AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 2004
SECURITIES ACT FILE NO. 333-119361
INVESTMENT COMPANY ACT FILE NO. 811-10481
________________________________________________________________________________
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
[x] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] AMENDMENT NO. 11
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COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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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)
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WITH COPIES TO:
SARAH E. COGAN, ESQ. LEONARD B. MACKEY, JR., ESQ.
SIMPSON THACHER & BARTLETT LLP CLIFFORD CHANCE US LLP
425 LEXINGTON AVENUE 31 WEST 52ND STREET
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10019
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, 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 REGISTRATION
BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(1)(2)
Series M7 AMPs, par value $0.001...... 3,760 $25,000 $94,000,000 $11,909.80
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
(2) Includes registration fees paid on September 29, 2004, of $126.70
-------------------
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 THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
________________________________________________________________________________
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
PRELIMINARY PROSPECTUS DATED NOVEMBER 12, 2004
PROSPECTUS [COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]
$94,000,000
COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
AUCTION MARKET PREFERRED SHARES ('AMPS')
3,760 SHARES, SERIES M7
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') is offering
3,760 Series M7 Auction Market Preferred Shares. The shares are referred to in
this Prospectus as 'AMPS.' The Fund is a non-diversified, closed-end management
investment company. The Fund's primary investment objective is high current
income through investment in real estate securities and its secondary investment
objective is capital appreciation. Under normal market conditions, the Fund will
invest at least 90% of its total assets in common stocks, preferred stocks and
other equity securities issued by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of the Fund's total assets will be
invested in income producing equity securities issued by high quality REITs. The
Fund may invest up to 10% of its total assets in debt securities issued or
guaranteed by real estate companies. The Fund will not invest more than 20% of
its total assets in non-investment grade preferred stock or debt securities
(commonly known as 'junk bonds'). 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.
(continued on following page)
INVESTING IN THE AMPS INVOLVES RISKS THAT ARE DESCRIBED IN THE 'RISK FACTORS'
SECTION BEGINNING ON PAGE 25 OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF
THE AMPS IS $25,000.
-----------------
PER SHARE TOTAL
--------- -----
Public offering price....................................... $25,000 $
Sales load.................................................. $250 $
Proceeds to the Fund(1)..................................... $24,750 $
(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 AMPS are first
issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the AMPS subject to various conditions. The
AMPS will be ready for delivery in book-entry form only through the facilities
of The Depository Trust Company, on or about , 2004.
-----------------
MERRILL LYNCH & CO.
CITIGROUP
A.G. EDWARDS
UBS INVESTMENT BANK
WACHOVIA SECURITIES
-----------------
The date of this Prospectus is , 2004.
Investors in the AMPS will be entitled to receive cash dividends at an
annual rate that may vary for the successive dividend periods for the AMPS. The
AMPS have a liquidation preference of $25,000 per share, plus any accumulated,
unpaid dividends. The AMPS also have priority over the Fund's common shares as
to distribution of assets as described in this Prospectus. See 'Description of
AMPS.' As of November 8, 2004, the Fund has outstanding 13,600 shares of five
other series of preferred stock: 2,800 Series T AMPS, par value $.001 per share
(the 'Series T AMPS'), 2,800 Series W AMPS, par value $.001 per share (the
'Series W AMPS'), 2,800 Series TH AMPS, par value $.001 per share (the
'Series TH AMPS'), 2,800 Series F AMPS, par value $.001 per share (the
'Series F AMPS'), and 2,400 Series M28 AMPS, par value $.001 per share (the
'Series M28 AMPS'). References to the AMPS and the Series T, Series W, Series
TH, Series F and Series M28 AMPS refer to Taxable Auction Market Preferred
Shares. The AMPS offered in this Prospectus rank on a parity with the Series T
AMPS, Series W AMPS, Series TH AMPS, Series F AMPS and Series M28 AMPS with
respect to dividends and liquidation preference. The AMPS and any other
outstanding shares of preferred stock have priority over the Fund's common
shares as to dividends and distribution of assets as described in this
Prospectus. See 'Description of AMPS.' The dividend rate for the initial
dividend period will be % for the AMPS. The initial dividend period is from
the date of issuance through , 2004 for the AMPS. For subsequent
dividend periods, the AMPS will pay dividends based on a rate set at auction,
usually held every seven days. Prospective purchasers should note: (1) a buy
order (called a 'bid order') or sell order is a commitment to buy or sell the
AMPS based on the results of an auction; and (2) purchases and sales will be
settled on the next business day after the auction. Investors may only buy or
sell the AMPS through an order placed at an auction with or through a
broker-dealer in accordance with the procedures specified in this Prospectus.
Broker-dealers are not required to maintain a secondary market in the AMPS, and
a secondary market may not provide you with liquidity. The Fund may redeem the
AMPS as described under 'Description of AMPS -- Redemption.'
The AMPS do not represent a deposit or obligation of, and are not guaranteed
or endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
The AMPS will be senior to the Fund's outstanding common shares. The AMPS
are not listed on an exchange. The Fund's common shares are traded on the New
York Stock Exchange (the 'NYSE') under the symbol 'RQI.' It is a condition of
closing this offering that the AMPS be offered with a rating of 'AAA' from
Standard & Poor's Ratings Services 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........................................ 17
The Fund.................................................... 19
Use of Proceeds............................................. 19
Capitalization.............................................. 20
Investment Objectives and Policies.......................... 21
Use of Leverage............................................. 23
Risk Factors................................................ 25
How the Fund Manages Risk................................... 32
Management of the Fund...................................... 34
Description of AMPS......................................... 36
The Auction................................................. 44
Description of Common Shares................................ 48
Certain Provisions of the Charter and By-Laws............... 48
Conversion to Open-End Fund................................. 50
Repurchase of Common Shares................................. 51
U.S. Federal Taxation....................................... 51
Underwriting................................................ 56
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 57
Legal Opinions.............................................. 57
Independent Registered Public Accounting Firm............... 57
Further Information......................................... 57
Table of Contents for the Statement of Additional
Information............................................... 59
-------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANY
OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU
WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE AND
THE UNDERWRITERS ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT
THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION 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 , 2004, as it may be supplemented (the 'SAI'),
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into (which means it is considered part of) this Prospectus. You can
review the table of contents of the SAI on page 59 of this Prospectus. You may
request a free copy of the SAI by calling (800) 437-9912. You may also obtain
the SAI and other information regarding the Fund on the Securities and Exchange
Commission website (http://www.sec.gov).
3
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the information
that you should consider before investing in AMPS. You should review the more
detailed information contained in this Prospectus and in the SAI, especially the
information set forth under the heading 'Risk Factors.'
THE FUND..................................... The Cohen & Steers Quality Income Realty Fund, Inc.
(the 'Fund') is a non-diversified, closed-end
management investment company. The Fund was organized
as a Maryland corporation on August 22, 2001 and is
registered under the Investment Company Act of 1940,
as amended (the '1940 Act'). The Fund commenced
investment operations on February 28, 2002 upon the
closing of an initial public offering of 34,000,000
common shares, par value $.001 per share ('Common
Shares'). On March 8, 2002 and March 21, 2002, the
Fund issued 2,000,000 and 1,700,000 additional Common
Shares, respectively, in connection with a partial
exercise by the underwriters of the overallotment
option. The Fund issued 2,800 Series T AMPS, 2,800
Series W AMPS, 2,800 Series TH AMPS and 2,800
Series F AMPS on April 4, 2002. The Fund issued 2,400
Series M28 AMPS on September 15, 2003. References to
the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS refer to Taxable Auction
Market Preferred Shares. As of November 8, 2004, the
Fund had 38,856,074 Common Shares outstanding and net
assets, plus the liquidation value of the Series T
AMPS, Series W AMPS, Series TH AMPS, Series F AMPS
and Series M28 AMPS, of $1,148,956,226. 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 3,760 Series M7 Auction Market
Preferred Shares, par value $.001 (the 'AMPS'), at a
purchase price of $25,000 per share plus dividends,
if any, that have accumulated from the date the Fund
first issues the AMPS. The AMPS are offered through a
group of underwriters led by Merrill Lynch, Pierce,
Fenner & Smith Incorporated ('Merrill Lynch').
The AMPS entitle their holders to receive cash
dividends at an annual rate that may vary for the
successive dividend periods for the AMPS. In general,
except as
4
described under ' -- Dividends and Rate Periods'
below and 'Description of AMPS -- Dividends and Rate
Periods,' the dividend period for the AMPS will be
seven days. The auction agent will determine the
dividend rate for a particular period by an auction
conducted on the business day immediately prior to
the start of that rate period. See 'The Auction.'
The AMPS are not listed on an exchange. Instead,
investors may buy or sell the AMPS 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 the AMPS will not receive
certificates representing ownership of their shares.
The securities depository (The Depository Trust
Company or any successor) or its nominee for the
account of the investor's broker-dealer will maintain
record ownership of the AMPS in book-entry form. An
investor's broker-dealer, in turn, will maintain
records of that investor's beneficial ownership of
the AMPS.
RATINGS...................................... The Fund will issue the AMPS 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 the market price or suitability for a
particular investor. The rating agency guidelines
described above also do not address the likelihood
that an owner of the AMPS will be able to sell such
shares in an auction or otherwise. The ratings are
based on current information furnished to Moody's and
S&P by the Fund and the Investment Manager and
information obtained from other sources. The ratings
may be changed, suspended or withdrawn from other
sources in the rating agencies' discretion as a
result of changes in, or the unavailability of, such
information. See 'Description of AMPS -- Rating
Agency Guidelines.'
USE OF PROCEEDS.............................. The net proceeds of the AMPS 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 the Fund's
investment objectives and
5
policies within four months of the completion of this
offering.
INVESTMENT OBJECTIVES AND POLICIES........... Our primary investment objective is high current
income through investment in real estate securities.
Capital appreciation is a secondary investment
objective. Our investment objectives and certain
investment policies are considered fundamental and
may not be changed without stockholder approval. See
'Investment Objectives and Policies.'
Under normal market conditions, the Fund seeks to
achieve its investment objectives by investing at
least 90% of its total assets in common stocks,
preferred stocks and other equity securities issued
by real estate companies, such as REITs. At least 80%
of the Fund's total assets will be invested in income
producing equity securities issued by high quality REITs,
and substantially all of the equity securities
of real estate companies in which we intend to invest
are traded on a national securities exchange or in
the over-the-counter market. High quality REITs are
companies that, in the opinion of the Investment
Manager, offer excellent prospects for consistent,
above-average revenue and earnings growth. To
determine whether a company is of high quality, the
Investment Manager generally looks to a strong record
of earnings growth, as well as to a company's current
ratio of debt to capital and the quality of its
management. All of the REITs in which the Fund will
invest will have a market capitalization greater than
$100 million. A real estate company generally derives
at least 50% of its revenue from real estate or has
at least 50% of its assets in real estate. A REIT is
a company dedicated to owning, and usually operating,
income producing real estate, or to financing real
estate. REITs are generally not taxed on income
distributed to stockholders provided they distribute
to their stockholders substantially all of their
income and otherwise comply with the requirements of
the Internal Revenue Code of 1986, as amended (the
'Code'). As a result, REITs generally pay relatively
high dividends (as compared to other types of
companies) and the Fund intends to use these REIT
dividends in an effort to meet its objective of high
current income. The Fund may invest up to 10% of our
total assets in debt
6
securities issued or guaranteed by real estate
companies. The Fund currently invests approximately
19.86% of its total assets in common stocks of real
estate companies and approximately 79.74% of its
total assets in preferred stocks of real estate
companies, although the actual percentage of common
and preferred stocks in the Fund's investment
portfolio may vary over time. The Fund will not
invest more than 20% of the Fund's total assets in
preferred stock or debt securities rated below
investment grade (commonly known as 'junk bonds') or
unrated securities of comparable quality. Preferred
stock or debt securities will be considered to be
investment grade if, at the time of investment, such
security has a rating of 'BBB-' or higher by S&P,
'Baa3' or higher by Moody's or an equivalent rating
by a nationally recognized statistical rating agency.
The Investment Manager may also invest in preferred
stock or debt securities which are unrated but which,
in the opinion of the Investment Manager, are
determined to be of equivalent quality. All of the
Fund's investments will be in securities of U.S.
issuers and we will generally not invest more than
10% of the Fund's total assets in the securities of
one issuer. There can be no assurance that the Fund's
investment objectives will be achieved. See
'Investment Objectives and Policies.'
INVESTMENT MANAGER........................... Cohen & Steers Capital Management, Inc. (the
'Investment Manager') is the investment manager of
the Fund pursuant to an Investment Management
Agreement. The Investment Manager, which was formed
in 1986, is a leading firm specializing in the
management of real estate securities portfolios and
as of September 30, 2004 had approximately
$16.1 billion in assets under management. 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
7
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 the AMPS, the Fund may borrow money or issue
debt securities such as commercial paper or notes.
Any such borrowings will have seniority over the AMPS
and any other outstanding shares of preferred stock,
and payments to holders of the AMPS and any other
outstanding shares of preferred stock 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 the AMPS and the Fund you should
consider certain risks carefully. The primary risks
of investing in the AMPS are:
the Fund will not be permitted to declare
dividends or other distributions with respect to your
AMPS or redeem your AMPS unless the Fund meets
certain asset coverage requirements required by
the 1940 Act and the rating agencies;
if you try to sell your AMPS between auctions you
may not be able to sell any or all of your shares
or you may not be able to sell them for $25,000
per share or $25,000 per share plus accumulated
but unpaid dividends, if any, whether or not
earned or declared. 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.
8
if an auction fails, you may not be able to sell
some or all of your AMPS;
you may receive less than the price you paid for
your AMPS if you sell them outside of the auction,
especially when market interest rates are rising;
a rating agency could downgrade the rating
assigned to the AMPS, which could affect liquidity;
the Fund may be forced to redeem your AMPS to meet
regulatory or rating agency requirements or may
voluntarily redeem your shares in certain
circumstances;
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 AMPS and any other outstanding shares
of preferred stock 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 the AMPS;
the AMPS will be junior to any borrowings;
any borrowings may constitute a substantial lien
and burden on the AMPS 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 AMPS or purchase
the AMPS 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 AMPS;
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
9
a negative impact on the income and/or asset value
of the Fund's investment portfolio. See 'Risk
Factors -- Risks of Investing in AMPS.'
In addition, although the offering of the AMPS is
conditioned upon receipt of ratings of 'AAA' from S&P
and 'Aaa' from Moody's for the AMPS, there are
additional risks related to the investment policies
of and an investment in the Fund, such as:
Real Estate Risks. Since the Fund concentrate its
assets in the real estate industry, the Fund's
investments will be closely linked to the performance
of the real estate markets. Property values may fall
due to increasing vacancies or declining rents
resulting from economic, legal, cultural or
technological developments. REIT prices also may drop
because of the failure of borrowers to pay their
loans and poor management. Many REITs utilize
leverage, which increases investment risk and could
adversely affect a REIT's operations and market value
in periods of rising interest rates as well as risks
normally associated with debt financing. In addition,
there are specific risks associated with particular
sectors of real estate investments such as retail,
office, hotel, healthcare, and multifamily
properties.
The Fund may also invest in preferred stocks and debt
securities of real estate companies. These securities
also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the
value of preferred stocks and debt securities may
fall. See 'Risk Factors -- General Risks of Investing
in the Fund -- General Real Estate Risks.'
Lower-Rated Securities Risk. Lower-rated preferred
stock or debt securities, or equivalent unrated
securities, which are commonly known as 'junk bonds,'
generally involve greater volatility of price and
risk of loss of income and principal, and may be more
susceptible to real or perceived adverse economic and
competitive industry conditions than higher grade
securities. It is reasonable to expect that any
adverse economic conditions could disrupt the market
for lower-rated securities, have an adverse impact on
the value of those securities, and adversely affect
the ability of the issuers of those securities to
repay principal and interest on those
10
securities. See 'Risk Factors -- General Risks of
Investing in the Fund -- Lower-Rated Securities
Risk.'
Tax Risk. The Fund's investment program and the tax
treatment of Fund distributions may be affected by
Internal Revenue Service ('IRS') interpretations of
the Code and future changes in tax laws and
regulations. In particular, the provisions that
currently apply to the favorable tax treatment of
qualified dividend income are scheduled to expire on
December 31, 2008 unless future legislation is passed
to make the provisions effective beyond this date.
The Fund does not expect a significant portion of the
Fund's distributions to be derived from qualified
dividend income. See 'Risk Factors -- General Risks
of Investing in the Fund -- Tax Risk.' See also 'U.S.
Federal Taxation.'
Non-Diversified Status. Because we, as a
non-diversified investment company, may invest in a
smaller number of individual issuers than a
diversified investment company, an investment in the
Fund presents greater risk to you than an investment
in a diversified company. We intend to comply with
the diversification requirements of the Code
applicable to regulated investment companies. See
'Risk Factors -- General Risks of Investing in the
Fund -- Non-Diversified Status.' See also 'U.S.
Federal Taxation' in the SAI.
Anti-Takeover Provisions. Certain provisions of the
Fund's Articles of Incorporation (which, as hereafter
amended, restated or supplemented from time to time,
and together with the Articles Supplementary, is
referred to as the 'Charter') 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 you of an
opportunity to redeem your AMPS. 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 Charter
and conversion to open-end status. See 'Risk
Factors -- Anti-Takeover Provisions.' See also
'Description of Common Shares' and 'Certain
Provisions of the Charter and By-Laws.'
Market Disruption Risk. The aftermath of the war in
Iraq and the continuing occupation of Iraq,
instability in
11
the Middle East and terrorist attacks in the U.S. and
around the world may have resulted in 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.
These events could also adversely affect individual
issuers and securities markets, interest rates,
auctions and auction participants, secondary trading,
ratings, credit risk, inflation, deflation and other
factors relating to the AMPS. 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 occupation or similar events in the
future on the U.S. economy and securities markets.
See 'Risk Factors -- General Risks of Investing in
the Fund -- Market Disruption Risk.'
For further discussion of the risks associated with
investing in the AMPS and the Fund, see 'Risk
Factors.'
DIVIDENDS AND RATE PERIODS................... The table below shows the dividend rate, the dividend
payment date and the number of days for the initial
rate period on the AMPS offered in this Prospectus.
For subsequent dividend periods, the AMPS will pay
dividends based on a rate set at auctions normally
held every seven 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 the AMPS will be cumulative
from the date the shares are first issued and will be
paid out of legally available funds.
INITIAL DIVIDEND PAYMENT DATE NUMBER OF
DIVIDEND FOR INITIAL DAYS OF INITIAL
RATE RATE PERIOD RATE PERIOD
---- ----------- -----------
Series M7.. % , 2004 days
The Fund may, subject to certain conditions,
designate special rate periods of more than seven
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
12
any additional dividends payable prior to such date
must be paid in full. The Fund also must have
received confirmation from Moody's and S&P or any
substitute rating agency that the proposed special
rate period will not adversely affect such agency's
then-current rating on the AMPS and the lead
Broker-Dealer designated by the Fund, initially
Merrill Lynch, must not have objected to declaration
of a special rate period.
See 'Description of AMPS -- Dividends and Rate
Periods' and ' -- Designation of Special Rate
Periods' and 'The Auction.'
SECONDARY MARKET TRADING..................... Broker-dealers may, but are not obligated to,
maintain a secondary trading market in the AMPS
outside of auctions. There can be no assurance that a
secondary market will provide owners with liquidity.
You may transfer shares outside of auctions only to
or through a broker-dealer that has entered into an
agreement with the auction agent and the Fund, or
other persons as the Fund permits.
INTEREST RATE TRANSACTIONS................... In order to seek to reduce the interest rate risk
inherent in the Fund's 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
AMPS and any other outstanding shares of preferred
stock. 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
13
securities at that point in time, this default could
negatively impact the Fund's ability to make dividend
payments on the AMPS and any other outstanding shares
of preferred stock. In addition, at the time an
interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the
Fund will not be able to obtain a replacement
transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction.
If this occurs, it could have a negative impact on
the Fund's ability to make dividend payments on the
AMPS. If the Fund fails to maintain the required
asset coverage on the AMPS and any other outstanding
shares of preferred stock 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 AMPS and any other outstanding shares of
preferred stock. See 'How the Fund Manages
Risk -- Interest Rate Transactions' for additional
information.
ASSET MAINTENANCE............................ Under the Fund's Articles Supplementary for the AMPS,
which establishes and fixes the rights and
preferences of the shares of the AMPS and the
respective Articles Supplementary for the Series T,
Series W, Series TH, Series F and Series M28 AMPS,
the Fund must maintain:
asset coverage of the AMPS and the Series T,
Series W, Series TH, Series F and Series M28 AMPS
as required by the rating agency or agencies
rating each of those AMPS, and
asset coverage of at least 200% with respect to
senior securities that are stock, including the AMPS
and the Series T, Series W, Series TH, Series F
and Series M28 AMPS.
In the event that the Fund does not maintain or cure
these coverage tests, some or all of the AMPS will be
subject to mandatory redemption. See 'Description of
AMPS -- Redemption.'
14
Based on the composition of the Fund's portfolio as
of November 8, 2004, the asset coverage of the AMPS
(and the Series T, Series W, Series TH, Series F and
Series M28 AMPS) as measured pursuant to the 1940 Act
would be approximately 286% if the Fund were to issue
all of the AMPS 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 the AMPS. However, under the Articles
Supplementary, it may be required to redeem the AMPS
in order, for example, to meet an asset coverage
ratio or to correct a failure to meet a rating agency
guideline in a timely manner. The Fund may also
voluntarily redeem the AMPS without the consent of
holders of the AMPS under certain conditions. See
'Description of AMPS -- Redemption.'
LIQUIDATION PREFERENCE....................... The liquidation preference (that is, the amount the
Fund must pay to holders of the AMPS if the Fund is
liquidated) for the AMPS will be $25,000 per share
plus accumulated but unpaid dividends, if any,
whether or not earned or declared.
VOTING RIGHTS................................ The 1940 Act requires that holders of the AMPS and
the holders of any other series of outstanding
preferred stock of the Fund, voting together 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 AMPS, or any
other series of preferred stock of the Fund, for
two full years and will continue to be so
represented until all dividends in arrears have
been paid or otherwise provided for.
The holders of the AMPS, and the holders of any other
series of preferred stock of the Fund, will vote as a
separate class or series on other matters as required
under the Fund's Charter, the 1940 Act and Maryland
law. On all other matters, holders of the AMPS will
vote together with the holders of Common Shares and
each share of any other series of preferred stock of
the Fund. Each Common Share, each share of the AMPS
and each share of any other series of preferred stock
of the Fund is entitled to one vote per share.
15
FEDERAL INCOME TAXATION...................... The distributions with respect to the AMPS (other
than distributions in redemption of the AMPS subject
to Section 302(b) of the Code) will constitute
dividends to the extent of the Fund's current or
accumulated earnings and profits, as calculated for
federal income tax purposes. Such dividends generally
will, except in the case of distributions of
qualified 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 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 dividends received
deduction, qualified dividend income,
interest-related dividends and short-term capital
gain dividends) 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
dividends received deduction, dividends derived from
qualified dividend income, interest-related dividends
and short-term capital gain dividends, if any,
between its Common Shares, the AMPS and the
Series T, Series TH, Series F, Series W and
Series M28 AMPS in proportion to the total dividends
paid to each class or series during or with respect
to such year. The Fund does not expect a significant
portion of Fund distributions to be eligible for the
dividends received deduction or derived from
qualified dividend income. See 'U.S. Federal
Taxation.'
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR.......... State Street Bank and Trust Company acts as the
Fund's custodian. The Bank of New York will act as
auction agent, transfer agent, dividend paying agent
and registrar for the AMPS.
16
FINANCIAL HIGHLIGHTS
Information contained in the table below under the heading 'Per Share
Operating Performance' and 'Ratios/Supplemental Data' shows the operating
performance of the Fund for the periods indicated.
The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the Fund's
Financial Statements included in the SAI dated , 2004. The table
should be read in conjunction with the Financial Statements and notes thereto.
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(UNAUDITED) (AUDITED) (AUDITED)
PER SHARE OPERATING PERFORMANCE: ----------- --------- ---------
Net asset value per common share, beginning of period..... $18.43 $13.25 $14.57
------ ------ ------
Income from investment operations:
Net investment income.................................. 0.55(b) 1.04(b) 0.78
Net realized and unrealized gain/(loss) on investments
and interest rate swap transactions................... 0.24 5.69 (0.90)
------ ------ ------
Total income from investment operations............. 0.79 6.73 (0.12)
------ ------ ------
Less dividends and distributions to preferred shareholders
from:
Net investment income.................................. (0.05) (0.07) (0.09)
Net realized gain on investments....................... -- (0.03) (0.01)
------ ------ ------
Total dividends and distributions to preferred
shareholders...................................... (0.05) (0.10) (0.10)
------ ------ ------
Total from investment operations applicable to
common shares..................................... 0.74 6.63 (0.22)
------ ------ ------
Less: Offering and organization costs charged to paid-in
capital -- common shares............................ -- -- (0.03)
Offering and organization costs charged to paid-in
capital -- preferred shares......................... -- (0.02) (0.09)
Preferred Offering Cost Adjustment.................... --(c) -- --
Dilutive effect of common share offering.............. -- -- (0.03)
------ ------ ------
Total offering and organization costs............... -- (0.02) (0.15)
------ ------ ------
Less dividends and distributions to common shareholders
from:
Net investment income.................................. (0.68) (0.76) (0.64)
Net realized gain on investments....................... -- (0.41) (0.08)
Tax return of capital.................................. -- (0.26) (0.23)
------ ------ ------
Total dividends and distributions to common
shareholders...................................... (0.68) (1.43) (0.95)
------ ------ ------
Net increase/(decrease) in net asset value per common
share.................................................... 0.06 5.18 (1.32)
------ ------ ------
Net asset value, per common share, end of period.......... $18.49 $18.43 $13.25
------ ------ ------
------ ------ ------
Market value, per common share, end of period............. $16.70 $17.85 $13.05
------ ------ ------
------ ------ ------
Net asset value total return(d)........................... 4.26%(e) 52.61% -2.73%(e)
------ ------ ------
------ ------ ------
Market value return(d).................................... -2.77%(e) 50.07% -6.95%(e)
------ ------ ------
------ ------ ------
---------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) Less than $.005 per share. See Note 5 to the financial statements.
(d) 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 that would have been paid by investors. 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.
Net asset value total return measures the changes in value over the period
indicated, taking into account dividends as reinvested.
(e) Not annualized.
17
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(UNAUDITED) (AUDITED) (AUDITED)
RATIOS/SUPPLEMENTAL DATA: ----------- --------- ---------
Net assets applicable to common shares, end of period
(in millions)........................................ $ 718.4 $ 716.1 $ 512.0
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (before expense
reduction)(f)........................................ 1.53%(c) 1.57% 1.52%(c)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (net of expense
reduction)(f)........................................ 1.06%(c) 1.09% 1.05%(c)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (before expense
reduction)(f)........................................ 5.53%(c) 6.39% 6.82%(c)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (net of expense
reduction)(f)........................................ 6.00%(c) 6.88% 7.29%(c)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(before expense reduction)(b,f)...................... 1.04%(c) 1.04% 1.04%(c)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(net of expense reduction)(b,f)...................... 0.72%(c) 0.72% 0.72%(c)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate............................... 2.05%(d) 20.51% 12.37%(d)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)........... $340,000 $340,000 $280,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)................... 14 14 11
-------- -------- --------
-------- -------- --------
Asset coverage per share.............................. $ 77,827 $ 77,653 $ 70,710
-------- -------- --------
-------- -------- --------
Liquidation preference per share...................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per share(e)..................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
---------
(a) Commencement of operations.
(b) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(c) Annualized.
(d) Not annualized.
(e) Based on weekly prices.
(f) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
18
THE FUND
The Fund is a non-diversified, closed-end management investment company. The
Fund was organized as a Maryland corporation on August 22, 2001 and is
registered as an investment company with the Securities and Exchange Commission
under the Investment Company Act of 1940 (the '1940 Act'). The Fund issued an
aggregate of 34,000,000 Common Shares, par value $.001 per share, pursuant to
the initial public offering thereof and commenced its operations with the
closing of this initial public offering on February 28, 2002. On March 8, 2002
and March 21, 2002, the Fund issued 2,000,000 and 1,700,000 additional Common
Shares, respectively, in connection with a partial exercise by the underwriters
of the overallotment option. On April 4, 2002, the Fund issued 2,800 Series T
AMPS, 2,800 Series W AMPS, 2,800 Series TH AMPS and 2,800 Series F AMPS. On
September 15, 2003, the Fund issued 2,400 Series M28 AMPS. The Fund's Common
Shares are traded on the NYSE under the symbol 'RQI.' The Fund's principal
office is located at 757 Third Avenue, New York, New York 10017, and our
telephone number is (212) 832-3232.
The following provides information about the Fund's outstanding shares as of
November 8, 2004:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common Shares................................. 99,986,400 0 38,856,074
Preferred Shares
Series T AMPS............................. 2,800 0 2,800
Series TH AMPS............................ 2,800 0 2,800
Series F AMPS............................. 2,800 0 2,800
Series W AMPS............................. 2,800 0 2,800
Series M28 AMPS........................... 2,400 0 2,400
Series M7 AMPS............................ 0 0 0
USE OF PROCEEDS
The Fund estimates that the net proceeds of this offering of the AMPS, 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.'
19
CAPITALIZATION (UNAUDITED)
The following table sets forth the unaudited capitalization of the Fund as
of November 8, 2004, and as adjusted to give effect to the issuance of the AMPS
offered in this Prospectus.
AS OF NOVEMBER 8, 2004
-------------------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
Preferred Shares, $0.001 par value, $25,000
liquidation value; 13,600 shares authorized (2,800
Series T AMPS, 2,800 Series W AMPS, 2,800
Series TH AMPS, 2,800 Series F AMPS and 2,400
Series M28 AMPS outstanding) and 17,360 shares
authorized after giving effect to the issuance of
3,760 shares of Series M7 AMPS...................... $ 340,000,000 $ 434,000,000
-------------- --------------
Common Shares, $.001 par value per share; As of
November 8, 2004, 99,986,400 shares authorized
(before giving effect to the issuance of 3,760
shares of Series M7 AMPS), 38,856,074 shares
outstanding......................................... $ 38,856 $ 38,856
Paid-in surplus....................................... $ 541,280,114 $ 539,944,595
Distributions in excess of net investment income...... $ (36,352,645) $ (36,352,645)
Accumulated net realized gain (loss) from investment
transactions........................................ $ 6,948,125 $ 6,948,125
Net unrealized appreciation (depreciation) of
investments......................................... $ 297,041,776 $ 297,041,776
-------------- --------------
Net assets applicable to common shares................ $ 808,956,226 $ 807,620,707
-------------- --------------
Net assets, plus liquidation preference of Preferred
Shares.............................................. $1,148,956,226 $1,241,620,707
-------------- --------------
-------------- --------------
As used in this Prospectus, unless otherwise noted, the Fund's 'managed
assets' include assets of the Fund attributable to the AMPS and any other
outstanding shares of preferred stock, 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 the AMPS and any other
outstanding shares of preferred stock from 'managed assets' so long as the AMPS
and any other outstanding shares of preferred stock have redemption features
that are not solely within the control of the Fund. In connection with the
rating of the AMPS and any other outstanding shares of preferred stock, the Fund
has established various portfolio covenants to meet third-party rating agency
guidelines in its Charter. 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 AMPS. For all regulatory
purposes, the Fund's AMPS will be treated as stock (rather than indebtedness).
20
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Our primary investment objective is high current income through investment
in real estate securities. Capital appreciation is a secondary investment
objective. The Fund's investment objectives and certain other policies are
fundamental and may not be changed without the approval of stockholders. Unless
otherwise indicated, the Fund's investment policies are not fundamental and may
be changed by the Board of Directors without the approval of stockholders,
although the Fund has no current intention of doing so. The Fund has a
fundamental investment policy of concentrating its investments in the U.S. real
estate industry and not in any other industry. Under normal market conditions,
the Fund will invest at least 90% of its total assets in common stocks,
preferred stocks and other equity securities issued by real estate companies,
such as REITs. At least 80% of our total assets will be invested in income
producing equity securities issued by high quality REITs and substantially all
of the equity securities of real estate companies in which the Fund intends to
invest are traded on a national securities exchange or in the over-the-counter
market. High quality REITs are companies that, in the opinion of the Investment
Manager, offer excellent prospects for consistent, above-average revenue and
earnings growth. To determine whether a company is of high quality, the
Investment Manager generally looks to a strong record of earnings growth, as
well as to a company's current ratio of debt to capital and the quality of its
management. All of the REITs in which the Fund will invest will have a market
capitalization greater than $100 million. The Fund may invest up to 10% of its
total assets in debt securities issued or guaranteed by real estate companies.
We will not invest more than 20% of its total assets in preferred stock or debt
securities rated below investment grade (commonly known as 'junk bonds') or
unrated securities of comparable quality. Preferred stock or debt securities
will be considered investment grade if, at the time of investment, it is rated
'BBB-' or higher by S&P, 'Baa3' 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. Preferred stock or debt
securities of below investment grade (BB/Ba or below) are commonly referred to
as 'junk bonds.' The Investment Manager may also invest in preferred stock or
debt securities which are unrated but which, in the opinion of the Investment
Manager, are determined to be of equivalent quality. See Appendix A in the SAI
for a description of bond ratings. These two policies are fundamental and cannot
be changed without the approval of a majority of the Fund's voting securities,
as defined in the 1940 Act, as amended. The Fund will invest only in securities
of U.S. issuers and generally will not invest more than 10% of the Fund's total
assets in the securities of one issuer.
The Fund will not enter into short sales or invest in derivatives, except as
described in this Prospectus in connection with the interest rate swap or
interest rate cap transactions. See 'How the Fund Manages Risk -- Interest Rate
Transactions.' There can be no assurance that the Fund's investment objectives
will be achieved.
INVESTMENT STRATEGIES
In making investment decisions on behalf of the Fund, the Investment Manager
relies on a fundamental analysis of each company. The Investment Manager reviews
each company's potential for success in light of the company's current financial
condition, its industry and sector position, and economic and market conditions.
The Investment Manager also evaluates a number of factors, including growth
potential, earnings estimates and the quality of management.
21
PORTFOLIO COMPOSITION
The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the SAI.
Real Estate Companies. For purposes of the Fund's 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 90% of its
total assets in the equity securities of real estate companies. These equity
securities can consist of:
common stocks (including REIT shares);
preferred stocks;
rights or warrants to purchase common and preferred stocks; and
securities convertible into common and preferred stocks where the
conversion feature represents, in the Investment Manager's view, a
significant element of the securities' value.
