will be
seven days and the dividend rate for this period will be 1.95%. The initial rate
period for the Series TH AMPS will be seven days and the dividend rate for this
period will be 1.95%. The initial rate period for the Series F AMPS will be
seven days and the dividend rate for this period will be 1.95%. The initial rate
period for the Series W AMPS will be 28 days and the dividend rate for this
period will be 2.00%. Subsequent rate periods generally will be seven days in
the case of the Series T, Series TH, and Series F AMPS, and 28 days in the case
of Series W AMPS and the dividend rates for those periods will be determined by
auction. The Fund, subject to certain conditions, may change the length of
subsequent rate periods by designating them as special rate periods. See
'Designation of Special Rate Periods' below.
Dividend Payment Dates. Dividends on AMPS will be payable, when, as and if
declared by the Board, out of legally available funds in accordance with the
Fund's Charter and applicable law. Dividend periods generally will begin on the
first business day after an auction. If dividends are payable on a day that is
not a business day, then dividends will generally be payable on the next day if
such day is a business day, or as otherwise specified in the Articles
Supplementary.
Dividends will be paid through the Depository Trust Company ('DTC') on each
dividend payment date. The dividend payment date will normally be the first
business day after the dividend period ends. DTC, in accordance with its current
procedures, is expected to distribute dividends received from the auction agent
in same-day funds on each dividend payment date to agent members (members of DTC
that will act on behalf of existing or potential holders of AMPS). These agent
members are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Fund that dividend payments will be available in same-day funds
on each dividend payment date to customers that use a Broker-Dealer or a
Broker-Dealer's designee as agent member.
Calculation of Dividend Payment. The Fund computes the dividends per share
payable on shares of AMPS by multiplying the applicable rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the rate period and the denominator will normally be 360. This rate is then
multiplied by $25,000 to arrive at the dividends per share.
Dividends on AMPS will accumulate from the date of their original issue,
which is April 4, 2002. For each dividend payment period after the initial rate
period, the dividend will be the dividend rate determined at auction. The
dividend rate that results from an auction will not be greater than the maximum
rate described below.
The maximum applicable rate for any regular period will be the applicable
percentage (set forth in the table below) of the applicable 'AA' Composite
Commercial Paper Rate. In the case of a special rate period, the maximum
applicable rate will be specified by the Fund in the notice
31
of the special rate period for such dividend payment period. The applicable
percentage is determined on the day that a notice of a special rate period is
delivered if the notice specifies a maximum applicable rate for a special rate
period. The applicable percentage will be determined based on the lower of the
credit rating or ratings assigned to the AMPS by Moody's and S&P. If Moody's or
S&P or both shall not make such rating available, the rate shall be determined
by reference to equivalent ratings issued by a substitute rating agency.
APPLICABLE
CREDIT RATINGS PERCENTAGE:
MOODY'S S&P NO NOTIFICATION
------- --- ---------------
'aa3' or higher AA- or higher 150%
'a3' to 'a1' A- to A+ 200%
'baa3' to 'baa1' BBB- to BBB+ 225%
Below 'baa3' Below BBB- 275%
Prior to each dividend payment date, the Fund is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any auction.
The Fund does not intend to establish any reserves for the payment of dividends.
Restriction on Dividends and Other Distributions. While any of the AMPS are
outstanding, the Fund generally may not declare, pay or set apart for payment,
any dividend or other distribution in respect of its common shares (other than
in additional shares of common stock or rights to purchase common stock) or
repurchase any of its common shares (except by conversion into or exchange for
shares of the Fund ranking junior to the AMPS as to the payment of dividends and
the distribution of assets upon liquidation) unless each of the following
conditions have been satisfied:
In the case of the Moody's coverage requirements, immediately after such
transaction, the aggregate Moody's Coverage Value (i.e., the aggregate
value of the Fund's portfolio discounted according to Moody's criteria)
would be equal to or greater than the Preferred Shares Basic Maintenance
Amount (i.e., the amount necessary to pay all outstanding obligations of
the Fund with respect to the AMPS, any preferred stock outstanding,
expenses for the next 90 days and any other liabilities of the Fund) (see
'Rating Agency Guidelines' below);
In the case of S&P's coverage requirements, immediately after such
transaction, the Aggregate S&P value (i.e., the aggregate value of the
Fund's portfolio discounted according to S&P criteria) would be equal to or
greater than the Preferred Shares Basic Maintenance Amount.
Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this Prospectus under 'Rating Agency Guidelines'
below) is met;
Full cumulative dividends on the AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the auction agent;
and
The Fund has redeemed the full number of AMPS required to be redeemed by
any provision for mandatory redemption contained in the Articles
Supplementary.
32
The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking as to the payment of dividends on a
parity with AMPS unless the Fund has declared and paid or contemporaneously
declares and pays full cumulative dividends on the AMPS through its most recent
dividend payment date. However, when the Fund has not paid dividends in full on
the AMPS through the most recent dividend payment date or upon any shares of the
Fund ranking, as to the payment of dividends, on a parity with AMPS through
their most recent respective dividend payment dates, the amount of dividends
declared per share on AMPS and such other class or series of shares will in all
cases bear to each other the same ratio that accumulated dividends per share on
the AMPS and such other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund may, in certain situations, at
its sole option, declare a special rate period. Prior to declaring a special
rate period, the Fund will give notice (a 'notice of special rate period') to
the auction agent and to each Broker-Dealer. The notice will state that the next
succeeding rate period for the AMPS will be a number of days as specified in
such notice. The Fund may not designate a special rate period unless sufficient
clearing bids were made in the most recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory redemptions and any
additional dividends payable prior to such date must be paid in full or
deposited with the auction agent. The Fund also must have received confirmation
from Moody's and S&P or any substitute rating agency that the proposed special
rate period will not adversely affect such agency's then-current rating on the
AMPS and the lead Broker-Dealer designated by the Fund, initially Merrill Lynch,
Pierce, Fenner & Smith Incorporated, must not have objected to declaration of a
special rate period. A notice of special rate period also will specify whether
the shares of AMPS will be subject to optional redemption during such special
rate period and, if so, the redemption, premium, if any, required to be paid by
the Fund in connection with such optional redemption.
VOTING RIGHTS
Except as noted below, the Fund's Common Shares and AMPS have equal voting
rights of one vote per share and vote together as a single class. In elections
of directors, the holders of AMPS, as a separate class, vote to elect two
directors, and the holders of the Common Shares and holders of AMPS vote
together as a single class to elect the remaining directors. In addition, during
any period ('Voting Period') in which the Fund has not paid dividends on the
AMPS in an amount equal to two full years dividends, the holders of AMPS, voting
as a single class, are entitled to elect (in addition to the two directors set
forth above) the smallest number of additional directors as is necessary to
ensure that a majority of the directors has been elected by the holders of AMPS.
The holders of AMPS will continue to have these rights until all dividends in
arrears have been paid or otherwise provided for.
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the AMPS of the number
of directors that such holders are entitled to elect. The persons elected by the
holders of the AMPS, together with the incumbent directors, will constitute the
duly elected directors of the Fund. When all dividends in arrears on the AMPS
have been paid or provided for, the terms of office of the additional directors
elected by the holders of the AMPS will terminate.
33
So long as any of the AMPS are outstanding, the Fund will not, without the
affirmative vote of the holders of a majority of the outstanding AMPS,
(i) institute any proceedings to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against it,
or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent
to the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Fund or a substantial part of its property,
or make any assignment for the benefit of creditors, or, except as may be
required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any
such action; (ii) create, incur or suffer to exist, or agree to create, incur or
suffer to exist, or consent to cause or permit in the future (upon the happening
of a contingency or otherwise) the creation, incurrence or existence of any
material lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or Fund receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
AMPS, (D) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness permitted under
clause (iii) below and (E) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's Paying Agent and
the auction agent; or (iii) create, authorize, issue, incur or suffer to exist
any indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Fund has eligible assets with an aggregate discounted value at least equal to
the Preferred Shares Basic Maintenance Amount as of the immediately preceding
valuation date.
In addition, the affirmative vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding AMPS 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 security holders of the Fund under
Section 13(a) of the 1940 Act, including, among other things, changes in the
Fund's investment restrictions described under `Investment Restrictions' in the
SAI and changes in the Fund's subclassification as a closed-end investment
company.
The affirmative vote of the holders of a majority, as defined in the 1940
Act, of the outstanding AMPS of any series, voting separately from any other
series, shall be required with respect to any matter that materially and
adversely affects the rights, preferences, or powers of that series in a manner
different from that of other series or classes of the Fund's shares of capital
stock. For purposes of the foregoing, no matter shall be deemed to adversely
affect any right, preference or power unless such matter (i) alters or abolishes
any preferential right of such series; (ii) creates, alters or abolishes any
right in respect of redemption of such series; or (iii) creates or alters (other
than to abolish) any restriction on transfer applicable to such series. The vote
of holders of any series described in this paragraph will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and/or
preferred stock necessary to authorize the action in question.
34
The Common Shares and the AMPS also will vote separately to the extent
otherwise required under Maryland law or the 1940 Act as in effect from time to
time. The class votes of holders of AMPS described above will in each case be in
addition to any separate vote of the requisite percentage of Common Shares and
AMPS, voting together as a single class, necessary to authorize the action in
question.
For purpose of any right of the holders of AMPS to vote on any matter,
whether the right is created by the Charter, by statute or otherwise, a holder
of a Preferred Share is not entitled to vote and the Preferred Share will not be
deemed to be outstanding for the purpose of voting or determining the number of
AMPS required to constitute a quorum, if prior to or concurrently with a
determination of the AMPS entitled to vote or of AMPS deemed outstanding for
quorum purposes, as the case may be, a notice of redemption was given in respect
of those AMPS and sufficient Deposit Securities (as defined in the SAI) for the
redemption of those AMPS were deposited.
RATING AGENCY GUIDELINES
The Fund is required under S&P and Moody's guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount (as defined below). S&P and Moody's have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by the rating agency). The S&P and
Moody's guidelines also impose certain diversification requirements on the
Fund's overall portfolio. The 'Preferred Shares Basic Maintenance Amount'
includes the sum of (i) the aggregate liquidation preference of the AMPS then
outstanding, (ii) the total principal of any senior debt (plus accrued and
projected dividends), (iii) certain Fund expenses and (iv) certain other current
liabilities.
The Fund also is required under rating agency guidelines to maintain, with
respect to the AMPS, as of the last business day of each month in which AMPS are
outstanding, asset coverage of at least 200% with respect to senior securities
that are shares of the Fund, including the AMPS (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities that are shares of a closed-end investment
company as a condition of declaring dividends on its Common Shares) ('1940 Act
Preferred Shares Asset Coverage'). S&P and Moody's have agreed that the auditors
must certify once per quarter the asset coverage test on a date randomly
selected by the auditor. Based on the Fund's assets and liabilities as of
March 21, 2002, and assuming the issuance of all AMPS offered hereby and the use
of the proceeds as intended, the 1940 Act Preferred Shares Asset Coverage with
respect to AMPS would be computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $839,852,330
--------------------------------------------- = ----------- = 300%
Senior securities representing indebtedness $280,000,000
plus liquidation value of the preferred shares
If the Fund does not timely cure a failure to maintain (1) a discounted
value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or
(2) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance
with the requirements of the rating agency or agencies
35
then rating the AMPS, the Fund will be required to redeem AMPS as described
below under ' -- Redemption.'
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change or a withdrawal of the
ratings altogether. In addition, any rating agency providing a rating for the
AMPS may, at any time, change or withdraw any such rating. The Board of
Directors may, without stockholder approval, amend, alter, add to or repeal any
or all of the definitions and related provisions that have been adopted by the
Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from S&P or Moody's, or both, as appropriate, that any such
change would not impair the ratings then assigned by S&P and Moody's to the
AMPS.
The Board of Directors may amend the definition of Maximum Rate to increase
the percentage amount by which the Reference Rate is multiplied to determine the
Maximum Rate shown therein without the vote or consent of the holders of AMPS,
including each Series, or any other stockholder of the Corporation, but only
with confirmation from each Rating Agency, and after consultation with the
broker-dealers, provided that immediately following any such increase the Fund
could meet the Preferred Shares Basic Maintenance Amount Test.
As described by S&P and Moody's, the AMPS rating is an assessment of the
capacity and willingness of the Fund to pay AMPS' obligations. The ratings on
the AMPS are not recommendations to purchase, hold or sell the AMPS, inasmuch as
the ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines also do not address the likelihood that
an owner of the AMPS will be able to sell such shares in an auction or
otherwise. The ratings are based on current information furnished to S&P and
Moody's by the Fund and the Investment Manager and information obtained from
other sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information.
The rating agency guidelines will apply to the AMPS only so long as such
rating agency is rating these shares. The Fund will pay fees to S&P and Moody's
for rating the AMPS.
REDEMPTION
Mandatory Redemption. If the Fund does not timely cure a failure to
(1) maintain a discounted value of its portfolio equal to the Preferred Shares
Basic Maintenance Amount, (2) maintain the 1940 Act Preferred Shares Asset
Coverage, or (3) file a required certificate related to asset coverage on time,
the AMPS will be subject to mandatory redemption out of funds legally available
therefor in accordance with the Articles Supplementary and applicable law, at
the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited to
the number of AMPS necessary to restore the required discounted value or the
1940 Act Preferred Shares Asset Coverage, as the case may be.
In determining the number of AMPS required to be redeemed in accordance with
the foregoing, the Fund will allocate the number of shares required to be
redeemed to satisfy the Preferred Shares Basic Maintenance Amount or the 1940
Act Preferred Shares Asset Coverage, as the case may be, pro rata among the AMPS
of the Fund and any other preferred stock of the Fund, subject to redemption or
retirement. If fewer than all outstanding shares of any series are,
36
as a result, to be redeemed, the Fund may redeem such shares by lot or other
method that it deems fair and equitable.
Optional Redemption. To the extent permitted under the 1940 Act and Maryland
law, the Fund at its option may without the consent of the holders of AMPS,
redeem AMPS having a dividend period of one year or less, in whole or in part,
on the business day after the last day of such dividend period upon not less
than 15 calendar days and not more than 40 calendar days prior notice. The
optional redemption price per share will be $25,000 per share, plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to the date fixed for redemption. AMPS having a dividend period of
more than one year are redeemable at the option of the Fund, in whole or in
part, prior to the end of the relevant dividend period, subject to any specific
redemption provisions, which may include the payment of redemption premiums to
the extent required under any applicable specific redemption provisions. The
Fund will not make any optional redemption unless, after giving effect thereto,
(i) the Fund has available certain deposit securities with maturities 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 the AMPS by reason of the redemption of the AMPS on such date fixed
for the redemption and (ii) the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance
Amount.
Notwithstanding the foregoing, AMPS may not be redeemed at the option of the
Fund unless all dividends in arrears on the outstanding AMPS, including all
outstanding preferred shares, have been or are being contemporaneously paid or
set aside for payment. This would not prevent the lawful purchase or exchange
offer for AMPS made on the same terms to holders of all outstanding preferred
shares.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with AMPS with respect to the distribution of assets upon
liquidation of the Fund, upon a liquidation of the Fund, whether voluntary or
involuntary, the holders of AMPS then outstanding will be entitled to receive
and to be paid out of the assets of the Fund available for distribution to its
stockholders, before any payment or distribution shall be made on the Common
Shares, an amount equal to the liquidation preference with respect to such
shares ($25,000 per share), plus an amount equal to all dividends thereon
(whether or not earned or declared by the Fund, but excluding the interest
thereon) accumulated but unpaid to and including the date of final distribution
in same-day funds in connection with the liquidation of the Fund. After the
payment to the holders of AMPS of the full preferential amounts provided for as
described herein, the holders of AMPS as such shall have no right or claim to
any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.
THE AUCTION
GENERAL
The Articles Supplementary provide that, except as otherwise described in
this prospectus, the applicable rate for the AMPS for each rate period after the
initial rate period will be the rate that
37
results from an auction conducted as set forth in the Articles Supplementary and
summarized below. In such an auction, persons determine to hold or offer to sell
or, based on dividend rates bid by them, offer to purchase or sell AMPS. See the
Articles Supplementary for a more complete description of the auction process.
Auction Agency Agreement. The Fund will enter into an 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 to determine the applicable rate for AMPS so long as the applicable
rate for AMPS is to be based on the results of an auction.
The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 60 days after the delivery of such notice. If the
auction agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that prior to such removal the Fund has entered into such an
agreement with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for AMPS.
The auction agent will pay to each Broker-Dealer after each auction from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the stated value ($25,000 per share) of the AMPS held by a Broker-Dealer's
customer upon settlement in an auction.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for the AMPS, each
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the auction agent) as a beneficial owner of AMPS may submit
the following types of orders with respect to AMPS to that Broker-Dealer:
1. Hold Order -- indicating its desire to hold AMPS without regard to the
applicable rate for the next rate period.
2. Bid -- indicating its desire to purchase or hold the indicated number of
AMPS at $25,000 per share if the applicable rate for shares of such
series for the next rate period is not less than the rate or spread
specified in the bid and which shall be deemed an irrevocable offer to
sell AMPS at $25,000 per share if the applicable rate for shares of such
series for the next rate period is less than the rate or spread specified
in the bid.
3. Sell Order -- indicating its desire to sell AMPS at $25,000 per share
without regard to the applicable rate for shares of such series for the
next rate period.
A beneficial owner of AMPS may submit different types of orders to its
Broker-Dealer with respect to AMPS then held by the beneficial owner. A
beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the maximum applicable rate on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have submitted
a hold order to its Broker-Dealer. However, if a beneficial owner fails to
submit an order for some or all of its shares to its Broker-Dealer for an
auction relating to a rate period of more than 91 days, such
38
beneficial owner will be deemed to have submitted a sell order for such shares
to its Broker-Dealer. A sell order constitutes an irrevocable offer to sell the
AMPS subject to the sell order. A beneficial owner that offers to become the
beneficial owner of additional AMPS is, for the purposes of such offer, a
potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of AMPS but that wishes to purchase AMPS or a beneficial owner
that wishes to purchase additional AMPS. A potential holder may submit bids to
its Broker-Dealer in which it offers to purchase AMPS at $25,000 per share if
the applicable rate for the next rate period is not less than the rate specified
in such bid. A bid placed by a potential holder specifying a rate higher than
the maximum applicable rate on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
However, neither the Fund nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of AMPS held
by it. A Broker-Dealer may also submit orders to the auction agent for its own
account as an existing holder or potential holder, provided it is not an
affiliate of the Fund.
There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to the number of AMPS subject
to sell orders submitted or deemed submitted to the auction agent by
Broker-Dealers for existing holders. If there are sufficient clearing bids, the
applicable rate for AMPS for the next succeeding rate period thereof 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 holders
and potential holders, would result in existing holders and potential holders
owning the AMPS available for purchase in the auction.
If there are not sufficient clearing bids, the applicable rate for the next
rate period will be the maximum rate on the auction date. However, if the Fund
has declared a special rate period and there not sufficient clearing bids, the
applicable rate for the next rate period will be the same as during the current
rate period. If there are not sufficient clearing bids, beneficial owners of
AMPS that have submitted or are deemed to have submitted sell orders may not be
able to sell in the auction all shares subject to such sell orders. If all of
the outstanding AMPS are the subject of submitted hold orders, then the rate
period following the auction will automatically be the same length as the
preceding rate period and the applicable rate for the next rate period will be
the 7-day 'AA' Composite Commercial Paper Rate in the case of a standard
dividend period for the Series T AMPS, Series TH AMPS and Series F AMPS, and the
30 day 'AA' Composite Commercial Paper Rate in the case of a standard dividend
period for the Series W AMPS. The 'AA' Composite Commercial Paper Rate is the
rate on commercial paper issued by financial corporations whose bonds are rated
AA by S&P as made available by the Federal Reserve Bank of New York or, if such
rate is not made available by the Federal Reserve Bank of New York, the
39
arithmetical average of such rates as quoted to the auction agent by a
commercial paper dealer as may be appointed by the Fund.
The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of AMPS that is different than the
number of shares specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as existing
holders or potential holders 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
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same-day funds to
DTC against delivery to their respective agent members. DTC will make payment to
the sellers' agent members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their agent members in same-day funds.
The auctions for AMPS will normally be held every 7 days in the case of the
Series T, Series TH, and Series F AMPS, and every 28 days in the case of
Series W AMPS, and each subsequent rate period will normally begin on the
following business day.
The first auction for Series T AMPS will be held on April 16, 2002, the
business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special rate periods, auctions for Series T
AMPS normally will be held every Tuesday, and each subsequent dividend period
for Series T AMPS normally will begin on the following Wednesday.
The first auction for Series TH AMPS will be held on April 18, 2002, the
business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during the special rate periods, auctions for
Series TH AMPS normally will be held every Thursday, and each subsequent
dividend period for Series TH AMPS normally will begin on the following Friday.
The first auction for Series F AMPS will be held on April 19, 2002, the
business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during the special rate periods, auctions for
Series F AMPS normally will be held every Friday, and each subsequent dividend
period for Series F AMPS normally will begin on the following Monday.
The first auction for Series W AMPS will be held on May 1, 2002 the business
day preceding the dividend payment date for the initial dividend period.
Thereafter, except during special rate periods, auctions for Series W AMPS
normally will be held every 28 days, and each subsequent dividend period for
Series W AMPS normally will begin on the following business day.
The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding AMPS of any series, and three current
holders. The three current holders and three potential holders submit orders
through Broker-Dealers at the auction:
40
Current Holder A...... Owns 500 shares, wants to sell Bid order of 4.1% rate for all
all 500 shares if auction rate 500 Shares
is less than 4.1%
Current Holder B...... Owns 300 shares, wants to hold Hold order -- will take the
auction rate
Current Holder C...... Owns 200 shares, wants to sell Bid order of 3.9% rate for all
all 200 shares 200 shares if auction rate is
less than 3.9%
Potential Holder D.... Wants to buy 200 shares Places order to buy at or
above 4.0%
Potential Holder E.... Wants to buy 300 shares Places order to buy at or
above 3.9%
Potential Holder F.... Wants to buy 200 shares Places order to buy at or
above 4.1%
The lowest dividend rate that will result in all 1,000 AMPS continuing to be
held is 4.0% (the offer by D). Therefore, the dividend rate will be 4.0%.
Current holders B and C will continue to own their shares. Current holder A will
sell its shares because A's dividend rate bid was higher than the dividend rate.
Potential holder D will buy 200 shares and potential holder E will buy 300
shares because their bid rates were at or below the dividend rate. Potential
holder F will not buy any shares because its bid rate was above the dividend
rate.
SECONDARY MARKET TRADING AND TRANSFER OF AMPS
The underwriters are not required to make a market in the AMPS. The
Broker-Dealers (including the underwriters) may maintain a secondary trading
market for outside of auctions, but they are not required to do so. There can be
no assurance that a secondary trading market for AMPS will develop or, if it
does develop, that it will provide owners with liquidity of investment. AMPS
will not be registered on any stock exchange or on the NASDAQ market. Investors
who purchase AMPS in an auction for a special rate period should note that
because the dividend rate on such shares will be fixed for the length of that
dividend period, the value of such shares may fluctuate in response to the
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 thereof, depending on
market conditions.
You may sell, transfer, or otherwise dispose of AMPS only in whole shares
and only
pursuant to a bid or sell order placed with the auction agent in accordance
with the auction procedures;
to a Broker-Dealer; or
to such other persons as may be permitted by the Fund; provided, however,
that (x) if you hold your AMPS in the name of a Broker-Dealer, a sale or
transfer of your AMPS to that Broker-Dealer, or to another customer of that
Broker-Dealer, will not be considered a sale or transfer for purposes of
the foregoing if that Broker-Dealer remains the existing holder of the AMPS
immediately after the transaction; and (y) in the case of all transfers,
other than through an auction, the Broker-Dealer (or other person, if the
Fund permits) receiving the transfer will advise the auction agent of the
transfer.
Further description of the auction procedures can be found in the Articles
Supplementary.
41
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue 99,988,800 Common Shares, par value $.001
per share. All Common Shares have equal rights to the payment of dividends and
the distribution of assets upon liquidation. Common Shares are fully paid and
non-assessable when issued and have no preemptive, conversion, exchange,
redemption or cumulative voting rights. Holders of Common Shares are entitled to
one vote per share. Whenever AMPS are outstanding, holders of Common Shares will
not be entitled to receive any distributions from the Fund unless all accrued
dividends on AMPS have been paid, and unless asset coverage (as defined in the
1940 Act) with respect to AMPS would be at least 200% after giving effect to the
distributions. Under the rules of the NYSE applicable to listed companies, the
Fund is required to hold an annual meeting of stockholders each year.
CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund has provisions in its Charter and By-Laws ('By-Laws') that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions or to modify
its structure. Commencing with the first annual meeting of stockholders, the
Board of Directors will be divided into three classes, having initial terms of
one, two and three years, respectively. At the annual meeting of stockholders in
each year thereafter, the term of one class will expire and directors will be
elected to serve in that class for terms of three years. This provision could
delay for up to two years the replacement of a majority of the Board of
Directors. A director may be removed from office only for cause and only by a
vote of the holders of at least 75% of the outstanding shares of the Fund
entitled to vote on the matter.
The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. Such conversion also requires the affirmative vote
of the holders of at least 75% of Common Shares and AMPS outstanding at the
time, voting as a single class, unless it is approved by a vote of at least 75%
of the Continuing Directors (as defined below), in which event such conversion
requires the approval of the holders of a majority of the votes entitled to be
cast thereon by the stockholders of the Fund. A 'Continuing Director' is any
member of the Board of Directors of the Fund who (i) is not a person or
affiliate of a person who enters or proposes to enter into a Business
Combination (as defined below) with the Fund (an 'Interested Party') and (ii)
who has been a member of the Board of Directors of the Fund for a period of at
least 12 months, or has been a member of the Board of Directors since the Fund's
initial public offering of Common Shares, or is a successor of a Continuing
Director who is unaffiliated with an Interested Party and is recommended to
succeed a Continuing Director by a majority of the Continuing Directors then on
the Board of Directors of the Fund. The affirmative vote of at least 75% of the
entire Board of Directors and at least 75% of the holders of Common Shares and
AMPS outstanding at the time, voting as a single class, will be required to
amend the Charter to change any of the provisions in this paragraph and the
preceding paragraph.
