PROSPECTUS
[LOGO: COHEN & STEERS
REIT AND PREFERRED INCOME FUND]
$51,000,000
COHEN & STEERS
REIT AND PREFERRED INCOME FUND, INC.
AUCTION MARKET PREFERRED SHARES ('AMPS')
2,040 SHARES, SERIES T28
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') is offering
2,040 Series T28 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 and its secondary investment objective is capital appreciation.
Under normal market conditions, the Fund will invest:
at least 40%, but no more than 60%, of its total assets in common stocks
issued by real estate companies, such as real estate investment trusts or
'REITs';
at least 40%, but no more than 60%, of its total assets in preferred
securities of which up to 5% may be preferred securities of REITs;
up to 20% of its total assets in debt securities other than preferred
securities;
(continued on following page)
INVESTING IN THE AMPS INVOLVES CERTAIN RISKS. SEE 'RISK FACTORS' BEGINNING
ON PAGE 36 OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF THE AMPS IS
$25,000.
-----------------
PER SHARE TOTAL
--------- -----
Public offering price....................................... $25,000 $51,000,000
Sales load.................................................. $250 $510,000
Proceeds to the Fund(1)..................................... $24,750 $50,490,000
(1) Not including offering expenses payable by the Fund estimated to be
$335,126.
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 December 10, 2003.
-----------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
UBS INVESTMENT BANK
-----------------
The date of this prospectus is December 8, 2003.
up to 10% of its total assets in preferred or other debt securities that at the
time of the investment are rated below investment grade or that are unrated but
judged to be of comparable quality by the Fund's Investment Manager;
a significant portion, but less than 25%, of its total assets in the securities
of companies principally engaged in the financial services industry. This
policy of investing in the financial services industry and the Fund's
concentration ofits investments in the real estate industry make the Fund
more susceptible to adverse economic or regulatory occurrences affecting
these sectors; and
up to 20% of its total assets in U.S. dollar-denominated securities of foreign
issuers traded or listed on a U.S. securities exchange or in the U.S.
over-the-counter market.
With respect to the preferred securities component of the portfolio, the Fund
expects that it will invest primarily in taxable preferred securities.
There can be no assurance that the Fund will achieve its investment objectives.
See 'Investment Objectives and Policies.' The Fund's investment manager is Cohen
& Steers Capital Management, Inc.
Investors in 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. As of December 1, 2003 the Fund had outstanding 24,800 shares of
eight other series of preferred stock: 3,280 Series M7 AMPS, par value $.001 per
share (the 'Series M7 AMPS'), 3,280 Series T7 AMPS, par value $.001 per share
(the 'Series T7 AMPS'), 3,280 Series W7 AMPS, par value $.001 per share (the
'Series W7 AMPS'), 3,280 Series TH7 AMPS, par value $.001 per share (the
'Series TH7 AMPS'), 3,280 Series F7 AMPS, par value $.001 per share (the
'Series F7 AMPS'), 2,800 Series W28A AMPS, par value $.001 per share (the
'Series W28A AMPS'), 2,800 Series W28B AMPS, par value $.001 per share (the
'Series W28B AMPS') and 2,800 Series W28C AMPS, par value $.001 per share (the
'Series W28C AMPS'). The AMPS offered in this Prospectus rank on a parity with
the Series M7 AMPS, Series T7 AMPS, Series W7 AMPS, Series TH7 AMPS, Series F7
AMPS, Series W28A AMPS, Series W28B AMPS and Series W28C AMPS with respect to
dividends and liquidation preference. The AMPS 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 1.20%. The initial dividend period is from the date of
issuance through January 6, 2004. For subsequent dividend periods, the AMPS will
pay dividends based on a rate set at auction, usually held every 28 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 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 'RNP.' 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........................................ 21
The Fund.................................................... 23
Use of Proceeds............................................. 23
Capitalization.............................................. 24
Investment Objectives and Policies.......................... 25
Use of Leverage............................................. 34
Risk Factors................................................ 36
How the Fund Manages Risk................................... 46
Management of the Fund...................................... 48
Description of AMPS......................................... 51
The Auction................................................. 59
Description of Common Shares................................ 63
Certain Provisions of the Charter and By-Laws............... 63
Conversion to Open-End Fund................................. 65
Repurchase of Common Shares................................. 65
U.S. Federal Taxation....................................... 66
Underwriting................................................ 70
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 71
Legal Opinions.............................................. 71
Independent Accountants..................................... 71
Further Information......................................... 71
Table of Contents for the Statement of Additional
Information............................................... 72
-------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NEITHER THE FUND NOR THE UNDERWRITERS HAVE
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEITHER THE FUND NOR THE UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU
SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS
OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE FUND'S BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE FUND YOU SHOULD
KNOW BEFORE INVESTING. YOU SHOULD READ THE PROSPECTUS BEFORE DECIDING WHETHER TO
INVEST AND RETAIN IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL
INFORMATION, DATED DECEMBER 8, 2003, CONTAINING ADDITIONAL INFORMATION ABOUT THE
FUND, HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS
INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. YOU CAN REVIEW THE TABLE OF
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ON PAGE 72 OF THIS
PROSPECTUS. YOU MAY REQUEST A FREE COPY OF THE STATEMENT OF ADDITIONAL
INFORMATION BY CALLING (800) 437-9912. YOU MAY ALSO OBTAIN THE STATEMENT OF
ADDITIONAL INFORMATION AND OTHER INFORMATION REGARDING THE FUND ON THE
SECURITIES AND EXCHANGE COMMISSION'S WEB SITE (http://www.sec.gov).
3
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the information
that you should consider before investing in AMPS. You should review the more
detailed information contained in this prospectus and in the Statement of
Additional Information (the 'SAI'), especially the information set forth under
the heading 'Risk Factors.'
THE FUND..................................... The Cohen & Steers REIT and Preferred Income Fund,
Inc. (the 'Fund') is a non-diversified, closed-end
management investment company. The Fund was organized
as a Maryland corporation on March 25, 2003 and is
registered under the Investment Company Act of 1940,
as amended (the '1940 Act'). The Fund commenced
investment operations on June 27, 2003 upon the
closing of an initial public offering of 42,750,000
common shares, par value $.001 per share ('Common
Shares'). The Fund issued 3,280 Series M7 AMPS, 3,280
Series T7 AMPS, 3,280 Series W7 AMPS, 3,280
Series TH7 AMPS, 3,280 Series F7 AMPS, 2,800
Series W28A AMPS, 2,800 Series W28B AMPS and 2,800
Series W28C AMPS on August 18, 2003. As of
December 1, 2003, the Fund had 48,251,666 Common
Shares outstanding and net assets, plus the
liquidation value of the Series M7 AMPS, Series T7
AMPS, Series W7 AMPS, Series TH7 AMPS, Series F7
AMPS, Series W28A AMPS, Series W28B AMPS and
Series W28C AMPS, of $1,866,797,414. 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 2,040 Series T28 Auction Market
Preferred Shares, par value $.001 per share (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 described under ' -- Dividends and Rate
Periods' below and 'Description of AMPS -- Dividends
and Rate Periods,' the dividend period for the AMPS
will be 28 days. The auction agent will determine the
dividend rate
4
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 ('DTC') 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 market price or suitability for a
particular investor. The ratings 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 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, together with the
proceeds from our initial public offering, will be
invested in accordance with the policies set forth
under 'Investment Objectives and Policies.' The Fund
estimates that the net proceeds of this offering will
be fully invested in accordance with our investment
objectives and policies within four months of the
completion of this offering. The Fund intends to
invest in income producing common stocks issued by
real estate companies, such as REITs, and preferred
and other debt securities. Pending
5
such investment, those proceeds may be invested in
U.S. Government securities or high quality,
short-term money market instruments.