Real Estate Investment Trusts. Under normal market conditions, at least 80%
of the Fund's total assets will be invested in income producing equity
securities of REITs. A REIT is a company dedicated to owning, and usually
operating, income producing real estate, or to financing real estate. REITs pool
investors' funds for investment primarily in income producing real estate or
real estate-related loans or interests. A REIT is not taxed on income
distributed to stockholders if, among other things, it distributes to its
stockholders substantially all of its taxable income (other than net capital
gains) for each taxable year. As a result, REITs tend to pay relatively higher
dividends than other types of companies and we intend to use these REIT
dividends in an effort to meet the current income goal of our investment
objectives.
REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
Preferred Stocks. Preferred stocks pay fixed or floating dividends to
investors, and have a 'preference' over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Under current market conditions, the Investment Manager
invests approximately 19.86% of the Fund's total assets in common shares of real
estate companies and approximately 79.74% in preferred shares of real estate
companies. The actual percentage of common and preferred shares in our
investment portfolio may vary over time based on the Investment Manager's
assessment of market conditions.
Debt Securities. The Fund may invest a maximum of 10% of its total assets in
investment grade and non-investment grade debt securities issued or guaranteed
by real estate companies.
22
Lower-rated Securities. The Fund will not invest more than 20% of its total
assets in preferred stock and debt securities rated below investment grade
(commonly known as 'junk bonds') and equivalent unrated securities of comparable
quality. Securities rated non-investment grade (lower than 'BBB-' by S&P or
lower than 'Baa3' by Moody's) are sometimes referred to as 'high yield' or
'junk' bonds. The Fund may only invest in high yield securities that are rated
'CCC' or higher by S&P, or rated 'Caa' or higher by Moody's, or unrated
securities determined by the Investment Manager to be of comparable quality. The
issuers of these securities have a currently identifiable vulnerability to
default and such issues may be in default or there may be present elements of
danger with respect to principal or interest. The Fund will not invest in
securities that are in default at the time of purchase. For a description of
bond ratings, see Appendix A of the SAI.
Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, we may
deviate from our investment objectives and invest all or any portion of its
assets in investment grade debt securities, without regard to whether the issuer
is a real estate company. When and to the extent, we assume a temporary
defensive position, we may not pursue or achieve our investment objectives.
OTHER INVESTMENTS
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which we may
invest our cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and such
obligations that are subject to repurchase agreements and commercial paper. See
'Additional Information about Fund Investment Objectives and Policies' in the
SAI.
USE OF LEVERAGE
The Fund may issue other preferred shares, in addition to the AMPS and the
outstanding Series T, Series W, Series TH, Series F and Series M28 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 AMPS and any
other outstanding shares of preferred stock. The Fund must also comply with
certain asset coverage requirements under the 1940 Act. See 'Description of
AMPS -- Rating Agency Guidelines.' 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 liquidation preference of any preferred shares, including the AMPS, 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
23
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, 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 holders of Common Shares 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 holders
of Common Shares 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 holders of Common Shares 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 AMPS, other 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 the extent to which the Fund employs leverage in addition to the AMPS
and the outstanding Series T, Series W, Series TH, Series F and Series M28 AMPS
will depend on many factors, the most important of which are investment outlook,
market conditions and interest rates.
24
RISK FACTORS
Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in the AMPS.
RISKS OF INVESTING IN AMPS
Leverage Risk. The Fund uses financial leverage for investment purposes by
issuing preferred shares, including the AMPS. It is currently anticipated that,
taking into account the AMPS 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's Common Shares and the asset coverage of the AMPS and the Series T,
Series W, Series TH, Series F and Series M28 AMPS. As long as the AMPS and the
Series T, Series W, Series TH, Series F and Series M28 AMPS are outstanding, the
Fund does not intend to utilize other forms of leverage.
Because the fees 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 AMPS and the
Fund's other outstanding shares of preferred stock), 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, such as the AMPS,
which pay dividends based on short-term interest rates. The Fund purchases real
estate equity securities that pay dividends that are based on the performance of
the issuing companies. The Fund also may buy real estate debt securities that
pay interest based on longer-term yields. These dividends and interest payments
are typically, although not always, higher than short-term interest rates. Real
estate company dividends, as well as long-term and short-term interest rates,
fluctuate. If short-term interest rates rise, dividend rates on the AMPS may
rise so that the amount of dividends to be paid to stockholders of the AMPS
exceeds the income from the portfolio securities. Because income from the Fund's
entire investment portfolio (not just the portion of the portfolio purchased
with the proceeds of the AMPS offering) is available to pay dividends on the
AMPS, however, dividend rates on the AMPS would need to greatly exceed the
Fund's net portfolio income before the Fund's ability to pay dividends on the
AMPS would be jeopardized. If long-term interest rates rise, this could
negatively impact the value of the Fund's investment portfolio, reducing the
amount of assets serving as asset coverage for the AMPS. The Fund anticipates
entering into interest rate swap or cap transactions with the intent to reduce
or eliminate the risk posed by an increase in short-term interest rates. There
is no guarantee that the Fund will engage in these transactions or that these
transactions will be successful in reducing or eliminating interest rate risk.
See 'How the Fund Manages Risk.'
Auction Risk. You may not be able to sell your AMPS at an auction if the
auction fails, i.e., if there are more AMPS offered for sale than there are
buyers for those shares. Also, if you place hold orders (orders to retain your
AMPS) at an auction only at a specified rate, and that bid rate exceeds the rate
set at the auction, you will not retain your AMPS. Additionally, if you buy
shares or elect to retain shares without specifying a rate below which you would
not wish to continue to hold those shares, and the auction sets a below-market
rate, you may receive a lower rate of return on your shares than the market
rate. Finally, the dividend period may be changed, subject
25
to certain conditions and with notice to the holders of the AMPS, which could
also affect the liquidity of your investment. See 'Description of AMPS' and 'The
Auction.'
Secondary Market Risk. If you try to sell your AMPS between auctions, you
may not be able to sell any or all of your shares, or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated but unpaid
dividends, if any, whether or not earned or declared. If the Fund has designated
a special rate period (a dividend period of more than seven days in the case of
the AMPS), changes in interest rates could affect the price you would receive if
you sold your shares in the secondary market. You may transfer shares outside of
auctions only to or through a broker-dealer that has entered into an agreement
with the auction agent and the Fund or other person as the Fund permits. The
Fund does not anticipate imposing significant restrictions on transfers to other
persons. However, unless any such other person has entered into a relationship
with a broker-dealer that has entered into a broker-dealer agreement with the
Auction Agent, that person will not be able to submit bids at auctions with
respect to the AMPS. Broker-dealers that maintain a secondary trading market for
the AMPS are not required to maintain this market, and the Fund is not required
to redeem shares either if an auction or an attempted secondary market sale
fails because of a lack of buyers. The AMPS are not registered on a stock
exchange or the National Association of Securities Dealers Automated Quotations,
Inc. ('NASDAQ') stock market. If you sell your AMPS to a broker-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. In addition, a broker-dealer may, in its own discretion, decide to
sell the AMPS in the secondary market to investors at any time and at any price,
including at prices equivalent to, below or above the liquidation preference of
the AMPS.
Securities and Exchange Commission Inquiries. Merrill Lynch has advised the
Fund that it and certain broker-dealers and other participants in the auction
rate securities markets, including both taxable and tax exempt markets, have
received letters from the Securities and Exchange Commission requesting that
each of them voluntarily conduct an investigation regarding their respective
practices and procedures in those markets. Those broker-dealers are cooperating
and expect to continue to cooperate with the Securities and Exchange Commission
in providing the requested information. No assurance can be given as to whether
the results of this process will affect the market for the AMPS or the auctions.
Ratings and Asset Coverage Risk. While it is a condition to the closing of
the offering that S&P assigns a rating of 'AAA' and Moody's assigns a rating of
'Aaa' to the AMPS, the ratings do not eliminate or necessarily mitigate the
risks of investing in the AMPS. In addition, Moody's, S&P or another rating
agency then rating the AMPS could downgrade the AMPS, which may make your shares
less liquid at an auction or in the secondary market. If a rating agency
downgrades the AMPS, the dividend rate on the AMPS will be the applicable
maximum rate based on the credit rating of the AMPS, which will be a rate higher
than is payable currently on the AMPS. See 'Description of AMPS -- Rating Agency
Guidelines' for a description of the asset maintenance tests the Fund must meet.
The Fund may not redeem AMPS if such a redemption would cause the Fund to fail
to meet regulatory or rating agency asset coverage requirements, and the Fund
may not declare, pay or set apart for payment any dividend or other distribution
if immediately thereafter the Fund would fail to meet regulatory asset coverage
requirements.
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
26
obligation to pay fixed dividends at the specified rate, in the case of
preferred stock, or to make interest and principal payments in the case of debt
securities. Common stock is not rated by rating agencies and it is incumbent on
the Investment Manager to select securities of real estate companies that it
believes have the ability to pay dividends at the forecasted level. Preferred
stock and debt securities may be rated. The Fund may invest up to 20% of its
total assets in preferred stock or debt securities rated below investment grade
(commonly known as 'junk bonds') by S&P or Moody's, or unrated securities
considered to be of comparable quality by the Investment Manager. In general,
lower-rated securities carry a greater degree of risk. If rating agencies lower
their ratings of securities held in the Fund's portfolio, the value of those
securities could decline, which would jeopardize the rating agencies' ratings of
the AMPS. The failure of a company to pay common stock or preferred stock
dividends, or interest payments, at forecasted or contractual rates, could have
a negative impact on the Fund's ability to pay dividends on the AMPS and could
result in the redemption of some or all of the AMPS.
Restrictions on Dividends and other Distributions. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Fund's Common Shares, the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 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 Series T, Series W, Series TH, Series F and
Series M28 AMPS, and the AMPS to enable the Fund to distribute its income as
required to maintain its qualification as a regulated investment company under
the Code, there can be no assurance that such actions can be effected in time to
meet the Code requirements. See 'U.S. Federal Taxation.'
GENERAL RISKS OF INVESTING IN THE FUND
We are a non-diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that we will achieve our
investment objectives.
Investment Risk. An investment in the Fund is subject to investment risk,
including the possible loss of the entire 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 the Fund's 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
27
increases in property taxes and operating expenses
changes in zoning laws
losses due to costs resulting from the clean-up of environmental problems
liability to third parties for damages resulting from environmental
problems
casualty or condemnation losses
limitations on rents
changes in neighborhood values and the appeal of properties to tenants
changes in interest rates
Thus, the value of the Fund's 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
28
addition, office properties that are not equipped to accommodate the needs of
modern businesses may become functionally obsolete and thus non-competitive.
Office properties may also be adversely affected if there is an economic decline
in the businesses operated by their tenants. The risks of such an adverse effect
is increased if the property revenue is dependent on a single tenant or if there
is a significant concentration of tenants in a particular business or industry.
Hotel Properties. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.
Also, hotels may be operated pursuant to franchise, management and operating
agreements that may be terminable by the franchiser, the manager or the
operator. Contrarily, it may be difficult to terminate an ineffective operator
of a hotel property subsequent to a foreclosure of such property.
Healthcare Properties. Healthcare properties and healthcare providers are
affected by several significant factors including federal, state and local laws
governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); and competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis.
These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursement. In addition, in the event that a tenant is in default
on its lease, a new operator or purchaser at a foreclosure sale will have to
apply in its own right for all relevant licenses if such new operator does not
already hold such licenses. There can be no assurance that such new licenses
could be obtained, and consequently, there can be no assurance that any
healthcare property subject to foreclosure will be disposed of in a timely
manner.
Multifamily Properties. The value and successful operation of a multifamily
property may be affected by a number of factors such as the location of the
property, the ability of management to provide adequate maintenance and
insurance, types of services provided by the property, the level of mortgage
rates, presence of competing properties, the relocation of tenants to new
projects with better amenities, adverse economic conditions in the locale, the
amount of rent charged, and oversupply of units due to new construction. In
addition, multifamily properties may be subject to rent control laws or other
laws affecting such properties, which could impact the future cash flows of such
properties.
Insurance Issues. Certain of the portfolio companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
29
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 real estate company could fail
to qualify as a REIT. In the event of any such unexpected failure to qualify as
a REIT, the real estate company would be subject to corporate-level taxation,
significantly reducing the return to the Fund on its investment in such company.
REITs could possibly fail to qualify for tax free pass-through of income under
the Code, or to maintain their exemptions from registration under the 1940 Act.
The above factors may also adversely affect a borrower's or a lessee's ability
to meet its obligations to the REIT. In the event of a default by a
30
borrower or lessee, the REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
its investments.
Preferred Stocks and Debt Securities Risk. In addition to the risks of
equity securities and securities linked to the real estate market, preferred
stocks and debt securities also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the value of preferred stocks and
debt securities may fall.
Lower-Rated Securities Risk. 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 the Fund's ability to achieve the Fund's investment
objectives may, to the extent the Fund is invested in lower-rated debt
securities, be more dependent upon such creditworthiness analysis than would be
the case if the Fund was investing in higher quality securities. The Fund may
invest in high yield securities that are rated 'CCC' or higher by S&P or 'Caa'
or higher by Moody's or unrated securities that are determined by the Investment
Manager to be of comparable quality. An issuer of these securities has a
currently identifiable vulnerability to default and the issues may be in default
or there may be present elements of danger with respect to principal or
interest. The Fund will not invest in securities which are in default at the
time of purchase.
Lower-rated 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. 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 and 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 NAV of our shares. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of those securities, and adversely affect the ability of the issuers of
those securities to repay principal and pay interest on those securities. New
laws and proposed new laws may adversely impact the market for lower-rated
securities.
Tax Risk. The Fund's investment program and the tax treatment of Fund
distributions may be affected by IRS interpretations of the Code and future
changes in tax laws and regulations. In particular, the provisions that
currently apply to the favorable tax treatment of qualified dividend income are
scheduled to expire on December 31, 2008 unless future legislation is passed to
make the provisions effective beyond this date. The Fund does not expect a
significant portion of the Fund's distributions to be derived from qualified
dividend income. See 'U.S. Federal Taxation.'
31
Non-Diversified Status. The Fund is classified as a 'non-diversified'
investment company under the 1940 Act, which means we are not limited by the
1940 Act in the proportion of our assets that may be invested in the securities
of a single issuer. However, we intend to conduct our operations so as to
qualify as a regulated investment company for purposes of the Code, which
generally will relieve the Fund of any liability for Federal income tax to the
extent our earnings are distributed to stockholders. See 'U.S. Federal Taxation'
in the SAI. To so qualify, among other requirements, we will limit our
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the value of our total assets will be invested in the
securities (other than U.S. Government securities or the securities of other
regulated investment companies) of a single issuer, or two or more issuers which
the Fund controls and are engaged in the same, similar or related trades or
businesses and (ii) at least 50% of the value of our total assets will be
invested in cash and cash items, U.S. Government securities, securities of other
regulated investment companies and other securities; provided, however, that
with respect to such other securities, not more than 5% of the value of our
total assets will be invested in the securities of a single issuer and we will
not own more than 10% of the outstanding voting securities of a single issuer.
In addition, pursuant to recently enacted legislation, at the close of each
quarter for taxable years beginning after October 22, 2004, no more than 25% of
the value of our total assets may be invested in the securities of one or more
'qualified publicly traded partnerships,' as defined in the Code. Because we, as
a non-diversified investment company, may invest in a smaller number of
individual issuers than a diversified investment company, an investment in the
Fund presents greater risk to you than an investment in a diversified company.
The Fund intends to comply with the diversification requirements of the Code
applicable to regulated investment companies.
Anti-Takeover Provisions. Certain provisions of the Fund's Charter and
By-Laws could 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. The
provisions may also have the effect of depriving stockholders of an opportunity
to redeem their AMPS. 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 Charter
and conversion to open-end status. See 'Certain Provisions of the Charter and
By-Laws.'
Market Disruption Risk. The aftermath of the war in Iraq and the continuing
occupation of Iraq, and instability in the Middle East and terrorist attacks in
the U.S. and around the world may have resulted in 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. These events could
also adversely affect individual issuers and securities markets, interest rates,
auctions and auction participants, secondary trading, ratings, credit risk,
inflation, deflation and other factors relating to the AMPS. 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 occupation 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
32
without the approval of the holders of a majority, as defined in the 1940 Act,
of the outstanding Common Shares, the AMPS and the Series T, Series W,
Series TH, Series F and Series M28 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 Series T, Series W, Series TH, Series F and Series M28 AMPS, and the
AMPS voting together as a separate class. The Fund will not invest more than 20%
of its total assets in preferred stock or debt securities rated below investment
grade (commonly known as 'junk bonds') or unrated securities of comparable
quality. All of our investments will be in securities of U.S. issuers and we
will generally not invest more than 10% of our total assets in the securities of
one issuer. The Fund may become subject to guidelines that are more limiting
than the investment restrictions set forth above in order to obtain and maintain
ratings from S&P or Moody's on the AMPS. See 'Investment Restrictions' in the
SAI for a complete list of the fundamental and non-fundamental investment
policies of the Fund.
INTEREST RATE TRANSACTIONS
In order to seek to reduce the interest rate risk inherent in the fund's
capital structure and 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
Fund's outstanding preferred stock, including the AMPS, or any variable rate
borrowing. The payment would be based on the notional amount of the swap. In an
interest rate cap, the Fund would pay a premium to the counterparty to the
interest rate cap and, to the extent that a specified variable rate index
exceeds a predetermined fixed rate, would receive from the counterparty payments
of the difference based on the notional amount of such cap. If the counterparty
to an interest rate swap or cap defaults, the Fund would not be able to use the
anticipated net receipts under the swap or cap to offset the dividend payments
on the Fund's outstanding preferred stock, including the AMPS, or rate of
interest on borrowings. 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 Fund's outstanding preferred stock, including the AMPS. In addition, at
the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund will not be able to obtain a
replacement transaction or that the terms of the replacement will not be as
favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the Fund's ability to make dividend payments on the Fund's
outstanding preferred stock, including the AMPS. To the extent there is a
decline in interest rates, the value of the interest rate swap or cap could
decline, resulting in a decline in the asset coverage for the AMPS. A sudden and
dramatic decline in interest rates may result in a significant decline in the
asset coverage. Under the terms of the AMPS, if the Fund fails to maintain the
required asset coverage on the outstanding AMPS or fails to comply with other
covenants, the Fund may be required to redeem some or all of the AMPS. The Fund
may choose or be required to redeem some or all of the Fund's outstanding
preferred stock, including the AMPS, or prepay any borrowings. This redemption
or prepayment would likely result in the Fund seeking to terminate
33
early all or a portion of any swap or cap transaction. Such early termination of
a swap could result in termination payment by or to the Fund. An early
termination of a cap could result in a 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. The
Investment Manager was formed in 1986 and had approximately $16.1 billion of
assets under management as of September 30, 2004. Its current clients include
pension plans, endowment funds, mutual funds and registered investment
companies, including the Fund, Cohen & Steers REIT and Utility Income Fund,
Inc., Cohen & Steers REIT and Preferred Income Fund, Inc., Cohen & Steers
Advantage Income Realty Fund, Inc., Cohen & Steers Select Utility 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
Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen &
Steers Realty Focus Fund, Inc., Cohen & Steers Realty Income Fund, Inc. and
Cohen & Steers Utility Fund, Inc., which are open-end investment companies. The
Investment Manager is a wholly owned subsidiary of Cohen & Steers, Inc., a
publicly traded company whose common stock is listed on the New York Stock
Exchange under the symbol 'CNS.'
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
34
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
.85% of the average daily managed asset value of the Fund. Managed asset value
is the net asset value of the Common Shares plus the liquidation preference of
the AMPS and the Series T, Series W, Series TH, Series F and Series M28 AMPS.
This fee is higher than the fees incurred by many other investment companies but
is comparable to fees paid by many registered management investment companies
that invest primarily in real estate securities. The Investment Manager has
contractually agreed to waive its investment management fees in the amount of
.32% of average daily managed assets for the first five fiscal years of the
Fund's operations, .26% of average daily managed assets in year six, .20% of
average daily managed assets in year seven, .14% of average daily managed assets
in year eight, .08% of average daily managed assets in year nine and .02% of
average daily managed assets in year 10. In addition to the monthly management
fee, the Fund pays all other costs and expenses of its operations, including
compensation of its directors, custodian, transfer agency and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, listing expenses, expenses of preparing, printing and
distributing stockholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
When the Fund is utilizing leverage, the fees paid to the Investment Manager
for investment advisory and management services will be higher than if the Fund
did not utilize leverage because the fees paid will be calculated based on the
Fund's managed assets, which includes the liquidation preference of the AMPS and
the Series T, Series W, Series TH, Series F and Series M28 AMPS.
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. Mr. Cohen is a
'controlling person' of the Investment Manager on the basis of his ownership
of common stock of the Investment Manager's parent company.
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. Mr. Steers is a
'controlling person' of the Investment Manager on the basis of his ownership
of the common stock of Investment Manager's parent company.
Joseph M. Harvey -- Mr. Harvey has been President of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager, since 2003, and was
Senior Vice President and Director of Investment Research prior thereto.
Prior to joining Cohen & Steers in 1992, he was a vice president with Robert
A. Stanger Co. for five years, where he was an analyst specializing in real
estate and related securities for the firm's research and consulting
activities.
35
ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT
Under its Administration Agreement with the Fund, the Investment Manager has
responsibility for providing administrative and accounting services and
assisting 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 .02% of the Fund's managed assets. Under the
Sub-Administration agreement, the Fund pays State Street Bank a monthly
administration fee. The sub-administration fee paid by the Fund to State Street
Bank is computed on the basis of the managed assets (including the liquidation
preference of AMPS and the liquidation preference of any other outstanding
shares of preferred stock) in the Fund at an annual rate equal to .04% of the
first $200 million in assets, .03% of the next $200 million, and .015% 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 AMPS. See 'Custodian, Auction
Agent, Transfer Agent, Dividend Paying Agent and Registrar.'
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. For the
complete terms of the AMPS, please refer to the detailed description of the AMPS
in the Fund's Articles Supplementary attached as Appendix B to the SAI.
GENERAL
Under its Charter, the Fund is authorized to issue shares of preferred
stock, with rights as determined by the Board of Directors, without the approval
of the holders of Common Shares. The AMPS will have a liquidation preference of
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared). The AMPS will rank on a parity with the
Series T, Series W, Series TH, Series F and Series M28 AMPS, and with shares of
any other series of preferred stock of the Fund, as to the payment of dividends
and the distribution of assets upon liquidation. The AMPS carry one vote per
share on all matters on which such shares are entitled to vote. The AMPS, when
issued by the Fund and paid for pursuant to the terms of this Prospectus, will
be fully paid and non-assessable and will have no preemptive, exchange or
conversion rights. Any AMPS repurchased or redeemed by the Fund will be
classified as authorized and unissued AMPS. The Board of Directors may by
resolution classify or reclassify any authorized and unissued AMPS from time to
time by setting or changing the
36
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares. The AMPS
will not be subject to any sinking fund, but will be subject to mandatory
redemption under certain circumstances described below.
DIVIDENDS AND RATE PERIODS
General. The following is a general description of dividends and rate
periods for the AMPS. The initial rate period for the AMPS will be days and
the initial dividend rate for this period will be the rate set out on the cover
of this Prospectus. For subsequent dividend rate periods, the dividend rates for
those periods will be determined by auction, normally held every seven days, but
the rate set at the auction will not exceed the Maximum Rate. 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 the AMPS will be payable, when, as and
if declared by the Board, out of legally available funds in accordance with the
Fund's Charter and applicable law. Dividend periods generally will begin on the
first business day after an auction. If dividends are payable on a day that is
not a business day, then dividends will generally be payable on the next day if
such day is a business day, or as otherwise specified in the Articles
Supplementary.
Dividends will be paid through the Depository Trust Company ('DTC') on each
dividend payment date. The dividend payment date will normally be the first
business day after the dividend period ends. DTC, in accordance with its current
procedures, is expected to distribute dividends received from the auction agent
in same-day funds on each dividend payment date to agent members (members of DTC
that will act on behalf of existing or potential holders of the AMPS). These
agent members are in turn expected to distribute such dividends to the persons
for whom they are acting as agents. 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 the AMPS by multiplying the applicable rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the rate period and the denominator will normally be 360. This rate is then
multiplied by $25,000 to arrive at the dividends per share.
Dividends on the AMPS will accumulate from the date of their original issue,
which is , 2004. For each dividend payment period after the initial
rate period, the dividend will be the dividend rate determined at auction. The
dividend rate that results from an auction will not be greater than the maximum
rate described below.
The maximum applicable rate for any regular period will be the applicable
percentage (set forth in the table below) of the applicable 'AA' Composite
Commercial Paper Rate. In the case of a special rate period, the maximum
applicable rate will be specified by the Fund in the notice of the special rate
period for such dividend payment period. The applicable percentage is determined
on the day that a notice of a special rate period is delivered if the notice
specifies a maximum applicable rate for a special rate period. The applicable
percentage will be determined based on the lower of the credit rating or ratings
assigned to the AMPS by Moody's and S&P. If
37
Moody's or S&P or both shall not make such rating available, the rate shall be
determined by reference to equivalent ratings issued by a substitute rating
agency.
APPLICABLE
CREDIT RATINGS PERCENTAGE:
MOODY'S S&P NO NOTIFICATION
------- --- ---------------
'Aa3' or higher AA- or higher 150%
'A3' to 'A1' A- to A+ 200%
'Baa3' to 'Baa1' BBB- to BBB+ 225%
Below 'Baa3' Below BBB- 275%
On or 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, subject to applicable cure periods, will
result in a default period during which no auction will be held. The Fund does
not intend to establish any reserves for the payment of dividends.
Restriction on Dividends and Other Distributions. While any of the AMPS are
outstanding, the Fund generally may not declare, pay or set apart for payment,
any dividend or other distribution in respect of its common shares (other than
in additional shares of common stock or rights to purchase common stock) or
repurchase any of its common shares (except by conversion into or exchange for
shares of the Fund ranking junior to the AMPS as to the payment of dividends and
the distribution of assets upon liquidation) unless each of the following
conditions have been satisfied:
In the case of the Moody's coverage requirements, immediately after such
transaction, the aggregate Moody's Coverage Value (i.e., the aggregate
value of the Fund's portfolio discounted according to Moody's criteria)
would be equal to or greater than the Preferred Shares Basic Maintenance
Amount (i.e., the amount necessary to pay all outstanding obligations of
the Fund with respect to the AMPS, any preferred stock outstanding,
expenses for the next 90 days and any other liabilities of the Fund) (see
'Rating Agency Guidelines' below);
In the case of S&P's coverage requirements, immediately after such
transaction, the aggregate S&P value (i.e., the aggregate value of the
Fund's portfolio discounted according to S&P criteria) would be equal to
or greater than the Preferred Shares Basic Maintenance Amount;
Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this Prospectus under 'Rating Agency Guidelines'
below) is met;
Full cumulative dividends on the AMPS due on or prior to the date of the
transaction have been declared and paid or shall have been declared and
sufficient funds for the payment thereof deposited with the auction agent;
and
The Fund has redeemed the full number of the AMPS 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 the AMPS unless the Fund has declared and paid or contemporaneously
declares and pays full cumulative dividends on the AMPS through its most recent
dividend payment date. However, when the Fund has not paid dividends in full on
the AMPS through the most recent dividend payment date or upon any shares of the
Fund ranking, as to the payment of dividends, on a parity with the AMPS through
their
38
most recent respective dividend payment dates, the amount of dividends declared
per share on the AMPS and such other class or series of shares will in all cases
bear to each other the same ratio that accumulated dividends per share on the
AMPS and such other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund may, in certain situations, at
its sole option, declare a special rate period. Prior to declaring a special
rate period, the Fund will give notice (a 'notice of special rate period') to
the auction agent and to each Broker-Dealer. The notice will state that the next
succeeding rate period for the AMPS will be a number of days as specified in
such notice. The Fund may not designate a special rate period unless sufficient
clearing bids were made in the most recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory redemptions and any
additional dividends payable prior to such date must be paid in full or
deposited with the auction agent. The Fund also must have received confirmation
from Moody's and S&P or any substitute rating agency that the proposed special
rate period will not adversely affect such agency's then-current rating on the
AMPS and the lead Broker-Dealer designated by the Fund, initially Merrill Lynch,
must not have objected to declaration of a special rate period. A notice of
special rate period also will specify whether the shares of the AMPS will be
subject to optional redemption during such special rate period and, if so, the
redemption premium, if any, required to be paid by the Fund in connection with
such optional redemption.
VOTING RIGHTS
Except as noted below, the Fund's Common Shares and the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) have equal voting
rights of one vote per share and vote together as a single class. In elections
of directors, the holders of the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS, as a separate class, together vote to elect two
directors, and the holders of the Common Shares and holders of the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) vote together as a
single class to elect the remaining directors. In addition, during any period
('Voting Period') in which the Fund has not paid dividends on the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) in an amount equal
to two full years dividends, the holders of the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS), voting together 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 the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS). The holders of the
AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS) will
continue to have these rights until all dividends in arrears have been paid or
otherwise provided for.
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
Directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) of the number of
directors that such holders are entitled to elect. The persons elected by the
holders of the AMPS (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS), together with the incumbent directors, will constitute the
duly elected Directors of the Fund. When all dividends in arrears on the AMPS
(and the Series T, Series W, Series TH, Series F and Series M28 AMPS) have been
paid or provided for, the terms of office of the additional directors elected by
the
39
holders of the AMPS (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS) will terminate.
So long as any of the AMPS (and the Series T, Series W, Series TH, Series F
and Series M28 AMPS) are outstanding, the Fund will not, without the affirmative
vote of the holders of a majority of the outstanding AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS), (i) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Fund or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or Fund receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS),
(D) liens, pledges, charges, security interests, security agreements or other
encumbrances arising in connection with any indebtedness permitted under
clause (iii) below and (E) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's Paying Agent and
the auction agent; or (iii) create, authorize, issue, incur or suffer to exist
any indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Fund has eligible assets with an aggregate discounted value at least equal to
the Preferred Shares Basic Maintenance Amount as of the immediately preceding
valuation date.
In addition, the affirmative vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding AMPS (together with the Series T, Series W,
Series TH, Series F and Series M28 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 shares of preferred stock of any series, voting
separately from any other series, shall be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the Fund's
shares of capital stock. For purposes of the foregoing, no matter shall be
deemed to adversely affect any right, preference or power unless such matter
(i) alters or abolishes any preferential
40
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 AMPS (together with the Series T, Series W,
Series TH, Series F and Series M28 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 the AMPS (together with the Series T,
Series W, Series TH, Series F and Series M28 AMPS) described above will in each
case be in addition to any separate vote of the requisite percentage of Common
Shares and the AMPS (together with the Series T, Series W, Series TH, Series F
and Series M28 AMPS), voting together as a single class, necessary to authorize
the action in question.
For purpose of any right of the holders of the AMPS to vote on any matter,
whether the right is created by the Charter, by statute or otherwise, a holder
of the AMPS 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 the AMPS
required to constitute a quorum, if prior to or concurrently with a
determination of the AMPS entitled to vote or of the AMPS deemed outstanding for
quorum purposes, as the case may be, a notice of redemption was given in respect
of those AMPS and sufficient Deposit Securities (as defined in the SAI) for the
redemption of those AMPS were deposited.
RATING AGENCY GUIDELINES
The Fund is required under S&P and Moody's guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount (as defined below). S&P and Moody's have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by the rating agency). The S&P and
Moody's guidelines also impose certain diversification requirements on the
Fund's overall portfolio. The 'Preferred Shares Basic Maintenance Amount'
includes the sum of (i) the aggregate liquidation preference of the AMPS (and
the Series T, Series W, Series TH, Series F and Series M28 AMPS) then
outstanding (plus accrued and projected dividends), (ii) the total principal of
any senior debt, (iii) certain Fund expenses and (iv) certain other current
liabilities.
The Fund also is required under rating agency guidelines to maintain, with
respect to the AMPS, as of the last business day of each month in which the AMPS
(and the Series T, Series W, Series TH, Series F and Series M28 AMPS) are
outstanding, asset coverage of at least 200% with respect to senior securities
that are shares of the Fund, including the AMPS (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities that are shares of a closed-end investment
company as a condition of declaring dividends on its Common Shares) ('1940 Act
Preferred Shares Asset Coverage'). S&P and Moody's have agreed that the auditors
must certify once per year the asset coverage test on a date randomly selected
by the auditor. Based on the Fund's assets and liabilities as of November 8,
2004, and assuming the issuance of all of the AMPS offered hereby and the use of
the proceeds as intended, the 1940 Act Preferred Shares Asset Coverage with
respect to the
41
AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS) would
be computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $1,241,620,707
---------------------------------------------- = -------------- = 286%
Senior securities representing indebtedness $434,000,000
plus liquidation value of the preferred shares
If the Fund does not timely cure a failure to maintain (1) a discounted
value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or
(2) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance
with the requirements of the rating agency or agencies then rating the
AMPS, the Fund will be required to redeem the AMPS as described below under
' -- Redemption.'
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change or a withdrawal of the
ratings altogether. In addition, any rating agency providing a rating for the
AMPS may, at any time, change or withdraw any such rating. The Board of
Directors may, without stockholder approval, amend, alter, add to or repeal any
or all of the definitions and related provisions that have been adopted by the
Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from S&P or Moody's, or both, as appropriate, that any
such change would not impair the ratings then assigned by S&P and Moody's
to the AMPS.
The Board of Directors may amend the definition of the 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 the AMPS, or any other stockholder of the Fund, but only with
confirmation from each Rating Agency, and after consultation with the
broker-dealers, provided that immediately following any such increase the Fund
could meet the Preferred Shares Basic Maintenance Amount Test.
As described by S&P and Moody's, the AMPS rating is an assessment of the
capacity and willingness of the Fund to pay the AMPS' obligations. The ratings
on the AMPS are not recommendations to purchase, hold or sell the AMPS, inasmuch
as the ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines also do not address the likelihood that
an owner of the AMPS will be able to sell such shares in an auction or
otherwise. The ratings are based on current information furnished to S&P and
Moody's by the Fund and the Investment Manager and information obtained from
other sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information.
The rating agency guidelines will apply to the AMPS only so long as such
rating agency is rating these shares. The Fund will pay fees to S&P and Moody's
for rating the AMPS.
REDEMPTION
Mandatory Redemption. If the Fund does not timely cure a failure to
(1) maintain a discounted value of its portfolio equal to the Preferred Shares
Basic Maintenance Amount, (2) maintain the 1940 Act Preferred Shares Asset
Coverage, or (3) file a required certificate related to asset coverage on time,
the AMPS will be subject to mandatory redemption out of funds legally available
therefor in accordance with the Articles Supplementary and applicable law,
42
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 the AMPS necessary to restore the required discounted value or the
1940 Act Preferred Shares Asset Coverage, as the case may be.
In determining the number of AMPS required to be redeemed in accordance with
the foregoing, the Fund will allocate the number of shares required to be
redeemed to satisfy the Preferred Shares Basic Maintenance Amount or the 1940
Act Preferred Shares Asset Coverage, as the case may be, pro rata among the AMPS
of the Fund and any other preferred stock of the Fund, subject to redemption or
retirement. If fewer than all outstanding shares of any series are, 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 the AMPS,
redeem AMPS having a dividend period of one year or less, in whole or in part,
on the business day after the last day of such dividend period upon not less
than 15 calendar days and not more than 40 calendar days prior notice. The
optional redemption price per share will be $25,000 per share, plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to the date fixed for redemption. AMPS having a dividend period of
more than one year are redeemable at the option of the Fund, in whole or in
part, prior to the end of the relevant dividend period, subject to any specific
redemption provisions, which may include the payment of redemption premiums to
the extent required under any applicable specific redemption provisions. The
Fund will not make any optional redemption unless, after giving effect thereto,
(i) the Fund has available certain deposit securities with maturities or tender
dates not later than the day preceding the applicable redemption date and having
a value not less than the amount (including any applicable premium) due to
holders of the AMPS by reason of the redemption of the AMPS on such date fixed
for the redemption and (ii) the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance
Amount.