The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of Common Shares and AMPS outstanding at the
time, voting as a single class, and (ii) in the case of a Business Combination
(as defined below), 66 2/3% of the Common Shares and AMPS outstanding at the
time, voting as a single class, other than votes held by an Interested
42
Party who is (or whose affiliate is) a party to a Business Combination (as
defined below) or an affiliate or associate of the Interested Party, are
required to authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with
or into any other entity;
(ii) issuance or transfer by the Fund (in one or a series of
transactions in any 12-month period) of any securities of the Fund to any
person or entity for cash, securities or other property (or combination
thereof) having an aggregate fair market value of $1,000,000 or more,
excluding issuances or transfers of debt securities of the Fund, sales of
securities of the Fund in connection with a public offering, issuances of
securities of the Fund pursuant to a dividend reinvestment plan adopted by
the Fund, issuances of securities of the Fund upon the exercise of any stock
subscription rights distributed by the Fund and portfolio transactions
effected by the Fund in the ordinary course of business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12 month
period) to or with any person or entity of any assets of the Fund having an
aggregate fair market value of $1,000,000 or more except for portfolio
transactions (including pledges of portfolio securities in connection with
borrowings) effected by the Fund in the ordinary course of its business
(transactions within clauses (i), (ii) and (iii) above being known
individually as a 'Business Combination');
(iv) any voluntary liquidation or dissolution of the Fund or an
amendment to the Fund's Charter to terminate the Fund's existence; or
(v) any stockholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets as to which stockholder
approval is required under federal or Maryland law.
However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of at least 75% of the Continuing Directors. In
that case, if Maryland law requires stockholder approval, the affirmative vote
of a majority of votes entitled to be cast thereon shall be required and if
Maryland law does not require stockholder approval, no stockholder approval will
be required. The Fund's By-Laws contain provisions the effect of which is to
prevent matters, including nominations of directors, from being considered at a
stockholders' meeting where the Fund has not received notice of the matters
generally at least 90 but no more than 120 days prior to the first anniversary
of the preceding year's annual meeting.
These provisions are in addition to any special voting rights granted to the
holders of the AMPS in the Charter. See 'Description of AMPS -- Voting Rights.'
The Board of Directors has determined that the foregoing voting requirements,
which are generally greater than the minimum requirements under Maryland law and
the 1940 Act, are in the best interest of the Fund's stockholders generally.
Reference is made to the Charter and By-Laws of the Fund, on file with the
SEC, for the full text of these provisions. These provisions could have the
effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. In the
opinion of the Investment Manager, however, these provisions offer several
possible advantages.
43
They may require persons seeking control of a Fund to negotiate with its
management regarding the price to be paid for the shares required to obtain such
control, they promote continuity and stability and they enhance the Fund's
ability to pursue long-term strategies that are consistent with its investment
objectives.
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and it may be converted to an
open-end investment company at any time by a vote of the outstanding shares. See
'Description of AMPS -- Voting Rights' and 'Certain Provisions of the Charter
and By-Laws' for a discussion of voting requirements applicable to conversion of
the Fund to an open-end investment company. If the Fund converted to an open-end
investment company, it would be required to redeem all AMPS then outstanding
(requiring in turn that it liquidate a portion of its investment portfolio), and
the Common Shares would no longer be listed on the NYSE. Conversion to open-end
status could also require the Fund to modify certain investment restrictions and
policies. Stockholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or 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. The Board of Directors may at any time propose conversion of the
Fund to open-end status, depending upon its judgment regarding the advisability
of such action in light of circumstances then prevailing. The Board of Directors
believes, however, that the closed-end structure is desirable in light of the
Fund's investment objectives and policies and it is currently not likely that
the Board of Directors would vote to convert the Fund to an open-end fund.
U.S. FEDERAL TAXATION
The following discussion offers only a brief outline of the U.S. federal
income tax consequences of investing in the Fund and is based on the U.S.
federal tax laws in effect on the date hereof. Such tax laws are subject to
change by legislative, judicial or administrative action, possibly with
retroactive effect. Investors should consult their own tax advisers for more
detailed information and for information regarding the impact of state, local
and foreign taxes on an investment in the Fund.
U.S. FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to elect to be treated as, and to qualify annually as, a
regulated investment company (a 'RIC') under Subchapter M of the Code. To
qualify, the Fund must, among other things, (a) derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived from its business of
investing in stock, securities or foreign currencies (the 'Income Requirement');
and (b) diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the value of its total assets is represented
by cash, U.S. Government securities, securities of other RICs and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5%
44
of the value of the Fund's total assets and that does not represent more than
10% of the issuer's outstanding voting securities and (ii) not more than 25% of
the value of its total assets is invested in the securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer, or of
two or more issuers which the Fund controls and which are engaged in the same,
similar or related trades or businesses.
For each taxable year that the Fund otherwise qualifies as a RIC, it will
not be subject to U.S. federal income tax on that part of its investment company
taxable income (as that term is defined in the Code, but determined without
regard to any deduction for dividends paid) and net capital gain (the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its shareholders, if it distributes at least 90% of the sum of its investment
company taxable income and any net tax-exempt interest income for that year (the
'Distribution Requirement'). The Fund intends to make sufficient distributions
of its investment company taxable income each taxable year to meet the
Distribution Requirement. If the Fund failed to qualify for treatment as a RIC
for any taxable year or failed to satisfy the Distribution Requirement in any
taxable year, (a) it would be taxed as an ordinary corporation on the full
amount of its taxable income for that year without being able to deduct the
distributions it makes to its shareholders, and (b) its shareholders would treat
any such distributions, including distributions of net capital gain, as
dividends (that is, ordinary income) to the extent of the Fund's current and
accumulated earnings and profits.
The Fund also currently intends to distribute all realized net capital gain
annually. If, however, the Board of Directors determines for any taxable year to
retain all or a portion of the Fund's net capital gain, that decision will not
affect the Fund's ability to qualify for treatment as a RIC, but will subject
the Fund to a tax of 35% of the amount retained. In that event, the Fund expects
to designate the retained amount as undistributed capital gains in a notice to
its shareholders, who (i) will be required to include their proportionate shares
of the undistributed amount in their gross income as long-term capital gain, and
(ii) will be entitled to credit their proportionate shares of the 35% tax paid
by the Fund against their U.S. federal income tax liabilities. For U.S. federal
income tax purposes, the tax basis of shares owned by a Fund shareholder will be
increased by an amount equal to 65% of the amount of undistributed capital gains
included in the shareholder's gross income.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of the sum of
its ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts. For this
and other purposes, a distribution will be treated as paid by the Fund and
received by the shareholders on December 31 if it is declared by the Fund in
October, November or December of such year, made payable to shareholders of
record on a date in such a month and paid by the Fund during January of the
following year. Any such distribution thus will be taxable to shareholders whose
taxable year is the calendar year in the year the distribution is declared,
rather than the year in which the distribution is received. To prevent
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.
U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF AMPS
Based in part on its lack of any present intention on the part of the Fund
to redeem or purchase the AMPS at any time in the future, the Fund believes that
under present law the
45
AMPS will constitute stock of the Fund and distributions with respect to the
AMPS (other than distributions in redemption of the AMPS that are treated as
exchanges of stock under Section 302(b) of the Code) thus will constitute
dividends to the extent of the Fund's current or accumulated earnings and
profits as calculated for U.S. federal income tax purposes. Such dividends
generally will be taxable as ordinary income to holders (other than capital gain
dividends, as described below) and generally will not qualify for the dividends
received deduction available to corporations under Section 243 of the Code,
although if a portion of the Fund's income consists of qualifying dividends paid
by U.S. corporations (other than REITs), a portion of the dividends paid by the
Fund to corporate shareholders may qualify for the dividends received deduction.
This view relies in part on a published ruling of the IRS stating that certain
preferred stock similar in many material respects to the AMPS represents equity.
It is possible, however, that the IRS might take a contrary position asserting,
for example, that the AMPS constitute debt of the Fund. If this position were
upheld, the discussion of the treatment of distributions above would not apply.
Instead, distributions by the Fund to holders of AMPS would constitute interest,
whether or not such distributions exceeded the earnings and profits of the Fund,
would be included in full in the income of the recipient and would be taxed as
ordinary income.
Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of capital gain dividends described below, be taxable
to stockholders as ordinary income. Distributions of net capital gain that are
designated by the Fund as capital gain dividends will be treated as long-term
capital gains in the hands of holders regardless of the holders' respective
holding periods for their AMPS. Distributions, if any, in excess of the Fund's
current and accumulated earnings and profits will first reduce the adjusted tax
basis of a shareholder's shares and, after that basis has been reduced to zero,
will constitute a capital gain to the stockholder (assuming the shares are held
as a capital asset). The IRS currently requires that a regulated investment
company that has two or more classes of stock allocate to each such class
proportionate amounts of each type of its income (such as ordinary income and
capital gains) based upon the percentage of total dividends paid out of current
or accumulated earnings and profits to each class for the tax year. Accordingly,
the Fund intends each year to allocate capital gain dividends between its Common
Shares, Series T, Series TH, Series F, and Series W AMPS in proportion to the
total dividends paid out of current or accumulated earnings and profits to each
class with respect to such tax year. Distributions in excess of the Fund's
current and accumulated earnings and profits, if any, however, will not be
allocated proportionately among the Common Shares, Series T, Series TH, Series
F, and Series W AMPS. Since the Fund's current and accumulated earnings and
profits will first be used to pay dividends on the AMPS, distributions in excess
of such earnings and profits, if any, will be made disproportionately to holders
of Common Shares.
Distributions will be treated in the manner described above regardless of
whether such distributions are paid in cash or invested in additional shares of
the Fund. Shareholders will be notified annually as to the U.S. federal tax
status of distributions.
SALE OF SHARES
The sale or other disposition of AMPS generally will be a taxable
transaction for U.S. federal income tax purposes. Selling holders of AMPS
generally will recognize gain or loss in an amount equal to the difference
between the amount received in exchange therefor and their respective bases in
such AMPS. If the AMPS are held as a capital asset, the gain or loss generally
will be a
46
capital gain or loss. Similarly, a redemption (including a redemption resulting
from liquidation of the Fund), if any, of AMPS by the Fund generally will give
rise to capital gain or loss if the holder does not own (and is not regarded
under certain tax law rules of constructive ownership as owning) any shares of
Common Shares in the Fund and provided that the redemption proceeds do not
represent declared but unpaid dividends.
Generally, a holder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. Capital gains of individuals are
generally taxed at a maximum rate of tax of 20% (or 18% for capital assets held
for more than five years and whose holding periods begin after December 31,
2000). However, any loss realized upon a taxable disposition of AMPS held for
six months or less will be treated as a long-term capital loss to the extent of
any capital gain dividends received by the holder (or amounts credited to the
holder as undistributed capital gains) with respect to such shares. Also, any
loss realized upon a taxable disposition of AMPS may be disallowed if other AMPS
are acquired within a 61-day period beginning 30 days before and ending 30 days
after the date the shares are disposed of. If disallowed, the loss will be
reflected by an upward adjustment to the basis of the AMPS acquired.
BACKUP WITHHOLDING
The Fund may be required to withhold, for U.S. federal income taxes, a
portion of all taxable dividends and redemption proceeds payable to shareholders
who fail to provide the Fund with their correct taxpayer identification numbers
or who otherwise fail to make required certifications, or if the Fund or a
Series shareholder has been notified by the IRS that such shareholder is subject
to backup withholding. Corporate shareholders and other shareholders specified
in the Code and the Treasury regulations promulgated thereunder are exempt from
such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld will be allowed as a refund or a credit against the
shareholder's federal income tax liability if the appropriate information is
provided to the IRS.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident aliens, 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. Investors are
advised to consult their own tax advisers with respect to the application to
their own circumstances of the above-described general taxation rules and with
respect to the state, local, foreign and other tax consequences to them of an
investment in AMPS.
FURTHER INFORMATION
The SAI summarizes further federal income tax considerations that may apply
to the Fund and its shareholders and may qualify the considerations discussed
herein.
47
UNDERWRITING
The underwriters named below (the 'Underwriters'), acting through Merrill
Lynch, Pierce, Fenner & Smith Incorporated, have severally agreed, subject to
the terms and conditions of the Purchase Agreement with the Fund to purchase,
and the Fund has agreed to sell, the number of AMPS set forth opposite their
respective names below.
NUMBER OF SHARES
----------------
SERIES T SERIES TH SERIES F SERIES W
UNDERWRITER -------- --------- -------- --------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................ 1,680 1,680 1,680 1,680
Prudential Securities Incorporated..... 560 560 560 560
A.G. Edwards & Sons, Inc............... 280 280 280 280
UBS Warburg LLC........................ 280 280 280 280
----- ----- ----- -----
Total....................... 2,800 2,800 2,800 2,800
----- ----- ----- -----
----- ----- ----- -----
The Purchase Agreement provides that the obligations of the Underwriters to
purchase the shares included in this offering are subject to approval of legal
matters by counsel and to other conditions. The Underwriters are obligated to
purchase all the AMPS if they purchase any of the shares. The Fund and the
Investment Manager have agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
for any of those liabilities.
The Fund has been advised by the Underwriters that they propose initially to
offer some of the shares directly to the public at the public offering price set
forth on the cover page of this Prospectus and some of the shares to dealers at
the public offering price less a concession not to exceed $137.50 per share. The
sales load the Fund will pay of $250 per share is equal to 1% of the initial
offering price. After the initial public offering, the Underwriters may change
the public offering price and the concession. Investors must pay for any AMPS
purchased in the initial public offering on or before April 4, 2002.
The Fund anticipates that the Underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions and that the
Underwriters, or their affiliates, may act as a counterparty in connection with
the interest rate transactions described above after they have ceased to be
Underwriters.
The Fund anticipates that the Underwriters or their respective affiliates
may, from time to time, act in auctions as broker dealers and receive fees as
set forth under 'The Auction' and in the SAI. The underwriters are active
underwriters of, and dealers in, securities and act as market makers in a number
of such securities, and therefore can be expected to engage in portfolio
transactions with, and perform services for, the Fund.
The principal business address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated is 4 World Financial Center, New York, New York 10080.
The settlement date for the purchase of the AMPS will be April 4, 2002, as
agreed upon by the Underwriters, the Fund and the Investment Manager pursuant to
Rule 15c6-1 under the Securities Exchange Act of 1934.
48
CUSTODIAN, AUCTION AGENT, TRANSFER
AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Bank of New York, whose principal dealing and trading business is
currently conducted from 5 Penn Plaza, 13th Floor, New York, NY 10001, will act
as auction agent, transfer agent, dividend paying agent, and registrar for the
AMPS. State Street Bank, whose principal business address is 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments. Neither The Bank of New York nor State Street Bank has any part in
deciding the Fund's investment policies or which securities are to be purchased
or sold for the Fund's portfolio.
LEGAL OPINIONS
The validity of the shares offered hereby is being passed on for the Fund by
Simpson Thacher & Bartlett, New York, New York, and certain other legal matters
will be passed on for the Underwriters by Clifford Chance Rogers & Wells LLP.
Venable, Baetjer and Howard, LLP will opine on certain matters pertaining to
Maryland law. Simpson Thacher & Bartlett and Clifford Chance Rogers & Wells LLP
may rely as to certain matters of Maryland law on the opinion of Venable,
Baetjer and Howard, LLP.
INDEPENDENT AUDITORS
The statement of assets and liabilities of the Fund at February 15, 2002 and
the related statement of operations for the one day then ended have been audited
by PricewaterhouseCoopers LLP, independent auditors, as set forth in their
report given upon PricewaterhouseCoopers LLP's authority as experts in
accounting and auditing. The address of PricewaterhouseCoopers LLP is 1177
Avenue of the Americas, New York, NY 10036.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the SEC. These documents can be inspected
and copied for a fee at the SEC's public reference room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Reports, proxy statements, and other information about
the Fund can be inspected at the offices of the NYSE.
This Prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this 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 the Fund and AMPS can be found in the Fund's
Registration Statement (including amendments, exhibits, and schedules) on Form
N-2 filed with the SEC. The Fund's SAI dated April 1, 2002 contains additional
information about the Fund and is incorporated by reference into (which means it
is considered to be a part of) this prospectus. The SEC maintains a web site
(http://www.sec.gov) that contains the Fund's Registration Statement, the SAI,
other documents incorporated by reference, and other information the Fund has
filed electronically with the SEC, including proxy statements and reports filed
under the Securities Exchange Act of 1934. Additional information may be found
on the Internet at http://www.cohenandsteers.com.
49
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
General Information......................................... 3
Additional Information about Fund Investment Objectives and
Policies.................................................. 3
Investment Restrictions..................................... 4
Management of the Fund...................................... 6
Compensation of Directors................................... 9
Investment Advisory and Other Services...................... 10
Portfolio Transactions and Brokerage........................ 12
Determination of Net Asset Value............................ 13
Additional Information Concerning the Auctions for AMPS..... 13
S&P and Moody's Guidelines.................................. 15
U.S. Federal Taxation....................................... 21
Performance Data and Index Returns.......................... 26
Experts..................................................... 27
Report of Independent Accountants........................... 28
Financial Statements........................................ 29
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
50
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$280,000,000
COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
TAXABLE AUCTION MARKET PREFERRED SHARES ('AMPS''r')
2,800 SHARES, SERIES T
2,800 SHARES, SERIES TH
2,800 SHARES, SERIES F
2,800 SHARES, SERIES W
LIQUIDATION PREFERENCE $25,000 PER SHARE
[Logo]
--------------------
PROSPECTUS
--------------------
MERRILL LYNCH & CO.
PRUDENTIAL SECURITIES
A.G. EDWARDS & SONS, INC.
UBS WARBURG
APRIL 1, 2002
'AMPS' is a registered trademark of Merrill Lynch & Co., Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[Logo]
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(800) 437-9912
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
Taxable Auction Market Preferred Shares ('AMPS')
2,800 Shares, Series T
2,800 Shares, Series TH
2,800 Shares, Series F
2,800 Shares, Series W
April 1, 2002
THIS STATEMENT OF ADDITIONAL INFORMATION ('SAI') OF COHEN & STEERS QUALITY
INCOME REALTY FUND, INC. (THE 'FUND') RELATING TO THIS OFFERING OF THE FUND'S
AUCTION MARKET PREFERRED SHARES (THE 'AMPS') DOES NOT CONSTITUTE A PROSPECTUS,
BUT SHOULD BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS RELATING TO THE
PREFERRED SHARES DATED APRIL 1, 2002.
THIS SAI DOES NOT INCLUDE ALL INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
CONSIDER BEFORE PURCHASING PREFERRED SHARES IN THIS OFFERING, AND INVESTORS
SHOULD OBTAIN AND READ THE PROSPECTUS PRIOR TO PURCHASING PREFERRED SHARES. A
COPY OF THE PROSPECTUS MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO THE ADDRESS
OR CALLING THE PHONE NUMBER SHOWN ABOVE.
CAPITALIZED TERMS USED IN THIS SAI HAVE THE MEANINGS ASSIGNED TO THEM IN THE
PROSPECTUS OR IN THE GLOSSARY OF THIS SAI.
----------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
General Information......................................... 3
Additional Information about Fund Investment Objectives and
Policies.................................................. 3
Investment Restrictions..................................... 4
Management of the Fund...................................... 6
Compensation of Directors................................... 9
Investment Advisory and Other Services...................... 10
Portfolio Transactions and Brokerage........................ 12
Determination of Net Asset Value............................ 13
Additional Information Concerning the Auctions for AMPS..... 13
S&P and Moody's Guidelines.................................. 15
U.S. Federal Taxation....................................... 21
Performance Data and Index Returns.......................... 26
Experts..................................................... 27
Report of Independent Accountants........................... 28
Financial Statements........................................ 29
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
2
GENERAL INFORMATION
The Fund is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940 (the '1940 Act'). Cohen &
Steers Capital Management, Inc. (the 'Investment Manager') serves as the Fund's
investment manager. The Fund's primary investment objective is high current
income through investment in real estate securities and its secondary investment
objective is capital appreciation. No assurance can be given that the Fund will
achieve its investment objectives.
ADDITIONAL INFORMATION ABOUT
FUND INVESTMENT OBJECTIVES AND POLICIES
The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks as set forth in the Prospectus.
Except as otherwise provided, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without the approval of
the stockholders; however, the Fund will not change its non-fundamental
investment policies without written notice to stockholders.
INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS
It is our fundamental policy to concentrate our investments in the U.S. real
estate market and not in any other industry. Under normal market conditions, we
invest at least 90% of our total assets in common stocks, preferred stocks and
other equity securities issued by real estate companies, such as real estate
investment trusts ('REITs').
REAL ESTATE COMPANIES
For purposes of our investment policies, a real estate company is one that
derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential real
estate; or has at least 50% of its assets in real estate.
REAL ESTATE INVESTMENT TRUSTS
A REIT is a company dedicated to owning, and usually operating, income
producing real estate, or to financing real estate. REITs can generally be
classified as Equity REITs, Mortgage REITs and Hybrid REITs. An Equity REIT
invests primarily in the fee ownership or leasehold ownership of land and
buildings and derives its income primarily from rental income. An Equity REIT
may also realize capital gains (or losses) by selling real estate properties in
its portfolio that have appreciated (or depreciated) in value. A Mortgage REIT
invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A Mortgage REIT generally derives its income
primarily from interest payments on the credit it has extended. A Hybrid REIT
combines the characteristics of both Equity REITs and Mortgage REITs. It is
anticipated, although not required, that under normal market conditions at least
90% of the Fund's investments in REITs consist of securities issued by Equity
REITs. At least 80% of our total assets will be invested in income producing
equity securities issued by REITs.
PREFERRED STOCKS
Preferred stocks pay fixed or floating dividends to investors, and have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. Preferred stockholders
usually have no right to vote for corporate directors or on other matters. Under
current market conditions, the Investment Manager invests approximately 70% of
our total assets in common shares of real estate companies and approximately 30%
in preferred shares of REITs. The actual percentage of common and preferred
shares in our investment portfolio may vary over time based on the Investment
Manager's assessment of market conditions.
3
LOWER-RATED SECURITIES
Securities rated non-investment grade (lower than BBB by Standard & Poor's
Rating Services ('S&P') or lower than baa by Moody's Investors Service Inc.
('Moody's')) are sometimes referred to as 'high yield' or 'junk' bonds. We may
only invest in securities rated 'CCC' or higher by S&P, or rated 'caa' or higher
by Moody's, or unrated securities of comparable quality. The issuers of these
securities have a currently identifiable vulnerability to default and the issues
may be in default or there may be present elements of danger with respect to
principal or interest. We may invest no more than 20% of our assets in preferred
stock and debt securities rated below investment grade and unrated securities of
comparable quality. This is a fundamental investment policy. We will not invest
in securities which are in default at the time of purchase.
ILLIQUID SECURITIES
A security is illiquid if, for legal or market reasons, it cannot be
promptly sold (i.e., within seven days) at a price which approximates its fair
value. Although substantially all of the equity securities of real estate
companies in which we intend to invest are traded on a national securities
exchange or in the over-the-counter market, there are no limitations on our
ability to invest in illiquid securities.
CASH RESERVES
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments.
Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as S&P or Moody's, certificates of
deposit, bankers' acceptances issued by domestic banks having total assets in
excess of one billion dollars, and money market mutual funds.
In entering into a repurchase agreement for the Fund, the Investment Manager
will evaluate and monitor the creditworthiness of the vendor. In the event that
a vendor should default on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If the vendor becomes bankrupt, the Fund might be
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral.
INVESTMENT RESTRICTIONS
The investment objectives and the general investment policies and investment
techniques of the Fund are described in the Prospectus. The Fund has also
adopted certain investment restrictions limiting the following activities except
as specifically authorized:
The Fund may not:
1. Issue senior securities (including borrowing money for other than
temporary purposes) except in conformity with the limits set forth in the
1940 Act; or pledge its assets other than to secure such issuances or
borrowings or in connection with permitted investment strategies;
notwithstanding the foregoing, the Fund may borrow up to an additional 5% of
its total assets for temporary purposes;
2. Act as an underwriter of securities issued by other persons, except
insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;
4
3. Purchase or sell real estate, mortgages on real estate or
commodities, except that the Fund may invest in securities of companies that
deal in real estate or are engaged in the real estate business, including
REITs, and securities secured by real estate or interests therein and the
Fund may hold and sell real estate or mortgages on real estate acquired
through default, liquidation, or other distributions of an interest in real
estate as a result of the Fund's ownership of such securities;
4. Purchase or sell commodities or commodity futures contracts, except
that the Fund may invest in financial futures contracts, options thereon and
such similar instruments;
5. Make loans to other persons except through the lending of securities
held by it (but not to exceed a value of one-third of total assets), through
the use of repurchase agreements, and by the purchase of debt securities,
all in accordance with its investment policies;
6. Purchase preferred stock and debt securities rated below investment
grade and unrated securities of comparable quality, if, as a result, more
than 20% of the Fund's total assets would then be invested in such
securities;
7. Acquire or retain securities of any investment company, except that
the Fund may (a) acquire securities of investment companies up to the limits
permitted by Section 12(d)(1) of the 1940 Act, and (b) acquire securities of
any investment company as part of a merger, consolidation or similar
transaction;
8. Invest in puts, calls, straddles, spreads or any combination thereof;
9. Enter into short sales;
10. Invest in the securities of a non-U.S. issuer;
11. Invest in oil, gas or other mineral exploration programs,
development programs or leases, except that the Fund may purchase securities
of companies engaging in whole or in part in such activities;
12. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowings; or
13. Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities.
The investment restrictions numbered 1 through 7 in this SAI have been
adopted as fundamental policies of the Fund. Under the 1940 Act, a fundamental
policy may not be changed without the vote of a majority of the outstanding
voting securities of the Fund, as defined under the 1940 Act. 'Majority of the
outstanding voting securities' means the lesser of (1) 67% or more of the shares
present at a meeting of stockholders of the Fund, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy,
or (2) more than 50% of the outstanding shares of the Fund. Investment
restrictions numbered 8 through 13 above are non-fundamental and may be changed
at any time by vote of a majority of the Board of Directors.
5
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. The directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreements with its Investment Manager, administrator, auction agent, custodian
and transfer agent. The management of the Fund's day-to-day operations is
delegated to its officers, the Investment Manager and the Fund's administrator,
subject always to the investment objectives and policies of the Fund and to the
general supervision of the Directors. As of April 1, 2002, the Directors and
officers as a group beneficially owned directly or indirectly less than 1% of
the outstanding shares of the Fund.
DIRECTORS AND OFFICERS
Basic information about the identity and experience of each Director and
officer is set forth in the charts below. Each director and officer is also a
director or officer of Cohen & Steers Advantage Income Realty Fund, Inc. and
Cohen & Steers Total Return Realty Fund, Inc., which are closed-end investment
companies also advised by the Investment Manager, and Cohen & Steers Equity
Income Fund, Inc., Cohen & Steers Institutional Realty Shares, Inc., Cohen &
Steers Realty Shares, Inc. and Cohen & Steers Special Equity Fund, Inc., which
are open-end investment companies advised by the Investment Manager. The
directors identified below as 'Interested Directors' are each an 'interested
person' of the Fund, as such term is defined in the 1940 Act, by virtue of such
person's affiliation with the Fund or the Investment Manager.
The Directors of the Fund, their addresses, their ages, the length of time
served, their principal occupations for at least the past five years, the number
of portfolios they oversee within the Fund complex, and other directorships held
by the Director are set forth below.