INVESTMENT OBJECTIVES AND POLICIES........... The Fund's primary investment objective is high
current income. Capital appreciation is its secondary
objective. Our investment objectives and certain
investment policies are considered fundamental and
may not be changed without shareholder approval. See
'Investment Objectives and Policies.'
Under normal market conditions, the Fund seeks to
achieve its objectives through a portfolio of income
producing common stock issued by REITs and preferred
and other debt securities. The Fund currently invests
approximately 56% of its total assets in common
stocks issued by REITs, approximately 40% in
preferred securities and approximately 3% in debt
securities other than preferred securities. These
percentages may vary from time to time consistent
with the Fund's investment objectives, although the
Fund will normally invest at least 40% of its total
assets in common stock issued by real estate
companies, including REITs and at least 40% of its
total assets in preferred securities. At any time,
under normal circumstances at least 80% of the Fund's
total assets will be invested in common stocks issued
by REITs and preferred securities.
Investment Strategies. In making investment decisions
with respect to common stocks and other equity
securities issued by real estate companies, including
REITs, the Investment Manager relies on a fundamental
analysis of each company. The Investment Manager
reviews each company's potential for success in light
of the company's current financial condition, its
industry and sector position, and economic and market
conditions. The Investment Manager evaluates a number
of factors, including growth potential, earnings
estimates and the quality of management.
In making investment decisions with respect to
preferred securities and debt securities, the
Investment Manager seeks to select what it believes
are superior securities (i.e., securities the
Investment Manager views as undervalued on the basis
of risk and return profiles). In making these
determinations, the Investment Manager
6
evaluates the fundamental characteristics of an
issuer, including an issuer's creditworthiness, and
also takes into account prevailing market factors. In
analyzing credit quality, the Investment Manager
considers not only fundamental analysis, but also an
issuer's corporate and capital structure and the
placement of the preferred or debt securities within
that structure. The Investment Manager also takes
into account other factors, such as call and other
structural features, momentum and other exogenous
signals (i.e., the likely directions of ratings) and
relative value versus other income security classes.
Common Stocks Issued by REITs. Under normal market
conditions, at least 40%, but no more than 60%, of
the Fund's total assets will be invested in common
stocks issued by real estate companies, consisting
primarily of REITs. Substantially all of the common
stocks issued by REITs in which the Fund intends to
invest are traded on a national securities exchange
or in the over-the-counter market. A real estate
company derives at least 50% of its revenue from real
estate or has at least 50% of its assets in real
estate. A REIT is a company dedicated to owning, and
usually operating, income producing real estate, or
to financing real estate. REITs are generally not
taxed on income distributed to shareholders provided
they distribute to their shareholders substantially
all of their taxable income (other than net capital
gains) and otherwise comply with the requirements of
the Internal Revenue Code of 1986, as amended (the
'Code'). As a result, REITs generally pay relatively
higher dividends (as compared to other types of
companies) and the Fund intends to use these REIT
dividends in an effort to meet its objective of high
current income. Dividends paid by REITs will not be
eligible for the dividends received deduction (the
'DRD') under Section 243 of the Code and are
generally not considered 'qualified dividend income'
eligible for reduced rates of taxation. The DRD
generally allows corporations to deduct 70% of the
income they receive from dividends that are paid out
of earnings and profits of the issuer. Pursuant to
recently enacted legislation, individuals will
generally be taxed at long-term capital gain rates on
qualified dividend income for taxable years beginning
on or before December 31, 2008. It is the Fund's
current intention to invest
7
approximately 50% of its total assets in common
stocks of real estate companies, consisting primarily
of REITs, although the actual percentage in its
portfolio may change.
Preferred Securities. Under normal market conditions,
at least 40%, but no more than 60%, of the Fund's
total assets will be invested in preferred
securities. Preferred securities pay fixed or
floating dividends to investors and have 'preference'
over common stock in the payment of dividends and the
liquidation of a company's assets. This means that a
company must pay dividends on preferred stock before
paying dividends on its common stock. Preferred
stockholders usually have no right to vote for
corporate directors or on other matters. The Fund
expects that, under current market conditions, it
will invest primarily in taxable preferred
securities. The taxable preferred securities in which
the Fund intends to invest do not qualify for the DRD
and are not expected to provide significant benefits
under the rules relating to qualified dividend
income. Accordingly, any corporate shareholder who
otherwise would qualify for the DRD, and any
individual shareholder who otherwise would qualify to
be taxed at long-term capital gain rates on qualified
dividend income, should assume that none of the
distributions it receives from the Fund will qualify
for the DRD or provide significant benefits under the
rules relating to qualified dividend income. The Fund
may also invest up to 5% of its total assets in
preferred securities issued by REITs. Under current
market conditions, the Fund's investments in
preferred securities consist primarily of taxable
preferred securities. When used in this prospectus,
taxable preferred securities refer generally to
hybrid-preferred securities as well as certain types
of traditional preferred securities that are not
eligible for the DRD (and are not expected to provide
significant benefits under the rules relating to
qualified dividend income), such as REIT preferred
securities.
The Fund also may invest up to 10% of its total
assets in preferred or other debt securities that at
the time of investment are rated below investment
grade (Ba/BB or B) by Moody's, S&P or Fitch Ratings
('Fitch') or that are unrated but judged to be of
comparable quality by the Fund's Investment Manager.
A security will not be
8
considered to be below investment grade quality if it
is rated within the four highest grades (Baa or BBB
or better) by Moody's, S&P or Fitch, or is unrated
but judged to be of comparable quality by the Fund's
Investment Manager. These below investment grade
quality securities are commonly referred to as 'junk
bonds' and are regarded as having predominantly
speculative characteristics with respect to the
payment of interest and repayment of principal.
While the Fund does not currently intend to invest in
illiquid securities (i.e., securities that are not
readily marketable), it may invest up to 10% of its
total assets in illiquid securities.
The Fund may invest up to 20% of its total assets in
debt securities, including convertible debt
securities and convertible preferred securities.
Common stock acquired pursuant to a conversion
feature will be subject to this 20% limitation.
The Fund will invest a significant portion, but less
than 25%, of its total assets in the securities of
companies principally engaged in the financial
services industry (which are prominent issuers of
preferred securities). In addition, under normal
market conditions the Fund will invest at least 40%
of its total assets in common stock issued by real
estate companies, consisting primarily of REITs. This
policy of investing in the financial services
industry and the Fund's concentration of its
investments in the real estate industry make the Fund
more susceptible to adverse economic or regulatory
occurrences affecting these sectors.
The Fund also may invest up to 20% of its total
assets in U.S. dollar-denominated securities of
foreign issuers traded or listed on a U.S. securities
exchange or the U.S. over-the-counter market.
The Fund will generally not invest more than 10% of
its total assets in the securities of one issuer. The
Fund may engage in portfolio trading when considered
appropriate, but short-term trading will not be used
as the primary means of achieving the Fund's
investment objectives.
