AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 2003
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-21326
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[ ] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] AMENDMENT NO. 7
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COHEN & STEERS
REIT AND PREFERRED INCOME FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
-------------------
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 832-3232
ROBERT H. STEERS
COHEN & STEERS CAPITAL MANAGEMENT, INC.
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(212) 832-3232
(NAME AND ADDRESS OF AGENT FOR SERVICE)
-------------------
WITH COPIES TO:
SARAH E. COGAN, ESQ.
SIMPSON THACHER & BARTLETT LLP
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
Series [ ] Preferred Shares, par value $.001.... 40 $25,000 $1,000,000 $80.90
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
CROSS REFERENCE SHEET
PART A -- PROSPECTUS
ITEM IN PART A OF FORM N-2
SPECIFIED IN PROSPECTUS LOCATION IN PROSPECTUS
----------------------- ----------------------
Item 1. Outside Front Cover.................................. Cover Page
Item 2. Inside Front and Outside Back Cover Page............. Cover Page; Inside Front Cover
Page; Outside Back Cover Page
Item 3. Fee Table and Synopsis............................... Inapplicable
Item 4. Financial Highlights................................. Financial Highlights
Item 5. Plan of Distribution................................. Cover Page; Prospectus Summary;
Underwriting
Item 6. Selling Shareholders................................. Inapplicable
Item 7. Use of Proceeds...................................... Use of Proceeds; Investment
Objectives and Policies
Item 8. General Description of the Registrant................ Cover Page; Prospectus Summary;
The Fund; Investment Objectives
and Policies; Risk Factors; How
the Fund Manages Risk
Item 9. Management........................................... Prospectus Summary; Management of
the Fund; How the Fund Manages
Risk
Item 10. Capital Stock, Long-Term Debt, and Other
Securities......................................... Capitalization; Investment
Objectives and Policies; U.S.
Federal Taxation; Description of
Preferred Shares; Description of
Common Shares
Item 11. Defaults and Arrears on Senior Securities............ Inapplicable
Item 12. Legal Proceedings.................................... Inapplicable
Item 13. Table of Contents of the Statement of Additional
Information........................................ Table of Contents of the Statement
of Additional Information
PART B -- STATEMENT OF ADDITIONAL INFORMATION
LOCATION IN STATEMENT
ITEMS IN PART B OF FORM N-2 OF ADDITIONAL INFORMATION
--------------------------- -------------------------
Item 14. Cover Page........................................... Cover Page
Item 15. Table of Contents.................................... Table of Contents
Item 16. General Information and History...................... General Information
Item 17. Investment Objectives and Policies................... Additional Information about Fund
Investment Objectives and
Policies; Investment
Restrictions
Item 18. Management........................................... Management of the Fund;
Compensation of Directors
Item 19. Control Persons and Principal Holders of
Securities......................................... Management of the Fund
Item 20. Investment Advisory and Other Services............... Investment Advisory and Other
Services
Item 21. Brokerage Allocation and Other Practices............. Portfolio Transactions and
Brokerage; Determination of Net
Asset Value
Item 22. Tax Status........................................... U.S. Federal Taxation
Item 23. Financial Information................................ Report of Independent Accountants;
Financial Information
PART C -- OTHER INFORMATION
Item 24-33. have been answered in Part C of this Registration
Statement
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED [ ], 2003
PROSPECTUS [COHEN & STEERS
REIT AND PREFERRED INCOME FUND LOGO]
$
COHEN & STEERS
REIT AND PREFERRED INCOME FUND, INC.
AUCTION MARKET PREFERRED SHARES
[ ] SHARES, SERIES [ ]
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') is offering
[ ] Series [ ] Auction Market Preferred Shares. The shares are
referred to in this prospectus as 'Preferred Shares.' The Fund is a
non-diversified, closed-end management investment company. Our primary
investment objective is high current income and our secondary investment
objective is capital appreciation.
(continued on following page)
INVESTING IN THE PREFERRED SHARES INVOLVES CERTAIN RISKS. SEE 'RISK FACTORS'
BEGINNING ON PAGE 35 OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF THE
PREFERRED SHARES IS $25,000.
-----------------
PER SHARE TOTAL
--------- -----
Public offering price....................................... $25,000 $
Sales load.................................................. $ $
Proceeds to the Fund(1)..................................... $ $
(1) Not including offering expenses payable by the Fund estimated to be
$ .
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares 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 Preferred Shares subject to various
conditions. The Preferred Shares will be ready for delivery in book-entry form
only through the facilities of The Depository Trust Company, on or about
[ ], 2003.
-----------------
The date of this prospectus is [ ], 2003.
Under normal market conditions, the Fund will invest:
at least 40%, but no more than 60%, of its total assets in common stocks
issued by real estate companies, such as real estate investment trusts or
'REITs';
at least 40%, but no more than 60%, of its total assets in preferred
securities of which up to 5% may be preferred securities of REITs;
up to 20% of its total assets in debt securities other than preferred
securities;
up to 10% of its total assets in preferred or other debt securities that at
the time of the investment are rated below investment grade or that are
unrated but judged to be of comparable quality by the Fund's Investment
Manager;
a significant portion, but less than 25%, of its total assets in the
securities of companies principally engaged in the financial services
industry. This policy of investing in the financial services industry and
the Fund's concentration of its investments in the real estate industry make
the Fund more susceptible to adverse economic or regulatory occurrences
affecting these sectors; and
up to 20% of its total assets in U.S. dollar-denominated securities of
foreign issuers traded or listed on a U.S. securities exchange or in the
U.S. over-the-counter market.
With respect to the preferred securities component of the portfolio, the Fund
expects that it will invest primarily in taxable preferred securities.
There can be no assurance that the Fund will achieve its investment
objectives. See 'Investment Objectives and Policies.' The Fund's investment
manager is Cohen & Steers Capital Management, Inc.
Investors in Preferred Shares will be entitled to receive cash dividends at
an annual rate that may vary for the successive dividend periods for the
Preferred Shares. The Preferred Shares have a liquidation preference of $25,000
per share, plus any accumulated, unpaid dividends. As of [ ], 2003 the
Fund had outstanding 24,800 shares of eight other series of preferred stock:
3,280 Series M7 AMPS, par value $.001 per share (the 'Series M7 AMPS'), 3,280
Series T7 AMPS, par value $.001 per share (the 'Series T7 AMPS'), 3,280
Series W7 AMPS, par value $.001 per share (the 'Series W7 AMPS'), 3,280
Series TH7 AMPS, par value $.001 per share (the 'Series TH7 AMPS'), 3,280
Series F7 AMPS, par value $.001 per share (the 'Series F7 AMPS'), 2,800
Series W28A AMPS, par value $.001 per share (the 'Series W28A AMPS'), 2,800
Series W28B AMPS, par value $.001 per share (the 'Series W28B AMPS') and 2,800
Series W28C AMPS, par value $.001 per share (the 'Series W28C AMPS'). The
Preferred Shares offered in this Prospectus rank on a parity with the Series M7
AMPS, Series T7 AMPS, Series W7 AMPS, Series TH7 AMPS, Series F7 AMPS,
Series W28A AMPS, Series W28B AMPS and Series W28C AMPS with respect to
dividends and liquidation preference. The Preferred Shares have priority over
the Fund's common shares as to dividends and distribution of assets as described
in this Prospectus. See 'Description of Preferred Shares.' The dividend rate for
the initial dividend period will be [ ]%. The initial dividend period is from
the date of issuance through [ ]. For subsequent dividend periods, the
Preferred Shares will pay dividends based on a rate set at auction, usually held
every [ ] days. Prospective purchasers should note: (1) a buy order (called a
'bid order') or sell order is a commitment to buy or sell Preferred Shares 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 Preferred
Shares 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 Preferred Shares, and a secondary
market may not provide you with liquidity. The Fund may redeem Preferred Shares
as described under 'Description of Preferred Shares -- Redemption.'
The Preferred Shares do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
The Preferred Shares will be senior to the Fund's outstanding common shares.
Preferred Shares are not listed on an exchange. The Fund's common shares are
traded on the New York Stock Exchange (the 'NYSE') under the symbol 'RNP.' It is
a condition of closing this offering that the Preferred Shares be offered with a
rating of 'AAA' from Standard & Poor's Ratings Services Group, a division of The
McGraw-Hill Companies, Inc. ('S&P') and of 'Aaa' from Moody's Investors Service,
Inc. ('Moody's').
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 4
Financial Highlights........................................ 21
The Fund.................................................... 22
Use of Proceeds............................................. 22
Capitalization.............................................. 23
Investment Objectives and Policies.......................... 24
Use of Leverage............................................. 33
Risk Factors................................................ 35
How the Fund Manages Risk................................... 46
Management of the Fund...................................... 47
Description of Preferred Shares............................. 50
The Auction................................................. 59
Description of Common Shares................................ 63
Certain Provisions of the Charter and By-Laws............... 63
Conversion to Open-End Fund................................. 65
Repurchase of Common Shares................................. 65
U.S. Federal Taxation....................................... 66
Underwriting................................................ 69
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 71
Legal Opinions.............................................. 71
Independent Accountants..................................... 71
Further Information......................................... 71
Table of Contents for the Statement of Additional
Information............................................... 72
-------------------
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 [ ], CONTAINING ADDITIONAL INFORMATION ABOUT THE
FUND, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. YOU CAN REVIEW THE TABLE OF
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ON PAGE [ ] OF THIS
PROSPECTUS. YOU MAY REQUEST A FREE COPY OF THE STATEMENT OF ADDITIONAL
INFORMATION BY CALLING (800) 437-9912. YOU MAY ALSO OBTAIN THE STATEMENT OF
ADDITIONAL INFORMATION AND OTHER INFORMATION REGARDING THE FUND ON THE
SECURITIES AND EXCHANGE COMMISSION'S WEB SITE (HTTP://WWW.SEC.GOV).
THROUGH AND INCLUDING [ ], 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 Preferred Shares. 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 REIT and Preferred Income Fund,
Inc. (the 'Fund') is a non-diversified, closed-end
management investment company. The Fund was organized
as a Maryland corporation on March 25, 2003 and is
registered under the Investment Company Act of 1940,
as amended (the '1940 Act'). The Fund commenced
investment operations on June 27, 2003 upon the
closing of an initial public offering of 42,750,000
common shares, par value $.001 per share ('Common
Shares'). The Fund issued 3,280 Series M7 AMPS, 3,280
Series T7 AMPS, 3,280 Series W7 AMPS, 3,280
Series TH7 AMPS, 3,280 Series F7 AMPS, 2,800
Series W28A AMPS, 2,800 Series W28B AMPS and 2,800
Series W28C AMPS on August 18, 2003. As of
[ ], the Fund had [ ] Common Shares
outstanding and net assets, plus the liquidation
value of the Series M7 AMPS, Series T7 AMPS,
Series W7 AMPS, Series TH7 AMPS, Series F7 AMPS,
Series W28A AMPS, Series W28B AMPS and Series W28C
AMPS, of $[ ]. 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................................. The Fund is offering [ ] Series [ ] Preferred
Shares, par value $.001 per share, at a purchase
price of $25,000 per share plus dividends, if any,
that have accumulated from the date the Fund first
issues the Preferred Shares. The Preferred Shares are
offered through a group of underwriters led by
[ ].
The Preferred Shares entitle their holders to receive
cash dividends at an annual rate that may vary for
the successive dividend periods for the Preferred
Shares. In general, except as described under
' -- Dividends and Dividend Periods' below and
'Description of Preferred Shares -- Dividends and
Dividend Periods,' the dividend period for the
Preferred Shares will be [ ] days. The auction agent
will determine the dividend rate for a particular
period by an auction conducted on the
4
business day immediately prior to the start of that
rate period. See 'The Auction.'
The Preferred Shares are not listed on an exchange.
Instead, investors may buy or sell Preferred Shares
in an auction by submitting orders to broker-dealers
that have entered into an agreement with the auction
agent and the Fund.
Generally, investors in Preferred Shares will not
receive certificates representing ownership of their
shares. The securities depository (The Depository
Trust Company ('DTC') or any successor) or its
nominee for the account of the investor's
broker-dealer will maintain record ownership of
Preferred Shares in book-entry form. An investor's
broker-dealer, in turn, will maintain records of that
investor's beneficial ownership of Preferred Shares.
RATINGS...................................... The Fund will issue Preferred Shares only if such
shares have received a credit quality rating of 'AAA'
from S&P and 'Aaa' from 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 ratings described above also
do not address the likelihood that an owner of
Preferred Shares 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 in the rating
agencies' discretion as a result of changes in, or
the unavailability of, such information. See
'Description of Preferred Shares -- Rating Agency
Guidelines.'
USE OF PROCEEDS.............................. The net proceeds of Preferred Shares, together with
the proceeds from our initial public offering, will
be invested in accordance with the policies set forth
under 'Investment Objectives and Policies.' The Fund
estimates that the net proceeds of this offering will
be fully invested in accordance with our investment
objectives and policies within four months of the
completion of this offering. The Fund intends to
invest in income producing
5
common stocks issued by real estate companies, such
as REITs, and preferred and other debt securities.
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. Capital appreciation is our secondary
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, the Fund seeks to
achieve its objectives through a portfolio of income
producing common stock issued by REITs and preferred
and other debt securities. The Fund currently invests
approximately [ ]% of its total assets in common
stocks issued by REITs, approximately [ ]% in
preferred securities and approximately [ ]% in debt
securities other than preferred securities. These
percentages may vary from time to time consistent
with the Fund's investment objectives, although the
Fund will normally invest at least 40% of its total
assets in common stock issued by real estate
companies, including REITs and at least 40% of its
total assets in preferred securities. At any time,
under normal circumstances at least 80% of the Fund's
total assets will be invested in common stocks issued
by REITs and preferred securities.
Investment Strategies. In making investment decisions
with respect to common stocks and other equity
securities issued by real estate companies, including
REITs, 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, and economic and market
conditions. The Investment Manager evaluates a number
of factors, including growth potential, earnings
estimates and the quality of management.
In making investment decisions with respect to
preferred securities and debt securities, the
Investment Manager seeks to select what it believes
are superior securities (i.e., securities the
Investment Manager views as
6
undervalued on the basis of risk and return
profiles). In making these determinations, the
Investment Manager evaluates the fundamental
characteristics of an issuer, including an issuer's
creditworthiness, and also takes into account
prevailing market factors. In analyzing credit
quality, the Investment Manager considers not only
fundamental analysis, but also an issuer's corporate
and capital structure and the placement of the
preferred or debt securities within that structure.
The Investment Manager also takes into account other
factors, such as call and other structural features,
momentum and other exogenous signals (i.e., the
likely directions of ratings) and relative value
versus other income security classes.
Common Stocks Issued by REITs. Under normal market
conditions, at least 40%, but no more than 60%, of
the Fund's total assets will be invested in common
stocks issued by real estate companies, consisting
primarily of REITs. Substantially all of the common
stocks issued by REITs in which the Fund intends to
invest are traded on a national securities exchange
or in the over-the-counter market. A real estate
company 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
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 taxable income (other than net capital
gains) and otherwise comply with the requirements of
the Internal Revenue Code of 1986, as amended (the
'Code'). As a result, REITs generally pay relatively
higher 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. It is the Fund's current intention to
invest approximately 50% of its total assets in
common stocks of real estate companies, consisting
primarily of REITs, although the actual percentage in
its portfolio may change.
Preferred Securities. Under normal market conditions,
at least 40%, but no more than 60%, of the Fund's
total assets will be invested in preferred
securities. Preferred securities pay fixed or
floating dividends to investors and have 'preference'
over common stock in the payment of
7
dividends and the liquidation of a company's assets.
This means that a company must pay dividends on
preferred stock before paying dividends on its common
stock. Preferred stockholders usually have no right
to vote for corporate directors or on other matters.
The Fund expects that, under current market
conditions, it will invest primarily in taxable
preferred securities. The taxable preferred
securities in which the Fund intends to invest do not
qualify for the dividends received deduction (the
'DRD') under Section 243 of the Code and are not
expected to provide significant benefits under the
rules relating to 'qualified dividend income.' The
DRD generally allows corporations to deduct from
their income 70% of dividends received. Pursuant to
recently enacted legislation, individuals will
generally be taxed at long-term capital gain rates on
qualified dividend income. Accordingly, any corporate
shareholder who otherwise would qualify for the DRD,
and any individual shareholder who otherwise would
qualify to be taxed at long-term capital gain rates
on qualified dividend income, should assume that none
of the distributions it receives from the Fund will
qualify for the DRD or provide significant benefits
under the rules relating to qualified dividend
income. The Fund may also invest up to 5% of its
total assets in preferred securities issued by REITs.
Under current market conditions, the Fund's
investments in preferred securities are expected to
consist primarily of fixed rate preferred securities.
When used in this prospectus, taxable preferred
securities refer generally to hybrid-preferred
securities as well as certain types of traditional
preferred securities that are not eligible for the
DRD (and are not expected to provide significant
benefits under the rules relating to qualified
dividend income), such as REIT preferred securities.
The Fund also may invest up to 10% of its total
assets in preferred or other debt securities that at
the time of investment are rated below investment
grade (Ba/BB or B) by Moody's, S&P or Fitch Ratings
('Fitch') or that are unrated but judged to be of
comparable quality by the Fund's Investment Manager.
A security will not be considered to be below
investment grade quality if it is rated within the
four highest grades (Baa or BBB or better) by
Moody's, S&P or Fitch, or is unrated but
8
judged to be of comparable quality by the Fund's
Investment Manager. These below investment grade
quality securities are commonly referred to as 'junk
bonds' and are regarded as having predominantly
speculative characteristics with respect to the
payment of interest and repayment of principal.
While the Fund does not currently intend to invest in
illiquid securities (i.e., securities that are not
readily marketable), it may invest up to 10% of its
total assets in illiquid securities.
The Fund may invest up to 20% of its total assets in
debt securities, including convertible debt
securities and convertible preferred securities.
Common stock acquired pursuant to a conversion
feature will be subject to this 20% limitation.
The Fund will invest a significant portion, but less
than 25%, of its total assets in the securities of
companies principally engaged in the financial
services industry (which are prominent issuers of
preferred securities). In addition, under normal
market conditions the Fund will invest at least 40%
of its total assets in common stock issued by real
estate companies, consisting primarily of REITs. This
policy of investing in the financial services
industry and the Fund's concentration of its
investments in the real estate industry make the Fund
more susceptible to adverse economic or regulatory
occurrences affecting these sectors.
The Fund also may invest up to 20% of its total
assets in U.S. dollar-denominated securities of
foreign issuers traded or listed on a U.S. securities
exchange or the U.S. over-the-counter market.
The Fund will generally not invest more than 10% of
its total assets in the securities of one issuer. The
Fund may engage in portfolio trading when considered
appropriate, but short-term trading will not be used
as the primary means of achieving the Fund's
investment objectives.
There are no limits on portfolio turnover, and
investments may be sold without regard to length of
time held when, in the opinion of the Investment
Manager, investment considerations warrant such
action. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and
other
9
transactional expenses that are borne by the Fund.
High portfolio turnover may result in the realization
of net short-term capital gains by the Fund which,
when distributed to shareholders, will be taxable as
ordinary income.
Although not intended to be a significant element in
the Fund's investment strategy, from time to time the
Fund may use various other investment management
techniques that also involve certain risks and
special considerations including: engaging in
interest rate and credit derivatives transactions and
using options and financial futures.
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 was formed in 1986, and as of
[ ] had approximately $[ ] billion in
assets under management, including approximately
$[ ] billion in REIT and corporate preferred
securities. Its clients include pension plans,
endowment funds and mutual funds, including some of
the largest open-end and closed-end real estate
funds. 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.'
USE OF LEVERAGE.............................. The Fund may, but is not required to, use financial
leverage for investment purposes. In addition to
issuing Preferred Shares, the Fund may borrow money
or issue debt securities such as commercial paper or
notes. Any
10
such borrowings will have seniority over Preferred
Shares, and payments to holders of Preferred Shares
in liquidation or otherwise will be subject to the
prior payment of any borrowings. Since the Investment
Manager's fee is based upon a percentage of the
Fund's managed assets, which include assets
attributable to any outstanding leverage, the
investment management fee will be higher if the Fund
is leveraged and the Investment Manager will have an
incentive to be more aggressive and leverage the
Fund. See 'Use of Leverage.'
PRINCIPAL INVESTMENT RISKS................... Risk is inherent in all investing. Therefore, before
investing in Preferred Shares and the Fund you should
consider certain risks carefully. The primary risks
of investing in Preferred Shares are:
the Fund will not be permitted to declare dividends
or other distributions with respect to your Preferred
Shares or redeem your Preferred Shares unless the
Fund meets certain asset coverage requirements;
if you try to sell your Preferred Shares 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, changes in interest rates could
affect the price you would receive if you sold your
shares in the secondary market. You may transfer
your 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;
if an auction fails, you may not be able to sell some
or all of your Preferred Shares;
you may receive less than the price you paid for your
Preferred Shares 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 Preferred Shares, which could affect
liquidity;
the Fund may be forced to redeem your Preferred
Shares to meet regulatory or rating agency
11
requirements or may voluntarily redeem your shares
in certain circumstances;
restrictions imposed by the 1940 Act and by rating
agencies on the declaration and payment of dividends
to the holders of the Fund's Common Shares and
Preferred Shares might impair the Fund's ability to
maintain its qualification as a regulated investment
company for federal income tax purposes;
in certain circumstances the Fund may not earn
sufficient income from its investments to pay
dividends on Preferred Shares;
the Preferred Shares will be junior to any
borrowings;
any borrowings may constitute a substantial lien and
burden on the Preferred Shares by reason of its
priority claim against the income of the Fund and
against the net assets of the Fund in liquidation;
if the Fund leverages through borrowings, the Fund
may not be permitted to declare dividends or other
distributions with respect to the Preferred Shares
or purchase Preferred Shares unless at the time
thereof the Fund meets certain asset coverage
requirements and the payments of principal and of
interest on any such borrowings are not in default;
the value of the Fund's investment portfolio may
decline, reducing the asset coverage for the
Preferred Shares; and
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 Preferred
Shares is conditioned upon receipt of ratings of
'AAA' from S&P and 'Aaa' from Moody's for the
Preferred Shares, there are additional risks related
to the investment policies of the Fund, such as:
Real Estate Risks. Since at least 40% of the Fund's
total assets normally will be concentrated in common
stock of real estate companies, consisting primarily
of REITs,
12
your investment in the Fund will be significantly
impacted by 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.
Preferred Securities Risks. There are also special
risks associated with investing in preferred
securities. Preferred securities are more sensitive
to changes in interest rates than common stocks. When
interest rates rise, the value of preferred stocks
may fall. Other risks include deferral or omission of
distributions, greater credit risk than more senior
debt securities, less liquidity than common stocks,
limited voting rights and special redemption rights.
Financial Services Risks. The Fund intends to invest
a significant portion, but less than 25%, of its
total assets in the securities of companies
principally engaged in financial services, which are
prominent issuers of preferred securities. Because
the Fund may invest such amounts in this sector, the
Fund may be more susceptible to adverse economic or
regulatory occurrences affecting that sector.
Foreign Securities Risks. Under normal market
conditions, the Fund may invest up to 20% of its
total assets in U.S. dollar-denominated securities of
foreign issuers traded or listed on a U.S. securities
exchange or in the U.S. over-the-counter market. Such
investments involve certain risks not involved in
domestic investments, including the risk of blockage
of foreign currency exchanges by foreign countries,
less rigorous disclosure or accounting standards and
regulatory practices and adverse political and
economic developments.
13
Interest Rate Risks. Interest rate risk is the risk
that fixed-income securities such as preferred and
debt securities, and to a lesser extent
dividend-paying common stocks such as REIT common
shares, will decline in value because of changes in
market interest rates. When market interest rates
rise, the market value of such securities generally
will fall. The Fund's investment in such securities
means that the net asset value and market price of
the common shares may tend to decline if market
interest rates rise.
During periods of declining interest rates, an issuer
may be able to exercise an option to prepay principal
earlier than scheduled, which is generally known as
call or prepayment risk. If this occurs, the Fund may
be forced to reinvest in lower yielding securities.
This is known as reinvestment risk. Preferred and
debt securities frequently have call features that
allow the issuer to repurchase the securities prior
to its stated maturity. An issuer may redeem an
obligation if the issuer can refinance the debt at a
lower cost due to declining interest rates or an
improvement in the credit standing of the issuer.
During periods of rising interest rates, the average
life of certain types of securities may be extended
because of slower than expected principal payments.
This may lock in a below market interest rate,
increase the security's duration and reduce the value
of the security. This is known as extension risk.
Market interest rates for investment grade
fixed-income securities in which the Fund will invest
have recently declined significantly below the recent
historical average rates for such securities. This
decline may have increased the risk that these rates
will rise in the future (which would cause the value
of the Fund's net assets to decline) and the degree
to which asset values may decline in such events;
however, historical interest rate levels are not
necessarily predictive of future interest rate
levels. See 'Risk Factors -- Interest Rate Risk.'
Credit Risk and Lower-Rated Securities Risk. Credit
risk is the risk that a security in the Fund's
portfolio will decline in price or the issuer will
fail to make dividend, interest or principal payments
when due because the issuer of the security
experiences a decline in its financial status.
Preferred securities normally are subordinated to
14
bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate
income and claim to corporate assets, and therefore
will be subject to greater credit risk than debt
instruments. The Fund may invest up to 10% (measured
at the time of investment) of its total assets in
preferred securities and other debt securities that
are rated below investment grade. Preferred stock or
debt securities will be considered to be investment
grade if, at the time of the 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 or,
if unrated, such security is determined by the
Investment Manager to be of comparable quality.
Lower-rated preferred stock or other 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 securities to repay principal
and interest on those securities.
Anti-Takeover Provisions. Certain provisions of the
Fund's Articles of Incorporation and By-Laws could
have the effect of limiting the ability of other
entities or persons to acquire control of the Fund or
to modify the Fund's structure. The provisions may
have the effect of depriving you of an opportunity to
redeem your shares and may have the effect of
inhibiting conversion of the Fund to an open-end
investment company. See 'Certain Provisions of the
Articles of Incorporation and By-Laws' and 'Risk
Factors -- Anti-Takeover Provisions.'
Market Disruption Risk. The terrorist attacks in the
U.S. on September 11, 2001 had a disruptive effect on
the securities markets. The war in Iraq and
instability in the Middle East also has resulted in
recent market volatility and may have long-term
effects on the U.S. and worldwide financial markets
and may cause further economic uncertainties in the
U.S. and worldwide. The
15
Fund does not know how long the securities markets
will continue to be affected by these events and
cannot predict the effects of the war or similar
events in the future on the U.S. economy and
securities markets.
For further discussion of the risks associated with
investing in the Preferred Shares and the Fund, see
'Risk Factors.'
DIVIDENDS AND RATE PERIODS................... The table below shows the dividend rate, the dividend
payment date and the number of days for the initial
rate period of the Preferred Shares offered in this
Prospectus. For subsequent rate periods, the
Preferred Shares will pay dividends based on a rate
set at auctions normally held every [ ] days. 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 Preferred Shares will be
cumulative from the date the Preferred 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 [ ]........
The Fund may, subject to certain conditions,
designate special rate periods of more than [ ]
days.
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 Preferred Shares
and the lead Broker-Dealer designated by the Fund,
initially [ ], must not have objected to
declaration of a special rate period.
16
See 'Description of Preferred Shares -- 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 Preferred
Shares 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, the
Fund 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 Preferred Shares or
any variable rate borrowing. The payment obligations
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 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 Preferred
Shares. 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
17
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 Preferred
Shares. If the Fund fails to maintain the required
asset coverage on the outstanding Preferred Shares 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. The Fund would not
enter into interest rate swap or cap transactions
having a notional amount that exceeded the
outstanding amount of the Preferred Shares. See 'How
the Fund Manages Risk -- Interest Rate Transactions'
for additional information.
ASSET MAINTENANCE............................ Under the Fund's Articles Supplementary for Preferred
Shares, which establishes and fixes the rights and
preferences of the shares of each series of Preferred
Shares, the Fund must maintain:
asset coverage of the Preferred Shares as required by
the rating agency or agencies rating the Preferred
Shares; and
asset coverage of at least 200% with respect to
senior securities that are stock, including the
Preferred Shares.
In the event that the Fund does not maintain or cure
these coverage tests, some or all of the Preferred
Shares will be subject to mandatory redemption. See
'Description of Preferred Shares -- Redemption.'
Based on the composition of the Fund's portfolio as
of [ ], 2003, the asset coverage of the
Preferred Shares and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS, as measured
pursuant to the 1940 Act, would be approximately
[ ]% if the Fund were to issue all of the Preferred
Shares offered in this prospectus, representing
approximately 35% of the Fund's managed assets (as
defined below).
REDEMPTION................................... The Fund does not expect to and ordinarily will not
redeem Preferred Shares. However, under the Articles
18
Supplementary, it may be required to redeem Preferred
Shares 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 Preferred Shares without
the consent of holders of the Preferred Shares under
certain conditions. See 'Description of Preferred
Shares -- Redemption.'
LIQUIDATION PREFERENCE....................... The liquidation preference (that is, the amount the
Fund must pay to holders of Preferred Shares if the
Fund is liquidated) for Preferred Shares 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 Preferred
Shares, 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 the Preferred Shares,
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 Preferred Shares, 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 share of the Preferred Shares, 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 Preferred Shares
(other than distributions in redemption of Preferred
Shares 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, except in the case of
distributions of qualified
19
dividend income and net capital gains, be taxable as
ordinary income to holders. 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 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, dividends qualifying for the
DRD and dividends derived from qualified dividend
income, if any, among its Common Shares, the
Preferred Shares and the Series M7, Series T7,
Series W7 , Series TH7, Series F7, Series W28A,
Series W28B and Series W28C 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
Preferred Shares.
20
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 June 27, 2003 through [ ], 2003.
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 [ ], 2003. It should be read in conjunction with
the Unaudited Financial Statements and notes thereto.
FOR THE PERIOD
JUNE 27, 2003(1)
THROUGH
[ ], 2003
---------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $
--------
Income from investment operations:
Net investment income...................................
Net unrealized gain on investments......................
--------
Total income from investment operations.............
--------
Less: Offering costs charged to paid-in capital.............
--------
Net decrease in net asset value.............................
--------
Net asset value, end of period.............................. $
--------
--------
Market value, end of period................................. $
--------
--------
Net asset value total return(2)............................. %(3)
--------
--------
Market value return(2)...................................... %(3)
--------
--------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (In millions)..................... $
--------
--------
Ratio of expenses to average daily net assets............... %(4)
--------
--------
Ratio of net investment income to average daily net
assets.................................................... %(4)
--------
--------
Portfolio turnover rate..................................... %(3)
--------
--------
---------
(1) Commencement of investment operations.