Notwithstanding the foregoing, the AMPS may not be redeemed at the option of
the Fund unless all dividends in arrears on the outstanding AMPS, including all
outstanding shares of preferred stock, have been or are being contemporaneously
paid or set aside for payment. This would not prevent the lawful purchase or
exchange offer for the AMPS made on the same terms to holders of all outstanding
shares of preferred stock.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with the AMPS with respect to the distribution of assets
upon liquidation of the Fund, upon a liquidation of the Fund, whether voluntary
or involuntary, the holders of the AMPS then outstanding will be entitled to
receive and to be paid out of the assets of the Fund available for distribution
to its stockholders, before any payment or distribution shall be made on the
Common Shares, an amount equal to the liquidation preference with respect to
such shares ($25,000 per share), plus an amount equal to all dividends thereon
(whether or not earned or declared by the Fund, but excluding the interest
thereon) accumulated but unpaid to and including the date of final distribution
in same-day funds in connection with the liquidation of the Fund. After the
payment to the holders of the AMPS of the full preferential amounts provided for
as described
43
herein, the holders of the AMPS as such shall have no right or claim to any of
the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.
THE AUCTION
GENERAL
The Articles Supplementary provide that, except as otherwise described in
this Prospectus, the applicable rate for the AMPS for each rate period after the
initial rate period will be the rate that 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 the AMPS. See the Articles Supplementary
for a more complete description of the auction process.
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (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 the AMPS so long as the
applicable rate for the AMPS is to be based on the results of an auction.
The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 60 days after the delivery of such notice. If the
auction agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that prior to such removal the Fund has entered into such an
agreement with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for the AMPS.
The auction agent will pay to each Broker-Dealer after each auction from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the stated value ($25,000 per share) of the AMPS held by a Broker-Dealer's
customer upon settlement in an auction. For any special rate period, the service
charge will be determined by mutual consent of the Fund and any such
Broker-Dealer or Broker-Dealers and will be based upon a selling concession that
would be applicable to an underwriting of fixed or variable rate preferred
shares with a similar final maturity or variable rate dividend period,
respectively, at the commencement of the dividend period with respect to such
auction. For purposes of the foregoing, the AMPS will be placed by a broker-
dealer if such shares were (i) the subject of hold orders deemed to have been
made by beneficial owners that were acquired by such beneficial owners through
such Broker-Dealer or (ii) the subject of the following orders submitted by such
Broker-Dealer: (A) a submitted bid of a Beneficial Owner that resulted in such
Beneficial Owner continuing to hold such shares as a result of the auction,
(B) a submitted bid of a potential Beneficial Owner that resulted in such
potential Beneficial Owner purchasing such shares as a result of the auction or
(C) a submitted hold order. A Broker-Dealer may share a portion of any such fees
with non-participating Broker-Dealers that
44
submit orders to the Broker-Dealer for an auction that are placed by that
Broker-Dealer in such auction.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for the AMPS, each
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the auction agent) as a beneficial owner of the AMPS may
submit the following types of orders with respect to the AMPS to that
Broker-Dealer:
1. Hold Order -- indicating its desire to hold the AMPS without regard to
the applicable rate for the next rate period.
2. Bid -- indicating its desire to purchase or hold the indicated number of
AMPS at $25,000 per share if the applicable rate for shares of such
series for the next rate period is not less than the rate or spread
specified in the bid and which shall be deemed an irrevocable offer to
sell the AMPS at $25,000 per share if the applicable rate for shares of
such series for the next rate period is less than the rate or spread
specified in the bid.
3. Sell Order -- indicating its desire to sell the AMPS at $25,000 per share
without regard to the applicable rate for shares of such series for the
next rate period.
A beneficial owner of the AMPS may submit different types of orders to its
Broker-Dealer with respect to the AMPS then held by the beneficial owner. A
beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the maximum applicable rate on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have submitted
a hold order to its Broker-Dealer. However, if a beneficial owner fails to
submit an order for some or all of its shares to its Broker-Dealer for an
auction relating to a rate period of more than 91 days, such beneficial owner
will be deemed to have submitted a sell order for such shares to its Broker-
Dealer. A sell order constitutes an irrevocable offer to sell the AMPS subject
to the sell order. A beneficial owner that offers to become the beneficial owner
of additional AMPS is, for the purposes of such offer, a potential holder as
discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of the AMPS but that wishes to purchase the AMPS or a
beneficial owner that wishes to purchase additional AMPS. A potential holder may
submit bids to its Broker-Dealer in which it offers to purchase the AMPS at
$25,000 per share if the applicable rate for the next rate period is not less
than the rate specified in such bid. A bid placed by a potential holder
specifying a rate higher than the maximum applicable rate on the auction date
will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
However, neither the Fund nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of the AMPS
held by it. A Broker-Dealer may also submit orders to the auction agent for its
own account as an existing holder or potential holder, provided it is not an
affiliate of the Fund. If a
45
Broker-Dealer submits an order for its own account in any auction, it may have
knowledge of orders placed through it in that auction and therefore have an
advantage over other bidders, but such Broker-Dealer would not have knowledge of
orders submitted by other Broker-Dealers in that auction. As a result of bidding
by the Broker-Dealer in an auction, the auction rate may be higher or lower than
the rate that would have prevailed had the Broker-Dealer not bid.
There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to the number of AMPS subject
to sell orders submitted or deemed submitted to the auction agent by
Broker-Dealers for existing holders. If there are sufficient clearing bids, the
applicable rate for the AMPS for the next succeeding rate period thereof will be
the lowest rate specified in the submitted bids which, taking into account such
rate and all lower rates bid by Broker-Dealers as or on behalf of existing
holders and potential holders, would result in existing holders and potential
holders owning the AMPS available for purchase in the auction.
If there are not sufficient clearing bids, the applicable rate for the next
rate period will be the maximum rate on the auction date. However, if the Fund
has declared a special rate period and there not sufficient clearing bids, the
applicable rate for the next rate period will be the same as during the current
rate period. If there are not sufficient clearing bids, beneficial owners of the
AMPS that have submitted or are deemed to have submitted sell orders may not be
able to sell in the auction all shares subject to such sell orders. If all of
the outstanding AMPS are the subject of submitted hold orders, then the rate
period following the auction will automatically be the same length as the
preceding rate period and the applicable rate for the next rate period will be
the 30 day 'AA' Composite Commercial Paper Rate in the case of a standard
dividend period for the AMPS. The 'AA' Composite Commercial Paper Rate is the
rate on commercial paper issued by financial corporations whose bonds are rated
AA by S&P as made available by the Federal Reserve Bank of New York or, if such
rate is not made available by the Federal Reserve Bank of New York, the
arithmetical average of such rates as quoted to the auction agent by a
commercial paper dealer as may be appointed by the Fund.
A Broker-Dealer may also bid in an auction in order to prevent what would
otherwise be (i) a failed auction, (ii) an 'all-hold' auction or (iii) an
applicable rate that the Broker-Dealer believes, in its sole discretion, does
not reflect the market for the AMPS at the time of the auction. A Broker-Dealer
may, but is not obligated to, advise beneficial owners of AMPS that the
applicable rate that would apply in an 'all-hold' auction may be lower than
would apply if beneficial owners submit bids, and such advice, if given, may
facilitate the submission of bids by beneficial owners that would avoid the
occurrence of an 'all-hold' auction.
The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of AMPS that is different than the
number of shares specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as existing
holders or potential holders in respect of customer orders will be required to
make appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same-day funds to
DTC against delivery to their respective agent
46
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 first auction for the AMPS will be held on , 2004, the
business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special rate periods, auctions for the AMPS
normally will be held every seven days, and each subsequent dividend period for
the AMPS normally will begin on the following business day.
The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding AMPS of any series, and three current
holders. The three current holders and three potential holders submit orders
through Broker-Dealers at the auction:
Current Holder A.... Owns 500 shares, wants to sell Bid order of 4.1% rate for all
all 500 shares if auction rate 500 Shares
is less than 4.1%
Current Holder B.... Owns 300 shares, wants to hold Hold order -- will take the
auction rate
Current Holder C.... Owns 200 shares, wants to sell Bid order of 3.9% rate for all
all 200 shares 200 shares if auction rate is
less than 3.9%
Potential Holder D.. Wants to buy 200 shares Places order to buy at or
above 4.0%
Potential Holder E.. Wants to buy 300 shares Places order to buy at or
above 3.9%
Potential Holder F.. Wants to buy 200 shares Places order to buy at or
above 4.1%
The lowest dividend rate that will result in all 1,000 AMPS continuing to be
held is 4.0% (the offer by D). Therefore, the dividend rate will be 4.0%.
Current holders B and C will continue to own their shares. Current holder A will
sell its shares because A's dividend rate bid was higher than the dividend rate.
Potential holder D will buy 200 shares and potential holder E will buy 300
shares because their bid rates were at or below the dividend rate. Potential
holder F will not buy any shares because its bid rate was above the dividend
rate.
SECONDARY MARKET TRADING AND TRANSFER OF AMPS
The underwriters are not required to make a market in the AMPS. The
Broker-Dealers (including the underwriters) may maintain a secondary trading
market for outside of auctions, but they are not required to do so. There can be
no assurance that a secondary trading market for the AMPS will develop or, if it
does develop, that it will provide owners with liquidity of investment. The AMPS
will not be registered on any stock exchange or on the NASDAQ market. Investors
who purchase the AMPS in an auction for a special rate period should note that
because the dividend rate on such shares will be fixed for the length of that
dividend period, the value of such shares may fluctuate in response to the
changes in interest rates, and may be more or less than their original cost if
sold on the open market in advance of the next auction thereof, depending on
market conditions. In addition, a Broker-Dealer may, in its own discretion,
decide to sell AMPS in the secondary market to investors at any time and at any
price, including at prices equivalent to, below or above the liquidation
preference of the AMPS.
47
You may sell, transfer, or otherwise dispose of the AMPS only in whole
shares and only
pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
to a Broker-Dealer; or
to such other persons as may be permitted by the Fund; provided, however,
that (x) if you hold your AMPS in the name of a Broker-Dealer, a sale or
transfer of your AMPS to that Broker-Dealer, or to another customer of
that Broker-Dealer, will not be considered a sale or transfer for purposes
of the foregoing if that Broker-Dealer remains the existing holder of the
AMPS immediately after the transaction; and (y) in the case of all
transfers, other than through an auction, the Broker-Dealer (or other
person, if the Fund permits) receiving the transfer will advise the
auction agent of the transfer.
Further description of the auction procedures can be found in the Articles
Supplementary.
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue Common Shares, par value $.001 per
share. 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 the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS are outstanding, holders of Common Shares will not
be entitled to receive any distributions from the Fund unless all accrued
dividends on the AMPS and the shares of Series T, Series W, Series TH, Series F
and Series M28 AMPS have been paid, and unless the applicable asset coverage
requirements under the 1940 Act with respect to the AMPS and the Series T,
Series W, Series TH, Series F and Series M28 AMPS would be at least 200% after
giving effect to the distributions. Under the rules of the NYSE applicable to
listed companies, the Fund is required to hold an annual meeting of stockholders
each year.
CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund has provisions in its Charter and By-Laws ('By-Laws') that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions or to modify
its structure. The Board of Directors has been divided into three classes. At
the annual meeting of stockholders held each year, 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 the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS) outstanding at the time,
voting together 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
48
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 the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 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 the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) outstanding at the
time, voting together as a single class, and (ii) in the case of a Business
Combination (as defined below), 66 2/3% of the Common Shares and the AMPS (and
the Series T, Series W, Series TH, Series F and Series M28 AMPS) outstanding at
the time, voting together 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 (a) issuances or transfers of debt securities of the Fund,
(b) sales of securities of the Fund in connection with a public offering,
(c) issuances of securities of the Fund pursuant to a dividend reinvestment
plan adopted by the Fund, (d) issuances of securities of the Fund upon the
exercise of any stock subscription rights distributed by the Fund and
(e) portfolio transactions effected by the Fund in the ordinary course of
business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12 month
period) to or with any person or entity of any assets of the Fund having an
aggregate fair market value of $1,000,000 or more except for portfolio
transactions (including pledges of portfolio securities in connection with
borrowings) effected by the Fund in the ordinary course of its business
(transactions within clauses (i), (ii) and (iii) above being known
individually as a 'Business Combination');
(iv) any voluntary liquidation or dissolution of the Fund or an
amendment to the Fund's Charter to terminate the Fund's existence; or
(v) any stockholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets as to which stockholder
approval is required under federal or Maryland law.
However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of
49
at least 75% of the Continuing Directors (as defined above). In that case, if
Maryland law requires stockholder approval, the affirmative vote of a majority
of votes entitled to be cast thereon shall be required and if Maryland law does
not require stockholder approval, no stockholder approval will be required. The
Fund's By-Laws contain provisions the effect of which is to prevent matters,
including nominations of directors, from being considered at a stockholders'
meeting where the Fund has not received notice of the matters generally at least
90 but no more than 120 days prior to the first anniversary of the preceding
year's annual meeting.
These provisions are in addition to any special voting rights granted to the
holders of the AMPS in the Charter. See 'Description of AMPS -- Voting Rights.'
The Board of Directors has determined that the foregoing voting requirements,
which are generally greater than the minimum requirements under Maryland law and
the 1940 Act, are in the best interest of the Fund's stockholders generally.
Reference is made to the Charter and By-Laws of the Fund, on file with the
Securities and Exchange Commission, for the full text of these provisions. These
provisions could have the effect of depriving stockholders of an opportunity to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. In the opinion of the Investment Manager, however, these
provisions offer several possible advantages. They may require persons seeking
control of a Fund to negotiate with its management regarding the price to be
paid for the shares required to obtain such control, they promote continuity and
stability and they enhance the Fund's ability to pursue long-term strategies
that are consistent with its investment objectives.
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and it may be converted to an
open-end investment company at any time by a vote of the outstanding shares. See
'Description of AMPS -- Voting Rights' and 'Certain Provisions of the Charter
and By-Laws' for a discussion of voting requirements applicable to conversion of
the Fund to an open-end investment company. If the Fund converted to an open-end
investment company, it would be required to redeem all the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) then outstanding
(requiring in turn that it liquidate a portion of its investment portfolio), and
the Common Shares would no longer be listed on the NYSE. Conversion to open-end
status could also require the Fund to modify certain investment restrictions and
policies. Stockholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or permitted under the 1940 Act) at their net asset value, less
such redemption charge, if any, as might be in effect at the time of redemption.
In order to avoid maintaining large cash positions or liquidating favorable
investments to meet redemptions, open-end investment companies typically engage
in a continuous offering of their shares. Open-end investment companies are thus
subject to periodic asset in-flows and out-flows that can complicate portfolio
management. The Board of Directors may at any time propose conversion of the
Fund to open-end status, depending upon its judgment regarding the advisability
of such action in light of circumstances then prevailing. The Board of Directors
believes, however, that the closed-end structure is desirable in light of the
Fund's investment objectives and policies and it is currently not likely that
the Board of Directors would vote to convert the Fund to an open-end fund.
50
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 holders of
Common Shares 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.
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. Furthermore, the acquisition of Common Shares by the Fund may
require the Fund to redeem the AMPS in order to maintain certain asset coverage
requirements. 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
stockholders 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 has elected to be treated as, and intends 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
51
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. The American Jobs Creation Act of 2004 (the 'Act'), which the
President recently signed into law, provides that for taxable years of a RIC
beginning after October 22, 2004, net income derived from an interest in a
'qualified publicly traded partnership,' as defined in the Code, will be treated
as qualifying income for purposes of the Income Requirement in clause
(a) above. In addition, for the purposes of the diversification requirements in
clause (b) above, the outstanding voting securities of any issuer includes the
equity securities of a qualified publicly traded partnership, and no more than
25% of the value of a RIC's total assets may be invested in the securities of
one or more qualified publicly traded partnerships. The Act also provides that
the separate treatment for publicly traded partnerships under the passive loss
rules of the Code applies to a RIC holding an interest in a qualified publicly
traded partnership, with respect to items attributable to such interest.
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 stockholders, if it distributes at least 90% of the sum of its investment
company taxable income and any net tax-exempt interest income for that year (the
'Distribution Requirement'). The Fund intends to make sufficient distributions
of its investment company taxable income each taxable year to meet the
Distribution Requirement. If the Fund failed to qualify for treatment as a RIC
for any taxable year or failed to satisfy the Distribution Requirement in any
taxable year, (a) it would be taxed as an ordinary corporation on the full
amount of its taxable income for that year without being able to deduct the
distributions it makes to its stockholders, and (b) its stockholders 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 dividends received deduction available to corporate stockholders and
(ii) for treatment as qualified dividend income in the case of individual
stockholders.
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 maximum tax rate 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 stockholders, 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 stockholder will be increased by an amount equal to 65% of the amount
of undistributed capital gains included in the stockholder'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 an amount at least equal to
the sum of (i) 98% of its ordinary income for that calendar year, (ii) 98% of
its capital gain net income for the one-year period ending on October 31 of that
calendar year and (iii) any ordinary income and capital gains for previous years
that were not distributed during those years and on which the Fund paid no U.S.
52
federal income tax. For this and other purposes, a distribution will be treated
as paid by the Fund and received by the stockholders on December 31 if it is
declared by the Fund in October, November or December of such year, made payable
to stockholders 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
stockholders whose taxable year is the calendar year in the year the
distribution is declared, rather than the year in which the distribution is
received. To prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF AMPS
Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the AMPS at any time in the future, the Fund believes that
under present law the AMPS will constitute stock of the Fund and distributions
with respect to the AMPS (other than distributions in redemption of the AMPS
that are treated as exchanges of stock under Section 302(b) of the Code) thus
will constitute dividends to the extent of the Fund's current or accumulated
earnings and profits as calculated for U.S. federal income tax purposes. Such
dividends generally will be taxable as ordinary income to holders (other than
distributions of qualified dividend income and capital gain dividends, as
described below). 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 AMPS represents equity. The following discussion
assumes such treatment will apply. It is possible, however, that the IRS
might take a contrary position asserting, for example, that the AMPS
constitute debt of the Fund. If this position were upheld, the discussion of
the treatment of distributions above would not apply. Instead, distributions
by the Fund to holders of AMPS would constitute interest, whether or not such
distributions exceeded the earnings and profits of the Fund, would be included
in full in the income of the recipient, would be taxed as ordinary income and
none of the distributions would be treated as capital gain dividends
or as qualified dividend 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. 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 stockholders, if properly designated,
may qualify for the dividends received deduction. 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 by both the Fund and the
stockholder. The Fund does not expect a significant portion of Fund
distributions to be eligible for the dividends received deduction or derived
from qualified dividend income. Distributions of net capital gain that are
designated by the Fund as capital gain dividends will be treated as long-term
capital gains in the hands of holders regardless of the holders' respective
holding periods for their AMPS. Distributions, if any, in excess of the Fund's
current and accumulated earnings and profits will first reduce the adjusted
tax basis of a stockholder'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
53
gains, dividends qualifying for the dividends received deduction, qualified
dividend income, interest-related dividends and short-term capital gain
dividends) 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 dividends received deduction, dividends derived from
qualifying dividend income, interest-related dividends and short-term capital
gain dividends, if any, between its Common Shares, the AMPS and the Series T,
Series W, Series TH, Series F and Series M28 AMPS in proportion to the total
dividends paid out of current or accumulated earnings and profits to each class
or series 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 AMPS, Series T,
Series W, Series TH, Series F and Series M28 AMPS. Since the Fund's current and
accumulated earnings and profits will first be used to pay dividends on the
AMPS, and the Series T, Series W, Series TH, Series F and Series M28 AMPS
distributions in excess of such earnings and profits, if any, will be made
disproportionately to holders of Common Shares.
Stockholders will be notified annually as to the U.S. federal tax status of
distributions.
SALE OF SHARES
The sale or other disposition of the AMPS generally will be a taxable
transaction for U.S. federal income tax purposes. Selling holders of the AMPS
generally will recognize gain or loss in an amount equal to the difference
between the amount received in exchange therefor and their respective bases in
such AMPS. If the AMPS are held as a capital asset, the gain or loss generally
will be a capital gain or loss. Similarly, a redemption (including a redemption
resulting from liquidation of the Fund), if any, of the AMPS by the Fund
generally will give rise to capital gain or loss if the holder does not own (and
is not regarded under certain tax law rules of constructive ownership as owning)
any shares of Common Shares in the Fund and provided that the redemption
proceeds do not represent declared but unpaid dividends.
Generally, a holder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. Capital gains of individuals are
generally taxed at a maximum rate of tax of 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 the AMPS held for
six months or less will be treated as a long-term capital loss to the extent of
any capital gain dividends received by the holder (or amounts credited to the
holder as undistributed capital gains) with respect to such shares. Also, any
loss realized upon a taxable disposition of AMPS may be disallowed if other AMPS
are acquired within a 61-day period beginning 30 days before and ending 30 days
after the date the shares are disposed of. If disallowed, the loss will be
reflected by an upward adjustment to the basis of the AMPS acquired. The ability
to otherwise deduct capital losses may be subject to other limitations under the
Code.
BACKUP WITHHOLDING
The Fund may be required to withhold at a current rate of 28%, for U.S.
federal income taxes, a portion of all taxable dividends and redemption proceeds
payable to stockholders 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 stockholder has been notified by the IRS
54
that such stockholder is subject to backup withholding. Corporate stockholders
and other stockholders 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 stockholder's federal income tax liability if the
appropriate information is provided to the IRS.
OTHER TAXATION
Foreign stockholders, including stockholders 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. Under the Act, a
new exemption is created under which U.S. source withholding taxes are no longer
imposed on dividends paid by RICs to the extent the dividends are designated as
'interest-related dividends' or 'short-term capital gain dividends.' Under this
exemption, interest-related dividends and short-term capital gain dividends
generally represent distributions of interest or short-term capital gains that
would not have been subject to U.S. withholding tax at the source if they had
been received directly by a foreign person, and that satisfy certain other
requirements. In addition, the Act provides that distributions of the Fund
attributable to gains from sales or exchanges of 'U.S. real property interests,'
as defined in the Code and Treasury Regulations (including gains on the sale or
exchange of shares in certain U.S. real property holding corporations, which may
include certain 'non-domestically controlled' REITs, and certain REIT capital
gain dividends) will generally cause the foreign stockholder to be treated as
recognizing such gain as income effectively connected to a trade or business
within the United States, generally subject to tax at the same rates applicable
to U.S. stockholders. Also, such gain may be subject to a 30% branch profits tax
in the hands of a foreign stockholder that is a corporation. Such distributions
may be subject to U.S. withholding tax and may give rise to an obligation on the
part of the foreign stockholder to file a U.S. federal income tax return. These
rules apply to dividends with respect to taxable years of RICs beginning after
December 31, 2004 and before January 1, 2008. 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
the AMPS.
FURTHER INFORMATION
The SAI summarizes further federal income tax considerations that may apply
to the Fund and its stockholders and may qualify the considerations discussed
herein. Fund distributions may also be subject to State and local taxes. You
should consult with your own tax adviser regarding the particular consequences
of investing in the Fund.
55
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated
, 2004, each underwriter named below, acting through Merrill Lynch,
Pierce, Fenner & Smith Incorporated, has severally agreed to purchase, and the
Fund has agreed to sell, the number of AMPS set forth opposite the name of such
underwriter.
NUMBER OF
UNDERWRITER AMPS
----------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
Citigroup Global Markets Inc. ..............................
A.G. Edwards & Sons, Inc. ..................................
UBS Securities LLC..........................................
Wachovia Capital Markets, LLC...............................
-------
Total............................................ 3,760
-------
-------
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to approval of certain
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 AMPS by Moody's and S&P, respectively, as of the time of the offering.
The underwriters are obligated to purchase all the AMPS if they purchase any of
the AMPS. 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 AMPS directly to the
public at the public offering price set forth on the cover page of this
Prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not to exceed of $ per share. The sales load the Fund will
pay of $250 per share is equal to 1% of the initial offering price of the AMPS.
After this offering, the underwriters may change the public offering price and
the concession. Investors must pay for any AMPS purchased in this offering on or
before , 2004.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions and that the
underwriters, or their affiliates, may act as counterparties in connection with
the interest rate transactions described above 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.
Merrill Lynch has advised the Fund that it and certain broker-dealers and
other participants in the auction rate securities markets, including both
taxable and tax exempt markets, have received letters from the Securities and
Exchange Commission requesting that each of them voluntarily conduct an
investigation regarding their respective practices and procedures in those
markets. Those broker-dealers are cooperating and expect to continue to
cooperate with the Securities and Exchange Commission in providing the requested
information. No assurance can be given as to whether the results of this process
will affect the market for the AMPS or the auctions.
56
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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated is 4 World Financial Center, New York, New York 10080.
The settlement date for the purchase of the AMPS will be , 2004,
as agreed upon by the underwriters, the Fund and the Investment Manager pursuant
to Rule 15c6-1 under the Securities Exchange Act of 1934.
CUSTODIAN, AUCTION AGENT, TRANSFER
AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Bank of New York, whose address is 101 Barclay Street, Floor 7W, New
York, New York 10286, will act as auction agent, transfer agent, dividend paying
agent, and registrar for the AMPS. State Street Bank, whose principal business
address is 225 Franklin Street, Boston, 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 AMPS 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 Clifford Chance US LLP,
New York, New York. Venable LLP will opine on certain matters pertaining to
Maryland law. Simpson Thacher & Bartlett LLP and Clifford Chance US LLP may rely
as to certain matters of Maryland law on the opinion of Venable LLP.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements of the Fund for the year ended December 31, 2003,
have been audited by PricewaterhouseCoopers LLP, independent registered public
accountants, as set forth in their report given upon the authority of said firm
as experts in auditing and accounting. The address of PricewaterhouseCoopers LLP
is 300 Madison Avenue, New York, NY 10017.
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 the AMPS can be found in the
Fund's Registration Statement (including amendments, exhibits, and schedules) on
Form N-2 filed with the
57
Securities and Exchange Commission. The Fund's SAI dated , 2004
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 website (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.
58
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
General Information......................................... 3
Additional Information about Fund Investment Objectives and
Policies.................................................. 3
Investment Restrictions..................................... 4
Management of the Fund...................................... 7
Compensation of Directors................................... 12
Investment Advisory and Other Services...................... 13
Portfolio Transactions and Brokerage........................ 22
Determination of Net Asset Value............................ 22
Additional Information Concerning the Auctions for AMPS..... 23
S&P and Moody's Guidelines.................................. 24
U.S. Federal Taxation....................................... 31
Performance Data and Index Returns.......................... 37
Experts..................................................... 38
Report of Independent Registered Public Accounting Firm..... 39
Financial Statements........................................ 40
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
59
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$94,000,000
[COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]
COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
AUCTION MARKET PREFERRED SHARES ('AMPS')
3,760 SHARES, SERIES M7
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
CITIGROUP
A.G. EDWARDS
UBS INVESTMENT BANK
WACHOVIA SECURITIES
, 2004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 2004
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 QUALITY INCOME REALTY FUND LOGO]
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(800) 437-9912
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
Auction Market Preferred Shares
Shares, Series M7
, 2004
--------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION ('SAI') OF COHEN & STEERS QUALITY
INCOME REALTY FUND, INC. (THE 'FUND') RELATING TO THIS OFFERING OF THE FUND'S
AUCTION MARKET PREFERRED SHARES, SERIES M7 (THE 'AMPS') DOES NOT CONSTITUTE A
PROSPECTUS, BUT SHOULD BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS
RELATING TO THE AMPS DATED , 2004, AS IT MAY BE SUPPLEMENTED.
THIS SAI DOES NOT INCLUDE ALL INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
CONSIDER BEFORE PURCHASING AMPS IN THIS OFFERING, AND INVESTORS SHOULD OBTAIN
AND READ THE PROSPECTUS PRIOR TO PURCHASING AMPS. A COPY OF THE PROSPECTUS MAY
BE OBTAINED WITHOUT CHARGE BY WRITING TO THE ADDRESS OR CALLING THE PHONE NUMBER
SHOWN ABOVE.
Capitalized terms used in this SAI have the meanings assigned to them in the
Prospectus or in the glossary of this SAI.
TABLE OF CONTENTS
PAGE
----
General Information......................................... 3
Additional Information about Fund Investment Objectives and
Policies.................................................. 3
Investment Restrictions..................................... 4
Management of the Fund...................................... 7
Compensation of Directors................................... 12
Investment Advisory and Other Services...................... 13
Portfolio Transactions and Brokerage........................ 22
Determination of Net Asset Value............................ 22
Additional Information Concerning the Auctions for AMPS..... 23
S&P and Moody's Guidelines.................................. 24
U.S. Federal Taxation....................................... 31
Performance Data and Index Returns.......................... 37
Experts..................................................... 38
Report of Independent Registered Public Accounting Firm..... 39
Financial Statements........................................ 40
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
2
GENERAL INFORMATION
The Fund is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940 (the '1940 Act'). Cohen &
Steers Capital Management, Inc. (the 'Investment Manager') serves as the Fund's
investment manager. The Fund's primary investment objective is high current
income through investment in real estate securities and its secondary investment
objective is capital appreciation. No assurance can be given that the Fund will
achieve its investment objectives. Much of the information contained in this SAI
expounds on subjects discussed in the Prospectus. Defined terms used herein have
the same meaning as in the Prospectus. No investment in the AMPS should be made
without first reading the Prospectus.
ADDITIONAL INFORMATION ABOUT
FUND INVESTMENT OBJECTIVES AND POLICIES
The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks as set forth in the Prospectus.
Except as otherwise provided, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without the approval of
the stockholders; however, the Fund will not change its non-fundamental
investment policies without written notice to stockholders.
INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS
It is the Fund's fundamental policy to concentrate its investments in the
U.S. real estate market and not in any other industry. Under normal market
conditions, the Fund invests at least 90% of its total assets in common stocks,
preferred stocks and other equity securities issued by real estate companies,
such as real estate investment trusts ('REITs').
REAL ESTATE COMPANIES
For purposes of the Fund's investment policies, a real estate company is one
that derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential real
estate; or has at least 50% of its assets in real estate.
REAL ESTATE INVESTMENT TRUSTS
A REIT is a company dedicated to owning, and usually operating, income
producing real estate, or to financing real estate. REITs can generally be
classified as Equity REITs, Mortgage REITs and Hybrid REITs. An Equity REIT
invests primarily in the fee ownership or leasehold ownership of land and
buildings and derives its income primarily from rental income. An Equity REIT
may also realize capital gains (or losses) by selling real estate properties in
its portfolio that have appreciated (or depreciated) in value. A Mortgage REIT
invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A Mortgage REIT generally derives its income
primarily from interest payments on the credit it has extended. A Hybrid REIT
combines the characteristics of both Equity REITs and Mortgage REITs. It is
anticipated, although not required, that under normal market conditions at least
90% of the Fund's investments in REITs consist of securities issued by Equity
REITs. At least 80% of our total assets will be invested in income producing
equity securities issued by REITs.
PREFERRED STOCKS
Preferred stocks pay fixed or floating dividends to investors, and have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. Preferred stockholders
usually have no right to vote for corporate directors or on other matters. Under
current market conditions, the Investment Manager invests approximately 70% of
our total assets in common shares of real estate companies and approximately 30%
in preferred
3
shares of REITs. The actual percentage of common and preferred shares in our
investment portfolio may vary over time based on the Investment Manager's
assessment of market conditions.
LOWER-RATED SECURITIES
Securities rated non-investment grade (lower than BBB - by Standard & Poor's
Rating Services ('S&P') or lower than Baa3 by Moody's Investors Service Inc.
('Moody's')) are sometimes referred to as 'high yield' or 'junk' bonds. We may
only invest in securities rated 'CCC' or higher by S&P, or rated 'caa' or higher
by Moody's, or unrated securities of comparable quality. The issuers of these
securities have a currently identifiable vulnerability to default and the issues
may be in default or there may be present elements of danger with respect to
principal or interest. We may invest no more than 20% of our assets in preferred
stock and debt securities rated below investment grade and unrated securities of
comparable quality. This is a fundamental investment policy. We will not invest
in securities which are in default at the time of purchase.
ILLIQUID SECURITIES
A security is illiquid if, for legal or market reasons, it cannot be
promptly sold (i.e., within seven days) at a price which approximates its fair
value. Although substantially all of the equity securities of real estate
companies in which we intend to invest are traded on a national securities
exchange or in the over-the-counter market, there are no limitations on our
ability to invest in illiquid securities.
CASH RESERVES
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments.
Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as S&P or Moody's, certificates of
deposit, bankers' acceptances issued by domestic banks having total assets in
excess of one billion dollars, and money market mutual funds.
In entering into a repurchase agreement for the Fund, the Investment Manager
will evaluate and monitor the creditworthiness of the vendor. In the event that
a vendor should default on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If the vendor becomes bankrupt, the Fund might be
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral.
INVESTMENT RESTRICTIONS
The investment objectives and the general investment policies and investment
techniques of the Fund are described in the Prospectus. The Fund has also
adopted certain investment restrictions limiting the following activities except
as specifically authorized:
The Fund may not:
1. Issue senior securities (including borrowing money for other than
temporary purposes) except in conformity with the limits set forth in the
1940 Act; or pledge its assets other than to secure such issuances or
borrowings or in connection with permitted investment strategies;
notwithstanding the foregoing, the Fund may borrow up to an additional 5% of
its total assets for temporary purposes;
4
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,
all in accordance with its investment policies;
6. Purchase preferred stock and debt securities rated below investment
grade and unrated securities of comparable quality, if, as a result, more
than 20% of the Fund's total assets would then be invested in such
securities;
7. Acquire or retain securities of any investment company, except that
the Fund may (a) acquire securities of investment companies up to the limits
permitted by Section 12(d)(1) of the 1940 Act, 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;
8. Invest in puts, calls, straddles, spreads or any combination
thereof;
9. Enter into short sales;
10. Invest in the securities of a non-U.S. issuer;
11. Invest in oil, gas or other mineral exploration programs,
development programs or leases, except that the Fund may purchase securities
of companies engaging in whole or in part in such activities;
12. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowings; or
13. Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities.