There are no limits on portfolio turnover, and
investments may be sold without regard to length of
time held when, in the opinion of the Investment
9
Manager, investment considerations warrant such
action. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and
other transactional expenses that are borne by the
Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the
Fund which, when distributed to shareholders, will be
taxable as ordinary income.
Although not intended to be a significant element in
the Fund's investment strategy, from time to time the
Fund may use various other investment management
techniques that also involve certain risks and
special considerations including: engaging in
interest rate and credit derivatives transactions and
using options and financial futures.
There can be no assurance that our investment
objectives will be achieved. See 'Investment
Objectives and Policies.'
INVESTMENT MANAGER........................... Cohen & Steers Capital Management, Inc. (the
'Investment Manager') is the investment manager
pursuant to an Investment Management Agreement. The
Investment Manager was formed in 1986, and as of
December 1, 2003 had approximately $11.4 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 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 AMPS, the Fund may borrow money or issue debt
10
securities such as commercial paper or notes. Any
such borrowings will have seniority over the AMPS,
and payments to holders of AMPS 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 AMPS and the Fund you should consider
certain risks carefully. The primary risks of
investing in AMPS are:
the Fund will not be permitted to declare dividends
or other distributions with respect to your AMPS or
redeem your AMPS unless the Fund meets certain asset
coverage requirements;
if you try to sell your AMPS between auctions you may
not be able to sell any or all of your shares or you
may not be able to sell them for $25,000 per share
or $25,000 per share plus accumulated dividends. If
the Fund has designated a special rate period,
changes in interest rates could affect the price you
would receive if you sold your shares in the
secondary market. You may transfer your shares
outside of auctions only to or through a
broker-dealer that has entered into an agreement
with the auction agent and the Fund or other person
as the Fund permits;
if an auction fails, you may not be able to sell some
or all of your 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;
11
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
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 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
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 a negative impact on the
income and/or asset value of the Fund's investment
portfolio.
In addition, although the offering of AMPS is
conditioned upon receipt of ratings of 'AAA' from S&P
and 'Aaa' from Moody's for the AMPS, there are
additional risks related to the investment policies
of the Fund, such as:
Real Estate Risks. Since at least 40% of the Fund's
total assets normally will be concentrated in common
stock of real estate companies, consisting primarily
of REITs, your investment in the Fund will be
significantly impacted by the performance of the real
estate markets.
12
Property values may fall due to increasing vacancies
or declining rents resulting from economic, legal,
cultural or technological developments. REIT prices
also may drop because of the failure of borrowers to
pay their loans and poor management. Many REITs
utilize leverage, which increases investment risk and
could adversely affect a REIT's operations and market
value in periods of rising interest rates as well as
risks normally associated with debt financing. In
addition, there are specific risks associated with
particular sectors of real estate investments such as
retail, office, hotel, healthcare, and multifamily
properties.
Preferred Securities Risks. There are also special
risks associated with investing in preferred
securities. Preferred securities are more sensitive
to changes in interest rates than common stocks. When
interest rates rise, the value of preferred stocks
may fall. Other risks include deferral or omission of
distributions, greater credit risk than more senior
debt securities, less liquidity than common stocks,
limited voting rights and special redemption rights.
Financial Services Risks. The Fund intends to invest
a significant portion, but less than 25%, of its
total assets in the securities of companies
principally engaged in financial services, which are
prominent issuers of preferred securities. Because
the Fund may invest such amounts in this sector, the
Fund may be more susceptible to adverse economic or
regulatory occurrences affecting that sector.
Foreign Securities Risks. Under normal market
conditions, the Fund may invest up to 20% of its
total assets in U.S. dollar-denominated securities of
foreign issuers traded or listed on a U.S. securities
exchange or in the U.S. over-the-counter market. Such
investments involve certain risks not involved in
domestic investments, including the risk of blockage
of foreign currency exchanges by foreign countries,
less rigorous disclosure or accounting standards and
regulatory practices and adverse political and
economic developments.
Interest Rate Risks. Interest rate risk is the risk
that fixed-income securities such as preferred and
debt securities, and to a lesser extent
dividend-paying common
13
stocks such as REIT common shares, will decline in
value because of changes in market interest rates.
When market interest rates rise, the market value of
such securities generally will fall. The Fund's
investment in such securities means that the net
asset value and market price of the common shares may
tend to decline if market interest rates rise.
During periods of declining interest rates, an issuer
may be able to exercise an option to prepay principal
earlier than scheduled, which is generally known as
call or prepayment risk. If this occurs, the Fund may
be forced to reinvest in lower yielding securities.
This is known as reinvestment risk. Preferred and
debt securities frequently have call features that
allow the issuer to repurchase the securities prior
to its stated maturity. An issuer may redeem an
obligation if the issuer can refinance the debt at a
lower cost due to declining interest rates or an
improvement in the credit standing of the issuer.
During periods of rising interest rates, the average
life of certain types of securities may be extended
because of slower than expected principal payments.
This may lock in a below market interest rate,
increase the security's duration and reduce the value
of the security. This is known as extension risk.
Market interest rates for investment grade
fixed-income securities in which the Fund will invest
have recently declined significantly below the recent
historical average rates for such securities. This
decline may have increased the risk that these rates
will rise in the future (which would cause the value
of the Fund's net assets to decline) and the degree
to which asset values may decline in such events;
however, historical interest rate levels are not
necessarily predictive of future interest rate
levels. See 'Risk Factors -- Interest Rate Risk.'
Credit Risk and Lower-Rated Securities Risk. Credit
risk is the risk that a security in the Fund's
portfolio will decline in price or the issuer will
fail to make dividend, interest or principal payments
when due because the issuer of the security
experiences a decline in its financial status.
Preferred securities normally are subordinated to
bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate
income and claim to corporate assets, and therefore
will be subject to
14
greater credit risk than debt instruments. The Fund
may invest up to 10% (measured at the time of
investment) of its total assets in preferred
securities and other debt securities that are rated
below investment grade. Preferred stock or debt
securities will be considered to be investment grade
if, at the time of the investment, such security has
a rating of 'BBB' or higher by S&P, 'Baa' or higher
by Moody's or an equivalent rating by a nationally
recognized statistical rating agency or, if unrated,
such security is determined by the Investment Manager
to be of comparable quality. Lower-rated preferred
stock or other debt securities, or equivalent unrated
securities, which are commonly known as 'junk bonds,'
generally involve greater volatility of price and
risk of loss of income and principal, and may be more
susceptible to real or perceived adverse economic and
competitive industry conditions than higher grade
securities. It is reasonable to expect that any
adverse economic conditions could disrupt the market
for lower-rated securities, have an adverse impact on
the value of those securities and adversely affect
the ability of the issuers of those securities to
repay principal and interest on those securities.
Anti-Takeover Provisions. Certain provisions of the
Fund's Articles of Incorporation and By-Laws could
have the effect of limiting the ability of other
entities or persons to acquire control of the Fund or
to modify the Fund's structure. The provisions may
have the effect of depriving you of an opportunity to
redeem your shares and may have the effect of
inhibiting conversion of the Fund to an open-end
investment company. See 'Certain Provisions of the
Charter and By-Laws' and 'Risk
Factors -- Anti-Takeover Provisions.'