(2) Total market value return is computed based upon the New York Stock Exchange
market price of the fund's shares and excludes the effects of brokerage
commissions. Dividends and distributions, if any, are assumed for purposes
of this calculation, to be reinvested at prices obtained under the fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends as
reinvested.
(3) Not annualized.
(4) Annualized.
See accompanying notes to unaudited financial statements.
21
THE FUND
The Fund is a non-diversified, closed-end management investment company. The
Fund was organized as a Maryland corporation on March 25, 2003 and is registered
as an investment company with the Securities and Exchange Commission under the
1940 Act. The Fund issued an aggregate of 42,750,000 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 June 27,
2003. On July 16, 2003 and August 5, 2003, the Fund issued 2,500,000 and
2,940,000 additional Common Shares, respectively, in connection with a partial
exercise by the underwriters of the overallotment option. On August 18, 2003,
the Fund issued 3,280 Series M7 AMPS, 3,280 Series T7 AMPS, 3,280 Series W7
AMPS, 3,280 Series TH7 AMPS, 3,280 Series F7 AMPS, 2,800 Series W28A AMPS, 2,800
Series W28B AMPS and 2,800 Series W28C AMPS. The Fund's Common Shares are traded
on the NYSE under the symbol 'RNP.' 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
[ ], 2003:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common......................................... [ ] 0 [ ]
Preferred Shares
Series [ ]................................ [ ] 0 [ ]
Series M7.................................. 3,280 0 3,280
Series T7.................................. 3,280 0 3,280
Series W7.................................. 3,280 0 3,280
Series TH7................................. 3,280 0 3,280
Series F7.................................. 3,280 0 3,280
Series W28A................................ 2,800 0 2,800
Series W28B................................ 2,800 0 2,800
Series W28C................................ 2,800 0 2,800
USE OF PROCEEDS
The Fund estimates the net proceeds of this offering of Preferred Shares,
after payment of the sales load and offering expenses, will be $[ ]. The
net proceeds of this offering will be invested in accordance with the policies
set forth under 'Investment Objectives and Policies.' The Fund estimates that
the net proceeds of this offering 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.'
22
CAPITALIZATION (UNAUDITED)
The following table sets forth the unaudited capitalization of the Fund as
of [ ], 2003, and as adjusted to give effect to the issuance of the
Preferred Shares offered in this prospectus.
AS OF [ ], 2003
-------------------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
AS OF [ ], 2003:
Preferred Shares, $.001 par value, $25,000 liquidation
value; [ ] shares authorized (3,280
Series M7 AMPS, 3,280 Series T7 AMPS, 3,280
Series W7 AMPS, 3,280 Series TH7 AMPS, 3,280
Series F7 AMPS, 2,800 Series W28A AMPS, 2,800
Series W28B AMPS, 2,800 Series W28C AMPS and [ ]
Series [ ] Preferred Shares issued, as
adjusted, respectively)............................. $ $
-------------- --------------
Shareholders' Equity Applicable to Common Shares
Common Shares, $.001 par value per share;
[ ] shares authorized, [ ] shares
outstanding..................................... [ ] [ ]
Paid-in surplus...................................
Balance of undistributed net investment income....
Accumulated net realized gain (loss) from
investment transactions.........................
Net unrealized appreciation (depreciation)........
-------------- --------------
Net assets applicable to Common Shareholders......
-------------- --------------
Net assets, plus liquidation preference of Preferred
Shares.............................................. $ $
-------------- --------------
-------------- --------------
As used in this prospectus, unless otherwise noted, the Fund's 'managed
assets' include assets of the Fund attributable to any outstanding Preferred
Shares, with no deduction for the liquidation preference of such shares. For
financial reporting purposes, however, the Fund is required to deduct the
liquidation preference of its outstanding Preferred Shares from 'managed assets'
so long as the Preferred Shares have redemption features that are not solely
within the control of the Fund. In connection with the rating of the Preferred
Shares, the Fund has established various portfolio covenants to meet third-party
rating agency guidelines in its Articles of Incorporation. These covenants
include, among other things, investment diversification requirements and
requirements that investments included in the Fund's portfolio meet specific
industry and credit quality criteria. Market factors outside the Fund's control
may affect its ability to meet the criteria of third-party rating agencies set
forth in the Fund's portfolio covenants. If the Fund violates these covenants,
it may be required to cure the violation by redeeming all or a portion of the
Preferred Shares. For all regulatory purposes, the Fund's Preferred Shares will
be treated as stock (rather than indebtedness).
23
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Fund's primary investment objective is to seek high current income.
Capital appreciation is our secondary objective. The Fund is not intended as a
complete investment program. There can be no assurance that the Fund will
achieve its investment objectives.
Under normal market conditions, the Fund will invest:
at least 40%, but no more than 60%, of its total assets in common stocks
issued by real estate companies such as REITs. A real estate company
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
usually operating, income producing real estate, or to financing real
estate;
at least 40%, but no more than 60%, of its total assets in preferred
securities; up to 5% of the Fund's total assets may be invested in
preferred securities issued by REITs;
up to 10% of its total assets in preferred or other securities that at the
time of investment are rated below investment grade (Ba/BB or B by Moody's,
S&P or Fitch) or that are unrated but judged to be of comparable quality by
the Fund's Investment Manager;
up to 20% of its total assets in debt securities, including convertible
debt securities and convertible preferred securities;
a significant portion, but less than 25%, of its total assets in the
securities of companies principally engaged in the financial services
industry (which are prominent issuers of preferred securities); and
up to 20% of its total assets in U.S. dollar-denominated securities of
foreign issuers traded or listed on a U.S. securities exchange or the U.S.
over-the-counter market.
The policy referred to above of investing in the financial services industry
and the Fund's concentration of its investments in the real estate industry make
the Fund more susceptible to adverse economic or regulatory occurrences
affecting these sectors. See 'Risk Factors -- General Risks of Investing in the
Fund -- General Risks of Securities Linked to the Real Estate Market' and 'Risk
Factors -- General Risks of Securities Linked to the Financial Services
Industry.'
Although the Fund does not currently intend to invest in illiquid securities
(i.e., securities that are not readily marketable), it may invest up to 10% of
its total assets in illiquid securities. Similarly, although the Fund does not
intend to invest in convertible securities, it may invest up to 20% of its total
assets in securities convertible into common or preferred securities where the
conversion feature represents, in the Investment Manager's view, a significant
element of the securities' value. Common stock acquired pursuant to a conversion
feature will be subject to this 20% limitation.
Under normal conditions, the Fund intends to invest in income producing
common stock issued by real estate companies, consisting primarily of REITs, and
preferred and other debt securities. Substantially all of the common stocks
issued by REITs in which the Fund intends to invest are traded on a national
securities exchange or in the over-the-counter market. 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
24
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. With respect to the
preferred securities component of the portfolio, under current market conditions
the Fund expects that it will invest primarily in taxable preferred securities.
Under current market conditions, the Fund's portfolio of preferred securities is
expected to consist primarily of fixed rate preferred securities.
A security will be considered investment grade quality if it is rated 'BBB'
or higher by S&P, 'Baa' or higher by Moody's or an equivalent rating by a
nationally recognized statistical rating agency, or is unrated but judged to be
of comparable quality by the Investment Manager. Bonds of below investment grade
quality (BB/Ba or below) are commonly referred to as 'junk bonds.' Securities of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal. The Fund's credit quality policies apply only at the time a security
is purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular
issue. In determining whether to retain or sell a security that a rating agency
has downgraded, the Investment Manager may consider such factors as its
assessment of the credit quality of the issuer of the security, the price at
which the security could be sold and the rating, if any, assigned to the
security by other rating agencies. Appendix A to the SAI contains a general
description of Moody's and S&P's ratings of securities.
The Fund's investment objectives and certain other policies are fundamental
and may not be changed without the approval of the holders of a 'majority of the
outstanding' Common Shares and Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS)
voting together as a single class, and of the holders of a 'majority of the
outstanding' Preferred Shares (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS), voting as
a separate class. When used with respect to particular shares of the Fund, a
'majority of the outstanding' shares means (i) 67% or more of the shares present
at a meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
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 the Fund has no current intention of doing so.
INVESTMENT STRATEGIES
In making investment decisions with respect to common stocks and other
equity securities issued by real estate companies, including REITs, 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, and
economic and market conditions. The Investment Manager evaluates a number of
factors, including growth potential, earnings estimates and the quality of
management.
In making investment decisions with respect to preferred securities and debt
securities, the Investment Manager seeks to select what it believes are superior
securities, (i.e., securities the Investment Manager views as undervalued on the
basis of risk and return profiles). In making these determinations, the
Investment Manager evaluates the fundamental characteristics of an issuer,
including an issuer's creditworthiness, and also takes into account prevailing
market factors.
25
In analyzing credit quality, the Investment Manager considers not only
fundamental analysis, but also an issuer's corporate and capital structure and
the placement of the preferred or debt securities within that structure. The
Investment Manager also takes into account other factors, such as call and other
structural features, momentum and other exogenous signals (i.e., the likely
directions of ratings) and relative value versus other income security classes.
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.
Under normal market conditions, the Fund seeks to achieve its objectives
through a portfolio of income producing common stock issued by REITs and
preferred and other debt securities. The Fund currently invests approximately
[ ]% of its total assets in common stocks issued by REITs, approximately
[ ]% in preferred securities and approximately [ ]% in debt securities other
than preferred securities. These percentages may vary from time to time
consistent with the Fund's investment objectives, although the Fund will
normally invest at least 40% of its total assets in common stock issued by real
estate companies, including REITs and at least 40% of its total assets in
preferred securities. At any time, under normal circumstances at least 80% of
the Fund's total assets will be invested in common stocks issued by REITs and
preferred securities.
Common Stocks Issued By Real Estate Companies and REITs. 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, the Fund will invest at least 40%, but no
more than 60%, of our total assets in the common stocks of real estate
companies, consisting primarily 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. REITs are
generally not taxed on income distributed to shareholders provided, among other
things, they distribute to their shareholders substantially all of their 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 the
Fund intends to use these REIT dividends in an effort to meet the current income
goal of its 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. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
Preferred Securities. Under normal market conditions, the Fund will invest
at least 40%, but no more than 60%, of its total assets in preferred securities.
There are two basic types of
26
preferred securities. The first, sometimes referred to in this prospectus as
traditional preferred securities, consists of preferred stock issued by an
entity taxable as a corporation. The second is referred to in this prospectus as
hybrid-preferred securities. Hybrid-preferred securities are usually issued by a
trust or limited partnership and often represent preferred interests in deeply
subordinated debt instruments issued by the corporation for whose benefit the
trust or partnership was established. Initially, the preferred securities
component of the Fund will be comprised primarily of taxable preferred
securities.
Traditional Preferred Securities. Traditional preferred securities generally
pay fixed or adjustable rate dividends to investors and generally 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. In order to be payable,
distributions on such preferred securities must be declared by the issuer's
board of directors. Income payments on typical preferred securities currently
outstanding are cumulative, causing dividends and distributions to accumulate
even if not declared by the board of directors or otherwise made payable. In
such a case, all accumulated dividends must be paid before any dividend on the
common stock can be paid. However, some traditional preferred stocks are
non-cumulative, in which case dividends do not accumulate and need not ever be
paid. A portion of the portfolio may include investments in non-cumulative
preferred securities, whereby the issuer does not have an obligation to make up
any arrearages to its shareholders. Should an issuer of a non-cumulative
preferred stock held by the Fund determine not to pay dividends on such stock,
the amount of dividends the Fund pays may be adversely affected. There is no
assurance that dividends or distributions on the traditional preferred
securities in which the Fund invests will be declared or otherwise made payable.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Shares of traditional preferred securities have a liquidation
value that generally equals the original purchase price at the date of issuance.
The market value of preferred securities may be affected by favorable and
unfavorable changes impacting companies in the utilities and financial services
sectors, which are prominent issuers of preferred securities, and by actual and
anticipated changes in tax laws, such as changes in corporate income tax rates.
Because the claim on an issuer's earnings represented by traditional preferred
securities may become onerous when interest rates fall below the rate payable on
such securities, the issuer may redeem the securities. Thus, in declining
interest rate environments in particular, the Fund's holdings of higher
rate-paying fixed rate preferred securities may be reduced and the Fund may be
unable to acquire securities of comparable credit quality paying comparable
rates with the redemption proceeds.
Pursuant to the DRD, corporations may generally deduct 70% of the income
they receive from dividends on traditional preferred securities that are paid
out of earnings and profits of the issuer. Corporate shareholders of a regulated
investment company like the Fund generally are permitted to claim a deduction
with respect to that portion of their distributions attributable to amounts
received by the regulated investment company that qualify for the DRD. However,
not all traditional preferred securities pay dividends that are eligible for the
DRD, including preferred securities issued by REITs described below. Under
current market conditions, it is expected that few, if any, of the preferred
securities in which the Fund intends to invest will qualify for the DRD.
Pursuant to recently enacted legislation, individuals will generally be
taxed at long-term capital gain rates on qualified dividend income for taxable
years beginning on or before December 31,
27
2008. Individual shareholders of a regulated investment company like the Fund
generally are permitted to treat as qualified dividend income that portion of
their distributions attributable to qualified dividend income received by the
regulated investment company. However, not all traditional preferred securities
will provide significant benefits under the rules relating to qualified dividend
income, including preferred securities issued by REITs described below. Under
current market conditions, it is expected that few, if any, of the preferred
securities in which the Fund intends to invest will provide significant benefits
under the rules relating to qualified dividend income.
Within the category of traditional preferred securities, the Fund may invest
up to 5% of its total assets in traditional preferred securities issued by real
estate companies, including REITs. REIT preferred securities are generally
perpetual in nature, although REITs often have the ability to redeem the
preferred securities after a specified period of time. The market value of REIT
preferred securities may be affected by favorable and unfavorable changes
impacting a particular REIT. While sharing characteristics that make them
similar to traditional preferred securities, dividends from REIT preferred
securities do not provide any DRD benefit (and generally do not provide
significant benefits under the rules relating to qualified dividend income).
Hybrid-Preferred Securities. Hybrid-preferred securities are a comparatively
new asset class. Hybrid-preferred securities are typically issued by
corporations, generally in the form of interest-bearing notes with preferred
securities characteristics, or by an affiliated business trust of a corporation,
generally in the form of beneficial interests in subordinated debentures or
similarly structured securities. The hybrid-preferred securities market consists
of both fixed and adjustable coupon rate securities that are either perpetual in
nature or have stated maturity dates.
Hybrid-preferred securities are typically junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor. In addition,
hybrid-preferred securities typically permit an issuer to defer the payment of
income for eighteen months or more without triggering an event of default.
Generally, the maximum deferral period is five years. Because of their
subordinated position in the capital structure of an issuer, the ability to
defer payments for extended periods of time without default consequences to the
issuer, and certain other features (such as restrictions on common dividend
payments by the issuer or ultimate guarantor when full cumulative payments on
the trust preferred securities have not been made), these hybrid-preferred
securities are often treated as close substitutes for traditional preferred
securities, both by issuers and investors. Hybrid-preferred securities have many
of the key characteristics of equity due to their subordinated position in an
issuer's capital structure and because their quality and value are heavily
dependent on the profitability of the issuer rather than on any legal claims to
specific assets or cash flows. Hybrid preferred securities include, but are not
limited to, trust originated preferred securities ('TOPRS'r'); monthly income
preferred securities ('MIPS'r'); quarterly income bond securities ('QUIBS'r');
quarterly income debt securities ('QUIDS'r'); quarterly income preferred
securities ('QUIPS'sm''); corporate trust securities ('CORTS'r'); public income
notes ('PINES'r'); and other hybrid-preferred securities.*
---------
* TOPRS is a registered service mark owned by Merrill Lynch & Co., Inc. MIPS and
QUIDS are registered service marks and QUIPS is a service mark owned by
Goldman, Sachs & Co. QUIBS is a registered service mark owned by Morgan
Stanley. CORTS and PINES are registered service marks owned by Citigroup
Global Markets Inc.
28
Hybrid-preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, a final maturity
date may be extended and/or the final payment of principal may be deferred at
the issuer's option for a specified time without default. No redemption can
typically take place unless all cumulative payment obligations have been met,
although issuers may be able to engage in open-market repurchases without regard
to whether all payments have been paid.
Many hybrid-preferred securities are issued by trusts or other special
purpose entities established by operating companies and are not a direct
obligation of an operating company. At the time the trust or special purpose
entity sells such preferred securities to investors, it purchases debt of the
operating company (with terms comparable to those of the trust or special
purpose entity securities), which enables the operating company to deduct for
tax purposes the interest paid on the debt held by the trust or special purpose
entity. The trust or special purpose entity is generally required to be treated
as transparent for federal income tax purposes such that the holders of the
trust preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company. Accordingly, payments on the
hybrid-preferred securities are treated as interest rather than dividends for
federal income tax purposes and, as such, are not eligible for the DRD or the
reduced rates of tax that apply to qualified dividend income. The trust or
special purpose entity in turn would be a holder of the operating company's debt
and would have priority with respect to the operating company's earnings and
profits over the operating company's common shareholders, but would typically be
subordinated to other classes of the operating company's debt. Typically a
preferred share has a rating that is slightly below that of its corresponding
operating company's senior debt securities.
Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.
Lower-Rated Securities. The Fund may invest up to 10% (measured at the time
of purchase) of its total assets in securities rated below investment grade.
These lower grade securities are commonly known as 'junk bonds.' Securities
rated below investment grade are judged to have speculative characteristics with
respect to their interest and principal payments. Such securities may face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Lower grade securities, though high yielding, are
characterized by high risk. They may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for the Fund to sell certain of
these securities or could result in lower prices than those used in calculating
the Fund's net asset value. 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, or, if
unrated, such security is determined by the Investment Manager to be of
comparable quality.
29
Financial Services Company Securities. The Fund intends to invest a
significant portion, but less than 25%, of its total assets in securities issued
by companies 'principally engaged' in the financial services industry (which are
prominent issuers of preferred securities). A company is 'principally engaged'
in financial services if it derives at least 50% of its consolidated revenues
from providing financial services. Companies in the financial services sector
include commercial banks, industrial banks, savings institutions, finance
companies, diversified financial services companies, investment banking firms,
securities brokerage houses, investment advisory companies, leasing companies,
insurance companies and companies providing similar services.
Foreign Securities. The Fund may invest up to 20% of its total assets in
U.S. dollar-denominated securities of non-U.S. issuers traded or listed on a
U.S. securities exchange or the U.S. over-the-counter market. The Fund may
invest in any region of the world and invests in companies operating in
developed countries such as Canada, Japan, Australia, New Zealand and most
Western European countries. The Fund does not intend to invest in companies
based in emerging markets such as the Far East, Latin America and Eastern
Europe. The World Bank and other international agencies define emerging markets
based on such factors as trade initiatives, per capita income and level of
industrialization. For purposes of this 20% limitation, non-U.S. securities
include securities represented by American Depository Receipts.
Debt Securities. The Fund may invest up to 20% of its total assets in debt
securities, including convertible debt securities and convertible preferred
securities. Convertible securities are debt securities or preferred stock that
are exchangeable for common stock of the issuer at a predetermined price (the
'conversion price'). Depending upon the relationship of the conversion price to
the market value of the underlying securities, convertible securities may trade
more like common stock than debt instruments. Common stock acquired pursuant to
a conversion feature will be subject to this 20% limitation. As a result of
conversion, the Fund may hold common stocks issued by companies other than real
estate companies or REITs, such holdings not normally to exceed 5% of total
assets. In addition, keeping with the income objective of the Fund, the Fund
expects to sell any common stock holdings of issuers other than real estate
companies or REITs as soon as practicable after conversion of a convertible
security. The Fund's investments in debt securities may include investments in
U.S. dollar-denominated corporate debt securities issued by domestic and
non-U.S. corporations (subject to the requirements noted above) and U.S.
dollar-denominated government debt securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or a non-U.S. Government or its
agencies or instrumentalities (subject to the requirements noted above).
Common Stocks. The Fund will normally invest at least 40%, but will not
invest more than 60%, of its total assets in common stocks issued by real estate
companies or REITs. Common stocks represent the residual ownership interest in
the issuer and holders of common stock are entitled to the income and increase
in the value of the assets and business of the issuer after all of its debt
obligations and obligations to preferred stockholders are satisfied. Common
stocks generally have voting rights. Common stocks fluctuate in price in
response to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest rates,
investor perceptions and market liquidity.
Other Investment Companies. The Fund may invest up to 10% of its total
assets in securities of other open- or closed-end investment companies,
including exchange traded funds that invest primarily in securities of the types
in which the Fund may invest directly. The Fund generally
30
expects to invest in other investment companies either during periods when it
has large amounts of uninvested cash, such as the period shortly after the Fund
receives the proceeds of the offering of its common shares, or during periods
when there is a shortage of attractive opportunities in the market. As a
shareholder in an investment company, the Fund would bear its ratable share of
that investment company's expenses, and would remain subject to payment of the
Fund's advisory and other fees and expenses with respect to assets so invested.
Holders of common shares would therefore be subject to duplicative expenses to
the extent the Fund invests in other investment companies. The Investment
Manager will take expenses into account when evaluating the investment merits of
an investment in an investment company relative to available bond investments.
The securities of other investment companies may also be leveraged and will
therefore be subject to the same leverage risks to which the Fund is subject. As
described in the sections entitled 'Use of Leverage,' the net asset value and
market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares. Investment companies may have investment policies that differ from those
of the Fund. In addition, to the extent the Fund invests in other investment
companies, the Fund will be dependent upon the investment and research abilities
of persons other than the Investment Manager.
Illiquid Securities. While the Fund does not currently intend to invest in
illiquid securities (i.e., securities that are not readily marketable), it may
invest up to 10% of its total assets in illiquid securities. For this purpose,
illiquid securities include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days. The Board of Directors or its delegate
has the ultimate authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid for purposes of
this 10% limitation. The Board of Directors has delegated to the Investment
Manager the day-to-day determination of the illiquidity of any security held by
the Fund, although it has retained oversight and ultimate responsibility for
such determinations. Although no definitive liquidity criteria are used, the
Board and/or the Investment Manager will consider factors such as (i) the nature
of the market for a security (including the institutional private resale market;
the frequency of trades and quotes for the security; the number of dealers
willing to purchase or sell the security; the amount of time normally needed to
dispose of the security; and the method of soliciting offers and the mechanics
of transfer), (ii) the terms of certain securities or other instruments allowing
for the disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments) and (iii) other permissible
relevant factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Directors or its delegate. If, through changes in the
market value of its portfolio securities, the Fund should be in a position where
more than 10% of the value of its total assets is invested in illiquid
securities, including restricted securities that are
31
not readily marketable, the Fund will take such steps as the Board and/or the
Investment Manager deem advisable, if any, to protect liquidity.
Strategic Transactions. The Fund may, but is not required to, use various
strategic transactions described below to mitigate risks and to facilitate
portfolio management. Such strategic transactions are generally accepted under
modern portfolio management and are regularly used by many closed-end funds and
other institutional investors. Although the Investment Manager seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity, fixed-income and interest rate indices, and other
financial instruments, purchase and sell financial futures contracts and options
thereon, enter into various interest rate transactions such as swaps, caps,
floors or collars or credit transactions and credit default swaps. The Fund also
may purchase derivative instruments that combine features of these instruments.
Collectively, all of the above are referred to as 'Strategic Transactions.' The
Fund generally seeks to use Strategic Transactions as a portfolio management or
hedging technique to seek to protect against possible adverse changes in the
market value of securities held in or to be purchased for the Fund's portfolio,
protect the value of the Fund's portfolio, facilitate the sale of certain
securities for investment purposes, manage the effective interest rate exposure
of the Fund, manage the effective maturity or duration of the Fund's portfolio,
or establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. There is no limit on the amount of
credit derivative transactions that may be entered into by the Fund.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Investment Manager's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may
result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the Fund can
realize on an investment, or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to Strategic Transactions are
not otherwise available to the Fund for investment purposes. A more complete
discussion of Strategic Transactions and their risks is contained in the Fund's
SAI.
The Fund also may enter into certain interest rate transactions that are
designed to reduce the risks inherent in the Fund's issuance of the Preferred
Shares. See 'How the Fund Manages Risk -- Interest Rate Transactions.'
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
securities on a when-issued or delayed delivery basis, making payment or taking
delivery at a later date, normally within 15 to 45 days of the trade date. This
type of transaction may involve an element of risk because no interest accrues
on the securities prior to settlement and, because securities are subject to
market fluctuations, the value of the securities at the time of delivery may be
less (or more) than cost. A separate account of the Fund will be established
with its custodian consisting of cash
32
equivalents or liquid securities having a market value at all times at least
equal to the amount of the commitment.
Portfolio Turnover. The Fund may engage in portfolio trading when considered
appropriate, but short-term trading will not be used as the primary means of
achieving the Fund's investment objectives. However, there are no limits on the
rate of portfolio turnover, and investments may be sold without regard to length
of time held when, in the opinion of the Investment Manager, investment
considerations warrant such action. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to shareholders, will be taxable as ordinary income.
Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, the Fund may
deviate from its 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 or REIT. When and to the extent the Fund assumes a
temporary defensive position, the Fund may not pursue or achieve its 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 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 and commercial paper. See
'Investment Objectives and Policies' in the SAI.
USE OF LEVERAGE
The Fund may issue other preferred shares, in addition to the Preferred
Shares and the outstanding Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS, or borrow or issue
short-term debt securities to increase its assets available for investment. The
Fund is authorized to issue preferred shares, borrow or issue debt obligations.
Before issuing such preferred shares to increase its assets available for
investment, the Fund must have received confirmation from Moody's and S&P or any
substitute rating agency that the proposed issuance will not adversely affect
such rating agency's then-current rating on the Preferred Shares. The Fund also
may borrow money as a temporary measure for extraordinary or emergency purposes,
including the payment of dividends and the settlement of securities transactions
which otherwise might require untimely dispositions of the Fund's holdings. When
the Fund leverages its assets, the fees paid to the Investment Manager for
investment management services will be higher than if the Fund did not borrow
because the Investment Manager's fees are calculated based on the Fund's managed
assets, which include the proceeds of the issuance of preferred shares or any
outstanding borrowings. Consequently, the Fund and the Investment Manager may
have differing interests in determining whether to leverage the Fund's assets.
The Fund's use of leverage is premised upon the expectation that the Fund's
preferred share dividends or borrowing cost will be lower than the return the
Fund achieves on its investments
33
with the proceeds of the issuance of preferred shares or borrowing. Such
difference in return may result from the Fund's higher credit rating or the
short-term nature of its borrowing compared to the long-term nature of its
investments. Since the total assets of the Fund (including the assets obtained
from leverage) will be invested in the higher yielding portfolio investments or
portfolio investments with the potential for capital appreciation, the holders
of common shares will be the beneficiaries of the incremental return. Should the
differential between the underlying assets and cost of leverage narrow, the
incremental return 'pick up' will be reduced. Furthermore, if long-term rates
rise or the Fund otherwise incurs losses on its investments, the Fund's net
asset value attributable to its common shares will reflect the decline in the
value of portfolio holdings resulting therefrom.
To the extent the income or capital appreciation derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return to the Fund's common shareholders ('Common Shareholders') will be
greater than if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such funds is not sufficient to
cover the cost of leverage or if the Fund incurs capital losses, the return of
the Fund to Common Shareholders will be less than if leverage had not been used.
The Investment Manager may determine to maintain the Fund's leveraged position
if it expects that the long-term benefits to the Fund's Common Shareholders of
maintaining the leveraged position will outweigh the current reduced return.
Capital raised through the issuance of preferred shares or borrowing will be
subject to dividend payments or interest costs that may or may not exceed the
income and appreciation on the assets purchased. The Fund also may be required
to maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest rate.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized rating organizations which may
issue ratings for the preferred shares or short-term debt instruments issued by
the Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. Certain
types of borrowings may result in the Fund being subject to covenants in credit
agreements, including those relating to asset coverage, borrowing base and
portfolio composition requirements and additional covenants. The Fund may also
be required to pledge its assets to the lenders in connection with certain types
of borrowing. The Investment Manager does not anticipate that these covenants or
restrictions will adversely affect its ability to manage the Fund's portfolio in
accordance with the Fund's investment objective and policies. Due to these
covenants or restrictions, the Fund may be forced to liquidate investments at
times and at prices that are not favorable to the Fund, or the Fund may be
forced to forgo investments that the Investment Manager otherwise views as
favorable.
If and to the extent that the Fund employs leverage in addition to the
Preferred Shares and the outstanding Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS will depend
on many factors, the most important of which are investment outlook, market
conditions and interest rates.
34
RISK FACTORS
Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in Preferred
Shares.
RISKS OF INVESTING IN PREFERRED SHARES
Leverage Risk. The Fund uses financial leverage for investment purposes by
issuing preferred shares. It is currently anticipated that, taking into account
the Preferred Shares being offered in this prospectus, the amount of leverage
will represent approximately 35% 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 Preferred Shares' asset coverage. As long as the Preferred Shares 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 the liquidation preference of the Preferred
Shares and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C 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 Preferred Shares, 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 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 Preferred Shares may rise
so that the amount of dividends to be paid to shareholders of Preferred Shares
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 Preferred Shares offering) is available to pay
dividends on the Preferred Shares, however, dividend rates on the Preferred
Shares would need to greatly exceed the Fund's net portfolio income before the
Fund's ability to pay dividends on the Preferred Shares 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 Preferred Shares. 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 Preferred Shares at an
auction if the auction fails, i.e., if there are more Preferred Shares offered
for sale than there are buyers for those shares. Also, if you place hold orders
(orders to retain Preferred Shares) at an auction only at a specified rate, and
that bid rate exceeds the rate set at the auction, you will not retain your
Preferred Shares. 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,
35
the dividend period may be changed, subject to certain conditions and with
notice to the holders of the Preferred Shares, which could also affect the
liquidity of your investment. See 'Description of Preferred Shares' and 'The
Auction.'
Secondary Market Risk. If you try to sell your Preferred Shares 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 [ ] days ), 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 Preferred Shares. Broker-dealers that maintain a
secondary trading market for Preferred Shares 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. Preferred
Shares are not listed on a stock exchange or the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') stock market. If you
sell your Preferred Shares to a broker-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 Preferred Shares, the ratings do not eliminate or necessarily
mitigate the risks of investing in Preferred Shares. In addition, Moody's, S&P
or another rating agency then rating the Preferred Shares could downgrade the
Preferred Shares, which may make your shares less liquid at an auction or in the
secondary market. If a rating agency downgrades the Preferred Shares, the
dividend rate on the Preferred Shares will be the applicable maximum rate based
on the credit rating of the Preferred Shares, which will be a rate higher than
is payable currently on the Preferred Shares. See 'Description of Preferred
Shares -- 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 10% 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 Preferred
Shares. The failure of a company to pay common stock or preferred stock
dividends, or interest payments, at forecasted or
36
contractual rates, could have a negative impact on the Fund's ability to pay
dividends on the Preferred Shares and could result in the redemption of some or
all of the Preferred Shares.