The investment restrictions numbered 1 through 7 in this SAI have been
adopted as fundamental policies of the Fund. Under the 1940 Act, a fundamental
policy may not be changed without the approval of a 'majority of the
outstanding' Common Shares, the AMPS and any other outstanding shares of
preferred stock voting together as a single class, and the holders of a
'majority of the outstanding' preferred shares voting as a separate class. When
used with respect to particular shares of the Fund, a 'majority of the
outstanding' means (1) 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
(2) more than 50% of the shares, whichever is less. Investment restrictions
numbered 8 through 13 above are non-fundamental and may be changed at any time
by vote of a majority of the Board of Directors.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance, the Fund's asset coverage with respect to
such preferred shares is at least 200%. The Fund's asset coverage with respect
to preferred shares is measured as the ratio that the Fund's total assets, less
liabilities and indebtedness not represented by senior securities, bears to the
aggregate amount of senior securities representing indebtedness of the Fund plus
the aggregate of the liquidation value of the Fund's outstanding preferred
shares (such ratio, 'Preferred Shares Asset Coverage'). 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 Fund's Preferred Shares
Asset Coverage is at least 200%. The Fund intends, to the extent possible, to
purchase or redeem the AMPS and any other outstanding shares of preferred stock
from time to time to the
5
extent necessary in order to maintain a Preferred Shares Asset Coverage of at
least 200%. If the Fund has AMPS and any other outstanding shares of preferred
stock, two of the Fund's Directors will be elected by the holders of the AMPS
and any other outstanding shares of preferred stock, voting separately as a
class. The remaining Directors of the Fund will be elected by holders of Common
Shares, AMPS and any other outstanding shares of preferred stock voting together
as a single class. In the event the Fund failed to pay dividends on the AMPS and
any other outstanding shares of preferred stock for two years, holders of the
AMPS and any other outstanding shares of preferred stock, voting together as a
single class 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 asset coverage related
to such borrowings is at least 300%. The Fund's asset coverage with respect to
indebtedness is the ratio that the Fund's total assets, less liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of senior securities representing indebtedness of the Fund (such ratio,
'Indebtedness Asset Coverage'). 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 Fund's Indebtedness Asset Coverage 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.
6
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreements with its Investment Manager, administrator, auction agent, custodian
and transfer agent. The management of the Fund's day-to-day operations is
delegated to its officers, the Investment Manager and the Fund's administrator,
subject always to the investment objectives and policies of the Fund and to the
general supervision of the Directors. As of November 8, 2004, the Directors and
officers as a group beneficially owned directly or indirectly less than 1% of
the outstanding shares of the Fund.
DIRECTORS AND OFFICERS
Basic information about the identity and experience of each Director and
officer is set forth in the charts below. Each such director and officer is also
a director or officer of Cohen & Steers Select Utility Fund, Inc., Cohen &
Steers REIT and Utility Income Fund, Inc., Cohen & Steers Advantage Income
Realty Fund, Inc., Cohen & Steers Premium Income Realty Fund, Inc., Cohen &
Steers REIT and Preferred Income Fund, Inc. and Cohen & Steers Total Return
Realty Fund, Inc., which are closed-end investment companies advised by the
Investment Manager, and Cohen & Steers Realty Income Fund, Inc., Cohen & Steers
Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen &
Steers Realty Focus Fund, Inc. and Cohen & Steers Utility Fund, Inc., which are
open-end investment companies advised by the Investment Manager.
PRINCIPAL NUMBER OF
OCCUPATION FUNDS WITHIN
DURING PAST FUND COMPLEX
5 YEARS OVERSEEN BY
(INCLUDING OTHER DIRECTOR
POSITION HELD TERM OF DIRECTORSHIPS (INCLUDING THE LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE HELD) FUND) TIME SERVED
--------------------- --------- ------ ----- ----- -----------
INTERESTED DIRECTORS
Robert H. Steers ........ Director, Chairman 2006 Co-Chairman and 12 Since
757 Third Avenue of the Board, and Co-Chief Inception
New York, New York Secretary Executive Officer
Age: 51 of Cohen & Steers
Capital
Management, Inc.,
the Fund's
Investment
Manager.
Martin Cohen *, ** ...... Director, 2007 Co-Chairman and 12 Since
757 Third Avenue President and Co-Chief Inception
New York, New York Treasurer Executive Officer
Age: 55 of Cohen & Steers
Capital
Management, Inc.,
the Fund's
Investment
Manager.
DISINTERESTED DIRECTORS
Bonnie Cohen ** ......... Director 2005 Consultant. Prior 12 Since
1824 Phelps Place, N.W. thereto, Inception
Washington, D.C. Undersecretary of
Age: 61 State, United
States Department
of State.
Director of
Wellsword Real
Properties, Inc.
George Grossman ......... Director 2006 Attorney-at-law. 12 Since
17 Elm Place Inception
Rye, New York
Age: 50
(table continued on next page)
7
(table continued from previous page)
PRINCIPAL NUMBER OF
OCCUPATION FUNDS WITHIN
DURING PAST FUND COMPLEX
5 YEARS OVERSEEN BY
(INCLUDING OTHER DIRECTOR
POSITION HELD TERM OF DIRECTORSHIPS (INCLUDING THE LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE HELD) FUND) TIME SERVED
--------------------- --------- ------ ----- ----- -----------
Richard E. Kroon ........ Director 2005 Board member of 12 Since
328 Newman Springs Rd. Finlay November
Red Bank, New Jersey Enterprises, Inc. 2004
Age: 62 (fine jewelry
retailer).
Formerly Chairman
and Managing
Partner of the
Sprout Group
Capital Fund, a
division of
Donald, Lufkin &
Jenrette
Securities
Corporation, and
former Chairman
of the National
Venture Capital
Association.
Richard J. Norman ....... Director 2007 Private Investor. 12 Since
7520 Hackamore Drive Prior thereto, Inception
Potomac, Maryland Investment
Age: 61 Representative of
Morgan Stanley
Dean Witter.
Frank K. Ross ........... Director 2007 Board member of 12 Since March
10130 Darmuid Green NCRIC Group, Inc. 2004
Drive (insurance) and
Potomac, Maryland Pepco Holdings,
Age: 61 Inc. (electric
utility).
Formerly,
Midatlantic Area
Managing Partner
for Audit and
Risk Advisory
Services at KPMG
LLP and Managing
Partner of its
Washington, DC
Office.
(table continued on next page)
8
(table continued from previous page)
PRINCIPAL NUMBER OF
OCCUPATION FUNDS WITHIN
DURING PAST FUND COMPLEX
5 YEARS OVERSEEN BY
(INCLUDING OTHER DIRECTOR
POSITION HELD TERM OF DIRECTORSHIPS (INCLUDING THE LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE HELD) FUND) TIME SERVED
--------------------- --------- ------ ----- ----- -----------
Willard H. Smith Director 2005 Board member of 12 Since
Jr.*'D' ................. Essex Property Inception
7231 Encelia Drive Trust Inc.,
La Jolla, California Highwoods
Age: 67 Properties, Inc.,
and Realty Income
Corporation and
Crest Net Lease,
Inc. Managing
Director at
Merrill Lynch &
Co., Equity
Capital Markets
Division from
1983 to 1995.
C. Edward Ward, Jr. ..... Director 2005 Formerly head of 12 Since
788 Columbus Avenue, Apt. closed-end fund November
7G listings for the 2004
New York, New York New York Stock
Age: 58 Exchange.
---------
* These Directors have been designated as preferred stock Directors
** Martin Cohen and Bonnie Cohen are unrelated
'D' Solely as a result of his ownership of securities of one of the
underwriters, Mr. Smith is technically an 'interested person' of the Fund
as defined in the 1940 Act until after completion of this offering of the
AMPS. After the completion of this offering, he will be a non-interested
Director.
The officers of the Fund, their addresses, their ages, and their principal
occupations for at least the past five years are set forth below.
POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------------ ------------------- --------------------------------------------
Joseph M. Harvey Vice President President of Cohen & Steers Capital
757 Third Avenue Management, Inc., the Fund's Investment
New York, New York Manager, since 2003. Prior thereto, he was
Age: 40 Senior Vice President and Director of
Investment Research of the Fund's Investment
Manager.
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. Prior
Age: 40 thereto, he was a Senior Vice President of
the Fund's Investment Manager.
Lawrence B. Stoller .......... Assistant Secretary Senior Vice President and General Counsel of
757 Third Avenue Cohen & Steers Capital Management, Inc., the
New York, New York Fund's Investment Manager, since 1999. Prior
Age: 40 to that, Associate General Counsel,
Neuberger Berman Management, Inc. (money
manager); and Assistant General Counsel, The
Dreyfus Corporation (money manager).
(table continued on next page)
9
(table continued from previous page)
POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------------ ------------------- --------------------------------------------
John E. McLean ............... Chief Compliance Vice President and Associate General Counsel
757 Third Avenue Officer of Cohen & Steers Capital Management since
New York, NY September 2003. Prior to that, Vice
Age: 33 President, Law & Regulation,
J. & W. Seligman & Co. Incorporated (money
manager); and Associate, Battle Fowler LLP
(law firm).
The following table provides information concerning the dollar range of the
Fund's equity securities owned by each Director and the aggregate dollar range
of securities owned in the Cohen & Steers Fund Complex is set forth below.
AGGREGATE DOLLAR
RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN THE
EQUITY SECURITIES IN COHEN & STEERS FUND
THE FUND AS OF COMPLEX AS OF
, 2004 , 2004
------ ------
Robert H. Steers........................................ Over $100,000 Over $100,000
Martin Cohen............................................ Over $100,000 Over $100,000
Bonnie Cohen............................................ $10,001 - $50,000 $50,001 - $100,000
Richard E. Kroon........................................ none none
George Grossman......................................... $10,001 - $50,000 $50,001 - $100,000
Richard J. Norman....................................... $10,001 - $50,000 Over $100,000
Frank K. Ross........................................... $10,001 - $50,000 $50,001 - $100,000
Willard H. Smith Jr..................................... none $10,001 - $50,000
C. Edward Ward, Jr...................................... none none
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. Solely as a result of his ownership of
securities of one of the underwriters, Mr. Smith is technically an 'interested
person' of the Fund as defined in the 1940 Act until after completion of this
offering of the AMPS. After the completion of this offering, he will be a
non-interested Director.
BOARD'S ROLE IN FUND GOVERNANCE
Committees. The Fund's Board of Directors has four standing committees of
the Board, the Audit Committee, the Nominating Committee, the Contract Review
Committee and the Governance Committee, each of which is composed of all of the
Directors who are not interested persons of the Fund, as defined in the 1940
Act. The members of the Committees are Ms. Cohen and Messrs. Grossman, Norman,
Kroon, Ross, Smith and Ward.
The function of the Audit Committee is to assist the Board of Directors in
its oversight of the Fund's financial reporting process. The Audit Committee met
three times during 2003. The functions of the Nominating Committee are to
identify individuals qualified to become members of the Board of Directors in
the event that a position is vacated or created, to select the director nominees
for any future meeting of stockholders and to set any necessary standards or
qualifications for service on the Board of Directors. The Nominating Committee
will consider nominees properly recommended by the Fund's shareholders.
Shareholders who wish to recommend a nominee should send nominations that
include, among other things, biographical data and the qualifications of the
proposed nominee to the Fund's Secretary. The Nominating Committee did not meet
during the fiscal year ended December 31, 2003.
The main functions of the Contract Review Committee are to make
recommendations to the Board of Directors after reviewing advisory and other
contracts that the Fund has with the
10
Investment Manager and to select third parties to provide evaluative reports and
other information regarding the services provided by the Investment Manager to
the Board. The Contract Review Committee was formed in 2004. The main function
of the Governance Committee is to assist the Board in the oversight of
appropriate and effective governance of the Fund. The Governance Committee will
oversee, among other things, the structure and composition of the Board
committees, the size of the Board and the compensation of independent directors
for service on the Board and any Board committee. The Governance Committee was
formed in 2004.
Approval of Investment Management Agreement. The Board of Directors,
including a majority of the Directors who are not parties to the Fund's
Investment Management Agreement, or interested persons of any such party
('Disinterested Directors') has the responsibility under the 1940 Act to approve
the Fund's Investment Management Agreement for its initial term and annually
thereafter at a meeting called for the purpose of voting on such matter. The
Investment Management Agreement was approved for an initial two-year term by the
Fund's Directors, including a majority of the Disinterested Directors, at their
meetings held on September 21, 2001 and the continuation was approved at a
meeting held on December 2, 2003.
In connection with the Board's consideration of the Investment Management
Agreement, the Board reviewed information reasonably necessary to evaluate the
terms of the Investment Management Agreement derived from a number of sources,
including materials provided by the Investment Manager and by the Directors'
independent counsel, and considered the following: (1) the level of the
management fees and expense ratio of the Fund as compared to competitive Funds
of a comparable size; (2) the nature and quality of the services to be rendered
by the Investment Manager; (3) benefits derived by the Investment Manager from
the relationship with the Fund, including not only the Investment Manager's
compensation for investment advisory services but also compensation paid to the
Investment Manager for administrative services; (4) the costs of providing
services to the Fund; and (5) the profitability of the Fund to the Investment
Manager. The Directors considered the fact that the Investment Manager agreed to
waive a portion of its investment management fee in the amount of .32% of the
Fund's average daily managed assets for the first five fiscal years of the
Fund's operations, and then declining amounts in years six through 10. The
Directors took note of the fact that the Fund's net investment management fee
compares favorably to the average investment management fee charged to
competitive funds of a comparable size. The Directors also noted that the
Investment Manager had agreed to pay from its own resources an additional
commission to the lead underwriter of the Fund's common stock offering at an
annual rate of .10% of the Fund's managed assets. They also considered the fact
that the Investment Manager agreed to pay all organizational expenses and
offering costs, other than the sales load, that exceeded $.03 per share in
connection with the Fund's common stock offering. The Directors then took into
consideration the benefits to be derived by the Investment Manager in connection
with the Investment Management Agreement, noting particularly the research and
related services, within the meaning of Section 28(e) of the Securities Exchange
Act of 1934, that the Investment Manager would be eligible to receive by
allocating the Fund's brokerage transactions.
In reviewing the nature and quality of services to be provided by the
Investment Manager, the Directors noted that, in addition to the investment
advisory services to be provided to the Fund, the Investment Manager also
provides administrative services, oversight of fund accounting, marketing
services, assistance in meeting legal and regulatory requirements and other
services necessary for the operation of the Fund. In addition, the Directors,
based on their experience as directors of other investment companies managed by
the Investment Manager, also focused on the anticipated role of senior
management in the day-to-day operations of the Fund and on the quality of the
compliance and administrative staff at the Investment Manager. The Directors
also focused on appropriate performance measurements of the Investment Manager,
including the past performance of the Investment Manager with respect to this
Fund and other funds invested in the same or similar asset classes. Moreover,
the Directors noted the Investment Manager's ability to attract quality and
experienced personnel to manage the Fund and its continuing efforts to expand
its capabilities.
11
In considering the fees and expenses of the Fund in comparison to the fees
and expenses of funds with similar characteristics, the Directors reviewed
information with respect to fees and expenses of other comparable funds within
this competitive universe.
Based on the foregoing and such other matters as were deemed relevant, the
Directors, including a majority of the Disinterested Directors, who were advised
by separate independent legal counsel throughout the process, concluded that the
management fee rate was reasonable and fair and in the best interests of the
Fund and its shareholders in relation to the services to be rendered and fees
and expenses of competitive funds of a comparable size and approved the
continuation of the Investment Management Agreement, including the fees payable
thereunder. The Disinterested Directors were represented by independent counsel
in their deliberations.
COMPENSATION OF DIRECTORS
Directors of the Fund who are not interested persons of the Fund are paid an
annual retainer of $4,500 and a fee of $500 for each regular meeting attended
and are reimbursed for the expenses of attendance at such meetings and, for the
fiscal year ended December 31, 2003, such fees and expenses paid by the Fund
totaled $42,312.
The following table sets forth information regarding compensation of
Directors by the Fund and by the fund complex of which the Fund is a part for
the fiscal year ended December 31, 2003. 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. In the column headed 'Total Compensation to Directors by Fund Complex,'
the compensation paid to each Director represents the nine funds that each
Director served in the fund complex during 2003. The Directors do not receive
any pension or retirement benefits from the fund complex.
COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 2003*
TOTAL
AGGREGATE COMPENSATION
COMPENSATION PAID TO
FROM DIRECTORS BY
NAME OF PERSON, POSITION REGISTRANT FUND COMPLEX
------------------------ ---------- ------------
Gregory C. Clark****, Director.............................. $7,250 $61,500
Bonnie Cohen**, Director.................................... $7,250 $61,500
Martin Cohen***, Director and President..................... $ 0 $ 0
George Grossman**, Director................................. $7,250 $61,500
Richard E. Kroon*,**, Director.............................. $ 0 $ 0
Richard J. Norman**, Director............................... $7,250 $61,500
Frank K. Ross*,............................................. $ 0 $ 0
Willard H. Smith Jr.***,'D', Director....................... $7,250 $61,500
Robert H. Steers***, Director and Chairman.................. $ 0 $ 0
C. Edward Ward, Jr.*,**, Director........................... $ 0 $ 0
---------
* Frank K. Ross was elected as a Director by the Fund's Board of Directors
effective March 5, 2004. Each of Richard E. Kroon and C. Edward Ward, Jr.
was elected as a Director by the Fund's Board of Directors effective
November 3, 2004. Therefore, none of these individuals received any
compensation during the fiscal year ended December 31, 2003.
** Member of the Audit Committee, Nominating Committee, Contract Review
Committee and Governance Committee.
*** 'Interested person,' as defined in the Act, of the Fund because of the
affiliation with Cohen & Steers Capital Management, Inc., the Fund's
investment manager.
**** Effective June 3, 2004, Mr. Clark resigned as a Director.
'D' Solely as a result of his ownership of securities of one of the
underwriters, Mr. Smith is technically an 'interested person' of the Fund
as defined in the 1940 Act until after completion of this offering of the
AMPS. After the completion of this offering, he will be a non-interested
director, and will become a member of the Audit Committee at such time.
12
PRINCIPAL STOCKHOLDERS
To the knowledge of the Fund, as of November 8, 2004, no current Director of
the Fund owned 1% or more of the outstanding Common Shares, and the officers and
Directors of the Fund owned, as a group, less than 1% of the Common Shares and
no AMPS.
As of November 8, 2004, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares. As of November 8,
2004, Cede & Co. c/o Depository Trust Company, Box 20, New York, New York was
the record owner of 99.68% of the outstanding Common Shares.
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT MANAGER
Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, is the Investment Manager to the Fund. The
Investment Manager, a registered investment adviser, was formed in 1986 and is a
wholly owned subsidiary of Cohen & Steers, Inc., a publicly traded company whose
common stock is listed on the New York Stock Exchange under the symbol 'CNS.'
Its current clients include pension plans of leading corporations, endowment
funds and mutual funds, including the Fund, Cohen & Steers Select Utility Fund,
Inc., Cohen & Steers REIT and Utility Income Fund, Inc., Cohen & Steers
Advantage Income Realty Fund, Inc., Cohen & Steers Premium Income Realty Fund,
Inc., Cohen & Steers REIT and Preferred Income Fund, Inc. and Cohen & Steers
Total Return Realty Fund, Inc., which are closed-end investment companies, and
Cohen & Steers Realty Income Fund, Inc., Cohen & Steers Institutional Realty
Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen & Steers Realty Focus
Fund, Inc. and Cohen & Steers Utility Fund, Inc., which are open-end investment
companies. The Investment Manager is a wholly owned subsidiary of Cohen &
Steers, Inc., a publicly traded company whose common stock is listed on the New
York Stock Exchange under the symbol 'CNS.'
Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Directors of the Fund.
Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of .85% of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares including the liquidation preference on the AMPS and the
Series T, Series W, Series TH, Series F and Series M28 AMPS, plus the principal
amount of any borrowings used for leverage) of the Fund. The Investment Manager
has contractually agreed to waive its investment management fees in the amount
of .32% of average daily managed assets for the first five fiscal years of the
Fund's operations, .26% of average daily managed assets in year six, .20% of
average daily managed assets in year seven, .14% of average daily managed assets
in year eight, .08% of average daily managed assets in year nine and .02% of
average daily managed assets in year ten. For the fiscal years ended
December 31, 2002 and December 31, 2003, the Fund incurred management fees of
$5,597,395 and $7,499,290, respectively, and the Investment Manager waived
management fees of $2,107,254 and $2,823,262, respectively.
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.
13
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 stockholders 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 stockholders; (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 Fund, including the
Custodian, Transfer Agent and printers; (viii) providing trading desk facilities
for the Fund; (ix) supervising compliance by the Fund with record-keeping
requirements under the 1940 Act and regulations thereunder, maintaining books
and records for the Fund (other than those maintained by the Custodian and
Transfer Agent) and preparing and filing of tax reports other than the Fund's
income tax returns; and (x) providing executive, clerical and secretarial help
needed to carry out these responsibilities. Under the Administration Agreement,
the Fund pays the Investment Manager an amount equal to, on an annual basis,
.02% of the Fund's managed assets.
In accordance with the terms of the Administration Agreement and with the
approval of the Fund's Board of Directors, the Investment Manager has caused the
Fund to retain State Street Bank and Trust Company ('State Street Bank') as
sub-administrator under a fund accounting and administration agreement (the
'Sub-Administration Agreement'). Under the Sub-Administration Agreement, State
Street Bank has assumed responsibility for performing certain of the foregoing
administrative functions, including (i) determining the Fund's net asset value
and preparing these figures for publication; (ii) maintaining certain of the
Fund's books and records that are not maintained by the Investment Manager,
custodian or transfer agent; (iii) preparing financial information for the
Fund's income tax returns, proxy statements, stockholders reports, and
Securities and Exchange Commission's filings; and (iv) responding to stockholder
inquiries.
Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank is computed on the basis of the managed assets
(which equals the net asset value of the Common Shares, including the
liquidation preference on the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS, plus the principal amount of any borrowings used
for leverage) in the Fund at an annual rate equal to .04% of the first $200
million in assets, .03% of the next $200 million, and .015% 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 administration fee. For the
fiscal years ended December 31, 2002 and December 31, 2003, the Fund paid
$131,703 and $176,454, respectively, in administration fees to the Investment
Manager.
The Investment Manager remains responsible for monitoring and overseeing the
performance by State Street Bank, and EquiServe Trust Company, NA as custodian
and transfer and disbursing agent, of their obligations to the Fund under their
respective agreements with the Fund, subject to the overall authority of the
Fund's Board of Directors.
14
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
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 for the Fund's Common Shares. 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. The Depository
Trust Company ('DTC') will act as securities depository for the AMPS. The Bank
of New York, whose principal place of business is 101 Barclay Street, Floor 7W,
New York, New York 10286, will act as auction agent, transfer agent, dividend
paying agent and registrar for the AMPS.
CODE OF ETHICS
The Fund and the Investment Manager have adopted codes of ethics in
compliance with Rule 17j-1 under the 1940 Act. The codes of ethics of the Fund
and the Investment Manager, among other things, prohibit management personnel
from investing in REITs and real estate securities, prohibit purchases in an
initial public offering and require pre-approval for investments in any Cohen &
Steers closed-end fund and 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 stockholders and to
safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information the Fund collects, how
we protect that information, and why in certain cases we may share this
information with others.
The Fund does not receive any nonpublic personal information relating to the
stockholders who purchase shares through an intermediary that acts as the record
owner of the shares. In the case of stockholders who are record owners of the
Fund, we receive nonpublic personal information on account applications or other
forms. With respect to these stockholders, 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
stockholders or former stockholders to anyone, except as permitted by law or as
is necessary to service stockholder accounts. The Fund restricts access to
nonpublic personal information about its stockholders 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 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 stockholders. Although accountability can be
promoted in a variety of ways, protecting stockholder voting rights may be
among our most important tools.
15
B. Rationalizing Management and Stockholder 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 stockholders. In this respect,
compensation must be structured to reward the creation of stockholder value.
C. Stockholder Communication. Since companies are owned by their
stockholders, 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 stockholders 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
stockholders 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 stockholder 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 stockholder value.
Stockholder 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 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
16
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 stockholders.
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 stockholders. 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 stockholder 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 stockholder
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 stockholder 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, the Investment Manager supports
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 believes 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.
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 stockholder 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:
Stockholder Rights Plans. The Investment Manager acknowledges that there
are arguments for and against stockholder rights plans, also known as
'poison pills.' Companies should put
17
their case for rights plans to stockholders. The Investment Manager
generally votes against any directors who, without stockholder 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 stockholders should be free to consider. The
Investment Manager generally withholds votes at the next stockholder 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 stockholders 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
stockholders 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 stockholder proposals to declassify a board of
directors unless a company's charter or governing corporate law allows
stockholders, by written consent, to remove a majority of directors at any time,
with or without cause.
Barriers to Stockholder Action. The Investment Manager votes to support
proposals that lower the barriers to stockholder action. This includes the right
of stockholders to call a meeting and the right of stockholders 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 stockholders' 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 the Investment Manager to vote against the approval of
the recommended auditor. For example, the Investment Manager's general policy is
to
18
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 stockholder proposals
restoring limited preemptive rights.
Dual Class Capitalizations. Because classes of common stock with unequal
voting rights limit the rights of certain stockholders, 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
stockholders 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
stockholders, 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 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
19
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
Stockholder meeting date
Brief identification of each matter voted upon
Whether the matter was proposed by management or a stockholder
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 stockholders. 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.
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
stockholder. 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.
20
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
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 decision is made and how the
proxy is voted).
The Fund is required to file Form N-PX, with its complete proxy voting
record for the 12 months ended June 30th, no later than August 31st of each
year. The Fund's Form N-PX filing for the twelve months ended June 30, 2004 is
available (i) without charge, upon request, by calling the
21
Fund toll-free at (800) 437-9912 and (ii) on the Securities and Exchange
Commission's website (http://www.sec.gov).
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Directors, decisions to buy and sell
securities for the Fund and negotiation of its brokerage commission rates are
made by the Investment Manager. Transactions on U.S. stock exchanges involve the
payment by the Fund of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, the Investment
Manager will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the Directors may
determine, the Investment Manager shall not be deemed to have acted unlawfully
or to have breached any duty solely by reason of its having caused the Fund to
pay a broker that provides research services to the Investment Manager an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, if the Investment Manager determines in good faith that such amount
of commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
the Investment Manager's ongoing responsibilities with respect to the Fund.
Research and investment information is provided by these and other brokers at no
cost to the Investment Manager and is available for the benefit of other
accounts advised by the Investment Manager and its affiliates, and not all of
the information will be used in connection with the Fund. While this information
may be useful in varying degrees and may tend to reduce the Investment Manager's
expenses, it is not possible to estimate its value and in the opinion of the
Investment Manager it does not reduce the Investment Manager's expenses in a
determinable amount. The extent to which the Investment Manager makes use of
statistical, research and other services furnished by brokers is considered by
the Investment Manager in the allocation of brokerage business but there is no
formula by which such business is allocated. The Investment Manager does so in
accordance with its judgment of the best interests of the Fund and its
stockholders. The Investment Manager may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the
Fund for services provided to it for which it would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Investment Manager may consider sales of shares of
the Fund as a factor in the selection of brokers and dealers to enter into
portfolio transactions with the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund determines the net asset value of its Common Shares daily, as of
the close of trading on the New York Stock Exchange (currently 4:00 p.m. New
York time). Net asset value is computed by dividing the value of all assets of
the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses, the liquidation preference of the AMPS and the
Series T, Series W, Series TH, Series F and Series M28 AMPS, and dividends
declared but unpaid), by the total number of Common Shares outstanding. Any swap
transaction that the Fund enters into may, depending on the applicable interest
rate environment, have a positive or negative value for purposes of calculating
net asset value. Any cap transaction that the Fund enters into may, depending on
the applicable interest rate environment, have no value or a positive value. In
22
addition, accrued payments to the Fund under such transactions will be assets of
the Fund and accrued payments by the Fund will be liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the 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.
Any securities for which market quotations are not readily available shall
be valued in accordance with procedures approved by the Board of Directors.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS
GENERAL
Securities Depository. The Depository Trust Company ('DTC') will act as the
Securities Depository with respect to the AMPS. One certificate for all of the
AMPS will be registered in the name of Cede & Co., as nominee of the Securities
Depository. Such certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of shares
of the AMPS contained in the Articles Supplementary. The Fund will also issue
stop-transfer instructions to the transfer agent for the AMPS. Prior to the
commencement of the right of holders of the AMPS (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS) to elect a majority of the Fund's
Directors, as described under 'Description of the AMPS -- Voting Rights' in the
Prospectus, Cede & Co. will be the holder of record of the AMPS and owners of
such shares will not be entitled to receive certificates representing their
ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in shares of the AMPS, whether for its
own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The auction agent will act as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its part,
the auction agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
the auction agency agreement between the Fund and the auction agent and will
23
not be liable for any error of judgment made in good faith unless the auction
agent was grossly negligent in ascertaining the pertinent facts.
The auction agent may conclusively rely upon, as evidence of the identities
of the holders of the AMPS, the auction agent's registry of holders, and the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under 'The
Auction-Secondary Market Trading and Transfers of the AMPS' in the Prospectus
and notices from the Fund. The auction agent is not required to accept any such
notice for an auction unless it is received by the auction agent by 3:00 p.m.,
New York City time, on the business day preceding such Auction.
The auction agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 45 days after such notice. If
the auction agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.
BROKER-DEALERS
The auction agent after each auction for the AMPS will pay to each
Broker-Dealer, from funds provided by the Trust, a service charge at the annual
rate of 1/4 of 1% in the case of any auction immediately preceding the dividend
period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealer in the case of any auction immediately preceding a dividend period
of one year or longer, of the purchase price of the AMPS placed by such Broker-
Dealer at such auction. For the purposes of the preceding sentence, the AMPS
will be placed by a Broker-Dealer if such shares were (a) the subject of hold
orders deemed to have been submitted to the auction agent by the Broker-Dealer
and were acquired by such Broker-Dealer for its customers who are beneficial
owners or (b) the subject of an order submitted by such Broker-Dealer that is
(i) a submitted bid of an existing holder that resulted in the existing holder
continuing to hold such shares as a result of the auction or (ii) a submitted
bid of a potential bidder that resulted in the potential holder purchasing such
shares as a result of the auction or (iii) a valid hold order.
The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account, unless
the Trust notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.
S&P AND MOODY'S GUIDELINES
The descriptions of the S&P and Moody's Guidelines contained in this SAI do
not purport to be complete and are subject to and qualified in their entireties
by reference to the Articles Supplementary. A copy of the Articles Supplementary
is filed as an exhibit to the registration statement of which the Prospectus and
this SAI are a part and may be inspected, and copies thereof may be obtained, as
described under 'Further Information' in the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred to
herein as the 'Rating Agency Guidelines') established by S&P and Moody's in
connection with the Fund's receipt of a rating of 'AAA' and 'Aaa' from S&P and
Moody's, respectively, for the AMPS. These Rating Agency Guidelines relate,
among other things, to industry and credit quality characteristics of issuers
and diversification requirements and specify various Discount Factors for
different types of
24
securities (with the level of discount greater as the rating of a security
becomes lower). Under the Rating Agency Guidelines, certain types of securities
in which the Fund may otherwise invest consistent with its investment strategy
are not eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio. Such instruments include, for example, private placements
(other than Rule 144A Securities) and other securities not within the investment
guidelines. Accordingly, although the Fund reserves the right to invest in such
securities to the extent set forth herein, they have not and it is anticipated
that they will not constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS) plus specified liabilities,
payment obligations and other amounts, as of periodic Valuation Dates. The
Rating Agency Guidelines also require the Fund to maintain asset coverage for
the AMPS (and the Series T, Series W, Series TH, Series F and Series M28 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 dividend requirements. An S&P or Moody's
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful. As described by Moody's, an
issue of preferred stock which is rated 'Aaa' is considered to be top-quality
preferred stock with good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
Ratings are not recommendations to purchase, hold or sell AMPS, inasmuch as
the rating does not comment as to market price or suitability for a particular
investor. The rating is based on current information furnished to S&P and
Moody's by the Fund and obtained by S&P and Moody's from other sources. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information.
25
S&P GUIDELINES
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Shares
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the Discounted Value of the Fund's portfolio, and,
among the requirements, the amount of such assets included in the portfolio at
any time, if any, may vary depending upon the credit quality (and related
Discounted Value) of the Fund's eligible assets at such time.
The Preferred Shares Basic Maintenance Amount includes the sum of
(1) $25,000 times the number of AMPS (and the Series T, Series W, Series TH,
Series F and Series M28 AMPS) then outstanding and (2) certain accrued and
projected payment obligations of the Fund. Upon any failure to maintain the
required Discounted Value, the Fund would seek to alter the composition of its
portfolio to reestablish required asset coverage within the specified ten
Business Day cure period, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, the holders of the AMPS
will acquire certain rights. See 'Description of AMPS -- Asset Maintenance.'
'Business Day,' as used in the Prospectus and this SAI, means each Monday,
Tuesday, Wednesday, Thursday and Friday that is a day on which the New York
Stock Exchange is open for trading and that is not a day on which banks in New
York City are authorized or required by law or executive order to close.
Under S&P guidelines, for purposes of determining the Discounted Value of
any S&P Eligible Asset, the percentage determined as follows:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
Minimum Number Of:
Issuers(1)...................................... 44 40 44 30
Real Estate Industry/Property Sectors(2)........ 10 8 7 7
Percent of Assets in:
Largest Real Estate Industry/Property Sector.... 17% 25% 30% 30%
2nd Largest Real Estate Industry/Property
Sector........................................ 15% 20% 25% 25%
3rd Largest Real Estate Industry/Property
Sector........................................ 12% 15% 15% 15%
4th Largest Real Estate Industry/Property
Sector........................................ 12% 12% 12% 12%
S&P Discount Factor:
common stock.................................... 190% 208% 223% 231%
preferred stock(3).............................. 157% 167% 174% 178%
---------
(1) Three issuers may each constitute 6% of assets and four issuers may each
constitute 5% of assets.
(2) As defined by the National Association of Real Estate Investment Trusts
('NAREIT').
(3) Applies to preferred stock of real estate companies, subject to
diversification guidelines whereby at least 34% of the preferred assets are
rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
Moody's equivalent) or greater; and the balance of the preferred assets is
rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
common stock will apply to preferred stock which is not in compliance with
the diversification standard.
26
(b) Debt Securities:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
Bond Rating(1):
A............................................... 116% 117% 119% 118%
A-.............................................. 117% 119% 120% 120%
BBB+............................................ 119% 121% 122% 122%
BBB............................................. 121% 122% 124% 124%
BBB-............................................ 122% 124% 126% 126%
BB+............................................. 127% 130% 133% 132%
BB.............................................. 133% 137% 141% 139%
BB-............................................. 139% 144% 149% 147%
B+.............................................. 152% 159% 166% 164%
B............................................... 163% 172% 182% 179%
B-.............................................. 176% 188% 202% 197%
CCC+............................................ 198% 212% 230% 224%
CCC............................................. 236% 262% 295% 284%
---------
(1) The S&P Discount Factors for debt securities shall also be applied to any
interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) If a security is unrated by S&P but is rated by Moody's, the conversion
chart under S&P OC Test Rating chart will apply.