NUMBER OF
FUNDS WITHIN
PRINCIPAL FUND
OCCUPATION COMPLEX
DURING PAST OVERSEEN BY
5 YEARS DIRECTOR
POSITION HELD TERM OF (INCLUDING OTHER (INCLUDING LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE DIRECTORSHIPS HELD) THE FUND) TIME SERVED
--------------------- --------- ------ ------------------- --------- -----------
INTERESTED DIRECTORS
Robert H. Steers ........ Director, Chairman Until Next Chairman of 7 Since
757 Third Avenue of the Board, and Election of Cohen & Steers Inception
New York, New York Secretary Directors Capital
Age: 48 Management,
Inc., the
Fund's
Investment
Manager.
Martin Cohen *, ** ...... Director, Until Next President of 7 Since
757 Third Avenue President and Election of Cohen & Steers Inception
New York, New York Treasurer Directors Capital
Age: 52 Management,
Inc., the
Fund's
Investment
Manager.
DISINTERESTED DIRECTORS
Gregory C. Clark ........ Director Until Next Private 7 Since
376 Mountain Laurel Drive Election of Investor. Prior Inception
Aspen, Colorado Directors thereto,
Age: 54 President of
Wellspring
Management
Group
(investment
advisory firm).
(table continued on next page)
6
(table continued from previous page)
NUMBER OF
FUNDS WITHIN
PRINCIPAL FUND
OCCUPATION COMPLEX
DURING PAST OVERSEEN BY
5 YEARS DIRECTOR
POSITION HELD TERM OF (INCLUDING OTHER (INCLUDING LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE DIRECTORSHIPS HELD) THE FUND) TIME SERVED
--------------------- --------- ------ ------------------- --------- -----------
Bonnie Cohen ** ......... Director Until Next Consultant. Prior 7 Since
1824 Phelps Place, N.W. Election of thereto, Inception
Washington, D.C. Directors Undersecretary of
Age: 59 State, United
States Department
of State.
George Grossman ......... Director Until Next Attorney-at-law. 7 Since
17 Elm Place Election of Inception
Rye, New York Directors
Age: 47
Richard J. Norman ....... Director Until Next Private Investor. 7 Since
7520 Hackamore Drive Election of Prior thereto, Inception
Potomac, Maryland Directors Investment
Age: 58 Representative of
Morgan Stanley Dean
Witter.
Willard H. Smith Jr.* ... Director Until Next Board member of 7 Since
5208 Renaissance Avenue, Election of Essex Property Inception
San Diego, California Directors Trust Inc.,
Age: 64 Highwoods
Properties, Inc.,
and Realty Income
Corporation.
Managing Director
at Merrill Lynch &
Co., Equity Capital
Markets Division
from 1983 to 1995.
---------
* These directors have been designated as preferred stock directors
** Martin Cohen and Bonnie Cohen are unrelated
The officers of the Fund, their addresses, their ages, and their principal
occupations for at least the past five years are set forth below.
POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- ---- -------------------------------------------
Greg E. Brooks ............... Vice President Senior Vice President of Cohen & Steers
757 Third Avenue Capital Management, Inc., the Fund's
New York, New York Investment Manager, since 2002 and a
Age: 35 Vice President of the Fund's Investment
Manager since 2000. Prior thereto, he was
an investment analyst with another real
estate securities investment manager.
(table continued on next page)
7
(table continued from previous page)
POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- ---- -------------------------------------------
Adam M. Derechin ............. Vice President and Senior Vice President of Cohen & Steers
757 Third Avenue Assistant Treasurer Capital Management, Inc., the Fund's
New York, New York Investment Manager, since 1998 and prior
Age: 37 to that Vice President of the Fund's
Investment Manager.
Lawrence B. Stoller .......... Assistant Secretary Senior Vice President and General Counsel
757 Third Avenue of Cohen & Steers Capital Management,
New York, New York Inc., the Fund's Investment Manager,
Age: 38 since 1999. Prior to that, Associate
General Counsel, Neuberger Berman
Management, Inc. (money manager); and
Assistant General Counsel, The Dreyfus
Corporation (money manager).
The following table provides information concerning the dollar range of the
Fund's equity securities owned by each Director and the aggregate dollar range
of securities owned in the Cohen & Steers Fund Complex is set forth below.
AGGREGATE DOLLAR
RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN THE
EQUITY SECURITIES IN COHEN & STEERS FUND
THE FUND AS OF COMPLEX AS OF
MARCH 15, 2002 MARCH 15, 2002
-------------- --------------
Robert H. Steers........................................ over $100,000 over $100,000
Martin Cohen............................................ over $100,000 over $100,000
Gregory C. Clark........................................ $10,001 -- $50,000 over $100,000
Bonnie Cohen............................................ $10,001 -- $50,000 $50,001 -- $100,000
George Grossman......................................... $10,001 -- $50,000 $10,001 -- $50,000
Richard J. Norman....................................... $10,001 -- $50,000 over $100,000
Willard H. Smith Jr..................................... none $10,001 -- $50,000
Conflicts of Interest. No Director who is an 'interested person' of the Fund
as defined in the 1940 Act, and no immediate family members, owns any securities
issued by the Investment Manager, or any person or entity (other than the Fund)
directly or indirectly controlling, controlled by, or under common control with
the Investment Manager.
BOARD'S ROLE IN FUND GOVERNANCE
Committees. The Fund's Board of Directors has one standing committee of the
Board, the Audit Committee, which is composed of all of the Directors who are
not interested persons of the Fund, as defined in the 1940 Act. The function of
the Audit Committee is to assist the Board of Directors in its oversight of the
Fund's financial reporting process.
Approval of Investment Management Agreement. The Board of Directors,
including a majority of the Directors who are not parties to the Fund's
Investment Management Agreement, or interested persons of any such party
('Disinterested Directors') has the responsibility under the 1940 Act to approve
the Fund's Investment Management Agreement for its initial term and annually
thereafter at a meeting called for the purpose of voting on such matter. The
Investment Management Agreement was approved for an initial two-year term by the
Fund's Directors, including a majority of the Disinterested Directors, at their
meetings held on September 21, 2001 and February 14, 2002. In determining to
approve the Investment Management Agreement, the Directors reviewed the
materials provided by the Investment Manager and considered the following: (1)
the level of the management fees and estimated expense ratio of the Fund as
8
compared to competitive Funds of a comparable size; (2) the nature and quality
of the services rendered by the Investment Manager; (3) anticipated benefits
derived by the Investment Manager from the relationship with the Fund; (4) the
costs of providing services to the Fund; and (5) the anticipated profitability
of the Fund to the Investment Manager. The Directors considered the fact that
the Investment Manager agreed to waive a portion of its investment management
fee in the amount of 0.32% of the Fund's average daily managed assets for the
first 5 fiscal years of the Fund's operations, and then declining amounts in
years 6 through 10. The Directors took note of the fact that the Fund's net
investment management fee for the initial term of the contract was projected to
compare favorably to the average investment management fee charged to
competitive funds of a comparable size. The Directors also noted that the
Investment Manager agreed to pay from its own resources an additional commission
to the lead underwriter of the Fund's common stock offering at an annual rate of
0.10% of the Fund's managed assets. They also considered the fact that the
Investment Manager agreed to pay all organizational expenses and offering costs,
other than the sales load, that exceeded $.03 per share in connection with the
Fund's common stock offering. The Directors then took into consideration the
benefits to be derived by the Investment Manager in connection with the
Investment Management Agreement, noting particularly the research and related
services, within the meaning of Section 28(e) of the Securities Exchange Act of
1934, that the Investment Manager would be eligible to receive by allocating the
Fund's brokerage transactions.
COMPENSATION OF DIRECTORS
The following table sets forth estimated information regarding compensation
expected to be paid to Directors by the Fund for the current fiscal year ending
December 31, 2002 and the aggregate compensation paid by the fund complex of
which the Fund is a part for the fiscal year ended December 31, 2001. Officers
of the Fund and Directors who are interested persons of the Fund do not receive
any compensation from the Fund or any other fund in the fund complex which is a
U.S. registered investment company. Each of the other Directors is paid an
annual retainer of $5,500, and a fee of $500 for each meeting attended and is
reimbursed for the expenses of attendance at such meetings. In the column headed
'Total Compensation From Fund Complex Paid to Directors,' the compensation paid
to each Director represents the six other funds that each Director serves in the
fund complex. The Directors do not receive any pension or retirement benefits
from the fund complex.
TOTAL
AGGREGATE COMPENSATION
COMPENSATION FROM FUND
FROM THE COMPLEX PAID TO
DIRECTOR FUND DIRECTORS
-------- ---- ---------
Gregory C. Clark*, Director................................. $7,500 $45,000
Bonnie Cohen*, Director..................................... $7,500 $11,250***
Martin Cohen**, Director and President...................... $ 0 $ 0
George Grossman*, Director.................................. $7,500 $45,000
Richard J. Norman, Director................................. $7,500 $11,250***
Willard H. Smith Jr.*, Director............................. $7,500 $45,000
Robert H. Steers**, Director and Chairman................... $ 0 $ 0
---------
* Member of the Audit Committee.
** 'Interested person,' as defined in the 1940 Act, of the Fund because of the
affiliation with Cohen & Steers Capital Management, Inc., the Fund's
Investment Manager.
*** Ms. Cohen and Mr. Norman were elected as Directors of the fund complex on
December 3, 2001.
9
PRINCIPAL STOCKHOLDERS
To the knowledge of the Fund, as of April 1, 2002, no current director of
the Fund owned 1% or more of the outstanding Common Shares, and the officers and
directors of the Fund owned, as a group, less than 1% of the Common Shares and
no AMPS.
As of April 1, 2002, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares.
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT MANAGER
Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, is the Investment Manager to the Fund. The
Investment Manager, a registered investment adviser, was formed in 1986 and
specializes in the management of real estate securities portfolios. Its current
clients include pension plans of leading corporations, endowment funds and
mutual funds, including Cohen & Steers Advantage Income Realty Fund, Inc. and
Cohen & Steers Total Return Realty Fund, Inc., both of which are closed-end
investment companies, and Cohen & Steers Equity Income Fund, Inc., Cohen &
Steers Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc. and
Cohen & Steers Special Equity Fund, Inc., which are open-end investment
companies. Cohen & Steers Realty Shares, Inc. is currently the largest
registered investment company that invests primarily in real estate securities.
Mr. Cohen and Mr. Steers are 'controlling persons' of the Investment Manager on
the basis of their ownership of the Investment Manager's stock.
Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Directors of the Fund.
Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of 0.85% of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares including the liquidation preference on any AMPS, plus the
principal amount on any borrowings) of the Fund.
The Investment Manager also provides the Fund with such personnel as the
Fund may from time to time request for the performance of clerical, accounting
and other office services, such as coordinating matters with the
sub-administrator, the transfer agent and the custodian. The personnel rendering
these services, who may act as officers of the Fund, may be employees of the
Investment Manager or its affiliates. These services are provided at no
additional cost to the Fund. The Fund does not pay any additional amounts for
services performed by officers of the Investment Manager or its affiliates.
ADMINISTRATIVE SERVICES
Pursuant to an Administration Agreement, the Investment Manager also
performs certain administrative and accounting functions for the Fund, including
(i) providing office space, telephone, office equipment and supplies for the
Fund; (ii) paying compensation of the Fund's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of the Fund; (iv) supervising preparation of the periodic updating of the Fund's
registration statement, including prospectus and statement of additional
information, for the purpose of filings with the Securities and Exchange
Commission and state securities administrators and monitoring and maintaining
the effectiveness of such filings, as appropriate; (v) supervising preparation
of periodic reports to the Fund's shareholders and filing of these reports with
the Securities and Exchange Commission, Forms N-SAR filed with the Securities
and Exchange Commission, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual shareholders; (vi) supervising the
10
daily pricing of the Fund's investment portfolio and the publication of the net
asset value of the Fund's shares, earnings reports and other financial data;
(vii) monitoring relationships with organizations providing services to the
Fund, including the Custodian, Transfer Agent and printers; (viii) providing
trading desk facilities for the Fund; (ix) supervising compliance by the Fund
with record-keeping requirements under the 1940 Act and regulations thereunder,
maintaining books and records for the Fund (other than those maintained by the
Custodian and Transfer Agent) and preparing and filing of tax reports other than
the Fund's income tax returns; and (x) providing executive, clerical and
secretarial help needed to carry out these responsibilities. Under the
Administration Agreement, the Fund pays the Investment Manager an amount equal
to, on an annual basis, 0.02% of the Fund's managed assets.
In accordance with the terms of the Administration Agreement and with the
approval of the Fund's Board of Directors, the Investment Manager has caused the
Fund to retain State Street Bank and Trust Company ('State Street Bank') as
sub-administrator under a fund accounting and administration agreement (the
'Sub-Administration Agreement'). Under the Sub-Administration Agreement, State
Street Bank has assumed responsibility for performing certain of the foregoing
administrative functions, including (i) determining the Fund's net asset value
and preparing these figures for publication; (ii) maintaining certain of the
Fund's books and records that are not maintained by the Investment Manager,
custodian or transfer agent; (iii) preparing financial information for the
Fund's income tax returns, proxy statements, shareholders reports, and SEC
filings; and (iv) responding to shareholder inquiries.
Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank is computed on the basis of the net assets in the
Fund at an annual rate equal to 0.030% of the first $200 million in assets,
0.020% of the next $200 million, and 0.013% of assets in excess of $400 million,
with a minimum fee of $120,000. The aggregate fee paid by the Fund and the other
funds advised by the Investment Manager to State Street Bank is computed by
multiplying the total number of funds by each break point in the above schedule
in order to determine the aggregate break points to be used in calculating the
total fee paid by the Cohen & Steers family of funds (i.e., 6 funds at $200
million or $1.2 billion at 0.030%, etc.). The Fund is then responsible for its
pro rata amount of the aggregate administration fee.
The Investment Manager remains responsible for monitoring and overseeing the
performance by State Street Bank, and EquiServe Trust Company, NA as custodian
and transfer and disbursing agent, of their obligations to the Fund under their
respective agreements with the Fund, subject to the overall authority of the
Fund's Board of Directors.
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Bank of New York, whose principal dealing and trading business is
currently conducted from 5 Penn Plaza, 13th Floor New York, NY 10001, will act
as auction agent, transfer agent, dividend paying agent, and registrar for the
AMPS. State Street Bank, whose principal business address is 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments. Neither The Bank of New York nor State Street Bank has any part in
deciding the Fund's investment policies or which securities are to be purchased
or sold for the Fund's portfolio.
CODE OF ETHICS
The Fund and the Investment Manager have adopted codes of ethics in
compliance with Rule 17j-1 under the 1940 Act. The codes of ethics of the Fund
and the Investment Manager, among other things, prohibit management personnel
from investing in REITs and real estate securities, prohibit purchases in an
initial public offering and require pre-approval for investments in private
placements. The Fund's Independent Directors are prohibited from purchasing or
selling any security if they knew or reasonably should have known at the time of
the transaction that, within the most recent 15 days, the security is being or
has been considered for purchase or sale by the Fund, or is being purchased or
sold by the Fund.
11
PRIVACY POLICY
The Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information the Fund collects, how
we protect that information, and why in certain cases we may share this
information with others.
The Fund does not receive any nonpublic personal information relating to the
shareholders who purchase shares through an intermediary that acts as the record
owner of the shares. In the case of shareholders who are record owners of the
Fund, we receive nonpublic personal information on account applications or other
forms. With respect to these shareholders, the Fund also has access to specific
information regarding their transactions in the Fund.
The Fund does not disclose any nonpublic personal information about its
shareholders or former shareholders to anyone, except as permitted by law or as
is necessary to service shareholder accounts. The Fund restricts access to
nonpublic personal information about its shareholders to Cohen & Steers
employees with a legitimate business need for the information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Directors, decisions to buy and sell
securities for the Fund and negotiation of its brokerage commission rates are
made by the Investment Manager. Transactions on U.S. stock exchanges involve the
payment by the Fund of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, the Investment
Manager will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the directors may
determine, the Investment Manager shall not be deemed to have acted unlawfully
or to have breached any duty solely by reason of its having caused the Fund to
pay a broker that provides research services to the Investment Manager an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, if the Investment Manager determines in good faith that such amount
of commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
the Investment Manager's ongoing responsibilities with respect to the Fund.
Research and investment information is provided by these and other brokers at no
cost to the Investment Manager and is available for the benefit of other
accounts advised by the Investment Manager and its affiliates, and not all of
the information will be used in connection with the Fund. While this information
may be useful in varying degrees and may tend to reduce the Investment Manager's
expenses, it is not possible to estimate its value and in the opinion of the
Investment Manager it does not reduce the Investment Manager's expenses in a
determinable amount. The extent to which the Investment Manager makes use of
statistical, research and other services furnished by brokers is considered by
the Investment Manager in the allocation of brokerage business but there is no
formula by which such business is allocated. The Investment Manager does so in
accordance with its judgment of the best interests of the Fund and its
stockholders. The Investment Manager may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the
Fund for services provided to it for which it would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Investment Manager
12
may consider sales of shares of the Fund as a factor in the selection of brokers
and dealers to enter into portfolio transactions with the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund will determine the net asset value of its Common Shares daily, as
of the close of trading on the New York Stock Exchange (currently 4:00 p.m. New
York time). Net asset value is computed by dividing the value of all assets of
the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses, the liquidation preference of the AMPS and
dividends declared but unpaid), by the total number of Common Shares
outstanding. Any swap transaction that the Fund enters into may, depending on
the applicable interest rate environment, have a positive or negative value for
purposes of calculating net asset value. Any cap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have no
value or a positive value. In addition, accrued payments to the Fund under such
transactions will be assets of the Fund and accrued payments by the Fund will be
liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange 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 closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') National List are
valued in a like manner. 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 as reflected on the tape at the close of the exchange
representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the current bid prices as reported by
NASDAQ or, in the case of securities not quoted by NASDAQ, the National
Quotation Bureau or such other comparable source as the directors deem
appropriate to reflect their fair market value. However, certain fixed-income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed by the Board of Directors to reflect the fair
market value of such securities. The prices provided by a pricing service take
into account institutional size trading in similar groups of securities and any
developments related to specific securities. Where securities are traded on more
than one exchange and also over-the-counter, the securities will generally be
valued using the quotations the Board of Directors believes reflect most closely
the value of such securities.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS
GENERAL
Securities Depository. The Depository Trust Company ('DTC') will act as the
Securities Depository with respect to the AMPS. One certificate for all of the
shares of each series 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 shares of the AMPS contained in the Articles Supplementary. The Fund will
also issue stop-transfer instructions to the transfer agent for the AMPS. Prior
to the commencement of the right of holders of the AMPS to elect a majority of
the Fund's Directors, as described under 'Description of the AMPS -- Voting
Rights' in the prospectus, Cede & Co. will be the holder of record of the AMPS
and owners of such shares will not be entitled to receive certificates
representing their ownership interest in such shares.
13
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, 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 in shares of the AMPS, whether for its
own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The auction agent will act as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross 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 between the Fund and the auction agent and will not
be liable for any error of judgment made in good faith unless the auction agent
was grossly negligent in ascertaining the pertinent facts.
The auction agent may conclusively rely upon, as evidence of the identities
of the holders of the AMPS, the auction agent's registry of holders, and the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under 'The
Auction-Secondary Market Trading and Transfers of the AMPS' in the prospectus
and notices from the Fund. 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.
The auction agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 45 days after such notice. If
the auction agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.
BROKER-DEALERS
The auction agent after each auction for the AMPS will pay to each
Broker-Dealer, from funds provided by the Trust, a service charge at the annual
rate of 1/4 of 1% in the case of any auction immediately preceding the dividend
period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealer in the case of any auction immediately preceding a dividend period
of one year or longer, of the purchase price of the AMPS placed by such Broker-
Dealer at such auction. For the purposes of the preceding sentence, the AMPS
will be placed by a Broker-Dealer if such shares 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 customers who are beneficial
owners or (b) the subject of an order submitted by such Broker-Dealer that is
(i) a submitted bid of an existing holder that resulted in the existing holder
continuing to hold such shares as a result of the auction or (ii) a submitted
bid of a potential bidder that resulted in the potential holder purchasing such
shares as a result of the auction or (iii) a valid hold order.
The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account, unless
the Trust notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.
14
S&P AND MOODY'S GUIDELINES
The descriptions of the S&P and Moody's Guidelines contained in this SAI do
not purport to be complete and are subject to and qualified in their entireties
by reference to the Articles Supplementary. A copy of the Articles Supplementary
is filed as an exhibit to the registration statement of which the Prospectus and
this SAI are a part and may be inspected, and copies thereof may be obtained, as
described under 'Further Information' in the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred to
herein as the 'Rating Agency Guidelines') established by S&P and Moody's in
connection with the Fund's receipt of a rating of 'AAA' and 'Aaa' from S&P and
Moody's, respectively, for the AMPS. These Rating Agency Guidelines relate,
among other things, to industry and credit quality characteristics of issuers
and diversification requirements and specify various Discount Factors for
different types of securities (with the level of discount greater as the rating
of a security becomes lower). Under the Rating Agency Guidelines, certain types
of securities in which the Fund may otherwise invest consistent with its
investment strategy are not eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio. Such instruments include, for example,
private placements (other than Rule 144A Securities) and other securities not
within the investment guidelines. Accordingly, although the Fund reserves the
right to invest in such securities to the extent set forth herein, they have not
and it is anticipated that they will not constitute a significant portion of the
Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the AMPS plus specified
liabilities, payment obligations and other amounts, as of periodic Valuation
Dates. The Rating Agency Guidelines also require the Fund to maintain asset
coverage for the AMPS on a non-discounted basis of at least 200% as of the end
of each month, and the 1940 Act requires this asset coverage as a condition to
paying dividends or other distributions on Common Shares. S&P and Moody's have
agreed that the auditors must certify once per quarter the asset coverage test
on a date randomly selected by the auditor. The effect of compliance with the
Rating Agency Guidelines may be to cause the Fund to invest in higher quality
assets and/or to maintain relatively substantial balances of highly liquid
assets or to restrict the Fund's ability to make certain investments that would
otherwise be deemed potentially desirable by the Investment Manager, including
private placements of other than Rule 144A Securities (as defined herein). The
Rating Agency Guidelines are subject to change from time to time with the
consent of the relevant rating agency and would not apply if the Fund in the
future elected not to use investment leverage consisting of senior securities
rated by one or more rating agencies, although other similar arrangements might
apply with respect to other senior securities that the Fund may issue.
The Fund intends to maintain, at specified times, a Discounted Value for its
portfolio at least equal to the amount specified by each rating agency (the
'Preferred Shares Basic Maintenance Amount'). S&P and Moody's have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable Rating Agency's
Guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency).
The Rating Agency Guidelines do not impose any limitations on the percentage
of Fund assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio. The amount of
such assets included in the portfolio at any time may vary depending upon the
rating, diversification and other characteristics of the assets included in the
portfolio which are eligible for inclusion in the Discounted Value of the
portfolio under the Rating Agency Guidelines.
As described by S&P, a preferred stock rating of AAA indicates strong asset
protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. An S&P or Moody's
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful. As described by Moody's,
15
an issue of preferred stock which is rated 'Aaa' is considered to be top-quality
preferred stock with good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
Ratings are not recommendations to purchase, hold or sell AMPS, inasmuch as
the rating does not comment as to market price or suitability for a particular
investor. The rating is based on current information furnished to S&P and
Moody's by the Fund and obtained by S&P and Moody's from other sources. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information.
S&P GUIDELINES
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Shares
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the Discounted Value of the Fund's portfolio, and,
among the requirements, the amount of such assets included in the portfolio at
any time, if any, may vary depending upon the credit quality (and related
Discounted Value) of the Fund's eligible assets at such time.
The Preferred Shares Basic Maintenance Amount includes the sum of (1)
$25,000 times the number of AMPS then outstanding and (2) certain accrued and
projected payment obligations of the Fund. Upon any failure to maintain the
required Discounted Value, the Fund would seek to alter the composition of its
portfolio to reestablish required asset coverage within the specified ten
Business Day cure period, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, the holders of the AMPS
will acquire certain rights. See 'Description of AMPS -- Asset Maintenance.'
'Business Day,' as used in the Prospectus and this SAI, means each Monday,
Tuesday, Wednesday, Thursday and Friday that is a day on which the New York
Stock Exchange is open for trading and that is not a day on which banks in New
York City are authorized or required by law or executive order to close.
Under S&P guidelines, for purposes of determining the Discounted Value of
any S&P Eligible Asset, the percentage determined as follows:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
Minimum Number Of:
Issuers(1)...................................... 44 40 44 30
Real Estate Industry/Property Sectors(2)........ 10 8 7 7
Percent of Assets in:
Largest Real Estate Industry/Property Sector.... 17% 25% 30% 30%
2nd Largest Real Estate Industry/Property
Sector........................................ 15% 20% 25% 25%
3rd Largest Real Estate
Industry/PropertySector....................... 12% 15% 15% 15%
4th Largest Real Estate Industry/Property
Sector........................................ 12% 12% 12% 12%
S&P Discount Factor:
common stock.................................... 190% 208% 223% 231%
preferred stock(3).............................. 157% 167% 174% 178%
---------
(1) Three issuers may each constitute 6% of assets and four issuers may each
constitute 5% of assets.
(2) As defined by the National Association of Real Estate Investment Trusts
('NAREIT').
(3) Applies to preferred stock of real estate companies, subject to
diversification guidelines whereby at least 34% of the preferred assets are
rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
Moody's equivalent) or greater; and the balance of the preferred assets is
rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
common stock will apply to preferred stock which is not in compliance with
the diversification standard.
16
(b) Debt Securities:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
Bond Rating(1):
A............................................... 116% 117% 119% 118%
A-.............................................. 117% 119% 120% 120%
BBB+............................................ 119% 121% 122% 122%
BBB............................................. 121% 122% 124% 124%
BBB -........................................... 122% 124% 126% 126%
BB+............................................. 127% 130% 133% 132%
BB.............................................. 133% 137% 141% 139%
BB-............................................. 139% 144% 149% 147%
B+.............................................. 152% 159% 166% 164%
B............................................... 163% 172% 182% 179%
B-.............................................. 176% 188% 202% 197%
CCC+............................................ 198% 212% 230% 224%
CCC............................................. 236% 262% 295% 284%
---------
(1) The S&P Discount Factors for debt securities shall also be applied to any
interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) If a security is unrated by S&P but is rated by Moody's, the conversion
chart under S&P OC Test Rating chart will apply.
S&P's Diversification Standard Levels 1 through 4 correspond to the portfolio's
diversification and impact the level of asset coverage needed to qualify for a
particular rating from S&P. The diversification of the Fund is measured by the
number of issuers and REIT sub-sectors within the Fund's portfolio. A high
number of issuers and sub-sectors corresponds to a more diversified Fund. The
more diversified the Fund is, the lower the asset coverage needed to qualify for
a particular S&P rating. The Fund must fall within Level 4, at a minimum, to
qualify for the AAA rating and, accordingly, must have a minimum number of
issuers and property sub-sectors in its portfolio.