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, the Preferred Shares and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C 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 the Preferred Shares and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C 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.'
In addition, investors should note that the Fund is not expected to generate
significant income that qualifies for the DRD or the reduced rates of tax that
apply to qualified dividend income. See 'U.S. Federal Taxation.'
GENERAL RISKS OF INVESTING IN THE FUND
The Fund is a non-diversified, closed-end management investment company
designed primarily as a long-term investment and not as a trading vehicle. The
Fund is not intended to be a complete investment program and, due to the
uncertainty inherent in all investments, there can be no assurance that the Fund
will achieve its investment objectives.
Limited Operating History. The Fund is a non-diversified, closed-end
management investment company with a limited operating history.
Investment Risk. An investment in the Fund is subject to investment risk,
including the possible loss of the entire principal amount that you invest.
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. The Fund will
not invest in real estate directly, but only in securities issued by real estate
companies, including REITs. However, because of its policy of concentration in
the securities of companies in the real estate industry, the Fund is 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;
37
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; and
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 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
38
addition, office properties that are not equipped to accommodate the needs of
modern businesses may become functionally obsolete and thus noncompetitive.
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 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
39
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.
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
40
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.
SPECIAL RISKS RELATED TO PREFERRED SECURITIES
There are special risks associated with investing in preferred securities,
including:
Deferral and Omission. Preferred securities may include provisions that
permit the issuer, at its discretion, to defer or omit distributions for a
stated period without any adverse consequences to the issuer. If the Fund
owns a preferred security that is deferring or omitting its distributions,
the Fund may be required to report income for tax purposes although it has
not yet received such income.
Subordination. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than more senior debt instruments.
Liquidity. Preferred securities may be substantially less liquid than
many other securities, such as common stocks or U.S. Government securities.
Limited Voting Rights. Generally, traditional preferred securities offer
no voting rights with respect to the issuing company unless preferred
dividends have been in arrears for a specified number of periods, at which
time the preferred security holders may elect a number of directors to the
issuer's board. Generally, once all the arrearages have been paid, the
preferred security holders no longer have voting rights. Hybrid-preferred
security holders generally have no voting rights.
Special Redemption Rights. In certain varying circumstances, an issuer
of preferred securities may redeem the securities prior to a specified date.
For instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with call
provisions, a redemption by the issuer may negatively impact the return of
the security held by the Fund.
Supply of Hybrid-Preferred Securities. The Financial Accounting
Standards Board currently is reviewing accounting guidelines relating to
hybrid-preferred securities. To the extent that a change in the guidelines
could adversely affect the market for, and availability of, these
securities, the Fund may be adversely affected. The recently enacted
legislation that reduced the federal income tax rates on dividends may
also adversely impact the market and supply of hybrid-preferred securities
if the issuance of such securities becomes less attractive to issuers.
New Types of Securities. From time to time, preferred securities,
including hybrid-preferred securities, have been, and may in the future be,
offered having features other than those described herein. The Fund reserves
the right to invest in these securities if the Investment Manager believes
that doing so would be consistent with the Fund's investment objectives and
policies. Since the market for these instruments would be new, the Fund may
have difficulty disposing of them at a suitable price and time. In addition
to limited liquidity, these instruments may present other risks, such as
high price volatility.
41
GENERAL RISKS OF SECURITIES LINKED TO THE FINANCIAL SERVICES INDUSTRY
The Fund intends to invest a significant portion, but less than 25%, of its
total assets in securities of companies principally engaged in the financial
services industry, which are prominent issuers of preferred securities. Because
the Fund may invest such amounts in this sector, the Fund may be susceptible to
adverse economic or regulatory occurrences affecting that sector.
Investing in the financial services sector includes the following risks:
regulatory actions -- financial services companies may suffer a setback if
regulators change the rules under which they operate;
changes in interest rates -- unstable interest rates can have a
disproportionate effect on the financial services sector;
concentration of loans -- financial services companies whose securities the
Fund may purchase may themselves have concentrated portfolios, such as a
high level of loans to real estate developers, which makes them vulnerable
to economic conditions that affect that sector; and
competition -- financial services companies have been affected by increased
competition, which could adversely affect the profitability or viability of
such companies.
FOREIGN SECURITIES RISKS
Under normal market conditions, the Fund may invest up to 20% of its total
assets in U.S. dollar-denominated securities of foreign issuers traded or listed
on a U.S. securities exchange or the U.S. over-the-counter market ('Foreign
Securities'). Typically, the Fund will not hold any Foreign Securities of
issuers in so-called 'emerging markets' (or lesser developed countries), but to
the extent it does, the Fund will not invest more than 10% of its total assets
in such securities. Investments in such securities are particularly speculative.
Investing in Foreign Securities involves certain risks not involved in domestic
investments, including, but not limited to:
future foreign economic, financial, political and social developments;
different legal systems;
the possible imposition of exchange controls or other foreign governmental
laws or restrictions;
less governmental supervision;
regulation changes;
changes in currency exchange rates;
less publicly available information about companies due to less rigorous
disclosure or accounting standards or regulatory practices;
high and volatile rates of inflation;
fluctuating interest rates;
less publicly available information; and
different accounting, auditing and financial record-keeping standards and
requirements.
Investments in Foreign Securities, especially in emerging market countries,
will expose the Fund to the direct or indirect consequences of political, social
or economic changes in the
42
countries that issue the securities or in which the issuers are located. Certain
countries in which the Fund may invest, especially emerging market countries,
have historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations, large amounts of
external debt, balance of payments and trade difficulties and extreme poverty
and unemployment. Many of these countries are also characterized by political
uncertainty and instability. The cost of servicing external debt will generally
be adversely affected by rising international interest rates because many
external debt obligations bear interest at rates which are adjusted based upon
international interest rates. In addition, with respect to certain foreign
countries, there is a risk of:
the possibility of expropriation of assets;
confiscatory taxation;
difficulty in obtaining or enforcing a court judgment;
economic, political or social instability; and
diplomatic developments that could affect investments in those countries.
In addition, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as:
growth of gross domestic product;
rates of inflation;
capital reinvestment;
resources;
self-sufficiency; and
balance of payments position.
In addition, certain investments in Foreign Securities also may be subject
to foreign withholding taxes.
Investing in securities of companies in emerging markets may entail special
risks relating to potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions
on foreign investment, the lack of hedging instruments, and on repatriation of
capital invested. Emerging securities markets are substantially smaller, less
developed, less liquid and more volatile than the major securities markets. The
limited size of emerging securities markets and limited trading value compared
to the volume of trading in U.S. securities could cause prices to be erratic for
reasons apart from factors that affect the quality of the securities. For
example, limited market size may cause prices to be unduly influenced by traders
who control large positions. Adverse publicity and investors' perceptions,
whether or not based on fundamental analysis, may decrease the value and
liquidity of portfolio securities, especially in these markets. Many emerging
market countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates and corresponding currency devaluations have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries. Typically, the Fund will not hold any Foreign
Securities of emerging market issuers, and, if it does, such securities will not
comprise more than 10% of the Fund's total assets.
43
As a result of these potential risks, the Investment Manager may determine
that, notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including the Investment
Manager, have had no or limited prior experience.
INTEREST RATE RISK
Interest rate risk is the risk that fixed-income securities such as
preferred and debt securities, and to a lessor extent dividend-paying common
stocks and shares such as REIT common shares, will decline in value because of
changes in market interest rates. When market interest rates rise, the market
value of such securities generally will fall. The Fund's investment in such
securities means that the net asset value and market price of common shares may
tend to decline if market interest rates rise. Because investors generally look
to REITs for a stream of income, the prices of REIT shares may be more sensitive
to changes in interest rates than are other equity securities.
During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled which is
generally known as call or prepayment risk. If this occurs, the Fund may be
forced to reinvest in lower yielding securities. This is known as reinvestment
risk. Preferred and debt securities frequently have call features that allow the
issuer to repurchase the security prior to its stated maturity. An issuer may
redeem an obligation if the issuer can refinance the debt at a lower cost due to
declining interest rates or an improvement in the credit standing of the issuer.
During periods of rising interest rates, the average life of certain types of
securities may be extended because of slower than expected principal payments.
This may lock in a below market interest rate, increase the security's duration
and reduce the value of the security. This is known as extension risk. Market
interest rates for investment grade fixed-income securities in which the Fund
will invest have recently declined significantly below the recent historical
average rates for such securities. This decline may have increased the risk that
these rates will rise in the future (which would cause the value of the Fund's
net assets to decline) and the degree to which asset values may decline in such
events; however, historical interest rate levels are not necessarily predictive
of future interest rate levels.
CREDIT RISK AND LOWER-RATED SECURITIES RISK
Credit risk is the risk that a preferred or debt security in the Fund's
portfolio will decline in price or fail to make dividend, interest or principal
payments when due because the issuer of the security experiences a decline in
its financial status. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to greater credit risk than debt
instruments. The Fund may invest up to 10% (measured at the time of purchase) of
its total assets in preferred or other debt securities that are rated below
investment grade. Securities rated below investment grade are regarded as having
predominately speculative characteristics with respect to the issuer's capacity
to pay interest and repay principal, and these bonds are commonly referred to as
'junk bonds.' These securities are subject to a greater risk of default. The
prices of these lower grade securities are more sensitive to negative
developments, such as a decline in the issuer's revenues or a general economic
downturn, than are the prices of higher grade securities. Lower grade securities
tend to be less liquid than investment grade securities. The market values of
lower grade securities tend to be more volatile than investment grade
securities. Preferred stock or debt securities will be
44
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, or, if
unrated, such security is determined by the Investment Manager to be of
comparable quality.
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 the Fund is invested in lower-
rated securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund was investing in higher quality securities. An
issuer of these securities has a currently identifiable vulnerability to default
and the issuer may be in default or there may be present elements of danger with
respect to principal or interest. The Fund 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 the Fund
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 creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the net asset value 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.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Fund's Articles of Incorporation and By-Laws may
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the Fund's structure. These provisions may also
have the effect of depriving shareholders of an opportunity to redeem their
Preferred Shares. These include provisions for staggered terms of office for
Directors, super-majority voting requirements for merger, consolidation,
liquidation, termination and asset sale transactions, amendments to the Articles
of Incorporation and conversion to open-end status. See 'Certain Provisions of
the Articles of Incorporation and By-Laws.'
45
MARKET DISRUPTION RISK
The terrorist attacks in the U.S. on September 11, 2001 had a disruptive
effect on the securities markets. The war in Iraq and instability in the Middle
East also have resulted in recent market volatility and may have long-term
effects on the U.S. and worldwide financial markets and may cause further
economic uncertainties in the U.S. and worldwide. The Fund does not know how
long the securities markets will continue to be affected by these events and
cannot predict the effects of the war or similar events in the future on the
U.S. economy and securities markets.
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, the
Preferred Shares and Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C 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 Preferred Shares and Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS voting as a
separate class. Among other restrictions, the Fund may not invest more than 25%
of its managed assets in securities of issuers in any one industry except for
the real estate industry. 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, Moody's or another nationally recognized
rating agency on the Preferred Shares. The Fund does not anticipate that such
guidelines would have a material adverse effect on the Fund's ability to achieve
its investment objectives. 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, the Fund 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
Preferred Shares 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 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 Preferred Shares. In
addition, at the
46
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 Preferred Shares. 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 Preferred
Shares. A sudden and dramatic decline in interest rates may result in a
significant decline in the asset coverage. Under the terms of the Preferred
Shares, if the Fund fails to maintain the required asset coverage on the
outstanding Preferred Shares 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 Preferred Shares. 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. The Fund would not enter into interest
rate swap or cap transactions having a notional amount that exceeded the
outstanding amount of the Fund's leverage. The Fund will monitor any interest
rate swap or cap transactions with a view to ensuring that it remains in
compliance with applicable tax requirements.
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 had approximately $[ ] billion of assets under
management as of [ ], 2003, including approximately $[ ] billion in
REIT and corporate preferred securities. Its current clients include pension
plans, endowment funds and registered investment companies, including the Fund,
Cohen & Steers Quality Income Realty Fund,
47
Inc., Cohen & Steers Advantage Income Realty Fund, Inc., Cohen & Steers Total
Return Realty Fund, Inc. and Cohen & Steers Premium Income 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.
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
..65% of the average daily managed assets of the Fund. Managed assets are the net
asset value of the Common Shares plus the liquidation preference of the
Preferred Shares (and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS). 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 issuing and repurchasing shares, expenses of preparing, printing and
distributing shareholder 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 the
Preferred Shares (and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS) for leverage.
The Fund's portfolio managers are:
Martin Cohen -- Mr. Cohen is a Director, President and Treasurer of the
Fund. He is Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager, and Vice President
of Cohen & Steers Securities, Inc., a registered broker-dealer. 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 Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager, and President of
Cohen & Steers Securities, Inc., a registered broker-dealer. 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 Manager, as a Vice President in April 2000 and
has been a Senior Vice
48
President since January 2002. Prior to joining Cohen & Steers in 2000,
Mr. Brooks was an investment analyst with another real estate securities
investment manager. Mr. Brooks is a Chartered Financial Analyst.
William F. Scapell -- Mr. Scapell joined Cohen & Steers Capital
Management, Inc., the Fund's Investment Manager, as a Senior Vice President
in February 2003. Prior to joining Cohen & Steers, Mr. Scapell was a
director in the fixed income research department of Merrill Lynch & Co.,
Inc., where he was also its chief strategist for preferred securities.
Before joining Merrill Lynch's research department, Mr. Scapell worked in
Merrill Lynch Treasury with a focus on balance sheet management. Prior to
working for Merrill Lynch, Mr. Scapell was employed at the Federal Reserve
Bank of New York in both bank supervision and monetary policy roles.
Mr. Scapell is a Chartered 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 .06% of the Fund's average daily managed
assets up to $1 billion, .04% of the Fund's average daily managed assets in
excess of $1 billion up to $1.5 billion and .02% of the Fund's average daily
managed assets in excess of $1.5 billion. 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 average daily managed assets (including the liquidation value of
Preferred Shares) in the Fund at an annual rate equal to .03% of the first $200
million in assets, .02% of the next $200 million, and .01% 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., six
funds at $200 million or $1.2 billion at .04%, 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 Preferred Shares. See 'Custodian,
Auction Agent, Transfer Agent, Dividend Paying Agent and Registrar.'
49
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, please refer to the detailed
description of the Preferred Shares 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. The Preferred Shares 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 Preferred Shares will rank on
a parity with Series M7, Series T7, Series W7, Series TH7, Series F7, Series
W28A, Series W28B and Series W28C 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 Preferred Shares, 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 conversion rights.
Any Preferred Shares 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 Preferred Shares 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 Preferred Shares 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 Preferred Shares. The initial rate period for the Preferred
Shares will be [ ] days and the dividend rate for this period will be the rate
set out on the cover of this prospectus. Subsequent rate periods will be [ ]
days, and the dividend rate will be determined by auction, but the rates set at
the auction will not exceed the maximum rates. 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 Preferred Shares 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.
If a dividend payment date is not a business day because the NYSE is closed
for business for more than three consecutive business days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or
50
communications services, or the dividend payable on such date can not be paid
for any such reason, then:
the dividend payment date for the affected dividend period will be the next
business day on which the Fund and its paying agent, if any, are able to
cause the dividend to by paid using their reasonable best efforts;
the affected dividend period will end on the day it would have ended had
such event not occurred and the dividend payment date had remained the
scheduled date; and
the next dividend period will begin and end on the dates on which it would
have begun and ended had such event not occurred and the dividend payment
date remained the scheduled date.
Dividends will be paid through 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 Preferred Shares). 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 Preferred Shares 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 Preferred Shares will accumulate from the date of their
original issue, which is [ ], 2003. 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 higher of (as
set forth in the table below) the applicable percentage of the reference rate or
the applicable spread plus the reference rate. The reference rate is the
applicable LIBOR Rate (for a dividend period or a special dividend period of
fewer than 365 days), or the applicable Treasury Index Rate (for a special
dividend period of 365 days or more). In the case of a special rate period, the
maximum applicable rate will be specified by the Fund in the notice of the
special rate period for such dividend payment period. The applicable percentage
or applicable spread 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 or applicable spread will be
determined based on the lower of the credit rating or ratings assigned to the
Preferred Shares by Moody's and S&P.
51
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.
CREDIT RATINGS FOR PREFERRED SHARES APPLICABLE
------------------------------------ PERCENTAGE OF
REFERENCE APPLICABLE
MOODY'S S&P RATE: SPREAD:
------------- -------------------- --------------- ----------
Aaa AAA 125% 125 bps
Aa3 to Aa1 AA- to AA+ 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 250% 250 bps
Ba1 and below BB+ and below 300% 300 bps
Assuming the Fund maintains an Aaa/AAA rating on the Preferred Shares, the
practical effect of the different methods used to calculate the Maximum
Applicable Rate is shown in the table below:
MAXIMUM MAXIMUM METHOD USED
APPLICABLE RATE APPLICABLE RATE TO DETERMINE
USING THE APPLICABLE USING THE APPLICABLE THE MAXIMUM
REFERENCE RATE PERCENTAGE SPREAD APPLICABLE RATE
-------------- -------------------- -------------------- ---------------
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
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 Preferred
Shares 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 Preferred Shares 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 Preferred Shares, 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
52
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 Preferred Shares 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 Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the
Articles Supplementary.
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 Preferred Shares unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on the Preferred
Shares through its most recent dividend payment date. However, when the Fund has
not paid dividends in full on the Preferred Shares 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 Preferred Shares through their most recent
respective dividend payment dates, the amount of dividends declared per share on
Preferred Shares 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
Preferred Shares and such other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund may, in certain situations,
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 Preferred Shares 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
Preferred Shares 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 Preferred Shares 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 Preferred Shares (and
the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) have equal voting rights of one vote per share
and vote together as a single class. In elections of directors, the holders of
Preferred Shares (and the Series M7, Series T7, Series W7, Series TH7, Series
F7, Series W28A, Series W28B and Series W28C AMPS), as a separate class, vote to
elect two directors, and the holders of the Common Shares and holders of
Preferred Shares (and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and
53
Series W28C 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 Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS)
in an amount equal to two full years dividends, the holders of Preferred Shares
(and the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C 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 Preferred Shares (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C AMPS). The holders of Preferred Shares (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C 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 Preferred Shares
(together with the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS) of the number of directors that
such holders are entitled to elect. The persons elected by the holders of the
Preferred Shares (and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS), together with the
incumbent directors, will constitute the duly elected directors of the Fund.
When all dividends in arrears on the Preferred Shares have been paid or provided
for, the terms of office of the additional directors elected by the holders of
the Preferred Shares will terminate.
So long as any of the Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS)
are outstanding, the Fund will not, without the affirmative vote of the holders
of a majority of the outstanding Preferred Shares (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C 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 trust 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 Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C
AMPS), (D) liens, pledges,
54
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, 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 will 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 Preferred Shares (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series
W28C 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 Preferred Shares, voting separately from any other
series, will be required with respect to any matter that materially and
adversely affects the rights, preferences, or powers of the Preferred Shares 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 will 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.
The Common Shares and the Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C 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
Preferred Shares (together with the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS) described
above will in each case be in addition to any separate vote of the requisite
percentage of Common Shares and Preferred Shares (together with the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C AMPS), voting together as a single class, necessary to authorize the
action in question.
For purpose of any right of the holders of Preferred Shares to vote on any
matter, whether the right is created by the Charter, by statute or otherwise, a
holder of Preferred Shares is not entitled to vote and the AMPS will not be
deemed to be outstanding for the purpose of voting or determining the number of
Preferred Shares required to constitute a quorum, if prior to or concurrently
with a determination of the Preferred Shares entitled to vote or of Preferred
Shares deemed outstanding for quorum purposes, as the case may be, a notice of
redemption was given
55
in respect of those AMPS and sufficient Deposit Securities (as defined in the
SAI) for the redemption of those Preferred Shares 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 Preferred
Shares (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C 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 Preferred Shares, as of the last business day of each month in
which Preferred Shares (and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS) are outstanding, asset
coverage of at least 200% with respect to senior securities that are shares of
the Fund, including the Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C 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 year the asset coverage test
on a date randomly selected by the auditor. Based on the Fund's assets and
liabilities as of [ ], 2003 and assuming the issuance of all
Preferred Shares offered hereby and the use of the proceeds as intended, the
1940 Act Preferred Shares Asset Coverage with respect to Preferred Shares (and
the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) would be computed as follows:
Value of Fund assets less liabilities $
not constituting senior securities
---------------------------------------- = ------------ = %
Senior securities representing indebtedness $
plus liquidation value of the Preferred Shares
and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS
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 then rating the Preferred
Shares, the Fund will be required to redeem Preferred Shares as described below
under ' -- Redemption.'
56
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
Preferred Shares may, at any time, change or withdraw any such rating. The Board
of Directors may, without shareholder 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
Preferred Shares.
The Board of Directors may amend the definition of the Maximum Rate to
increase the percentage amount by which the Reference Rate is multiplied, or the
percentage spread added to the Reference Rate, to determine the Maximum Rate
without the vote or consent of the holders of Preferred Sharesor 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 Preferred Shares rating is an
assessment of the capacity and willingness of the Fund to pay Preferred Shares'
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell the Preferred Shares, 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
Preferred Shares 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 Preferred Shares 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 Preferred Shares.
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 Preferred
Shares 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 Preferred Shares 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 Preferred Shares 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 Preferred Shares of the Fund and any other preferred stock
57
of the Fund, subject to redemption or retirement. If fewer than all outstanding
shares of any series are, 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 Preferred
Shares, redeem Preferred Shares 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. Preferred Shares 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 Preferred Shares by
reason of the redemption of the Preferred Shares 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, Preferred Shares may not be redeemed at the
option of the Fund unless all dividends in arrears on the outstanding Preferred
Shares, and any other 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 Preferred Shares 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 Preferred Shares 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 Preferred Shares 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 is 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 Preferred Shares of the full preferential
amounts provided for as described herein, the holders of Preferred Shares as
such will 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 entity
nor the merger or consolidation of any other entity into or with the Fund, will
be a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
58
THE AUCTION
GENERAL
The Articles Supplementary provide that, except as otherwise described in
this prospectus, the applicable rate for the Preferred Shares for each rate
period after the initial rate period will be the rate that 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 Preferred Shares. 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 (initially, 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 Preferred Shares, so long as the
applicable rate for Preferred Shares 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 Preferred Shares.
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 liquidation preference ($25,000 per share) of the Preferred Shares 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 Preferred
Shares, 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
Preferred Shares may submit the following types of orders with respect to
Preferred Shares to that Broker-Dealer:
1. Hold Order -- indicating its desire to hold Preferred Shares without
regard to the applicable rate for the next rate period.
2. Bid -- indicating its desire to purchase or hold the indicated number of
Preferred Shares 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 Preferred Shares 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 Preferred Shares at $25,000
per share without regard to the applicable rate for shares of such series
for the next rate period.
59
A beneficial owner of Preferred Shares may submit different types of orders
to its Broker-Dealer with respect to Preferred Shares 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 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 Preferred Shares subject to the sell order. A beneficial owner that
offers to become the beneficial owner of additional Preferred Shares 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 Preferred Shares but that wishes to purchase Preferred
Shares or a beneficial owner that wishes to purchase additional Preferred
Shares. A potential holder may submit bids to its Broker-Dealer in which it
offers to purchase Preferred Shares 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 Preferred
Shares 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
Preferred Shares 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 Preferred
Shares 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 Preferred Shares 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 Preferred Shares 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
Preferred Shares 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 Preferred
60
Shares 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 90% of the reference
rate.
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 Preferred Shares 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 Preferred Shares will normally be held every [ ] days and
each subsequent rate period will normally begin on the following business day.
The first auction for Preferred Shares will be held on [ ], 2003,
the business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special rate periods, auctions for Preferred
Shares normally will be held every [ ] days, and each subsequent dividend
period the Preferred Shares normally will begin on the following business day.
If a dividend payment date is not a business day because the NYSE is closed
for business for more than three consecutive business days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications
services, or the dividend payable on such date can not be paid for any such
reason, then:
the dividend payment date for the affected dividend period will be the next
business day on which the Fund and its paying agent, if any, are able to
cause the dividend to by paid using their reasonable best efforts;
the affected dividend period will end on the day it would have ended had
such event not occurred and the dividend payment date had remained the
scheduled date; and
the next dividend period will begin and end on the dates on which it would
have begun and ended had such event not occurred and the dividend payment
date remained the scheduled date.
The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding Preferred Shares of any series, and three
current holders. The three current holders and three potential holders submit
orders through Broker-Dealers at the auction:
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%
61
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 Preferred Shares
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 PREFERRED SHARES
The underwriters are not required to make a market in the Preferred Shares.
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 Preferred Shares will develop
or, if it does develop, that it will provide owners with liquidity of
investment. Preferred Shares will not be registered on any stock exchange or on
the NASDAQ market. Investors who purchase Preferred Shares 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 Preferred Shares 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 (i) if you hold your Preferred Shares in the name of a Broker-Dealer,
a sale or transfer of your Preferred Shares 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 Preferred Shares immediately after the transaction
and (ii) 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.
62
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue [ ] 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 Preferred Shares are outstanding, holders of Common
Shares will not be entitled to receive any distributions from the Fund unless
all accrued dividends on Preferred Shares have been paid, and unless asset
coverage (as defined in the 1940 Act) with respect to Preferred Shares 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 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 Preferred Shares (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C 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 Preferred Shares (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C 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 Preferred Shares (and the
Series M7, Series T7, Series W7,
63
Series TH7, Series F7, Series W28A, Series W28B and Series W28C 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
Preferred Shares (and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS) outstanding at the
time, voting as a single class, other than votes held by an Interested 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 shareholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets as to which shareholder
approval is required under federal or Maryland law.
However, the shareholder 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 shareholder approval, the affirmative vote
of a majority of votes entitled to be cast thereon shall be required and if
Maryland law does not require shareholder approval, no shareholder 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
shareholders' 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 Preferred Shares in the Charter. See 'Description of Preferred
Shares -- 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 shareholders generally.
64
Reference is made to the Charter and By-Laws of the Fund, on file with the
Securities and Exchange Commission, for the full text of these provisions. These
provisions could have the effect of depriving shareholders 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. 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 Preferred Shares -- 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 Preferred
Shares (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C 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. Shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or 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.
REPURCHASE OF COMMON SHARES
Common shares of closed-end investment companies often trade at a discount
to net asset value, and the Fund's Common Shares may also trade at a discount to
their net asset value, although it is possible that they may trade at a premium
above net asset value. The market price of the Fund's Common Shares will be
determined by such factors as relative demand for and supply of the Common
Shares in the market, the Fund's net asset value, general market and economic
conditions and other factors beyond the control of the Fund. Although Common
Shareholders will not have the right to redeem the Common Shares, the Fund may
take action to repurchase Common Shares in the open market or make tender offers
for its Common Shares at net asset value.
65
The acquisition of Common Shares by the Fund will decrease the total assets
of the Fund and, therefore, have the effect of increasing the Fund's expense
ratio and may adversely affect the ability of the Fund to achieve its investment
objectives. To the extent the Fund may need to liquidate investments to fund
repurchases of Common Shares, this may result in portfolio turnover which will
result in additional expenses being borne by the Fund. The Board of Directors
currently considers the following factors to be relevant to a potential decision
to repurchase Common Shares: the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action on the Fund or its
shareholders and market considerations. Any share repurchases or tender offers
will be made in accordance with the requirements of the Securities Exchange Act
of 1934, as amended, and the 1940 Act. See 'U.S. Federal Taxation' for a
description of the potential tax consequences of a repurchase of Common Shares.
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% 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
66
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. Such distributions
generally would be eligible (i) for the DRD available to corporate shareholders
and (ii) for treatment as qualified dividend income in the case of individual
shareholders.
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 PREFERRED SHARES
Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the Preferred Shares at any time in the future, the Fund
believes that under present law the Preferred Shares will constitute stock of
the Fund and distributions with respect to the Preferred Shares (other than
distributions in redemption of the Preferred Shares 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
distributions of qualified dividend income and capital gain dividends, as
described below). 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, if properly designated,
may qualify for the DRD. In addition, for taxable years beginning on or before
December 31, 2008, distributions of investment income designated by the Fund as
derived from qualified dividend income will be taxed in the hands of individuals
at the rates applicable to long-
67
term capital gain, provided holding period and other requirements are met. The
Fund does not expect a significant portion of Fund distributions to be eligible
for the DRD or derived from qualified dividend income. The foregoing discussion
relies in part on a published ruling of the IRS stating that certain preferred
stock similar in many material respects to the Preferred Shares represents
equity. It is possible, however, that the IRS might take a contrary position
asserting, for example, that the Preferred Shares 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
Preferred Shares 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 distributions of qualified dividend income and
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
Preferred Shares. 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, capital gains,
dividends qualifying for the DRD and qualified dividend income) 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, dividends qualifying for the DRD and
dividends derived from qualified dividend income, if any, between its Common
Shares, the Preferred Shares and the Series M7, Series T7, Series W7, Series
TH7, Series F7, Series W28A, Series W28B and Series W28C 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, the Preferred Shares and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS. Since the Fund's current and accumulated
earnings and profits will first be used to pay dividends on the Preferred
Shares, distributions in excess of such earnings and profits, if any, will be
made disproportionately to holders of Common Shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions.
SALE OF SHARES
The sale or other disposition of Preferred Shares generally will be a
taxable transaction for U.S. federal income tax purposes. Selling holders of
Preferred Shares 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 Preferred Shares. If the Preferred Shares are held as a capital
asset, the gain or loss generally will be a capital gain or loss. Similarly, a
redemption (including a redemption resulting from liquidation of the Fund), if
any, of Preferred Shares by the Fund generally will give rise to capital gain or
loss if the holder does not own (and is not regarded
68
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 15% for taxable years beginning on
or before December 31, 2008 (after which time the maximum rate will increase to
20%). However, any loss realized upon a taxable disposition of Preferred 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 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 Preferred Shares may be
disallowed if other Preferred Shares 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 Preferred Shares 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 Preferred Shares.
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.
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated
[ ], 2003, each underwriter named below, acting through
[ ], has severally agreed to purchase,
69
and the Fund has agreed to sell, the number of Preferred Shares set forth
opposite the name of such underwriter.
NUMBER OF
UNDERWRITER PREFERRED SHARES
----------- ----------------
---------
Total...................................................