S&P's Diversification Standard Levels 1 through 4 correspond to the portfolio's
diversification and impact the level of asset coverage needed to qualify for a
particular rating from S&P. The diversification of the Fund is measured by the
number of issuers and REIT sub-sectors within the Fund's portfolio. A high
number of issuers and sub-sectors corresponds to a more diversified Fund. The
more diversified the Fund is, the lower the asset coverage needed to qualify for
a particular S&P rating. The Fund must fall within Level 4, at a minimum, to
qualify for the AAA rating and, accordingly, must have a minimum number of
issuers and property sub-sectors in its portfolio.
(c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:
52-week Treasury Bills*..................................... 102%
Two-Year Treasury Notes..................................... 104%
Three-Year Treasury Notes................................... 108%
Five-Year Treasury Notes.................................... 109%
10-Year Treasury Notes...................................... 115%
30-Year Treasury Bonds...................................... 126%
---------
* Treasury Bills with maturities of less than 52 weeks will be discounted at the
appropriate Short-Term Money Market Instrument levels. Treasury Bills that
mature the next day are considered cash equivalents and are valued at 100%.
Treasury Strips: Treasury interest-only Strips will apply the discount
factor for the Treasury category set forth above following the maturity of the
Treasury Strip, e.g., a Treasury interest-only Strip with a maturity of seven
years will apply the discount factor for the U.S. Treasury securities with a
10-year maturity. Treasury principal-only Strips will apply the discount factor
that is two categories greater than its maturity, e.g., a Treasury
principal-only Strip with a maturity of seven years will apply the discount
factor for U.S. Treasury securities with a 30-year maturity.
(d) Cash and Cash Equivalents.
The S&P Discount Factor applied to Cash and Cash Equivalents will be (A)
100%, and (B) 102% for those portfolio securities which mature in 181 to 360
calendar days.
Under current S&P guidelines, the following are considered to be S&P
Eligible Assets:
(a) Common Stock, Preferred Stock and any debt securities of REITs and
Real Estate Companies;
27
(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 and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS)
originally issued. The interest rate swap transaction will be marked-to-
market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);
(d) Short-Term Money Market Instruments so long as (A) such securities
are issued by an institution, which, at the time of investment, is a
permitted bank (including commercial paper issued by a corporation which
complies with the applicable assumptions that follow) ('permitted bank'
means any bank, domestic or foreign, whose commercial paper is rated
A-1+) provided, however, that Short-Term Money Market Instruments with
maturities of 30 days of less, invested in an institution rated A-1 may
comprise up to 20% of eligible portfolio assets; and
(e) Cash, which is any immediately available funds in U.S. dollars or
any currency other than U.S. dollars which is a freely convertible currency
and Cash Equivalents, which means investments (other than Cash) that are one
or more of the following obligations or Securities: (i) U.S. Government
Securities; (ii) certificates of deposit of, banker's acceptances issued by
or money market accounts in any depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof and subject to supervision and examination by Federal and/or state
banking authorities, so long as the deposits offered by such depository
institution or trust company at the time of such investments are rated and
have a rating of at least 'P-1' by Moody's and 'A-1+' by S&P (or, in the
case of the principal depository institution in a holding company system
whose deposits are not so rated, the long term debt obligations of such
holding company are rated and such rating is at least 'A-1' by Moody's and
'A+' by S&P); (iii) commercial paper issued by any depository institution or
trust company incorporated under the laws of the United States of America or
any state thereof and subject to supervision and examination by Federal
and/or state banking authorities, or any corporation incorporated under the
laws of the United States of America or any state thereof, so long as the
commercial paper of such issuer is rated and has at the time of such
investment a short term rating of at least 'P-1' by Moody's and 'A-1+' by
S&P on its commercial paper; (iv) securities bearing interest or sold at a
discount issued by any corporation incorporated under the laws of the United
States of America or any state thereof the obligations of which at the time
of such investment are rated and that have a credit rating of at least 'P-1'
by Moody's and 'A-1+' by S&P either at the time of such investment or the
making of a contractual commitment providing for such investment;
(v) shares of any money market fund organized under the laws of a
jurisdiction other than the United States, so long as such money market fund
is rated and has at the time of such investment a short-term rating of at
least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and ownership of such
investments will not cause the issuer to become engaged in a trade or
business within the United States for U.S. Federal income tax purposes or
subject the issuer to tax on a net income basis; and (vi) unleveraged
overnight repurchase obligations on customary terms with respect to
investments described in clauses (i) through (iv) above entered into a
depository institution, trust company or corporation that has a short-term
rating of at least 'A-1+' by S&P; provided, that (i) in no event shall Cash
Equivalents include any obligation that provides for payment of interest
alone; (ii) Cash Equivalents referred to in clauses (ii) and (iii) above
shall mature within 183 days of issuance; (iii) if either Moody's or S&P
changes its rating system, then any ratings included in this definition
shall be deemed to be an equivalent rating in a successor rating category of
Moody's or S&P, as the case may be; (iv) if either Moody's or S&P is not in
the business of rating securities, then any ratings included in this
definition shall be deemed to be an equivalent rating from another Rating
Agency; (v) Cash Equivalents (other than U.S. Government Securities or money
market funds maintained by the Custodian)
28
shall not include any such investment of more than $100 million in any
single issuer; and (vi) in no event shall Cash Equivalents include any
obligation that is not denominated in Dollars, any synthetic securities, any
Securities with ratings containing an 'r' subscript, any IOs or any POs
(other than commercial paper with a maturity within 183 days of issuance).
MOODY'S GUIDELINES
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ('Moody's Eligible Assets')
must be discounted by certain discount factors set forth below ('Moody's
Discount Factors'). The Discounted Value of a portfolio security under Moody's
guidelines is the Market Value thereof, determined as specified by Moody's,
divided by the Moody's Discount Factor. The Moody's Discount Factor with respect
to securities other than those described below will be the percentage provided
in writing by Moody's.
The following Discount Factors apply to portfolio holdings as described
below, subject to diversification, issuer size and other requirements, in order
to constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common Stock of REITs....................................... 154%
Preferred Stock of REITs
with Senior Implied Moody's (or S&P) rating:............ 154%
without Senior Implied Moody's (or S&P) rating:......... 208%
Preferred Stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P) rating:............ 208%
without Senior Implied Moody's (or S&P) rating:......... 250%
---------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed 30%
of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
Assets.
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is below $500
million.
(b) Debt Securities of REITs and Other Real Estate Companies:
TERMS OF
MATURITY OF
NON-INVESTMENT
GRADE BONDS Aaa Aa A Baa Ba B NR(1)
----------- --- -- - --- -- - -----
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) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the corporation's or municipal
issuer'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 or
(footnote continued on next page)
29
(footnote continued from previous page)
municipal 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 the Corporate or
Municipal Debt Tables. 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. Split rated
securities assigned by S&P and Fitch will be accepted at the lower of the
two ratings.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 115%
3 years or less (but longer than 2 years) 118% 121%
4 years or less (but longer than 3 years) 123% 128%
5 years or less (but longer than 4 years) 128% 135%
7 years or less (but longer than 5 years) 135% 147%
10 years or less (but longer than 7 years) 141% 163%
15 years or less (but longer than 10 years) 146% 191%
20 years or less (but longer than 15 years) 154% 218%
30 years or less (but longer than 20 years) 154% 244%
(d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P or Fitch and
mature or have a demand feature at par exercisable within 49 days of the
relevant valuation date. A Moody's Discount Factor of 100% will be applied to
cash.
Under current Moody's guidelines, the following are considered to be Moody's
Eligible Assets:
(a) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies. (i) Common stock of REITs and preferred
stock and any debt security of REITs and Other Real Estate Companies: (A)
which comprise at least 7 of the 14 Moody's Real Estate Industry/Property
Sector Classifications ('Moody's Sector Classifications') listed below
and of which no more than 35% may constitute a single such
classification; (B) which in the aggregate constitute at least 40
separate 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 7.0% of the Market Value of Moody's
Eligible Assets, and (D) issued by a single issuer which, with respect to
50% of the Market Value of Moody's Eligible Assets, constitute in the
aggregate no more than 5% of Market Value of Moody's Eligible Assets; and
(ii) Unrated debt securities issued by an issuer which: (A) has not
filed for bankruptcy within the past three years; (B) is current on all
principal and interest on its fixed income obligations; (C) is current on
all preferred stock dividends; (D) possesses a current, unqualified
auditor's report without qualified, explanatory language and (E) in the
aggregate do not exceed 10% of the discounted Moody's Eligible Assets;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the
swap transaction has a short-term rating of not less than P-1 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; (ii) the original aggregate notional
amount of the interest rate swap transaction or transactions is not to be
greater than the liquidation preference of the AMPS (and the Series T,
Series W, Series TH,
30
Series F and Series M28 AMPS) originally issued; (iii) the interest rate
swap transaction will be marked-to-market daily; (iv) 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 (v) 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;
(c) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(d) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2, or (C) in all other cases, the supporting entity (1) is rated
A2 and the security matures within one month, (2) is rated A1 and the
security matures within three months or (3) is rated at least Aa3 and the
security matures within six months; provided, however, that for purposes
of this definition, such instruments (other than commercial paper rated
by S&P and not rated by Moody's) need not meet any otherwise applicable
Moody's rating criteria; and
(e) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within 49 days of the relevant valuation date) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades which
generated such receivables are (A) settled through clearing house firms
with respect to which the Fund has received prior written authorization
from Moody's or (B) (1) with counterparties having a Moody's long-term
debt rating of at least Baa3 or (2) with counterparties having a Moody's
Short-Term Money Market Instrument rating of at least P-1.
See the Articles Supplementary of the Fund for further detail on the above
Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.
The foregoing Rating Agency Guidelines are subject to change from time to
time. The Fund may, but it is not required to, adopt any such change. Nationally
recognized rating agencies other than S&P and Moody's may also from time to time
rate the AMPS; any nationally recognized rating agency providing a rating for
the AMPS may, at any time, change or withdraw any such rating.
U.S. FEDERAL TAXATION
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Fund and its stockholders. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its
stockholders, and the following discussion is not intended as a substitute for
careful tax planning. Stockholders 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 has elected to be taxed as, and intends 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 stockholders, 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
31
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. The American Jobs Creation Act of 2004 (the 'Act'), which
the President recently signed into law, provides that for taxable years of a
regulated investment company beginning after October 22, 2004, net income
derived from an interest in a 'qualified publicly traded partnership,' as
defined in the Code, will be treated as qualifying income for purposes of the
90% gross income requirement described above. In addition, for the purposes of
the diversification requirements described above, the outstanding voting
securities of any issuer includes the equity securities of a qualified publicly
traded partnership, and no more than 25% of the value of a regulated investment
company's total assets may be invested in the securities of one or more
qualified publicly traded partnerships. The Act also provides that the separate
treatment for publicly traded partnerships under the passive loss rules of the
Code applies to a regulated investment company holding an interest in a
qualified publicly traded partnership, with respect to items attributable to
such interest.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund will be required (i) to suspend distributions to holders of Common
Shares, and (ii) under certain circumstances to partially redeem the AMPS in
order to maintain or restore the requisite asset coverage, either of which could
prevent the Fund from making distributions required to qualify as a regulated
investment company for U.S. federal income tax purposes and to avoid the excise
taxes discussed below. Depending on the size of the Fund's assets relative to
its outstanding senior securities, redemption under certain circumstances of the
AMPS might restore asset coverage. If asset coverage were restored, the Fund
would again be able to pay dividends and depending on the circumstances, could
requalify or avoid disqualification as a regulated investment company and avoid
the excise taxes discussed below.
If for any taxable year the Fund does not qualify as a regulated investment
company or satisfy the Distribution Requirement, all of its taxable income
(including its net capital gain) will be subject to U.S. federal income tax at
regular corporate rates without any deduction for distributions to stockholders,
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 dividends received deduction in the case
of corporate stockholders and (ii) for treatment as qualified dividend income in
the case of individual stockholders.
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
32
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 stockholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received. To prevent the application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar
year distribution requirement.
DISTRIBUTIONS
Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the AMPS at any time in the future, the Fund believes that
under present law the AMPS will constitute stock of the Fund and distributions
with respect to the AMPS (other than distributions in redemption of the AMPS
that are treated as exchanges of stock under Section 302(b) of the Code) thus
will constitute dividends to the extent of the Fund's current or accumulated
earnings and profits as calculated for U.S. federal income tax purposes. Such
dividends generally will be taxable as ordinary income to holders (other than
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 stockholders, if properly designated,
may qualify for the dividends received deduction. 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 by both the Fund and
the stockholder. The Fund does not expect a significant portion of Fund
distributions to be eligible for the dividends received deduction 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 AMPS represents equity. The following discussion
assumes such treatment will apply. It is possible, however, that the IRS might
take a contrary position asserting, for example, that the AMPS constitute debt
of the Fund. If this position were upheld, the discussion of the treatment of
distributions above would not apply. Instead, distributions by the Fund to
holders of AMPS would constitute interest, whether or not such distributions
exceeded the earnings and profits of the Fund, would be included in full in
the income of the recipient, would be taxed as ordinary income and none of
the distributions would be treated as capital gain dividends or as qualified
dividend income.
The Fund may either retain or distribute to stockholders 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 stockholders at long-term
capital gains rates regardless of the length of time the stockholders 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
stockholders. As a result, each stockholder 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 stockholder's
33
tax basis in his or her shares; any such return of capital distributions in
excess of the stockholder's tax basis will be treated as gain from the sale of
his or her shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund. If the NAV at the time a stockholder purchases
shares of the Fund reflects undistributed income or gain, distributions of such
amounts will be taxable to the stockholder in the manner described above, even
though such distributions economically constitute a return of capital to the
stockholder.
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 dividends received deduction, qualified dividend income,
interest-related dividends and short-term capital gain dividends) 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 dividends
received deduction, dividends derived from qualified dividend income,
interest-related dividends and short-term capital gain dividends, if any,
between its Common Shares, the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 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 AMPS and the Series T, Series W, Series TH, Series F and
Series M28 AMPS. Since the Fund's current and accumulated earnings and profits
will first be used to pay dividends on the AMPS (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS) distributions in excess of such
earnings and profits, if any, will be made disproportionately to holders of
Common Shares.
SALE OF SHARES
A stockholder 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 stockholder'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 stockholder's holding period for the shares. Generally, a
stockholder'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
stockholder (or amounts credited to the stockholder 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. The ability to otherwise deduct capital losses may be subject
to other limitations under the Code.
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, (vi) adversely alter the characterization of
certain complex financial transactions and (vii) produce income that will not
qualify as good income under the 90% annual gross income test described above.
The Fund will monitor its transactions and may make certain tax elections in
order to mitigate the effect of these provisions.
34
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 stockholders.
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 stockholders of the regulated investment company in
proportion to the dividends received by such stockholders, with the same
consequences as if the stockholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to stockholders (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 stockholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
'disqualified organization' (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest U.S. federal income tax rate imposed on corporations.
The Investment Manager does not intend on behalf of the Fund to invest in REITs,
a substantial portion of the assets of which consists of residual interests in
REMICs.
BACKUP WITHHOLDING
If a stockholder fails to furnish a correct taxpayer identification number,
or fails to make required certifications or has been notified by the IRS that
they are subject to 'backup withholding,' the stockholder may be subject to a
'backup withholding' tax at a current rate of 28% with respect to (1) taxable
dividends and (2) the proceeds of any sales or repurchases of AMPS. An
individual's taxpayer identification number is generally his or her social
security number. Corporate stockholders and other stockholders specified in the
Code or the Treasury regulations promulgated thereunder are exempt from backup
withholding. Backup withholding is not an additional tax and any amounts
withheld will be allowed as a refund or a credit against a taxpayer's U.S.
federal income tax liability if the appropriate information is provided to the
IRS.
FOREIGN STOCKHOLDERS
U.S. taxation of a stockholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ('foreign stockholder') as defined in the Code, depends
on whether the income of the Fund is 'effectively connected' with a U.S. trade
or business carried on by the stockholder.
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
stockholder, distributions of investment company taxable income, including any
dividends designated as qualified dividend income, will generally be subject to
a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
35
inclusion income allocated to the stockholder (see 'U.S. Federal
Taxation -- Investments in Real Estate Investment Trusts' above)), which tax is
generally withheld from such distributions. Under the Act, a new exemption is
created under which U.S. source withholding taxes are no longer imposed on
dividends paid by regulated investment companies to the extent the dividends are
designated as 'interest-related dividends' or 'short-term capital gain
dividends.' Under this exemption, interest-related dividends and short-term
capital gain dividends generally represent distributions of interest or
short-term capital gains that would not have been subject to U.S. withholding
tax at the source if they had been received directly by a foreign person, and
that satisfy certain other requirements. The exemption applies to dividends with
respect to taxable years of regulated investment companies beginning after
December 31, 2004 and before January 1, 2008.
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will generally not be subject to U.S.
federal withholding tax at the rate of 30% (or lower treaty rate) unless the
foreign stockholder 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 generally 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
stockholder 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 stockholder 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. Under the Act, distributions attributable
to gains from U.S. real property interests (including certain U.S. real property
holding corporations which may include certain 'non-domestically controlled'
REITs and certain REIT capital gain dividends) will generally cause the foreign
stockholder to be treated as recognizing such gain as income effectively
connected to a trade or business within the United States and subject to the
rules described under 'U.S. Federal Taxation -- Foreign Stockholders -- Income
Effectively Connected' below. Also, such gain may be subject to a 30% branch
profits tax in the hands of a foreign stockholder that is a corporation. Such
distributions may be subject to U.S. withholding tax and may give rise to an
obligation on the part of the foreign stockholder to file a U.S. federal
income tax return. This provision generally would apply to distributions with
respect to taxable years of regulated investment companies beginning after
December 31, 2004 and before January 1, 2008. Any gain that a foreign
stockholder realizes upon the sale or exchange of such stockholder's shares
of the Fund will ordinarily be exempt from U.S. federal withholding tax unless
(i) in the case of a stockholder that is a nonresident alien individual, the
gain is U.S. source income and such stockholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements, or (ii) except, as provided for under the Act as described
below at any time during the shorter of the period during which the foreign
stockholder 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 stockholder actually or constructively
held more than 5% of the shares of the same class, in which event described in
(iii), the gain would be taxed in the same manner as for a U.S. stockholder 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 stockholder's U.S. federal income tax liability on such
disposition. However, pursuant to the Act, beginning after December 31, 2004,
through December 31, 2007, (ii) above will not apply if at all times during
the testing period described, the value of the stock of the regulated
investment company is owned 50% or more by U.S. persons. 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
36
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 stockholder,
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 generally be subject to U.S. federal income tax at the
graduated rates applicable to U.S. citizens, residents and domestic
corporations. Foreign corporate stockholders may also be subject to the branch
profits tax imposed by the Code.
The tax consequences to a foreign stockholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
stockholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
TAX SHELTER REPORTING REGULATIONS
Under Treasury regulations, if a stockholder recognizes a loss with respect
to shares of $2 million or more for an individual stockholder or $10 million or
more for a corporate stockholder in any single taxable year (or a greater loss
over a combination of years), the stockholder must file with the IRS a
disclosure statement on Form 8886. Direct stockholders of portfolio securities
are in many cases excepted from this reporting requirement, but under current
guidance, stockholders of a regulated investment company are not excepted.
Future guidance may extend the current exception from this reporting requirement
to stockholders of most or all regulated investment companies. In addition,
recently enacted legislation imposes significant penalties for failure to comply
with these requriements. 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. Stockholders should consult their 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.
Accordingly, foreign stockholders that would not have been subject to U.S.
withholding tax if they earned interest income or short-term capital gains
directly may, under the Act, also not be subject to U.S. withholding tax if they
receive distributions from a regulated investment company attributable to such
amounts. For the affect the Act has upon the tax imposed on foreign stockholders
selling shares, see 'U.S. Federal Taxation -- Foreign Stockholders.'
Stockholders should consult their own tax advisers to determine the effect of
the Act in light of their individual circumstances.
Income received by the Fund from foreign sources may be subject to
withholding and other taxes imposed by foreign jurisdictions, absent treaty
relief. Distributions to stockholders also may be subject to state, local and
foreign taxes, depending upon each stockholder's particular situation.
Stockholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Fund.
PERFORMANCE DATA AND INDEX RETURNS
From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to stockholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank
37
deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing the Fund's performance with that of other investment
companies should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
AVERAGE ANNUAL TOTAL RETURN
The Fund's 'average annual total return' figures described in the Prospectus
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:
P(1 + T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
YIELD
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ('net investment income') and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
a-b
------
2[( cd + 1)'pp'6 - 1]
Where: a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
In reports or other communications to stockholders of the Fund or in
advertising materials, the Fund may compare its performance with that of (i)
other investment companies listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or (ii) the Standard and Poor's Index of 500
Stocks, the Dow Jones Industrial Average, Dow Jones Utility Index, the National
Association of Real Estate Investment Trusts (NAREIT) Equity REIT Index, the
Salomon Brothers Broad Investment Grade Bond Index (BIG), Morgan Stanley Capital
International Europe Australia Far East (MSCI EAFE) Index, the NASDAQ Composite
Index, and other relevant indices and industry publications. The Fund may also
compare the historical volatility of its portfolio to the volatility of such
indices during the same time periods. (Volatility is a generally accepted
barometer of the market risk associated with a portfolio of securities and is
generally measured in comparison to the stock market as a whole -- the
beta -- or in absolute terms -- the standard deviation.)
EXPERTS
Simpson Thacher & Bartlett LLP serves as counsel to the Fund, and is located
at 425 Lexington Avenue, New York, New York 10017-3909. PricewaterhouseCoopers
LLP have been appointed as independent registered public accountants for the
Fund. The audited financial statements for the year ended December 31, 2003
included in this statement of additional information have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent registered
public accountants, given on the authority of said firm as experts in auditing
and accounting.
38
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cohen & Steers Quality Income Realty Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Cohen & Steers Quality Income
Realty Fund, Inc. (the 'Fund') at December 31, 2003, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and the period February 28, 2002
(commencement of operations) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
As explained in Note 1, the Fund has revised amounts previously reported as
net investment income to reflect the reclassification of distributions received
in excess of income from underlying investments. Also as explained in Note 1, as
a result of a recent FASB Emerging Issues Task Force consensus which requires
that periodic payments under interest rate swap transactions be reported as a
component of realized and unrealized gains/losses in the Fund's statement of
operations, the Fund has reclassified amounts previously reported as interest
expense on interest rate swap transactions. These reclassifications had no
effect on net assets or the net increase in net assets resulting from
operations.
PricewaterhouseCoopers LLP
New York, New York
February 17, 2004
39
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)(a)
--------- -------- --------------
Equities 148.01%(b)
Common Stock 115.40%
Diversified 16.56%
Colonial Properties Trust...................... 582,300 $ 23,059,080 6.72%
Crescent Real Estate Equities Co............... 1,396,200 23,916,906 8.76
iStar Financial................................ 400,500 15,579,450 6.81
Newcastle Investment Corp...................... 678,528 18,388,109 7.38
Vornado Realty Trust........................... 687,443 37,637,504 5.19
--------------
118,581,049
--------------
Health Care 17.82%
Health Care Property Investors................. 595,200 30,236,160 6.54
Health Care REIT............................... 969,625 34,906,500 6.50
Nationwide Health Properties................... 1,205,300 23,563,615 7.57
Ventas......................................... 1,766,500 38,863,000 4.86
--------------
127,569,275
--------------
Hotel 2.00%
Hospitality Properties Trust................... 346,400 14,299,392 6.98
--------------
Industrial 4.39%
First Industrial Realty Trust.................. 614,500 20,739,375 8.12
Keystone Property Trust........................ 484,900 10,711,441 5.98
--------------
31,450,816
--------------
Office 32.51%
Arden Realty................................... 826,800 25,085,112 6.66
Brandywine Realty Trust........................ 1,140,900 30,541,893 6.57
CarrAmerica Realty Corp........................ 1,010,600 30,095,668 6.72
Equity Office Properties Trust................. 1,314,400 37,657,560 6.98
Highwoods Properties........................... 670,400 17,028,160 6.69
Mack-Cali Realty Corp.......................... 1,073,800 44,691,556 6.05
Maguire Properties............................. 604,800 14,696,640 6.58
Prentiss Properties Trust...................... 1,000,200 32,996,598 6.79
--------------
232,793,187
--------------
---------
(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange or
market, on which such security trades. The dividend yield has not
been audited.
(b) Percentages indicated are based on the net assets of the Fund.
See accompanying notes to financial statements.
40
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------- -----------
Office/Industrial 8.69%
Kilroy Realty Corp............................. 142,600 $ 4,670,150 6.05
Liberty Property Trust......................... 1,065,200 41,436,280 6.22
Reckson Associates Realty Corp................. 663,800 16,130,340 6.99
--------------
62,236,770
--------------
Residential -- Apartment 14.44%
AMLI Residential Properties Trust.............. 77,000 2,063,600 7.16
Apartment Investment & Management Co........... 114,500 3,950,250 6.96
Archstone-Smith Trust.......................... 754,100 21,099,718 6.11
AvalonBay Communities.......................... 307,200 14,684,160 5.86
Camden Property Trust.......................... 366,600 16,240,380 5.73
Gables Residential Trust....................... 586,900 20,388,906 6.94
Home Properties................................ 361,600 14,605,024 6.14
Mid-America Apartment Communities.............. 309,400 10,389,652 6.97
--------------
103,421,690
--------------
Self Storage 0.45%
Sovran Self Storage.............................. 87,300 3,243,195 6.49
--------------
Shopping Center 18.54%
Community Center 6.70%
Cedar Shopping Centers......................... 200,000 2,484,000 7.25
Heritage Property Investment Trust............. 449,100 12,776,895 7.38
Kramont Realty Trust........................... 1,293,300 23,408,730 7.18
New Plan Excel Realty Trust.................... 65,800 1,623,286 6.69
Urstadt Biddle Properties -- Class A........... 544,000 7,697,600 5.94
--------------
47,990,511
--------------
Regional Mall 11.84%
CBL & Associates Properties.................... 50,000 2,825,000 5.13
Glimcher Realty Trust.......................... 605,200 13,544,376 8.58
Macerich Co.................................... 807,857 35,949,637 5.48
Mills Corp..................................... 737,400 32,445,600 5.14
--------------
84,764,613
--------------
Total Shopping Center.......................... 132,755,124
--------------
Total Common Stock (Identified cost --
$661,283,955)............................ 826,350,498
--------------
See accompanying notes to financial statements.
41
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------- -----------
Preferred Stock 32.61%
Diversified 7.06%
Colonial Properties Trust, 8.125%, Series D.... 64,900 $ 1,762,684 7.47%
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible)(a).................... 1,826,000 42,710,140 7.23
iStar Financial, 7.80%, Series F............... 94,600 2,473,790 7.46
iStar Financial, 7.65%, Series G............... 80,000 2,020,000 7.56
Newcastle Investment Corp., 9.75%, Series B.... 56,000 1,558,480 8.77
--------------
50,525,094
--------------
Health Care 0.29%
LTC Properties, 8.50%, Series E................ 65,600 2,057,872 6.79
--------------
Hotel 6.90%
FelCor Lodging Trust, 9.00%, Series B.......... 652,500 16,351,650 8.98
Host Marriott Corp., 10.00%, Series A.......... 7,000 187,180 9.35
Host Marriott Corp., 10.00%, Series B.......... 14,100 380,700 9.26
Host Marriott Corp., 10.00%, Series C.......... 30,700 837,189 9.17
Innkeepers USA Trust, 8.625%, Series A......... 68,200 1,712,502 8.60
Innkeepers USA Trust, 8.00%, Series C.......... 56,000 1,416,800 7.91
LaSalle Hotel Properties, 10.25%, Series A..... 1,000,000 28,550,000 8.97
--------------
49,436,021
--------------
Industrial 0.28%
Keystone Property Trust, 9.125%, Series D...... 75,000 2,036,250 8.40
--------------
Office 2.33%
HRPT Properties Trust, 8.75%, Series B......... 120,000 3,342,000 7.86
Highwoods Properties, 8.625%, Series A......... 13,195 13,359,938 8.52
--------------
16,701,938
--------------
Office/Industrial 0.09%
PS Business Parks, 9.25%, Series A............. 10,800 274,968 9.07
PS Business Parks, 8.75%, Series F............. 4,100 110,126 8.15
ProLogis, 8.54%, Series C...................... 4,000 233,500 7.31
--------------
618,594
--------------
---------
(a) 410,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
42
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------- -----------
Residential -- Apartment 4.88%
Apartment Investment & Management Co., 8.75%,
Series D..................................... 5,530 $ 139,634 8.67%
Apartment Investment & Management Co., 10.10%,
Series R..................................... 950,000 25,811,500 9.20
Home Properties, 9.00%, Series F............... 196,000 5,399,800 8.17
Mid-America Apartment Communities, 8.30%,
Series H..................................... 138,100 3,607,172 7.96
--------------
34,958,106
--------------
Shopping Center 10.78%
Community Center 5.52%
Commercial Net Lease Realty, 9.00%, Series A... 25,000 685,000 8.21
Developers Diversified Realty Corp., 8.60%,
Series F..................................... 1,039,400 27,751,980 8.05
Federal Realty Investment Trust, 8.50%,
Series B..................................... 310,300 8,533,250 7.75
Urstadt Biddle Properties, 8.50%, Series C..... 24,000 2,526,000 8.08
--------------
39,496,230
--------------
Outlet Center 0.11%
Chelsea Property Group, 8.375%, Series A....... 14,000 772,625 7.59
--------------
Regional Mall 5.15%
CBL & Associates Properties, 8.75%,
Series B(b).................................. 430,000 23,564,000 7.99
Glimcher Realty Trust, 8.75%, Series F......... 40,000 1,059,200 8.27
Mills Corp., 9.00%, Series B................... 55,300 1,522,962 8.17
Mills Corp., 9.00%, Series C................... 159,600 4,412,142 8.14
Mills Corp., 8.75%, Series E................... 84,000 2,276,400 8.08
Simon Property Group, 8.75%, Series F.......... 30,000 819,000 8.02
Taubman Centers, 8.30%, Series A............... 127,600 3,243,591 8.18
--------------
36,897,295
--------------
Total Shopping Center.......................... 77,166,150
--------------
Total Preferred Stock (Identified cost --
$209,248,013)............................ 233,500,025
--------------
Total Equities (Identified
cost -- $870,531,968).................... 1,059,850,523
--------------
---------
(b) 158,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
43
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
PRINCIPAL VALUE YIELD
AMOUNT (NOTE 1) (UNAUDITED)
------ -------- -----------
Commercial Paper 0.92%
UBS Financial, 0.75%, due 01/02/04 (Identified
cost -- $6,605,862).......................... $6,606,000 6,605,862
--------------
Total Investments (Identified cost -- $877,137,830)
............................................ 148.93% 1,066,456,385
Liabilities in Excess of Other Assets ....... (1.45)% (10,372,698)
Liquidation Value of Taxable Auction Market Preferred
Shares: Series T, Series W, Series TH and Series F
(Equivalent to $25,000 per share based on 2,800
shares outstanding for Series T, Series W,
Series TH, and Series F) .................. (39.10)% (280,000,000)
Liquidation Value of Auction Market Preferred Shares:
Series M28, (Equivalent to $25,000 per share based on
2,400 shares outstanding) .................. (8.38)% (60,000,000)
Net Assets -- Applicable to Common Shares (Equivalent
to $18.43 per share based on 38,856,074 shares of
capital stock outstanding) .................. 100.00% $ 716,083,687
--------------
--------------
See accompanying notes to financial statements.
44
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003 (AUDITED)
Assets:
Investments in securities, at value (Identified
cost -- $877,137,830) (Note 1)........................ $1,066,456,385
Cash.................................................... 63
Dividends receivable.................................... 6,906,282
Receivable for investment securities sold............... 294,738
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6).......................... 128,059
Other assets............................................ 40,126
--------------
Total Assets........................................ 1,073,825,653
--------------
Liabilities:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 14,681,022
Payable for investment securities purchased............. 1,400,000
Payable for dividends declared on common shares......... 772,846
Payable to investment manager........................... 468,125
Payable for dividends declared on preferred shares...... 206,900
Other liabilities....................................... 213,073
--------------
Total Liabilities................................... 17,741,966
--------------
Liquidation Value of Preferred Shares:
Taxable auction market preferred shares, Series T
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series W
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series TH
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series F
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Auction market preferred shares, Series M28 ($25,000
liquidation value, $0.001 par value, 2,400 shares
issued and outstanding) (Notes 1 and 5)............... 60,000,000
--------------
340,000,000
--------------
Total Net Assets Applicable to Common Shares................ $ 716,083,687
--------------
--------------
Total Net Assets Applicable to Common Shares consist of:
Common stock ($0.001 par value, 38,856,074 shares issued
and outstanding) (Notes 1 and 5)...................... $ 541,197,061
Undistributed net investment income..................... 543,697
Accumulated net realized loss on investments............ (422,663)
Net unrealized appreciation/(depreciation) on
investments and interest rate swap transactions....... 174,765,592
--------------
$ 716,083,687
--------------
--------------
Net Asset Value Per Common Share:
($716,083,687[div]38,856,074 shares outstanding)........ $ 18.43
--------------
--------------
Market Price Per Common Share............................... $ 17.85
--------------
--------------
Market Price Discount to Net Asset Value per Common Share... (3.15)%
--------------
--------------
See accompanying notes to financial statements.
45
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003(a) (AUDITED)
Investment Income (Note 1):
Dividend income......................................... $ 46,451,092
Interest income......................................... 126,415
------------
Total Income........................................ 46,577,507
------------
Expenses:
Investment management fees (Note 2)..................... 7,499,290
Preferred remarketing fees.............................. 744,384
Administration fees (Note 2)............................ 340,661
Reports to shareholders................................. 212,620
Professional fees....................................... 101,814
Custodian fees and expenses............................. 86,286
Directors' fees and expenses (Note 2)................... 42,312
Transfer agent fees and expenses........................ 22,338
Miscellaneous........................................... 141,796
------------
Total Expenses...................................... 9,191,501
Reduction of Expenses (Note 2).......................... (2,823,262)
------------
Net Expenses........................................ 6,368,239
------------
Net Investment Income....................................... 40,209,268
------------
Net Realized and Unrealized Gain/(Loss) on Investments
(Note 1):
Net realized gain on investments........................ 16,665,842
Net realized loss on interest rate swap transactions.... (8,126,956)
Net change in unrealized appreciation on investments.... 207,953,973
Net change in unrealized depreciation on interest rate
swap transactions..................................... 4,360,791
------------
Net realized and unrealized gain/(loss) on
investments....................................... 220,853,650
------------
Net Increase Resulting from Operations...................... 261,062,918
------------
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (3,743,228)
------------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $257,319,690
------------
------------
---------
(a) See Note 1.