(c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:
52-week Treasury Bills*..................................... 102%
Two-Year Treasury Notes..................................... 104%
Three-Year Treasury Notes................................... 108%
Five-Year Treasury Notes.................................... 109%
10-Year Treasury Notes...................................... 115%
30-Year Treasury Bonds...................................... 126%
---------
* Treasury Bills with maturities of less than 52 weeks will be discounted at the
appropriate Short-Term Money Market Instrument levels. Treasury Bills that
mature the next day are considered cash equivalents and are valued at 100%.
Treasury Strips: Treasury interest-only Strips will apply the discount
factor for the Treasury category set forth above following the maturity of the
Treasury Strip, e.g., a Treasury interest-only Strip with a maturity of seven
years will apply the discount factor for the U.S. Treasury securities with a
10-year maturity. Treasury principal-only Strips will apply the discount factor
that is two categories greater than its maturity, e.g., a Treasury
principal-only Strip with a maturity of seven years will apply the discount
factor for U.S. Treasury securities with a 30-year maturity.
(d) Cash and Cash Equivalents.
The S&P Discount Factor applied to Cash and Cash Equivalents will be (A)
100%, and (B) 102% for those portfolio securities which mature in 181 to 360
calendar days.
Under current S&P guidelines, the following are considered to be S&P
Eligible Assets:
(a) Common Stock, Preferred Stock and any debt securities of REITs and
Real Estate Companies;
17
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the swap
transaction has a short-term rating of not less than A-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is AA- or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
AMPS originally issued. The interest rate swap transaction will be
marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);
(d) Short-Term Money Market Instruments so long as (A) such securities
are issued by an institution, which, at the time of investment, is a
permitted bank (including commercial paper issued by a corporation which
complies with the applicable assumptions that follow) ('permitted bank'
means any bank, domestic or foreign, whose commercial paper is rated
A-1+) provided, however, that Short-Term Money Market Instruments with
maturities of 30 days of less, invested in an institution rated A-1 may
comprise up to 20% of eligible portfolio assets; and
(e) Cash, which is any immediately available funds in U.S. dollars or
any currency other than U.S. dollars which is a freely convertible currency
and Cash Equivalents, which means investments (other than Cash) that are one
or more of the following obligations or Securities: (i) U.S. Government
Securities; (ii) certificates of deposit of, banker's acceptances issued by
or money market accounts in any depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof and subject to supervision and examination by Federal and/or state
banking authorities, so long as the deposits offered by such depository
institution or trust company at the time of such investments are rated and
have a rating of at least 'P-1' by Moody's and 'A-1+' by S&P (or, in the
case of the principal depository institution in a holding company system
whose deposits are not so rated, the long term debt obligations of such
holding company are rated and such rating is at least 'A-1' by Moody's and
'A+' by S&P); (iii) commercial paper issued by any depository institution or
trust company incorporated under the laws of the United States of America or
any state thereof and subject to supervision and examination by Federal
and/or state banking authorities, or any corporation incorporated under the
laws of the United States of America or any state thereof, so long as the
commercial paper of such issuer is rated and has at the time of such
investment a short term rating of at least 'P-1' by Moody's and 'A-1+' by
S&P on its commercial paper; (iv) securities bearing interest or sold at a
discount issued by any corporation incorporated under the laws of the United
States of America or any state thereof the obligations of which at the time
of such investment are rated and that have a credit rating of at least 'P-1'
by Moody's and 'A-1+' by S&P either at the time of such investment or the
making of a contractual commitment providing for such investment;
(v) shares of any money market fund organized under the laws of a
jurisdiction other than the United States, so long as such money market fund
is rated and has at the time of such investment a short-term rating of at
least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and ownership of such
investments will not cause the issuer to become engaged in a trade or
business within the United States for U.S. Federal income tax purposes or
subject the issuer to tax on a net income basis; and (vi) unleveraged
overnight repurchase obligations on customary terms with respect to
investments described in clauses (i) through (iv) above entered into a
depository institution, trust company or corporation that has a short-term
rating of at least 'A-1+' by S&P; provided, that (i) in no event shall Cash
Equivalents include any obligation that provides for payment of interest
alone; (ii) Cash Equivalents referred to in clauses (ii) and (iii) above
shall mature within 183 days of issuance; (iii) if either Moody's or S&P
changes its rating system, then any ratings included in this definition
shall be deemed to be an equivalent rating in a successor rating category of
Moody's or S&P, as the case may be; (iv) if either Moody's or S&P is not in
the business of rating securities, then any ratings included in this
definition shall be deemed to be an equivalent rating from another Rating
Agency; (v) Cash Equivalents (other than U.S. Government Securities or money
market funds maintained by the Custodian) shall not include any such
investment of more than $100 million in any single issuer; and
18
(vi) in no event shall Cash Equivalents include any obligation that is not
denominated in Dollars, any synthetic securities, any Securities with
ratings containing an 'r' subscript, any IOs or any POs (other than
commercial paper with a maturity within 183 days of issuance).
MOODY'S GUIDELINES
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ('Moody's Eligible Assets')
must be discounted by certain discount factors set forth below ('Moody's
Discount Factors'). The Discounted Value of a portfolio security under Moody's
guidelines is the Market Value thereof, determined as specified by Moody's,
divided by the Moody's Discount Factor. The Moody's Discount Factor with respect
to securities other than those described below will be the percentage provided
in writing by Moody's.
The following Discount Factors apply to portfolio holdings as described
below, subject to diversification, issuer size and other requirements, in order
to constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
common stock of REITs....................................... 154%
preferred stock of REITs
with Senior Implied Moody's (or S&P) rating:............ 154%
without Senior Implied Moody's (or S&P) rating:......... 208%
preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P) rating:............ 208%
without Senior Implied Moody's (or S&P) rating:......... 250%
---------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/ Property Sector Classification which exceed
30% of Moody's Eligible Assets but are not greater than 35% of Moody's
Eligible Assets.
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is below $500
million.
(b) Debt Securities of REITs and Other Real Estate Companies(1):
MATURITY IN YEARS AAA AA A BAA BA B CAA NR(2)
----------------- --- -- - --- -- - --- -----
1....................... 109% 112% 115% 118% 119% 125% 225% 250%
2....................... 115% 118% 122% 125% 127% 133% 225% 250%
3....................... 120% 123% 127% 131% 133% 140% 225% 250%
4....................... 126% 129% 133% 138% 140% 147% 225% 250%
5....................... 132% 135% 139% 144% 146% 154% 225% 250%
7....................... 139% 143% 147% 152% 156% 164% 225% 250%
10...................... 145% 150% 155% 160% 164% 173% 225% 250%
15...................... 150% 155% 160% 165% 170% 180% 225% 250%
20...................... 150% 155% 160% 165% 170% 190% 225% 250%
30...................... 150% 155% 160% 165% 170% 191% 225% 250%
---------
(1) The Moody's Discount Factors for debt securities shall also be applied to
any interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) Unrated debt securities are limited to 10% of discounted Eligible Assets. If
a security is unrated by Moody's but is rated by S&P, a rating two numeric
ratings below the S&P rating will be used, e.g., where the S&P rating is
AAA, a Moody's rating of Aa2 will be used; where the S&P rating is AA+, a
Moody's rating of Aa3 will be used. If a security is unrated by either
Moody's or S&P, the percentage set forth under 'NR' in this table will be
used.
19
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less................................. 107% 107%
2 years or less (but longer than 1 year)....... 113% 114%
3 years or less (but longer than 2 year)....... 118% 120%
4 years or less (but longer than 3 year)....... 123% 127%
5 years or less (but longer than 4 year)....... 128% 133%
7 years or less (but longer than 5 year)....... 135% 145%
10 years or less (but longer than 7 year)...... 141% 159%
15 years or less (but longer than 10 year)..... 146% 184%
20 years or less (but longer than 15 year)..... 154% 211%
30 years or less (but longer than 20 year)..... 154% 236%
(d) Short-Term Instruments and Cash.
The Moody's Discount Factor applied to Moody's Eligible Assets that are
short term money instruments (as defined by Moody's) will be (i) 100%, so long
as such portfolio securities mature or have a demand feature at par exercisable
within 49 days of the relevant valuation date, (ii) 102%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within 49 days of the relevant valuation date, and (iii) 125%, if such
securities are not rated by Moody's, so long as such portfolio securities are
rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at
par exercisable within 49 days of the relevant valuation date. A Moody's
Discount Factor of 100% will be applied to cash.
Under current Moody's guidelines, the following are considered to be Moody's
Eligible Assets:
(a) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies. (i) Common stock of REITs and preferred stock
and any debt security of REITs and Other Real Estate Companies: (A) which
comprise at least 7 of the 14 Moody's Real Estate Industry/ Property Sector
Classifications ('Moody's Sector Classifications') and of which no more than
35% may constitute a single such classification; (B) which in the aggregate
constitute at least 40 separate classes of common stock, preferred stock,
and debt securities, issued by at least 30 issuers; (C) issued by a single
issuer which in the aggregate constitute no more than 7.0% of the Market
Value of Moody's Eligible Assets, and (D) issued by a single issuer which,
with respect to 50% of the Market Value of Moody's Eligible Assets,
constitute in the aggregate no more than 5% of Market Value of Moody's
Eligible Assets; and (ii) Unrated debt securities issued by an issuer which:
(A) has not filed for bankruptcy within the past three years; (B) is current
on all principal and interest on its fixed income obligations; (C) is
current on all preferred stock dividends; (D) possesses a current,
unqualified auditor's report without qualified, explanatory language and
(E) in the aggregate, do not exceed 10% of the discounted Moody's Eligible
Assets;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the swap
transaction has a short-term rating of not less than P-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is Aa3 or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
AMPS originally issued. The interest rate swap transaction will be
marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(d) Short-Term Money Market Instruments so long as (A) such securities
are rated at least P-1, (B) in the case of demand deposits, time deposits
and overnight funds, the supporting entity is rated at least A2, or (C) in
all other cases, the supporting entity (1) is rated A2 and the security
matures within one month, (2) is rated A1 and the security matures within
three months or (3) is rated at least Aa3 and the security matures within
six months; provided, however, that for purposes of this definition, such
instruments (other than
20
commercial paper rated by S&P and not rated by Moody's) need not meet any
otherwise applicable Moody's rating criteria; and
(e) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within 49 days of the relevant valuation date) and
receivables for Moody's Eligible Assets sold if the receivable is due within
five Business Days of the Valuation Date, and if the trades which generated
such receivables are (A) settled through clearing house firms with respect
to which the Corporation has received prior written authorization from
Moody's or (B)(1) with counterparties having a Moody's long-term debt rating
of at least Baa3 or (2) with counterparties having a Moody's Short-Term
Money Market Instrument rating of at least P-1.
See the Articles Supplementary of the Fund for further detail on the above
Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.
The foregoing Rating Agency Guidelines are subject to change from time to
time. The Fund may, but it is not required to, adopt any such change. Nationally
recognized rating agencies other than S&P and Moody's may also from time to time
rate the AMPS; any nationally recognized rating agency providing a rating for
the AMPS may, at any time, change or withdraw any such rating.
U.S. FEDERAL TAXATION
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Fund and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Fund.
TAXATION OF THE FUND
The Fund intends to elect to be taxed as, and to qualify annually as, a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, the Fund generally is not subject to U.S. federal income tax
on the portion of its investment company taxable income (as that term is defined
in the Code, but determined without regard to any deduction for dividends paid)
and net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss) that it distributes to shareholders, provided that it
distributes at least 90% of the sum of its investment company taxable income and
any net tax-exempt interest income for the taxable year (the 'Distribution
Requirement'), and satisfies certain other requirements of the Code that are
described below. The Fund intends to make sufficient distributions of its
investment company taxable income each taxable year to meet the Distribution
Requirement.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of any such issuer
21
and as to which the Fund does not hold more than 10% of the outstanding voting
securities of any such issuer), and no more than 25% of the value of its total
assets may be invested in the securities (other than U.S. Government securities
and securities of other regulated investment companies) of any one issuer, or of
two or more issuers which the Fund controls and which are engaged in the same or
similar or related trades or businesses.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund will be required (i) to suspend distributions to shareholders, and
(ii) under certain circumstances to partially redeem the AMPS in order to
maintain or restore the requisite asset coverage, either of which could prevent
the Fund from making distributions required to qualify as a regulated investment
company for U.S. federal income tax purposes and to avoid the excise taxes
discussed below. Depending on the size of the Fund's assets relative to its
outstanding senior securities, redemption under certain circumstances of the
AMPS might restore asset coverage. If asset coverage were restored, the Fund
would again be able to pay dividends and depending on the circumstances, could
requalify or avoid disqualification as a regulated investment company and avoid
the excise taxes discussed below.
If for any taxable year the Fund does not qualify as a regulated investment
company or satisfy the Distribution Requirement, all of its taxable income
(including its net capital gain) will be subject to U.S. federal income tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends received deduction in the case of
corporate shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in a calendar year an amount equal to the sum of (1)
98% of its ordinary taxable income for the calendar year, (2) 98% of its capital
gain net income (i.e., capital gains in excess of capital losses) for the
one-year period ended on October 31 of such calendar year, and (3) any ordinary
taxable income and capital gain net income for previous years that was not
distributed or taxed to the regulated investment company during those years. A
distribution will be treated as paid on December 31 of the current calendar year
if it is declared by the Fund in October, November or December with a record
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions will be taxed to shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received. To prevent the application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar
year distribution requirement.
DISTRIBUTIONS
Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of capital gain dividends described below, be taxable
to shareholders as ordinary income. Although such dividends generally will not
qualify for the dividends received deduction available to corporations under
Section 243 of the Code, if a portion of the Fund's income consists of
qualifying dividends paid by U.S. corporations (other than REITs), a portion of
the dividends paid by the Fund to corporate shareholders may be eligible for the
corporate dividends received deduction.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it generally will be taxable to individual shareholders at long-term
capital gains rates regardless of the length of time the shareholders have held
their shares. Conversely, if the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital loss
carryovers) at the applicable corporate tax rate. In such event, it is expected
that the Fund also will elect to treat such gain as having been distributed to
shareholders. As a result, each shareholder will be required to report his or
her pro
22
rata share of such gain on his or her tax return as long-term capital gain, will
be entitled to claim a tax credit for his or her pro rata share of tax paid by
the Fund on the gain, and will increase the tax basis for his or her shares by
an amount equal to the deemed distribution less the tax credit.
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his or her shares; any such
return of capital distributions in excess of the shareholder's tax basis will be
treated as gain from the sale of his or her shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund. If the NAV at the time a shareholder purchases
shares of the Fund reflects undistributed income or gain, distributions of such
amounts will be taxable to the shareholder in the manner described above, even
though such distributions economically constitute a return of capital to the
shareholder.
The IRS currently requires that a regulated investment company that has two
or more classes of stock allocate to each such class proportionate amounts of
each type of its income (such as ordinary income and capital gains) based upon
the percentage of total dividends paid out of current or accumulated earnings
and profits to each class for the tax year. Accordingly, the Fund intends each
year to allocate capital gain dividends between its Common Shares, Series T,
Series TH, Series F, and Series W Preferred Shares in proportion to the total
dividends paid out of current or accumulated earnings and profits to each class
with respect to such tax year. Distributions in excess of the Fund's current and
accumulated earnings and profits, if any, however, will not be allocated
proportionately among the Common Shares, Series T, Series TH, Series F, and
Series W AMPS. Since the Fund's current and accumulated earnings and profits
will first be used to pay dividends on the AMPS, distributions in excess of such
earnings and profits, if any, will be made disproportionately to holders of
Common Shares.
SALE OF SHARES
A shareholder generally will recognize gain or loss on the sale or exchange
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale and the shareholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the shareholder's holding period for the shares. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. However, any capital loss arising from the
sale of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder (or amounts credited to the shareholder as undistributed capital
gains) with respect to such shares. Also, any loss realized on a sale or
exchange of shares will be disallowed to the extent the shares disposed of are
replaced with other substantially identical shares within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such case, the tax basis of the acquired shares will be adjusted to reflect the
disallowed loss.
NATURE OF FUND'S INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
provisions.
23
ORIGINAL ISSUE DISCOUNT SECURITIES
Investments by the Fund in zero coupon or other discount securities will
result in income to the Fund equal to a portion of the excess of the face value
of the securities over their issue price (the 'original issue discount') each
year that the securities are held, even though the Fund receives no cash
interest payments. This income is included in determining the amount of income
which the Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its shareholders.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits ('REMICs'). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an 'excess inclusion') will be subject to U.S.
federal income tax in all events. These regulations are also expected to provide
that excess inclusion income of a regulated investment company, such as the
Fund, will be allocated to shareholders of the regulated investment company in
proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income, thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign shareholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
'disqualified organization' (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest U.S. federal income tax rate imposed on corporations.
The Investment Manager does not intend on behalf of the Fund to invest in REITs,
a substantial portion of the assets of which consists of residual interests in
REMICs.
BACKUP WITHHOLDING
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that he
or she has provided a correct taxpayer identification number and that he or she
is not subject to 'backup withholding,' the shareholder may be subject to a
'backup withholding' tax with respect to (1) taxable dividends and (2) the
proceeds of any sales or repurchases of AMPS. An individual's taxpayer
identification number is generally his or her social security number. Corporate
shareholders and other shareholders specified in the Code or the Treasury
regulations promulgated thereunder are exempt from backup withholding. Backup
withholding is not an additional tax and any amounts withheld will be allowed as
a refund or a credit against a taxpayer's U.S. federal income tax liability if
the appropriate information is provided to the IRS.
FOREIGN SHAREHOLDER
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ('foreign shareholder') depends on whether the income of
the Fund is 'effectively connected' with a U.S. trade or business carried on by
the shareholder.
24
Income Not Effectively Connected. If the income from the Fund is not
'effectively connected' with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the shareholder (see 'U.S. Federal Taxation --
Investments in Real Estate Investment Trusts' above)), which tax is generally
withheld from such distributions.
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will not be subject to U.S. federal
withholding tax at the rate of 30% (or lower treaty rate) unless the foreign
shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual present
in the United States for more than 182 days during the taxable year is generally
treated as a resident for U.S. income tax purposes; in that case, he or she
would be subject to U.S. federal income tax on his or her worldwide income at
the graduated rates applicable to U.S. citizens, rather than the 30% U.S.
federal withholding tax. In the case of a foreign shareholder who is a
nonresident alien individual, the Fund may be required to backup withhold U.S.
federal income tax on distributions of net capital gain unless the foreign
shareholder certifies his or her non-U.S. status under penalties of perjury or
otherwise establishes an exemption. See 'U.S. Federal Taxation -- Backup
Withholding,' above. Any gain that a foreign shareholder realizes upon the sale
or exchange of such shareholder's shares of the Fund will ordinarily be exempt
from U.S. federal withholding tax unless (i) in the case of a shareholder that
is a nonresident alien individual, the gain is U.S. source income and such
shareholder is physically present in the United States for more than 182 days
during the taxable year and meets certain other requirements, or (ii) at any
time during the shorter of the period during which the foreign shareholder held
shares of the Fund and the five year period ending on the date of the
disposition of those shares, the Fund was a 'U.S. real property holding
corporation' and the foreign shareholder held more than 5% of the shares of the
Fund, in which event the gain would be taxed in the same manner as for a U.S.
shareholder as discussed above and a 10% U.S. federal withholding tax would be
imposed on the amount realized on the disposition of such shares to be credited
against the foreign shareholder's U.S. federal income tax liability on such
disposition. A corporation is a 'U.S. real property holding corporation' if the
fair market value of its U.S. real property interests equals or exceeds 50% of
the fair market value of such interests plus its interests in real property
located outside the United States plus any other assets used or held for use in
a business. In the case of the Fund, U.S. real property interests include
interests in stock in U.S. real property holding corporations (other than stock
of a REIT controlled by U.S. persons and holdings of 5% or less in the stock of
publicly traded U.S. real property holding corporations) and certain
participating debt securities.
Income Effectively Connected. If the income from the Fund is 'effectively
connected' with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will be subject to U.S. federal income tax at the graduated
rates applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate shareholders may also be subject to the branch profits tax imposed by
the Code.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations issued thereunder as in effect on
the date of this SAI. Future
25
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions and considerations
discussed herein.
Income received by the Fund from foreign sources may be subject to
withholding and other taxes imposed by foreign jurisdictions, absent treaty
relief. Distributions to shareholders also may be subject to state, local and
foreign taxes, depending upon each shareholder's particular situation.
Shareholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Fund.
PERFORMANCE DATA AND INDEX RETURNS
From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to stockholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.
AVERAGE ANNUAL TOTAL RETURN
The Fund's 'average annual total return' figures described in the Prospectus
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:
P(1 + T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
YIELD
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ('net investment income') and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
a-b
---
2[( cd + 1)'pp'6 - 1]
Where: a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
In reports or other communications to stockholders of the Fund or in
advertising materials, the Fund may compare its performance with that of (i)
other investment companies listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
26
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or (ii) the Standard and Poor's Index of 500
Stocks, the Dow Jones Industrial Average, Dow Jones Utility Index, the National
Association of Real Estate Investment Trusts (NAREIT) Equity REIT Index, the
Salomon Brothers Broad Investment Grade Bond Index (BIG), Morgan Stanley Capital
International Europe Australia Far East (MSCI EAFE) Index, the NASDAQ Composite
Index, and other relevant indices and industry publications. The Fund may also
compare the historical volatility of its portfolio to the volatility of such
indices during the same time periods. (Volatility is a generally accepted
barometer of the market risk associated with a portfolio of securities and is
generally measured in comparison to the stock market as a whole -- the
beta -- or in absolute terms -- the standard deviation.)
EXPERTS
PricewaterhouseCoopers LLP have been appointed as independent accountants
for the Fund. The statement of assets and liabilities and the statement of
operations of the Fund as of February 15, 2002 included in this statement of
additional information has been so included in reliance on the report of
PricewaterhouseCoopers LLP, New York, New York, independent accountants, given
the authority of the firm as experts in auditing and accounting.
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.:
In our opinion, the accompanying statement of assets and liabilities and the
related statement of operations present fairly, in all material respects, the
financial position of Cohen & Steers Quality Income Realty Fund, Inc. (the
'Fund') at February 15, 2002 and the results of its operations for the one day
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 19, 2002
28
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES AS OF FEBRUARY 15, 2002
Assets:
Cash.................................................... $100,275
Deferred Offering Costs................................. 120,000
Receivable from adviser................................. 15,000
--------
Total Assets........................................ 235,275
--------
Liabilities
Accrued expenses........................................ 120,000
Payable for organization costs.......................... 15,000
--------
Total Liabilities................................... 135,000
--------
Net Assets applicable to 7,000 shares of $.001 par value
common stock outstanding.................................. $100,275
--------
--------
Net asset value per Common Shares outstanding ($100,275
divided by 7,000 Common shares outstanding)............... $ 14.33
--------
--------
STATEMENT OF OPERATIONS
FOR THE ONE DAY ENDED FEBRUARY 15, 2002
INVESTMENT INCOME........................................... $ --
Expenses:
Organization costs...................................... 15,000
Expense reimbursement................................... (15,000)
--------
Total expenses...................................... --
--------
Net investment income....................................... $ --
--------
--------
NOTES TO FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION
Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on August 22, 2001 and is
registered under the Investment Company Act of 1940 (the 'Act'), as amended, as
a closed-end non-diversified management investment company. The Fund has been
inactive since that date except for matters relating to the Fund's
establishment, designation, registration of the Fund's shares of common stock
('Shares') under the Securities Act of 1933, and the sale of 7,000 shares
('Initial Shares') for $100,275 to Cohen & Steers Capital Management, Inc. (the
'Adviser'). The proceeds of such Initial Shares in the Fund were invested in
cash. There are 100,000,000 shares of $0.001 par value common stock authorized.
Cohen & Steers Capital Management, Inc. has agreed to reimburse all
organization expenses (approximately $15,000) and pay all offering costs (other
than the sales load) that exceed $0.03 per Common Share.
NOTE 2: ACCOUNTING POLICIES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from these estimates.
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT
The Fund has entered into an Investment Management Agreement with the
Adviser, under which the Adviser will provide general investment advisory and
adminstrative services for the Fund. For providing these services, facilities
and for bearing the related expenses, the Adviser will receive a fee from the
Fund, accrued daily and paid monthly, at an annual rate equal to 0.85% of the
average daily managed assets. Managed asset value is the net asset value of the
Common
29
Shares plus the liquidation preference of any Fund Preferred Shares and the
principal amount of any borrowings used for leverage.
In addition to the reimbursement and waiver of organization and offering
costs discussed in Note 1, the Adviser has contractually agreed with the Fund to
waive a portion of its fees in the amount of 0.32% of average daily managed
assets for the first 5 years of the Fund's operations, 0.26% of average daily
managed assets in year 6, 0.20% of average daily managed assets in year 7, 0.14%
of average daily managed assets in year 8, 0.08% of average daily managed assets
in year 9 and 0.02% of average daily managed assets in year 10. The Adviser will
not reimburse the Fund for any portion of its fees beyond December 31, 2011.