Market Disruption Risk. The terrorist attacks in the
U.S. on September 11, 2001 had a disruptive effect on
the securities markets. The war in Iraq and
instability in the Middle East also have resulted in
recent market volatility and may have long-term
effects on the U.S. and worldwide financial markets
and may cause further economic uncertainties in the
U.S. and worldwide. The Fund does not know how long
the securities markets will continue to be affected
by these events and cannot
15
predict the effects of the war or similar events in
the future on the U.S. economy and securities
markets.
Given the risks described above, an investment in the
AMPS may not be appropriate for all investors. You
should carefully consider your ability to assume
these risks before making an investment in the fund.
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 of the AMPS offered in this Prospectus.
For subsequent rate periods, the AMPS will pay
dividends based on a rate set at auctions normally
held every 28 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.
DIVIDEND
INITIAL PAYMENT DATE NUMBER OF
DIVIDEND FOR INITIAL DAYS OF INITIAL
RATE RATE PERIOD RATE PERIOD
---- ----------- -----------
Series T28........... 1.20% January 7, 2004 28
The Fund may, subject to certain conditions,
designate special rate periods of more than 28 days.
The Fund may not designate a special rate period
unless sufficient clearing bids were made in the most
recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory
redemptions and any additional dividends payable
prior to such date must be paid in full. The Fund
also must have received confirmation from Moody's and
S&P or any substitute rating agency that the proposed
special rate period will not adversely affect such
agency's then-current rating on the AMPS and the lead
Broker-Dealer designated by the
16
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 its 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 or any variable rate borrowing. The payment
obligations would be based on the notional amount of
the swap. In an interest rate cap, the Fund would pay
a premium to the counterparty to the interest rate
cap and, to the extent that a specified variable rate
index exceeds a predetermined fixed rate, would
receive from the counterparty payments of the
difference based on the notional amount of such cap.
If the counterparty to an interest rate swap or cap
defaults, the Fund would be obligated to make the
payments that it had intended to avoid. Depending on
the general state of short-term interest rates and
the returns on the Fund's portfolio securities at
that point in time, this default could negatively
impact the Fund's ability to make dividend payments
on the 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
17
will not be able to obtain a replacement transaction
or that the terms of the replacement will not be as
favorable as on the expiring transaction. If this
occurs, it could have a negative impact on the Fund's
ability to make dividend payments on the AMPS. If the
Fund fails to maintain the required asset coverage on
the outstanding AMPS or fails to comply with other
covenants, the Fund may be required to redeem some or
all of these shares. Such redemption likely would
result in the Fund seeking to terminate early all or
a portion of any swap or cap transaction. Early
termination of the swap could result in a termination
payment by or to the Fund. Early termination of a cap
could result in a termination payment to the Fund.
The Fund would not enter into interest rate swap or
cap transactions having a notional amount that
exceeded the outstanding amount of the AMPS. See 'How
the Fund Manages Risk -- Interest Rate Transactions'
for additional information.
ASSET MAINTENANCE............................ Under the Fund's Articles Supplementary for the AMPS,
which establishes and fixes the rights and
preferences of the AMPS (and the Series M7,
Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS), the
Fund must maintain:
asset coverage of the AMPS (and the Series M7,
Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS) as
required by the rating agency or agencies rating the
AMPS; and
asset coverage of at least 200% with respect to
senior securities that are stock, including the AMPS.
In the event that the Fund does not maintain or cure
these coverage tests, some or all of the AMPS will be
subject to mandatory redemption. See 'Description of
AMPS -- Redemption.'
Based on the composition of the Fund's portfolio as
of December 1, 2003, the asset coverage of the AMPS
(and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and
Series W28C AMPS), as measured pursuant to the 1940
Act, would be approximately 286% if the Fund were to
issue all of the AMPS offered in this prospectus,
representing
18
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 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 the holders of the AMPS,
and the holders of any other series of preferred
stock of the Fund, voting as a separate class, have
the right to:
elect at least two directors at all times; and
elect a majority of the directors if at any time the
Fund fails to pay dividends on 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 Articles of Incorporation (which, as
hereafter amended, restated or supplemented from time
to time is, together with the Articles Supplementary,
referred to as the 'Charter'), the 1940 Act and
Maryland law. Each Common Share, each share of the
AMPS, and each share of any other series of preferred
stock of the Fund is entitled to one vote per share.
FEDERAL INCOME TAXATION...................... The distributions with respect to 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
19
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 Internal Revenue Service ('IRS') currently
requires that a regulated investment company that has
two or more classes of stock allocate to each such
class proportionate amounts of each type of its
income (such as ordinary income and capital gains)
based upon the percentage of total dividends
distributed to each class for the tax year.
Accordingly, the Fund intends each year to allocate
capital gain dividends, dividends qualifying for the
DRD and dividends derived from qualified dividend
income, if any, among its Common Shares, the AMPS and
the Series M7, Series T7, Series W7 , Series TH7,
Series F7, Series W28A, Series W28B and Series W28C
AMPS in proportion to the total dividends paid to
each class during or with respect to such year. See
'U.S. Federal Taxation.'
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR.......... State Street Bank serves as the Fund's custodian. The
Bank of New York serves as auction agent, transfer
agent, dividend paying agent and registrar for the
AMPS.
20
FINANCIAL HIGHLIGHTS (UNAUDITED)
Information contained in the table below under the headings 'Per Share
Operating Performance' and 'Ratios/Supplemental Data' shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on June 27, 2003 through September 30, 2003.
The following table includes selected data for a share outstanding
throughout each period and other performance information derived from the Fund's
Unaudited Financial Statements included in the Statement of Additional
Information dated December 8, 2003. It should be read in conjunction with the
Unaudited Financial Statements and notes thereto.
FOR THE PERIOD
JUNE 27, 2003(1)
THROUGH
SEPTEMBER 30, 2003
(UNAUDITED)
-----------
PER SHARE OPERATING PERFORMANCE:
Net asset value per common share, beginning of period....... $ 23.88
---------
Income from investment operations:
Net investment income................................... 0.33 (5)
Net realized and unrealized gain on investments......... 1.05 (5)
---------
Total income from investment operations............. 1.38
Less distributions to preferred shareholders................ (0.02)
---------
Total from investment operations applicable to
common shares..................................... 1.36
---------
Less: Offering costs charged to paid-in capital
-- common shares.................................... (0.05)(5)
Offering costs charged to paid-in capital
-- preferred shares................................. (0.16)(5)
Dilutive effect of common share offering............... (0.01)(5)
---------
Total offering costs............................ (0.22)
---------
Less: distributions to common shareholders.................. (0.34)
---------
Net increase in net asset value............................. 0.80
---------
Net asset value, per common share, end of period............ $ 24.68
---------
---------
Market value, per common share, end of period............... $ 24.57
---------
---------
Net asset value total return(2)............................. 4.83%(3)
---------
---------
Market value return(2)...................................... - 0.34%(3)
---------
---------
(table continued on next page)
21
(table continued from previous page)
FOR THE PERIOD
JUNE 27, 2003(1)
THROUGH
SEPTEMBER 30, 2003
(UNAUDITED)
-----------
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period (in
millions)................................................. $ 1,191.0
---------
---------
Ratio of expenses to average daily net assets applicable to
common shares............................................. 1.02%(4)
---------
---------
Ratio of net investment income to average daily net assets
applicable to common shares............................... 5.09%(4)
---------
---------
Ratio of expenses to average daily managed assets........... 0.82%(4)
---------
---------
Portfolio turnover rate..................................... 1.22%(3)
---------
---------
AMPS:
Liquidation value, end of period (in 000's)................. $ 620,000
---------
---------
Total shares outstanding (in 000's)......................... 25
---------
---------
Asset coverage per share.................................... $ 73,024
---------
---------
Liquidation preference per share............................ $ 25,000
---------
---------
Average market value per share.............................. $ 25,000
---------
---------
---------
(1) Commencement of investment operations.