See accompanying notes to financial statements.
46
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
(AUDITED)
FOR THE PERIOD
FOR THE FEBRUARY 28, 2002(a)
YEAR ENDED THROUGH
DECEMBER 31, 2003(b) DECEMBER 31, 2002(b)
-------------------- --------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income........................... $ 40,209,268 $ 32,953,127
Net realized gain on investments and interest
rate swap transactions........................ 8,538,886 (1,286,027)
Net change in unrealized
appreciation/(depreciation) on investments and
interest rate swap transactions............... 212,314,764 (37,549,172)
------------ ------------
Net increase/(decrease) in net assets
resulting from operations................. 261,062,918 (5,882,072)
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income........................... (2,449,183) (3,509,955)
Net realized gain on investments................ (1,294,045) (434,405)
------------ ------------
Total dividends and distributions to
preferred shareholders.................... (3,743,228) (3,944,360)
------------ ------------
Net increase/(decrease) in net assets from
operations applicable to common shares........ 257,319,690 (9,826,432)
------------ ------------
Less Dividends and Distributions to Common
Shareholders from:
Net investment income........................... (29,555,562) (24,413,662)
Net realized gain on investments................ (15,615,873) (3,021,534)
Tax return of capital........................... (10,118,665) (8,942,086)
------------ ------------
Total dividends and distributions to common
shareholders.............................. (55,290,100) (36,377,282)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from common share
transactions.................................. -- 557,997,269
Increase in net assets from shares issued to
common shareholders for reinvestment of
dividends..................................... 3,038,014 3,417,272
Decrease in net assets from underwriting
commissions and offering expenses from
issuance of preferred shares.................. (935,773) (3,360,947)
------------ ------------
Net increase in net assets from capital
stock transactions........................ 2,102,241 558,053,594
------------ ------------
Total increase in net assets applicable to
common shares............................. 204,131,831 511,849,880
Net Assets Applicable to Common Shares:
Beginning of period............................. 511,951,856 101,976
------------ ------------
End of period................................... $716,083,687 $511,951,856
------------ ------------
------------ ------------
---------
(a) Commencement of operations.
(b) See Note 1.
See accompanying notes to financial statements.
47
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
The following table includes selected data for a common share outstanding
throughout the period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
FOR THE PERIOD
FOR THE FEBRUARY 28, 2002(a)
YEAR ENDED THROUGH
DECEMBER 31, 2003(b) DECEMBER 31, 2002(b)
PER SHARE OPERATING PERFORMANCE: ------------------ ---------------------
Net asset value per common share, beginning of period..... $13.25 $14.57
------ ------
Income from investment operations:
Net investment income................................ 1.04(c) 0.78
Net realized and unrealized gain/(loss) on
investments............................................. 5.69 (0.90)
------ ------
Total income from investment operations........... 6.73 (0.12)
------ ------
Less dividends and distributions to preferred shareholders
from:
Net investment income................................ (0.07) (0.09)
Net realized gain on investments..................... (0.03) (0.01)
------ ------
Total dividends and distributions to preferred
shareholders.................................... (0.10) (0.10)
------ ------
Total from investment operations applicable to
common shares................................... 6.63 (0.22)
------ ------
Less: Offering and organization costs charged to paid-in
capital -- common shares........................... -- (0.03)
Offering and organization costs charged to paid-in
capital -- preferred shares........................ (0.02) (0.09)
Dilutive effect of common share offering............. -- (0.03)
------ ------
Total offering and organization costs............. (0.02) (0.15)
------ ------
Less dividends and distributions to common shareholders
from:
Net investment income................................ (0.76) (0.64)
Net realized gain on investments..................... (0.41) (0.08)
Tax return of capital................................ (0.26) (0.23)
------ ------
Total dividends and distributions to common
shareholders.................................... (1.43) (0.95)
------ ------
Net increase/(decrease) in net asset value per common
share................................................... 5.18 (1.32)
------ ------
Net asset value, per common share, end of period.......... $18.43 $13.25
------ ------
------ ------
Market value, per common share, end of period............. $17.85 $13.05
------ ------
------ ------
Net asset value total return(d)........................... 52.61% - 2.73%(e)
------ ------
------ ------
Market value return(d).................................... 50.07% - 6.95%(e)
------ ------
------ ------
---------
(a) Commencement of operations.
(b) See Note 1.
(c) Calculation based on average shares outstanding.
(d) 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. Net asset value total return measures the
changes in value over the period indicated, taking into account dividends
as reinvested.
(e) Not annualized.
See accompanying notes to financial statements.
48
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD
FOR THE FEBRUARY 28, 2002(f)
YEAR ENDED THROUGH
DECEMBER 31, 2003(h) DECEMBER 31, 2002(h)
RATIOS/SUPPLEMENTAL DATA: -------------------- --------------------
Net assets applicable to common shares, end of period (in
millions)............................................... $ 716.1 $ 512.0
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable
to common shares (before expense reduction)(l).......... 1.57% 1.52%(i)
-------- --------
-------- --------
Ratio of expenses to average daily net assets applicable
to common shares (net of expense reduction)(l).......... 1.09% 1.05%(i)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (before expense
reduction)(l)........................................... 6.39% 6.82%(i)
-------- --------
-------- --------
Ratio of net investment income to average daily net assets
applicable to common shares (net of expense
reduction)(l)........................................... 6.88% 7.29%(i)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (before
expense reduction)(g,l)................................. 1.04% 1.04%(i)
-------- --------
-------- --------
Ratio of expenses to average daily managed assets (net of
expense reduction)(g,l)................................. 0.72% 0.72%(i)
-------- --------
-------- --------
Portfolio turnover rate................................... 20.51% 12.37%(j)
-------- --------
-------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)............... $340,000 $280,000
-------- --------
-------- --------
Total shares outstanding (in 000's)....................... 14 11
-------- --------
-------- --------
Asset coverage per share.................................. $ 77,653 $ 70,710
-------- --------
-------- --------
Liquidation preference per share.......................... $ 25,000 $ 25,000
-------- --------
-------- --------
Average market value per share(k)......................... $ 25,000 $ 25,000
-------- --------
-------- --------
---------
(f) Commencement of operations.
(g) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(h) See Note 1.
(i) Annualized.
(j) Not annualized.
(k) Based on weekly prices.
(l) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
See accompanying notes to financial statements.
49
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
closed-end management investment company. The fund had no operations until
February 15, 2002 when it sold 7,000 shares of common stock for $100,275 to
Cohen & Steers Capital Management, Inc. (the investment manager). In addition,
on February 27, 2002, the investment manager made a capital contribution of
$1,701 to the fund. Investment operations commenced on February 28, 2002.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with 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.
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of taxable auction market preferred shares. The interest rate 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 floating rate nature of leverage. In an interest rate swap, the fund agrees
to pay 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 the fund a variable rate payment that is intended to approximate the fund's
variable rate payment obligation on the taxable auction market preferred shares.
The payment obligation is based on the notional amount of the swap. Depending on
the state of interest rates in general, the use of interest rate swaps could
enhance or harm the overall performance of the common shares. The market value
of interest rate
50
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
swaps is based on pricing models that consider the time value of money,
volatility, the current market and contractual prices of the underlying
financial instrument.
Swap agreements involve, to varying degrees, elements of market and
counterparty risk, and exposure to loss in excess of the related amounts
reflected in the Statement of Assets and Liabilities.
Revision of Financial Information: As a result of a recent FASB Emerging
Issues Task Force consensus, which requires that periodic payments under
interest rate swap transactions be reported as a component of realized and
unrealized gains/losses in the fund's Statement of Operations, the fund has
reclassified amounts previously reported as interest expense on interest rate
swap transactions, thereby revising certain amounts in the Statement of Changes
in Net Assets and the Financial Highlights. For the year ended December 31, 2003
net investment income was increased by $8,204,532 ($0.21 per share), and net
realized loss on interest rate swap transactions and net change in unrealized
depreciation on interest rate swap transactions were increased by $8,126,956 and
$77,576, respectively (a total of $0.21 per share). For the period ended
December 31, 2002, net investment income was increased by $5,029,510 ($0.13 per
share), and net realized loss on interest rate swap transactions and net change
in unrealized depreciation on interest rate swap transactions were increased by
$4,563,379 and $466,131, respectively (a total of $0.13 per share).
Additionally, the ratio of net investment income to average daily net assets
applicable to common shares (before expense reduction and net of expense
reduction) increased 1.40% and 1.11% for the year ended December 31, 2003 and
the period ended December 31, 2002, respectively; the ratio of expenses to
average daily net assets applicable to common shares (before expense reduction
and net of expense reduction) decreased 1.40% and 1.11% for the year ended
December 31, 2003 and the period ended December 31, 2002, respectively; and the
ratio of expenses to average daily managed assets (before expense reduction
and net of expense reduction) decreased 0.93% and 0.75% for the year ended
December 31, 2003 and the period ended December 31, 2002, respectively. The
reclassifications had no effect on net assets or the net increase in net assets
from operations applicable to common shares.
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. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such amounts are
based on estimates if actual amounts are not available, and actual amounts of
income, realized gain and return of capital may differ from the estimated
amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as necessary once the
issuers provide information about the actual composition of the distributions.
Revision of Financial Information: Due to the nature of commercial real
estate and the REIT structure, which generally is not subject to corporate tax,
REIT dividends can be characterized as a combination of net income, capital
gains (from asset dispositions) and return of capital (which generally relates
to property depreciation). To date, it has been the fund's policy to distribute
to its shareholders all dividends received, regardless of dividend
characterization, from the securities it holds in the year that such dividends
were received. The fund has reclassified a portion of its net investment income
as an increase to net realized gain on investments and as an increase to
unrealized appreciation/(depreciation) on investments for the current year and
for prior periods. These reclassifications are being done to recognize the
return of capital and realized gains that
51
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
have been reported by the securities held in the portfolio of investments. These
changes for the year ended December 31, 2002 are reflected in the Statement of
Changes in Net Assets as follows:
PREVIOUSLY AS
REPORTED REVISED
-------- -------
Net investment income............................ $ 42,419,421 $ 32,953,127
Net realized gains on investments and interest
rate swap transactions......................... (2,358,962) (1,286,027)
Net change in unrealized
appreciation/(depreciation) on investments and
interest rate swap transactions................ (45,942,531) (37,549,172)
------------ ------------
Net increase/(decrease) in net assets
resulting from operations.................. $ (5,882,072) $ (5,882,072)
------------ ------------
------------ ------------
On the Financial Highlights, the net investment income per share figures
have been reduced and the net realized gain/(loss) on investments per share have
been correspondingly increased. In addition, the ratios of net investment income
have been reduced. These reclassifications do not change the actual dividends
that were received by the fund, nor do they alter any taxpayer records, as such
adjustments have historically been captured in the fund's tax reporting to its
shareholders.
The reclassifications for the Financial Highlights are as follows:
DECREASE IN
RATIOS OF NET
INCREASE IN INVESTMENT
NET REALIZED INCOME TO
AND AVERAGE DAILY
UNREALIZED NET ASSETS
DECREASE IN NET GAIN/(LOSS) (BEFORE EXPENSE
INVESTMENT ON REDUCTION AND
YEAR ENDED INCOME INVESTMENTS NET OF EXPENSE
DECEMBER 31, PER SHARE PER SHARE REDUCTION)
------------ --------- --------- ----------
2002 $0.35 $0.35 3.20%
These reclassifications had no effect on net assets or the net increase in
net assets resulting from operations or cash received from the underlying
investments.
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.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from generally accepted accounting principles.
Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are declared
and recorded for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.
Series M28 and Series W preferred shares pay dividends based on a variable
interest rate set at auctions, normally held every 28 days. Dividends for Series
M28 and Series W preferred shares are declared and recorded for the subsequent
28 day period on the auction date. In most instances, dividends are payable
every 28 days, on the first business day following the end of the dividend
period.
52
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
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 0.85% 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 the preferred shares. For the year ended December 31,
2003, the fund incurred investment management fees of $7,499,290.
The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine and 0.02% of average daily
managed asset value in year 10. As long as this waiver continues, it may lower
the fund's expenses and increase its total return. For the year ended
December 31, 2003, the investment manager waived management fees of $2,823,262.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the year ended December 31, 2003, the fund incurred $176,454 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 year ended December 31, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $42,312.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
year ended December 31, 2003, totaled $237,550,482 and $179,574,976,
respectively.
NOTE 4. INCOME TAXES
The fund had a return of capital of $10,118,665 ($0.26 per common share) for
year ended December 31, 2003 which has been deducted from paid-in capital.
Short-term capital gains are reflected in the financial statements as realized
gains on investments but are typically treated as ordinary income for tax
purposes.
53
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
For the year ended December 31, 2003 the dividends and distributions to
shareholders are characterized for tax purposes as follows:
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2003 2002
---- ----
Preferred shareholders:
Ordinary income........................................ $ 2,449,183 $ 3,509,955
Long-term capital gains................................ 1,294,045 434,405
----------- -----------
Total dividends and distributions to preferred
shareholders..................................... $ 3,743,228 $ 3,944,360
----------- -----------
----------- -----------
Common shareholders:
Ordinary income........................................ $29,555,562 $24,413,662
Long-term capital gains................................ 15,615,873 3,021,534
Tax return of capital.................................. 10,118,665 8,942,086
----------- -----------
Total dividends and distributions to common
shareholders..................................... $55,290,100 $36,377,282
----------- -----------
----------- -----------
At December 31, 2003 the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:
Aggregate cost.............................................. $877,016,796
------------
------------
Gross unrealized appreciation............................... $192,448,512
Gross unrealized depreciation............................... (3,008,923)
------------
Net unrealized appreciation on investments.................. 189,439,589
Net unrealized depreciation on interest rate swap
transactions.............................................. (14,552,963)
------------
Net unrealized depreciation................................. $174,886,626
------------
------------
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to differing treatments of interest rate swap
payments and wash sales on Portfolio Securities. To the extent such differences
are permanent in nature, such amounts are reclassified within the capital
accounts. During the year ended December 31, 2003 the fund decreased
undistributed net investment income by $7,660,825 and increased accumulated net
realized gain on investments by $7,660,825.
The components of distributable earnings on a tax basis consist of
undistributed ordinary income of $0 and undistributed captial gains of $0.
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.
During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
On February 28, 2002, the fund completed the initial public offering of
34,000,000 shares of common stock. Proceeds paid to the fund amounted to
$494,292,000 after deduction of underwriting commissions and offering expenses
of $15,708,000.
On March 8, 2002, the fund completed a subsequent offering of 2,000,000
shares of common stock. Proceeds paid to the fund amounted to $29,076,000 after
deduction of underwriting commissions and offering expenses of $924,000.
54
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
On March 21, 2002, the fund's underwriters exercised an option to purchase
an additional 1,700,000 shares. Proceeds paid to the fund amounted to
$24,714,600 after deduction of underwriting commissions and offering expenses of
$785,400.
On April 8, 2002, the fund's underwriters exercised an option to purchase an
additional 681,983 shares. Proceeds paid to the fund amounted to $9,914,669
after deduction of underwriting commissions and offering expenses of $315,076.
During the period February 28, 2002 (commencement of operations) through
December 31, 2002, the fund issued 247,339 shares of common stock for the
reinvestment of dividends.
On September 15, 2003, the fund issued 2,400 auction market preferred
shares, Series M28 (par value $0.001). Proceeds paid to the fund amounted to
$59,064,267 after deduction of underwriting commissions and offering expenses of
$935,733. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.
On April 4, 2002, the fund issued 2,800 taxable auction market preferred
shares, Series T (par value $0.001), 2,800 taxable auction market preferred
shares, Series W (par value $0.001), 2,800 taxable auction market preferred
shares, Series TH (par value $0.001), and 2,800 taxable auction market preferred
shares, Series F (par value $0.001) (together referred to as preferred shares).
Proceeds paid to the fund amounted to $276,639,053 after deduction of
underwriting commissions and offering expenses of $3,360,947. These issues have
received a 'AAA/Aaa' rating from Standard & Poor's and Moody's.
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, 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. 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 a mandatory redemption
at the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon to the date fixed for redemption. To the extent
permitted under the 1940 Act and Maryland Law, the fund at its option may
without 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 to notice. The optional
redemption price is $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon to the date fixed for redemption.
The fund's common shares and preferred shares have equal voting rights of
one vote per share and vote together as a single class. In addition, the
affirmative vote of the holders a majority, as defined in the 1940 Act, of the
outstanding preferred shares shall be required to (1) approve any plan of
reorganization that would adversely affect the taxable auction market preferred
shares and (2) approve any matter that materially and adversely affects the
rights, preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products, UBS AG, Fleet Global Markets, and Royal Bank of Canada.
Under the agreements the
55
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
fund receives a floating rate of interest and pays a respective fixed rate of
interest on the nominal value of the swaps. Details of the swaps at December 31,
2003 are as follows:
UNREALIZED
NOTIONAL FLOATING RATE(a) APPRECIATION/
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) TERMINATION DATE (DEPRECIATION)
------------ ------ ---------- ---------------- ---------------- --------------
Merrill Lynch Derivative
Products $46,000,000 4.5600% 1.1700% April 5, 2005 $ (1,812,882)
Merrill Lynch Derivative
Products $46,000,000 5.2100% 1.1700% April 5, 2007 (3,517,438)
Merrill Lynch Derivative
Products $46,000,000 5.5800% 1.1700% April 6, 2009 (4,425,903)
UBS AG $24,000,000 4.4500% 1.1620% April 15, 2005 (900,935)
UBS AG $24,000,000 5.1200% 1.1620% April 15, 2007 (1,731,909)
UBS AG $24,000,000 5.4950% 1.1620% April 15, 2009 (2,151,539)
Fleet Global Markets $14,000,000 3.2125% 1.1700% October 22, 2008 128,059
Royal Bank of Canada $14,000,000 3.6800% 1.1488% October 22, 2008 (140,416)
------------
$(14,552,963)
------------
------------
-------------------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at December 31, 2003.
56
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
--------- -------------- ------------
Equities 147.54%(b)
Common Stock 116.69%
Diversified 13.76%
Colonial Properties Trust..................... 582,300 $ 22,436,019 6.96%
Crescent Real Estate Equities Co.............. 1,396,200 22,506,744 9.31
iStar Financial............................... 400,500 16,020,000 6.98
Vornado Realty Trust.......................... 663,443 37,889,230 4.97
--------------
98,851,993
--------------
Health Care 17.59%
Health Care Property Investors................ 1,190,400 28,617,216 6.95
Health Care REIT.............................. 969,625 31,512,812 7.38
LTC Properties................................ 131,200 2,177,920 6.63
Nationwide Health Properties.................. 1,205,300 22,780,170 7.83
Ventas........................................ 1,766,500 41,247,775 5.57
--------------
126,335,893
--------------
Hotel 2.29%
Hospitality Properties Trust.................. 389,200 16,463,160 6.81
--------------
Industrial 3.15%
First Industrial Realty Trust................. 614,500 22,662,760 7.43
--------------
Mortgage 2.83%
Newcastle Investment Corp..................... 678,528 20,321,914 8.01
--------------
Office 33.62%
Arden Realty.................................. 826,800 24,316,188 6.87
Brandywine Realty Trust....................... 1,140,900 31,021,071 6.47
CarrAmerica Realty Corp....................... 1,010,600 30,550,438 6.62
Equity Office Properties Trust................ 1,314,400 35,751,680 7.35
Highwoods Properties.......................... 670,400 15,754,400 7.23
HRPT Properties Trust......................... 635,400 6,360,354 7.99
Kilroy Realty Corp. .......................... 142,600 4,862,660 5.81
Mack-Cali Realty Corp. ....................... 1,073,800 44,433,844 6.09
Maguire Properties............................ 604,800 14,980,896 6.46
Prentiss Properties Trust..................... 1,000,200 33,526,704 6.68
--------------
241,558,235
--------------
-------------------
(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange or market,
on which such security trades.
(b) Percentages indicated are based on the net assets of the Fund.
See accompanying notes to financial statements.
57
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Office/Industrial 9.00%
Liberty Property Trust........................ 1,065,200 $ 42,831,692 6.02%
Reckson Associates Realty Corp. .............. 794,100 21,805,986 6.18
--------------
64,637,678
--------------
Residential 15.21%
Apartment 14.69%
AMLI Residential Properties Trust............. 77,000 2,259,180 6.54
Archstone-Smith Trust......................... 754,100 22,117,753 5.86
AvalonBay Communities......................... 307,200 17,362,944 4.95
Camden Property Trust......................... 366,600 16,790,280 5.55
Gables Residential Trust...................... 586,900 19,942,862 7.09
Home Properties............................... 361,600 14,095,168 6.36
Mid-America Apartment Communities............. 309,400 11,723,166 6.18
Town & Country Trust.......................... 50,000 1,262,000 6.81
--------------
105,553,353
--------------
Manufactured Home 0.52%
Affordable Residential Communities............ 225,200 3,738,320 7.53
--------------
Total Residential............................. 109,291,673
--------------
Self Storage 0.46%
Sovran Self Storage........................... 87,300 3,333,114 6.31
--------------
Shopping Center 18.78%
Community Center 6.74%
Cedar Shopping Centers........................ 200,000 2,298,000 7.83
Heritage Property Investment Trust............ 449,100 12,152,646 7.76
Kramont Realty Trust.......................... 1,293,300 20,692,800 8.13
New Plan Excel Realty Trust................... 222,700 5,202,272 7.06
Urstadt Biddle Properties -- Class A.......... 544,000 8,056,640 5.81
--------------
48,402,358
--------------
See accompanying notes to financial statements.
58
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Regional Mall 12.04%
Glimcher Realty Trust......................... 605,200 $ 13,387,024 8.69%
Macerich Co................................... 807,857 38,672,115 5.10
Mills Corp.................................... 737,400 34,436,580 5.10
--------------
86,495,719
--------------
Total Shopping Center......................... 134,898,077
--------------
Total Common Stock
(Identified cost -- $660,580,498)....... 838,354,497
--------------
Preferred Stock 30.85%
Diversified 5.90%
Colonial Properties Trust, 8.125%, Series D... 64,900 1,663,387 7.93
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible)(a)................... 1,826,000 36,483,480 8.45
iStar Financial, 7.80%, Series F.............. 94,600 2,242,020 8.23
iStar Financial, 7.65%, Series G.............. 80,000 1,938,000 7.90
--------------
42,326,887
--------------
Health Care 0.14%
Omega Healthcare Investors, 8.375%,
Series D.................................... 40,000 1,004,000 8.34
--------------
Hotel 6.41%
FelCor Lodging Trust, 9.00%, Series B......... 652,500 16,312,500 9.00
Host Marriott Corp., 10.00%, Series A......... 7,000 178,850 9.77
Host Marriott Corp., 10.00%, Series B......... 14,100 363,921 9.69
Host Marriott Corp., 10.00%, Series C......... 30,700 807,410 9.51
Host Marriott Corp., 8.875%, Series E......... 10,000 254,500 8.72
Innkeepers USA Trust, 8.00%, Series C......... 56,000 1,349,600 8.30
LaSalle Hotel Properties, 10.25%, Series A.... 1,000,000 26,775,000 9.57
--------------
46,041,781
--------------
Industrial 0.23%
Keystone Property Trust, 9.125%, Series D..... 64,400 1,667,960 8.81
--------------
Mortgage 0.21%
Newcastle Investment Corp., 9.75%, Series B... 56,000 1,534,400 8.90
--------------
-----------
(a) 410,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
59
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Office 2.64%
HRPT Properties Trust, 8.75%, Series B........ 120,000 $ 3,156,000 8.32%
Highwoods Properties, 8.625%, Series A........ 13,195 13,227,988 8.60
Maguire Properties, 7.625%, Series A.......... 106,600 2,574,390 7.89
--------------
18,958,378
--------------
Office/Industrial 0.05%
PS Business Parks, 8.75%, Series F............ 4,100 107,830 8.32
ProLogis, 8.54%, Series C..................... 4,000 225,500 7.57
--------------
333,330
--------------
Residential -- Apartment 4.74%
Apartment Investment & Management Co.,
8.75%, Series D............................. 5,530 138,858 8.71
Apartment Investment & Management Co.,
10.10%, Series R............................ 950,000 25,042,000 9.48
Home Properties, 9.00%, Series F.............. 196,000 5,424,300 8.23
Mid-America Apartment Communities, 8.30%,
Series H.................................... 138,100 3,473,215 8.25
--------------
34,078,373
--------------
Shopping Center 10.53%
Community Center 5.25%
Developers Diversified Realty Corp., 8.60%,
Series F.................................... 1,039,400 26,868,490 8.33
Federal Realty Investment Trust, 8.50%,
Series B.................................... 310,300 8,207,435 8.03
Urstadt Biddle Properties, 8.50%, Series C.... 24,000 2,628,000 7.76
--------------
37,703,925
--------------
Free Standing 0.09%
Commercial Net Lease Realty, 9.00%,
Series A.................................... 25,000 658,000 8.55
--------------
Outlet Center 0.11%
Chelsea Property Group, 8.375%, Series A...... 14,000 793,625 7.39
--------------
See accompanying notes to financial statements.
60
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Regional Mall 5.08%
CBL & Associates Properties, 8.75%,
Series B.................................... 430,000 $ 22,704,000 8.29%
Glimcher Realty Trust, 8.75%, Series F........ 40,000 1,012,000 8.65
Glimcher Realty Trust, 8.125%, Series G....... 40,000 950,000 8.55
Mills Corp., 9.00%, Series B.................. 55,300 1,473,192 8.45
Mills Corp., 9.00%, Series C.................. 159,600 4,233,390 8.52
Mills Corp., 8.75%, Series E.................. 84,000 2,201,640 8.35
Simon Property Group, 8.75%, Series F......... 30,000 786,000 8.35
Taubman Centers, 8.30%, Series A.............. 127,600 3,170,860 8.35
--------------
36,531,082
--------------
Total Shopping Center......................... 75,686,632
--------------
Total Preferred Stock
(Identified cost -- $210,286,023)....... 221,631,741
--------------
Total Equities
(Identified cost -- $870,866,521)....... 1,059,986,238
--------------
PRINCIPAL
AMOUNT
----------
Commercial Paper 0.40%
State Street Corp., 1.10%, due 07/01/04
(Identified cost -- $2,851,000).............. $2,851,000 2,851,000
-------------
Total Investments (Identified cost --
$873,717,521)............................. 147.94% 1,062,837,238
Liabilities In Excess of Other Assets....... (0.61)% (4,388,460)
Liquidation Value of Taxable Auction Market
Preferred Shares: Series T, Series W,
Series TH, and Series F (Equivalent to
$25,000 per share based on 2,800 shares
outstanding for Series T, Series W,
Series TH and Series F)................... (38.98)% (280,000,000)
Liquidation Value of Auction Market
Preferred Shares: Series M28 (Equivalent
to $25,000 per share based on 2,400
shares outstanding)....................... (8.35)% (60,000,000)
------ -------------
Net Assets Applicable to Common Shares
(Equivalent to $18.49 per share based on
38,856,074 shares of capital stock
outstanding).............................. 100.00% $ 718,448,778
------ -------------
------ -------------
See accompanying notes to financial statements.
61
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2004 (UNAUDITED)
Assets:
Investments in securities, at value (Identified
cost -- $873,717,521) (Note 1)........................ $1,062,837,238
Cash.................................................... 330
Dividends receivable.................................... 5,495,603
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6).......................... 568,264
Other assets............................................ 65,760
--------------
Total Assets........................................ 1,068,967,195
--------------
Liabilities:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 9,089,970
Payable to investment manager........................... 453,833
Payable for dividends declared on common shares......... 337,192
Payable for investment securities purchased............. 293,878
Payable for dividends declared on preferred shares...... 212,552
Payable to administrator................................ 30,607
Other liabilities....................................... 100,385
--------------
Total Liabilities................................... 10,518,417
--------------
Liquidation Value of Preferred Shares:
Taxable auction market preferred shares, Series T
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series W
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series TH
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series F
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Auction market preferred shares, Series M28 ($25,000
liquidation value, $0.001 par value, 2,400 shares
issued and outstanding) (Notes 1 and 5)............... 60,000,000
--------------
340,000,000
--------------
Total Net Assets Applicable to Common Shares................ $ 718,448,778
--------------
--------------
Total Net Assets Applicable to Common Shares consist of:
Common stock ($0.001 par value, 38,856,074 shares issued
and outstanding) (Notes 1 and 5)...................... $ 541,318,970
Distributions in excess of net investment income........ (6,197,802)
Accumulated net realized gain on investments............ 2,729,599
Net unrealized appreciation on investments and interest
rate swap transactions................................ 180,598,011
--------------
$ 718,448,778
--------------
--------------
Net Asset Value per Common Share:
($718,448,778[div]38,856,074 shares outstanding).......... $ 18.49
--------------
--------------
Market Price per Common Share............................... $ 16.70
--------------
--------------
Market Price Premium/(Discount) to Net Asset Value per
Common Share.............................................. (9.68)%
--------------
--------------
See accompanying notes to financial statements.
62
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Investment Income (Note 1):
Dividend income......................................... $25,279,246
Interest income......................................... 25,030
-----------
Total Income........................................ 25,304,276
-----------
Expenses:
Investment management fees (Note 2)..................... 4,486,517
Preferred remarketing fees.............................. 423,078
Administration fees (Note 2)............................ 189,490
Reports to shareholders................................. 168,000
Professional fees....................................... 73,980
Custodian fees and expenses............................. 46,675
Directors' fees and expenses (Note 2)................... 20,976
Transfer agent fees and expenses........................ 10,817
Miscellaneous........................................... 62,094
-----------
Total Expenses...................................... 5,481,627
Reduction of Expenses (Note 2).......................... (1,689,042)
-----------
Net Expenses........................................ 3,792,585
-----------
Net Investment Income....................................... 21,511,691
-----------
Net Realized and Unrealized Gain/(Loss) on Investments
(Note 1):
Net realized gain on investments........................ 7,667,289
Net realized loss on interest rate swap transactions.... (4,515,027)
Net change in unrealized appreciation on investments.... (198,838)
Net change in unrealized depreciation on interest rate
swap transactions..................................... 6,031,257
-----------
Net realized and unrealized gain/(loss) on
investments....................................... 8,984,681
-----------
Net Increase Resulting from Operations...................... 30,496,372
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (2,025,340)
-----------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $28,471,032
-----------
-----------
See accompanying notes to financial statements.
63
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES (UNAUDITED)
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, 2003
---------------- -----------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income............................... $ 21,511,691 $ 40,209,268
Net realized gain on investments and interest rate
swap transactions................................. 3,152,262 8,538,886
Net change in unrealized appreciation/(depreciation)
on investments and interest rate swap
transactions...................................... 5,832,419 212,314,764
------------ ------------
Net increase in net assets resulting from
operations.................................... 30,496,372 261,062,918
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income............................... (2,025,340) (2,449,183)
Net realized gain on investments.................... -- (1,294,045)
------------ ------------
Total dividends and distributions to preferred
shareholders.................................. (2,025,340) (3,743,228)
------------ ------------
Net increase in net assets from operations
applicable to common shares................... 28,471,032 257,319,690
------------ ------------
Less Dividends and Distributions to Common Shareholders
from:
Net investment income............................... (26,227,850) (29,555,562)
Net realized gain on investments.................... -- (15,615,873)
Tax return of capital............................... -- (10,118,665)
------------ ------------
Total dividends and distributions to common
shareholders.................................. (26,227,850) (55,290,100)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from shares issued to common
shareholders for reinvestment of dividends........ -- 3,038,014
Increase in net assets from preferred offering cost
adjustment........................................ 121,909 --
Decrease in net assets from underwriting commissions
and offering expenses from issuance of preferred
shares............................................ -- (935,773)
------------ ------------
Net increase in net assets from capital stock
transactions.................................. 121,909 2,102,241
------------ ------------
Total increase in net assets applicable to
common shares................................. 2,365,091 204,131,831
Net Assets Applicable to Common Shares:
Beginning of period................................. 716,083,687 511,951,856
------------ ------------
End of period(a).................................... $718,448,778 $716,083,687
------------ ------------
------------ ------------
---------
(a) Includes distributions in excess of net investment income of $6,197,802 at
June 30, 2004 and undistributed net investment income of $543,697 at
December 31, 2003.
See accompanying notes to financial statements.
64
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
PER SHARE OPERATING PERFORMANCE: ---------------- ----------------- ------------------
Net asset value per common share, beginning of
period....................................... $18.43 $13.25 $14.57
------ ------ ------
Income from investment operations:
Net investment income...................... 0.55(b) 1.04(b) 0.78
Net realized and unrealized gain/(loss) on
investments and interest rate swap
transactions............................. 0.24 5.69 (0.90)
------ ------ ------
Total income from investment
operations........................... 0.79 6.73 (0.12)
------ ------ ------
Less dividends and distributions to preferred
shareholders from:
Net investment income...................... (0.05) (0.07) (0.09)
Net realized gain on investments........... -- (0.03) (0.01)
------ ------ ------
Total dividends and distributions to
preferred shareholders............... (0.05) (0.10) (0.10)
------ ------ ------
Total from investment operations
applicable to common shares.......... 0.74 6.63 (0.22)
------ ------ ------
Less: Offering and organization costs charged
to paid-in capital -- common shares.... -- -- (0.03)
Offering and organization costs charged
to paid-in capital -- preferred
shares................................. -- (0.02) (0.09)
Preferred Offering Cost Adjustment....... --(c) -- --
Dilutive effect of common share
offering............................... -- -- (0.03)
------ ------ ------
Total offering and organization
costs................................ -- (0.02) (0.15)
------ ------ ------
Less dividends and distributions to common
shareholders from:
Net investment income...................... (0.68) (0.76) (0.64)
Net realized gain on investments........... -- (0.41) (0.08)
Tax return of capital...................... -- (0.26) (0.23)
------ ------ ------
Total dividends and distributions to
common shareholders.................. (0.68) (1.43) (0.95)
------ ------ ------
Net increase/(decrease) in net asset value per
common share................................. 0.06 5.18 (1.32)
------ ------ ------
Net asset value, per common share, end of
period....................................... $18.49 $18.43 $13.25
------ ------ ------
------ ------ ------
Market value, per common share, end of
period....................................... $16.70 $17.85 $13.05
------ ------ ------
------ ------ ------
Net asset value total return(d)............... 4.26%(e) 52.61% -2.73%(e)
------ ------ ------
------ ------ ------
Market value return(d)........................ -2.77%(e) 50.07% -6.95%(e)
------ ------ ------
------ ------ ------
---------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) Less than $.005 per share. See Note 5.
(d) 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. Net asset value total return measures the
changes in value over the period indicated, taking into account dividends as
reinvested.
(e) Not annualized.
See accompanying notes to financial statements.