30
STATEMENT OF ASSETS AND LIABILITIES AS OF MARCH 21, 2002
(UNAUDITED)
Assets:
Investments in securities, at value (Identified
cost -- $603,097,039)..................................... $617,889,235
Cash.................................................... 529
Dividends and interest receivable....................... 863,173
Receivable for investment securities sold............... 15,972
Other assets............................................ 28,552
------------
Total Assets........................................ 618,797,461
------------
Liabilities:
Payable for investment securities purchased............. 54,481,500
Payable to investment adviser........................... 164,122
Payable to administrator................................ 8,484
Other liabilities....................................... 948,765
------------
Total Liabilities................................... 55,602,871
------------
Net Assets applicable to 37,707,000 shares of $0.001 par
value common stock outstanding............................ $563,194,590
------------
------------
Net Asset Value per Share:
($563,194,590/37,707,000 shares outstanding).... $ 14.94
------------
------------
Market Value per Share:..................................... $ 15.19
------------
------------
Market Price Premium/(Discount) to Net Asset Value per
Share..................................................... 1.7%
------------
------------
Net Assets consist of:
Paid-in capital......................................... $548,184,576
Accumulated undistributed net investment income......... 1,000,964
Accumulated net realized gain on investments............ 26,854
------------
Net unrealized appreciation on investments.............. 13,982,196
------------
$563,194,590
------------
------------
STATEMENT OF OPERATIONS FOR THE PERIOD FEBRUARY 28, 2002
THROUGH MARCH 21, 2002 (UNAUDITED)
Investment Income:
Dividend income......................................... $ 1,028,090
Interest income......................................... 176,186
------------
Total Income........................................ 1,204,276
------------
Expenses:
Investment advisory fees................................ 263,215
Miscellaneous........................................... 1,888
Administration fees..................................... 14,677
Transfer agent fees..................................... 946
Professional fees....................................... 8,733
Custodian fees and expenses............................. 4,488
Reports to shareholders................................. 4,783
Registration and filing fees............................ 902
Directors' fees and expenses............................ 2,773
------------
Total Expenses...................................... 302,405
------------
Reduction of Expenses................................... (99,093)
------------
Net Expenses........................................ 203,312
------------
Net Investment Income....................................... 1,000,964
------------
Net Realized and Unrealized Gain on Investments:
Net realized gain on investments........................ 26,854
Net change in unrealized appreciation/(depreciation) on
investments........................................... 13,982,196
------------
Net realized and unrealized gain on investments..... 14,009,050
------------
Net Increase in Net Assets Resulting from Operations........ $ 15,010,014
------------
------------
See accompanying notes to unaudited financial statements
31
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM FEBRUARY 28, 2002 THROUGH MARCH 21, 2002
(UNAUDITED)
FOR THE PERIOD
FEBRUARY 28, 2002
THROUGH MARCH 21, 2002
(UNAUDITED)
-----------
Changes in Net Assets:
From Operations:
Net investment income................................... $ 1,000,964
Net realized gain on investments........................ 26,854
Net change in unrealized appreciation/depreciation on
investments........................................... 13,982,196
------------
Net increase in net assets resulting from
operations........................................ 15,010,014
------------
Dividends and Distributions to Shareholders from (Note 1):
Net investment income................................... --
Tax return of capital................................... --
------------
Total dividends and distributions to shareholders... --
------------
Capital Stock Transactions (Note 4)
Increase/(decrease) in net assets from Fund share
transactions.......................................... 548,084,301
------------
Total increase/(decrease) in net assets............. 563,094,315
Net Assets
Beginning of the period................................. 100,275
------------
End of the period....................................... $563,194,590
------------
------------
See accompanying notes to unaudited financial statements
32
FINANCIAL HIGHLIGHTS
(UNAUDITED)
FOR THE PERIOD
FEBRUARY 28, 2002*
THROUGH MARCH 21, 2002
----------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $14.57**
------
Less: Offering costs charged to paid-in capital on
common shares......................................... (0.03)
Dilutive effect of common share offering........... (0.03)
------
Total offering and organization costs.............. (0.06)
------
Income from investment operations:
Net investment income................................... 0.03
Net realized and unrealized gain/(loss) on
investments........................................... 0.40
------
Total from investment operations.................... 0.43
------
Less dividends and distributions to shareholders from:
Net investment income................................... 0.00
Net realized gain on investments........................ 0.00
Tax return of capital................................... 0.00
------
Total dividends and distributions to shareholders... 0.00
------
Net increase/(decrease) in net assets....................... 0.37
------
Net asset value, end of period.............................. $14.94
------
------
Per Share Market Value, End of Period....................... 15.19
------
Total Return on NAV......................................... 2.73%(1)
------
Total Investment Return on Market Value..................... 1.27%(1)
------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (In millions)..................... $563.2
------
------
Ratio of expenses to average daily net assets (before
expense reduction)........................................ 0.97%(2)(3)
------
------
Ratio of expenses to average daily net assets (net of
expense reduction)........................................ 0.65%(2)
------
------
Ratio of net investment income to average daily net assets
(before expense reduction)................................ 2.88%(2)
------
------
Ratio of net investment income to average daily net assets
(net of expense reduction)................................ 3.20%(2)(3)
------
------
Portfolio turnover rate (%)................................. 0.03%(1)
------
------
---------
* Commencement of operations.
** Prior to February 28, 2002 (Commencement of Operations), 7,000 shares were
sold to Cohen & Steers Capital Management, Inc. (the 'Investment Manager')
for $100,275. Includes the effect of a capital contribution by the
Investment Manager of $1,701 on February 26, 2002.
(1) Not annualized.
(2) Annualized.
(3) The Investment Manager has agreed to waive a portion of its investment
management fees in the amount of 0.32% of average daily managed assets for
the first 5 fiscal years of the Fund's operations, 0.26% of average daily
managed assets in year 6, 0.20% of average daily managed assets in year 7,
0.14% in year 8, 0.08% of average daily managed assets in year 9 and 0.02%
of average daily managed assets in year 10.
See accompanying notes to unaudited financial statements
33
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on August 22, 2001 and is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company. Prior to
February 28, 2002, the Fund had no operations except when it sold 7,000 shares
of common stock for $100,275 to Cohen & Steers Capital Management, Inc. (the
'Investment Manager') and includes a capital contribution by the Investment
Manager of $1,701 on February 26, 2002. Investment operations commenced on
February 28, 2002. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles. The preparation of the financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange 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 closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the Board of Directors shall determine in good faith
to reflect its fair market value.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. ('NASDAQ') National
Market System are valued in a similar manner. 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 as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the mean of the current bid and asked
prices as reported by NASDAQ, the National Quotations Bureau or such other
comparable sources as the Board of Directors deems appropriate to reflect their
fair market value. However, certain fixed-income securities may be valued on the
basis of prices provided by a pricing service when such prices are believed by
the Board of Directors to reflect the fair market value of such securities.
Where securities are traded on more than one exchange and also over-the-
counter, the securities will generally be valued using the quotations the Board
of Directors believes reflect most closely the value of such securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date. Discounts and premiums of securities purchased are
amortized using the scientific method over their respective lives.
Dividends and Distributions to Shareholders: Dividends from net investment
income are expected to be declared and paid monthly. The first monthly dividend
is expected to be declared approximately 45 days, and paid approximately
60-75 days, from the completion of the offering, depending on market conditions.
A portion of the Fund's dividend may consist of amounts in excess of net
investment income derived from non-taxable components of the dividends from the
Fund's portfolio investments. Net realized capital gains, unless offset by any
available capital loss carryforward, are distributed to shareholders annually.
Distributions to shareholders are recorded on the ex-dividend date.
34
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. Federal income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to return of capital and capital gain distributions received by
the Fund on portfolio securities.
Federal Income Taxes: It is the policy of the Fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for Federal income or excise tax is necessary.
Organization & Offering Costs: All costs incurred in connection with
organizing and establishing the Fund are being reimbursed by the Investment
Manager. In addition, the Investment Manager has agreed to limit the offering
costs (other than the sales load) to $0.03 per share.
2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
'Investment Manager') serves as the investment manager to the Fund, pursuant to
an Investment Management Agreement (the 'Management Agreement'). The Investment
Manager furnishes a continuous investment program for the Fund's portfolio,
makes the day-to-day investment decisions for the Fund and generally manages the
Fund's investments in accordance with the stated polices of the Fund, subject to
the general supervision of the Board of Directors of the Fund. The Investment
Manager also performs certain administrative services for the Fund. For the
services under the Management Agreement, the Fund pays the Investment Manager a
monthly management fee, computed daily and payable monthly at an annual rate of
0.85% of the Fund's average daily net assets. For the period of February 28,
2002 (commencement of operations through March 21, 2002), the Fund incurred
investment management fees including waivers of $263,215.
Administration Fees: Pursuant to an administration agreement, the Investment
Manager also performs certain administrative accounting functions for the Fund
and receives a fee of 0.02% of the Fund's managed assets. For the period of
February 28, 2001 (commencement of operations) through March 21, 2002, the Fund
incurred $14,677 in administration fees.
In addition, Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers
Advantage Income Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen
& Steers Institutional Realty Shares, Inc., Cohen & Steers Special Equity Fund,
Inc., Cohen & Steers Equity Income Fund, Inc., and Cohen & Steers Total Return
Realty Fund, Inc. (the 'Funds') have entered into a sub-administration agreement
with State Street Bank ('State Street') pursuant to which State Street performs
administration functions for the Fund. The sub-administration fee paid by the
Fund to State Street is computed on the basis of the net assets in the Fund at
an annual rate equal to 0.030% of the first $200 million in assets, 0.020% of
the next $200 million, and 0.013% of assets in excess of $400 million. The
aggregate fee paid by the Funds is computed by multiplying the total number of
funds by each break point in the above schedule in order to determine the
aggregate break points to be used in calculating the total fee paid by the
Funds. The Fund is then responsible for its pro rate amount of the aggregate
subadministration fee.
Director's Fees: Certain directors and officers of the Fund are also
directors, officers and/or employees of the Investment Manager. None of the
directors and officers so affiliated received compensation for their services.
Fees and related expenses accrued for non-affiliated directors totaled $2,773
for the period of February 28, 2002 (commencement of operations) through
March 21, 2002.
3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
period of February 28, 2002 (commencement of operations) through March
21, 2002, totaled $490,109,209 and $165,021, respectively.
35
At March 21, 2002, the cost and unrealized appreciation in value of the
investments owned by the Fund are as follows:
Aggregated cost............................................. $464,466,039
------------
------------
Gross unrealized appreciation............................... $ 14,581,476
Gross unrealized depreciation............................... (599,280)
------------
Net unrealized appreciation................................. $ 13,982,196
4. COMMON STOCK
At March 21, 2002, the Fund has one class of common stock, par value $0.001
per share, of which 100,000,000 million shares are authorized and
37,707,000 shares are outstanding. Cohen & Steers Capital Management, Inc. owned
7,000 shares.
5. SUBSEQUENT EVENTS
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase, from time to time, shares of its
common stock in the open market.
36
APPENDIX A
RATINGS OF INVESTMENTS
Description of certain ratings assigned by S&P and Moody's:
S&P
LONG-TERM
'AAA' -- An obligation rated 'AAA' has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
'AA' -- An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
'A' -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
'BBB' -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
'BB', 'B', 'CCC', 'CC', and 'C' -- Obligations rated 'BB', 'B', 'CCC', 'CC',
and 'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
'BB' -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
'B' -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
'CCC' -- An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
'CC' -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
'C' -- A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
'D' -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
'r' -- The symbol 'r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
A-1
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
'N.R.' -- The designation 'N.R.' indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter of policy.
Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a
plus (+) or minus ( - ) sign designation to show relative standing within the
major rating categories.
SHORT-TERM
'A-1' -- A short-term obligation rated 'A-1' is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
'A-2' -- A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
'A-3' -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
'B' -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.
'C' -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
'D' -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
MOODY'S
LONG-TERM
'Aaa' -- Bonds rated 'Aaa' are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
'Aa' -- Bonds rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 'Aaa'
securities.
'A' -- Bonds rated 'A' possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
A-2
'Baa' -- Bonds rated 'Baa' are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
'Ba' -- Bonds rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
'B' -- Bonds rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
'Caa' -- Bonds rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
'Ca' -- Bonds rated 'Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
'C' -- Bonds rated 'C' are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from 'Aa' through 'Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
PREFERRED STOCK
Because of the fundamental differences between preferred stocks and bonds,
Moody's employs a variation of our familiar bond rating symbols in the quality
ranking of preferred stock.
These symbols, presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind that preferred
stock occupies a junior position to bonds within a particular capital structure
and that these securities are rated within the universe of preferred stocks.
'aaa' -- An issue rated 'aaa' is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
'aa' -- An issue rated 'aa' is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
'a' -- An issue rated 'a' is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
'baa' -- An issue rated 'baa' is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present, but may be questionable over any great
length of time.
'ba' -- An issue rated 'ba' is considered to have speculative elements. Its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
'b' -- An issue rated 'b' generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
A-3
'caa' -- An issue rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
'ca' -- An issue rated 'ca' is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.
'c' -- This is the lowest-rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: As in the case of bond ratings, Moody's applies to preferred stock
ratings the numerical modifiers 1, 2, and 3 in rating classifications 'aa'
through 'b'. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
PRIME RATING SYSTEM (SHORT-TERM)
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-4
APPENDIX B
ARTICLES SUPPLEMENTARY
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
Articles Supplementary Creating And Fixing The Rights of
Series T, Series TH, Series F and Series W
Taxable Auction Market Preferred Shares
Cohen & Steers Quality Income Realty Fund, Inc., a Maryland corporation
having its principal Maryland office in the City of Baltimore in the State of
Maryland (the 'Corporation'), certifies to the State Department of Assessments
and Taxation of Maryland that:
First: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article FIFTH of its Amended and Restated Articles of
Incorporation (which as hereafter amended, restated and supplemented from time
to time, is together with these Articles Supplementary, the 'Charter'), and the
Maryland General Corporation Law (the 'MGCL'), the Board of Directors has duly
classified out of the Corporation's authorized and unissued common stock, and
authorized the creation and issuance of, 11,200 shares of the Corporation's
Taxable Auction Market Preferred Shares (par value $.001 per share) (the 'AMPS')
and has further classified 2,800 of such shares as 'Series T AMPS', liquidation
preference $25,000 per share, 2,800 of such shares as 'Series TH AMPS',
liquidation preference $25,000 per share, 2,800 of such shares as 'Series F
AMPS', liquidation preference $25,000 per share, and 2,800 of such shares as
'Series W AMPS', liquidation preference $25,000 per share (respectively the
'Series T AMPS' the 'Series TH AMPS', the 'Series F AMPS', and the 'Series W
AMPS' and each a 'Series' of Taxable Auction Market Preferred Shares, and,
together, the 'AMPS').
Second: Pursuant to Section 2-411 of the MGCL and authority granted by
Article III of the Corporation's Amended and Restated By-laws, the Board of
Directors of the Corporation has appointed a pricing committee (the 'Pricing
Committee') and has authorized such Pricing Committee to fix the terms of the
AMPS for each Series, as set forth herein.
Third: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the AMPS
are as follows:
DESIGNATION
Series T AMPS: A series of 2,800 AMPS, par value $0.001 per share,
liquidation preference $25,000 per share, is hereby designated 'Series T Taxable
Auction Market Preferred Shares' ('Series T AMPS'). Each share of Series T AMPS
may be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an initial dividend
rate per annum, initial Dividend Period and an initial Dividend Payment Date as
shall be determined in advance of the issuance thereof by the Board of Directors
of the Corporation or pursuant to their delegated authority; and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of these
Articles Supplementary. The Series T AMPS shall constitute a separate series of
AMPS of the Corporation.
B-1
Series TH AMPS: A series of 2,800 AMPS, par value $0.001 per share,
liquidation preference $25,000 per share, is hereby designated 'Series TH
Taxable Auction Market Preferred Shares' ('Series TH AMPS'). Each share of
Series TH Preferred Share may be issued on a date to be determined by the Board
of Directors of the Corporation or pursuant to their delegated authority; have
an initial dividend rate per annum, initial Dividend Period and an initial
Dividend Payment Date as shall be determined in advance of the issuance thereof
by the Board of Directors of the Corporation or pursuant to their delegated
authority; and have such other preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, in addition to those required by applicable law, or as are set forth
in Part I and Part II of these Articles Supplementary. The Series TH Preferred
Shares shall constitute a separate series of AMPS of the Corporation.
Series F AMPS: A series of 2,800 AMPS, par value $0.001 per share,
liquidation preference $25,000 per share, is hereby designated 'Series F Taxable
Auction Market Preferred Shares' ('Series F AMPS'). Each share of Series F AMPS
may be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an initial dividend
rate per annum, initial Dividend Period and an initial Dividend Payment Date as
shall be determined in advance of the issuance thereof by the Board of Directors
of the Corporation or pursuant to their delegated authority; and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of these
Articles Supplementary. The Series F AMPS shall constitute a separate series of
AMPS of the Corporation.
Series W AMPS: A series of 2,800 AMPS, par value $0.001 per share,
liquidation preference $25,000 per share, is hereby designated 'Series W Taxable
Auction Market Preferred Shares' ('Series W AMPS'). Each share of Series W AMPS
may be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an initial dividend
rate per annum, initial Dividend Period and an initial Dividend Payment Date as
shall be determined in advance of the issuance thereof by the Board of Directors
of the Corporation or pursuant to their delegated authority; and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of these
Articles Supplementary. The Series W AMPS shall constitute a separate series of
AMPS of the Corporation.
Subject to the provisions of Section 11(b) of Part I hereof, the Board of
Directors of the Corporation may, in the future, reclassify additional shares of
the Corporation's unissued common stock as preferred stock, with the same
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and other terms herein
described, except that the dividend rate for its initial Dividend Period, its
initial Dividend Payment Date and any other changes in the terms herein set
forth shall be as set forth in these Articles Supplementary with respect to the
additional shares.
As used in Part I and Part II of these Articles Supplementary, capitalized
terms shall have the meanings provided in Section 17 of Part I and Section 1 of
Part II of these Articles Supplementary.
B-2
Part I: Terms of AMPS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Series T AMPS
is 2,800 shares, the initial number of authorized shares constituting the Series
TH AMPS is 2,800 shares, the initial number of authorized shares constituting
the Series F AMPS is 2,800 shares, and the initial number of authorized shares
constituting the Series W AMPS is 2,800 shares. No fractional shares of any
Series shall be issued.
(b) Shares of each Series which at any time have been redeemed or purchased
by the Corporation shall, after such redemption or purchase, have the status of
authorized but unissued shares of preferred stock.
(c) Shares of each Series shall rank on a parity with shares of any other
series of preferred stock of the Corporation (including any other AMPS) as to
the payment of dividends to which such shares are entitled.
(d) No Holder of shares of any Series shall have, solely by reason of being
such a holder, any preemptive or other right to acquire, purchase or subscribe
for any shares of any Series, Common Shares of the Corporation or other
securities of the Corporation which it may hereafter issue or sell.
2. Dividends.
(a) The Holders of shares of each Series shall be entitled to receive, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, cumulative cash dividends on their shares at the Applicable Rate,
determined as set forth in paragraph (c) of this Section 2, and no more, payable
on the respective dates determined as set forth in paragraph (b) of this
Section 2. Dividends on the Outstanding shares of each Series issued on the Date
of Original Issue shall accumulate from the Date of Original Issue.
(b) (i) Dividends shall be payable when, as and if declared by the Board of
Directors following the initial Dividend Payment Date, subject to subparagraph
(b)(ii) of this Section 2, on the shares of each Series, as follows:
(A) with respect to any Dividend Period of one year or less, on the
Business Day following the last day of such Dividend Period; provided,
however, if the Dividend Period is more than 91 days then on the 91st, 181st
and 271st days within such period, if applicable, and on the Business Day
following the last day of such Dividend Period; and
(B) with respect to any Dividend Period of more than one year, on a
quarterly basis on each January 1, April 1, July 1 and October 1 within such
Dividend Period and on the Business Day following the last day of such
Dividend Period.
(ii) If a day for payment of dividends resulting from the application of
subparagraph (b) above is not a Business Day, then the Dividend Payment Date
shall be the first Business Day following such day for payment of dividends.
(iii) The Corporation shall pay to the Paying Agent not later than
12:00 noon, New York City time, on each Dividend Payment Date for a Series, an
aggregate amount of immediately available funds equal to the dividends to be
paid to all Holders of such Series on such Dividend Payment Date. The
Corporation shall not be required to establish any reserves for the payment of
dividends.
B-3
(iv) All moneys paid to the Paying Agent for the payment of dividends shall
be held in trust for the payment of such dividends by the Paying Agent for the
benefit of the Holders specified in subparagraph (b)(v) of this Section 2. Any
moneys paid to the Paying Agent in accordance with the foregoing but not applied
by the Paying Agent to the payment of dividends will, upon request and to the
extent permitted by law, be repaid to the Corporation at the end of 90 days from
the date on which such moneys were to have been so applied.
(v) Each dividend on each Series shall be paid on the Dividend Payment Date
therefor to the Holders of that Series as their names appear on the stock ledger
or stock records of the Corporation on the Business Day next preceding such
Dividend Payment Date; provided, however, if dividends are in arrears, they may
be declared and paid at any time to Holders as their names appear on the stock
ledger or stock records of the Corporation on such date not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of Directors.
No interest will be payable in respect of any dividend payment or payments which
may be in arrears.
(c) (i) The dividend rate on Outstanding shares of each Series during the
period from and after the Date of Original Issue to and including the last day
of the initial Dividend Period therefor shall be equal to the rate as determined
in the manner set forth under 'Designation' above. For each subsequent Dividend
Period for each Series, the dividend rate shall be equal to the rate per annum
that results from an Auction (but the rate set at the Auction will not exceed
the Maximum Rate); provided, however, that if an Auction for any subsequent
Dividend Period of a Series is not held for any reason or if Sufficient Clearing
Orders have not been made in an Auction (other than as a result of all shares of
any Series being the subject of Submitted Hold Orders and other than in an
auction for a Special Dividend Period), then the dividend rate on the shares of
that Series for any such Dividend Period shall be the Maximum Rate (except (i)
during a Default Period when the dividend rate shall be the Default Rate, as set
forth in Section 2(c)(ii) below or (ii) after a Default Period and prior to the
beginning of the next Dividend Period when the dividend rate shall be the
Maximum Rate at the close of business on the last day of such Default Period).
If the Fund has declared a Special Dividend Period and there are not Sufficient
Clearing Orders, the dividend rate for the next rate period will be the same as
during the current rate period. If as a result of an unforeseeable disruption of
the financial markets, an Auction cannot be held for a period of more than three
business days, the dividend rate for the Subsequent Dividend Period will be the
same as the dividend rate for the current Dividend Period.
(ii) Subject to the cure provisions in Section 2(c)(iii) below, a 'Default
Period' with respect to a particular Series will commence on any date the
Corporation fails to deposit irrevocably in trust in same-day funds, with the
Paying Agent by 12:00 noon, New York City time, (A) the full amount of any
declared dividend on that Series payable on the Dividend Payment Date (a
'Dividend 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 a Dividend Default,
hereinafter referred to as 'Default').
Subject to the cure provisions of Section 2(c)(iii) below, a Default Period
with respect to a Dividend Default or a Redemption Default shall end on the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and any unpaid Redemption Price shall have been deposited irrevocably in trust
in same-day funds with the Paying Agent. In the case of a Dividend Default, the
Applicable Rate for each Dividend Period commencing during a Default
B-4
Period will be equal to the Default Rate, and each subsequent Dividend Period
commencing after the beginning of a Default Period shall be a Standard Dividend
Period; provided, however, that the commencement of a Default Period will not by
itself cause the commencement of a new Dividend Period. No Auction shall be held
during a Default Period applicable to that Series.
(iii) No Default Period with respect to a Dividend Default or Redemption
Default shall be deemed to commence if the amount of any dividend or any
Redemption Price due (if such default is not solely due to the willful failure
of the Corporation) is deposited irrevocably in trust, in same-day funds with
the Paying Agent by 12:00 noon, New York City time within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with an
amount equal to the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 360 for each
Series. The Default Rate shall be equal to the Reference Rate multiplied by
three (3).
(iv) The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was Outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be 360
for each Series, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one (1)
year or more, the amount of dividends per share payable on any Dividend Payment
Date (or in respect of dividends on another date in connection with a redemption
during such Dividend Period) shall be computed as described in the preceding
sentence, except that it will be determined on the basis of a year consisting of
twelve 30-day months.
(d) Any dividend payment made on shares of any Series shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to that Series.
(e) For so long as the AMPS are Outstanding, except as otherwise
contemplated by Part I of these Articles Supplementary, the Corporation 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 Shares or other shares ranking
junior to the AMPS as to dividends or upon liquidation) with respect to Common
Shares or any other capital stock of the Corporation ranking junior to the AMPS
as to dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Shares or other capital stock
ranking junior to the AMPS (except by conversion into or exchange for shares of
the Corporation ranking junior to the AMPS as to dividends and upon
liquidation), unless (i) immediately after such transaction, the Corporation
would have Eligible Assets with an aggregate Discounted Value at least equal to
the Preferred Shares Basic Maintenance Amount and the 1940 Act Preferred Shares
Asset Coverage would be achieved, (ii) all cumulative and unpaid dividends due
on or prior to the date of the transaction have been declared and paid in full
with respect to the Corporation's preferred stock, including the AMPS or shall
have been declared and sufficient funds for the payment thereof deposited with
the Auction Agent, and (iii) the Corporation has redeemed the full number of
shares of preferred stock required to be redeemed by any mandatory provision for
redemption including the AMPS required to be redeemed by any
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provision for mandatory redemption contained in Section 3(a)(ii) of Part I of
these Articles Supplementary.
(f) For so long as the AMPS are Outstanding, except as set forth in the next
sentence, the Corporation will not declare, pay or set apart for payment on any
series of stock of the Corporation ranking, as to the payment of dividends, on a
parity with the AMPS for any period unless full cumulative dividends have been
or contemporaneously are declared and paid on each Series through their most
recent Dividend Payment Date. When dividends are not paid in full upon the AMPS
through their most recent Dividend Payment Dates or upon any other series of
stock ranking on a parity as to the payment of dividends with AMPS through their
most recent respective Dividend Payment Dates, all dividends declared upon the
AMPS and any other such series of stock ranking on a parity as to the payment of
dividends with the AMPS shall be declared pro rata so that the amount of
dividends declared per share on the AMPS and such other series of preferred
stock ranking on a parity therewith shall in all cases bear to each other the
same ratio that accumulated dividends per share on the AMPS and such other
series of preferred stock ranking on a parity therewith bear to each other.
3. Redemption.
(a) (i) After the initial Dividend Period, subject to the provisions of this
Section 3 and to the extent permitted under the 1940 Act and Maryland law, the
Corporation may, at its option, redeem in whole or in part out of funds legally
available therefor shares of any Series herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption not less than 15
calendar days and not more than 40 calendar days prior to the Redemption Date,
at a redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date ('Redemption Price'), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the relevant
Dividend Period by delivering a notice of redemption not less than 15 calendar
days and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus 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 at the time of the designation of such
Dividend Period as set forth in Section 4 of Part I of these Articles
Supplementary; provided, however, that during a Dividend Period of more than one
year, no shares of any Series will be subject to optional redemption except in
accordance with any Specific Redemption Provisions approved by the Board of
Directors after consultation with the Broker-Dealers at the time of the
designation of such Dividend Period. Notwithstanding the foregoing, the
Corporation shall not give a notice of or effect any redemption pursuant to this
Section 3(a)(i) unless, on the date on which the Corporation gives such notice
and on the Redemption Date, (a) the Corporation has available 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 each Series by reason of the redemption of
each Series on the Redemption Date and (b) the Corporation would have Eligible
Assets with an aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount immediately subsequent to such redemption, if such
redemption were to occur on such date, it being understood that the provisions
of paragraph (d) of this Section 3 shall be applicable in such circumstances in
the event the Corporation makes the deposit and takes the other action required
thereby.
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(ii) If the Corporation fails as of any Valuation Date to meet the Preferred
Shares Basic Maintenance Amount Test or, as of the last Business Day of any
month, the 1940 Act Preferred Shares Asset Coverage, and such failure is not
cured within ten Business Days following the relevant Valuation Date, in the
case of a failure to meet the Preferred Shares Basic Maintenance Amount Test, or
the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an 'Asset Coverage Cure
Date'), the AMPS will be subject to mandatory redemption out of funds legally
available therefor. The number of AMPS to be redeemed in such circumstances will
be equal to the lesser of (A) the minimum number of AMPS 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 the Corporation
meeting the Preferred Shares Basic Maintenance Amount Test, and the 1940 Act
Preferred Shares 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
number of shares the redemption of which would have such result, all AMPS then
Outstanding will be redeemed) and (B) the maximum number of AMPS that can be
redeemed out of funds expected to be available therefor on the Mandatory
Redemption Date at the Mandatory Redemption Price set forth in subparagraph
(a)(iii) of this Section 3.