---------
---------
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 certain other conditions, including without
limitation, the receipt by the underwriters of customary closing certificates,
opinions and other documents and the receipt by the Fund of Aaa and AAA ratings
on the Preferred Shares by Moody' and S&P, respectively, as of the time of the
offering. The underwriters are obligated to purchase all the Preferred Shares if
they purchase any of the Preferred Shares. In the purchase agreement, 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 underwriters propose to initially offer some of the Preferred Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Preferred Shares to certain dealers at the
public offering price less a concession not in excess of $[ ] per share. The
sales load the Fund will pay of $[ ] 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
Preferred Shares purchased in the initial public offering on or before
[ ], 2003.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. 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 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 principal business address of [ ] is [ ].
The settlement date for the purchase of the Preferred Shares will be
[ ], 2003, as agreed upon by the underwriters, the Fund and the
Investment Manager pursuant to Rule 15c6-1 under the Securities Exchange Act of
1934.
70
CUSTODIAN, AUCTION AGENT, TRANSFER
AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Bank of New York, whose address is 100 Church Street, 8th Floor, New
York, New York 10286, will act as auction agent, transfer agent, dividend paying
agent, and registrar for the Preferred Shares. State Street Bank, whose
principal business address is 225 Franklin Street, Boston, Massachusetts 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 LLP, New York, New York, and certain other legal
matters will be passed on for the underwriters by [ ]. Venable
LLP will opine on certain matters pertaining to Maryland law. Simpson Thacher &
Bartlett LLP and [ ] may rely as to certain matters of Maryland
law on the opinion of Venable LLP.
INDEPENDENT ACCOUNTANTS
The statement of assets and liabilities of the Fund at [ ], 2003
has been audited by [ ], independent accountants, as set forth
in their report given upon [ ]'s authority as experts in
accounting and auditing. The address of [ ] is [ ].
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 Securities and Exchange Commission.
These documents can be inspected and copied for a fee at the Securities and
Exchange Commission'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 Preferred Shares can be found in
the Fund's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the Securities and Exchange Commission. The
Fund's SAI dated August [ ], 2003 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 Securities and Exchange
Commission 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 Securities and
Exchange Commission, including proxy statements and reports filed under the
Securities Exchange Act of 1934, as amended. Additional information may be found
on the Internet at http://www.cohenandsteers.com.
71
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
General Information......................................... 3
Investment Objectives and Policies, Additional Information
Regarding Fund Investments................................ 3
Investment Restrictions..................................... 11
Management of the Fund...................................... 12
Compensation of Directors and Certain Officers.............. 16
Investment Advisory and Other Services...................... 16
Portfolio Transactions and Brokerage........................ 25
Determination of Net Asset Value............................ 26
Additional Information Concerning the Auctions for Preferred
Shares.................................................... 26
S&P and Moody' Guidelines................................... 28
U.S. Federal Taxation....................................... 37
Performance Data and Index Returns.......................... 43
Experts..................................................... 44
Report of Independent Accountants........................... 45
Financial Information....................................... 46
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
72
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$
[COHEN & STEERS REIT AND PREFERRED INCOME FUND LOGO]
COHEN & STEERS
REIT AND PREFERRED INCOME FUND, INC.
AUCTION MARKET PREFERRED SHARES
[ ] SHARES, SERIES [ ]
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
PROSPECTUS
-----------------
[ ], 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED [ ], 2003
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE
AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
[COHEN & STEERS REIT AND PREFERRED INCOME FUND LOGO]
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(800) 437-9912
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
[ ], 2003
THIS STATEMENT OF ADDITIONAL INFORMATION ('SAI') OF COHEN & STEERS REIT AND
PREFERRED INCOME FUND, INC. (THE 'FUND') RELATING TO THIS OFFERING OF THE FUND'S
TAXABLE AUCTION MARKET PREFERRED SHARES (THE 'PREFERRED SHARES') DOES NOT
CONSTITUTE A PROSPECTUS, BUT SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS RELATING TO THE PREFERRED SHARES DATED [ ], 2003, AS
SUPPLEMENTED FROM TIME TO TIME (THE 'PROSPECTUS').
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
THIS PROSPECTUS OR IN THE GLOSSARY OF THIS SAI.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
General Information......................................... 3
Investment Objectives and Policies, Additional Information
Regarding Fund Investments................................ 3
Investment Restrictions..................................... 11
Management of the Fund...................................... 12
Compensation of Directors and Certain Officers.............. 16
Investment Advisory and Other Services...................... 16
Portfolio Transactions and Brokerage........................ 25
Determination of Net Asset Value............................ 26
Additional Information Concerning the Auctions for Preferred
Shares.................................................... 26
S&P and Moody' Guidelines................................... 28
U.S. Federal Taxation....................................... 37
Performance Data and Index Returns.......................... 43
Experts..................................................... 44
Report of Independent Accountants........................... 45
Financial Information....................................... 46
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
2
STATEMENT OF ADDITIONAL INFORMATION
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') is a
non-diversified, closed-end management investment company organized as a
Maryland corporation on March 25, 2003. Much of the information contained in
this Statement of Additional Information expands on subjects discussed in the
prospectus. Defined terms used herein have the same meanings as in the
prospectus. No investment in the shares of the Fund should be made without first
reading the prospectus.
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS
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 shareholders; however, the Fund will not change its non-fundamental
investment policies without written notice to shareholders.
INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS
Under normal market conditions, the Fund will invest at least 40%, but no
more than 60%, of our total assets in common stocks issued by real estate
companies or real estate investment trusts or '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
such 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 will consist
of securities issued by Equity REITs.
PREFERRED SECURITIES
Under normal market conditions, the Fund will invest at least 40%, but no
more than 60%, of its total assets in preferred securities. Initially, the
preferred component of the Fund will be comprised primarily of hybrid-preferred
and other taxable preferred securities. The taxable preferred securities in
which the Fund intends to invest do not qualify for the dividends received
deduction (the 'DRD') under Section 243 of the Internal Revenue Code of 1986, as
amended (the 'Code') and are not expected to provide significant benefits under
the rules relating to 'qualified dividend income.' The DRD generally allows
corporations to deduct from their income 70% of dividends received. Pursuant to
recently enacted legislation, individuals will generally be taxed at long-term
capital gain rates on qualified dividend income. Accordingly, any corporate
shareholder who otherwise would qualify for the DRD, and any individual
shareholder who otherwise would qualify to be taxed at long-term capital gain
rates on qualified dividend income, should assume that none of the distributions
it receives from the Fund will qualify for the DRD or provide significant
benefits under the rules relating to qualified dividend income.
3
There are two basic types of preferred securities: traditional preferred
securities and hybrid-preferred securities. When used in this SAI and the
related prospectus, taxable preferred securities refer generally to
hybrid-preferred securities as well as certain types of traditional preferred
securities that are not eligible for the DRD (and are not expected to provide
significant benefits under the rules relating to qualified dividend income),
such as REIT preferred securities.
Traditional Preferred Securities. Traditional preferred securities pay fixed
or adjustable rate 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. In order to be payable, distributions on
preferred securities must be declared by the issuer's board of directors. Income
payments on typical preferred securities currently outstanding are cumulative,
causing dividends and distributions to accrue even if not declared by the board
of directors or otherwise made payable. There is no assurance that dividends or
distributions on the preferred securities in which the Fund invests will be
declared or otherwise made payable. Preferred stockholders usually have no right
to vote for corporate directors or on other matters. Shares of preferred
securities have a liquidation value that generally equals the original purchase
price at the date of issuance. The market value of preferred securities may be
affected by favorable and unfavorable changes impacting companies in the
utilities, real estate and financial services sectors, which are prominent
issuers of preferred securities, and by actual and anticipated changes in tax
laws, such as changes in corporate income tax rates, the rates applicable to
qualified dividend income and in the DRD. Because the claim on an issuer's
earnings represented by preferred securities may become onerous when interest
rates fall below the rate payable on such securities, the issuer may redeem the
securities. Thus, in declining interest rate environments in particular, the
Fund's holdings of higher rate-paying fixed rate preferred securities may be
reduced and the Fund would be unable to acquire securities paying comparable
rates with the redemption proceeds.
Hybrid-Preferred Securities. The hybrid-preferred securities market is
divided into the '$25 par' and the 'institutional' segments. The $25 par segment
is typified by securities that are listed on the New York Stock Exchange, trade
and are quoted 'flat,' i.e., without accrued dividend income, and are typically
callable at par value five years after their original issuance date. The
institutional segment is typified by $1,000 par value securities that are not
exchange-listed, trade and are quoted on an 'accrued income' basis, and
typically have a minimum of ten years of call protection (at premium prices)
from the date of their original issuance.
Hybrid-preferred securities are treated in a similar fashion to traditional
preferred securities by several regulatory agencies, including the Federal
Reserve Bank, and by credit rating agencies, for various purposes, such as the
assignment of minimum capital ratios, over-collateralization rates and
diversification limits.
Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.
See 'Investment Objectives and Policies -- Portfolio
Composition -- Hybrid-Preferred Securities' in the Fund's prospectus for a
general description of hybrid-preferred securities.
SHORT-TERM FIXED INCOME SECURITIES
For temporary defensive purposes or to keep cash on hand fully invested, and
following the offering pending investment in securities that meet the Fund's
investment objectives, the Fund may
4
invest up to 100% of its total assets in cash equivalents and short-term fixed
income securities. Short-term fixed income investments are defined to include,
without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing
as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities. U.S. Government securities include securities issued
by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
and Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and
Tennessee Valley Authority, whose securities are supported by the right
of the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are supported only by its
credit. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it always will do so since it is not so obligated by
law. The U.S. Government, its agencies and instrumentalities do not
guarantee the market value of their securities. Consequently, the value
of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a
savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the
amount deposited plus interest to the bearer of the certificate on the
date specified thereon. Certificates of deposit purchased by the Fund
may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At
the time the Fund purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures a predetermined yield
for the Fund during its holding period, since the resale price is always
greater than the purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Fund to invest temporarily
available cash. The Fund may enter into repurchase agreements only with
respect to obligations of the U.S. Government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Fund may invest. Repurchase agreements may be considered loans
to the seller, collateralized by the underlying securities. The risk to
the Fund is limited to the ability of the seller to pay the agreed-upon
sum on the repurchase date; in the event of default, the repurchase
agreement provides that the Fund is entitled to sell the underlying
collateral. If the value of the collateral declines after the agreement
is entered into, and if the seller defaults under a repurchase agreement
when the value of the underlying collateral is less than the repurchase
price, the Fund could incur a loss of both principal and interest. The
Investment Manager monitors the value of the collateral at the time the
action is entered into and at all times during the term of the
repurchase agreement. The Investment Manager does so in an effort to
determine that the value of the collateral always equals or exceeds the
agreed-upon repurchase price to be paid to the Fund. If the seller were
to be subject to a federal bankruptcy proceeding, the ability of the
Fund to liquidate the collateral could be delayed or impaired because of
certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory
notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time.
5
The Investment Manager will consider the financial condition of the
corporation (e.g., earning power, cash flow and other liquidity ratios) and will
continuously monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the corporation
were unable to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the two highest categories by
a major rating agency or are unrated but determined to be of comparable quality
by the Investment Manager and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
LOWER RATED SECURITIES
The Fund may invest up to 10% of its total assets (measured at the time of
purchase) in securities rated below investment grade or securities comparably
rated by other rating agencies or in unrated securities determined by the
Investment Manager to be below investment grade. Securities rated Ba by Moody's
are judged to have speculative elements; their future cannot be considered as
well assured and often the protection of interest and principle payments may be
very moderate. Securities rated BB by S&P are regarded as having predominantly
speculative characteristics and, while such obligations have less near-term
vulnerability to default than other speculative grade debt, they face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Lower grade securities, though high yielding, are
characterized by high risk. They may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for the Fund to sell certain
securities or could result in lower prices than those used in calculating the
Fund's net asset value.
The prices of debt securities generally are inversely related to interest
rate changes; however, the price volatility caused by fluctuating interest rates
of securities also is inversely related to the coupons of such securities.
Accordingly, below investment grade securities may be relatively less sensitive
to interest rate changes than higher quality securities of comparable maturity
because of their higher coupon. This higher coupon is what the investor receives
in return for bearing greater credit risk. The higher credit risk associated
with below investment grade securities potentially can have a greater effect on
the value of such securities than may be the case with higher quality issues of
comparable maturity.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely disrupt the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principle and pay interest thereon and increase the incidence of default for
such securities.
The ratings of Moody's, S&P and other rating agencies represent their
opinions as to the quality of the obligations that they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principle payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be an
initial criterion for selection of portfolio investments, the Investment Manager
also will independently evaluate these securities and the ability for the
issuers of such securities to pay interest and principal. To the extent that the
Fund invests in lower grade securities that have not been rated by a rating
agency, the Fund's ability to achieve its investment objectives will be more
dependent on the Fund's credit analysis than would be the case when the Fund
invests in rated securities.
STRATEGIC TRANSACTIONS
Consistent with its investment objective and policies as set forth herein,
the Fund may also enter into certain hedging and risk management transactions.
In particular, the Fund may purchase and sell futures contracts, exchange-listed
and over-the-counter put and call options on securities, financial indices and
futures contracts and may enter into various interest rate transactions
6
(collectively, 'Strategic Transactions'). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of the Fund's
portfolio resulting from fluctuations in the securities markets and changes in
interest rates, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes or to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. Any or all of these techniques
may be used at any time. There is no particular strategy that requires use of
one technique rather than another. Use of any Strategic Transaction is a
function of market conditions. The Strategic Transactions that the Fund may use
are described below. The ability of the Fund to hedge successfully will depend
on the Investment Manager's ability to predict pertinent market movements, which
cannot be assured.
Interest Rate Transactions. Among the Strategic Transactions into which the
Fund may enter are interest rate swaps and the purchase or sale of interest rate
caps and floors. The Fund expects to enter into the transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio as a duration management technique or to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date or,
as discussed in the prospectus, to hedge against increased Fund Preferred Share
dividend rates or increases in the Fund's cost of borrowing.
Futures Contracts and Options on Futures Contracts. In connection with its
hedging and other risk management strategies, the Fund may also enter into
contracts for the purchase or sale for future delivery ('future contracts') of
debt securities, aggregates of debt securities, financial indices, and U.S.
Government debt securities or options on the foregoing to hedge the value of its
portfolio securities that might result from a change in interest rates or market
movements. The Fund will engage in such transactions only for bona fide hedging
or non-hedging purposes in accordance with CFTC regulations which permit
principals of an investment company registered under the 1940 Act to engage in
such transactions without registering as commodity pool operators. The Fund will
determine that the price fluctuations in the futures contracts and options on
futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which the Fund expects to
purchase. Except as stated below, the Fund's futures transactions will be
entered into for traditional hedging purposes -- i.e., futures contracts will be
sold to protect against a decline in the price of securities that the Fund owns,
or futures contracts will be purchased to protect the Fund against an increase
in the price of securities it intends to purchase.
Although the Fund does not intend to engage in non-hedging transactions, in
accordance with CFTC regulations, the Fund is permitted to engage in non-hedging
transactions, provided that:
(i) its pro rata share of the sum of the amount of initial margin
deposits on futures contracts entered into by the Fund and premiums paid for
unexpired options with respect to such contracts does not exceed 5% of the
liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on such contracts and options (in the case of
an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation); or
(ii) the aggregate 'notional value' (i.e., the size of the contract, in
contract units, times the current market price (futures position) or strike
price (options position) of each such unit) of the contract, it does not
exceed the liquidation value of the Fund, after taking into account
unrealized profits and unrealized losses on such contracts and options.
Credit Derivatives. The Fund may engage in credit derivative transactions.
There are two broad categories of credit derivatives: default price risk
derivatives and market spread derivatives. Default price risk derivatives are
linked to the price of reference securities or loans after a default by the
issuer or borrower, respectively. Market spread derivatives are based on the
risk that changes in market factors, such as credit spreads, can cause a decline
in the value of a security, loan or index. There are three basic transactional
forms for credit derivatives: swaps, options and structured instruments. The use
of credit derivatives is a highly specialized activity that involves strategies
and risks different from those associated with ordinary portfolio security
transactions. If incorrect in its forecasts of default risks, market spreads or
other applicable factors, the investment
7
performance of the Fund would diminish compared with what it would have been if
these techniques were not used. Moreover, even if it is correct in its
forecasts, there is a risk that a credit derivative position may correlate
imperfectly with the price of the asset or liability being hedged. There is no
limit on the amount of credit derivative transactions that may be entered into
by the Fund. The Fund's risk of loss in a credit derivative transaction varies
with the form of the transaction. For example, if the Fund purchases a default
option on a security, and if no default occurs with respect to the security, the
Fund's loss is limited to the premium it paid for the default option. In
contrast, if there is a default by the grantor of a default option, the Fund's
loss will include both the premium that it paid for the option and the decline
in value of the underlying security that the default option hedged.
Calls on Securities, Indices and Futures Contracts. In order to enhance
income or reduce fluctuations in net asset value, the Fund may sell or purchase
call options ('calls') on securities, futures contracts and indices based upon
the prices of debt securities that are traded on U.S. securities exchanges and
to the over-the-counter markets. A call option gives the purchaser of the option
the right to buy, and obligates the seller to sell, the underlying security,
futures contract or index at the exercise price at any time or at a specified
time during the option period. All such calls sold by the Fund must be 'covered'
as long as the call is outstanding (i.e., the Fund must own the instrument
subject to the call or other securities or assets acceptable for applicable
segregation and coverage requirements). A call sold by the Fund exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security, index or futures
contract and may require the Fund to hold an instrument that it might otherwise
have sold. The purchase of a call gives the Fund the right to buy the underlying
instrument or index at a fixed price. Calls on futures contracts on securities
written by the Fund must also be covered by assets or instruments acceptable
under applicable segregation and coverage requirement.
Puts on Securities, Indices and Futures Contracts. As with calls, the Fund
may purchase put options ('puts') on securities (whether or not it holds such
securities in its portfolio). For the same purposes, the Fund may also sell puts
on securities, financial indices and puts on futures contracts on securities if
the Fund's contingent obligations on such puts are secured by segregated assets
consisting of cash or liquid securities having a value not less than the
exercise price. The Fund will not sell puts if, as a result, more than 50% of
the Fund's assets would be required to cover its potential obligation under its
hedging and other investment transactions. In selling puts, there is a risk that
the Fund may be required to buy the underlying instrument or index at higher
than the current market price.
The principal risks relating to the use of futures and other Strategic
Transitions are: (i) less than perfect correlation between the prices of the
hedging instrument and the market value of the securities in the Fund's
portfolio; (ii) possible lack of a liquid secondary market for closing out a
position in such instruments; (iii) losses resulting from interest rate or other
market movements not anticipated by the Investment Manager; and (iv) the
obligation to meet additional variation margin or other payment requirements.
Certain provisions of the Code may restrict or affect the ability of the
Fund to engage in Strategic Transactions. See 'U.S. Federal Taxation.'
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
open- or closed-end investment companies; including exchange traded funds that
invest primarily in securities of the types in which the Fund may invest
directly. The Fund generally expects to invest in other investment companies
either during periods when it has large amounts of uninvested cash, such as the
period shortly after the Fund receives the proceeds of the offering of its
common shares, or during periods when there is a shortage of attractive
opportunities in the market. As a shareholder in an investment company, the Fund
would bear its ratable share of that investment company's expenses, and would
remain subject to payment of the Fund's advisory and other fees and expenses
with respect to assets so invested. Holders of common shares would therefore be
subject
8
to duplicative expenses to the extent the Fund invests in other investment
companies. The Investment Manager will take expenses into account when
evaluating the investment merits of an investment in an investment company
relative to available bond investments. The securities of other investment
companies may also be leveraged and will therefore be subject to the same
leverage risks to which the Fund is subject. As described in the prospectus in
the sections entitled 'Use of Leverage' the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares. Investment
companies may have investment policies that differ from those of the Fund. In
addition, to the extent the Fund invests in other investment companies, the Fund
will be dependent upon the investment and research abilities of persons other
than the Investment Manager.
RESTRICTED AND ILLIQUID SECURITIES
When purchasing securities that have not been registered under the
Securities Act, and are not readily marketable, the Fund will endeavor, to the
extent practicable, to obtain the right to registration at the expense of the
issuer. Generally, there will be a lapse of time between the Fund's decision to
sell any such security and the registration of the security permitting sale.
During any such period, the price of the securities will be subject to market
fluctuations. In addition, the Fund may not be able to readily dispose of such
securities at prices that approximate those at which the Fund could sell such
securities if they were more widely traded and, as a result of such illiquidity,
the Fund may have to sell other investments or engage in borrowing transactions
if necessary to raise cash to meet its obligations.
The Fund may purchase certain securities eligible for resale to qualified
institutional buyers as contemplated by Rule 144A under the Securities Act
('Rule 144A Securities'). Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to certain qualified institutional buyers. One effect of Rule 144A is
that certain restricted securities may be considered liquid, though no assurance
can be given that a liquid market for Rule 144A Securities will develop or be
maintained. However, where a substantial market of qualified institutional
buyers has developed for certain unregistered securities purchased by the Fund
pursuant to Rule 144A, the Fund intends to treat such securities as liquid
securities in accordance with procedures approved by the Fund's Board of
Directors. Because it is not possible to predict with assurance how the market
for Rule 144A Securities will develop, the Fund's Board of Directors has
directed the Investment Manager to monitor carefully the Fund's investments in
such securities with particular regard to trading activity, availability of
reliable price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, the Fund's investing in such securities may
have the effect of increasing the level of illiquidity in its investment
portfolio during such period.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase securities on a 'when-issued' basis and may purchase
or sell securities on a 'forward commitment' basis in order to acquire the
security or to hedge against anticipated changes in interest rates and prices.
When such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. When-issued securities
and forward commitments may be sold prior to the settlement date, but the Fund
will enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the Fund
disposes of the right to acquire a when-issued security prior to its acquisition
or disposes of its right to deliver or receive against a forward commitment, it
might incur a gain or loss. At the time the Fund enters into a transaction on a
when-issued or forward commitment basis, it will designate on its books and
records cash or liquid debt securities equal to at least the value of the
when-issued or forward commitment securities. The value of these assets will be
monitored daily to ensure that their marked to market value will at all times
9
equal or exceed the corresponding obligations of the Fund. There is always a
risk that the securities may not be delivered and that the Fund may incur a
loss. Settlements in the ordinary course, which may take substantially more than
three business days, are not treated by the Fund as when-issued or forward
commitment transactions and accordingly are not subject to the foregoing
restrictions.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, actual or anticipated, in the level of interest rates. Securities
purchased with a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risks that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the Fund
is fully invested may result in greater potential fluctuation in the value of
the Fund's net assets and its net asset value per share.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein.
Reverse repurchase agreements involve the sale of securities held by the Fund
with an agreement by the Fund to repurchase the securities at an agreed upon
price, date and interest payment. The use by the Fund of reverse repurchase
agreements involves many of the same risks of leverage described under 'Use of
Leverage,' since the proceeds derived from such reverse repurchase agreements
may be invested in additional securities. At the time the Fund enters into a
reverse repurchase agreement, it may designate on its books and records liquid
instruments having a value not less than the repurchase price (including accrued
interest). If the Fund designates liquid instruments on its books and records, a
reverse repurchase agreement will not be considered a borrowing by the Fund;
however, under circumstances in which the Fund does not designate liquid
instruments on its books and records, such reverse repurchase agreement will be
considered a borrowing for the purpose of the Fund's limitation on borrowings.
Reverse repurchase agreements involve the risk that the market value of the
securities acquired in connection with the reverse repurchase agreement may
decline below the price of the securities the Fund has sold but is obligated to
repurchase. Also, reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale by the Fund in connection with
the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
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 Moody's or S&P, certificates of
deposit, bankers' acceptances
10
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;
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;
6. Invest more than 25% of its total assets in securities of issuers in
any one industry other than the real estate industry, in which at least 25%
of the Fund's total assets will be invested; provided, however, that such
limitation shall not apply to obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities;
7. Purchase preferred stock and debt securities rated below investment
grade and unrated securities of comparable quality, if, as a result, more
than 10% of the Fund's total assets would then be invested in such
securities;
8. 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, or any exemption granted
under the 1940 Act, and (b) acquire securities of any investment company as
part of a merger, consolidation or similar transaction;
9. 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;
10. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowings; or
11. Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities.
11
The investment restrictions numbered 1 through 6 in this Statement of
Additional Information have been adopted as fundamental policies of the Fund.
Under the 1940 Act, a fundamental policy may not be changed without the approval
of the holders of a 'majority of the outstanding' Common Shares and Preferred
Shares (and Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS) voting together as a single
class, and of the holders of a 'majority of the outstanding' Preferred Shares
and the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS voting as a separate class. When used with
respect to particular shares of the Fund, a 'majority of the outstanding' shares
means (i) 67% or more of the shares present at a meeting, if the holders of more
than 50% of the shares are present or represented by proxy, or (ii) more than
50% of the shares, whichever is less. Investment restrictions numbered 7 through
11 above are non-fundamental and may be changed at any time by vote of a
majority of the Board of Directors.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance the value of the Fund's total assets is at
least 200% of the liquidation value of the outstanding preferred shares (i.e.,
such liquidation value may not exceed 50% of the Fund's total assets less
liabilities other than borrowing). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Common Shares unless, at
the time of such declaration, the value of the Fund's total assets less
liabilities other than borrowing is at least 200% of such liquidation value. The
Fund intends, to the extent possible, to purchase or redeem Preferred Shares
from time to time to the extent necessary in order to maintain coverage of any
Preferred Shares of at least 200%. If the Fund has Preferred Shares outstanding,
two of the Fund's Directors will be elected by the holders of the Preferred
Shares (and any Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS outstanding), voting separately as
a class. The remaining Directors of the Fund will be elected by holders of
Common Shares and Preferred Shares (and Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS) voting
together as a single class. In the event the Fund failed to pay dividends on
Preferred Shares for two years, Preferred Shareholders would be entitled to
elect a majority of the Directors of the Fund.
Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing the value of the Fund's total assets less
liabilities other than the borrowing is at least 300% of the principal amount of
such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the value of the Fund's total assets, less liabilities other than
the borrowings, is at least 300% of such principal amount. If the Fund borrows,
the Fund intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle the debt holders to
elect a majority of the board of directors.
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, 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 [ ], 2003, the Directors and
officers as a group beneficially owned, directly or indirectly, less than 1% of
the outstanding shares of the Fund.
Basic information about the identity and experience of each Director and
officer is set forth in the charts below. Each such Director and officer is also
a director or officer of Cohen & Steers Advantage Income Realty Fund, Inc.,
Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers Premium Income
Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc., which are
closed-end investment companies 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.
12
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 Co-Chairman and 9 Since
757 Third Avenue of the Board, and Election of Co-Chief Executive Inception
New York, New York Secretary Directors Officer of Cohen &
Age: 50 Steers Capital
Management, Inc.,
the Fund's
Investment Manager.
Martin Cohen* ........... Director, Until Next Co-Chairman and 9 Since
757 Third Avenue President and Election of Co-Chief Executive Inception
New York, New York Treasurer Directors Officer of Cohen &
Age: 54 Steers Capital
Management, Inc.,
the Fund's
Investment Manager.
DISINTERESTED DIRECTORS
Gregory C. Clark ........ Director Until Next Private Investor. 9 Since
99 Jane Street Election of Prior thereto, Inception
New York, New York Directors President of
Age: 56 Wellspring
Management Group
(investment
advisory firm).
Bonnie Cohen* ........... Director Until Next Consultant. Prior 9 Since
1824 Phelps Place, N.W. Election of thereto, Inception
Washington, D.C. Directors Undersecretary of
Age: 60 State, United
States Department
of State. Director
of Wellsford Real
Properties, Inc.
George Grossman ......... Director Until Next Attorney-at-law. 9 Since
17 Elm Place Election of Inception
Rye, New York Directors
Age: 49
(table continued on next page)
13
(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
--------------------- --------- ------ ------------------- --------- -----------
Richard J. Norman ....... Director Until Next Private Investor. 9 Since
7520 Hackamore Drive Election of Prior thereto, Inception
Potomac, Maryland Directors Investment
Age: 60 Representative of
Morgan Stanley Dean
Witter.
Willard H. Smith, Jr. ... Director Until Next Board member of 9 Since
7231 Encelia Drive Election of Essex Property Inception
La Jolla, California Directors Trust Inc.,
Age: 66 Highwoods
Properties, Inc.,
Realty Income
Corporation and
Crest Net Lease,
Inc. Managing
Director at Merrill
Lynch & Co., Equity
Capital Markets
Division from 1983
to 1995.
---------
* 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
NAME, ADDRESS AND AGE WITH 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 Vice
Age: 37 President of the Fund's Investment Manager
since 2000. Prior thereto, he was an
investment analyst with another real estate
securities investment manager.
William F. Scapell ........... Vice President Senior Vice President of Cohen & Steers
757 Third Avenue Capital Management, Inc., the Fund's
New York, New York Investment Manager, since February 2003.
Age: 36 Prior thereto, he was the chief strategist
for preferred securities at Merrill Lynch &
Co.
Adam M. Derechin ............. Vice President and Chief Operating Officer of Cohen & Steers
757 Third Avenue Assistant Treasurer Capital Management, Inc., the Fund's
New York, New York Investment Manager, since August, 2003 and
Age: 39 a Senior Vice President of the Fund's
Investment Manager since 1998. Prior
thereto he was a Vice President of the
Fund's Investment Manager.
(table continued on next page)
14
(table continued from previous page)
POSITION(S) HELD
NAME, ADDRESS AND AGE WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- --------- -------------------------------------------
Lawrence B. Stoller .......... Assistant Secretary Senior Vice President and General Counsel
757 Third Avenue of Cohen & Steers Capital Management, Inc.,
New York, New York the Fund's Investment Manager, since 1999.
Age: 40 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.
AGGREGATE DOLLAR
RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN THE
EQUITY SECURITIES IN COHEN & STEERS
THE FUND AS OF FUND COMPLEX AS OF
[ ], 2003 [ ], 2003
--------- ---------
Robert H. Steers.........................................
Martin Cohen.............................................
Gregory C. Clark.........................................
Bonnie Cohen.............................................
George Grossman..........................................
Richard Norman...........................................
Willard H. Smith, Jr. ...................................
Conflicts of Interest. No Director who is not 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 a
meeting held on May 28, 2003. 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 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. 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 $.05 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, as amended, that the
Investment Manager would be eligible to receive by allocating the Fund's
brokerage transactions.
15
COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS
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, 2003 and the aggregate compensation paid by the fund complex of
which the Fund is a part for the fiscal year ended December 31, 2002. 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 $5,000, 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 aggregate amount paid to the Director by the
Fund and the seven 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
COMPENSATION
AGGREGATE FROM FUND
COMPENSATION COMPLEX PAID TO
NAME OF PERSON, POSITION OF FUND DIRECTORS FROM FUND DIRECTORS
------------------------------------------ --------- ---------
Gregory C. Clark,* Director................................. $ $52,500
Bonnie Cohen,* Director..................................... $ $49,000
Martin Cohen,** Director and President...................... $ 0 $ 0
George Grossman,* Director.................................. $ $52,500
Richard J. Norman,* Director................................ $ $52,500
Willard H. Smith, Jr.,* Director............................ $ $52,000
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
affiliation with Cohen & Steers Capital Management, Inc., the Fund's
Investment Manager.