65
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED) -- (CONTINUED)
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(f)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
RATIOS/SUPPLEMENTAL DATA: ---------------- ----------------- ------------------
Net assets applicable to common shares, end of
period (in millions)......................... $ 718.4 $ 716.1 $ 512.0
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (before expense
reduction)(k)................................ 1.53%(h) 1.57% 1.52%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (net of expense
reduction)(k)................................ 1.06%(h) 1.09% 1.05%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(before expense reduction)(k)................ 5.53%(h) 6.39% 6.82%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(net of expense reduction)(k)................ 6.00%(h) 6.88% 7.29%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed
assets (before expense reduction)(g,k)....... 1.04%(h) 1.04% 1.04%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed
assets (net of expense reduction)(g,k)....... 0.72%(h) 0.72% 0.72%(h)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate....................... 2.05%(i) 20.51% 12.37%(i)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)... $340,000 $340,000 $280,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)........... 14 14 11
-------- -------- --------
-------- -------- --------
Asset coverage per share...................... $ 77,827 $ 77,653 $ 70,710
-------- -------- --------
-------- -------- --------
Liquidation preference per share.............. $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per share(j)............. $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
---------
(f) Commencement of operations.
(g) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(h) Annualized.
(i) Not annualized.
(j) Based on weekly prices.
(k) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
See accompanying notes to financial statements.
66
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a nondiversified,
closed-end management investment company.
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.
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of auction market preferred shares. The interest rate 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 floating rate nature of leverage. In an interest rate swap, the fund agrees
to pay 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 the fund a variable rate payment that is intended to approximate the fund's
variable rate payment obligation on the auction market preferred shares. The
payment obligation is based on the notional amount of the swap. Depending on the
state of interest rates in general, the use of interest rate swaps could enhance
or harm the overall performance of the common shares. The market value of
interest rate swaps is based on pricing models that consider the time value of
money, volatility, the current market and contractual prices of the underlying
financial instrument. Unrealized gains are reported as an asset and unrealized
losses are reported as a liability on the Statement of Assets and Liabilities.
The change in value of swaps, including the periodic amounts of interest to be
paid or received on swaps, is reported as unrealized gains or losses in the
Statement of Operations. A realized gain or loss is
67
recorded upon payment or receipt of a periodic payment or termination of swap
agreements. Swap agreements involve, to varying degrees, elements of market and
counterparty risk, and exposure to loss in excess of the related amounts
reflected in the Statement of Assets and Liabilities.
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. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such amounts are
based on estimates if actual amounts are not available, and actual amounts of
income, realized gain and return of capital may differ from the estimated
amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as an increase to
unrealized appreciation/(depreciation) on investments as necessary once the
issuers provide information about the actual composition of the distributions.
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.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from generally accepted accounting principles.
Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are declared
and recorded for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.
Series M28 and Series W preferred shares pay dividends based on a variable
interest rate set at auctions, normally held every 28 days. Dividends for
Series M28 and Series W preferred shares are declared and recorded for the
subsequent 28 day period on the auction date. In most instances, dividends are
payable every 28 days, on the first business day following the end of the
dividend period.
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 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.
For the services under the management agreement, the fund pays the
investment manager a monthly management fee, computed daily and payable monthly
at an annual rate of 0.85% of the fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of the preferred shares. For the six months ended
June 30, 2004, the fund incurred investment management fees of $4,486,517.
68
The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine and 0.02% of average daily
managed asset value in year 10. As long as this waiver continues, it may lower
the fund's expenses and increase its total return. For the six months ended
June 30, 2004, the investment manager waived management fees of $1,689,042.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the six months ended June 30, 2004, the fund incurred $105,565 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 he six months ended June 30, 2004, fees and related expenses accrued for
nonaffiliated directors totaled $20,976.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
six months ended June 30, 2004, totaled $24,246,705 and $21,808,617,
respectively.
NOTE 4. INCOME TAXES
At June 30, 2004 the cost of investments and net unrealized appreciation for
federal income tax purposes were as follows:
Aggregate cost.............................................. $873,717,521
------------
------------
Gross unrealized appreciation............................... $191,074,571
Gross unrealized depreciation............................... (1,954,854)
------------
Net unrealized appreciation on investments.................. 189,119,717
Net unrealized depreciation on interest rate swap
transactions.............................................. (8,521,706)
------------
Net unrealized appreciation................................. $180,598,011
------------
------------
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.
During the six months ended June 30, 2004, the fund issued no shares of
common stock for the reinvestment of dividends. An adjustment of $121,909
related to preferred offering costs was credited to common stock during the six
months ended June 30, 2004.
On September 15, 2003, the fund issued 2,400 auction market preferred
shares, Series M28 (par value $0.001). Proceeds paid to the fund amounted to
$59,064,267 after deduction of underwriting commissions and offering expenses of
$935,733. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.
During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, 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. 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
69
will be subject to a mandatory redemption at the redemption price of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. To the extent permitted under the 1940 Act and
Maryland Law, the fund at its option may without 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 to notice. The optional redemption price is $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. The fund's common shares and preferred shares have
equal voting rights of one vote per share and vote together as a single class.
In addition, the affirmative vote of the holders a majority, as defined in the
1940 Act, of the outstanding preferred shares shall be required to (1) approve
any plan of reorganization that would adversely affect the taxable auction
market preferred shares and (2) approve any matter that materially and adversely
affects the rights, preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products, UBS AG, Fleet National Bank, and Royal Bank of Canada.
Under the agreements the fund receives a floating rate of interest and pays a
respective fixed rate of interest on the nominal value of the swaps. Details of
the swaps at June 30, 2004 are as follows:
UNREALIZED
NOTIONAL FLOATING RATE(a) APPRECIATION/
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) TERMINATION DATE DEPRECIATION
------------ ------ ---------- --------------- ---------------- ------------
Merrill Lynch Derivative
Products $46,000,000 4.5600% 1.150% April 5, 2005 $ (948,638)
Merrill Lynch Derivative
Products $46,000,000 5.2100% 1.150% April 5, 2007 (2,225,784)
Merrill Lynch Derivative
Products $46,000,000 5.5800% 1.150% April 5, 2009 (2,944,853)
UBS AG $24,000,000 4.4500% 1.238% April 15, 2005 (468,907)
UBS AG $24,000,000 5.1200% 1.238% April 15, 2007 (1,082,982)
UBS AG $24,000,000 5.4950% 1.238% April 15, 2009 (1,418,806)
Fleet National Bank $14,000,000 3.2125% 1.113% October 2, 2008 400,087
Royal Bank of Canada $14,000,000 3.6800% 1.280% October 22, 2008 168,177
------------
$ (8,521,706)
------------
------------
---------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at June 30, 2004.
70
APPENDIX A
RATINGS OF INVESTMENTS
Description of certain ratings assigned by S&P and Moody's:
S&P
LONG-TERM
'AAA' -- An obligation rated 'AAA' has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
'AA' -- An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
'A' -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
'BBB' -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
'BB', 'B', 'CCC', 'CC', and 'C'-- Obligations rated 'BB', 'B', 'CCC', 'CC',
and 'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
'BB' -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
'B' -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
'CCC' -- An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
'CC' -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
'C' -- A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
'D' -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
'r' -- The symbol 'r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
A-1
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
'N.R.' -- The designation 'N.R.' indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter of policy.
Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a
plus (+) or minus (-) sign designation to show relative standing within the
major rating categories.
SHORT-TERM
'A-1' -- A short-term obligation rated 'A-1' is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
'A-2' -- A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
'A-3' -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
'B' -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.
'C' -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
'D' -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
MOODY'S
LONG-TERM
'Aaa' -- Bonds rated 'Aaa' are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
'Aa' -- Bonds rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 'Aaa'
securities.
'A' -- Bonds rated 'A' possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
A-2
'Baa' -- Bonds rated 'Baa' are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
'Ba' -- Bonds rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
'B' -- Bonds rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
'Caa' -- Bonds rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
'Ca' -- Bonds rated 'Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
'C' -- Bonds rated 'C' are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from 'Aa' through 'Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
PREFERRED STOCK
Because of the fundamental differences between preferred stocks and bonds,
Moody's employs a variation of our familiar bond rating symbols in the quality
ranking of preferred stock.
These symbols, presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind that preferred
stock occupies a junior position to bonds within a particular capital structure
and that these securities are rated within the universe of preferred stocks.
'aaa' -- An issue rated 'aaa' is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
'aa' -- An issue rated 'aa' is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
'a' -- An issue rated 'a' is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
'baa' -- An issue rated 'baa' is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present, but may be questionable over any great
length of time.
'ba' -- An issue rated 'ba' is considered to have speculative elements. Its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
'b' -- An issue rated 'b' generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
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'caa' -- An issue rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
'ca' -- An issue rated 'ca' is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.
'c' -- This is the lowest-rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: As in the case of bond ratings, Moody's applies to preferred stock
ratings the numerical modifiers 1, 2, and 3 in rating classifications 'aa'
through 'b'. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
PRIME RATING SYSTEM (SHORT-TERM)
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
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APPENDIX B
ARTICLES SUPPLEMENTARY
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
Articles Supplementary Creating And Fixing The Rights of
Series M7 Taxable Auction Market Preferred Shares
Cohen & Steers Quality Income Realty 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
and supplemented (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, 3,760 shares of the Corporation's
Taxable Auction Market Preferred Shares ('AMPS') (par value $.001 per share) and
has further classified all of such shares as 'Series M7 AMPS,' liquidation
preference $25,000 per share (herein referred to as the 'Series').
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 Series, as set forth
herein.
Third: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the Series
are as follows:
DESIGNATION
Series M7 AMPS: A series of AMPS, par value $.001 per share, liquidation
preference $25,000 per share, is hereby designated 'Series M7 Taxable Auction
Market Preferred Shares'. Each share of the Series 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 Series
will constitute a separate series of AMPS of the Corporation.
Subject to the provisions of Section 11(b) of Part I hereof, the Board of
Directors of the Corporation may, in the future, reclassify additional shares of
the Corporation's unissued common stock as preferred stock, with the same
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and other terms herein
described, except that the dividend rate for its initial Dividend Period, its
initial Dividend Payment Date and any other changes in the terms herein set
forth 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.
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PART I: TERMS OF AMPS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Series is 3,760
shares. No fractional shares of the Series will be issued.
(b) Shares of the Series 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 Series will rank on a parity with shares of any other
series of preferred stock of the Corporation (including any other AMPS) as to
the payment of dividends to which such shares are entitled.
(d) No Holder of shares of the Series 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 Series, Common Shares of the Corporation or other
securities of the Corporation which it may hereafter issue or sell.
2. Dividends.
(a) The Holders of shares of the Series 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 Series 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 Series, as follows:
(A) with respect to any Dividend Period of one year or less, on the
Business Day following the last day of such Dividend Period; provided,
however, if the Dividend Period is more than 91 days then on the 91st, 181st
and 271st days within such period, if applicable, and on the Business Day
following the last day of such Dividend Period; and
(B) with respect to any Dividend Period of more than one year, on a
quarterly basis on each January 1, April 1, July 1 and October 1 within such
Dividend Period and on the Business Day following the last day of such
Dividend Period.
(ii) If a day for payment of dividends resulting from the application of
subparagraph (b) above is not a Business Day, then the Dividend Payment Date
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 Series, an
aggregate amount of immediately available funds equal to the dividends to be
paid to all Holders of the Series 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 Series will be paid on the Dividend Payment Date
therefor to the Holders of the Series as their names appear on the stock ledger
or stock records of the Corporation on the Business Day next preceding such
Dividend Payment Date; provided, however, if dividends are in arrears, they may
be declared and paid at any time to Holders as their names appear on the stock
ledger or stock records of the Corporation on such date not exceeding 15
B-2
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 Series 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 Series, 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 Series is not held for any reason or if Sufficient
Clearing Orders have not been made in an Auction (other than as a result of all
shares of the Series being the subject of Submitted Hold Orders and other than
in an auction for a Special Dividend Period), then the dividend rate on the
shares of the Series 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 Corporation 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 Series will commence on any date the Corporation
fails to deposit irrevocably in trust in same-day funds, with the Paying Agent
by 12:00 noon, New York City time, (A) the full amount of any declared dividend
on the Series payable on the Dividend Payment Date (a 'Dividend Default') or
(B) the full amount of any redemption price (the 'Redemption Price') payable on
the date fixed for redemption (the 'Redemption Date') (a 'Redemption Default'
and together with a Dividend Default, hereinafter referred to as 'Default').
Subject to the cure provisions of Section 2(c)(iii) below, a Default Period
with respect to a Dividend Default or a Redemption Default 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.
(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
Series. 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 each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) 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 denominator of which will be 360
for the Series, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one (1)
year or more, the amount of dividends per share payable on any
B-3
Dividend Payment Date (or in respect of dividends on another date in connection
with a redemption during such Dividend Period) will be computed as described in
the preceding sentence, except that it will be determined on the basis of a year
consisting of twelve 30-day months.
(d) Any dividend payment made on shares of the Series will first be credited
against the earliest accumulated but unpaid dividends.
(e) For so long as the shares of the Series 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 Series as to dividends or upon liquidation) with
respect to Common Shares or any other capital stock of the Corporation ranking
junior to the Series 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 Series (except by conversion
into or exchange for shares of the Corporation ranking junior to the Series 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 Series 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 Series
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 shares of the Series 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 Series for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the Series
through its most recent Dividend Payment Date. When dividends are not paid in
full upon the Series through its most recent Dividend Payment Date or upon any
other series of stock ranking on a parity as to the payment of dividends with
the Series through its most recent Dividend Payment Date, all dividends declared
upon the Series and any other such series of stock ranking on a parity as to the
payment of dividends with the Series will be declared pro rata so that the
amount of dividends declared per share on the Series 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 Series 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 Series herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption not less than 15
calendar days and not more than 40 calendar days prior to the Redemption Date,
at a redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date ('Redemption Price'), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the relevant
Dividend Period by delivering a notice of redemption not less than 15 calendar
days and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus a redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealers and set forth in any
applicable Specific Redemption Provisions at the time of the designation of such
Dividend Period as set forth in Section 4 of Part I of these Articles
Supplementary; provided, however, that during a Dividend Period of more than one
year, no shares of the Series will be
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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 Series by reason of the redemption of the Series on the Redemption Date and
(b) the Corporation would have Eligible Assets with an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount
immediately subsequent to such redemption, if such redemption were to occur on
such date, it being understood that the provisions of paragraph (d) of this
Section 3 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 Series will be subject to mandatory redemption out of funds legally
available therefor. The number of shares of the Series to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of shares of
the Series 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 shares of the Series then Outstanding will be redeemed) and (B) the
maximum number of shares of the Series 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 shares of the Series 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 Series 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 shares of the Series 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 shares of the Series, 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 shares of the Series to be redeemed and the
Paying Agent. The Corporation will deposit with the Paying Agent funds
sufficient to redeem the specified number of shares of the Series 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
B-5
Business Day immediately preceding the Mandatory Redemption Date. If fewer than
all of the Outstanding shares of the Series 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 shares of the
Series 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 (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 Series
called for redemption not later than the close of business on the Business Day
immediately following the day on which the Auction Agent determines the shares
to be redeemed (or, during a Default Period with respect to such shares, not
later than the close of business on the Business Day immediately following the
day on which the Auction Agent receives Notice of Redemption from the
Corporation). The Auction Agent 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 Series at their addresses appearing on
the share records of the Corporation. Such Notice of Redemption will set forth
(i) the date fixed for redemption, (ii) the number and identity of shares of the
Series to be redeemed, (iii) the redemption price (specifying the amount of
accumulated dividends to be included therein), (iv) that dividends on the shares
to be redeemed will cease to accumulate on such date fixed for redemption, and
(v) the provision under which redemption 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 Series, may be redeemed at the option of the
Corporation unless all dividends in arrears on the Outstanding shares of the
Series 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 Series with
the Paying Agent and the giving of the Notice of Redemption to the Auction Agent
under paragraph (b) of this Section 3, dividends on such shares 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. 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
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for redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the shares of the Series called for redemption on
such date and (ii) such other amounts, if any, to which Holders of shares of the
Series 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 Series so called for redemption may look only to the Corporation
for payment of the redemption price and all other amounts, if any, to which they
may be entitled; provided, however, that the Paying Agent 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 Series 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 Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of the Series and will include those shares of the
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption price
of shares of the Series 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 Series are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.
(h) Except for the provisions described above, nothing contained in these
Articles Supplementary limits any right of the Corporation to purchase or
otherwise acquire any shares of the Series outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on, or the mandatory or
optional redemption price with respect to, any shares of the Series for which
Notice of Redemption has been given and the Corporation meets the 1940 Act
Preferred Shares Asset Coverage and the Preferred Shares Basic Maintenance
Amount Test after giving effect to such purchase or acquisition on the date
thereof. Any shares which are purchased, redeemed or otherwise acquired by the
Corporation will have no voting rights. If fewer than all the Outstanding shares
of the Series 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 Series 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 AMPS, ranking
on a parity with the Series 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
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Outstanding Series) 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 shares of the Series 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 Series will be as determined in the
manner set forth under 'Designation' above. The Corporation will designate the
duration of subsequent Dividend Periods of the Series; provided, however, that
no such designation is necessary for a Standard Dividend Period and, provided
further, that any designation of a Special Dividend Period 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 Series 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 and 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, the Broker-Dealers will have
notified the Corporation in writing that it believes the Auction for the Special
Dividend Period will be successful, 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 Series.
(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
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 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.
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5. Restrictions on Transfer. Shares of the Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Corporation or any Affiliate. Notwithstanding the foregoing, a
transfer other than pursuant to an Auction will not be effective unless the
selling Existing Holder or the Agent Member of such Existing Holder, in the case
of an Existing Holder whose shares are listed in its own name on the books of
the Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer,
in the case of a transfer between persons holding shares of the Series through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of the Series issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.
6. Voting Rights.
(a) Except as otherwise provided in the Charter or as otherwise required by
applicable law, (i) each Holder of shares of the Series will be entitled to one
vote for each share of the Series held on each matter on which the Holders of
the Series are entitled to vote, and (ii) the holders of the Outstanding shares
of preferred stock, including the Series, 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 Series, represented in person or by proxy at a meeting for the election of
directors, 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 Series, entitling the holder thereof to one vote. The identities of the
nominees of such directorships may be fixed by the Board of Directors. Subject
to paragraph (b) of this Section 6, the holders of outstanding shares of Common
Shares and outstanding shares of preferred stock, including the Series, voting
together as a single class, will be entitled to elect the balance of the
directors.
(b) If at any time dividends on the Series will be unpaid in an amount equal
to two full years' dividends on the Series (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 Series,
pursuant to paragraph (a) of this Section 6) constitute a majority of such
increased number, and the holders of any shares of preferred stock, including
the Series, 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 Series 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 Series, upon the
further occurrence of any of the events described in this paragraph (b) of
Section 6.
(c) As soon as practicable after the accrual of any right of the holders of
shares of preferred stock, including the Series, 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 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 Series, held during a Voting Period at which
directors are to be elected, such holders, voting
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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 Series, 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 Series, to vote on any matter, whether such right
is created by these Articles Supplementary, by statute or otherwise, if
redemption of some or all of the shares of preferred stock, including the
Series, is required, no holder of shares of preferred stock, including the
Series, will be entitled to vote and no share of preferred stock, including the
Series, 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 Series 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 Series 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 Series 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 Series 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 Series of the Corporation or
fails to redeem any shares of the Series which it is required to redeem, or any
other event occurs which requires the mandatory redemption of the Series 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 Series 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 Series 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 Series, are
outstanding, the Corporation will not, without the affirmative vote of the
Holders of a majority of the outstanding preferred stock, including the Series,
(i) institute any proceedings to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against it,
or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent
to the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Corporation or a substantial part of its
property, or make any assignment for the benefit of creditors, or, except as may
be required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any
such action; (ii) create, incur or suffer to exist, or agree to create, incur or
suffer to exist, or consent to cause or permit in the future (upon the happening
of a contingency or otherwise) the creation, incurrence or existence of any
material lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Corporation's assets as a whole, except
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(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 Series, (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 Series,
voting together 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 Series, or any other stockholder of the
Corporation, may from time to time amend, alter or repeal any or all of the
definitions contained herein, add covenants and other obligations of the
Corporation, or confirm the applicability of covenants and other obligations set
forth herein, all in connection with obtaining or maintaining the rating of any
Rating Agency with respect to the Series, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of the
Series 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 the Series) that any such
amendment, alteration or repeal would not adversely affect the rating then
assigned by such Rating Agency.
In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred
stock, including the Series, or any other stockholder of the Corporation, but
only with confirmation from each Rating Agency, and after consultation with the
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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 Series, 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 Series will rank on a parity
with shares of any other series of preferred stock of the Corporation 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 Series, 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 Series, ratably in any such
distribution of assets according to the respective amounts which would be
payable on all such shares if all amounts thereon were paid in full. Unless and
until payment in full has been made to the holders of all outstanding shares of
preferred stock, including the Series, of the liquidation distributions to which
they are entitled, no dividends or distributions will be made to holders of
Common Shares or any stock of the Corporation ranking junior to the preferred
stock as to liquidation.
(c) Neither the consolidation nor merger of the Corporation with or into any
other 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 Series of the full preferential
amounts provided for in this Section 7, the Holders of the Series 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 Series, 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 Series,
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 Series as
provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of shares ranking junior to the Series 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 Series will not be entitled to
share therein.
8. Auction Agent. For so long as any shares of the Series 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,
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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 Series are Outstanding, the Corporation
will use its best efforts to enter into an agreement with a successor auction
agent containing substantially the same terms and conditions as the auction
agency agreement. The Corporation may remove the auction agent provided that
prior to such removal the Corporation 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 shares of the Series 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
Series 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 Series 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 Series), Moody's (if Moody's is
then rating the Series) and (if applicable) such Other Rating Agency, that any
such action would not impair the rating then assigned by such Rating Agency to
the Series, 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 Series, issue
additional shares of any series of preferred stock, including the Series or
reissue any shares of preferred stock, including the Series previously
purchased or redeemed by the Corporation;
(c) engage in any short sales of securities;
(d) lend portfolio securities;
(e) merge or consolidate into or with any other fund; or
(f) for purposes of valuation of Moody's Eligible Assets: (A) if the
Corporation writes a call option, the underlying asset will be valued as
follows: (1) if the option is exchange-traded and may be offset readily or
if the option expires before the earliest possible redemption of the Series,
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
Series are rated by Moody's: (A) the Corporation will not engage in options
transactions for leveraging or speculative purposes; (B) the Corporation
will not write or sell any anticipatory contracts pursuant to which the
Corporation hedges the anticipated purchase of an asset prior to completion
of such purchase; (C) the Corporation will not enter into an option
transaction with respect to portfolio securities unless, after giving effect
thereto, the Corporation would continue to have Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount; (D) the Corporation will not enter into an option
transaction with respect to portfolio securities unless after giving effect
to such transaction the Corporation would continue to be in compliance with
the provisions relating to the Preferred Shares Basic Maintenance Amount;
(E) for purposes of the Preferred Shares Basic Maintenance Amount assets in
margin accounts are not Eligible Assets; (F) the Corporation will write only
exchange-traded options on exchanges approved by Moody's (if Moody's is then
B-13
rating the Series); (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 Series is rated by S&P, the Corporation will not
purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it
receives written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the Series by S&P.
12. Compliance Procedures for Asset Maintenance Tests. For so long as any
shares of the Series 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
shares of the Series 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
shares of the Series which are deemed to be Outstanding hereunder.
(d) In the case of the asset coverage requirements for Moody's and S&P,
the auditors must certify once per calendar year the asset coverage test on
a date randomly selected by the auditor.
(e) The Corporation will deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (i)-(iii) of
paragraph (a) of this Section 12 (a 'Preferred Shares Basic Maintenance
Certificate') as of (A) the Date of Original Issue, (B) the last Valuation
Date of each month, (C) any date requested by any Rating Agency, (D) a
Business Day on or before any Asset Coverage Cure Date relating to the
Corporation's cure of a failure to meet the Preferred Shares Basic
Maintenance Amount Test, (E) any day that Common Shares outstanding ,
preferred shares of the Fund, including the Series, are redeemed and
(F) any day the S&P Eligible Assets have an aggregate discounted value less
than or equal to 110% of the Preferred Shares Basic Maintenance Amount. Such
Preferred Shares Basic Maintenance Certificate 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.
(f) The Corporation will deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (iv) and (v)
of paragraph (a) of this Section 12 (a '1940 Act Preferred Shares Asset
Coverage Certificate') (i) as of the Date of Original Issue, and (ii) as of
(A) the last Valuation Date of each quarter thereafter, and (B) as of a
Business Day on or before any Asset Coverage Cure Date relating to the
failure to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act
Preferred Shares Asset Coverage Certificate will be delivered in the case of
clause (i) on the Date of Original Issue
B-14
and in the case of clause (ii) on or before the seventh Business Day
after the relevant Valuation Date or the Asset Coverage Cure Date. The
certificates required by paragraphs (d) and (e) of this Section 12 may be
combined into a single certificate.
(g) Within ten Business Days of the Date of Original Issue, the
Corporation will deliver to the Auction Agent and each Rating Agency a
letter prepared by the Corporation's independent auditors (an 'Auditor's
Certificate') regarding the accuracy of the calculations made by the
Corporation in the Preferred Shares Basic Maintenance Certificate and the
1940 Act Preferred Shares Asset Coverage Certificate required to be
delivered by the Corporation on the Date of Original Issue. Within ten
Business Days after delivery of the Preferred Shares Basic Maintenance
Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate
relating to the last Valuation Date of each fiscal quarter of the
Corporation, the Corporation will deliver to the Auction Agent and each
Rating Agency an Auditor's Certificate regarding the accuracy of the
calculations made by the Corporation in a Preferred Shares Basic Maintenance
Certificate with respect to a date randomly selected by the Corporation's
independent auditors during such fiscal quarter. In addition, the
Corporation will deliver to the persons specified in the preceding sentence
an Auditor's Certificate regarding the accuracy of the calculations made by
the Corporation on each Preferred Shares Basic Maintenance Certificate and
1940 Act Preferred Shares Asset Coverage Certificate delivered in relation
to an Asset Coverage Cure Date within ten days after the relevant Asset
Coverage Cure Date. If an Auditor's Certificate shows that an error was made
in any such report, the calculation or determination made by the
Corporation's independent auditors will be conclusive and binding on the
Corporation.
(h) The Auditor's Certificates referred to in paragraph (f) above will
confirm, based upon the independent auditor's review of portfolio data
provided by the Corporation, (i) the mathematical accuracy of the
calculations reflected in the related Preferred Shares Basic Maintenance
Amount Certificates and 1940 Act Preferred Shares Asset Coverage
Certificates and (ii) that, based upon such calculations, the Corporation
had, at such Valuation Date, met the Preferred Shares Basic Maintenance
Amount Test.
(i) In the event that a Preferred Shares Basic Maintenance Certificate
or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified
in this Section 12, the Corporation 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.
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 shares of the Series may waive any provision
hereof intended for their 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 shares of the Series 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.
B-15
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:
'AA' Composite Commercial Paper Rate' on any date means (i) the interest
equivalent of the 7-day rate, in the case of a Dividend Period which is 7
days or shorter; for Dividend Periods greater than 7 days but fewer than or
equal to 31 days, the 30-day rate; for Dividend Periods greater than
31 days but fewer than or equal to 61 days, the 60-day rate; for Dividend
Periods greater than 61 days but fewer than or equal to 91 days, the 90 day
rate; for Dividend Periods greater than 91 days but fewer than or equal to
270 days, the rate described in clause (ii) below; for Dividend Periods
greater than 270 days, the Treasury Index Rate; on commercial paper on
behalf of financial issuers whose corporate bonds are rated 'AA' by S&P, or
the equivalent of such rating by another nationally recognized rating
agency, as announced by the Federal Reserve Bank of New York for the close
of business on the Business Day immediately preceding such date; or (ii) if
the Federal Reserve Bank of New York does not make available such a rate,
then the arithmetic average of the interest equivalent of such rates on
commercial paper placed on behalf of such issuers, as quoted on a discount
basis or otherwise by the Commercial Paper Dealers to the Auction Agent for
the close of business on the Business Day immediately preceding such date
(rounded to the next highest .001 of 1%). If any Commercial Paper Dealer
does not quote a rate required to determine the 'AA' Composite Commercial
Paper Rate, such rate shall be determined on the basis of the quotations (or
quotation) furnished by the remaining Commercial Paper Dealers (or Dealer),
if any, or, if there are no such Commercial Paper Dealers, by the Auction
Agent as agreed to by Merrill Lynch & Co. For purposes of this definition,
(A) 'Commercial Paper Dealers' shall mean (1) Salomon Smith Barney Inc.,
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Goldman Sachs & Co.; (2) in lieu of any thereof, its respective Affiliate or
successor; and (3) in the event that any of the foregoing shall cease to
quote rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of
such issuers then making such quotations selected by the Corporation, and
(B) 'interest equivalent' of a rate stated on a discount basis for
commercial paper of a given number of days' maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of
1%) of (1) such rate expressed as a decimal, divided by (2) the difference
between (x) 1.00 and (y) a fraction, the numerator of which shall be the
product of such rate expressed as a decimal, multiplied by the number of
days in which such commercial paper shall mature and the denominator of
which shall be 360.
'Affiliate' means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Corporation; provided,
however, that no Broker-Dealer controlled by, in control of or under common
control with the Corporation 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.
'All Hold Rate' means the 7-day 'AA' Composite Commercial Paper Rate.
B-16
'AMPS' has the meaning set forth in Article FIRST of these Articles
Supplementary.
'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 Series are the subject of Submitted Hold
Orders for the Auction in respect thereof, the All Hold Rate.
'Approved Price' means the 'fair value' as determined by the Corporation
in accordance with the valuation procedures adopted from time to time by the
Board of Directors and for which the Corporation receives a mark-to-market
price (which, for the purpose of clarity, does not mean a Market Value
Price) from an independent source at least semi-annually.
'Asset Coverage Cure Date' has the meaning set forth in Section 3(a)(ii)
of these Articles Supplementary.
'Auction' means each periodic operation of the Auction Procedures.
'Auction Agent' means The Bank of New York unless and until another
commercial bank, trust company, or other financial institution appointed by
a resolution of the Board of Directors enters into an agreement with the
Corporation to follow the Auction Procedures for the purpose of determining
the Applicable Rate.
'Auction Date' means the first Business Day next preceding the first day
of a Dividend Period for the Series.
'Auction Procedures' means the procedures for conducting Auctions as set
forth in Part II of these Articles Supplementary.
'Auditor's Certificate' has the meaning set forth in Section 12(f) of
Part I of these Articles Supplementary.
'Beneficial Owner' 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 the 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.
B-17
'Date of Original Issue' means the date on which the Series is
originally issued by the Corporation.
'Default' has the meaning set forth in Section 2(c)(ii) of Part I of
these Articles Supplementary.
'Default Period' has the meaning set forth in Sections 2(c)(ii) or (iii)
of Part I of these Articles Supplementary.
'Default Rate' has the meaning set forth in Sections 2(c)(iii) of
Part I of these Articles Supplementary.
'Deposit Securities' means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets,
rated at least AAA or A-1 by S&P, except that, for purposes of optional
redemption, such obligations or securities will be considered 'Deposit
Securities' only if they also are rated at least P-1 by Moody's.
'Discount Factor' means the S&P Discount Factor (if S&P is then rating
the Series), the Moody's Discount Factor (if Moody's is then rating the
Series) or the discount factor established by any Other Rating Agency which
is then rating the Series and which so requires, whichever is applicable.
'Discounted Value' means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor, provided that with respect
to an Eligible Asset that is currently callable, Discounted Value will be
equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable,
Discounted Value will be equal to the quotient as calculated above or the
par value, whichever is lower.
'Dividend Default' has the meaning set forth in Section 2(c)(ii) of
Part I of these Articles Supplementary.
'Dividend Payment Date' 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 Series), S&P Eligible Assets (if S&P is then rating the Series),
and/or Other Rating Agency Eligible Assets if any Other Rating Agency is
then rating the Series, 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 Series, the registered holder of
shares of the Series as the same appears on the stock ledger or stock
records of the Corporation.
'Investment Manager' means Cohen & Steers Capital Management, Inc.
'Liquidation Preference' means $25,000 per share of the Series.
'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
B-18
day, the securities are valued at the closing mean prices on such day and
provided further that, if no 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 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' means, on any date on which the Applicable Rate is
determined, the applicable percentage of the 'AA' Composite Commercial Paper
Rate on the date of such Auction determined as set forth below based on the
lower of the credit ratings assigned to the Series by Moody's and S&P subject to
upward but not downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers; provided that immediately following
any such increase the Corporation would be in compliance with the Preferred
Shares Basic Maintenance Amount.
MOODY'S S&P APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or Above AA- or Above 150%
A3 or A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 225%
Below Baa3 Below BBB- 275%
'Moody's' means Moody's Investors Service, Inc. and its successors at law.
'Moody's Discount Factor' means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined as follows. The
Moody's Discount Factor for any Moody's Eligible Asset other than the securities
set forth below will be the percentage provided in writing by Moody's.
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common stock of REITs 154%
Preferred stock of REITs
with Senior Implied Moody's (or S&P) rating: 154%
without Senior Implied Moody's (or S&P) rating: 208%
Preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P) rating: 208%
without Senior Implied Moody's (or S&P) rating: 250%
(footnotes on next page)
B-19
(footnotes from previous page)
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed 30%
of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
Assets.
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is below $500
million.
(b) Debt Securities of REITs and Other Real Estate Companies:
TERMS OF MATURITY OF
NON-INVESTMENT GRADE BONDS Aaa Aa A Baa Ba B NR(1)
-------------------------- --- -- - --- -- - -----
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) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the corporation's or municipal
issuer'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 or municipal 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 the Corporate or Municipal Debt Tables. 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. Split rated securities assigned by S&P and Fitch will be
accepted at the lower of the two ratings.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY STRIPS U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 115%
3 years or less (but longer than 2 years) 118% 121%
4 years or less (but longer than 3 years) 123% 128%
5 years or less (but longer than 4 years) 128% 135%
7 years or less (but longer than 5 years) 135% 147%
10 years or less (but longer than 7 years) 141% 163%
15 years or less (but longer than 10 years) 146% 191%
20 years or less (but longer than 15 years) 154% 218%
30 years or less (but longer than 20 years) 154% 244%
(d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P or Fitch 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-20
'Moody's Eligible Assets' means the following:
(a) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies. (i) Common stock of REITs and preferred
stock and any debt security of REITs and Other Real Estate Companies:
(A) which comprise at least 7 of the 14 Moody's Real Estate
Industry/Property Sector Classifications ('Moody's Sector
Classifications') listed below and of which no more than 35% may
constitute a single such classification; (B) which in the aggregate
constitute at least 40 separate 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 7.0% of the
Market Value of Moody's Eligible Assets, and (D) issued by a single
issuer which, with respect to 50% of the Market Value of Moody's Eligible
Assets, constitute in the aggregate no more than 5% of Market Value of
Moody's Eligible Assets; and
(ii) Unrated debt securities issued by an issuer which: (A) has not
filed for bankruptcy within the past three years; (B) is current on all
principal and interest on its fixed income obligations; (C) is current on
all preferred stock dividends; (D) possesses a current, unqualified
auditor's report without qualified, explanatory language and (E) in the
aggregate do not exceed 10% of the discounted Moody's Eligible Assets;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if
(i) the counterparty to the swap transaction has a short-term
rating of not less than P-1 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;
(ii) the original aggregate notional amount of the interest rate
swap transaction or transactions is not to be greater than the
liquidation preference of the AMPS originally issued;
(iii) the interest rate swap transaction will be marked-to-market
daily;
(iv) 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
(v) 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;
(c) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(d) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2, or (C) in all other cases, the supporting entity (1) is rated
A2 and the security matures within one month, (2) is rated A1 and the
security matures within three months or (3) is rated at least Aa3 and the
security matures within six months; provided, however, that for purposes
of this definition, such instruments (other than commercial paper rated
by S&P and not rated by Moody's) need not meet any otherwise applicable
Moody's rating criteria; and
(e) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within 49 days of the relevant valuation date) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades which
generated such receivables are (A) settled through clearing house firms
with respect to which the Corporation has received prior written
authorization from Moody's or (B) (1) with counterparties having a
Moody's long-term debt rating of at least Baa3 or (2) with
B-21
counterparties having a Moody's Short-Term Money Market Instrument rating
of at least P-1.