(2) Total market value return is computed based upon the New York Stock Exchange
market price of the Fund's shares and excludes the effects of brokerage
commissions. Dividends and distributions, if any, are assumed for purposes
of this calculation, to be reinvested at prices obtained under the Fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends as
reinvested.
(3) Not annualized.
(4) Annualized.
(5) Based on average share's outstanding during the period.
See accompanying notes to unaudited financial statements.
22
THE FUND
The Fund is a non-diversified, closed-end management investment company. The
Fund was organized as a Maryland corporation on March 25, 2003 and is registered
as an investment company with the Securities and Exchange Commission under the
1940 Act. The Fund issued an aggregate of 42,750,000 Common Shares, par value
$.001 per share, pursuant to the initial public offering thereof and commenced
its operations with the closing of this initial public offering on June 27,
2003. On July 16, 2003 and August 5, 2003, the Fund issued 2,500,000 and
2,940,000 additional Common Shares, respectively, in connection with a partial
exercise by the underwriters of the overallotment option. On August 18, 2003,
the Fund issued 3,280 Series M7 AMPS, 3,280 Series T7 AMPS, 3,280 Series W7
AMPS, 3,280 Series TH7 AMPS, 3,280 Series F7 AMPS, 2,800 Series W28A AMPS, 2,800
Series W28B AMPS and 2,800 Series W28C AMPS. The Fund's Common Shares are traded
on the NYSE under the symbol 'RNP.' The Fund's principal office is located at
757 Third Avenue, New York, New York 10017, and our telephone number is
(212) 832-3232.
The following provides information about the Fund's outstanding shares as of
December 1, 2003:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common......................................... 99,973,160 0 48,251,666
AMPS
Series T28................................. 2,040 0 0
Series M7.................................. 3,280 0 3,280
Series T7.................................. 3,280 0 3,280
Series W7.................................. 3,280 0 3,280
Series TH7................................. 3,280 0 3,280
Series F7.................................. 3,280 0 3,280
Series W28A................................ 2,800 0 2,800
Series W28B................................ 2,800 0 2,800
Series W28C................................ 2,800 0 2,800
USE OF PROCEEDS
The Fund estimates the net proceeds of this offering of AMPS, after payment
of the sales load and offering expenses, will be $50,154,874. 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.'
23
CAPITALIZATION (UNAUDITED)
The following table sets forth the unaudited capitalization of the Fund as
of December 1, 2003, and as adjusted to give effect to the issuance of the AMPS
offered in this prospectus.
AS OF DECEMBER 1, 2003
-------------------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
AS OF DECEMBER 1, 2003:
Auction Market Preferred Shares, $.001 par value,
$25,000 liquidation value; 26,840 shares authorized
(3,280 Series M7 AMPS, 3,280 Series T7 AMPS, 3,280
Series W7 AMPS, 3,280 Series TH7 AMPS, 3,280
Series F7 AMPS, 2,800 Series W28A AMPS, 2,800
Series W28B AMPS and 2,800 Series W28C AMPS
(collectively, the 'Outstanding AMPS') issued and
Series T28 AMPS no shares issued, 2,040 shares
issued, as adjusted................................. $ 620,000,000 $ 671,000,000
-------------- --------------
Shareholders' Equity Applicable to Common Shares
Common Shares, $.001 par value per share;
99,973,160 shares authorized, 48,251,666 shares
outstanding..................................... 48,252 48,252
Paid-in surplus................................... 1,142,369,518 1,141,524,392
Balance of undistributed net investment income.... (4,432,340) (4,432,340)
Accumulated net realized gain (loss) from
investment transactions......................... 75,409 75,409
Net unrealized appreciation (depreciation)........ 108,736,575 108,736,575
-------------- --------------
Net assets applicable to Common Shareholders...... 1,246,797,414 1,245,952,288
-------------- --------------
Net assets, plus liquidation preference of AMPS....... $1,866,797,414 $1,916,952,288
-------------- --------------
-------------- --------------
As used in this prospectus, unless otherwise noted, the Fund's 'managed
assets' include assets of the Fund attributable to any outstanding AMPS, with no
deduction for the liquidation preference of such shares. For financial reporting
purposes, however, the Fund is required to deduct the liquidation preference of
its outstanding AMPS from 'managed assets' so long as the outstanding AMPS have
redemption features that are not solely within the control of the Fund. In
connection with the rating of the outstanding AMPS, the Fund has established
various portfolio covenants to meet third-party rating agency guidelines in its
Articles of Incorporation. These covenants include, among other things,
investment diversification requirements and requirements that investments
included in the Fund's portfolio meet specific industry and credit quality
criteria. Market factors outside the Fund's control may affect its ability to
meet the criteria of third-party rating agencies set forth in the Fund's
portfolio covenants. If the Fund violates these covenants, it may be required to
cure the violation by redeeming all or a portion of the outstanding AMPS. For
all regulatory purposes, the Fund's outstanding AMPS will be treated as stock
(rather than indebtedness).
24
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Fund's primary investment objective is to seek high current income.
Capital appreciation is our secondary objective. The Fund is not intended as a
complete investment program. There can be no assurance that the Fund will
achieve its investment objectives.
Under normal market conditions, the Fund will invest:
at least 40%, but no more than 60%, of its total assets in common stocks
issued by real estate companies such as REITs. A real estate company
derives at least 50% of its revenue from real estate or has at least 50% of
its assets in real estate. A REIT is a company dedicated to owning, and
usually operating, income producing real estate, or to financing real
estate;
at least 40%, but no more than 60%, of its total assets in preferred
securities; up to 5% of the Fund's total assets may be invested in
preferred securities issued by REITs;
up to 10% of its total assets in preferred or other securities that at the
time of investment are rated below investment grade (Ba/BB or B by Moody's,
S&P or Fitch) or that are unrated but judged to be of comparable quality by
the Fund's Investment Manager;
up to 20% of its total assets in debt securities, including convertible
debt securities and convertible preferred securities;
a significant portion, but less than 25%, of its total assets in the
securities of companies principally engaged in the financial services
industry (which are prominent issuers of preferred securities); and
up to 20% of its total assets in U.S. dollar-denominated securities of
foreign issuers traded or listed on a U.S. securities exchange or the U.S.
over-the-counter market.
The policy referred to above of investing in the financial services industry
and the Fund's concentration of its investments in the real estate industry make
the Fund more susceptible to adverse economic or regulatory occurrences
affecting these sectors. See 'Risk Factors -- General Risks of Investing in the
Fund -- General Risks of Securities Linked to the Real Estate Market' and 'Risk
Factors -- General Risks of Securities Linked to the Financial Services
Industry.'