PRINCIPAL STOCKHOLDERS
To the knowledge of the Fund, as of September 30, 2003, 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.
As of September 30, 2003, 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. Its
current clients include pension plans of leading corporations, endowment funds
and registered funds, including the Fund, Cohen & Steers Advantage Income Realty
Fund, Inc., Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers
Premium Income Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund,
Inc., 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. 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
16
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 .65% of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares, including the liquidation preference on the Preferred Shares
and the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C 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 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 Company, 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 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, .06% of the Fund's average daily managed assets up to $1
billion, .04% of the Fund's average daily managed assets in excess of $1 billion
up to $1.5 billion and .02% of the Fund's average daily managed assets in excess
of $1.5 billion.
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
Securities and Exchange Commission 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
17
is computed on the basis of the average daily managed assets in the Fund at an
annual rate equal to .030% of the first $200 million in assets, .020% of the
next $200 million, and .010% 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., six funds at $200 million or
$1.2 billion at .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, as custodian, and EquiServe Trust Company, NA,
as 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 AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank, which has its principal business office at 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments and EquiServe Trust Company, NA, which has its principal business
office at 150 Royall Street, Canton, MA 02021, as the Fund's transfer and
dividend disbursing agent. Neither State Street nor EquiServe 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 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, real estate securities and preferred 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.
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
the Fund protects that information, and why in certain cases the Fund 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, the Fund receives 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.
PROXY VOTING
The Fund's Board of Directors has delegated to the Investment Manager the
responsibility for voting proxies on behalf of the Fund, and has determined that
proxies with respect to the Fund's portfolio companies shall be voted in
accordance with Cohen & Steers Capital Management, Inc.'s Statement of Policies
and Procedures Regarding the Voting of Securities (the 'Proxy Voting
18
Policies and Procedures'). The following is a summary of the Proxy Voting
Policies and Procedures.
Voting rights are an important component of corporate governance. The
Investment Manager has three overall objectives in exercising voting rights:
A. Responsibility. The Investment Manager shall seek to ensure that
there is an effective means in place to hold companies accountable for their
actions. While management must be accountable to its board, the board must
be accountable to a company's shareholders. Although accountability can be
promoted in a variety of ways, protecting shareholder voting rights may be
among our most important tools.
B. Rationalizing Management and Shareholder Concerns. The Investment
Manager seeks to ensure that the interests of a company's management and
board are aligned with those of the company's shareholders. In this respect,
compensation must be structured to reward the creation of shareholder value.
C. Shareholder Communication. Since companies are owned by their
shareholders, the Investment Manager seeks to ensure that management
effectively communicates with its owners about the company's business
operations and financial performance. It is only with effective
communication that shareholders will be able to assess the performance of
management and to make informed decisions on when to buy, sell or hold a
company's securities.
In exercising voting rights, the Investment Manager shall conduct itself in
accordance with the general principles set forth below.
1. The ability to exercise a voting right with respect to a security is
a valuable right and, therefore, must be viewed as part of the asset
itself.
2. In exercising voting rights, the Investment Manager shall engage in a
careful evaluation of issues that may materially affect the rights of
shareholders and the value of the security.
3. Consistent with general fiduciary principles, the exercise of voting
rights shall always be conducted with reasonable care, prudence and
diligence.
4. In exercising voting rights on behalf of clients, the Investment
Manager conduct itself in the same manner as if it were the
constructive owner of the securities.
5. To the extent reasonably possible, the Investment Manager participate
in each shareholder voting opportunity.
6. Voting rights shall not automatically be exercised in favor of
management-supported proposals.
7. The Investment Manager, and its officers and employees, shall never
accept any item of value in consideration of a favorable proxy voting
decision.
Set forth below are general guidelines that the Investment Manager shall
follow in exercising proxy voting rights:
Prudence. In making a proxy voting decision, the Investment Manager
shall give appropriate consideration to all relevant facts and
circumstances, including the value of the securities to be voted and the
likely effect any vote may have on that value. Since voting rights must be
exercised on the basis of an informed judgment, investigation shall be a
critical initial step.
Third Party Views. While the Investment Manager may consider the views
of third parties, it shall never base a proxy voting decision solely on the
opinion of a third party. Rather, decisions shall be based on a reasonable
and good faith determination as to how best to maximize shareholder value.
Shareholder Value. Just as the decision whether to purchase or sell a
security is a matter of judgment, determining whether a specific proxy
resolution will increase the market value of
19
a security is a matter of judgment as to which informed parties may differ.
In determining how a proxy vote may affect the economic value of a security,
The Investment Manager shall consider both short-term and long-term views
about a company's business and prospects, especially in light of our
projected holding period on the stock (e.g., the Investment Manager may
discount long-term views on a short-term holding).
Set forth below are guidelines as to how specific proxy voting issues shall
be analyzed and assessed. While these guidelines will provide a framework for
our decision making process, the mechanical application of these guidelines can
never address all proxy voting decisions. When new issues arise or old issues
present nuances not encountered before, the Investment Manager must be guided by
its reasonable judgment to vote in a manner that the Investment Manager deems to
be in the best interests of the Fund and its shareholders.
Stock-Based Compensation
Approval of Plans or Plan Amendments. By their nature, compensation plans
must be evaluated on a case-by-case basis. As a general matter, the Investment
Manager always favors compensation plans that align the interests of management
and shareholders. The Investment Manager generally approves compensation plans
under the following conditions:
10% Rule. The dilution effect of the newly authorized shares, plus the
shares reserved for issuance in connection with all other stock related
plans, generally should not exceed 10%.
Exercise Price. The minimum exercise price of stock options should be at
least equal to the market price of the stock on the date of grant.
Plan Amendments. Compensation plans should not be materially amended
without shareholder approval.
Non-Employee Directors. Awards to non-employee directors should not be
subject to management discretion, but rather should be made under
non-discretionary grants specified by the terms of the plan.
Repricing/Replacement of Underwater Options. Stock options generally
should not be re-priced, and never should be re-priced without shareholder
approval. In addition, companies should not issue new options, with a lower
strike price, to make up for previously issued options that are
substantially underwater. The Investment Manager will vote against the
election of any slate of directors that, to its knowledge, has authorized a
company to re-price or replace underwater options during the most recent
year without shareholder approval.
Reload/Evergreen Features. The Investment Manager will generally vote
against plans that enable the issuance of reload options and that provide an
automatic share replenishment ('evergreen') feature.
Measures to Increase Executive Long-Term Stock Ownership. The Investment
Manager supports measures to increase the long-term stock ownership by a
company's executives. These include requiring senior executives to hold a
minimum amount of stock in a company (often expressed as a percentage of
annual compensation), requiring stock acquired through option exercise to be
held for a certain minimum amount of time, and issuing restricted stock
awards instead of options. In this respect, we support the expensing of
option grants because it removes the incentive of a company to issue options
in lieu of restricted stock. The Investment Manager also supports employee
stock purchase plans, although the Investment Manager generally believe the
discounted purchase price should be at least 85% of the current market
price.
Vesting. Restricted stock awards normally should vest over at least a
two-year period.
Other Stock Awards. Stock awards other than stock options and restricted
stock awards should be granted in lieu of salary or a cash bonus, and the
number of shares awarded should be reasonable.
20
Change of Control Issues
While the Investment Manager recognizes that a takeover attempt can be a
significant distraction for the board and management to deal with, the simple
fact is that the possibility of a corporate takeover keeps management focused on
maximizing shareholder value. As a result, the Investment Manager opposes
measures that are designed to prevent or obstruct corporate takeovers because
they can entrench current management. The following are the Investment Manager's
guidelines on change of control issues:
Shareholder Rights Plans. The Investment Manager acknowledges that there
are arguments for and against shareholder rights plans, also known as
'poison pills.' Companies should put their case for rights plans to
shareholders. The Investment Manager generally votes against any directors
who, without shareholder approval, to our knowledge have instituted a new
poison pill plan, extended an existing plan, or adopted a new plan upon the
expiration of an existing plan during the past year.
Golden Parachutes. The Investment Manager opposes the use of accelerated
employment contracts that result in cash grants of greater than three times
annual compensation (salary and bonus) in the event of termination of
employment following a change in control of a company. In general, the
guidelines call for voting against 'golden parachute' plans because they
impede potential takeovers that shareholders should be free to consider. The
Investment Manager generally withholds votes at the next shareholder meeting
for directors who to its knowledge approved golden parachutes.
Approval of Mergers. The Investment Manager votes against proposals that
require a super-majority of shareholders to approve a merger or other
significant business combination. The Investment Manager supports proposals
that seek to lower super-majority voting requirements.
Routine Issues
Director Nominees in a Non-Contested Election -- The Investment Manager
generally votes in favor of management proposals on director nominees.
Director Nominees in a Contested Election -- By definition, this type of
board candidate or slate runs for the purpose of seeking a significant change in
corporate policy or control. Therefore, the economic impact of the vote in favor
of or in opposition to that director or slate must be analyzed using a higher
standard normally applied to changes in control. Criteria for evaluating
director nominees as a group or individually should include: performance;
compensation, corporate governance provisions and takeover activity; criminal
activity; attendance at meetings; investment in the company; interlocking
directorships; inside, outside and independent directors; whether the chairman
and CEO titles are held by the same person; number of other board seats; and
other experience. It is impossible to have a general policy regarding director
nominees in a contested election.
Board Composition -- The Investment Manager supports the election of a board
that consists of at least a majority of independent directors. The Investment
Manager generally withholds support for non-independent directors who serve on a
company's audit, compensation and/or nominating committees. The Investment
Manager also generally withholds support for director candidates who have not
attended a sufficient number of board or committee meetings to effectively
discharge their duties as directors.
Classified Boards -- Because a classified board structure prevents
shareholders from electing a full slate of directors at annual meetings, the
Investment Manager generally votes against classified boards. The Investment
Manager votes in favor of shareholder proposals to declassify a board of
directors unless a company's charter or governing corporate law allows
shareholders, by written consent, to remove a majority of directors at any time,
with or without cause.
21
Barriers to Shareholder Action -- The Investment Manager votes to support
proposals that lower the barriers to shareholder action. This includes the right
of shareholders to call a meeting and the right of shareholders to act by
written consent.
Cumulative Voting -- Having the ability to cumulate votes for the election
of directors -- that is, cast more than one vote for a director about whom they
feel strongly -- generally increases shareholders' rights to effect change in
the management of a corporation. The Investment Manager therefore generally
supports proposals to adopt cumulative voting.
Ratification of Auditors -- Votes generally are cast in favor of proposals
to ratify an independent auditor, unless there is a reason to believe the
auditing firm is no longer performing its required duties or there are exigent
circumstances requiring us to vote against the approval of the recommended
auditor. For example, the Investment Manager's general policy is to vote against
an independent auditor that receives more than 50% of its total fees from a
company for non-audit services.
Stock Related Items
Increase Additional Common Stock -- The Investment Manager's guidelines
generally call for approval of increases in authorized shares, provided that the
increase is not greater than three times the number of shares outstanding and
reserved for issuance (including shares reserved for stock-related plans and
securities convertible into common stock, but not shares reserved for any poison
pill plan).
Votes generally are cast in favor of proposals to authorize additional
shares of stock except where the proposal:
1. creates a blank check preferred stock; or
2. establishes classes of stock with superior voting rights.
Blank Check Preferred Stock -- Votes generally are cast in opposition to
management proposals authorizing the creation of new classes of preferred stock
with unspecific voting, conversion, distribution and other rights, and
management proposals to increase the number of authorized blank check preferred
shares. The Investment Manager may vote in favor of this type of proposal when
it receives assurances to its reasonable satisfaction that (i) the preferred
stock was authorized by the board for the use of legitimate capital formation
purposes and not for anti-takeover purposes, and (ii) no preferred stock will be
issued with voting power that is disproportionate to the economic interests of
the preferred stock. These representations should be made either in the proxy
statement or in a separate letter from the company to the Investment Manager.
Preemptive Rights -- Votes are cast in favor of shareholder proposals
restoring limited preemptive rights.
Dual Class Capitalizations -- Because classes of common stock with unequal
voting rights limit the rights of certain shareholders, the Investment Manager
votes against adoption of a dual or multiple class capitalization structure.
Social Issues
The Investment Manager believes that it is the responsibility of the board
and management to run a company on a daily basis. With this in mind, in the
absence of unusual circumstances, the Investment Manager does not believe that
shareholders should be involved in determining how a company should address
broad social and policy issues. As a result, the Investment Manager generally
votes against these types of proposals, which are generally initiated by
shareholders, unless the Investment Manager believes the proposal has
significant economic implications.
Other Situations
No set of guidelines can anticipate all situations that may arise. The
Investment Manager's portfolio managers and analysts will be expected to analyze
proxy proposals in an effort to gauge
22
the impact of a proposal on the financial prospects of a company, and vote
accordingly. These policies are intended to provide guidelines for voting. They
are not, however, hard and fast rules because corporate governance issues are so
varied.
Proxy Voting Procedures
The Investment Manager maintains a record of all voting decisions for the
period required by applicable laws. In each case in which the Investment Manager
votes contrary to the stated policies set forth in these guidelines, the record
shall indicate the reason for such a vote.
The Investment Committee of the Investment Manager shall have responsibility
for voting proxies, under the supervision of the Director of Research. The
Director of Research's designee (the 'Designee') shall be responsible for
ensuring that the Investment Committee is aware of all upcoming proxy voting
opportunities. The Designee shall ensure that proxy votes are properly recorded
and that the requisite information regarding each proxy voting opportunity is
maintained. The Investment Manager's General Counsel shall have overall
responsibility for ensuring that the Investment Manager complies with all proxy
voting requirements and procedures.
Recordkeeping
The Designee shall be responsible for recording and maintaining the
following information with respect to each proxy voted by the Investment
Manager:
Name of the company
Ticker symbol
CUSIP number
Shareholder meeting date
Brief identification of each matter voted upon
Whether the matter was proposed by management or a shareholder
Whether the Investment Manager voted on the matter
If the Investment Manager voted, then how the Investment Manager voted
Whether the Investment Manager voted with or against management
The Investment Manager's General Counsel shall be responsible for
maintaining and updating the Policies and Procedures, and for maintaining any
records of written client requests for proxy voting information and documents
that were prepared by the Investment Manager and were deemed material to making
a voting decision or that memorialized the basis for the decision.
The Investment Manager shall rely on the Securities and Exchange
Commission's EDGAR filing system with respect to the requirement to maintain
proxy materials regarding client securities.
Conflicts of Interest
There may be situations in which the Investment Manager may face a conflict
between its interests and those of its clients or fund shareholders. Potential
conflicts are most likely to fall into three general categories:
Business Relationships -- This type of conflict would occur if the
Investment Manager or an affiliate has a substantial business relationship
with the company or a proponent of a proxy proposal relating to the company
(such as an employee group) such that failure to vote in favor of management
(or the proponent) could harm the relationship of the Investment Manager or
its affiliate with the company or proponent. In the context of the
Investment Manager, this could occur if an affiliate of the Investment
Manager has a material business relationship with a company that Investment
Manager has invested in on behalf of the Fund, and the Investment Manager is
encouraged to vote in favor of management as an inducement to acquire or
maintain the affiliate's relationship.
23
Personal Relationships -- The Investment Manager or an affiliate could
have a personal relationship with other proponents of proxy proposals,
participants in proxy contests, corporate directors or director nominees.
Familial Relationships -- The Investment Manager or an affiliate could
have a familial relationship relating to a company (e.g., spouse or other
relative who serves as a director or nominee of a public company).
The next step is to identify if a conflict is material. A material matter is
one that is reasonably likely to be viewed as important by the average
shareholder. Materiality will be judged under a two-step approach:
Financial Based Materiality -- The Investment Manager presumes a
conflict to be non-material unless it involves at least $500,000.
Non-Financial Based Materiality -- Non-financial based materiality would
impact the members of the Investment Manager's Investment Committee, who are
responsible for making proxy voting decisions.
Finally, if a material conflict exists, the Investment Manager shall vote in
accordance with the advice of a proxy voting service.
The Investment Manager's General Counsel shall have responsibility for
supervising and monitoring conflicts of interest in the proxy voting process
according to the following process:
Identifying Conflicts -- The Investment Manager is responsible for
monitoring the relationships of the Investment Manager's affiliates for
purposes of the Investment Manager's Inside Information Policy and
Procedures. The general counsel (or his designee) maintains a watch list and
a restricted list. The Investment Manager's Investment Committee is unaware
of the content of the watch list and therefore it is only those companies on
the restricted list, which is made known to everyone at the Investment
Manager, for which potential concerns might arise. When a company is placed
on the restricted list, the general counsel (or his designee) shall promptly
inquire of the Designee as to whether there is a pending proxy voting
opportunity with respect to that company, and continue to inquire on a
weekly basis until such time as the company is no longer included on the
restricted list. When there is a proxy voting opportunity with respect to a
company that has been placed on the restricted list, the general counsel
shall inform the Investment Committee that no proxy vote is to be submitted
for that company until the general counsel completes the conflicts analysis.
For purposes of monitoring personal or familial relationships, the
general counsel (or his designee) shall receive on at least an annual basis
from each member of the Investment Manager's Investment Committee written
disclosure of any personal or familial relationships with public company
directors that could raise potential conflict of interest concerns.
Investment Committee members also shall agree in writing to advise if (i)
there are material changes to any previously furnished information, (ii) a
person with whom a personal or familial relationship exists is subsequently
nominated as a director or (iii) a personal or familial relationship exists
with any proponent of a proxy proposal or a participant in a proxy contest.
Identifying Materiality -- The General Counsel (or his designee) shall
be responsible for determining whether a conflict is material. He shall
evaluate financial based materiality in terms of both actual and potential
fees to be received. Non-financial based items impacting a member of the
Investment Committee shall be presumed to be material.
Communication with Investment Committee; Voting of Proxy -- If the
General Counsel determines that the relationship between the Investment
Manager's affiliate and a company is financially material, he shall
communicate that information to the members of the Investment Manager's
Investment Committee and instruct them, and the Designee, that the
Investment Manager will vote its proxy based on the advice of a consulting
firm engaged by the Investment Manager. Any personal or familial
relationship, or any other business relationship, that exists between a
company and any member of the Investment Committee shall be
24
presumed to be material, in which case the Investment Manager again will
vote its proxy based on the advice of a consulting firm engaged by the
Investment Manager. The fact that a member of the Investment Committee
personally owns securities issued by a company will not disqualify the
Investment Manager from voting common stock issued by that company, since
the member's personal and professional interests will be aligned.
In cases in which the Investment Manager will vote its proxy based on
the advice of a consulting firm, the general counsel (or his designee) shall
be responsible for ensuring that the Designee votes proxies in this manner.
The General Counsel will maintain a written record of each instance when a
conflict arises and how the conflict is resolved (e.g., whether the conflict
is judged to be material, the basis on which the materiality is decision is
made and how the proxy is voted).
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 markup. 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
shareholders. 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 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.
25
DETERMINATION OF NET ASSET VALUE
The Fund will determine the net asset value of its shares daily, as of the
close of trading on the NYSE (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 and dividends declared but unpaid), by the total number of 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 (NASDAQ traded securities are valued at the NASDAQ
official closing price). Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined 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 official closing price 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 PREFERRED SHARES
GENERAL
Securities Depository. The Depository Trust Company ('DTC') will act as the
Securities Depository with respect to the Preferred Shares. 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 Preferred Shares contained in the Articles
Supplementary. The Fund will also issue stop-transfer instructions to the
transfer agent for the Preferred Shares. Prior to the commencement of the right
of holders of the Preferred Shares to elect a majority of the Fund's Directors,
as described under 'Description of the Preferred Shares -- Voting Rights' in the
prospectus, Cede & Co. will be the holder of record of the Preferred Shares and
owners of such shares will not be entitled to receive certificates representing
their ownership interest in such shares.
26
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 Preferred Shares,
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 Preferred Shares, 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 Preferred Shares' 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 60 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 Preferred Shares will pay to
each Broker-Dealer, from funds provided by the Fund, 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 Preferred Shares
placed by such Broker-Dealer at such auction. For the purposes of the preceding
sentence, the Preferred Shares 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 Fund 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.
27
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 Preferred Shares. 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 Preferred Shares (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C 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 Preferred
Shares (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C 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 year
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
28
dividend requirements. A 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, 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 Preferred Shares,
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 Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C 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 Preferred Shares will acquire
certain rights. See 'Description of Preferred Shares -- 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.
With respect to an S&P Eligible Asset specified below, the following
applicable number is the S&P Discount Factor (used to determine the Discounted
Value of any S&P Eligible Asset) provided that the S&P Exposure Period is 25
Business Days or less:
(a) Types of S&P Eligible Assets
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Common Stock of REITs and other real estate companies 162%
DRD Eligible Preferred Stock with a senior or preferred
stock rating of at least BBB - 245%
REIT and Non-DRD eligible Preferred Stock with a senior or
preferred stock rating of at least BBB - 164%
DRD Eligible Preferred Stock with a senior or preferred
stock rating below BBB - 250%
REIT and non-DRD Eligible Preferred Stock with a senior or
preferred stock rating below BBB - 169%
Un-rated DRD Eligible Preferred Stock 255%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock 174%
Convertible bonds rated AAA to AAA - 165%
Convertible bonds rated AA+ to AA - 170%
Convertible bonds rated A+ to A - 175%
Convertible bonds rated BBB+ to BBB - 180%
29
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Convertible bonds rated BB+ to BB - 185%
Convertible bonds rated B+ to B 190%
Convertible bonds rated B - 195%
Convertible bonds rated CCC+ 205%
Convertible bonds rated CCC 220%
U.S. Short-Term Money Market Investments with maturities of
180 days or less 104%
U.S. Short-Term Money Market Investments with maturities of
between 181 and 360 days 113%
U.S. Government Obligations (52 week Treasury Bills) 102%
U.S. Government Obligations (Two-Year Treasury Notes) 104%
U.S. Government Obligations (Five-Year Treasury Notes) 110%
U.S. Government Obligations (Ten-Year Treasury Notes) 117%
U.S. Government Obligations (Thirty-Year Treasury Bonds) 130%
Agency Mortgage Collateral (Fixed 15-Year) 129%
Agency Mortgage Collateral (Fixed 30-Year) 132%
Agency Mortgage Collateral (ARM 1/1) 122%
Agency Mortgage Collateral (ARM 3/1) 123%
Agency Mortgage Collateral (ARM 5/1) 123%
Agency Mortgage Collateral (ARM 10/1) 123%
Mortgage Pass-Through Fixed (15 Year) 131%
Mortgage Pass-Through Fixed (30 Year) 134%
Debt securities of REIT's and other real estate
companies according to the following corporate bond
schedule
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA - 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A - 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB - 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB - 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B - 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC - 350%
Cash and Cash Equivalents 100%
(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 A+ or higher.
(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 Preferred Shares (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C
AMPS).
30
(iii) The interest rate swap transaction will be marked-to-market weekly
by the swap counterparty.
(iv) If the Fund fails to maintain an aggregate discounted value at
least equal to the basic maintenance amount on two consecutive valuation
dates then the agreement shall terminate immediately.
(v) For the purpose of calculating the asset coverage test 90% of any
positive mark-to-market valuation of the Fund's rights will be eligible
assets. 100% of any negative mark-to-market valuation of the Fund's rights
will be included in the calculation of the Preferred Shares Basic
Maintenance Amount.
(vi) The Fund must maintain liquid assets with a value at least equal to
the net amount of the excess, if any, of the Fund's obligations over its
entitlement with respect to each swap. For caps/floors, must maintain liquid
assets with a value at least equal to the Fund's obligations with respect to
such caps or floors.
(c) Cash and Cash Equivalents
(i) Cash and Cash Equivalents Cash and demand deposits in an 'A-1+'
rated institution are valued at 100%. 'A-1+' rated commercial paper, with
maturities no greater than 30 days and held instead of cash until maturity,
is valued at 100%. Securities with next-day maturities invested in 'A-1+'
rated institutions re considered cash equivalents and are valued at 100%.
Securities maturing in 181 to 360 calendar days are valued at 114.2%.
(ii) The S&P Discount Factor for shares of unrated Money Market Funds
affiliated with the Fund used as 'sweep' vehicles will be 111%. Money Market
Funds rated 'AAAm' will be discounted at the appropriate level as dictated
by the exposure period. No S&P Discount Factor will be applied to Money
Market Funds rated AAAm by S&P with effective next day maturities.
'S&P Eligible Assets' shall mean:
(A) Deposit Securities;
(B) U.S. Government Obligations and U.S. Government Agencies;
(C) Corporate Indebtedness. Evidences of indebtedness other than Deposit
Securities, U.S. Government Obligations and Municipal Obligations that are
not convertible into or exchangeable or exercisable for stock of a
corporation (except to the extent of ten percent (10%) in the case of a
share exchange or tender offer) ('Other Debt') and that satisfy all of the
following conditions:
(1) be no more than 10% of total assets may be below a S&P rating of
BBB - , or comparable Moody's or Fitch rating, or unrated;
(2) the remaining term to maturity of such Other Debt shall not
exceed fifty (50) years;
(3) such Other Debt must provide for periodic interest payments in
cash over the life of the security;
(4) no more than 10% of the issuers of such evidences of indebtedness
do not file periodic financial statements with the U.S. Securities and
Exchange Commission;
(5) which, in the aggregate, have an average duration of not more
than 12 years.
(D) Convertible Corporate Indebtedness. Evidences of indebtedness other
than Deposit Securities, U.S. Government Obligations and Municipal
Obligations that are convertible into or exchangeable or exercisable for
stock of a corporation and that satisfy all of the following conditions:
(1) such evidence of indebtedness is rated at least CCC by S&P; and
(2) if such evidence of indebtedness is rated BBB or lower by S&P,
the market capitalization of the issuer of such evidence of indebtedness
is at least $100 million;
31
(E) Agency Mortgage Collateral. Certificates guaranteed by U.S.
Government Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC) for
timely payment of interest and full and ultimate payment of principal.
Agency Mortgage Collateral also evidence undivided interests in pools of
level-payment, fixed, variable, or adjustable rate, fully amortizing loans
that are secured by first liens on one- to four-family residences
residential properties (or in the case of Plan B FHLMC certificates, five or
more units primarily designed for residential use) ('Agency Mortgage
Collateral'). Agency Mortgage Collateral the following conditions apply:
(1) For GNMA certificates backed by pools of graduated payment
mortgages, levels are 20 points above established levels;
(2) Qualifying 'large pool' FNMA mortgage-backed securities and FHLMC
participation certificates are acceptable as eligible collateral. The
eligible fixed-rate programs include FNMA MegaPools, FNMA Majors, FHLMC
Multilender Swaps, and FHLMC Giant certificates. Eligible adjustable rate
mortgage ('ARMs') programs include nonconvertible FNMA ARM MegaPools and
FHLMC weighted average coupon ARM certificates. Eligible FHLMC Giant
programs exclude interest-only and principal only stripped securities;
(3) FNMA certificates backed by multifamily ARMs pegged to the 11th
District Cost of Funds Index are acceptable as eligible collateral at 5
points above established levels; and
(4) Multiclass REMICs issued by FNMA and FHLMC are acceptable as
eligible collateral at the collateral levels established for CMOs.
(F) Mortgage Pass-Through Certificates. Publicly issued instruments
maintaining at least a AA - ratings by S&P. Certificates evidence
proportional, undivided interests in pools of whole residential mortgage
loans. Pass-through certificates backed by pools of convertible ARMs are
acceptable as eligible collateral at 5 points above the levels established
for pass-through certificates backed by fixed or non-convertible ARM pools.
(G) Preferred Stocks. Preferred stocks that satisfy all of the following
conditions:
1. The preferred stock issue has a senior rating from S&P, or the
preferred issue must be rated. In the case of Yankee preferred stock, the
issuer should have a S&P senior rating of at least 'BBB - ', or the
preferred issue must be rated at least 'BBB - '.
2. The issuer -- or if the issuer is a special purpose corporation,
its parent -- is listed on either the New York Stock Exchange, the
American Stock Exchange or NASDAQ if the traded par amount is less than
$1,000. If the traded par amount is $1,000 or more exchange listing is
not required.
3. The collateral pays cash dividends denominated in U.S. dollars.
4. Private placement 144A with registration rights are eligible
assets.
5. The minimum market capitalization of eligible issuers is US$100
million.
Restrictions for floating-rate preferred stock:
1. Holdings must be limited to stock with a dividend period of
less than or equal to 49 days, except for a new issue, where the
first dividend period may be up to 64 days.
2. The floating-rate preferred stock may not have been subject to
a failed auction.
Restrictions for adjustable -- or auction-rate preferred stock:
1. The total fair market value of adjustable-rate preferred stock
held in the portfolio may not exceed 10% of eligible assets.
32
Concentration Limits:
2. Total issuer exposure in preferred stock of any one issuer is
limited to 10% of the fair market value of eligible assets.
3. Preferred stock rated below B - (including non-rated preferred
stock) and preferred stock with a market cap of less than US$100
million are limited to no more than 15% of the fair market value of
the eligible assets.
4. Add 5 points to over-collateralization level for issuers with
a senior rating or preferred stock rating of less than BBB - .
5. Add 10 point to over-collateralization level of issuers with
no senior rating, preferred stock rating or dividend history.
(H) Common Stocks of REITs and Other Real Estate Companies. Common
stocks of REITs and Other Real Estate Companies that satisfy all of the
following conditions:
(1) such common stock (including the common stock of any predecessor
or constituent issuer) has been traded on a recognized national
securities exchange or quoted on the National Market System (or any
equivalent or successor thereto) of NASDAQ, but excluding '144a' or 'pink
sheet' stock not carried in daily newspaper over-the-counter listings;
(2) the market capitalization of such issuer of common stock exceeds
$100 million;
(3) the issuer of such common stock is not an entity that is treated
as a partnership for federal income taxes;
(4) if such issuer is organized under the laws of any jurisdiction
other than the United States, any state thereof, any possession or
territory thereof or the District of Columbia, the common stock of such
issuer held by the Fund is traded on a recognized national securities
exchange or quoted on the National Market System of NASDAQ either
directly or in the form of depository receipts.