(iii) In determining the AMPS required to be redeemed in accordance with the
foregoing Section 3(a)(ii), the Corporation shall allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
Test or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro
rata or among the Holders of the AMPS in proportion to the number of shares they
hold and shares of other preferred stock subject to mandatory redemption
provisions similar to those contained in this Section 3, subject to the further
provisions of this subparagraph (iii). The Corporation shall effect any required
mandatory redemption pursuant to: (A) the Preferred Shares Basic Maintenance
Amount Test, as described in subparagraph (a)(ii) of this Section 3, no later
than 30 days after the Corporation last met the Preferred Shares Basic
Maintenance Amount Test, or (B) the 1940 Act Preferred Shares Asset Coverage, as
described in subparagraph (a)(ii) of this Section 3, no later than 30 days after
the Asset Coverage Cure Date (the 'Mandatory Redemption Date'), except that if
the Corporation does not have funds legally available for the redemption of, or
is not otherwise legally permitted to redeem, the number of AMPS which would be
required to be redeemed by the Corporation under clause (A) of subparagraph
(a)(ii) of this Section 3 if sufficient funds were available, together with
shares of other preferred stock which are subject to mandatory redemption under
provisions similar to those contained in this Section 3, or the Corporation
otherwise is unable to effect such redemption on or prior to such Mandatory
Redemption Date, the Corporation shall redeem those AMPS, and shares of other
preferred stock which it was unable to redeem, on the earliest practicable date
on which the Corporation will have such funds available, upon notice pursuant to
Section 3(b) to record owners of AMPS to be redeemed and the Paying Agent. The
Corporation will deposit with the Paying Agent funds sufficient to redeem the
specified number of AMPS with respect to a redemption required under
subparagraph (a)(ii) of this Section 3, by 1:00 P.M., New York City time, of the
Business Day immediately preceding the Mandatory Redemption Date. If fewer than
all of the Outstanding AMPS are to be redeemed pursuant to this
Section 3(a)(iii), the number of shares to be redeemed shall be redeemed pro
rata from the Holders of such shares in proportion to the number of the AMPS
held by such Holders, by lot or by such other method as the Corporation shall
deem fair and equitable, subject, however, to the terms of any applicable
Specific Redemption Provisions. 'Mandatory Redemption Price' means the
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Redemption Price plus (in the case of a Dividend Period of one year or more
only) 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.
(b) In the event of a redemption pursuant to the foregoing Section 3(a), the
Corporation will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Corporation shall deliver a notice of redemption to the Auction Agent (the
'Notice of Redemption') containing the information set forth below (i) in the
case of an optional redemption pursuant to Section 3(a)(i) above, one Business
Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the 10th
day preceding the Mandatory Redemption Date. Only with respect to shares held by
the Securities Depository, the Auction Agent will use its reasonable efforts to
provide telephonic notice to each Holder of shares of any Series called for
redemption not later than the close of business on the Business Day immediately
following the day on which the Auction Agent determines the shares to be
redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives Notice of Redemption from the Corporation). The
Auction Agent shall confirm such telephonic notice in writing not later than the
close of business on the third Business Day preceding the date fixed for
redemption by providing the Notice of Redemption to each Holder of shares called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository. Notice of Redemption will be addressed to the registered
owners of shares of any Series at their addresses appearing on the share records
of the Corporation. Such Notice of Redemption will set forth (i) the date fixed
for redemption, (ii) the number and identity of shares of each Series to be
redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption, and (v) the
provision under which redemption shall be made. No defect in the Notice of
Redemption or in the transmittal or mailing thereof will affect the validity of
the redemption proceedings, except as required by applicable law. If fewer than
all shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the number of shares to be redeemed
from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3, no
preferred stock, including the AMPS, may be redeemed at the option of the
Corporation unless all dividends in arrears on the Outstanding AMPS and any
other preferred stock have been or are being contemporaneously paid or set aside
for payment; provided, however, that the foregoing shall not prevent the
purchase or acquisition of outstanding shares of preferred stock pursuant to the
successful completion of an otherwise lawful purchase or exchange offer made on
the same terms to holders of all outstanding shares of preferred stock.
(d) Upon the deposit of funds sufficient to redeem shares of any Series with
the Paying Agent and the giving of the Notice of Redemption to the Auction Agent
under paragraph (b) of this Section 3, dividends on such shares shall cease to
accumulate and such shares shall no longer be deemed to be Outstanding for any
purpose (including, without limitation, for purposes of calculating whether the
Corporation has met the Preferred Shares Basic Maintenance Amount Test or the
1940 Act Preferred Shares Asset Coverage), and all rights of the Holders of the
shares so called for redemption shall cease and terminate, except the right of
such Holder to receive the
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redemption price specified herein, but without any interest or other additional
amount. Such redemption price shall be paid by the Paying Agent to the nominee
of the Securities Depository. The Corporation shall be entitled to receive from
the Paying Agent, promptly after the date fixed for redemption, any cash
deposited with the Paying Agent in excess of (i) the aggregate redemption price
of the shares of any Series called for redemption on such date and (ii) such
other amounts, if any, to which Holders of shares of any Series called for
redemption may be entitled. Any funds so deposited that are unclaimed at the end
of two years from such redemption date shall, to the extent permitted by law, be
paid to the Corporation, after which time the Holders of shares of each Series
so called for redemption may look only to the Corporation for payment of the
redemption price and all other amounts, if any, to which they may be entitled;
provided, however, that the Paying Agent shall notify all Holders whose funds
are unclaimed by placing a notice in The Wall Street Journal concerning the
availability of such funds once each week for three consecutive weeks. The
Corporation shall be entitled to receive, from time to time after the date fixed
for redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption has
been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption shall be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of any Series shall
be deemed to exist at any time after the date specified for redemption in a
Notice of Redemption when the Corporation shall have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the redemption price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Corporation may not have redeemed shares of
each Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of any Series and shall include those shares of any
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption price
of shares of any Series called for redemption shall be held in trust by the
Paying Agent for the benefit of holders of shares so to be redeemed.
(g) So long as any shares of any Series are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.
(h) Except for the provisions described above, nothing contained in these
Articles Supplementary limits any right of the Corporation to purchase or
otherwise acquire any shares of each Series 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 dividends on, or the mandatory or
optional redemption price with respect to, any shares of each Series for which
Notice of Redemption has been given and the Corporation meets the 1940 Act
Preferred Shares Asset Coverage and the Preferred Shares Basic Maintenance
Amount Test after giving effect to such purchase or acquisition on the date
thereof. Any shares which are purchased, redeemed or otherwise acquired by the
Corporation shall have no voting rights. If fewer than all the Outstanding
shares of any Series are redeemed or otherwise acquired by the Corporation, the
Corporation shall give notice of such transaction to the auction agent, in
accordance with the procedures agreed upon by the Board of Directors.
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(i) In the case of any redemption pursuant to this Section 3, only whole
shares of each Series shall be redeemed, and in the event that any provision of
the Charter would require redemption of a fractional share, the Auction Agent
shall be authorized to round up so that only whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary, including, without
limitation, Section 6(k) of Part I of these Articles Supplementary, the Board of
Directors, upon notification to each Rating Agency, may authorize, create or
issue other series of preferred stock, including other series of AMPS, series of
preferred stock ranking on a parity with the AMPS with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Corporation, to the extent permitted by the 1940 Act,
if upon issuance of any such series, either (A) the net proceeds from the sale
of such stock (or such portion thereof needed to redeem or repurchase the
Outstanding AMPS) are deposited with the Paying Agent in accordance with
Section 3(d) of Part I of these Articles Supplementary, Notice of Redemption as
contemplated by Section 3(b) of Part I of these Articles Supplementary has been
delivered prior thereto or is sent promptly thereafter, and such proceeds are
used to redeem all Outstanding AMPS or (B) the Corporation would meet the 1940
Act Preferred Shares Asset Coverage, the Preferred Shares Basic Maintenance
Amount Test and the requirements of Section 12(b) of Part I of these Articles
Supplementary.
4. Designation of Dividend Period.
(a) The initial Dividend Period for each Series shall be as determined in
the manner set forth under 'Designation' above. The Corporation will designate
the duration of subsequent Dividend Periods of each Series; provided, however,
that no such designation is necessary for a Standard Dividend Period and,
provided further, that any designation of a Special Dividend Period shall be
effective only if (i) notice thereof shall have been given as provided herein,
(ii) any failure to pay in a timely manner to the Auction Agent the full amount
of any dividend on, or the redemption price of, each Series shall have been
cured as provided above, (iii) Sufficient Clearing Orders shall have existed in
an Auction held on the Auction Date immediately preceding the first day of such
proposed Special Dividend Period, (iv) if the Corporation shall have mailed a
Notice of Redemption with respect to any shares, the redemption price with
respect to such shares shall have been deposited with the Paying Agent, (v) in
the case of the designation of a Special Dividend Period, the Broker-Dealers
shall have notified the Corporation in writing that it believes the Auction for
the Special Dividend Period will be successful, and (vi) each Rating Agency
shall have confirmed in writing to the Corporation that such designation shall
not adversely affect their respective then-current ratings of the AMPS.
(b) If the Corporation proposes to designate any Special Dividend Period,
not fewer than seven Business Days (or two Business Days in the event the
duration of the Dividend Period prior to such Special Dividend Period is fewer
than eight days) nor more than 30 Business Days prior to the first day of such
Special Dividend Period, notice shall be (i) made by press release and
(ii) communicated by the Corporation by telephonic or other means to the Auction
Agent and each Broker-Dealer and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Corporation proposes to exercise its option
to designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Applicable Rate for such Special Dividend Period
and (B) that the Corporation will by 3:00 P.M., New York City time, on the
second Business Day next preceding the first day of such Special Dividend
Period, notify the
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Auction Agent, who will promptly notify the Broker-Dealers, of either (x) its
determination, subject to certain conditions, to proceed with such Special
Dividend Period, subject to the terms of any Specific Redemption Provisions, or
(y) its determination not to proceed with such Special Dividend Period, in which
latter event the succeeding Dividend Period shall be a Standard Dividend 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 Dividend Period, the Corporation
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Corporation has determined to
designate the next succeeding Dividend Period as a Special Dividend Period,
specifying the first and last days thereof and (B) the terms of any Specific
Redemption Provisions; or
(ii) a notice stating that the Corporation has determined not to
exercise its option to designate a Special Dividend Period.
If the Corporation fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of paragraph (a) of this
Section 4 by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Dividend Period, the
Corporation shall be deemed to have delivered a notice to the Auction Agent with
respect to such Dividend Period to the effect set forth in clause (ii) above,
thereby resulting in a Standard Dividend Period.
5. Restrictions on Transfer. Shares of each Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Corporation or any Affiliate. Notwithstanding the foregoing, a
transfer other than pursuant to an Auction will not be effective unless the
selling Existing Holder or the Agent Member of such Existing Holder, in the case
of an Existing Holder whose shares are listed in its own name on the books of
the Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer,
in the case of a transfer between persons holding shares of any Series through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of each Series issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.
6. Voting Rights.
(a) Except as otherwise provided in the Charter or as otherwise required by
applicable law, (i) each Holder of shares of any Series shall be entitled to one
vote for each share of any Series held on each matter on which the Holders of
the AMPS are entitled to vote, and (ii) the holders of the Outstanding shares of
preferred stock, including each Series, and holders of shares of Common Shares
shall vote together as a single class on all matters submitted to the
stockholders; provided, however, that, with respect to the election of
directors, the holders of the Outstanding shares of preferred stock, including
each Series, represented in person or by proxy at a meeting for the election of
directors, shall be entitled, as a class, to the exclusion of the holders of all
other securities and classes of capital stock, including the Common Shares, to
elect two directors of the Corporation, each share of preferred stock, including
each Series, entitling the holder thereof to one vote. The identities of the
nominees of such directorships may be fixed by the Board of Directors. Subject
to paragraph (b) of this Section 6, the holders of outstanding shares of Common
Shares and outstanding shares of preferred stock, including each Series, voting
together as a single class, shall be entitled to elect the balance of the
directors.
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(b) If at any time dividends on the AMPS shall be unpaid in an amount equal
to two full years' dividends on the AMPS (a 'Voting Period'), the number of
directors constituting the Board of Directors shall be automatically increased
by the smallest number of additional directors that, when added to the number of
directors then constituting the Board of Directors, shall (together with the two
directors elected by the holders of preferred stock, including each Series,
pursuant to paragraph (a) of this Section 6) constitute a majority of such
increased number, and the holders of any shares of preferred stock, including
each Series, shall be entitled, voting as a single class on a one-vote-per-share
basis (to the exclusion of the holders of all other securities and classes of
capital stock of the Corporation), to elect the smallest number of such
additional directors of the Corporation that shall constitute a majority of the
total number of directors of the Corporation so increased. The Voting Period and
the voting rights so created upon the occurrence of the conditions set forth in
this paragraph (b) of Section 6 shall continue unless and until all dividends in
arrears on each Series shall have been paid or declared and sufficient cash or
specified securities are set apart for the payment of such dividends. Upon the
termination of a Voting Period, the voting rights described in this paragraph
(b) of Section 6 shall cease, subject always, however, to the revesting of such
voting rights in the holders of preferred stock, including each Series, upon the
further occurrence of any of the events described in this paragraph (b) of
Section 6.
(c) As soon as practicable after the accrual of any right of the holders of
shares of preferred stock, including each Series, to elect additional directors
as described in paragraph (b) of this Section 6, the Corporation shall notify
the Auction Agent, and the Auction Agent shall call a special meeting of such
holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than ten nor more than 90 days after the date of
mailing of such notice. If the Corporation fails to send such notice to the
Auction Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting shall be
the close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
preferred stock, including each Series, held during a Voting Period at which
directors are to be elected, such holders, voting together as a class (to the
exclusion of the holders of all other securities and classes of capital stock of
the Corporation), shall be entitled to elect the number of directors prescribed
in paragraph (b) of this Section 6 on a one-vote-per-share basis. At any such
meeting or adjournment thereof in the absence of a quorum, a majority of the
holders of shares of preferred stock, including Holders of the AMPS, present in
person or by proxy shall have the power to adjourn the meeting without notice,
other than an announcement at the meeting, until a quorum is present.
(d) For purposes of determining any rights of the holders of the shares of
preferred stock, including each Series, to vote on any matter, whether such
right is created by these Articles Supplementary, by statute or otherwise, if
redemption of some or all of the shares of preferred stock, including each
Series, is required, no holder of shares of preferred stock, including each
Series, shall be entitled to vote and no share of preferred stock, including
each Series, shall be deemed to be 'outstanding' for the purpose of voting or
determining the number of shares required to constitute a quorum, if prior to or
concurrently with the time of determination, sufficient Deposit Securities for
the redemption of such shares have been deposited in the case of AMPS in trust
with the Paying Agent for that purpose and the requisite Notice of Redemption
with respect to such shares shall have been given as provided in Section 3(b) of
Part I of these
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Articles Supplementary and in the case of other preferred stock the Corporation
has otherwise met the conditions for redemption applicable to such shares.
(e) The terms of office of all persons who are directors of the Corporation
at the time of a special meeting of Holders of the AMPS and holders of other
shares of preferred stock to elect directors pursuant to paragraph (b) of this
Section 6 shall continue, notwithstanding the election at such meeting by the
holders of the number of directors that they are entitled to elect.
(f) Simultaneously with the termination of a Voting Period, the terms of
office of the additional directors elected by the Holders of the AMPS and
holders of shares of other preferred stock pursuant to paragraph (b) of this
Section 6 shall terminate, the remaining directors shall constitute the
directors of the Corporation and the voting rights of such holders to elect
additional directors pursuant to paragraph (b) of this Section 6 shall cease,
subject to the provisions of the last sentence of paragraph (b) of this
Section 6.
(g) Unless otherwise required by law or in the Corporation's Charter, the
Holders of AMPS shall not have any relative rights or preferences or other
special rights other than those specifically set forth herein. In the event that
the Corporation fails to pay any dividends on the AMPS of the Corporation or
fails to redeem any AMPS which it is required to redeem, or any other event
occurs which requires the mandatory redemption of AMPS and the required Notice
of Redemption has not been given, other than the rights set forth in paragraph
(a) of Section 3 of Part I of these Articles Supplementary, the exclusive remedy
of the Holders of AMPS shall be the right to vote for directors pursuant to the
provisions of paragraph (b) of this Section 6. In no event shall the Holders of
AMPS have any right to sue for, or bring a proceeding with respect to, such
dividends or redemptions or damages for the failure to receive the same.
(h) For so long as any shares of preferred stock, including each Series, are
outstanding, the Corporation will not, without the affirmative vote of the
Holders of a majority of the outstanding preferred stock, (i) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Corporation or a substantial part of its property, or
make any assignment for the benefit of creditors, or, except as may be required
by applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Corporation's assets as a whole, except (A) liens the validity of
which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the AMPS, (D) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
permitted under clause (iii) below and (E) liens to secure payment for services
rendered including, without limitation, services rendered by the Corporation's
Paying Agent and the Auction Agent; or (iii) create, authorize, issue, incur or
suffer to exist any indebtedness for
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borrowed money or any direct or indirect guarantee of such indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness, except
the Corporation may borrow as may be permitted by the Corporation's investment
restrictions; provided, however, that transfers of assets by the Corporation
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Corporation has Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount as of the immediately
preceding Valuation Date.
(i) The affirmative vote of the holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock, including each Series,
voting as a separate class, 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 security holders of the Corporation
under Section 13(a) of the 1940 Act. In the event a vote of holders of shares of
preferred stock is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Corporation shall, not later than ten Business Days prior to the
date on which such vote is to be taken, notify each Rating Agency that such vote
is to be taken and the nature of the action with respect to which such vote is
to be taken and shall, not later than ten Business Days after the date on which
such vote is taken, notify each Rating Agency of the results of such vote.
(j) The affirmative vote of the Holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock of any series, voting
separately from any other series, shall be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the
Corporation's shares of capital stock. For purposes of the foregoing, no matter
shall be deemed to adversely affect any rights, preference or power unless such
matter (i) alters or abolishes any preferential right of such series;
(ii) creates, alters or abolishes any right in respect of redemption of such
series; or (iii) creates or alters (other than to abolish) any restriction on
transfer applicable to such series. The vote of holders of any series described
in this Section (j) will in each case be in addition to a separate vote of the
requisite percentage of Common Shares and/or preferred stock necessary to
authorize the action in question.
(k) The Board of Directors, without the vote or consent of any holder of
shares of preferred stock, including each Series, or any other stockholder of
the Corporation, may from time to time amend, alter or repeal any or all of the
definitions contained herein, add covenants and other obligations of the
Corporation, or confirm the applicability of covenants and other obligations set
forth herein, all in connection with obtaining or maintaining the rating of any
Rating Agency with respect to each Series, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of AMPS or
the Holders thereof, provided that the Board of Directors receives written
confirmation from each relevant Rating Agency (with such confirmation in no
event being required to be obtained from a particular Rating Agency with respect
to definitions or other provisions relevant only to and adopted in connection
with another Rating Agency's rating of the any Series) that any such amendment,
alteration or repeal would not adversely affect the rating then assigned by such
Rating Agency.
In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred
stock, including each Series, or any other stockholder of the
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Corporation, but only with confirmation from each Rating Agency, and after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Corporation would meet the Preferred Shares Basic Maintenance
Amount Test.
7. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of preferred stock, including each Series, shall be entitled to receive
out of the assets of the Corporation available for distribution to stockholders,
after claims of creditors but before distribution or payment shall be made in
respect of the Common Shares or to any other shares of stock of the Corporation
ranking junior to the preferred stock, as to liquidation payments, a liquidation
distribution in the amount of $25,000 per share (the 'Liquidation Preference'),
plus an amount equal to all unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not declared by the Board of
Directors, but excluding interest thereon), but such Holders shall be entitled
to no further participation in any distribution or payment in connection with
any such liquidation, dissolution or winding up. Each Series shall rank on a
parity with shares of any other series of preferred stock of the Corporation
(including each Series) as to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Corporation.
(b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of preferred stock, including each Series, shall be insufficient to
permit the payment in full to such holders of the amounts to which they are
entitled, then such available assets shall be distributed among the holders of
all outstanding shares of preferred stock, including each Series, ratably in any
such distribution of assets according to the respective amounts which would be
payable on all such shares if all amounts thereon were paid in full. Unless and
until payment in full has been made to the holders of all outstanding shares of
preferred stock, including each Series, of the liquidation distributions to
which they are entitled, no dividends or distributions will be made to holders
of Common Shares or any stock of the Corporation ranking junior to the preferred
stock as to liquidation.
(c) Neither the consolidation nor merger of the Corporation with or into any
other corporation or corporations, nor the sale, lease, exchange or transfer by
the Corporation of all or substantially all of its property and assets, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 7.
(d) After the payment to Holders of AMPS of the full preferential amounts
provided for in this Section 7, the Holders of the AMPS as such shall have no
right or claim to any of the remaining assets of the Corporation.
(e) In the event the assets of the Corporation or proceeds thereof available
for distribution to the Holders of AMPS, upon dissolution, liquidation or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such Holders are
entitled pursuant to paragraph (a) of this Section 7, no such distribution shall
be made on account of any shares of any other series of preferred stock unless
proportionate distributive amounts shall be paid on account of the AMPS,
ratably, in proportion to the full distributable amounts to which holders of all
shares of preferred stock are entitled upon such dissolution, liquidation or
winding up.
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(f) Subject to the rights of the holders of shares of other preferred stock
or after payment shall have been made in full to the Holders of AMPS as provided
in paragraph (a) of this Section 7, but not prior thereto, any other series or
class of shares ranking junior to the AMPS with respect to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the
Corporation shall, subject to any respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to be paid
or distributed, and the Holders of the AMPS shall not be entitled to share
therein.
8. Auction Agent. For so long as any AMPS are Outstanding, the Auction
Agent, duly appointed by the Corporation to so act, shall be in each case a
commercial bank, trust company or other financial institution independent of the
Corporation and its Affiliates (which, however, may engage or have engaged in
business transactions with the Corporation or its Affiliates) and at no time
shall the Corporation or any of its Affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of any
Series are Outstanding, the Corporation will use its best efforts to enter into
an agreement with a successor auction agent containing substantially the same
terms and conditions as the auction agency agreement. The Fund may remove the
auction agent provided that prior to such removal the Fund shall have entered
into such an agreement with a successor auction agent.
9. 1940 Act Preferred Shares Asset Coverage. The Corporation shall maintain,
as of the last Business Day of each month in which any AMPS are Outstanding, the
1940 Act Preferred Shares Asset Coverage; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Corporation fails to
do so.
10. Preferred Shares Basic Maintenance Amount. So long as any AMPS are
Outstanding and any Rating Agency so requires, the Corporation shall maintain,
as of each Valuation Date, Moody's Eligible Assets and S&P Eligible Assets, as
applicable, having an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) shall be the sole remedy in the event the Corporation fails to
do so.
11. Certain Other Restrictions. So long as any AMPS are Outstanding and S&P,
Moody's or any Other Rating Agency that is rating such shares so requires, the
Corporation will not, unless it has received written confirmation from S&P (if
S&P is then rating the AMPS), Moody's (if Moody's is then rating the AMPS) and
(if applicable) such Other Rating Agency, that any such action would not impair
the rating then assigned by such Rating Agency to the AMPS, engage in any one or
more of the following transactions:
(a) purchase or sell futures contracts or options thereon with respect
to portfolio securities or write put or call options on portfolio
securities;
(b) except in connection with a refinancing of the AMPS, issue
additional shares of any series of preferred stock, including any Series or
reissue any shares of preferred stock, including any Series previously
purchased or redeemed by the Corporation;
(c) engage in any short sales of securities;
(d) lend portfolio securities;
(e) merge or consolidate into or with any other fund; or
(f) for purposes of valuation of Moody's Eligible Assets: (A) if the
Corporation writes a call option, the underlying asset will be valued as
follows: (1) if the option is exchange-traded and may be offset readily or
if the option expires before the earliest possible redemption of
B-16
the AMPS, at the lower of the Discounted Value of the underlying security of
the option and the exercise price of the option or (2) otherwise, it has no
value; (B) if the Corporation writes a put option, the underlying asset will
be valued as follows: the lesser of (1) exercise price and (2) the
Discounted Value of the underlying security; and (C) call or put option
contracts which the Corporation buys have no value. For so long as the AMPS
are rated by Moody's: (A) the Corporation will not engage in options
transactions for leveraging or speculative purposes; (B) the Corporation
will not write or sell any anticipatory contracts pursuant to which the
Corporation hedges the anticipated purchase of an asset prior to completion
of such purchase; (C) the Corporation will not enter into an option
transaction with respect to portfolio securities unless, after giving effect
thereto, the Corporation would continue to have Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount; (D) the Corporation will not enter into an option
transaction with respect to portfolio securities unless after giving effect
to such transaction the Corporation would continue to be in compliance with
the provisions relating to the Preferred Shares Basic Maintenance Amount;
(E) for purposes of the Preferred Shares Basic Maintenance Amount assets in
margin accounts are not Eligible Assets; (F) the Corporation shall write
only exchange-traded options on exchanges approved by Moody's (if Moody's is
then rating the AMPS); (G) where delivery may be made to the Corporation
with any of a class of securities, the Corporation shall assume for purposes
of the Preferred Shares Basic Maintenance Amount that it takes delivery of
that security which yields it the least value; (H) the Corporation will not
engage in forward contracts; and (I) there shall be a quarterly audit made
of the Corporation's options transactions by the Corporation's independent
auditors to confirm that the Corporation is in compliance with these
standards.
(g) For so long as any AMPS are rated by S&P, the Corporation will not
purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the AMPS by S&P.
12. Compliance Procedures for Asset Maintenance Tests. For so long as any
AMPS are Outstanding and any Rating Agency so requires:
(a) As of each Valuation Date, the Corporation shall determine (i) the
Market Value of each Eligible Asset owned by the Corporation on that date,
(ii) the Discounted Value of each such Eligible Asset, (iii) whether the
Preferred Shares Basic Maintenance Amount Test is met as of that date,
(iv) the value (as used in the 1940 Act) of the total assets of the
Corporation, less all liabilities, and (v) whether the 1940 Act Preferred
Shares Asset Coverage is met as of that date.
(b) Upon any failure to meet the Preferred Shares Basic Maintenance
Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation
Date, the Corporation may use reasonable commercial efforts (including,
without limitation, altering the composition of its portfolio, purchasing
AMPS outside of an Auction or, in the event of a failure to file a
certificate on a timely basis, submitting the requisite certificate), to
meet (or certify in the case of a failure to file a certificate on a timely
basis, as the case may be) the Preferred Shares Basic Maintenance Amount
Test or 1940 Act Preferred Shares Asset Coverage on or prior to the Asset
Coverage Cure Date.