Although the Fund does not currently intend to invest in illiquid securities
(i.e., securities that are not readily marketable), it may invest up to 10% of
its total assets in illiquid securities. Similarly, although the Fund does not
intend to invest in convertible securities, it may invest up to 20% of its total
assets in securities convertible into common or preferred securities where the
conversion feature represents, in the Investment Manager's view, a significant
element of the securities' value. Common stock acquired pursuant to a conversion
feature will be subject to this 20% limitation.
Under normal conditions, the Fund intends to invest in income producing
common stock issued by real estate companies, consisting primarily of REITs, and
preferred and other debt securities. Substantially all of the common stocks
issued by REITs in which the Fund intends to invest are traded on a national
securities exchange or in the over-the-counter market. REITs are generally not
taxed on income distributed to shareholders provided they distribute to their
shareholders substantially all of their income and otherwise comply with the
requirements of the
25
Code. As a result, REITs generally pay relatively high dividends (as compared to
other types of companies) and the Fund intends to use these REIT dividends in an
effort to meet its objective of high current income. With respect to the
preferred securities component of the portfolio, under current market conditions
the Fund expects that it will invest primarily in taxable preferred securities.
Under current market conditions, the Fund's portfolio of preferred securities is
expected to consist primarily of fixed rate preferred securities.
A security will be considered investment grade quality if it is rated 'BBB'
or higher by S&P, 'Baa' or higher by Moody's or an equivalent rating by a
nationally recognized statistical rating agency, or is unrated but judged to be
of comparable quality by the Investment Manager. Bonds of below investment grade
quality (BB/Ba or below) are commonly referred to as 'junk bonds.' Securities of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal. The Fund's credit quality policies apply only at the time a security
is purchased, and the Fund is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular
issue. In determining whether to retain or sell a security that a rating agency
has downgraded, the Investment Manager may consider such factors as its
assessment of the credit quality of the issuer of the security, the price at
which the security could be sold and the rating, if any, assigned to the
security by other rating agencies. Appendix A to the SAI contains a general
description of Moody's and S&P's ratings of securities.
The Fund's investment objectives and certain other policies are fundamental
and may not be changed without the approval of the holders of a 'majority of the
outstanding' Common Shares and AMPS (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS) voting
together as a single class, and of the holders of a 'majority of the
outstanding' AMPS (and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS), voting as a separate
class. When used with respect to particular shares of the Fund, a 'majority of
the outstanding' shares means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
Unless otherwise indicated, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors without the approval of
shareholders, although the Fund has no current intention of doing so.
INVESTMENT STRATEGIES
In making investment decisions with respect to common stocks and other
equity securities issued by real estate companies, including REITs, the
Investment Manager relies on a fundamental analysis of each company. The
Investment Manager reviews each company's potential for success in light of the
company's current financial condition, its industry and sector position, and
economic and market conditions. The Investment Manager evaluates a number of
factors, including growth potential, earnings estimates and the quality of
management.
In making investment decisions with respect to preferred securities and debt
securities, the Investment Manager seeks to select what it believes are superior
securities, (i.e., securities the Investment Manager views as undervalued on the
basis of risk and return profiles). In making these determinations, the
Investment Manager evaluates the fundamental characteristics of an issuer,
including an issuer's creditworthiness, and also takes into account prevailing
market factors.
26
In analyzing credit quality, the Investment Manager considers not only
fundamental analysis, but also an issuer's corporate and capital structure and
the placement of the preferred or debt securities within that structure. The
Investment Manager also takes into account other factors, such as call and other
structural features, momentum and other exogenous signals (i.e., the likely
directions of ratings) and relative value versus other income security classes.
PORTFOLIO COMPOSITION
Our portfolio will be composed principally of the following investments. A
more detailed description of our investment policies and restrictions and more
detailed information about our portfolio investments are contained in the SAI.
Under normal market conditions, the Fund seeks to achieve its objectives
through a portfolio of income producing common stock issued by REITs and
preferred and other debt securities. The Fund currently invests approximately
56% of its total assets in common stocks issued by REITs, approximately 40% in
preferred securities and approximately 3% in debt securities other than
preferred securities. These percentages may vary from time to time consistent
with the Fund's investment objectives, although the Fund will normally invest at
least 40% of its total assets in common stock issued by real estate companies,
including REITs and at least 40% of its total assets in preferred securities. At
any time, under normal circumstances at least 80% of the Fund's total assets
will be invested in common stocks issued by REITs and preferred securities.
Common Stocks Issued By Real Estate Companies and REITs. For purposes of our
investment policies, a real estate company is one that:
derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial or residential real
estate; or
has at least 50% of its assets in such real estate.
Under normal market conditions, the Fund will invest at least 40%, but no
more than 60%, of our total assets in the common stocks of real estate
companies, consisting primarily of REITs. A REIT is a company dedicated to
owning, and usually operating, income producing real estate, or to financing
real estate. REITs pool investors' funds for investment primarily in income
producing real estate or real estate-related loans or interests. REITs are
generally not taxed on income distributed to shareholders provided, among other
things, they distribute to their shareholders substantially all of their taxable
income (other than net capital gains) for each taxable year. As a result, REITs
tend to pay relatively higher dividends than other types of companies and the
Fund intends to use these REIT dividends in an effort to meet the current income
goal of its investment objectives. Dividends paid by REITs will not be eligible
for the DRD and are generally not considered qualified dividend income eligible
for reduced rates of taxation. The DRD generally allows corporations to deduct
70% of the income they receive from dividends that are paid out of earnings and
profits of the issuer. Pursuant to recently enacted legislation, individuals
will generally be taxed at long-term capital gain rates on qualified dividend
income for taxable years beginning on or before December 31, 2008.
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
27
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
Preferred Securities. Under normal market conditions, the Fund will invest
at least 40%, but no more than 60%, of its total assets in preferred securities.
There are two basic types of preferred securities. The first, sometimes referred
to in this prospectus as traditional preferred securities, consists of preferred
stock issued by an entity taxable as a corporation. The second is referred to in
this prospectus as hybrid-preferred securities. Hybrid-preferred securities are
usually issued by a trust or limited partnership and often represent preferred
interests in deeply subordinated debt instruments issued by the corporation for
whose benefit the trust or partnership was established. Initially, the preferred
securities component of the Fund will be comprised primarily of taxable
preferred securities.
Traditional Preferred Securities. Traditional preferred securities generally
pay fixed or adjustable rate dividends to investors and generally have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. In order to be payable,
distributions on such preferred securities must be declared by the issuer's
board of directors. Income payments on typical preferred securities currently
outstanding are cumulative, causing dividends and distributions to accumulate
even if not declared by the board of directors or otherwise made payable. In
such a case, all accumulated dividends must be paid before any dividend on the
common stock can be paid. However, some traditional preferred stocks are
non-cumulative, in which case dividends do not accumulate and need not ever be
paid. A portion of the portfolio may include investments in non-cumulative
preferred securities, whereby the issuer does not have an obligation to make up
any arrearages to its shareholders. Should an issuer of a non-cumulative
preferred stock held by the Fund determine not to pay dividends on such stock,
the amount of dividends the Fund pays may be adversely affected. There is no
assurance that dividends or distributions on the traditional preferred
securities in which the Fund invests will be declared or otherwise made payable.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Shares of traditional preferred securities have a liquidation
value that generally equals the original purchase price at the date of issuance.