Escrow Bonds may comprise 100% of the Fund's S&P Eligible Assets. Bonds
that are legally defeased and secured by direct U.S. government obligations
are not required to meet any minimum issuance size requirement. Bonds that
are economically defeased or secured by other U.S. agency paper must meet
the minimum issuance size requirement for the Fund described above. Bonds
initially rated or rerated as an escrow bond by another Rating Agency are
limited to 50% of the Fund's S&P Eligible Assets, and carry one full rating
lower than the equivalent S&P rating for purposes of determining the
applicable discount factors. Bonds economically defeased and either
initially rated or rerated by S&P or another Rating Agency are assigned that
same rating level as its debt issuer, and will remain in its original
industry category unless it can be demonstrated that a legal defeasance has
occurred.
With respect to the above, the Fund portfolio must consist of no less
than 20 issues representing no less than 10 industries as determined by the
S&P Industry Classifications and S&P Real Estate Industry/Property sectors.
For purposes of determining the discount factors applicable to
collateral not rated by S&P, the collateral will carry an S&P rating one
full rating level lower than the equivalent S&P rating.
'S&P Exposure Period' shall mean the sum of (i) that number of days from
the last Valuation Date on which the Fund's Discounted Value of S&P Eligible
Assets were greater than the Preferred Shares Basic Maintenance Amount to
the Valuation Date on which the Fund's Discounted Value of S&P Eligible
Assets failed to exceed the Preferred Shares Basic Maintenance Amount,
(ii) the maximum number of days following a Valuation Date that the Fund has
under this Statement to cure any failure to maintain a Discounted Value of
S&P Eligible Assets at least equal to the Preferred Shares Basic Maintenance
Amount, and (iii) the maximum number of days the Fund has to effect a
mandatory redemption under Section 3(a)(ii) of Part I of the Articles
Supplementary.
33
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) Preferred Stock and Common Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common stock of REITs and other real estate companies....... 154%
Preferred stock of REITs
with Senior Implied Moody's (or S&P or Fitch) rating:... 154%
without Senior Implied Moody's (or S&P or Fitch)
rating:............................................... 208%
Preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P or Fitch) rating:... 208%
without Senior Implied Moody's (or S&P or Fitch)
rating:............................................... 250%
Preferred Securities of non-real estate companies (4)(5)....
The Moody's Discount Factor for non-real estate preferred
securities shall be
(A) for preferred securities issued by a utility........ 152%
(B) for preferred securities of industrial and financial
issuers and other issuers............................. 197%
(C) for auction rate preferred securities............... 350%
---------
(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 a real estate issuer is
below $500 million.
(4) Applies to preferred securities which have a minimum issue size of
$50 million.
(5) Non-real estate eligible preferred securities will be issued by investment
grade companies having a senior unsecured debt rating that is Baa3 or higher
by Moody's or BBB - by S&P or Fitch and pay dividends in U.S. Dollars or
Euros. The market value of eligible non-cumulative preferred issues are
subject to standard preferred stock discount factors multiplied by a factor
of 1.10.
34
(b) Debt Securities(1)(2)(3):
The percentage determined by reference to the rating on such asset with
reference to the remaining term to maturity of such assets, in accordance
with the table set forth below.
TERM OF MATURITY OF DEBT SECURITY Aaa Aa A Baa Ba B UNRATED(3)
--------------------------------- --- -- - --- -- - ----------
1 year or less................. 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than
1 year)...................... 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than
2 years)..................... 120% 123% 127% 131% 153% 168% 250%
4 years or less (but longer than
3 years)..................... 126% 129% 133% 138% 161% 176% 250%
5 years or less (but longer than
4 years)..................... 132% 135% 139% 144% 168% 185% 250%
7 years or less (but longer than
5 years)..................... 139% 143% 147% 152% 179% 197% 250%
10 years or less (but longer than
7 years)..................... 145% 150% 155% 160% 189% 208% 250%
15 years or less (but longer than
10 years).................... 150% 155% 160% 165% 196% 216% 250%
20 years or less (but longer than
15 years).................... 150% 155% 160% 165% 196% 228% 250%
30 years or less (but longer than
20 years).................... 150% 155% 160% 165% 196% 229% 250%
Greater than 30 years.......... 165% 173% 181% 189% 205% 240% 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) Corporate debt securities if (A) such securities provide for the periodic
payment of interest in cash in U.S. dollars or euros, except that such
securities that do not pay interest in U.S. dollars or euros shall be
considered Moody's Eligible Assets if they are rated by Moody's or S&P or
Fitch; (B) for debt securities rated Ba1 and below taken together with
'Unrated' securities, no more than 10% of the original amount of such issue
may constitute Moody's Eligible Assets; (C) such securities have been
registered under the Securities Act or are restricted as to resale under
federal securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act as determined by the Fund's investment manager or
portfolio manager acting pursuant to procedures approved by the Board of
Directors, except that such securities that are not subject to U.S. federal
securities laws shall be considered Moody's Eligible Assets if they are
publicly traded; and (D) such securities are not subject to extended
settlement.
(3) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Corporation's assets can be
derived from other sources as well as combined with a number of sources as
presented by the Corporation to Moody's, securities rated below B by Moody's
and unrated securities, which are securities rated by neither Moody's, S&P
nor Fitch, are limited to 10% of Moody's Eligible Assets. If a corporate
debt security is unrated by Moody's, S&P or Fitch, the Corporation will use
the percentage set forth under 'Below B and Unrated' in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's at face value.
However, adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate a
Moody's rating equivalent.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY DISCOUNT FACTOR U.S. TREASURY STRIPS
-------------------------- --------------- --------------------
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 years)...... 118% 120%
4 years or less (but longer than 3 years)...... 123% 127%
5 years or less (but longer than 4 years)...... 128% 133%
7 years or less (but longer than 5 years)...... 135% 145%
10 years or less (but longer than 7 years)..... 141% 159%
15 years or less (but longer than 10 years).... 146% 184%
20 years or less (but longer than 15 years).... 154% 211%
30 years or less (but longer than 20 years).... 154% 236%
35
(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 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.
(e) Rule 144A Debt or Preferred Securities:
The Moody's Discount Factor applied to Rule 144A debt or preferred
securities will be 130% of the Moody's Discount Factor which would apply
were the securities registered under the Securities Act.
(f) Convertible Securities:
MOODY'S RATING CATAGORY(1)
INDUSTRY CATEGORY Aaa Aa A Baa Ba B NR
----------------- --- -- - --- -- - --
Utility.............. 162% 167% 172% 188% 195% 199% 300%
Industrial........... 256% 261% 266% 282% 290% 293% 300%
Financial............ 233% 238% 243% 259% 265% 270% 300%
Transportation....... 332% 337% 342% 358% 365% 369% 370%
---------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Fund's assets can be derived
from other sources as well as combined with a number of sources as presented
by the Fund to Moody's, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch,
are limited to 10% of Moody's Eligible Assets. If a corporate debt security
is unrated by Moody's, S&P or Fitch, the Fund will use the percentage set
forth under 'Below B and Unrated' in this table. Ratings assigned by S&P or
Fitch are generally accepted by Moody's at face value. However, adjustments
to face value may be made to particular categories of credits for which the
S&P and/or Fitch rating does not seem to approximate a Moody's rating
equivalent.
Under current Moody's guidelines, the following are considered to be Moody's
Eligible Assets:
(i) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies and Preferred Stock and debt securities of non
real estate companies: (A) which comprise at least 7 of the total number of
Moody's Real Estate Industry/ Property Sector Classifications ('Moody's
Sector Classifications') and Moody's Industry Classification, of which no
more than 35% may constitute a single such classification; (B) which in the
aggregate constitute at least 40 separate issues 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 6.0% 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;
(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 taken together with securities rated Ba1 by Moody's, or comparable
by S&P or Fitch, and below do not exceed 10% of the discounted Moody's
Eligible Assets;
(iii) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (A) the counterparty to the swap
transaction has a short-term rating of P-1 by Moody's or A-1 by S&P or, if
the counterparty does not have a short-term rating, the counterparty's
senior unsecured long-term debt rating is A3 or higher by Moody's or A+ or
higher by S&P; (B) the original aggregate notional amount of the interest
rate swap
36
transaction or transactions is not to be greater than the liquidation
preference of the Preferred Shares originally issued; (C) the interest rate
swap transaction will be marked-to-market daily; (D) an interest rate swap
that is in-the-money is discounted at the counterparty's corporate debt
rating for the maturity of the swap for purposes of calculating Moody's
Eligible Assets; and (E) an interest rate swap that is out-of-the money
includes that negative mark-to-market amount as indebtedness for purposes of
calculating the Preferred Shares Basic Maintenance amount.
(iv) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(v) 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
(vi) 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 (1) settled through clearing house firms with respect
to which the Corporation has received prior written authorization from
Moody's or (2) with counterparties having a Moody's long-term debt rating of
at least Baa3 or (3) 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 Preferred Securities; any nationally recognized rating agency providing
a rating for the Preferred Securities 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
37
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 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 Common Shareholders,
and (ii) under certain circumstances to partially redeem the Preferred Shares 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
Preferred Shares 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 (i) for the DRD in the case of corporate shareholders
and (ii) for treatment as qualified dividend income in the case of individual
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.
38
DISTRIBUTIONS
Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of distributions of qualified dividend income and
capital gain dividends described below, be taxable to shareholders as ordinary
income. 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, if properly designated, may be eligible for the
DRD. In addition, for taxable years beginning on or before December 31, 2008,
distributions of investment income designated by the Fund as derived from
qualified dividend income will be taxed in the hands of individuals at the rates
applicable to long-term capital gain, provided holding period and other
requirements are met. The Fund does not expect a significant portion of Fund
distributions to be eligible for the DRD or derived from qualified dividend
income.
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 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.
Long-term capital gain rates for individuals have been temporarily reduced
to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for
taxable years beginning on or before December 31, 2008.
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.
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, capital gains, dividends
qualifying for the DRD and qualified dividend income) 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, dividends qualifying for the DRD and dividends derived
from qualified dividend income, if any, between its Common Shares, the Preferred
Shares, Series M7 AMPS, Series T7 AMPS, Series W7 AMPS, Series TH7 AMPS,
Series F7 AMPS, Series W28A AMPS, Series W28B AMPS and Series W28C 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, the Preferred
Shares, Series M7 AMPS, Series T7 AMPS, Series W7 AMPS, Series TH7 AMPS,
Series F7 AMPS, Series W28A AMPS, Series W28B AMPS and Series W28C AMPS. Since
the Fund's current and accumulated earnings and profits will first be used to
pay dividends on the Preferred Shares (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS),
distributions in excess of such earnings and profits, if any, will be made
disproportionately to holders of Common Shares.
39
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.
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
40
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.
INVESTMENTS IN SECURITIES OF UNCERTAIN TAX CHARACTER
The Fund may invest in preferred securities or other securities the U.S.
federal income tax treatment of which may not be clear or may be subject to
recharacterization by the IRS. To the extent the tax treatment of such
securities or the income from such securities differs from the tax treatment
expected by the Fund, it could affect the timing or character of income
recognized by the Fund, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Code.
BORROWINGS
If the Fund utilizes leverage through borrowing, it may be restricted by
loan covenants with respect to the declaration of, and payment of, dividends in
certain circumstances. Limits on the Fund's payments of dividends may prevent
the Fund from meeting the distribution requirements, described above, and may,
therefore, jeopardize the Fund's qualification for taxation as a regulated
investment company and possibly subject the Fund to the 4% excise tax. The Fund
will endeavor to avoid restrictions on its ability to make dividend payments.
INVESTMENT IN NON-U.S. SECURITIES
The Fund's investment in non-U.S. securities may be subject to non-U.S.
withholding taxes. In that case, the Fund's yield on those securities would be
decreased. Shareholders will generally not be entitled to claim a credit or
deduction with respect to foreign taxes paid by the Fund.
In addition, if the Fund acquires an equity interest in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) or that hold at least 50% of their assets in investments producing such
passive income ('passive foreign investment companies'), the Fund could be
subject to U.S. federal income tax and additional interest charges on gains and
certain distributions with respect to those equity interests, even if all the
income or gain is timely distributed to its shareholders. The Fund will not be
able to pass through to its shareholders any credit or deduction for such taxes.
An election would generally be available to ameliorate these adverse tax
consequences, but any such election could require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. These investments could
also result in the treatment of capital gains as ordinary income. The Fund
intends to manage its holdings to limit the tax liability from these
investments.
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 Preferred Shares. 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.
41
FOREIGN SHAREHOLDERS
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.
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
such 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 actually or constructively held more
than 5% of the shares of the same class, in which event described in (ii), 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 generally would be imposed on the
amount realized on the disposition of such shares and 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
42
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
TAX SHELTER REPORTING REGULATIONS
Under recently promulgated Treasury regulations, if a shareholder recognizes
a loss with respect to shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder in any single
taxable year (or a greater loss over a combination of years), the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a regulated investment
company are not excepted. Future guidance may extend the current exception from
this reporting requirement to shareholders of most or all regulated investment
companies. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's treatment of the loss
is proper. Shareholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.
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 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.
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 shareholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and 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 Securities and Exchange
Commission. 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.
43
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 shareholders of the Fund or in
advertising materials, the Fund may compare its performance with that of
(i) other investment companies listed in the rankings prepared by Lipper
Analytical Services, Inc., publications such as Barrons, Business Week, Forbes,
Fortune, Institutional Investor, Kiplinger's Personal Finance, Money,
Morningstar Mutual Fund Values, The New York Times, The Wall Street Journal and
USA Today or other industry or financial publications or (ii) the Standard and
Poor's Index of 500 Stocks, the Dow Jones Industrial Average, 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.)
Marketing materials for the Fund may make reference to other closed-end
investment companies for which the Investment Manager serves as investment
adviser. The past performance of any other Cohen & Steers Fund is not a
guarantee of future performance for the Fund.
EXPERTS
[ ] has been appointed as independent accountants for the
Fund. The statement of assets and liabilities of the Fund as of [ ],
2003 included in this statement of additional information has been so included
in reliance on the report of [ ], independent accountants, given
the authority of the firm as experts in auditing and accounting.
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.:
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Cohen & Steers REIT
and Preferred Income Fund, Inc. (the 'Fund') at [ ], 2003 in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement 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 statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
[ ], 2003
45
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES AS OF [ ], 2003
(AUDITED)
Assets:
Cash.................................................... $
Deferred Offering Costs.................................
--------
Total Assets........................................
--------
Liabilities
Accrued expenses........................................
--------
Total Liabilities...................................
--------
Net Assets applicable to [ ]shares of $.001 par value
common stock outstanding.................................. $
--------
--------
Net asset value per Common Shares outstanding ($[ ]
divided by [ ] Common shares outstanding)................ $
--------
--------
NOTES TO FINANCIAL STATEMENT
NOTE 1: ORGANIZATION
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on March 25, 2003 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 [ ] shares
('Initial Shares') for $[ ] 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 $.001 par value common stock authorized.
Cohen & Steers Capital Management, Inc. has agreed to pay all organization
expenses (approximately $15,000) and pay all offering costs (other than the
sales load) that exceed $.05 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 statement. Actual results could differ from these
estimates. In the normal course of business, the Fund enters into contracts that
contain a variety of representations which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Fund that have not yet
occurred. However, the Fund expects the risk of loss to be remote.
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
administrative 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 .65% of the
average daily managed assets. Managed assets is the net asset value of the
Common Shares plus the liquidation preference of any AMPS and the principal
amount of any borrowings used for leverage.
46
SCHEDULE OF INVESTMENTS
[ ], 2003
(UNAUDITED)
See accompanying notes to unaudited financial statements.
47
STATEMENT OF ASSETS AND LIABILITIES
[ ], 2003
(UNAUDITED)
ASSETS:
Investments in securities, at value (Identified
cost -- $) (Note 1)................................... $
Cash....................................................
Dividends and interest receivable.......................
--------------
Total Assets........................................
--------------
LIABILITIES:
Payable for investment securities purchased.............
Payable for original fund offering costs................
Payable to investment manager...........................
Other liabilities.......................................
--------------
Total Liabilities...................................
--------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES................ $
--------------
--------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Paid-in Capital (Notes 1 and 5)......................... $
Undistributed net investment income.....................
Net unrealized appreciation on investments..............
--------------
$
--------------
--------------
NET ASSET VALUE PER COMMON SHARE:
($[ ][div][ ] shares outstanding)............... $
--------------
--------------
MARKET PRICE PER COMMON SHARE............................... $
--------------
--------------
MARKET PRICE PREMIUM TO NET ASSET VALUE PER COMMON SHARE.... %
--------------
--------------
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 27, 2003(a) THROUGH [ ], 2003
(UNAUDITED)
Investment Income (Note 1):
Dividend income......................................... $
Interest income.........................................
--------
Total Income........................................
--------
Expenses:
Investment management fees (Note 2).....................
Administration fees (Note 2)............................
Reports to shareholders.................................
Custodian fees and expenses.............................
Professional fees.......................................
Directors' fees and expenses (Note 2)...................
Transfer agent fees and expenses........................
Miscellaneous...........................................
--------
Total Expenses......................................
--------
Net Investment Income.......................................
--------
Net Unrealized Gain on Investments:
Net unrealized appreciation on investments..............
--------
Net Increase in Net Assets Resulting from Operations........ $
--------
--------
--------
(a) Commencement of operations.
See accompanying notes to unaudited financial statements
48
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
FOR THE PERIOD
JUNE 27, 2003(a)
THROUGH
[ ], 2003
---------
Change in Net Assets:
From Operations:
Net investment income............................... $
Net unrealized appreciation on investments..........
--------------
Net increase in net assets resulting from
operations....................................
--------------
Capital Stock Transactions (Note 5):
Increase in net assets from fund share
transactions......................................
--------------
Total increase in net assets....................
Net Assets:
Beginning of period.................................
--------------
End of period....................................... $
--------------
--------------
FINANCIAL HIGHLIGHTS
(UNAUDITED)
FOR THE PERIOD
JUNE 27, 2003(a)
THROUGH
[ ], 2003
PER SHARE OPERATING PERFORMANCE: ---------
Net asset value, beginning of period........................ $
--------
Income from investment operations:
Net investment income...................................
Net unrealized gain on investments......................
--------
Total income from investment operations.............
--------
Less: Offering costs charged to paid-in capital.............
--------
Net decrease in net asset value.............................
--------
Net asset value, end of period.............................. $
--------
--------
Market value, end of period................................. $
--------
--------
Net asset value total return(b)............................. %(c)
--------
--------
Market value return(b)...................................... %(c)
--------
--------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in millions).
--------
--------
Ratio of expenses to average daily net assets............... %(d)
--------
--------
Ratio of net investment income to average daily net
assets.................................................... %(d)
--------
--------
Portfolio turnover rate..................................... %(c)
--------
--------
---------
(a) Commencement of operations.
(b) Total market value return is computed based upon the New York Stock Exchange
market price of the fund's shares and excludes the effects of brokerage
commissions. Dividends and distributions, if any, are assumed for purposes
of this calculation, to be reinvested at prices obtained under the fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends
as reinvested.
(c) Not annualized.
(d) Annualized.
See accompanying notes to unaudited financial statements
49
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on March 25, 2003 and is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, nondiversified management investment company. The Fund had no
operations until June 6, 2003 when it sold 4,200 shares of common stock for
$100,275 to Cohen & Steers Capital Management, Inc. (the investment manager).
Investment operations commenced on June 27, 2003.
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 accounting principles generally accepted in the
United States of America. 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 official closing 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 declared and paid to Common Shareholders monthly. Dividends to
shareholders are recorded on the ex-dividend date. A portion of the Fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable 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.
50
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 principals.
Indemnifications: In the normal course of business the Fund enters into
contracts that contain a variety of representations which provide general
indemnifications. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
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.
NOTE 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 0.65% of the Fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of any Fund preferred shares. For the period June 27,
2003 (commencement of operations) through [ ] 30, 2003, the fund incurred
investment management fees of $.
Administration Fees: Pursuant to an administration agreement, the Investment
Manager also performs certain administrative and accounting functions for the
Fund and receives a fee equal to, on an annual basis, 0.06% of the Fund's
average daily managed assets up to $1 billion, 0.04% of the Fund's average daily
managed assets in excess of $1 billion up to $1.5 billion and 0.02% of the
Fund's average daily managed assets in excess of $1.5 billion. For the period
June 27, 2003 (commencement of operations) through [ ], 2003, the Fund
incurred $[ ] in administration fees.
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.
For the period June 27, 2003 (commencement of operations) through [ ] 30,
2003, fees and related expenses accrued for nonaffiliated directors totaled $.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
period June 27, 2003 (commencement of operations) through [ ] 30, 2003,
totaled $ and $ , respectively.
51
NOTE 4. INCOME TAXES
At [ ] 30, 2003 the cost of investments and net unrealized
appreciation for federal income tax purposes were as follows:
Aggregate cost.............................................. $
--------------
--------------
Gross unrealized appreciation............................... $
Gross unrealized depreciation...............................
--------------
Net unrealized appreciation on investments.................. $
--------------
--------------
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to return of capital and capital gain
distributions received by the fund on portfolio securities. To the extent such
differences are permanent in nature, such amounts are reclassified within the
capital accounts. Short-term capital gains are reflected in the financial
statements as realized gains on investments but are typically reclassified as
ordinary income for tax purposes.
NOTE 5. CAPITAL STOCK
On June 27, 2003, the Fund completed the initial public offering of
42,750,000 shares of common stock. Proceeds paid to the Fund amounted to
$1,018,518,750 after deduction of underwriting commissions and offering expenses
of $50,231,250.
On July 17, 2003, the Fund completed a subsequent offering of 2,500,000
shares of common stock. Proceeds paid to the Fund amounted to $59,562,500 after
deduction of underwriting commissions and offering expenses of $2,937,500.
On August 5, 2003, the Fund completed a subsequent offering of 2,940,000
shares of common stock. Proceeds paid to the Fund amounted to $70,045,500 after
deduction of underwriting commissions and offering expenses of $3,454,500.
On August 4, 2003, the Fund entered into, on a forward basis, two interest
rate swap transactions with UBS AG. The notional amount of each swap is
$58,125,000. The purpose of these transactions was to lock in a payment rate on
these swaps in anticipation of the Fund's issuance of certain auction market
preferred shares, as described below. The swaps are intended to reduce or
eliminate the risk that an increase in short-term interest rates could have on
the performance of the Fund's Common Shares as a result of the leverage created
by the issuance of such auction market preferred shares.
On August 18, 2003, the Fund issued 3,280 taxable auction market preferred
shares, Series M7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series T7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series W7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series TH7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series F7 (par value $0.001), 2,800 taxable auction market preferred
shares, Series W28A (par value $0.001), 2,800 taxable auction market preferred
shares, Series W28B (par value $0.001) and 2,800 taxable auction market
preferred shares, Series W28C (par value $0.001). Proceeds paid to the Fund
amounted to $612,816,830 after deduction of underwriting commissions and
offering expenses of $7,183,170. This issue has received a 'AAA/Aaa' rating from
Standard & Poor's and Moody's.
During the period June 27, 2003 (commencement of operations) through
[ ], 2003, the Fund issued [ ] shares of common stock for the
reinvestment of dividends.
52
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.
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-3
APPENDIX B
ARTICLES SUPPLEMENTARY
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
Articles Supplementary Creating And Fixing The Rights of Series [ ]
Taxable Auction Market Preferred Shares
Cohen & Steers REIT and Preferred Income Fund, Inc., a Maryland corporation
having its principal 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 Articles of Incorporation, as amended,
(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, [ ] shares of the Corporation's Taxable
Auction Market Preferred Shares (par value $.001 per share) and has further
classified all of such shares as 'Series [ ] Preferred Shares', liquidation
preference $25,000 per share (the 'Preferred Shares').
Second: Pursuant to Section 2-411 of the MGCL and authority granted by
Article III of the Corporation's 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 Preferred Shares, as
set forth herein.
Third: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
Preferred Shares are as follows:
DESIGNATION
Series [ ] Preferred Shares: A series of [ ] Preferred Shares, par
value $.001 per share, liquidation preference $25,000 per share, is hereby
designated 'Series [ ] Taxable Auction Market Preferred Shares' (the 'Preferred
Shares'). Each share of the Preferred Shares 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 will 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
Preferred Shares will constitute a separate series of preferred stock 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 will be as set forth in the Articles Supplementary with respect to the
additional shares.
As used in Part I and Part II of these Articles Supplementary, capitalized
terms will have the meanings provided in Section 17 of Part I and Section 1 of
Part II of these Articles Supplementary.
B-1
PART I: TERMS OF PREFERRED SHARES
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Preferred
Shares is [ ] shares. No fractional shares will be issued.
(b) Shares of the Preferred Shares which at any time have been redeemed or
purchased by the Corporation will, after such redemption or purchase, have the
status of authorized but unissued shares of preferred stock.
(c) Shares of the Preferred Shares will rank on a parity with shares of any
other series of preferred stock of the Corporation as to the payment of
dividends to which such shares are entitled.
(d) No Holder of shares of the Preferred Shares will have, solely by reason
of being such a holder, any preemptive or other right to acquire, purchase or
subscribe for any shares of the Preferred Shares , 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 the Preferred Shares will 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 the Preferred
Shares issued on the Date of Original Issue will accumulate from the Date of
Original Issue.
(b) (i) Dividends will 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 the Preferred Shares,
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 first
Business Day of each calendar month within such period, 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 the
first Business Day of each calendar month 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
will be the first Business Day following such day for payment of dividends.
(iii) The Corporation will pay to the Paying Agent not later than 12:00
noon, New York City time, on each Dividend Payment Date for the Preferred
Shares, an aggregate amount of immediately available funds equal to the
dividends to be paid to all Holders of the Preferred Shares on such Dividend
Payment Date. The Corporation will not be required to establish any reserves for
the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of dividends will
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 the Preferred Shares will be paid on the Dividend
Payment Date therefor to the Holders of the Preferred Shares 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
B-2
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 the Preferred Shares
during the period from and after the Date of Original Issue to and including the
last day of the initial Dividend Period therefor will be equal to the rate as
determined in the manner set forth under 'Designation' above. For each
subsequent Dividend Period for the Preferred Shares, the dividend rate will 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 the Preferred Shares 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 the Preferred Shares 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 the Preferred Shares for any
such Dividend Period will be the Maximum Rate (except (i) during a Default
Period when the dividend rate will 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 will 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 the Preferred Shares 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 the Preferred Shares 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 will end on the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and any unpaid Redemption Price will 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 Period will
be equal to the Default Rate, and each subsequent Dividend Period commencing
after the beginning of a Default Period will 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 will be held during
a Default Period applicable to the Preferred Shares.
(iii) No Default Period with respect to a Dividend Default or Redemption
Default will 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 the
Preferred Shares. The Default Rate will 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 a Dividend Period (or in respect of dividends on
another date in connection with a redemption during such Dividend Period) will
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
B-3
denominator of which will be 360 for the Preferred Shares, multiplying the
amount so obtained by $25,000, and rounding the amount so obtained to the
nearest cent.
(d) Any dividend payment made on shares of the Preferred Shares will first
be credited against the earliest accumulated but unpaid dividends due with
respect to the Preferred Shares.
(e) For so long as the Preferred Shares 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 Preferred Shares as to dividends or upon liquidation) with respect
to Common Shares or any other capital stock of the Corporation ranking junior to
the Preferred Shares 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 Preferred Shares (except by
conversion into or exchange for shares of the Corporation ranking junior to the
Preferred Shares 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 Preferred Shares or will 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 Preferred Shares required to be redeemed by any
provision for mandatory redemption contained in Section 3(a)(ii) of Part I of
these Articles Supplementary.
(f) For so long as the Preferred Shares 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 Preferred Shares for any period unless full
cumulative dividends have been or contemporaneously are declared and paid on the
Preferred Shares through their most recent Dividend Payment Date. When dividends
are not paid in full upon the Preferred Shares 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 the Preferred Shares through their most recent
respective Dividend Payment Dates, all dividends declared upon the Preferred
Shares and any other such series of stock ranking on a parity as to the payment
of dividends with the Preferred Shares will be declared pro rata so that the
amount of dividends declared per share on the Preferred Shares and such other
series of preferred stock ranking on a parity therewith will in all cases bear
to each other the same ratio that accumulated dividends per share on the
Preferred Shares 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 the Preferred Shares 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
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Supplementary; provided, however, that during a Dividend Period of more than one
year, no shares of the Preferred Shares 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 will 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 the Preferred Shares by reason of the
redemption of the Preferred Shares 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 will be
applicable in such circumstances in the event the Corporation makes the deposit
and takes the other action required thereby.
(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 Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. The number of Preferred Shares to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum number of
Preferred Shares 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 Preferred Shares then Outstanding will be redeemed) and (B) the
maximum number of Preferred Shares 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 Preferred Shares required to be redeemed in
accordance with the foregoing Section 3(a)(ii), the Corporation will 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 Preferred Shares 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 will 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 Preferred Shares 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
will redeem those Preferred Shares, 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 Preferred Shares to be redeemed and the Paying Agent. The Corporation
will deposit with the
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Paying Agent funds sufficient to redeem the specified number of Preferred Shares
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
Preferred Shares are to be redeemed pursuant to this Section 3(a)(iii), the
number of shares to be redeemed will be redeemed pro rata from the Holders of
such shares in proportion to the number of the Preferred Shares held by such
Holders, by lot or by such other method as the Corporation will deem fair and
equitable, subject, however, to the terms of any applicable Specific Redemption
Provisions. 'Mandatory Redemption Price' means the 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 will deliver a notice of redemption to the Auction Agent and Rating
Agencies (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 the Preferred Shares
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 will 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 the Preferred Shares 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 the Preferred Shares 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
will 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 will 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 Preferred Shares, may be redeemed at the option
of the Corporation unless all dividends in arrears on the Outstanding Preferred
Shares and any other preferred stock have been or are being contemporaneously
paid or set aside for payment; provided, however, that the foregoing will 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 the Preferred
Shares 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
will cease to accumulate and such shares will 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 will cease and
terminate, except the right of such Holder to receive the redemption price
specified herein, but without any interest or other additional amount.
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Such redemption price will be paid by the Paying Agent to the nominee of the
Securities Depository. The Corporation will 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 the Preferred Shares called for redemption on such date and (ii) such
other amounts, if any, to which Holders of shares of the Preferred Shares called
for redemption may be entitled. Any funds so deposited that are unclaimed at the
end of two years from such redemption date will, to the extent permitted by law,
be paid to the Corporation, after which time the Holders of shares of the
Preferred Shares 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 will 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 will 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 will 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 the Preferred
Shares will be deemed to exist at any time after the date specified for
redemption in a Notice of Redemption when the Corporation will 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 the Preferred Shares for which a Notice of Redemption has been given,
dividends may be declared and paid on shares of the Preferred Shares and will
include those shares 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 the Preferred Shares called for redemption will 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 the Preferred Shares 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 the Preferred Shares 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 the
Preferred Shares 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 will have no voting rights. If fewer than
all the Outstanding shares of the Preferred Shares are redeemed or otherwise
acquired by the Corporation, the Corporation will give notice of such
transaction to the auction agent, in accordance with the procedures agreed upon
by the Board of Directors.