'Moody's Real Estate Industry/ Property Sector Classification' means,
for the purposes of determining Moody's Eligible Assets, each of the
following Industry Classifications (as defined by the National Association
of Real Estate Investment Trusts, 'NAREIT'):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment in
consultation with the independent auditor and/or Moody's, as necessary.
'1933 Act' means the Securities Act of 1933, as amended.
'1940 Act' means the Investment Company Act of 1940, as amended.
'1940 Act Preferred Shares Asset Coverage' means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least
200% with respect to all outstanding senior securities of the Corporation
which are stock, including all outstanding shares of the Series (or such
other asset coverage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring dividends on its
common shares), determined on the basis of values calculated as of a time
within 48 hours (not including Sundays or holidays) next preceding the time
of such determination.
'1940 Act Preferred Shares Asset Coverage Certificate' means the
certificate required to be delivered by the Corporation pursuant to Section
12(e) of these Articles Supplementary.
'Notice of Redemption' means any notice with respect to the redemption
of the Series 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 Series 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 Series.
'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.
B-22
'Outstanding' means, as of any date, shares of the Series theretofore
issued by the Corporation except, without duplication, (i) any shares of the
Series 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 shares
of the Series 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 shares of the Series 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 shares of the Series 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, shares of the Series 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 'Persons' means and includes an individual, a partnership,
the corporation, a trust, a corporation, a limited liability company, an
unincorporated association, a joint venture or other entity or a government
or any agency or political subdivision thereof.
'Potential Beneficial Owner or Holder' has the meaning set forth in
Section 1 of Part II of these Articles Supplementary.
'Preferred Shares Basic Maintenance Amount' means as of any Valuation
Date as the dollar amount equal to the difference of:
(i) the sum of (A) the product resulting from multiplying the number
of shares of the Series outstanding on such date by the Liquidation
Preference per share (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 Series (or other preferred shares) then subject to
redemption; plus (B) the aggregate amount of dividends that will have
accumulated (whether or not earned or declared) for the shares of the
Series outstanding and any other series of preferred shares outstanding
on such date to the 30th day after such Valuation Date; plus (C) the
aggregate amount of dividends that would accumulate on shares of the
Series outstanding from the first Dividend Payment Date after the
Valuation Date therefor through the 56th day after such Valuation Date,
at the Maximum Rate (plus the aggregate amount of dividends that would
accumulate on other outstanding preferred shares from the first
respective dividend payment date for such shares after the Valuation
Date through the 56th day after such Valuation Date, at the respective
maximum rates for such other outstanding preferred shares); plus (D)
the amount of anticipated Corporation non-interest expenses for the 90
days subsequent to such Valuation Date; plus (E) the amount of the
current outstanding balances of any indebtedness which is senior to
the shares of the Series plus interest actually accrued together
with 30 days additional interest on the current outstanding balances
calculated at the current rate; plus (F) any other current liabilities
payable during the 30 days subsequent to such Valuation Date, including,
without limitation, indebtedness due within one year and any redemption
premium due with respect to shares of the Series and any other
outstanding series of preferred shares for which a Notice of Redemption
or notice of redemption, respectively, has been given, as of such
Valuation Date, to the extent not reflected in any of (i)(A) through
(i)(E); and plus (G) any current liabilities as of such Valuation
Date to the extent not reflected in any of (i)(A) through (i)(F); less
(ii) the sum of any cash plus the value of any of the Corporation's
assets irrevocably deposited by the Corporation for the payment of any
(i)(B) through (i)(F) ('value,' for purposes of this clause (ii), means
the Discounted Value of the security, except that if the
B-23
security matures prior to the relevant redemption payment date and is
either fully guaranteed by the U.S. Government or is rated at least P-1
by Moody's and A-1 by S&P, it will be valued at its face value).
'Preferred Shares Basic Maintenance Amount Test' means a test which is
met if the lower of the aggregate Discounted Values of the Moody's Eligible
Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares
Basic Maintenance Amount.
'Preferred Shares Basic Maintenance Certificate' has the meaning set
forth in Section 12(d) of Part I of these Articles Supplementary.
'Pricing Service' means any of the following: Bloomberg, Bridge
Information Services, Data Resources Inc., Interactive Data, International
Securities Market Association, Merrill Lynch Securities Pricing Service,
Muller Data Corp., Reuters, Standard & Poors/J.J. Kenny, Telerate, Trepp
Pricing and Wood Gundy.
'Rating Agency' means Moody's and S&P as long as such rating agency is
then rating the Series.
'Redemption Date' has the meaning set forth in Section 2(c)(ii) of
Part II of these Articles Supplementary.
'Redemption Default' has the meaning set forth in Section 2(c)(ii) of
Part I of these Articles Supplementary.
'Redemption Price' has the meaning set forth in Section 3(a)(i) of
Part I of these Articles Supplementary.
'Reference Rate' means, with respect to the determination of the Default
Rate, the applicable 'AA' Composite Commercial Paper Rate (for a Dividend
Period of fewer than 184 days) or the applicable Treasury Index Rate (for a
Dividend Period of 184 days or more).
'Registrar' means The Bank of New York, unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Corporation to serve as transfer agent.
'REIT' or real estate investment trust, means a company dedicated to
owning, and usually operating, income producing real estate, or to financing
real estate.
'S&P' means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors at law. 'S&P Discount Factor' means, for purposes of
determining the Discounted Value of any S&P Eligible Asset, the percentage
determined as follows. The S&P Discount Factor for any S&P Eligible Asset
other than the securities set forth below will be the percentage provided in
writing by S&P:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
MINIMUM NUMBER OF:
Issuers(1) 44 40 44 30
Real Estate Industry/Property Sectors(2) 10 8 7 7
PERCENT OF ASSETS IN:
Largest Real Estate Industry/Property Sector 17% 25% 30% 30%
2nd Largest Real Estate Industry/Property Sector 15% 20% 25% 25%
3rd Largest Real Estate Industry/Property Sector 12% 15% 15% 15%
4th Largest Real Estate Industry/Property Sector 12% 12% 12% 12%
S&P DISCOUNT FACTOR:
common stock 190% 208% 223% 231%
preferred stock(3) 157% 167% 174% 178%
---------
(1) Three issuers may each constitute 6% of assets and four issuers may each
constitute 5% of assets.
(footnotes continued on next page)
B-24
(footnotes continued from previous page)
(2) As defined by NAREIT.
(3) Applies to preferred stock of real estate companies, subject to
diversification guidelines whereby at least 34% of the preferred assets are
rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
Moody's equivalent) or greater; and the balance of the preferred assets is
rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
common stock will apply to preferred stock which is not in compliance with
the diversification standard.
(b) Debt Securities:
DIVERSIFICATION STANDARD
-------------------------------------
BOND RATING(1) LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
-------------- ------- ------- ------- -------
A 116% 117% 119% 118%
A- 117% 119% 120% 120%
BBB+ 119% 121% 122% 122%
BBB 121% 122% 124% 124%
BBB- 122% 124% 126% 126%
BB+ 127% 130% 133% 132%
BB 133% 137% 141% 139%
BB- 139% 144% 149% 147%
B+ 152% 159% 166% 164%
B 163% 172% 182% 179%
B- 176% 188% 202% 197%
CCC+ 198% 212% 230% 224%
CCC 236% 262% 295% 284%
---------
(1) The S&P Discount Factors for debt securities 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) If a security is unrated by S&P but is rated by Moody's, the conversion
chart under S&P OC Test Rating Chart will apply.
(c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:
52-week Treasury Bills* 102%
Two-Year Treasury Notes 104%
Three-Year Treasury Notes 108%
Five-Year Treasury Notes 109%
10-Year Treasury Notes 115%
30-Year Treasury Bonds 126%
---------
* Treasury Bills with maturities of less than 52 weeks will be discounted at the
appropriate Short-Term Money Market Instrument levels. Treasury Bills that
mature the next day are considered cash equivalents and are valued at 100%.
Treasury Strips: Treasury interest-only Strips will apply the discount factor
for the Treasury category set forth above following the maturity of the Treasury
Strip, e.g., a Treasury interest-only Strip with a maturity of seven years will
apply the discount factor for the U.S. Treasury securities with a 10-year
maturity. Treasury principal-only Strips will apply the discount factor that is
two categories greater than its maturity, e.g., a Treasury principal-only Strip
with a maturity of seven years will apply the discount factor for U.S. Treasury
securities with a 30-year maturity.
(d) Cash and Cash Equivalents: The S&P Discount Factor applied to Cash and
Cash Equivalents will be (A) 100% and (B) 102% for those portfolio securities
which mature in 181 to 360 calendar days.
'S&P Eligible Assets' means the following:
(a) Common Stock, Preferred Stock and any debt securities of REITs
and Real Estate Companies;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the
swap transaction has a short-term rating of not less than A-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is A+ or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
B-25
transactions is not to be greater than the liquidation preference of the
Series and any other outstanding preferred shares originally issued. The
interest rate swap transaction will be marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);
(d) Short-Term Money Market Instruments so long as (A) such
securities are issued by an institution, which, at the time of
investment, is a permitted bank (including commercial paper issued by a
corporation which complies with the applicable assumptions that follow)
('permitted bank' means any bank, domestic or foreign, whose commercial
paper is rated A-1+) provided, however, that Short-Term Money Market
Instruments with maturities of 30 days of less, invested in an
institution rated A-1 may comprise up to 20% of eligible portfolio
assets; and
(e) Cash, which is any immediately available funds in U.S. dollars or
any currency other than U.S. dollars which is a freely convertible
currency, and Cash Equivalents, which means investments (other than Cash)
that are one or more of the following obligations or securities:
(i) U.S. Government Securities; (ii) certificates of deposits of,
banker's acceptances issued by or money market accounts in any depository
institution or trust company incorporated under the laws of the United
States of America or any state thereof and subject to supervision and
examination by Federal and/ or state banking authorities, so long as the
deposits offered by such depository institution or trust company at the
time of such investments are rated and have a rating of at least 'P-1' by
Moody's and 'A-1+' by S&P (or, in the case of the principal depository
institution in a holding company system whose deposits are not so rated,
the long term debt obligations of such holding company are rated and such
rating is at least 'A-1' by Moody's and 'A+' by S&P); (iii) commercial
paper issued by any depositary institution or trust company incorporated
under the laws of the United States of America or any state thereof and
subject to supervision and examination by Federal and/or state banking
authorities, or any corporation incorporated under the laws of the United
States of America or any state thereof, so long as the commercial paper
of such issuer is rated and has at the time of such investment a short
term rating of at least 'P-1' by Moody's and 'A-1+' by S&P on its
commercial paper; (iv) securities bearing interest or sold at a discount
issued by any corporation incorporated under the laws of the United
States of America or any state thereof the obligations of which at the
time of such investment are rated and that have a credit rating of at
least 'P-1' by Moody's and 'A-1+' by S&P either at the time of such
investment or the making of a contractual commitment providing for such
investment; (v) shares of any money market fund organized under the laws
of a jurisdiction other than the United States, so long as such money
market fund is rated and has at the time of such investment a short-term
rating of at least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and
ownership of such investments will not cause the issuer to become engaged
in a trade or business within the United States for U.S. Federal income
tax purposes or subject the issuer to tax on a net income basis; and
(vi) unleveraged overnight repurchase obligations on customary terms with
respect to investments described in clauses (i) through (iv) above
entered into a depository institution, trust company or corporation that
has a short-term rating of at least 'A-1+' by S&P; provided, that (i) in
no event will Cash Equivalents include any obligation that provides for
payment of interest alone; (ii) Cash Equivalents referred to in clauses
(ii) and (iii) above will mature within 183 days of issuance;
(iii) either Moody's or S&P changes its rating system, then any ratings
included in this definition will be deemed to be an equivalent rating in
a successor rating category of Moody's or S&P, as the case may be;
(iv) if either Moody's or S&P is not in the business of rating
securities, then any ratings included in this definition will be deemed
to be an equivalent rating from another Rating Agency; (v) Cash
Equivalents (other than U.S. Government Securities or money market funds
maintained by the Custodian) will not include any such investment of more
than $100 million in any single issuer; and (vi) in no event will Cash
Equivalents include any obligation that is not denominated in Dollars,
any synthetic securities, any Securities with ratings containing an
B-26
'r' subscript, and IOs or any POs (other than commercial paper with a
maturity within 183 days of issuance).
'S&P OC Test Rating Chart' means the chart set forth below:
MOODY'S RATING MAPPED S&P RATING
-------------- -----------------
Aaa AA+
Aa1 AA
Aa2 AA-
Aa3 A+
A1 A
A2 A-
A3 BBB+
Baa1 BBB
Baa2 BBB-
Baa3 BB+
Ba1 BB-
Ba2 B+
Ba3 B
B1 B-
B2 CCC+
B3 CCC
Caa CCC-
NR or below Caa NR
'S&P Real Estate Industry/Property Sector Classification' means, for the
purposes of determining S&P Eligible Assets, each of the following Industry
Classifications (as defined by NAREIT):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment, and, when
necessary will consult with the independent auditor and/or S&P, as
necessary.
'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 Series.
'Sell Order' has the meaning set forth in Section 2(ii) of Part II of
these Articles Supplementary.
B-27
'Short-Term Money Market Instrument' means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Corporation, the remaining term to maturity thereof is not in excess of 180
days:
(i) commercial paper rated A-1 if such commercial paper matures in
30 days or A-1+if such commercial paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof or the District of Columbia or (B) a United States branch office
or agency of a foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) overnight funds; and
(iv) U.S. Government Securities.
'Special Dividend Period' means a Dividend Period that is not a Standard
Dividend Period.
'Specific Redemption Provisions' means, with respect to any Special
Dividend Period of more than one year, either, or any combination of (i) a
period (a 'Non-Call Period') determined by the Board of Directors after
consultation with the Broker-Dealers, during which the shares subject to
such Special Dividend Period are not subject to redemption at the option of
the Corporation and (ii) a period (a 'Premium Call Period'), consisting of a
number of whole years as determined by the Board of Directors after
consultation with the Broker-Dealers, during each year of which the shares
subject to such Special Dividend Period will be redeemable at the
Corporation's option at a price per share equal to the Liquidation
Preference plus accumulated but unpaid dividends (whether or not earned or
declared) plus a premium expressed as a percentage or percentages of the
Liquidation Preference or expressed as a formula using specified variables
as determined by the Board of Directors after consultation with the
Broker-Dealers.
'Standard Dividend Period' means a Dividend Period of 7 days, unless the
day after such 7th day is not a Business Day, then the number of days ending
on the calendar day next preceding the next Business Day (such Business Day,
being the Dividend Payment Date).
'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
B-28
and that, other than United States Treasury Bills, provide for the periodic
payment of interest and the full payment of principal at maturity or call
for redemption.
'Valuation Date' means the last Business Day of each week, or such other
date as the Corporation and Rating Agencies may agree to for purposes of
determining the Preferred Shares Basic Maintenance Amount.
'Voting Period' has the meaning set forth in Section 6(b) of Part I of
these Articles Supplementary.
'Winning Bid Rate' has the meaning set forth in Section 4(a)(iii) of
Part II of these Articles Supplementary.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Certain Definitions. As used in Part II of these Articles Supplementary,
the following terms 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 Holders or Potential Holders
of shares of the Series.
'Available Shares of the Series' 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 shares
of the Series listed in that person's name in the records of the Auction
Agent or (b) the beneficial owner of those shares of the Series 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 shares of the Series 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 shares of the Series or (b) any other person who may
be interested in acquiring shares of the Series 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.
B-29
'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 shares of the Series are the
subject of Submitted Hold Orders or that the number of shares of the Series
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 shares of the Series 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 shares of the
Series that are subject to Submitted Sell Orders.
'Winning Bid Rate' means the lowest rate specified in the Submitted
Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
specifying such lowest rate and all other Submitted Hold/Sell Orders from
Existing Holders specifying lower rates were accepted and (B) each Submitted
Buy Order from Potential Holders specifying such lowest rate and all other
Submitted Buy Orders from Potential Holders specifying lower rates were
accepted, would result in the Existing Holders described in clause (A) above
continuing to hold an aggregate number of shares of the Series which, when
added to the number of shares of the Series to be purchased by the Potential
Holders described in clause (B) above and the number of shares of the Series
subject to Submitted Hold Orders, would be equal to the number of shares of
the Series.
2. Orders.
(a) On or prior to the Submission Deadline on each Auction Date for shares
of the Series:
(i) each Beneficial Owner of shares of the Series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of the Series held by
such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for such shares for the next
succeeding Dividend Period of such shares;
(B) the number of Outstanding shares, if any, of the Series held by
such Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for such shares for the next succeeding Dividend Period
of such shares will be less than the rate per annum specified by such
Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of the Series held by
such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for such shares for the next succeeding
Dividend Period of such shares; 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 the Series which
each such Potential Beneficial Owner offers to purchase if the Applicable
Rate for such shares for the next succeeding Dividend Period of such shares
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
B-30
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
Series subject to an Auction on any Auction Date will constitute an irrevocable
offer to sell:
(A) the number of Outstanding shares of the Series specified in such Bid
if the Applicable Rate for shares of the 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 the Series
to be determined as set forth in clause (iv) of paragraph (a) of Section 5
of this Part II if the Applicable Rate for such shares determined on such
Auction Date will be equal to the rate specified therein; or
(C) the number of Outstanding shares of the Series specified in such Bid
if the rate specified therein will be higher than the Maximum Rate for such
shares, or such number or a lesser number of Outstanding shares of the
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 such shares and Sufficient Clearing Bids for such
shares do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
the Series subject to an Auction on any Auction Date will constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of the Series specified in such
Sell Order; or
(B) such number or a lesser number of Outstanding shares of the Series
as set forth in clause (iii) of paragraph (b) of Section 5 of this Part II
if Sufficient Clearing Bids for such shares do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of the Series 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 Series subject to an
Auction on any Auction Date will constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of the Series specified in such Bid
if the Applicable Rate for such shares 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 the Series as set forth in clause (v) of
paragraph (a) of Section 5 of this Part II if the Applicable Rate for such
shares determined on such Auction Date will be equal to the rate specified
therein.
(c) No Order for any number of shares of the Series 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 shares of the 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 the Series that are the subject
of such Order;
B-31
(iii) to the extent that such Bidder is an Existing Holder of such
shares:
(A) the number of shares of the Series, if any, subject to any Hold
Order of such Existing Holder;
(B) the number of shares of the Series, if any, subject to any Bid of
such Existing Holder and the rate specified in such Bid; and
(C) the number of shares of the Series, if any, subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of such shares, the
rate and number of such shares 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 shares of the
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 the 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 the 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 the 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 shares of
the 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 such shares will be considered valid, but only
up to and including in the aggregate the number of Outstanding shares of the
Series held by such Existing Holder, and if the number of shares of the
Series subject to such Hold Orders exceeds the number of Outstanding shares
of the 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 the Series held by such Existing Holder;
(ii) (A) any Bid for shares of the Series will be considered valid up to
and including the excess of the number of Outstanding shares of the Series
held by such Existing Holder over the number of shares of the 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 the Series is submitted to the Auction Agent with
the same rate and the number of Outstanding shares of the 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 the Series subject to each Bid with the same rate will be
reduced pro rata to cover the number of shares of the Series equal to
such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of the 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 the 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 the Series by or on behalf of a Potential Holder at
the rate therein specified; and
B-32
(iii) all Sell Orders for shares of the Series will be considered valid
up to and including the excess of the number of Outstanding shares of the
Series held by such Existing Holder over the sum of shares of the 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 Series 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.
(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 Series, the Auction Agent will assemble all valid Orders submitted or
deemed submitted to it by the Broker-Dealers in respect of shares of the 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
the Series:
(i) the excess of the number of Outstanding shares of the Series over
the number of Outstanding shares of the Series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the 'Available Shares
of the Series');
(ii) from the Submitted Orders for shares of the Series whether:
(A) the number of Outstanding shares of the 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
the Series; exceeds or is equal to the sum of
(B) the number of Outstanding shares of the 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 the
Series; and
(C) the number of Outstanding shares of the Series subject to
Submitted Sell Orders(in the event such excess or such equality exists
(other than because the number of shares of the Series in subclauses (B)
and (C) above is zero because all of the Outstanding shares of the 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 the Series); and
(iii) if Sufficient Clearing Bids for shares of the Series exist, the
lowest rate specified in such Submitted Bids (the 'Winning Bid Rate' for
shares of the 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 the 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 the Series which, when added to the
number of Outstanding shares of the Series to be purchased by such
Potential Holders described in subclause (B) above, would equal not less
than the Available Shares of the 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 Series for which an Auction is being held on
the Auction Date and, based on such
B-33
determination, the Applicable Rate for shares of the Series for the next
succeeding Dividend Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of the Series exist, that the
Applicable Rate for all shares of the Series for the next succeeding
Dividend Period thereof will be equal to the Winning Bid Rate for shares of
the Series so determined;
(ii) if Sufficient Clearing Bids for shares of the Series do not exist
(other than because all of the Outstanding shares of the Series are subject
to Submitted Hold Orders), that the Applicable Rate for all shares of the
Series for the next succeeding Dividend Period thereof will be equal to the
Maximum Rate for shares of the Series; or
(iii) if all of the Outstanding shares of the Series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of the Series
for the next succeeding Dividend Period thereof will be the All Hold Rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders will continue to hold the shares of the Series 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 Series have been made,
all Submitted Sell Orders with respect to shares of the 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 the Series will be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids with respect to shares of the Series will be rejected:
(i) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is higher than the Winning Bid Rate for shares
of the Series will be accepted, thus requiring each such Existing Holder
to sell the shares of the Series subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is lower than the Winning Bid Rate for shares of
the Series will be rejected, thus entitling each such Existing Holder to
continue to hold the shares of the Series subject to such Submitted Bids;
(iii)Potential Holders' Submitted Bids for shares of the Series
specifying any rate that is lower than the Winning Bid Rate for shares of
the Series will be accepted;
(iv) each Existing Holder's Submitted Bid for shares of the Series
specifying a rate that is equal to the Winning Bid Rate for shares of the
Series will be rejected, thus entitling such Existing Holder to continue
to hold shares of the Series subject to such Submitted Bid, unless the
number of Outstanding shares of the Series subject to all such Submitted
Bids will be greater than the number of shares of the Series ('remaining
shares') in the excess of the Available Shares of the Series over the
number of shares of the Series 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 shares of the Series
subject to such Submitted Bid, but only in an amount equal to the shares
of the Series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which will be the number of Outstanding shares
of the Series held by such Existing Holder subject to such Submitted Bid
and the denominator of which will be the aggregate number of Outstanding
shares of the Series subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate for
shares of the Series; and
(v) each Potential Holder's Submitted Bid for shares of the Series
specifying a rate that is equal to the Winning Bid Rate for shares of the
Series will be accepted but only in an amount equal to the number of
shares of the Series obtained by multiplying the number of shares in the
excess of the Available Shares of the Series over the number of
B-34
shares of the Series 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 shares of the Series subject to such
Submitted Bid and the denominator of which will be the aggregate number
of Outstanding shares of the Series subject to such Submitted Bids made
by all such Potential Holders that specified a rate equal to the Winning
Bid Rate for shares of the Series.
(b) If Sufficient Clearing Bids for shares of the Series have not been
made (other than because all of the Outstanding shares of the Series are
subject to Submitted Hold Orders), subject to the provisions of paragraph
(d) of this Section 5, Submitted Orders for shares of the Series will be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids for shares of the Series will be rejected:
(i) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of the Series will be rejected, thus entitling such Existing
Holders to continue to hold the shares of the Series subject to such
Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of the Series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of the Series will be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of the Series
specifying any rate that is higher than the Maximum Rate for shares of
the Series and the Submitted Sell Orders for shares of the 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 the 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 the Series obtained by
multiplying the number of shares of the 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 the 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 the Series subject to all such Submitted Bids and
Submitted Sell Orders.
(c) If all of the Outstanding shares of the Series are subject to
Submitted Hold Orders, all Submitted Bids for shares of the 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 Series 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 shares
of the 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 Series.
(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 Series on any Auction
Date, the Auction Agent will, in such manner as it will determine in its
sole discretion, allocate shares of the Series for purchase among Potential
Holders so that only whole shares of the 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
shares of the Series on such Auction Date.
(f) Based on the results of each Auction for shares of the Series, the
Auction Agent will determine the aggregate number of shares of the Series to
be purchased and the aggregate number of shares of the 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,
B-35
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, shares of the 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 Series with respect to whom a Broker-Dealer submitted a Bid to the
Auction Agent for such shares that was accepted in whole or in part, 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 shares
of the Series that have been made in respect of Potential Holders' or
Potential Beneficial Owners' Submitted Bids for shares of the 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 any shares of the
Series or to pay for shares of the Series sold or purchased pursuant to the
Auction Procedures or otherwise.
6. Transfer of AMPS. Unless otherwise permitted by the Corporation, a
Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of shares of the Series 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 shares of the Series 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.
[Remainder of page left blank]
B-36
IN WITNESS WHEREOF, COHEN & STEERS QUALITY INCOME REALTY FUND, INC. has
caused these presents to be signed in its name and on its behalf by its Vice
President and witnessed by its Assistant Secretary as of this day of , 2004.
WITNESS:
By: ..............................
Name: Lawrence B. Stoller
Title: Assistant Secretary
COHEN & STEERS QUALITY
INCOME REALTY FUND, INC.
By: .................................
Name: Adam Derechin
Title: Vice President
THE UNDERSIGNED, Vice President of the COHEN & STEERS QUALITY INCOME REALTY
FUND, INC., who executed on behalf of the Corporation the foregoing Articles
Supplementary hereby acknowledges the foregoing Articles Supplementary to be the
corporate act of the Corporation and hereby certifies to the best of his
knowledge, information, and belief that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
By: .................................
Name: Adam Derechin
Title: Vice President
B-37
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
Part A -- Financial Highlights for the six months ended June 30, 2004
(unaudited), the year ended December 31, 2003 (audited) and the
period February 28, 2002 through December 31, 2002 (audited)
Part B -- Report of Independent Accountants
-- Statement of Assets and Liabilities, as of December 31, 2003
(audited)
-- Statement of Operations, for the year ended December 31, 2003
(audited)
-- Statement of Changes in Net Assets, for the year ended
December 31, 2003 and the period February 28, 2002 through
December 31, 2002 (audited)
-- Notes to Financial Statements (audited)
-- Statement of Assets and Liabilities, as of June 30, 2004
(unaudited)
-- Statement of Operations for the six months ended June 30, 2004
(unaudited)
-- Statement of Changes in Net Assets for the six months ended
June 30, 2004 (unaudited) and the period February 28, 2002 through
December 31, 2002 (audited)
-- Financial Highlights for the six months ended June 30, 2004
(unaudited) and the period February 28, 2002 through December 31,
2002 (audited)
-- Notes to Financial Statements (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'
-- (i) Articles of Amendment.'D''D'
(b) -- By-Laws. Incorporated by reference to the Registration
Statement.'D'
(c) -- Not applicable.
(d) -- (i) Form of Articles Supplementary Creating Series M7
Auction Market Preferred Shares.*
-- (ii) Specimen Certificate for Series M7 Auction Market
Preferred Shares.*
(e) -- Dividend Reinvestment Plan.'D''D'
(f) -- Not applicable.
(g) -- Investment Management Agreement.'D''D'
(h) -- Form of Purchase Agreement.*
(i) -- Not applicable.
(j) -- Form of Master Custodian Agreement.'D''D'
(k) -- (i) Form of Transfer Agency, Registrar and Dividend
Disbursing Agreement.'D''D'
-- (ii) Form of Administration Agreement between the Fund
and the Investment Manager.'D''D'
-- (iii) Form of Administration Agreement between the Fund
and State Street Bank and Trust Company.'D''D'
-- (iv) Form of Auction Agency Agreement between the Fund
and The Bank of New York.*
-- (v) Form of Broker-Dealer Agreement.*
C-1
(l) -- (i) Opinion and Consent of Simpson Thacher & Bartlett
LLP.*
-- (ii) Opinion and Consent of Venable LLP.*
(m) -- Not applicable.
(n) -- Consent of Independent Registered Public Accounting
Firm.*
(o) -- Not applicable.
(p) -- Not applicable.
(q) -- Not applicable.
(r) -- (i) Code of Ethics of the Fund.'D''D'
-- (ii) Code of Ethics of Investment Manager.'D''D'
(s) -- (i) Powers of Attorney, except for the Powers of Attorney
for Richard E. Kroon,
Frank K. Ross and C. Edward Ward, Jr.'D'
-- (ii) Powers of Attorney for Richard E. Kroon, Frank K.
Ross and C. Edward Ward, Jr.*
---------
* Filed herewith.
'D' Incorporated by reference to the Fund's Registration Statement on
Form N-2, (File Nos. 333-68150 and 811-10481) filed on August 22, 2001.
'D''D' Incorporated by reference to Amendment No. 1 to the Fund's Registration
Statement, (File Nos. 333-68150 and 811-10481) filed January 23, 2002.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The approximate expenses in connection with the Offering, all of which are
being borne by the Registrant, are as follows:
Printing Costs.............................................. $125,000
Legal Fees.................................................. $160,000
Auditing Fees............................................... $ 45,000
Registration Fees........................................... $ 11,919
S&P and Moody's Rating Initial Costs........................ $ 52,600
Miscellaneous............................................... $ 1,000
--------
$395,519
--------
--------
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
C-2
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Set forth below is the number of record holders as of November 8, 2004, of
each class of securities of the Registrant:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares............................................... 134
Series T AMPS, par value $0.001 per share................... 1
Series TH AMPS, par value $0.001 per share.................. 1
Series F AMPS, par value $0.001 per share................... 1
Series W AMPS, par value $0.001 per share................... 1
Series M28 AMPS, par value $0.001 per share................. 1
Series M7 AMPS, par value $0.001 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 Charter (the 'Charter'), 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 Charter. 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
stockholders is set forth in Section 5 of the Investment Management Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, 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 whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
The description 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.
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Name Title
----- -------
Robert H. Steers. Co-Chairman and Co-Chief Executive Officer, Director
Martin Cohen......................... Co-Chairman and Co-Chief Executive Officer, Director
Joseph M. Harvey..................... President
Adam Derechin........................ Chief Operating Officer
John J. McCombe...................... Executive Vice President
Douglas R. Bond...................... Executive Vice President
Lawrence B. Stoller.................. Senior Vice President and General Counsel
William F. Scapell................... Senior Vice President, Director of Fixed Income Investments
Robert Becker........................ Senior Vice President
William J. Frischling................ Senior Vice President
James S. Corl........................ Senior Vice President
Kevin P. Norton...................... Senior Vice President
Jay J. Chen.......................... Senior Vice President
Victor M. Gomez...................... Senior Vice President and Chief Financial Officer
Rahul Bhattacharjee.................. Vice President and Director of Investment Research
Anthony Dotro........................ Vice President
Mark Freed........................... Vice President
Robert Tisler........................ Vice President
Norbert Berrios...................... Vice President
Terrance R. Ober..................... Vice President
Thomas Bohjalian..................... Vice President
David Oakes.......................... Vice President
Hoyt Peters.......................... Vice President
Salvatore Rappa...................... Vice President and Associate General Counsel
John McLean.......................... Vice President and Associate General Counsel
Blair Lewis.......................... Vice President
Scott Collins........................ Vice President
Rizaldi Santiago..................... Controller
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 Realty Income Fund, Inc.
Cohen & Steers Premium Income Realty Fund, Inc.
Cohen & Steers Realty Shares, Inc.
Cohen & Steers REIT and Preferred Income Fund, Inc.
Cohen & Steers REIT and Utility Income Fund, Inc.
Cohen & Steers Select Utility Fund, Inc.
Cohen & Steers Total Return Realty Fund, Inc.
Cohen & Steers Realty Focus Fund, Inc.
Cohen & Steers Utility Fund, Inc.
American Skandia Trust -- AST Cohen & Steers Realty Portfolio
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
C-4
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) The Registrant undertakes to suspend the offering of AMPS until the
prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of this Registration Statement or
(2) the 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) The Registrant undertakes that:
a. for the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant
to 497(h) under the 1933 Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective; and
b. for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, its Statement of Additional Information.
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SIGNATURES
Pursuant to requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, 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 12th day of November 2004.
COHEN & STEERS QUALITY INCOME
REALTY FUND, INC.
By: /s/ MARTIN COHEN
..................................
MARTIN COHEN
PRESIDENT, TREASURER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
* Director, Chairman and Secretary November 12, 2004
..........................................
(ROBERT H. STEERS)
/s/ MARTIN COHEN Director, President and Treasurer November 12, 2004
.........................................
(MARTIN COHEN)
* Director November 12, 2004
.........................................
(BONNIE COHEN)
* Director November 12, 2004
.........................................
(GEORGE GROSSMAN)
* Director November 12, 2004
.........................................
(RICHARD E. KROON)
* Director November 12, 2004
.........................................
(RICHARD J. NORMAN)
Director November 12, 2004
.........................................
(FRANK K. ROSS)
* Director November 12, 2004
.........................................
(WILLARD H. SMITH, JR.)
* Director November 12, 2004
.........................................
(C. EDWARD WARD, JR.)
*By: /S/ MARTIN COHEN
.........................................
MARTIN COHEN
ATTORNEY-IN-FACT**
---------
** Powers of attorney were previously filed, except for the powers of attorney
for Richard E. Kroon, Frank K. Ross and C. Edward Ward, Jr., which are filed
herewith.
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STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as................................... 'D'
The division sign shall be expressed as...................................[div]