The market value of preferred securities may be affected by favorable and
unfavorable changes impacting companies in the utilities and financial services
sectors, which are prominent issuers of preferred securities, and by actual and
anticipated changes in tax laws, such as changes in corporate income tax rates.
Because the claim on an issuer's earnings represented by traditional preferred
securities may become onerous when interest rates fall below the rate payable on
such securities, the issuer may redeem the securities. Thus, in declining
interest rate environments in particular, the Fund's holdings of higher
rate-paying fixed rate preferred securities may be reduced and the Fund may be
unable to acquire securities of comparable credit quality paying comparable
rates with the redemption proceeds.
Pursuant to the DRD, corporations may generally deduct 70% of the income
they receive from dividends on traditional preferred securities that are paid
out of earnings and profits of the issuer. Corporate shareholders of a regulated
investment company like the Fund generally are permitted to claim a deduction
with respect to that portion of their distributions attributable to amounts
received by the regulated investment company that qualify for the DRD. However,
not all traditional preferred securities pay dividends that are eligible for the
DRD, including preferred
28
securities issued by REITs described below. Under current market conditions, it
is expected that few, if any, of the preferred securities in which the Fund
intends to invest will qualify for the DRD.
Pursuant to recently enacted legislation, individuals will generally be
taxed at long-term capital gain rates on qualified dividend income for taxable
years beginning on or before December 31, 2008. Individual shareholders of a
regulated investment company like the Fund generally are permitted to treat as
qualified dividend income that portion of their distributions attributable to
qualified dividend income received by the regulated investment company. However,
not all traditional preferred securities will provide significant benefits under
the rules relating to qualified dividend income, including preferred securities
issued by REITs described below. Under current market conditions, it is expected
that few, if any, of the preferred securities in which the Fund intends to
invest will provide significant benefits under the rules relating to qualified
dividend income.
Within the category of traditional preferred securities, the Fund may invest
up to 5% of its total assets in traditional preferred securities issued by real
estate companies, including REITs. REIT preferred securities are generally
perpetual in nature, although REITs often have the ability to redeem the
preferred securities after a specified period of time. The market value of REIT
preferred securities may be affected by favorable and unfavorable changes
impacting a particular REIT. While sharing characteristics that make them
similar to traditional preferred securities, dividends from REIT preferred
securities do not provide any DRD benefit (and generally do not provide
significant benefits under the rules relating to qualified dividend income).
Hybrid-Preferred Securities. Hybrid-preferred securities are a comparatively
new asset class. Hybrid-preferred securities are typically issued by
corporations, generally in the form of interest-bearing notes with preferred
securities characteristics, or by an affiliated business trust of a corporation,
generally in the form of beneficial interests in subordinated debentures or
similarly structured securities. The hybrid-preferred securities market consists
of both fixed and adjustable coupon rate securities that are either perpetual in
nature or have stated maturity dates.
Hybrid-preferred securities are typically junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor. In addition,
hybrid-preferred securities typically permit an issuer to defer the payment of
income for eighteen months or more without triggering an event of default.
Generally, the maximum deferral period is five years. Because of their
subordinated position in the capital structure of an issuer, the ability to
defer payments for extended periods of time without default consequences to the
issuer, and certain other features (such as restrictions on common dividend
payments by the issuer or ultimate guarantor when full cumulative payments on
the trust preferred securities have not been made), these hybrid-preferred
securities are often treated as close substitutes for traditional preferred
securities, both by issuers and investors. Hybrid-preferred securities have many
of the key characteristics of equity due to their subordinated position in an
issuer's capital structure and because their quality and value are heavily
dependent on the profitability of the issuer rather than on any legal claims to
specific assets or cash flows. Hybrid
---------
* TOPRS is a registered service mark owned by Merrill Lynch & Co., Inc. MIPS and
QUIDS are registered service marks and QUIPS is a service mark owned by
Goldman, Sachs & Co. QUIBS is a registered service mark owned by Morgan
Stanley. CORTS and PINES are registered service marks owned by Citigroup
Global Markets Inc.
29
preferred securities include, but are not limited to, trust originated preferred
securities ('TOPRS'r''); monthly income preferred securities ('MIPS'r'');
quarterly income bond securities ('QUIBS'r''); quarterly income debt securities
('QUIDS'r''); quarterly income preferred securities ('QUIPS'sm''); corporate
trust securities ('CORTS'r''); public income notes ('PINES'r''); and other
hybrid-preferred securities.*
Hybrid-preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, a final maturity
date may be extended and/or the final payment of principal may be deferred at
the issuer's option for a specified time without default. No redemption can
typically take place unless all cumulative payment obligations have been met,
although issuers may be able to engage in open-market repurchases without regard
to whether all payments have been paid.
Many hybrid-preferred securities are issued by trusts or other special
purpose entities established by operating companies and are not a direct
obligation of an operating company. At the time the trust or special purpose
entity sells such preferred securities to investors, it purchases debt of the
operating company (with terms comparable to those of the trust or special
purpose entity securities), which enables the operating company to deduct for
tax purposes the interest paid on the debt held by the trust or special purpose
entity. The trust or special purpose entity is generally required to be treated
as transparent for federal income tax purposes such that the holders of the
trust preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company. Accordingly, payments on the
hybrid-preferred securities are treated as interest rather than dividends for
federal income tax purposes and, as such, are not eligible for the DRD or the
reduced rates of tax that apply to qualified dividend income. The trust or
special purpose entity in turn would be a holder of the operating company's debt
and would have priority with respect to the operating company's earnings and
profits over the operating company's common shareholders, but would typically be
subordinated to other classes of the operating company's debt. Typically a
preferred share has a rating that is slightly below that of its corresponding
operating company's senior debt securities.
Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.
Lower-Rated Securities. The Fund may invest up to 10% (measured at the time
of purchase) of its total assets in securities rated below investment grade.
These lower grade securities are commonly known as 'junk bonds.' Securities
rated below investment grade are judged to have speculative characteristics with
respect to their interest and principal payments. Such securities may face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Lower grade securities, though high yielding, are
characterized by high risk. They may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for
30
the Fund to sell certain of these securities or could result in lower prices
than those used in calculating the Fund's net asset value. Preferred stock or
debt securities will be considered to be investment grade if, at the time of
investment, such security has a rating of 'BBB' or higher by S&P, 'Baa' or
higher by Moody's or an equivalent rating by a nationally recognized statistical
rating agency, or, if unrated, such security is determined by the Investment
Manager to be of comparable quality.
Financial Services Company Securities. The Fund intends to invest a
significant portion, but less than 25%, of its total assets in securities issued
by companies 'principally engaged' in the financial services industry (which are
prominent issuers of preferred securities). A company is 'principally engaged'
in financial services if it derives at least 50% of its consolidated revenues
from providing financial services. Companies in the financial services sector
include commercial banks, industrial banks, savings institutions, finance
companies, diversified financial services companies, investment banking firms,
securities brokerage houses, investment advisory companies, leasing companies,
insurance companies and companies providing similar services.
Foreign Securities. The Fund may invest up to 20% of its total assets in
U.S. dollar-denominated securities of non-U.S. issuers traded or listed on a
U.S. securities exchange or the U.S. over-the-counter market. The Fund may
invest in any region of the world and invests in companies operating in
developed countries such as Canada, Japan, Australia, New Zealand and most
Western European countries. The Fund does not intend to invest in companies
based in emerging markets such as the Far East, Latin America and Eastern
Europe. The World Bank and other international agencies define emerging markets
based on such factors as trade initiatives, per capita income and level of
industrialization. For purposes of this 20% limitation, non-U.S. securities
include securities represented by American Depository Receipts.