(i) In the case of any redemption pursuant to this Section 3, only whole
shares of the Preferred Shares will be redeemed, and in the event that any
provision of the Charter would require redemption of a fractional share, the
Auction Agent will 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
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Preferred Shares, ranking on a parity with the Preferred Shares 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 Preferred Shares) 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
Preferred Shares 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 the Preferred Shares will be as
determined in the manner set forth under 'Designation' above. The Corporation
will designate the duration of subsequent Dividend Periods of the Preferred
Shares; provided, however, that no such designation is necessary for a Standard
Dividend Period and, provided further, that any designation of a Special
Dividend Period will be effective only if (i) notice thereof will 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,
the Preferred Shares will have been cured as provided above, (iii) Sufficient
Clearing Orders will 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 will have mailed a Notice of Redemption with respect to
any shares, the redemption price with respect to such shares will have been
deposited with the Paying Agent, (v) in the case of the designation of a Special
Dividend Period, [ ], or any successor Broker-Dealer designated by the
Corporation will have notified the Corporation in writing that it does not
object to the designation of such Special Dividend Period and (vi) each Rating
Agency will have confirmed in writing to the Corporation that such designation
will not adversely affect their respective then-current ratings of the Preferred
Shares.
(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 will 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 will 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 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 will 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 will 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
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second Business Day next preceding the first day of such proposed Special
Dividend Period, the Corporation will 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 the Preferred Shares 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 the Preferred Shares through different Broker-Dealers, advises the
Auction Agent of such transfer. The certificates representing the shares of the
Preferred Shares 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 the Preferred Shares will be
entitled to one vote for each share of the Preferred Shares held on each matter
on which the Holders of the Preferred Shares are entitled to vote, and (ii) the
holders of the Outstanding shares of preferred stock, including the Preferred
Shares, and holders of shares of Common Shares will 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 the Preferred Shares, will 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 the Preferred Shares,
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 the Preferred Shares, voting
together as a single class, will be entitled to elect the balance of the
directors.
(b) If at any time dividends on the Preferred Shares will be unpaid in an
amount equal to two full years' dividends on the Preferred Shares (a 'Voting
Period'), the number of directors constituting the Board of Directors will be
automatically increased by the smallest number of additional directors that,
when added to the number of directors then constituting the Board of Directors,
will (together with the two directors elected by the holders of preferred stock,
including the Preferred Shares, 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 the Preferred Shares, will 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 will
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 will
continue unless and until all dividends in arrears on the Preferred Shares will
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 will
cease, subject always, however, to the revesting of such voting rights in the
holders of preferred stock, including the Preferred Shares, 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 the Preferred Shares, to elect additional
directors as described in paragraph (b) of this Section 6, the Corporation will
notify the Auction Agent, and the Auction Agent will 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
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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 will 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 the Preferred Shares, 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), will 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 Preferred Shares,
present in person or by proxy will 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 the Preferred Shares, 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 the
Preferred Shares, is required, no holder of shares of preferred stock, including
the Preferred Shares, will be entitled to vote and no share of preferred stock,
including the Preferred Shares, will 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 the Preferred Shares in trust with the Paying Agent for that purpose and
the requisite Notice of Redemption with respect to such shares will have been
given as provided in Section 3(b) of Part I of these 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 Preferred Shares and holders
of other shares of preferred stock to elect directors pursuant to paragraph (b)
of this Section 6 will 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 Preferred
Shares and holders of shares of other preferred stock pursuant to paragraph (b)
of this Section 6 will terminate, the remaining directors will 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 will 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 the Preferred Shares will 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 Preferred Shares of
the Corporation or fails to redeem any shares of the Preferred Shares which it
is required to redeem, or any other event occurs which requires the mandatory
redemption of shares of the Preferred Shares 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 the Preferred Shares will be the right to vote for directors
pursuant to the provisions of paragraph (b) of this Section 6. In no event will
the Holders of the Preferred Shares 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 the Preferred
Shares, 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
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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 Preferred Shares, (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
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 will 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 the Preferred
Shares, voting as a separate class, will 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 will, 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 will, 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, will 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
will 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 the Preferred Shares, 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 the Preferred Shares, and any
such amendment, alteration or repeal will not be deemed to affect the
preferences, rights or powers of the Preferred Shares 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 Preferred Shares) that any such
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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 the Preferred Shares, 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 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 the Preferred Shares, will 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 will
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 will be entitled to no further participation in any distribution or
payment in connection with any such liquidation, dissolution or winding up. The
Preferred Shares will rank on a parity with shares of any other series of
preferred stock of the Corporation (including the Preferred Shares) 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 the Preferred Shares, will be insufficient
to permit the payment in full to such holders of the amounts to which they are
entitled, then such available assets will be distributed among the holders of
all outstanding shares of preferred stock, including the Preferred Shares,
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 the Preferred Shares, 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 entity or entities, nor the sale, lease, exchange or transfer by the
Corporation of all or substantially all of its property and assets, will 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 the Preferred Shares of the full
preferential amounts provided for in this Section 7, the Holders of the
Preferred Shares as such will 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 the Preferred Shares, upon dissolution,
liquidation or winding up of the affairs of the Corporation, whether voluntary
or involuntary, will 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 will be made on account of any shares of any other series of
preferred stock unless proportionate distributive amounts will be paid on
account of the Preferred Shares, 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.
(f) Subject to the rights of the holders of shares of other preferred stock
or after payment will have been made in full to the Holders of the Preferred
Shares as provided in paragraph (a) of
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this Section 7, but not prior thereto, any other series or class of shares
ranking junior to the Preferred Shares with respect to the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the
Corporation will, 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 Preferred Shares will not be entitled to
share therein.
8. Auction Agent. For so long as any shares of the Preferred Shares are
Outstanding, the Auction Agent, duly appointed by the Corporation to so act,
will 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 will 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 the Preferred Shares 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 will have entered into such an agreement with a successor
auction agent.
9. 1940 Act Preferred Shares Asset Coverage. The Corporation will maintain,
as of the last Business Day of each month in which any Preferred Shares are
Outstanding, the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) will be the sole remedy in the event the Corporation fails
to do so.
10. Preferred Shares Basic Maintenance Amount. So long as any shares of the
Preferred Shares are Outstanding and any Rating Agency so requires, the
Corporation will 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) will be the sole remedy in the event
the Corporation fails to do so.
11. Certain Other Restrictions. So long as any shares of the Preferred
Shares 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 Preferred Shares),
Moody's (if Moody's is then rating the Preferred Shares) and (if applicable)
such Other Rating Agency, that any such action would not impair the rating then
assigned by such Rating Agency to the Preferred Shares, 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 Preferred Shares,
issue additional shares of any series of preferred stock, including the
Preferred Shares or reissue any shares of preferred stock, including the
Preferred Shares 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 the
Preferred Shares, 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 Preferred Shares 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
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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 will write only exchange-traded options on exchanges
approved by Moody's (if Moody's is then rating the Preferred Shares); (G)
where delivery may be made to the Corporation with any of a class of
securities, the Corporation will 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 will 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 the Preferred Shares are rated by S&P and Moody's,
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 and Moody's that
engaging in such transactions will not impair the ratings then assigned to
the Preferred Shares by S&P and Moody's.
(h) Change the pricing service referred to in the definition of Market
Value.
(i) Enter into reverse repurchase agreements.
12. Compliance Procedures for Asset Maintenance Tests. For so long as any
Preferred Shares are Outstanding and any Rating Agency so requires:
(a) As of each Valuation Date, the Corporation will 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
Preferred Shares 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.
(c) Compliance with the Preferred Shares Basic Maintenance Amount and
1940 Act Asset Coverage Tests will be determined with reference to those
Preferred Shares which are deemed to be Outstanding hereunder.
(d) The Corporation will deliver to 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) on or before the 5th business day after the Date of Original Issue,
(B) the last Valuation Date of each month (such monthly report to include
the net asset value and trade price as of that date), (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 Preferred Shares are redeemed and (F) any day the S&P
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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 will 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.
(e) The Corporation will deliver to 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 will 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.
(f) Within fifteen Business Days of the Date of Original Issue and any
redemption of Preferred Shares, the Corporation will deliver to 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 fifteen
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 year of the Corporation,
the Corporation will deliver to each Rating Agency an Auditor's Certificate
regarding the accuracy of the calculations made by the Corporation in a
Preferred Shares Basic Maintenance Certificate with respect to a date
randomly selected by the Corporation's independent auditors during such
fiscal year. 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 determination made by the Corporation's independent auditors will be
conclusive and binding on the Corporation.
(g) 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.
(h) 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 will 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 will 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.
(i) The Corporation will provide S&P with no less than 30 days'
notification of: (i) any material changes to the Corporation's
organizational documents and material contracts, (ii) any redemptions, or
(iii) any failed auctions.
B-15
(j) The Corporation will provide to S&P and Moody's an audited financial
statement for its fiscal year.
13. Notice. All notices or communications hereunder, unless otherwise
specified in these Articles Supplementary, will 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 will 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 Preferred Shares, acting collectively, 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 Preferred Shares are Outstanding, all
rights and preferences of such shares established and designated hereunder will
cease and terminate, and all obligations of the Corporation under these Articles
Supplementary will 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 will 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:
'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 will be deemed to be an Affiliate nor will 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.
'Applicable Percentage' means the percentage determined based on the
credit rating assigned to the Preferred Shares on such date by Moody's (if
Moody's is then rating the Preferred Shares) and S&P (if S&P is then rating
the Preferred Shares) as follows:
CREDIT RATINGS
-------------- APPLICABLE
MOODY'S S&P PERCENTAGE
------- --- ----------
Aaa AAA 125%
Aa3 to Aa1 AA - to AA+ 150%
A3 to A1 A - to A+ 200%
Baa3 to Baa1 BBB - to BBB+ 250%
Ba1 and lower BB+ and lower 300%
For purposes of this definition, the 'prevailing rating' of shares of
the Preferred Shares will be (i) AAA if such shares have a rating of AAA by
Moody's or Fitch or the equivalent of such ratings by such agencies or
substitute rating agencies selected as provided below; (ii) if not AAA, then
AA - if such shares have a rating of AA - or better by Moody's or Fitch or
the equivalent of such ratings by such agencies or substitute rating
agencies selected as provided below, (iii) if not AA - or higher, than A -
if such shares have a rating of A - or
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better by Moody's or Fitch or the equivalent of such ratings by such
agencies or substitute rating agencies selected as provided below, (iv) if
not A - or higher then BBB - if such shares have a rating of BBB - or better
by Moody's or Fitch or the equivalent of such ratings by such agencies or
substitute rating agencies selected as provided below, (v) if not BBB - or
higher, then below BBB - ; provided, however, that if such shares are rated
by only one rating agency, the prevailing rating will be determined without
reference to the rating of any other rating agency.
The Applicable Percentage as so determined will be further subject to
upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers, provided that that
immediately following any such increase the Fund would be in compliance with
the Preferred Shares Basic Maintenance Amount. The Fund will take all
reasonable action necessary to enable either Moody's or Fitch to provide a
rating for the Preferred Shares. If neither Moody's nor Fitch will make such
a rating available, the Fund will select another Rating Agency to act as a
substitute Rating Agency.
'Applicable Rate' means 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 the Preferred Shares are the subject of
Submitted Hold Orders for the Auction in respect thereof, 90% of the
reference rate corresponding to Preferred Shares.
'Applicable Spread' means the spread determined based on the credit
rating assigned to the Preferred Shares on such date by Moody's (if Moody's
is then rating the Preferred Shares) and Fitch (if Fitch is then rating the
Preferred Shares) as follows:
CREDIT RATINGS
-------------- APPLICABLE
MOODY'S FITCH SPREAD
------- ----- ------
Aaa AAA 125 bps
Aa3 to Aa1 AA - to AA+ 150 bps
A3 to A1 A - to A+ 200 bps
Baa3 to Baa1 BBB - to BBB+ 250 bps
Ba1 and lower BB+ and lower 300 bps
For purposes of this definition, the 'prevailing rating' of shares of
the Preferred Shares will be (i) AAA if such shares have a rating of AAA by
Moody's or Fitch or the equivalent of such ratings by such agencies or
substitute rating agencies selected as provided below; (ii) if not AAA, then
AA - if such shares have a rating of AA - or better by Moody's or Fitch or
the equivalent of such ratings by such agencies or substitute rating
agencies selected as provided below, (iii) if not AA - or higher, than A -
if such shares have a rating of A - or better by Moody's or Fitch or the
equivalent of such ratings by such agencies or substitute rating agencies
selected as provided below, (iv) if not A - or higher then BBB - if such
shares have a rating of BBB - or better by Moody's or Fitch or the
equivalent of such ratings by such agencies or substitute rating agencies
selected as provided below, (v) if not BBB - or higher, then below BBB - ;
provided, however, that if such shares are rated by only one rating agency,
the prevailing rating will be determined without reference to the rating of
any other rating agency.
The Applicable Spread as so determined will be further subject to upward
but not downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers, provided that that immediately
following any such increase the Fund would be in compliance with the
Preferred Shares Basic Maintenance Amount. The Fund will take all reasonable
action necessary to enable either Moody's or Fitch to provide a rating for
each the Preferred Shares. If neither Moody's nor Fitch will make such a
rating available, the Fund will select another Rating Agency to act as a
substitute Rating Agency.
'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
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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 the Preferred Shares.
'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 the Preferred Shares,
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 will 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.
'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 the Preferred Shares
are 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.
B-18
'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 Preferred Shares), the Moody's Discount Factor (if Moody's is then
rating the Preferred Shares) or the discount factor established by any Other
Rating Agency which is then rating the Preferred Shares and which so
requires, whichever is applicable.
'Discounted Value'
(a) for Moody's 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.
(b) for S&P means the quotient of the Market Value of an Eligible Asset
divided by the applicable Discount Factor 'Dividend Default' has the meaning
set forth in Section 2(c)(ii) of Part I of these Articles Supplementary.
'Dividend Payment Date' with respect to the Preferred Shares means any
date on which dividends are payable pursuant to Section 2(b) of Part I
hereof.
'Dividend Period' means the initial period determined in the manner set
forth under 'Designation' above, and thereafter, the period commencing on
the Business Day following each Dividend Period and ending on the calendar
day immediately preceding the next Dividend Payment Date.
'Eligible Assets' means Moody's Eligible Assets (if Moody's is then
rating the Preferred Shares), S&P Eligible Assets (if S&P is then rating the
Preferred Shares), and/or Other Rating Agency Eligible Assets if any Other
Rating Agency is then rating the Preferred Shares, whichever is applicable.
'Existing Holder' has the meaning set forth in Section 1 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 Preferred Shares, the registered
holder of shares as the same appears on the stock ledger or stock records of
the Corporation.
'Investment Manager' means Cohen & Steers Capital Management, Inc.
'LIBOR Dealers' means [ ] and such other dealer or dealers as the Fund
may from time to time appoint, or, in lieu of any thereof, their respective
affiliates or successors.
'LIBOR Rate,' on any Auction Date, means (i) the rate for deposits in
U.S. dollars for the designated Dividend Period, which appears on display
page 3750 of Moneyline's Telerate Service ('Telerate Page 3750') (or such
other page as may replace that page on that service, or such other service
as may be selected by the LIBOR Dealer or its successors that are LIBOR
Dealers) as of 11:00 a.m., London time, on the day that is the London
Business Day preceding the Auction Date (the 'LIBOR Determination Date'), or
(ii) if such rate does not appear on Telerate Page 3750 or such other page
as may replace such Telerate Page 3750, (A) the LIBOR Dealer will determine
the arithmetic mean of the offered quotations of the Reference Banks to
leading banks in the London interbank market for deposits in U.S. dollars
for the designated Dividend Period in an amount determined by such LIBOR
Dealer by reference to requests for quotations as of approximately 11:00
a.m. (London time) on such
B-19
date made by such LIBOR Dealer to the Reference Banks, (B) if at least two
of the Reference Banks provide such quotations, LIBOR Rate will equal such
arithmetic mean of such quotations, (C) if only one or none of the Reference
Banks provide such quotations, LIBOR Rate will be deemed to be the
arithmetic mean of the offered quotations that leading banks in The City of
New York selected by the LIBOR Dealer (after obtaining the Fund's approval)
are quoting on the relevant LIBOR Determination Date for deposits in U.S.
dollars for the designated Dividend Period in an amount determined by the
LIBOR Dealer (after obtaining the Fund's approval) that is representative of
a single transaction in such market at such time by reference to the
principal London offices of leading banks in the London interbank market;
provided, however, that if one of the LIBOR Dealers does not quote a rate
required to determine the LIBOR Rate, the LIBOR Rate will be determined on
the basis of the quotation or quotations furnished by any Substitute LIBOR
Dealer or Substitute LIBOR Dealers selected by the Fund to provide such rate
or rates not being supplied by the LIBOR Dealer; provided further, that if
the LIBOR Dealer and Substitute LIBOR Dealers are required but unable to
determine a rate in accordance with at least one of the procedures provided
above, LIBOR Rate will be LIBOR Rate as determined on the previous Auction
Date. If the number of Dividend Period days will be (i) 7 or more but fewer
than 21 days, such rate will be the seven-day LIBOR rate; (ii) more than 21
but fewer than 49 days, such rate will be the one-month LIBOR rate;
(iii) 49 or more but fewer than 77 days, such rate will be the two-month
LIBOR rate; (iv) 77 or more but fewer than 112 days, such rate will be the
three-month LIBOR rate; (v) 112 or more but fewer than 140 days, such rate
will be the four-month LIBOR rate; (vi) 140 or more but fewer than 168 days,
such rate will be the five-month LIBOR rate; (vii) 168 or more but fewer
than 189 days, such rate will be the six-month LIBOR rate; (viii) 189 or
more but fewer than 217 days, such rate will be the seven-month LIBOR rate;
(ix) 217 or more but fewer than 252 days, such rate will be the eight-month
LIBOR rate; (x) 252 or more but fewer than 287 days, such rate will be the
nine-month LIBOR rate; (xi) 287 or more but fewer than 315 days, such rate
will be the ten-month LIBOR rate; (xii) 315 or more but fewer than 343 days,
such rate will be the eleven-month LIBOR rate; and (xiii) 343 or more but
fewer than 365 days, such rate will be the twelve-month LIBOR rate.
'Liquidation Preference' means $25,000 per share of the Preferred
Shares.
'London Business Day' means any day on which commercial banks are
generally open for business in London.
'Mandatory Redemption Date' has meaning set forth in Section 3(a)(iii)
of Part I of these Articles Supplementary.
'Mandatory Redemption Price' has the meaning set forth in
Section 3(a)(iii) 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 will 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
B-20
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 will 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 be valued using the quotations the Board of
Directors believes reflect most closely the value of such securities.
'Maximum Rate,' for shares of the Preferred Shares on any Auction Date
for shares of such series, will mean for any Rate Period, the greater of the
Applicable Percentage of the Reference Rate or the Applicable Spread plus
the Reference Rate. The Auction Agent will round each applicable Maximum
Rate to the nearest one-thousandth (0.001) of one percent per annum, with
any such number ending in five ten-thousandths of one percent being rounded
upwards to the nearest one-thousandth (0.001) of one percent.
'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) Preferred Stock and Common Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common stock of REITs and other real estate companies 154%
Preferred stock of REITs
with Senior Implied Moody's (or S&P or Fitch)
rating: 154%
without Senior Implied Moody's (or S&P or Fitch)
rating 208%
Preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P or Fitch)
rating: 208%
without Senior Implied Moody's (or S&P or Fitch)
rating: 250%
Preferred Securities of non-real estate companies
(4)(5):
The Moody's Discount Factor for non-real estate
preferred securities will be
(A) for preferred securities issued by a utility, 152%
(B) for preferred securities of industrial and
financial issuers and other issuers, 197%
(C) for auction rate preferred securities, 350%
---------
(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 a real estate issuer is
below $500 million.
(4) Applies to preferred securities which have a minimum issue size of $50
million.
(5) Non-real estate eligible preferred securities will be issued by investment
grade companies having a senior unsecured debt rating that is Baa3 or higher
by Moody's or BBB- by S&P or Fitch and pay dividends in U.S. Dollars or
Euros. The market value of eligible non-cumulative preferred issues are
subject to standard preferred stock discount factors multiplied by a factor
of 1.10.
B-21
(b) Debt Securities (1)(2)(3):
The percentage determined by reference to the rating on such asset with
reference to the remaining term to maturity of such asset, in accordance with
the table set forth below.
TERM TO MATURITY OF DEBT SECURITY Aaa Aa A Baa Ba B UNRATED(3)
--------------------------------- --- -- - --- -- - ----------
1 year or less 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than 2 years) 120% 123% 127% 153% 153% 168% 250%
4 years or less (but longer than 3 years) 126% 129% 133% 161% 161% 176% 250%
5 years or less (but longer than 4 years) 132% 135% 139% 168% 168% 185% 250%
7 years or less (but longer than 5 years) 139% 143% 147% 179% 179% 197% 250%
10 years or less (but longer than 7 years) 145% 150% 155% 189% 189% 208% 250%
15 years or less (but longer than 10
years) 150% 155% 160% 196% 196% 216% 250%
20 years or less (but longer than 15
years) 150% 155% 160% 196% 196% 228% 250%
30 years or less (but longer than 20
years) 150% 155% 160% 196% 196% 229% 250%
Greater than 30 years 165% 173% 181% 189% 205% 240% 250%
---------
(1) The Moody's Discount Factors for debt securities will also be applied to any
interest rate swap or cap, in which case the rating of the counterparty will
determine the appropriate rating category.
(2) Corporate debt securities if (A) such securities provide for the periodic
payment of interest in cash in U.S. dollars or euros, except that such
securities that do not pay interest in U.S. dollars or euros will be
considered Moody's Eligible Assets if they are rated by Moody's or S&P or
Fitch; (B) for debt securities rated B and below taken together with
'Unrated' securities, no more than 10% of the original amount of such issue
may constitute Moody's Eligible Assets; (C) such securities have been
registered under the Securities Act or are restricted as to resale under
federal securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act as determined by the Fund's investment manager or
portfolio manager acting pursuant to procedures approved by the Board of
Directors, except that such securities that are not subject to U.S. federal
securities laws will be considered Moody's Eligible Assets if they are
publicly traded; and (D) such securities are not subject to extended
settlement.
(3) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Corporation's assets can be
derived from other sources as well as combined with a number of sources as
presented by the Corporation to Moody's, securities rated below B by Moody's
and unrated securities, which are securities rated by neither Moody's, S&P
nor Fitch, are limited to 10% of Moody's Eligible Assets. If a corporate
debt security is unrated by Moody's, S&P or Fitch, the Corporation will use
the percentage set forth under 'Below B and Unrated' in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's at face value.
However, adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate a
Moody's rating equivalent.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY DISCOUNT FACTOR U.S. TREASURY STRIPS
-------------------------- --------------- --------------------
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 years) 118% 120%
4 years or less (but longer than 3 years) 123% 127%
5 years or less (but longer than 4 years) 128% 133%
7 years or less (but longer than 5 years) 135% 145%
10 years or less (but longer than 7 years) 141% 159%
15 years or less (but longer than 10 years) 146% 184%
20 years or less (but longer than 15 years) 154% 211%
30 years or less (but longer than 20 years) 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 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-22
(e) Rule 144A Debt or Preferred Securities:
The Moody's Discount Factor applied to Rule 144A debt or preferred
securities will be 130% of the Moody's Discount Factor which would apply were
the securities registered under the Securities Act.
(f) Convertible Securities:
MOODY'S RATING CATEGORY(1)
INDUSTRY CATEGORY Aaa Aa A Baa Ba B NR
----------------- --- -- - --- -- - --
Utility 162% 167% 172% 188% 195% 199% 300%
Industrial 256% 261% 266% 282% 290% 293% 300%
Financial 233% 238% 243% 259% 265% 270% 300%
Transportation 332% 337% 342% 358% 365% 369% 370%
---------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Corporation's assets can be
derived from other sources as well as combined with a number of sources as
presented by the Corporation to Moody's, securities rated below B by Moody's
and unrated securities, which are securities rated by neither Moody's, S&P
nor Fitch, are limited to 10% of Moody's Eligible Assets. If a corporate
debt security is unrated by Moody's, S&P or Fitch, the Corporation will use
the percentage set forth under 'Below B and Unrated' in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's at face value.
However, adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate a
Moody's rating equivalent.
'Moody's Eligible Assets' means the following:
(i) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies, and Preferred Stock and debt securities of non
real estate companies:
(A) which comprise at least 7 of the total number of Moody's Real
Estate Industry/Property Sector Classifications ('Moody's Sector
Classifications') and Moody's Industry Classifications, of which no more
than 35% may constitute a single such classification;
(B) which in the aggregate constitute at least 40 separate issues 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 6.0% 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;
(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 taken together with securities rated Ba1 by
Moody's, or comparable by S&P or Fitch, and below do not exceed 10% of
the discounted Moody's Eligible Assets;
(iii) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if
(A) the counterparty to the swap transaction has a short-term rating
of not less than P-1 by Moody's or A-1 by S&P or, if the counterparty
does not have a short-term rating, the counterparty's senior unsecured
long-term debt rating is A3 or higher by Moody's or A+ or higher by S&P;
B-23
(B) the original aggregate notional amount of the interest rate swap
transaction or transactions is not to be greater than the liquidation
preference of the Preferred Shares originally issued;
(C) the interest rate swap transaction will be marked-to-market
daily;
(D) an interest rate swap that is in-the-money is discounted at the
counterparty's corporate debt rating for the maturity of the swap for
purposes of calculating Moody's Eligible Assets; and
(E) an interest rate swap that is out-of-the money includes that
negative mark-to-market amount as indebtedness for purposes of
calculating the Preferred Shares Basic Maintenance amount.
(iv) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(v) 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.
(vi) 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 (1) settled
through clearing house firms with respect to which the Corporation has
received prior written authorization from Moody's or (2) with
counterparties having a Moody's long-term debt rating of at least Baa3 or
(3) with counterparties having a Moody's Short-Term Money Market
Instrument rating of at least P-1.
The foregoing Rating Agency Guidelines are subject to change from time
to time. The Fund may, but 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 Preferred Shares; any nationally recognized
rating agency providing a rating for the Preferred Shares may, at any time
change or withdraw any such rating.
'Moody's Industry Classifications' means, for the purposes of
determining Moody's Eligible Assets, each of the following Industry
Classifications:
1. Aerospace & Defense
2. Automobile
3. Banking
4. Beverage, Food & Tobacco
5. Buildings & Real Estate
6. Chemicals, Plastics & Rubber
7. Containers, Packaging & Glass
8. Personal & Nondurable Consumer Projects (Manufacturing Only)
B-24
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals & Minerals
12. Ecological
13. Electronics
14. Finance
15. Farming & Agriculture
16. Grocery
17. Healthcare, Education & Childcare
18. Home & Office Furnishings, Housewares & Durable Consumer Products
19. Hotels, Motels, Inns and Gaming
20. Insurance
21. Leisure, Amusement, Entertainment
22. Machinery (Nonagriculture, Nonconstruction, Nonelectronic)
23. Mining, Steel, Iron & Nonprecious Metals
24. Oil & Gas
25. Personal, Food & Misc. Services
26. Printing & Publishing
27. Cargo Transport
28. Retail Stores
29. Telecommunications
30. Textiles & Leather
31. Personal Transportation
32. Utilities
33. Broadcasting & Entertainment
'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'):
(i) Office
(ii) Industrial
(iii) Mixed
(iv) Shopping Centers
(v) Regional Malls
(vi) Free Standing
(vii) Apartments
(viii) Manufactured Homes
(ix) Diversified
(x) Lodging/Resorts
(xi) Health Care
(xii) Home Financing
(xiii) Commercial Financing
(xiv) Self Storage
(xv) Specialty
B-25
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 Preferred Shares (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(f) of these Articles Supplementary.
'Notice of Redemption' means any notice with respect to the redemption
of Preferred Shares 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 Preferred Shares pursuant to the request of
the Corporation.
'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 Preferred Shares.
'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, Preferred Shares theretofore issued
by the Corporation except, without duplication, (i) any Preferred Shares
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
Preferred Shares 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 Preferred Shares 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 Preferred Shares 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, Preferred Shares 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.
B-26
'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 product of the number of Preferred Shares outstanding on
such date multiplied by $25,000 (plus the product of the number of shares
of any other series of preferred shares outstanding on such date
multiplied by the liquidation preference of such shares), plus any
redemption premium applicable to the Preferred Shares (or other preferred
shares) then subject to redemption; (B) the aggregate amount of dividends
that will have accumulated at the Applicable Rate (whether or not earned
or declared) to (but not including) the first Dividend Payment Date for
the Preferred Shares outstanding that follows such Valuation Date (plus
the aggregate amount of dividends, whether or not earned or declared,
that will have accumulated in respect of other outstanding preferred
shares to, but not including, the first respective dividend payment date
for such other shares that follows such Valuation Date); (C) the
aggregate amount of dividends that would accumulate on shares of the
Preferred Shares outstanding from such first Dividend Payment Date
therefor through the 56th day after such Valuation Date, at the Maximum
Rate; (D) the amount of anticipated expenses of the Corporation for the
90 days subsequent to such Valuation Date; (E) the amount of any
indebtedness or obligations of the Corporation senior in right of payment
to the Preferred Shares; and (F) any current liabilities as of such
Valuation Date, to the extent not reflected in any of (i)(A) through
(i)(F) less
(ii) the value (i.e., for purposes of current Moody's guidelines, the
face value of cash and short-term securities that are the direct
obligation of the U.S. government, provided in each case that such
securities mature on or prior to the date upon which any of
(i)(A) through (i)(F) become payable, otherwise the Moody's Discounted
Value) (i.e., for the purposes of the current S&P guidelines, the face
value of cash, and short term securities that are the direct obligations
of the U.S. government, provided in each case that such securities mature
on or prior to the date upon which any of (i)(A) through (i)(F) becomes
payable, otherwise the S&P Discounted Value) of any of the Corporation's
assets irrevocably deposited by the Corporation for the payment of any of
(i)(A) through (i)(F).
'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. The Corporation will notify Moody's if coverage
declines below 1.30X 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 Global Pricing
Chanin Capital Partners
Data Resources Inc. (a McGraw-Hill company)
FT Interactive Data
J.J. Kenny Drake
JP Morgan Pricing Services
Loan Pricing Corporation (owned by Reuters)
Meenan, Mcdevitt & Co., Inc
Reuters
Securities Evaluation Services
Standard & Poor's Evaluation Services
B-27
Thomson Financial Securities Management
Telerate
Telekurs
Trepp Pricing Service
Van Kampen Merritt Investment Advisory Corp Pricing Service
CIBC World Markets
'Rating Agency' means Moody's and S&P as long as such rating agencies
are then rating the Preferred Shares.