B-17
(c) Compliance with the Preferred Shares Basic Maintenance Amount and
1940 Act Asset Coverage Tests shall be determined with reference to those
AMPS which are deemed to be Outstanding hereunder.
(d) In the case of the asset coverage requirements for Moody's and S&P,
the auditors must certify once per quarter the asset coverage test on a date
randomly selected by the auditor.
(e) The Corporation shall deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (i)-(iii) of
paragraph (a) of this Section 12 (a 'Preferred Shares Basic Maintenance
Certificate') as of (A) the Date of Original Issue, (B) the last Valuation
Date of each month, (C) any date requested by any Rating Agency, (D) a
Business Day on or before any Asset Coverage Cure Date relating to the
Corporation's cure of a failure to meet the Preferred Shares Basic
Maintenance Amount Test, (E) any day that Common Shares or AMPS are redeemed
and (F) any day the S&P Eligible Assets have an aggregate discounted value
less than or equal to 110% of the Preferred Shares Basic Maintenance Amount.
Such Preferred Shares Basic Maintenance Certificate shall be delivered in
the case of clause (i)(A) on the Date of Original Issue and in the case of
all other clauses above on or before the seventh Business Day after the
relevant Valuation Date or Asset Coverage Cure Date.
(f) The Corporation shall deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (iv) and (v)
of paragraph (a) of this Section 12 (a '1940 Act Preferred Shares Asset
Coverage Certificate') (i) as of the Date of Original Issue, and (ii) as of
(A) the last Valuation Date of each quarter thereafter, and (B) as of a
Business Day on or before any Asset Coverage Cure Date relating to the
failure to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act
Preferred Shares Asset Coverage Certificate shall be delivered in the case
of clause (i) on the Date of Original Issue and in the case of clause (ii)
on or before the seventh Business Day after the relevant Valuation Date or
the Asset Coverage Cure Date. The certificates required by paragraphs (d)
and (e) of this Section 12 may be combined into a single certificate.
(g) Within ten Business Days of the Date of Original Issue, the
Corporation shall deliver to the Auction Agent and each Rating Agency a
letter prepared by the Corporation's independent auditors (an 'Auditor's
Certificate') regarding the accuracy of the calculations made by the
Corporation in the Preferred Shares Basic Maintenance Certificate and the
1940 Act Preferred Shares Asset Coverage Certificate required to be
delivered by the Corporation on the Date of Original Issue. Within ten
Business Days after delivery of the Preferred Shares Basic Maintenance
Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate
relating to the last Valuation Date of each fiscal quarter of the
Corporation, the Corporation will deliver to the Auction Agent and each
Rating Agency an Auditor's Certificate regarding the accuracy of the
calculations made by the Corporation in such Certificates and in one other
Preferred Shares Basic Maintenance Certificate randomly selected by the
Corporation's independent auditors during such fiscal quarter. In addition,
the Corporation will deliver to the persons specified in the preceding
sentence an Auditor's Certificate regarding the accuracy of the calculations
made by the Corporation on each Preferred Shares Basic Maintenance
Certificate and 1940 Act Preferred Shares Asset Coverage Certificate
delivered in relation to an Asset Coverage Cure Date within ten days after
the relevant Asset Coverage Cure Date. If an Auditor's Certificate shows
that an error was made in any such report, the calculation or
B-18
determination made by the Corporation's independent auditors will be
conclusive and binding on the Corporation.
(h) The Auditor's Certificates referred to in paragraph (f) above will
confirm, based upon the independent auditor's review of portfolio data
provided by the Corporation, (i) the mathematical accuracy of the
calculations reflected in the related Preferred Shares Basic Maintenance
Amount Certificates and 1940 Act Preferred Shares Asset Coverage
Certificates and (ii) that, based upon such calculations, the Corporation
had, at such Valuation Date, met the Preferred Shares Basic Maintenance
Amount Test.
(i) In the event that a Preferred Shares Basic Maintenance Certificate
or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified
in this Section 12, the Corporation shall be deemed to have failed to meet
the Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred
Shares Asset Coverage, as the case may be, on such Valuation Date for
purposes of Section 12(b) of Part I of these Articles Supplementary. In the
event that a Preferred Shares Basic Maintenance Certificate, a 1940 Act
Preferred Shares Asset Coverage Certificate or an applicable Auditor's
Certificate with respect to an Asset Coverage Cure Date is not delivered
within the time periods specified herein, the Corporation shall be deemed to
have failed to meet the Preferred Shares Basic Maintenance Amount Test or
the 1940 Preferred Shares Asset Coverage, as the case may be, as of the
related Valuation Date.
13. Notice. All notices or communications hereunder, unless otherwise
specified in these Articles Supplementary, shall be sufficiently given if in
writing and delivered in person, by telecopier or mailed by first-class mail,
postage prepaid. Notices delivered pursuant to this Section 13 shall be deemed
given on the earlier of the date received or the date five days after which such
notice is mailed, except as otherwise provided in these Articles Supplementary
or by the MGCL for notices of stockholders' meetings.
14. Waiver. To the extent permitted by Maryland Law, Holders of at least
two-thirds of the Outstanding AMPS, acting collectively, or each Series, acting
as a separate series, may waive any provision hereof intended for their
respective benefit in accordance with such procedures as may from time to time
be established by the Board of Directors.
15. Termination. In the event that no AMPS are Outstanding, all rights and
preferences of such shares established and designated hereunder shall cease and
terminate, and all obligations of the Corporation under these Articles
Supplementary shall terminate.
16. Amendment. Subject to the provisions of these Articles Supplementary,
the Board of Directors may, by resolution duly adopted without stockholder
approval (except as otherwise provided by these Articles Supplementary or
required by applicable law), amend these Articles Supplementary to reflect any
amendments hereto which the Board of Directors is entitled to adopt pursuant to
the terms of Section 6(k) of Part I of these Articles Supplementary without
stockholder approval. To the extent permitted by applicable law, the Board of
Directors may interpret, amend or adjust the provisions of these Articles
Supplementary to resolve any inconsistency or ambiguity or to remedy any patent
defect.
17. Definitions. As used in Part I and Part II of these Articles
Supplementary, the following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:
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'`AA' Composite Commercial Paper Rate' on any date means (i) the
interest equivalent of the 7-day rate, in the case of a Dividend Period
which is 7 days or shorter; for Dividend Periods greater than 7 days but
fewer than or equal to 31 days, the 30-day rate; for Dividend Periods
greater than 31 days but fewer than or equal to 61 days, the 60-day rate;
for Dividend Periods greater than 61 days but fewer than or equal to 91
days, the 90 day rate; for Dividend Periods greater than 91 days but fewer
than or equal to 270 days, the rate described in clause (ii) below; for
Dividend Periods greater than 270 days, the Treasury Index Rate; on
commercial paper on behalf of financial issuers whose corporate bonds are
rated 'AA' by S&P, or the equivalent of such rating by another nationally
recognized rating agency, as announced by the Federal Reserve Bank of New
York for the close of business on the Business Day immediately preceding
such date; or (ii) if the Federal Reserve Bank of New York does not make
available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by the Commercial Paper
Dealers to the Auction Agent for the close of business on the Business Day
immediately preceding such date (rounded to the next highest .001 of 1%). If
any Commercial Paper Dealer does not quote a rate required to determine the
'AA' Composite Commercial Paper Rate, such rate shall be determined on the
basis of the quotations (or quotation) furnished by the remaining Commercial
Paper Dealers (or Dealer), if any, or, if there are no such Commercial Paper
Dealers, by the Auction Agent as agreed to by Merrill Lynch & Co. For
purposes of this definition, (A) 'Commercial Paper Dealers' shall mean
(1) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Goldman Sachs & Co.; (2) in lieu of any
thereof, its respective Affiliate or successor; and (3) in the event that
any of the foregoing shall cease to quote rates for commercial paper of
issuers of the sort described above, in substitution therefor, a nationally
recognized dealer in commercial paper of such issuers then making such
quotations selected by the Corporation, and (B) 'interest equivalent' of a
rate stated on a discount basis for commercial paper of a given number of
days' maturity shall mean a number equal to the quotient (rounded upward to
the next higher one-thousandth of 1%) of (1) such rate expressed as a
decimal, divided by (2) the difference between (x) 1.00 and (y) a fraction,
the numerator of which shall be the product of such rate expressed as a
decimal, multiplied by the number of days in which such commercial paper
shall mature and the denominator of which shall be 360.
'Affiliate' means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Corporation; provided,
however, that no Broker-Dealer controlled by, in control of or under common
control with the Corporation shall be deemed to be an Affiliate nor shall
any corporation or any Person controlled by, in control of or under common
control with such corporation, one of the directors or executive officers of
which is a director of the Corporation be deemed to be an Affiliate solely
because such director or executive officer is also a director of the
Corporation.
'Agent Member' means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.
'All Hold Rate' means the 7-day 'AA' Composite Commercial Paper Rate in
the case of the Series T, Series TH and Series F AMPS, and the 30-day 'AA'
Composite Commercial Paper Rate in the case of the Series W AMPS;
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'AMPS' has the meaning set forth in paragraph FIRST of Part I of these
Articles Supplementary.
'Applicable Rate' means, with respect to each Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Rate, and (iii) in the
case of any Dividend Period if all the shares of a Series are the subject of
Submitted Hold Orders for the Auction in respect thereof, the All Hold Rate
corresponding to that Series.
'Approved Price' means the 'fair value' as determined by the Corporation
in accordance with the valuation procedures adopted from time to time by the
Board of Directors and for which the Corporation receives a mark-to-market
price (which, for the purpose of clarity, does not mean a Market Value
Price) from an independent source at least semi-annually.
'Asset Coverage Cure Date' has the meaning set forth in
Section 3(a)(ii) of these Articles Supplementary.
'Auction' means each periodic operation of the Auction Procedures.
'Auction Agent' means The Bank of New York unless and until another
commercial bank, trust company, or other financial institution appointed by
a resolution of the Board of Directors enters into an agreement with the
Corporation to follow the Auction Procedures for the purpose of determining
the Applicable Rate.
'Auction Date' means the first Business Day next preceding the first day
of a Dividend Period for each Series.
'Auction Procedures' means the procedures for conducting Auctions as set
forth in Part II of these Articles Supplementary.
'Auditor's Certificate' has the meaning set forth in Section 12(f) of
Part I of these Articles Supplementary.
'Beneficial Owner,' with respect to shares of each Series, means a
customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of such series.
'Bid' has the meaning set forth in Section 2(a)(ii) of Part II of these
Articles Supplementary.
'Bidder' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary, provided however that neither the Corporation
nor any Affiliate shall be permitted to be Bidder in an Auction.
'Board of Directors' or 'Board' means the Board of Directors of the
Corporation or any duly authorized committee thereof as permitted by
applicable law.
'Broker-Dealer' means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer
by the Auction Procedures, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement that remains effective.
'Broker-Dealer Agreement' means an agreement between the Auction Agent
and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
B-21
'Business Day' means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York, New York are authorized or obligated by law to
close.
'Charter' has the meaning set forth in the preamble to these Articles
Supplementary.
'Code' means the Internal Revenue Code of 1986, as amended.
'Commission' means the Securities and Exchange Commission.
'Common Shares' means the shares of the Corporation's Common Stock, par
value $.001 per share.
'Corporation' has the meaning set forth in the preamble to these
Articles Supplementary.
'Date of Original Issue' means the date on which a Series is originally
issued by the Corporation.
'Default' has the meaning set forth in Section 2(c)(ii) of Part I of
these Articles Supplementary.
'Default Period' has the meaning set forth in Sections 2(c)(ii) or (iii)
of Part I of these Articles Supplementary.
'Default Rate' has the meaning set forth in Sections 2(c)(iii) of
Part I of these Articles Supplementary.
'Deposit Securities' means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets,
rated at least AAA or A-1 by S&P, except that, for purposes of optional
redemption, such obligations or securities will be considered 'Deposit
Securities' only if they also are rated at least P-1 by Moody's.
'Discount Factor' means the S&P Discount Factor (if S&P is then rating
the AMPS), the Moody's Discount Factor (if Moody's is then rating the AMPS)
or the discount factor established by any Other Rating Agency which is then
rating the AMPS and which so requires, whichever is applicable.
'Discounted Value' means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor, provided that with respect
to an Eligible Asset that is currently callable, Discounted Value will be
equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable,
Discounted Value will be equal to the quotient as calculated above or the
par value, whichever is lower.
'Dividend Default' has the meaning set forth in Section 2(c)(iii) of
Part I of these Articles Supplementary.
'Dividend Payment Date' with respect to the AMPS means any date on which
dividends are payable pursuant to Section 2(b) of Part I hereof.
'Dividend Period' means, with respect to each Series, the initial
period determined in the manner set forth under 'Designation' above, and
thereafter, as to such Series, the period commencing on the Business Day
following each Dividend Period for such Series and ending on the calendar
day immediately preceding the next Dividend Payment Date for such Series.
'Eligible Assets' means Moody's Eligible Assets (if Moody's is then
rating the AMPS), S&P Eligible Assets (if S&P is then rating the AMPS),
and/or Other Rating Agency Eligible Assets if any Other Rating Agency is
then rating the AMPS, whichever is applicable.
B-22
'Existing Holder' has the meaning set forth in Section 1(d) of Part II
of these Articles Supplementary.
'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Holder' means, with respect to the AMPS, the registered holder of
shares of each Series as the same appears on the stock ledger or stock
records of the Corporation.
'Investment Manager' means Cohen & Steers Capital Management, Inc.
'Liquidation Preference' means $25,000 per Preferred Share.
'Mandatory Redemption Date' has meaning set forth in Section 3(a)(iv) of
Part I of these Articles Supplementary.
'Mandatory Redemption Price' has the meaning set forth in
Section 3(a)(iv) of Part I of these Articles Supplementary.
'Market Value' means the fair market value of an asset of the
Corporation as computed as follows: Securities listed on the New York Stock
Exchange at the last sale price reflected on the consolidated tape at the
close of the New York Stock Exchange on the business day as of which such
value is being determined provided that, if there has been no sale on such
day, the securities are valued at the closing bid prices on such day and
provided further that, if no bid prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine
in good faith to reflect its fair market value. Readily marketable
securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the
National Association of Securities Dealers Automated Quotations, Inc.
('NASDAQ') National List are valued in a like manner. 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 as
reflected on the tape at the close of the exchange representing the
principal market for such securities. Readily marketable securities traded
in the over-the-counter market, including listed securities whose primary
market is believed by the Investment Manager to be over-the-counter, but
excluding securities admitted to trading on the NASDAQ National List, are
valued at the current bid prices as reported by NASDAQ or, in the case of
securities not quoted by NASDAQ, the National Quotation Bureau or such other
comparable source as the directors deem appropriate to reflect their fair
market value. The fair market value of certain fixed-income securities is
computed based upon (i) the basis of prices provided by a Pricing Service or
(ii) the lower of the value set forth in bids from two independent dealers
in securities, one of which bids will be in writing, in each case with
interest accrued added to such computation for those assets of the
Corporation where such computation does not include interest accrued. The
independent dealers from whom bids are sought shall be either (a) market
makers in the securities being valued or (b) members of the National
Association of Securities Dealers, Inc. Where securities are traded on more
than one exchange and also over-the-counter, the securities will generally
B-23
be valued using the quotations the Board of Directors believes reflect most
closely the value of such securities.
'Maximum Rate' means, on any date on which the Applicable Rate is
determined, the applicable percentage of the 'AA' Composite Commercial Paper
Rate on the date of such Auction determined as set forth below based on the
lower of the credit ratings assigned to the AMPS by Moody's and S&P subject
to upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers; provided that
immediately following any such increase the Corporation would be in
compliance with the AMPS Shares Basic Maintenance Amount.
Moody's S&P Applicable
Credit Rating Credit Rating Percentage
------------- ------------- ----------
aa3 or Above AA- or Above 150%
a3 or a1 A- to A+ 200%
baa3 to baa1 BBB- to BBB+ 225%
Below baa3 Below BBB- 275%
'Moody's' means Moody's Investors Service, Inc. and its successors at
law.
'Moody's Discount Factor' means, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined as
follows. The Moody's Discount Factor for any Moody's Eligible Asset other
than the securities set forth below will be the percentage provided in
writing by Moody's.
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
Discount Factor(1)(2)(3)
------------------------
common stock of REITs 154%
preferred stock of REITs
with Senior Implied Moody's (or S&P) rating: 154%
without Senior Implied Moody's (or S&P) rating: 208%
preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P) rating: 208%
without Senior Implied Moody's (or S&P) rating: 250%
---------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed 30%
of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
Assets.
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is below $500
million.
B-24
(b) Debt Securities of REITs and Other Real Estate Companies(1):
Maturity
in Years Aaa Aa A Baa Ba B Caa NR(2)
-------- --- -- - --- -- - --- -----
1 109% 112% 115% 118% 119% 125% 225% 250%
2 115% 118% 122% 125% 127% 133% 225% 250%
3 120% 123% 127% 131% 133% 140% 225% 250%
4 126% 129% 133% 138% 140% 147% 225% 250%
5 132% 135% 139% 144% 146% 154% 225% 250%
7 139% 143% 147% 152% 156% 164% 225% 250%
10 145% 150% 155% 160% 164% 173% 225% 250%
15 150% 155% 160% 165% 170% 180% 225% 250%
20 150% 155% 160% 165% 170% 190% 225% 250%
30 150% 155% 160% 165% 170% 191% 225% 250%
---------
(1) The Moody's Discount Factors for debt securities shall also be applied to
any interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) Unrated debt securities are limited to 10% of discounted Eligible Assets. If
a security is unrated by Moody's but is rated by S&P, a rating two numeric
ratings below the S&P rating will be used, e.g., where the S&P rating is
AAA, a Moody's rating of Aa2 will be used; where the S&P rating is AA+, a
Moody's rating of Aa3 will be used. If a security is unrated by either
Moody's or S&P, the percentage set forth under 'NR' in this table will be
used.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. Treasury Securities U.S. Treasury Strips
Remaining Term to Maturity Discount Factor Discount Factor
-------------------------- --------------- ---------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 114%
3 years or less (but longer than 2 year) 118% 120%
4 years or less (but longer than 3 year) 123% 127%
5 years or less (but longer than 4 year) 128% 133%
7 years or less (but longer than 5 year 135% 145%
10 years or less (but longer than 7 year) 141% 159%
15 years or less (but longer than 10 year) 146% 184%
20 years or less (but longer than 15 year) 154% 211%
30 years or less (but longer than 20 year) 154% 236%
(d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP- 1+/AA by S&P and mature
or have a demand feature at par exercisable within 49 days of the relevant
valuation date. A Moody's Discount Factor of 100% will be applied to cash.
B-25
'Moody's Eligible Assets' means the following:
(a) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies. (i) Common stock of REITs and preferred
stock and any debt security of REITs and Other Real Estate Companies: (A)
which comprise at least 7 of the 14 Moody's Real Estate Industry/
Property Sector Classifications ('Moody's Sector Classifications') listed
below and of which no more than 35% may constitute a single such
classification; (B) which in the aggregate constitute at least 40
separate classes of common stock, preferred stock, and debt securities,
issued by at least 30 issuers; (C) issued by a single issuer which in the
aggregate constitute no more than 7.0% of the Market Value of Moody's
Eligible Assets, and (D) issued by a single issuer which, with respect to
50% of the Market Value of Moody's Eligible Assets, constitute in the
aggregate no more than 5% of Market Value of Moody's Eligible Assets; and
(ii) Unrated debt securities issued by an issuer which: (A) has not
filed for bankruptcy within the past three years; (B) is current on all
principal and interest on its fixed income obligations; (C) is current on
all preferred stock dividends; (D) possesses a current, unqualified
auditor's report without qualified, explanatory language and (E) in the
aggregate do not exceed 10% of the discounted Moody's Eligible Assets;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the
swap transaction has a short-term rating of not less than P-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is Aa3 or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
AMPS originally issued. The interest rate swap transaction will be
marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(d) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2, or (C) in all other cases, the supporting entity (1) is rated
A2 and the security matures within one month, (2) is rated A1 and the
security matures within three months or (3) is rated at least Aa3 and the
security matures within six months; provided, however, that for purposes
of this definition, such instruments (other than commercial paper rated
by S&P and not rated by Moody's) need not meet any otherwise applicable
Moody's rating criteria; and
(e) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within 49 days of the relevant valuation date) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades which
generated such receivables are (A) settled through clearing house firms
with respect to which the Corporation has received prior written
authorization from Moody's or (B) (1) with counterparties having a
Moody's long-term debt rating of at least Baa3 or (2) with counterparties
having a Moody's Short-Term Money Market Instrument rating of at least
P-1.
B-26
'Moody's Real Estate Industry/ Property Sector Classification' means,
for the purposes of determining Moody's Eligible Assets, each of the
following Industry Classifications (as defined by the National Association
of Real Estate Investment Trusts, 'NAREIT'):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment in
consultation with the independent auditor and/or Moody's, as necessary.
'1933 Act' means the Securities Act of 1933, as amended.
'1940 Act' means the Investment Company Act of 1940, as amended.
'1940 Act Preferred Shares Asset Coverage' means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least
200% with respect to all outstanding senior securities of the Corporation
which are stock, including all Outstanding AMPS (or such other asset
coverage 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
shares), determined on the basis of values calculated as of a time within 48
hours (not including Sundays or holidays) next preceding the time of such
determination.
'1940 Act Preferred Shares Asset Coverage Certificate' means the
certificate required to be delivered by the Corporation pursuant to
Section 12(e) of these Articles Supplementary.
'Notice of Redemption' means any notice with respect to the redemption
of AMPS pursuant to Section 3 of Part I of these Articles Supplementary.
'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Other Rating Agency' means any rating agency other than S&P or Moody's
then providing a rating for the AMPS pursuant to the request of the
Corporation.
B-27
'Other Rating Agency Eligible Assets' means assets of the Corporation
designated by any Other Rating Agency as eligible for inclusion in
calculating the discounted value of the Corporation's assets in connection
with such Other Rating Agency's rating of the AMPS.
'Other Real Estate Companies' companies which generally derive at least
50% of their revenue from real estate or has at least 50% of its assets in
real estate, but not including REITs.
'Outstanding' means, as of any date, AMPS theretofore issued by the
Corporation except, without duplication, (i) any AMPS theretofore canceled,
redeemed or repurchased by the Corporation, or delivered to the Auction
Agent for cancellation or with respect to which the Corporation has given
notice of redemption and irrevocably deposited with the Paying Agent
sufficient funds to redeem such shares and (ii) any AMPS represented by any
certificate in lieu of which a new certificate has been executed and
delivered by the Corporation. Notwithstanding the foregoing, (A) for
purposes of voting rights (including the determination of the number of
shares required to constitute a quorum), any AMPS as to which the
Corporation or any Affiliate is the Existing Holder will be disregarded and
not deemed Outstanding; (B) in connection with any Auction, any AMPS as to
which the Corporation or any person known to the Auction Agent to be an
Affiliate is the Existing Holder will be disregarded and not deemed
Outstanding; and (C) for purposes of determining the Preferred Shares Basic
Maintenance Amount, AMPS held by the Corporation will be disregarded and not
deemed Outstanding, but shares held by any Affiliate will be deemed
Outstanding.
'Paying Agent' means The Bank of New York unless and until another
entity appointed by a resolution of the Board of Directors enters into an
agreement with the Corporation to serve as paying agent, which paying agent
may be the same as the Auction Agent.
'Person' or 'Person' means and includes an individual, a partnership,
the corporation, a trust, a corporation, a limited liability company, an
unincorporated association, a joint venture or other entity or a government
or any agency or political subdivision thereof.
'Potential Beneficial Owner or Holder' has the meaning set forth in
Section 1 of Part II of these Articles Supplementary.
'Preferred Shares Basic Maintenance Amount' means as of any Valuation
Date as the dollar amount equal to the sum of:
(i)(A) the sum of the products resulting from multiplying the number
of Outstanding AMPS on such date by the Liquidation Preference (and
redemption premium, if any) per share; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or
not earned or declared) for each Outstanding Preferred Share to the 30th
day after such Valuation Date; (C) the amount of anticipated Corporation
non-interest expenses for the 90 days subsequent to such Valuation Date;
(D) the amount of the current outstanding balances of any indebtedness
which is senior to the AMPS plus interest actually accrued together with
30 days additional interest on the current outstanding balances
calculated at the current rate; and (E) any other current liabilities
payable during the 30 days subsequent to such Valuation Date, including,
without limitation, indebtedness due within one year and any redemption
premium due with respect to AMPS for which a Notice of Redemption has
been given, as of such Valuation Date, to the extent not reflected in any
of (i)(A) through (i)(D): less
B-28
(ii) the sum of any cash plus the value of any of the Corporation's
assets irrevocably deposited by the Corporation for the payment of any
(i)(B) through (i)(F) ('value,' for purposes of this clause (ii), means
the Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated at least P-1 by Moody's and
A-1 by S&P, it will be valued at its face value).
'Preferred Shares Basic Maintenance Amount Test' means a test which is
met if the lower of the aggregate Discounted Values of the Moody's Eligible
Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares
Basic Maintenance Amount.
'Preferred Shares Basic Maintenance Certificate' has the meaning set
forth in Section 12(d) of Part I of these Articles Supplementary.
'Pricing Service' means any of the following: Bloomberg, Bridge
Information Services, Data Resources Inc., Interactive Data, International
Securities Market Association, Merrill Lynch Securities Pricing Service,
Muller Data Corp., Reuters, Standard & Poors/J.J. Kenny, Telerate, Trepp
Pricing and Wood Gundy.
'Rating Agency' means Moody's and S&P as long as such rating agency is
then rating the AMPS.
'Redemption Date' has the meaning set forth in Section 2(c)(ii) of
Part II of these Articles Supplementary.
'Redemption Default' has the meaning set forth in Section 2(c)(ii) of
Part I of these Articles Supplementary.
'Redemption Price' has the meaning set forth in Section 3(a)(i) of
Part I of these Articles Supplementary.
'Reference Rate' means, with respect to the determination of the Default
Rate, the applicable 'AA' Composite Commercial Paper Rate (for a Dividend
Period of fewer than 184 days) or the applicable Treasury Index Rate (for a
Dividend Period of 184 days or more).
'Registrar' means The Bank of New York, unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Corporation to serve as transfer agent.
'REIT' or real estate investment trust, means a company dedicated to
owning, and usually operating, income producing real estate, or to financing
real estate.
'S&P' means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors at law.