'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 Banks' means four major banks in the London interbank market
selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates or successors or such other party as the Fund may from time to
time appoint.
'Reference Rate' means, with respect to the determination of the Default
Rate, the applicable LIBOR Rate (for a Dividend Period of fewer than 365
days) or the applicable Treasury Index Rate (for a Dividend Period of 365
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, with respect to an S&P Eligible Asset
specified below, the following applicable number is the S&P Discount Factor
provided that the S&P Exposure Period is 25 Business Days or less:
(a) Types of S&P Eligible Assets
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Common Stock of REITs and other real estate companies 162%
DRD Eligible Preferred Stock with a senior or preferred
stock rating of at least BBB - 245%
REIT and Non-DRD eligible Preferred Stock with a senior or
preferred stock rating of at least BBB - 164%
DRD Eligible Preferred Stock with a senior or preferred
stock rating below BBB - 250%
REIT and non-DRD Eligible Preferred Stock with a senior or
preferred stock rating below BBB - 169%
Un-rated DRD Eligible Preferred Stock 255%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock 174%
Convertible bonds rated AAA to AAA - 165%
Convertible bonds rated AA+ to AA - 170%
Convertible bonds rated A+ to A - 175%
Convertible bonds rated BBB+ to BBB - 180%
(table continued on next page)
B-28
(table continued from previous page)
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Convertible bonds rated BB+ to BB - 185%
Convertible bonds rated B+ to B 190%
Convertible bonds rated B - 195%
Convertible bonds rated CCC+ 205%
Convertible bonds rated CCC 220%
U.S. Short-Term Money Market Investments with maturities of
180 days or less 104%
U.S. Short-Term Money Market Investments with maturities of
between 181 and 360 days 113%
U.S. Government Obligations (52 week Treasury Bills) 102%
U.S. Government Obligations (Two-Year Treasury Notes) 104%
U.S. Government Obligations (Five-Year Treasury Notes) 110%
U.S. Government Obligations (Ten-Year Treasury Notes) 117%
U.S. Government Obligations (Thirty-Year Treasury Bonds) 130%
Agency Mortgage Collateral (Fixed 15-Year) 129%
Agency Mortgage Collateral (Fixed 30-Year) 132%
Agency Mortgage Collateral (ARM 1/1) 122%
Agency Mortgage Collateral (ARM 3/1) 123%
Agency Mortgage Collateral (ARM 5/1) 123%
Agency Mortgage Collateral (ARM 10/1) 123%
Mortgage Pass-Through Fixed (15 Year) 131%
Mortgage Pass-Through Fixed (30 Year) 134%
Debt securities of REIT's and other real estate
companies according to the following corporate bond
schedule
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA - 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A - 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB - 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB - 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B - 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC - 350%
Cash and Cash Equivalents 100%
B-29
(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
A-1, or equivalent by S&P or, if the counterparty does not have a short-term
rating, the counterparty's senior unsecured long-term debt rating is A+, or
equivalent by S&P or higher.
(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 Preferred Shares.
(iii) The interest rate swap transaction will be marked-to-market weekly
by the swap counterparty.
(iv) If the Corporation fails to maintain an aggregate discounted value
at least equal to the basic maintenance amount on two consecutive valuation
dates then the agreement will terminate immediately.
(v) For the purpose of calculating the asset coverage test 90% of any
positive mark-to-market valuation of the Corporation's rights will be
eligible assets. 100% of any negative mark-to-market valuation of the
Corporation's rights will be included in the calculation of the Preferred
Shares Basic Maintenance Amount.
(vi) The Corporation must maintain liquid assets with a value at least
equal to the net amount of the excess, if any, of the Corporation's
obligations over its entitlement with respect to each swap. For caps/floors,
must maintain liquid assets with a value at least equal to the Corporation's
obligations with respect to such caps or floors.
(c) Cash and Cash Equivalents
(i) Cash and Cash Equivalents and demand deposits in an 'A-1+' rated
institution are valued at 100%. 'A-1+' rated commercial paper, with
maturities no greater than 30 days and held instead of cash until maturity,
is valued at 100%. Securities with next-day maturities invested in 'A-1+'
rated institutions re considered cash equivalents and are valued at 100%.
Securities maturing in 181 to 360 calendar days are valued at 114.2%.
(ii) The S&P Discount Factor for shares of unrated Money Market Funds
affiliated with the Corporation used as 'sweep' vehicles will be 111%. Money
Market Funds rated 'AAAm' will be discounted at the appropriate level as
dictated by the exposure period. No S&P Discount Factor will be applied to
Money Market Funds rated AAAm by S&P with effective next day maturities.
'S&P Eligible Assets' will mean:
(A) Deposit Securities;
(B) U.S. Government Obligations and U.S. Government Agencies;
(C) Corporate Indebtedness. Evidences of indebtedness other than Deposit
Securities, U.S. Government Obligations and Municipal Obligations that are
not convertible into or exchangeable or exercisable for stock of a
corporation (except to the extent of ten percent (10%) in the case of a
share exchange or tender offer) ('Other Debt') and that satisfy all of the
following conditions:
(1) be no more than 10% of total assets may be below a S&P rating of
BBB - , or comparable Moody's or Fitch rating, or unrated;
(2) the remaining term to maturity of such Other Debt will not exceed
fifty (50) years;
(3) such Other Debt must provide for periodic interest payments in
cash over the life of the security;
(4) no more than 10% of the issuers of such evidences of indebtedness
do not file periodic financial statements with the U.S. Securities and
Exchange Commission;
(5) which, in the aggregate, have an average duration of not more
than 12 years.
(D) Convertible Corporate Indebtedness. Evidences of indebtedness other
than Deposit Securities, U.S. Government Obligations and Municipal
Obligations that are convertible into or
B-30
exchangeable or exercisable for stock of a corporation and that satisfy all
of the following conditions:
(1) such evidence of indebtedness is rated at least CCC by S&P; and
(2) if such evidence of indebtedness is rated BBB or lower by S&P,
the market capitalization of the issuer of such evidence of indebtedness
is at least $100 million;
(E) Agency Mortgage Collateral. Certificates guaranteed by U.S.
Government Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC) for
timely payment of interest and full and ultimate payment of principal.
Agency Mortgage Collateral also evidence undivided interests in pools of
level-payment, fixed, variable, or adjustable rate, fully amortizing loans
that are secured by first liens on one- to four-family residences
residential properties (or in the case of Plan B FHLMC certificates, five or
more units primarily designed for residential use) ('Agency Mortgage
Collateral'). Agency Mortgage Collateral the following conditions apply:
(1) For GNMA certificates backed by pools of graduated payment
mortgages, levels are 20 points above established levels;
(2) Qualifying 'large pool' FNMA mortgage-backed securities and FHLMC
participation certificates are acceptable as eligible collateral. The
eligible fixed-rate programs include FNMA MegaPools, FNMA Majors, FHLMC
Multilender Swaps, and FHLMC Giant certificates. Eligible adjustable rate
mortgage ('ARMs') programs include nonconvertible FNMA ARM MegaPools and
FHLMC weighted average coupon ARM certificates. Eligible FHLMC Giant
programs exclude interest-only and principal only stripped securities;
(3) FNMA certificates backed by multifamily ARMs pegged to the 11th
District Cost of Funds Index are acceptable as eligible collateral at 5
points above established levels; and
(4) Multiclass REMICs issued by FNMA and FHLMC are acceptable as
eligible collateral at the collateral levels established for CMOs.
(F) Mortgage Pass-Through Certificates. Publicly issued instruments
maintaining at least a AA - ratings by S&P. Certificates evidence
proportional, undivided interests in pools of whole residential mortgage
loans. Pass-through certificates backed by pools of convertible ARMs are
acceptable as eligible collateral at 5 points above the levels established
for pass-through certificates backed by fixed or non-convertible ARM pools.
(G) Preferred Stocks. Preferred stocks that satisfy all of the following
conditions:
1. The preferred stock issue has a senior rating from S&P, or the
preferred issue must be rated. In the case of Yankee preferred stock, the
issuer should have a S&P senior rating of at least 'BBB - ', or the
preferred issue must be rated at least 'BBB - '.
2. The issuer -- or if the issuer is a special purpose corporation,
its parent -- is listed on either the New York Stock Exchange, the
American Stock Exchange or NASDAQ if the traded par amount is less than
$1,000. If the traded par amount is $1,000 or more exchange listing is
not required.
3. The collateral pays cash dividends denominated in U.S. dollars.
4. Private placement 144A with registration rights are eligible
assets.
5. The minimum market capitalization of eligible issuers is US$100
million.
Restrictions for floating-rate preferred stock:
1. Holdings must be limited to stock with a dividend period of
less than or equal to 49 days, except for a new issue, where the
first dividend period may be up to 64 days.
2. The floating-rate preferred stock may not have been subject to
a failed auction.
Restrictions for adjustable -- or auction-rate preferred stock:
B-31
1. The total fair market value of adjustable-rate preferred stock
held in the portfolio may not exceed 10% of eligible assets.
Concentration Limits:
2. Total issuer exposure in preferred stock of any one issuer is
limited to 10% of the fair market value of eligible assets.
3. Preferred stock rated below B - (including non-rated preferred
stock) and preferred stock with a market cap of less than US$100
million are limited to no more than 15% of the fair market value of
the eligible assets.
4. Add 5 points to over-collateralization level for issuers with
a senior rating or preferred stock rating of less than BBB - .
5. Add 10 point to over-collateralization level of issuers with
no senior rating, preferred stock rating or dividend history.
(H) Common Stocks of REITs and Other Real Estate Companies. Common
stocks of REITs and Other Real Estate Companies that satisfy all of the
following conditions:
(1) such common stock (including the common stock of any predecessor
or constituent issuer) has been traded on a recognized national
securities exchange or quoted on the National Market System (or any
equivalent or successor thereto) of NASDAQ, but excluding '144a' or 'pink
sheet' stock not carried in daily newspaper over-the-counter listings;
(2) the market capitalization of such issuer of common stock exceeds
$100 million;
(3) the issuer of such common stock is not an entity that is treated
as a partnership for federal income taxes;
(4) if such issuer is organized under the laws of any jurisdiction
other than the United States, any state thereof, any possession or
territory thereof or the District of Columbia, the common stock of such
issuer held by the Corporation is traded on a recognized national
securities exchange or quoted on the National Market System of NASDAQ
either directly or in the form of depository receipts.
Escrow Bonds may comprise 100% of the Corporation's S&P Eligible Assets.
Bonds that are legally defeased and secured by direct U.S. government
obligations are not required to meet any minimum issuance size requirement.
Bonds that are economically defeased or secured by other U.S. agency paper
must meet the minimum issuance size requirement for the Trust described
above. Bonds initially rated or rerated as an escrow bond by another Rating
Agency are limited to 50% of the Corporation's S&P Eligible Assets, and
carry one full rating lower than the equivalent S&P rating for purposes of
determining the applicable discount factors. Bonds economically defeased and
either initially rated or rerated by S&P or another Rating Agency are
assigned that same rating level as its debt issuer, and will remain in its
original industry category unless it can be demonstrated that a legal
defeasance has occurred.
With respect to the above, the Corporation portfolio must consist of no
less than 20 issues representing no less than 10 industries as determined by
the S&P Industry Classifications and S&P Real Estate Industry/Property
sectors.
For purposes of determining the discount factors applicable to
collateral not rated by S&P, the collateral will carry an S&P rating one
full rating level lower than the equivalent S&P rating.
'S&P Exposure Period' will mean the sum of (i) that number of days from
the last Valuation Date on which the Corporation's Discounted Value of S&P
Eligible Assets were greater than the Preferred Shares Basic Maintenance
Amount to the Valuation Date on which the Corporation's Discounted Value of
S&P Eligible Assets failed to exceed the Preferred Shares Basic Maintenance
Amount, (ii) the maximum number of days following a Valuation Date that the
Corporation has under this Statement to cure any failure to maintain a
Discounted Value of S&P Eligible Assets at least equal to the Preferred
Shares Basic
B-32
Maintenance Amount, and (iii) the maximum number of days the Corporation has
to effect a mandatory redemption under Section 3(a)(ii) of Part I of these
Articles Supplementary.
'S&P Industry Classifications' will mean, for the purposes of
determining S&P Eligible Assets, each of the following industry
classifications (as defined by the S&P global industry classification):
Aerospace & Defense
Air Freight and Logistics Airlines
Automobiles
Automobile Components
Beverages
Biotechnology
Building Products
Cable
Capital Markets
Computers & Peripherals
Commercial Banks
Commercial Services & Supplies
Communications Equipment
Construction & Engineering
Consumer Finance
Containing & Packaging
Distributors
Diversified Financial Services
Diversified Telecommunication Services
Electric Utilities
Electrical Equipment
Electronic Equipment & Instrument
Energy Equipment & Services
Food & Staples Retailing
Food Products
Gas Utilities
Healthcare Equipment & Supplies
Healthcare Providers & Services
Hotels, Restaurants & Leisure
Household Durables
Household Products
Industrial Conglomerates
Insurance
Internet & Catalog Retail
Internet Software & Services
IT Services
Leisure Equipment & Products
Machinery
Marine
Media
Metals & Mining
Office Electronics
Oil & Gas Packaging and Containers
Paper & Forest Products
Personal Products
Pharmaceuticals
Real Estate
Retail
Road & Rail
B-33
Software
Specialty Retail
Semiconducters and Semi Conducter Equipment
Textiles, Apparel and Luxury Goods
Thrift & Mortgage Finance
Tobacco Trading Companies & Distributors
Transportation and Infrastructure
Transportation Utilities
Water Utilities
Wireless Telecommunication Services
'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
15. Specialty
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.
The foregoing Rating Agency Guidelines are subject to change from time
to time. The Fund may, but 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 Preferred Shares; any nationally recognized
rating agency providing a rating for the Preferred Shares may, at any time
change or withdraw any such rating.
'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 Preferred Shares.
'Sell Order' has the meaning set forth in Section 2(a)(ii) 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
B-34
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;
(iv) U.S. Government Securities; and
(v) Rule 2a-7 eligible money market funds.
'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 [ ] days in the
case of the Preferred Shares unless the day after such [ ] day is not a
Business Day, then the number of days ending on the calendar day next
preceding the next Business 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.
'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 will not have been published during the 15 days preceding the date
of computation, the foregoing computations will 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.
B-35
'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 will 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 will 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
Preferred Shares.
'Available Preferred Shares' has the meaning set forth in Section
4(a)(i) of Part II of these Articles Supplementary.
'Existing Holder' means (a) a person who beneficially owns those
Preferred Shares listed in that person's name in the records of the Auction
Agent or (b) the beneficial owner of those Preferred Shares which are listed
under such person's Broker-Dealer's name in the records of the Auction
Agent, which Broker-Dealer will 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 Preferred Shares 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 Preferred Shares or (b) any other person who may be
interested in acquiring Preferred Shares 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
will have executed a Master Purchaser's Letter.
'Sell Order' has the meaning set forth in Section 2(a)(ii) 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 Preferred Shares are the
subject of Submitted Hold Orders or that the number of Preferred Shares 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 Preferred Shares 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 Preferred Shares that
are subject to Submitted Sell Orders.
B-36
'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 Preferred Shares which, when added
to the number of Preferred Shares to be purchased by the Potential Holders
described in clause (B) above and the number of Preferred Shares subject to
Submitted Hold Orders, would be equal to the number of Preferred Shares.
2. Orders.
(a) On or prior to the Submission Deadline on each Auction Date for shares
of a series of Preferred Shares:
(i) each Beneficial Owner of shares of the Preferred Shares 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 will 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,
will 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 will 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 the
Preferred Shares subject to an Auction on any Auction Date will 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 will be less than the rate specified therein;
(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
B-37
Applicable Rate for shares of such series determined on such Auction Date
will 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 will 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
will 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
the Preferred Shares subject to an Auction on any Auction Date will 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 the Preferred Shares will 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 the Preferred Shares subject
to an Auction on any Auction Date will 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 will 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
will be equal to the rate specified therein.
(c) No Order for any number of Preferred Shares other than whole shares will
be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for Preferred Shares 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 will specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which will 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
B-38
(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 will round such rate up to the
next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding Preferred Shares
of a series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent will 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 will 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 Preferred
Shares of a series subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(i) all Hold Orders for shares of such series will 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 will 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 will 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 Outstanding shares of such series subject
to such Bids is greater than such excess, such Bids will 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 will 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 will 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) will 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 will 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 the Preferred Shares is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted will be a separate Bid with the rate and number of shares
therein specified.
B-39
(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, will 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 the Preferred Shares, the Auction Agent will 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 will 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
Preferred Shares' 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 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 Preferred Shares of such series.
(b) Promptly after the Auction Agent has made the determinations pursuant to
paragraph (a) of this Section 4, the Auction Agent will advise the Corporation
of the Maximum Rate for shares of the Preferred Shares 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 will 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
B-40
Applicable Rate for all shares of such series for the next succeeding
Dividend Period thereof will 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 will be 90% of the
reference rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders will continue to hold the Preferred Shares 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 will be accepted or rejected by the Auction Agent and the Auction
Agent will take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of the Preferred Shares have
been made, all Submitted Sell Orders with respect to shares of such series
will 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 will be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids with respect to shares of such series will be rejected:
(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 will be accepted, thus requiring each such Existing Holder
to sell the Preferred Shares 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 will be rejected, thus entitling each such Existing Holder to
continue to hold the Preferred Shares 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 will 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 will be rejected, thus entitling such Existing Holder to
continue to hold the Preferred Shares subject to such Submitted Bid,
unless the number of Outstanding Preferred Shares subject to all such
Submitted Bids will be greater than the number of Preferred Shares
('remaining shares') in the excess of the Available Preferred Shares of
such series over the number of Preferred Shares subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which event
such Submitted Bid of such Existing Holder will be rejected in part, and
such Existing Holder will be entitled to continue to hold Preferred
Shares subject to such Submitted Bid, but only in an amount equal to the
Preferred Shares of such series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which will be the number
of Outstanding Preferred Shares held by such Existing Holder subject to
such Submitted Bid and the denominator of which will be the aggregate
number of Outstanding Preferred Shares 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 will 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 Preferred Shares of such series over the number
of Preferred Shares subject to Submitted Bids described in clauses (ii)
through (iv) of this paragraph (a) by a fraction, the numerator of which
will be the number of Outstanding Preferred Shares subject to such
Submitted Bid and the denominator of which will be the aggregate number
of Outstanding Preferred Shares 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-41
(b) If Sufficient Clearing Bids for shares of the Preferred Shares 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
will be accepted or rejected as follows in the following order of priority
and all other Submitted Bids for shares of such series will 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 will be rejected, thus entitling such Existing
Holders to continue to hold the Preferred Shares subject to such
Submitted Bids;
(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 will 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 will 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 will 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 will 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 the Preferred Shares are subject
to Submitted Hold Orders, all Submitted Bids for shares of such series will
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
the Preferred Shares on any Auction Date, the Auction Agent will, in such
manner as it will determine in its sole discretion, round up or down the
number of Preferred Shares 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 will be whole
shares of the Preferred Shares.
(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 the Preferred Shares on any
Auction Date, the Auction Agent will, in such manner as it will determine in
its sole discretion, allocate Preferred Shares of such series for purchase
among Potential Holders so that only whole Preferred Shares 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 Preferred Shares of such series on such Auction Date.
(f) Based on the results of each Auction for shares of the Preferred
Shares, the Auction Agent will 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 will deliver, or from which other Potential
Holder(s) or Existing Holder(s) they will receive, as the case may be,
Preferred Shares 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 the Preferred
Shares with respect to whom a Broker-Dealer
B-42
submitted a Bid to the Auction Agent for such shares that was accepted in
whole or in part, 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 Preferred Shares 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 will constitute good
delivery to such Potential Holders and Potential Beneficial Owners.
(g) Neither the Corporation nor the Auction Agent nor any affiliate of
either will 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 Preferred Shares
of any series or to pay for Preferred Shares of any series sold or purchased
pursuant to the Auction Procedures or otherwise.
6. Transfer of Preferred Shares. Unless otherwise permitted by the
Corporation, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of Preferred Shares 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 Preferred Shares 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 will 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 will advise the Auction Agent of such
transfer.
7. Force Majeure. (a) Notwithstanding anything else set forth herein, if an
Auction Date is not a Business Day because the New York Stock Exchange is closed
for business for more than three consecutive Business Days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications services
or the Auction Agent is not able to conduct an Auction in accordance with the
Auction Procedures for any reason, then the Applicable Rate for the next
Dividend Period will be the Applicable Rate determined on the previous Auction
Date, provided that, if the New York Stock Exchange is closed for such reason
for three or less than three consecutive Business Days, then the Applicable Rate
for the next Dividend Period will be the Applicable Rate determined by auction
on the first Business Day following such Auction Date.
(b) Notwithstanding anything else set forth herein, if a Dividend Payment
Date is not a Business Day because the New York Stock Exchange is closed for
business for more than three consecutive Business Days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications services
or the dividend payable on such date can not be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend Period will be
the next Business Day on which the Fund and its paying agent, if any, are
able to cause the dividend to be paid using their reasonable best efforts;
(ii) the affected Dividend Period will end on the day it would have
ended had such event not occurred and the Dividend Payment Date had remained
the scheduled date; and
(iii) the next Dividend Period will begin and end on the dates on which
it would have begun and ended had such event not occurred and the Dividend
Payment Date remained the scheduled date.
[Remainder of page left blank]
B-43
IN WITNESS WHEREOF, COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC. has
caused these Articles Supplementary 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 , 2003.
WITNESS:
By:
..................................
Name: Lawrence B. Stoller
Title: Assistant Secretary
COHEN & STEERS REIT AND PREFERRED
INCOME FUND, INC.
By:
..................................
Name: Adam M. Derechin
Title: Vice President
THE UNDERSIGNED, Vice President of the COHEN & STEERS REIT AND PREFERRED
INCOME 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-44
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1) Financial Statements
Part A -- Financial Highlights, for the period June 27, 2003 through [ ]
30, 2003 (unaudited)
Part B -- Report of Independent Accountants
-- Statement of Assets and Liabilities, as of [ ], 2003
(audited)
-- Schedule of Investments, as of, [ ], 2003
(unaudited)
-- Statement of Assets and Liabilities, as of [ ], 2003
(unaudited)
-- Statement of Operations, for the period June 27, 2003
through [ ], 2003 (unaudited)
-- Statement of Changes in Net Assets, for the period June
27, 2003 through [ ], 2003 (unaudited)
-- Financial Highlights, for the period June 27, 2003
through [ ], 2003 (unaudited)
All other financial statements, schedules and historical financial
information are omitted because the conditions requiring their filing do not
exist.
2) Exhibits
(a) -- Articles of Incorporation'D'
(b) -- By-Laws'D'
(c) -- Not Applicable
(d) -- (i) Form of Articles Supplementary creating Series [ ]
Preferred Shares.*
-- (ii) Specimen Certificate for Series [ ] Preferred
Shares.*
(e) -- Form of Dividend Reinvestment Plan'D'
(f) -- Not Applicable
(g) -- (i) Form of Investment Management Agreement'D'
-- (ii) Not Applicable
(h) -- Form of Purchase Agreement*
(i) -- Not Applicable
(j) -- Form of Custodian Agreement'D'
(k) -- (i) Form of Transfer Agency, Registrar and Dividend
Disbursing Agency Agreement'D'
-- (ii) Form of Administration Agreement between the Fund
and the Investment Manager'D'
-- (iii) Form of Administration Agreement between the Fund
and State Street Bank and Trust Company'D'
-- (iv) Form of Auction Agency Agreement between the Fund
and the Bank of New York*
-- (v) Form of Broker-Dealer Agreement'D''D'
(l) -- (i) Opinion and Consent of Simpson Thacher & Bartlett
LLP*
-- (ii) Opinion and Consent of Venable LLP*
(m) -- Not Applicable
(n) -- Consent of Independent Accountants*
(o) -- Not Applicable
(p) -- Not Applicable
(q) -- Not Applicable
(r) -- (i) Code of Ethics of the Fund'D'
-- (ii) Code of Ethics of Investment Manager'D'
(s) -- Power of Attorney'D'
---------
* To be filed by Amendment.
'D' Incorporated by reference to Amendment No. 1 to the Fund's Registration
Statement, (File Nos. 333-104047 and 811-21326) filed on May 5, 2003.
'D''D' Incorporated by reference to Amendment No. 1 to the Fund's Registration
Statement, (File Nos. 333-106347 and 811-21326) filed on August 8, 2003.
C-1
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this registration statement:
Registration Fees........................................... $
Printing and engraving expenses*............................
Auditing fees and expenses*.................................
Legal fees and expenses*....................................
S&P and Moody's Rating Initial Costs........................
Miscellaneous*..............................................
--------
Total*.................................................. $
--------
--------
---------
* Estimated.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Set forth below is the number of record holders as of [ ], 2003, of
each class of securities of the Registrant:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares...............................................
Series M7 AMPS, par value $.001 per share................... 3,280
Series T7 AMPS, par value $.001 per share................... 3,280
Series W7 AMPS, par value $.001 per share................... 3,280
Series TH7 AMPS, par value $.001 per share.................. 3,280
Series F7 AMPS, par value $.001 per share................... 3,280
Series W28A AMPS, par value $.001 per share................. 2,800
Series W28B AMPS, par value $.001 per share................. 2,800
Series W28C AMPS, par value $.001 per share................. 2,800
Series [ ] Preferred Shares, par value $.001 per share.... 0
ITEM 29. INDEMNIFICATION
It is the Registrant's policy to indemnify its directors, officers,
employees and other agents to the maximum extent permitted by Section 2-418 of
the General Corporation Law of the State of Maryland as set forth in Article
NINTH of Registrant's Articles of Incorporation, and Article VIII of the
Registrant's By-Laws. The liability of the Registrant's directors and officers
is dealt with in Article NINTH of Registrant's Articles of Incorporation. The
liability of Cohen & Steers Capital Management, Inc., the Registrant's
investment manager (the 'Investment Manager'), for any loss suffered by the
Registrant or its shareholders is set forth in Section 5 of the Investment
Management Agreement.
The Registrant has agreed to indemnify the underwriters of the Registrant's
common stock to the extent set forth in Exhibit 2(h).
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to the directors and officers, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
C-2
therefore unenforceable. If a claim for indemnification against such liabilities
under the Securities Act of 1933 (other than for expenses incurred in a
successful defense) is asserted against the Company by the directors or officers
in connection with the shares, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in such Act and will be governed by the
final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
The descriptions of the Investment Manager under the caption 'Management of
the Fund' in the prospectus and in the Statement of Additional Information,
respectively, constituting Parts A and B, respectively, of this registration
statement are incorporated by reference herein.
The following is a list of the Directors and Officers of the Investment
Manager. None of the persons listed below has had other business connections of
a substantial nature during the past two fiscal years.
NAME TITLE
---- -----
Robert H. Steers................................ Co-Chairman, Co-Chief Executive Officer, Director
Martin Cohen.................................... Co-Chairman, Co-Chief Executive Officer, Director
Joseph M. Harvey................................ President
Adam M. Derechin................................ Chief Operating Officer
Victor M. Gomez................................. Senior Vice President and Chief Financial Officer
Jay J. Chen..................................... Senior Vice President and Director of
Administration
James S. Corl................................... Senior Vice President and Director of Investment
Strategy
John J. McCombe................................. Senior Vice President
Lawrence B. Stoller............................. Senior Vice President and General Counsel
Greg E. Brooks.................................. Senior Vice President
William F. Scapell.............................. Senior Vice President
Kevin P. Norton................................. Senior Vice President
Rahul Bhattacharjee............................. Vice President and Director of Research
Terrance R. Ober................................ Vice President
Anthony Dotro................................... Vice President
Robert Tisler................................... Vice President
Mark Freed...................................... Vice President
Norbert Berrios................................. Vice President
John E. McLean.................................. Vice President and Associate General Counsel
Cohen & Steers Capital Management, Inc. acts as Investment Manager of, in
addition to the Registrant, the following registered investment companies:
Cohen & Steers Advantage Income Realty Fund, Inc.
Cohen & Steers Institutional Realty Shares, Inc.
Cohen & Steers Equity Income Fund, Inc.
Cohen & Steers Premium Income Realty Fund, Inc.
Cohen & Steers Quality Income Realty Fund, Inc.
Cohen & Steers Realty Shares, Inc.
Cohen & Steers Total Return Realty Fund, Inc.
Cohen & Steers Special Equity Fund, Inc.
American Skandia Trust -- AST Cohen & Steers Realty Portfolio
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ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
and the Rules thereunder will be maintained as follows: journals, ledgers,
securities records and other original records will be maintained principally at
the offices of the Registrant's Administrator and Custodian, State Street Bank
and Trust Company. All other records so required to be maintained will be
maintained at the offices of Cohen & Steers Capital Management, Inc., 757 Third
Avenue, New York, New York 10017.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend the offering of shares until the
prospectus is amended, if subsequent to the effective date of this registration
statement, its net asset value declines more than ten percent from its net asset
value as of the effective date of the registration statement or its net asset
value increases to an amount greater than its net proceeds as stated in the
prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, the information omitted from the form of prospectus
filed as part of the registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
497(h) shall be deemed to be a part of the registration statement as of the time
it was declared effective.
Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form of
prospectus will be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
will be deemed to be the initial bona fide offering thereof.
(6) Registrant undertakes to send by first-class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act and the 1940 Act, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and the State of New York, on the 21st day of October, 2003.
COHEN & STEERS REIT AND PREFERRED
INCOME FUND, INC.
By: /s/ ROBERT H. STEERS
..................................
ROBERT H. STEERS
CHAIRMAN
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT H. STEERS Director, Chairman and Secretary October 21, 2003
...........................................
(ROBERT H. STEERS)
/s/ MARTIN COHEN Director, President and Treasurer October 21, 2003
.........................................
(MARTIN COHEN)
* Director October 21, 2003
.........................................
(GREGORY CLARK)
* Director October 21, 2003
.........................................
(BONNIE COHEN)
* Director October 21, 2003
.........................................
(GEORGE GROSSMAN)
* Director October 21, 2003
.........................................
(RICHARD J. NORMAN)
* Director October 21, 2003
.........................................
(WILLARD H. SMITH, JR.)
*By: /s/ MARTIN COHEN
.........................................
MARTIN COHEN
ATTORNEY-IN-FACT**
** Powers of Attorney were previously filed.
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STATEMENT OF DIFFERENCES
------------------------
The registered trademark symbol shall be expressed as................... 'r'
The service mark symbol shall be expressed as........................... 'sm'
The dagger symbol shall be expressed as................................. 'D'
Characters normally expressed as superscript shall be preceded by....... 'pp'