'S&P Discount Factor' means, for purposes of determining the Discounted
Value of any S&P Eligible Asset, the percentage determined as follows. The
S&P Discount Factor for any S&P Eligible Asset other than the securities set
forth below will be the percentage provided in writing by S&P:
B-29
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
Diversification Standard
-------------------------------------
Level 1 Level 2 Level 3 Level 4
------- ------- ------- -------
Minimum Number of:
Issuers(1) 44 40 44 30
Real Estate Industry/Property Sectors(2) 10 8 7 7
Percent of Assets in:
Largest Real Estate Industry/Property Sector 17% 25% 30% 30%
2nd Largest Real Estate Industry/Property Sector 15% 20% 25% 25%
3rd Largest Real Estate Industry/Property Sector 12% 15% 15% 15%
4th Largest Real Estate Industry/Property Sector 12% 12% 12% 12%
S&P Discount Factor:
common stock 190% 208% 223% 231%
preferred stock(3) 157% 167% 174% 178%
---------
(1) Three issuers may each constitute 6% of assets and four issuers may each
constitute 5% of assets.
(2) As defined by NAREIT.
(3) Applies to preferred stock of real estate companies, subject to
diversification guidelines whereby at least 34% of the preferred assets are
rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
Moody's equivalent) or greater; and the balance of the preferred assets is
rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
common stock will apply to preferred stock which is not in compliance with
the diversification standard.
(b) Debt Securities:
Diversification Standard
-------------------------------------
Bond Rating(1) Level 1 Level 2 Level 3 Level 4
-------------- ------- ------- ------- -------
A 116% 117% 119% 118%
A- 117% 119% 120% 120%
BBB+ 119% 121% 122% 122%
BBB 121% 122% 124% 124%
BBB- 122% 124% 126% 126%
BB+ 127% 130% 133% 132%
BB 133% 137% 141% 139%
BB- 139% 144% 149% 147%
B+ 152% 159% 166% 164%
B 163% 172% 182% 179%
B- 176% 188% 202% 197%
CCC+ 198% 212% 230% 224%
CCC 236% 262% 295% 284%
---------
(1) The S&P Discount Factors for debt securities shall also be applied to any
interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) If a security is unrated by S&P but is rated by Moody's, the conversion
chart under S&P OC Test Rating Chart will apply.
B-30
(c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:
52-week Treasury Bills* 102%
Two-Year Treasury Notes 104%
Three-Year Treasury Notes 108%
Five-Year Treasury Notes 109%
10-Year Treasury Notes 115%
30-Year Treasury Bonds 126%
---------
* Treasury Bills with maturities of less than 52 weeks will be
discounted at the appropriate Short-Term Money Market Instrument
levels. Treasury Bills that mature the next day are considered cash
equivalents and are valued at 100%.
Treasury Strips: Treasury interest-only Strips will apply the discount factor
for the Treasury category set forth above following the maturity of the
Treasury Strip, e.g., a Treasury interest-only Strip with a maturity of seven
years will apply the discount factor for the U.S. Treasury securities with a
10-year maturity. Treasury principal-only Strips will apply the discount
factor that is two categories greater than its maturity, e.g., a Treasury
principal-only Strip with a maturity of seven years will apply the discount
factor for U.S. Treasury securities with a 30-year maturity.
(d) Cash and Cash Equivalents: The S&P Discount Factor applied to Cash and
Cash Equivalents will be (A) 100% and (B) 102% for those portfolio securities
which mature in 181 to 360 calendar days.
'S&P Eligible Assets' means the following:
(a) Common Stock, Preferred Stock and any debt securities of REITs
and Real Estate Companies;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the
swap transaction has a short-term rating of not less than A-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is AA - or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
AMPS originally issued. The interest rate swap transaction will be
marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);
(d) Short-Term Money Market Instruments so long as (A) such
securities are issued by an institution, which, at the time of
investment, is a permitted bank (including commercial paper issued by a
corporation which complies with the applicable assumptions that follow)
('permitted bank' means any bank, domestic or foreign, whose commercial
paper is rated A-1+) provided, however, that Short-Term Money Market
Instruments with maturities of 30 days of less, invested in an
institution rated A-1 may comprise up to 20% of eligible portfolio
assets; and
(e) Cash, which is any immediately available funds in U.S. dollars or
any currency other than U.S. dollars which is a freely convertible
currency, and Cash Equivalents, which means investments (other than Cash)
that are one or more of the following
B-31
obligations or securities: (i) U.S. Government Securities;
(ii) certificates of deposits of, banker's acceptances issued by or money
market accounts in any depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof and subject to supervision and examination by Federal and/ or
state banking authorities, so long as the deposits offered by such
depository institution or trust company at the time of such investments
are rated and have a rating of at least 'P-1' by Moody's and 'A-1+' by
S&P (or, in the case of the principal depository institution in a holding
company system whose deposits are not so rated, the long term debt
obligations of such holding company are rated and such rating is at least
'A-1' by Moody's and 'A+' by S&P); (iii) commercial paper issued by any
depositary institution or trust company incorporated under the laws of
the United States of America or any state thereof and subject to
supervision and examination by Federal and/or state banking authorities,
or any corporation incorporated under the laws of the United States of
America or any state thereof, so long as the commercial paper of such
issuer is rated and has at the time of such investment a short term
rating of at least 'P-1' by Moody's and 'A-1+' by S&P on its commercial
paper; (iv) securities bearing interest or sold at a discount issued by
any corporation incorporated under the laws of the United States of
America or any state thereof the obligations of which at the time of such
investment are rated and that have a credit rating of at least 'P-1' by
Moody's and 'A-1+' by S&P either at the time of such investment or the
making of a contractual commitment providing for such investment;
(v) shares of any money market fund organized under the laws of a
jurisdiction other than the United States, so long as such money market
fund is rated and has at the time of such investment a short-term rating
of at least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and ownership of
such investments will not cause the issuer to become engaged in a trade
or business within the United States for U.S. Federal income tax purposes
or subject the issuer to tax on a net income basis; and (vi) unleveraged
overnight repurchase obligations on customary terms with respect to
investments described in clauses (i) through (iv) above entered into a
depository institution, trust company or corporation that has a
short-term rating of at least 'A-1+' by S&P; provided, that (i) in no
event shall Cash Equivalents include any obligation that provides for
payment of interest alone; (ii) Cash Equivalents referred to in clauses
(ii) and (iii) above shall mature within 183 days of issuance;
(iii) either Moody's or S&P changes its rating system, then any ratings
included in this definition shall be deemed to be an equivalent rating in
a successor rating category of Moody's or S&P, as the case may be; (iv)
if either Moody's or S&P is not in the business of rating securities,
then any ratings included in this definition shall be deemed to be an
equivalent rating from another Rating Agency; (v) Cash Equivalents (other
than U.S. Government Securities or money market funds maintained by the
Custodian) shall not include any such investment of more than $100
million in any single issuer; and (vi) in no event shall Cash Equivalents
include any obligation that is not denominated in Dollars, any synthetic
securities, any Securities with ratings containing an 'r' subscript, and
IOs or any POs (other than commercial paper with a maturity within 183
days of issuance).
B-32
'S&P OC Test Rating Chart' means the chart set forth below:
Moody's Rating Mapped S&P Rating
-------------- -----------------
Aaa AA+
Aa1 AA
Aa2 AA-
Aa3 A+
A1 A
A2 A-
A3 BBB+
Baa1 BBB
Baa2 BBB-
Baa3 BB+
Ba1 BB-
Ba2 B+
Ba3 B
B1 B-
B2 CCC+
B3 CCC
Caa CCC-
NR or below Caa NR
'S&P Real Estate Industry/Property Sector Classification' means, for the
purposes of determining S&P Eligible Assets, each of the following Industry
Classifications (as defined by NAREIT):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment, and, when
necessary will consult with the independent auditor and/or S&P, as
necessary.
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'Securities Depository' means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by
the Corporation that agrees to follow the procedures required to be followed
by such securities depository in connection with the AMPS.
'Sell Order' has the meaning set forth in Section 2(b) of Part II of
these Articles Supplementary.
'Short-Term Money Market Instrument' means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Corporation, the remaining term to maturity thereof is not in excess of 180
days:
(i) commercial paper rated A-1 if such commercial paper matures in 30
days or A-1+ if such commercial paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof or the District of Columbia or (B) a United States branch office
or agency of a foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) overnight funds; and
(iv) U.S. Government Securities.
'Special Dividend Period' means a Dividend Period that is not a Standard
Dividend Period.
'Specific Redemption Provisions' means, with respect to any Special
Dividend Period of more than one year, either, or any combination of (i) a
period (a 'Non-Call Period') determined by the Board of Directors after
consultation with the Broker-Dealers, during which the shares subject to
such Special Dividend Period are not subject to redemption at the option of
the Corporation and (ii) a period (a 'Premium Call Period'), consisting of a
number of whole years as determined by the Board of Directors after
consultation with the Broker-Dealers, during each year of which the shares
subject to such Special Dividend Period will be redeemable at the
Corporation's option at a price per share equal to the Liquidation
Preference plus accumulated but unpaid dividends (whether or not earned or
declared) plus a premium expressed as a percentage or percentages of the
Liquidation Preference or expressed as a formula using specified variables
as determined by the Board of Directors after consultation with the
Broker-Dealers.
'Standard Dividend Period' means a Dividend Period of seven days in the
case of Series T, Series TH and Series F AMPS unless such 7th day is not a
Business Day, then the number of days ending on the Business Day next
preceding such 7th day, or 28 days in the case of the Series W Preferred
Shares, unless such day is not a Business Day, then the number of days
ending on the Business Day next preceding such 28th day.
'Submission Deadline' means 1:00 p.m., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the
Auction Agent from time to time.
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'Transfer Agent' means The Bank of New York, unless and until another
entity appointed by a resolution of the Board of Directors enters into an
agreement with the Corporation to serve as Transfer Agent.
'Treasury Index Rate' means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the
same number of 30-day periods to maturity as the length of the applicable
Dividend Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having the next
shorter and next longer number of 30-day periods to maturity treating all
Dividend Periods with a length greater than the longest maturity for such
securities as having a length equal to such longest maturity, in all cases
based upon data set forth in the most recent weekly statistical release
published by the Board of Governors of the Federal Reserve System (currently
in H.15 (519)); provided, however, if the most recent such statistical
release shall not have been published during the 15 days preceding the date
of computation, the foregoing computations shall be based upon the average
of comparable data as quoted to the Corporation by at least three recognized
dealers in U.S. Government Securities selected by the Corporation.
'U.S. Government Securities' means direct obligations of the United
States or by its agencies or instrumentalities that are entitled to the full
faith and credit of the United States and that, other than United States
Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
'Valuation Date' means the last Business Day of each week, or such other
date as the Corporation and Rating Agencies may agree to for purposes of
determining the Preferred Shares Basic Maintenance Amount.
'Voting Period' has the meaning set forth in Section 6(b) of Part I of
these Articles Supplementary.
'Winning Bid Rate' has the meaning set forth in Section 4(a)(iii) of
Part II of these Articles Supplementary.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
Part II: Auction Procedures
1. Certain Definitions. As used in Part II of these Articles Supplementary,
the following terms shall have the following meanings, unless the context
otherwise requires and all section references below are to Part II of these
Articles Supplementary except as otherwise indicated: Capitalized terms not
defined in Section 1 of Part II of these Articles Supplementary shall have the
respective meanings specified in Part I of these Articles Supplementary.
'Agent Member' means a member of or participant in the Securities
Depository that will act on behalf of existing or potential holders of AMPS.
'Available AMPS' has the meaning set forth in Section 4(a)(i) of
Part II of these Articles Supplementary.
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'Existing Holder' means (a) a person who beneficially owns those AMPS
listed in that person's name in the records of the Auction Agent or (b) the
beneficial owner of those AMPS which are listed under such person's
Broker-Dealer's name in the records of the Auction Agent, which
Broker-Dealer shall have signed a Master Purchaser's Letter.
'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Master Purchaser's Letter' means the letter which is required to be
executed by each prospective purchaser of AMPS or the Broker-Dealer through
whom the shares will be held.
'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Potential Holder,' means (a) any Existing Holder who may be interested
in acquiring additional AMPS or (b) any other person who may be interested
in acquiring AMPS and who has signed a Master Purchaser's Letter or whose
shares will be listed under such person's Broker-Dealer's name on the
records of the Auction Agent which Broker-Dealer shall have executed a
Master Purchaser's Letter.
'Sell Order' has the meaning set forth in Section 2(b) of Part II of
these Articles Supplementary.
'Submitted Bid Order' has the meaning set forth in Section 4(a) of
Part II of these Articles Supplementary.
'Submitted Hold Order' has the meaning set forth in Section 4(a) of
Part II of these Articles Supplementary.
'Submitted Order' has the meaning set forth in Section 4(a) of Part II
of these Articles Supplementary.
'Submitted Sell Order' has the meaning set forth in Section 4(a) of
Part II of these Articles Supplementary.
'Sufficient Clearing Orders' means that all AMPS are the subject of
Submitted Hold Orders or that the number of AMPS that are the subject of
Submitted Buy Orders by Potential Holders specifying one or more rates equal
to or less than the Maximum Rate exceeds or equals the sum of (A) the number
of AMPS that are subject of Submitted Hold/Sell Orders by Existing Holders
specifying one or more rates higher than the Maximum Applicable Rate and
(B) the number of AMPS that are subject to Submitted Sell Orders.
'Winning Bid Rate' means the lowest rate specified in the Submitted
Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
specifying such lowest rate and all other Submitted Hold/Sell Orders from
Existing Holders specifying lower rates were accepted and (B) each Submitted
Buy Order from Potential Holders specifying such lowest rate and all other
Submitted Buy Orders from Potential Holders specifying lower rates were
accepted, would result in the Existing Holders described in clause (A) above
continuing to hold an aggregate number of AMPS which, when added to the
number of AMPS to be purchased by the Potential Holders described in clause
(B) above and the number of AMPS subject to Submitted Hold Orders, would be
equal to the number of AMPS.
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2. Orders.
(a) On or prior to the Submission Deadline on each Auction Date for shares
of a series of AMPS:
(i) each Beneficial Owner of shares of such Series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for shares of such series for
the next succeeding Dividend Period of such shares;
(B) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for shares of such series for the next succeeding
Dividend Period of shares of such series shall be less than the rate per
annum specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series held by
such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of such series for the next
succeeding Dividend Period of shares of such series; and
(ii) each Broker-Dealer, using lists of Potential Beneficial Owners,
shall in good faith for the purpose of conducting a competitive Auction in a
commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners,
on such lists to determine the number of shares, if any, of such series
which each such Potential Beneficial Owner offers to purchase if the
Applicable Rate for shares of such series for the next succeeding Dividend
Period of shares of such series shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C)
or (ii) of this paragraph (a) is hereinafter referred to as an 'Order' and
collectively as 'Orders' and each Beneficial Owner and each Potential
Beneficial Owner placing an Order with a Broker-Dealer, and such
Broker-Dealer placing an Order with the Auction Agent, is hereinafter
referred to as a 'Bidder' and collectively as 'Bidders'; an Order containing
the information referred to in clause (i)(A) of this paragraph (a) is
hereinafter referred to as a 'Hold Order' and collectively as 'Hold Orders';
an Order containing the information referred to in clause (i)(B) or (ii) of
this paragraph (a) is hereinafter referred to as a 'Bid' and collectively as
'Bids'; and an Order containing the information referred to in clause (i)(C)
of this paragraph (a) is hereinafter referred to as a 'Sell Order' and
collectively as 'Sell Orders.'
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of AMPS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be less than the rate specified therein;
B-37
(B) such number or a lesser number of Outstanding shares of such series
to be determined as set forth in clause (iv) of paragraph (a) of Section 5
of this Part II if the Applicable Rate for shares of such series determined
on such Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in such
Bid if the rate specified therein shall be higher than the Maximum Rate for
shares of such series, or such number or a lesser number of Outstanding
shares of such series to be determined as set forth in clause (iii) of
paragraph (b) of Section 5 of this Part II if the rate specified therein
shall be higher than the Maximum Rate for shares of such series and
Sufficient Clearing Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of a
series of AMPS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such
Sell Order; or
(B) such number or a lesser number of Outstanding shares of such series
as set forth in clause (iii) of paragraph (b) of Section 5 of this Part II
if Sufficient Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of AMPS shall not be liable to any Person for failing to
sell such shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 3 of this Part II if (1) such shares were transferred
by the Beneficial Owner thereof without compliance by such Beneficial Owner or
its transferee Broker-Dealer (or other transferee person, if permitted by the
Corporation) with the provisions of Section 6 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Holder of shares of a series of AMPS subject to
an Auction on any Auction Date shall constitute an irrevocable offer to
purchase:
(A) the number of Outstanding shares of such series specified in such
Bid if the Applicable Rate for shares of such series determined on such
Auction Date shall be higher than the rate specified therein; or (B) such
number or a lesser number of Outstanding shares of such series as set forth
in clause (v) of paragraph (a) of Section 5 of this Part II if the
Applicable Rate for shares of such series determined on such Auction Date
shall be equal to the rate specified therein.
(c) No Order for any number of AMPS other than whole shares shall be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for AMPS of a series
subject to an Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
shall specify with respect to each Order for such shares:
B-38
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Corporation);
(ii) the aggregate number of shares of such series that are the subject
of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of
such series:
(A) the number of shares, if any, of such series subject to any Hold
Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid
of such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series, the rate and number of shares of such series specified in such
Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent shall round such rate up to the
next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding AMPS of a series
held by any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of such series held by such Existing Holder and not subject
to Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series held by any
Existing Holder is not submitted to the Auction Agent prior to the Submission
Deadline for an Auction relating to a Special Dividend Period consisting of more
than 91 Dividend Period days, the Auction Agent shall deem a Sell Order to have
been submitted by or on behalf of such Existing Holder covering the number of
outstanding shares of such series held by such Existing Holder and not subject
to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding AMPS of a
series subject to an Auction held by such Existing Holder, such Orders shall be
considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be considered valid,
but only up to and including in the aggregate the number of Outstanding
shares of such series held by such Existing Holder, and if the number of
shares of such series subject to such Hold Orders exceeds the number of
Outstanding shares of such series held by such Existing Holder, the number
of shares subject to each such Hold Order shall be reduced pro rata to cover
the number of Outstanding shares of such series held by such Existing
Holder;
(ii) (A) any Bid for shares of such series shall be considered valid up
to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such series
subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing Holder
for shares of such series is submitted to the Auction Agent with the same
rate and the number of
B-39
Outstanding shares of such series subject to such Bids is greater than such
excess, such Bids shall be considered valid up to and including the amount
of such excess, and the number of shares of such series subject to each Bid
with the same rate shall be reduced pro rata to cover the number of shares
of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of such series is submitted to the Auction Agent
with different rates, such Bids shall be considered valid in the ascending
order of their respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of such Outstanding shares of
such series subject to any portion of Bids considered not valid in whole or
in part under this clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at the rate
therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum of shares of such
series subject to valid Hold Orders referred to in clause (i) above and
valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of AMPS is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and number of shares
therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for shares
of a series of AMPS, the Auction Agent shall assemble all valid Orders submitted
or deemed submitted to it by the Broker-Dealers in respect of shares of such
series (each such Order as submitted or deemed submitted by a Broker-Dealer
being hereinafter referred to individually as a 'Submitted Hold Order,' a
'Submitted Bid' or a 'Submitted Sell Order,' as the case may be, or as a
'Submitted Order' and collectively as 'Submitted Hold Orders,' 'Submitted Bids'
or 'Submitted Sell Orders,' as the case may be, or as 'Submitted Orders') and
shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over
the number of Outstanding shares of such series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the 'Available AMPS' of
such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to
Submitted Bids of Potential Holders specifying one or more rates equal to
or lower than the Maximum Rate (for all Dividend Periods) for shares of
such series; exceeds or is equal to the sum of
(B) the number of Outstanding shares of such series subject to
Submitted Bids of Existing Holders specifying one or more rates higher
than the Maximum Rate (for all Dividend Periods) for shares of such
series; and
(C) the number of Outstanding shares of such series subject to
Submitted Sell Orders (in the event such excess or such equality exists
(other than because the number of shares
B-40
of such series in subclauses (B) and (C) above is zero because all of the
Outstanding shares of such series are subject to Submitted Hold Orders),
such Submitted Bids in subclause (A) above being hereinafter referred to
collectively as 'Sufficient Clearing Bids' for shares of such series);
and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the 'Winning Bid Rate' for
shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such
lowest rate and (II) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling such Existing
Holders to continue to hold the shares of such series that are subject to
such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such
lowest rate and (II) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted; would result in such Existing
Holders described in subclause (A) above continuing to hold an aggregate
number of Outstanding shares of such series which, when added to the
number of Outstanding shares of such series to be purchased by such
Potential Holders described in subclause (B) above, would equal not less
than the Available AMPS of such series.
(b) Promptly after the Auction Agent has made the determinations pursuant to
paragraph (a) of this Section 4, the Auction Agent shall advise the Corporation
of the Maximum Rate for shares of the series of AMPS for which an Auction is
being held on the Auction Date and, based on such determination, the Applicable
Rate for shares of such series for the next succeeding Dividend Period thereof
as follows:
(i) if Sufficient Clearing Bids for shares of such series exist, that
the Applicable Rate for all shares of such series for the next succeeding
Dividend Period thereof shall be equal to the Winning Bid Rate for shares of
such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not exist
(other than because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), that the Applicable Rate for all shares of such
series for the next succeeding Dividend Period thereof shall be equal to the
Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of such
series for the next succeeding Dividend Period thereof shall be the All Hold
Rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders shall continue to hold the AMPS that are subject to
Submitted Hold Orders, and, based on the determinations made pursuant to
paragraph (a) of Section 4 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of AMPS have been
made, all Submitted Sell Orders with respect to shares of such series shall
be accepted and, subject to the provisions of paragraphs (d) and (e) of this
Section 5, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids with respect to shares of such series shall be
rejected:
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(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares
of such series shall be accepted, thus requiring each such Existing
Holder to sell the AMPS subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be rejected, thus entitling each such Existing Holder
to continue to hold the AMPS subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be rejected, thus entitling such Existing Holder to
continue to hold the AMPS subject to such Submitted Bid, unless the
number of Outstanding AMPS subject to all such Submitted Bids shall be
greater than the number of AMPS ('remaining shares') in the excess of the
Available AMPS of such series over the number of AMPS subject to
Submitted Bids described in clauses (ii) and (iii) of this paragraph (a),
in which event such Submitted Bid of such Existing Holder shall be
rejected in part, and such Existing Holder shall be entitled to continue
to hold AMPS subject to such Submitted Bid, but only in an amount equal
to the AMPS of such series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall be the
number of Outstanding AMPS held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate number
of Outstanding AMPS subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate for
shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of
such series shall be accepted but only in an amount equal to the number
of shares of such series obtained by multiplying the number of shares in
the excess of the Available AMPS of such series over the number of AMPS
subject to Submitted Bids described in clauses (ii) through (iv) of this
paragraph (a) by a fraction, the numerator of which shall be the number
of Outstanding AMPS subject to such Submitted Bid and the denominator of
which shall be the aggregate number of Outstanding AMPS subject to such
Submitted Bids made by all such Potential Holders that specified a rate
equal to the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of AMPS have not
been made (other than because all of the Outstanding shares of such series
are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 5, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority
and all other Submitted Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the AMPS subject to such Submitted Bids;
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(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of
such series and the Submitted Sell Orders for shares of such series of
each Existing Holder shall be accepted, thus entitling each Existing
Holder that submitted or on whose behalf was submitted any such Submitted
Bid or Submitted Sell Order to sell the shares of such series subject to
such Submitted Bid or Submitted Sell Order, but in both cases only in an
amount equal to the number of shares of such series obtained by
multiplying the number of shares of such series subject to Submitted Bids
described in clause (ii) of this paragraph (b) by a fraction, the
numerator of which shall be the number of Outstanding shares of such
series held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to all such Submitted
Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of AMPS are subject to
Submitted Hold Orders, all Submitted Bids for shares of such series shall be
rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of a
series of AMPS on any Auction Date, the Auction Agent shall, in such manner
as it shall determine in its sole discretion, round up or down the number of
AMPS of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that
the number of shares so purchased or sold by each Existing Holder or
Potential Holder on such Auction Date shall be whole shares of a series of
AMPS.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 5 any Potential Holder would be entitled or
required to purchase less than a whole share of a series of AMPS on any
Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, allocate AMPS of such series for purchase among
Potential Holders so that only whole AMPS of such series are purchased on
such Auction Date as a result of such procedures by any Potential Holder,
even if such allocation results in one or more Potential Holders not
purchasing AMPS of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of AMPS,
the Auction Agent shall determine the aggregate number of shares of such
series to be purchased and the aggregate number of shares of such series to
be sold by Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of shares to be
sold differ, determine to which other Potential Holder(s) or Existing
Holder(s) they shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be, AMPS of such
series. Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of AMPS with respect to whom a
Broker-Dealer submitted a Bid to the Auction Agent for such shares that was
accepted in whole or in part,
B-43
or submitted or is deemed to have submitted a Sell Order for such shares
that was accepted in whole or in part, fails to instruct its Agent Member to
deliver such shares against payment therefor, partial deliveries of AMPS
that have been made in respect of Potential Holders' or Potential Beneficial
Owners' Submitted Bids for shares of such series that have been accepted in
whole or in part shall constitute good delivery to such Potential Holders
and Potential Beneficial Owners.
(g) Neither the Corporation nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect to the
failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver AMPS of
any series or to pay for AMPS of any series sold or purchased pursuant to
the Auction Procedures or otherwise.
6. Transfer of AMPS. Unless otherwise permitted by the Corporation, a
Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of AMPS only in whole shares and only pursuant to a Bid or Sell Order placed
with the Auction Agent in accordance with the procedures described in this
Part II or to a Broker-Dealer; provided, however, that (a) a sale, transfer or
other disposition of AMPS from a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer as the holder of such shares 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 this Section 6 if such
Broker-Dealer remains the Existing Holder of the shares 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 the Corporation) to whom such transfer is made
shall advise the Auction Agent of such transfer.
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B-44
IN WITNESS WHEREOF, COHEN & STEERS QUALITY INCOME REALTY FUND, INC. has
caused these presents to be signed in its name and on its behalf by its Vice
President and witnessed by its Assistant Secretary as of this day of
, 2002.
WITNESS:
By: ...........................................................................
Name: Lawrence B. Stoller
Title: Assistant Secretary
COHEN & STEERS QUALITY
INCOME REALTY FUND, INC.
By: .................................
Name: Adam M. Derechin
Title: Vice President
THE UNDERSIGNED, Vice President of the COHEN & STEERS QUALITY INCOME REALTY
FUND, INC., who executed on behalf of the Corporation the foregoing Articles
Supplementary hereby acknowledges the foregoing Articles Supplementary to be the
corporate act of the Corporation and hereby certifies to the best of his
knowledge, information, and belief that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
.....................................
Name: Adam M. Derechin
Title: Vice President
B-45
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.......................'r'
Characters normally expressed as superscript shall be preceded by..........'pp'
The dagger symbol shall be expressed as....................................'D'