Debt Securities. The Fund may invest up to 20% of its total assets in debt
securities, including convertible debt securities and convertible preferred
securities. Convertible securities are debt securities or preferred stock that
are exchangeable for common stock of the issuer at a predetermined price (the
'conversion price'). Depending upon the relationship of the conversion price to
the market value of the underlying securities, convertible securities may trade
more like common stock than debt instruments. Common stock acquired pursuant to
a conversion feature will be subject to this 20% limitation. As a result of
conversion, the Fund may hold common stocks issued by companies other than real
estate companies or REITs, such holdings not normally to exceed 5% of total
assets. In addition, keeping with the income objective of the Fund, the Fund
expects to sell any common stock holdings of issuers other than real estate
companies or REITs as soon as practicable after conversion of a convertible
security. The Fund's investments in debt securities may include investments in
U.S. dollar-denominated corporate debt securities issued by domestic and
non-U.S. corporations (subject to the requirements noted above) and U.S.
dollar-denominated government debt securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or a non-U.S. Government or its
agencies or instrumentalities (subject to the requirements noted above).
Common Stocks. The Fund will normally invest at least 40%, but will not
invest more than 60%, of its total assets in common stocks issued by real estate
companies or REITs. Common stocks represent the residual ownership interest in
the issuer and holders of common stock are entitled to the income and increase
in the value of the assets and business of the issuer after all of its debt
obligations and obligations to preferred stockholders are satisfied. Common
stocks
31
generally have voting rights. Common stocks fluctuate in price in response to
many factors including historical and prospective earnings of the issuer, the
value of its assets, general economic conditions, interest rates, investor
perceptions and market liquidity.
Other Investment Companies. The Fund may invest up to 10% of its total
assets in securities of other open- or closed-end investment companies,
including exchange traded funds that invest primarily in securities of the types
in which the Fund may invest directly. The Fund generally expects to invest in
other investment companies either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the proceeds
of the offering of its common shares, or during periods when there is a shortage
of attractive opportunities in the market. As a shareholder in an investment
company, the Fund would bear its ratable share of that investment company's
expenses, and would remain subject to payment of the Fund's advisory and other
fees and expenses with respect to assets so invested. Holders of common shares
would therefore be subject to duplicative expenses to the extent the Fund
invests in other investment companies. The Investment Manager will take expenses
into account when evaluating the investment merits of an investment in an
investment company relative to available bond investments. The securities of
other investment companies may also be leveraged and will therefore be subject
to the same leverage risks to which the Fund is subject. As described in the
sections entitled 'Use of Leverage,' the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares. Investment
companies may have investment policies that differ from those of the Fund. In
addition, to the extent the Fund invests in other investment companies, the Fund
will be dependent upon the investment and research abilities of persons other
than the Investment Manager.
Illiquid Securities. While the Fund does not currently intend to invest in
illiquid securities (i.e., securities that are not readily marketable), it may
invest up to 10% of its total assets in illiquid securities. For this purpose,
illiquid securities include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days. The Board of Directors or its delegate
has the ultimate authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid for purposes of
this 10% limitation. The Board of Directors has delegated to the Investment
Manager the day-to-day determination of the illiquidity of any security held by
the Fund, although it has retained oversight and ultimate responsibility for
such determinations. Although no definitive liquidity criteria are used, the
Board and/or the Investment Manager will consider factors such as (i) the nature
of the market for a security (including the institutional private resale market;
the frequency of trades and quotes for the security; the number of dealers
willing to purchase or sell the security; the amount of time normally needed to
dispose of the security; and the method of soliciting offers and the mechanics
of transfer), (ii) the terms of certain securities or other instruments allowing
for the disposition to a third party or the issuer thereof (e.g., certain
repurchase obligations and demand instruments) and (iii) other permissible
relevant factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
32
Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than that which prevailed when it
decided to sell. Illiquid securities will be priced at fair value as determined
in good faith by the Board of Directors or its delegate. If, through changes in
the market value of its portfolio securities, the Fund should be in a position
where more than 10% of the value of its total assets is invested in illiquid
securities, including restricted securities that are not readily marketable, the
Fund will take such steps as the Board and/or the Investment Manager deem
advisable, if any, to protect liquidity.
Strategic Transactions. The Fund may, but is not required to, use various
strategic transactions described below to mitigate risks and to facilitate
portfolio management. Such strategic transactions are generally accepted under
modern portfolio management and are regularly used by many closed-end funds and
other institutional investors. Although the Investment Manager seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as
exchange-listed and over-the-counter put and call options on securities,
financial futures, equity, fixed-income and interest rate indices, and other
financial instruments, purchase and sell financial futures contracts and options
thereon, enter into various interest rate transactions such as swaps, caps,
floors or collars or credit transactions and credit default swaps. The Fund also
may purchase derivative instruments that combine features of these instruments.
Collectively, all of the above are referred to as 'Strategic Transactions.' The
Fund generally seeks to use Strategic Transactions as a portfolio management or
hedging technique to seek to protect against possible adverse changes in the
market value of securities held in or to be purchased for the Fund's portfolio,
protect the value of the Fund's portfolio, facilitate the sale of certain
securities for investment purposes, manage the effective interest rate exposure
of the Fund, manage the effective maturity or duration of the Fund's portfolio,
or establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. There is no limit on the amount of
credit derivative transactions that may be entered into by the Fund.
Strategic Transactions have risks, including the imperfect correlation
between the value of such instruments and the underlying assets, the possible
default of the other party to the transaction or illiquidity of the derivative
instruments. Furthermore, the ability to successfully use Strategic Transactions
depends on the Investment Manager's ability to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may
result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the Fund can
realize on an investment, or may cause the Fund to hold a security that it might
otherwise sell. Additionally, amounts paid by the Fund as premiums and cash or
other assets held in margin accounts with respect to Strategic Transactions are
not otherwise available to the Fund for investment purposes. A more complete
discussion of Strategic Transactions and their risks is contained in the Fund's
SAI.
The Fund also may enter into certain interest rate transactions that are
designed to reduce the risks inherent in the Fund's issuance of the AMPS. See
'How the Fund Manages Risk -- Interest Rate Transactions.'
33
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
securities on a when-issued or delayed delivery basis, making payment or taking
delivery at a later date, normally within 15 to 45 days of the trade date. This
type of transaction may involve an element of risk because no interest accrues
on the securities prior to settlement and, because securities are subject to
market fluctuations, the value of the securities at the time of delivery may be
less (or more) than cost. A separate account of the Fund will be established
with its custodian consisting of cash equivalents or liquid securities having a
market value at all times at least equal to the amount of the commitment.
Portfolio Turnover. The Fund may engage in portfolio trading when considered
appropriate, but short-term trading will not be used as the primary means of
achieving the Fund's investment objectives. However, there are no limits on the
rate of portfolio turnover, and investments may be sold without regard to length
of time held when, in the opinion of the Investment Manager, investment
considerations warrant such action. A higher portfolio turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to shareholders, will be taxable as ordinary income.
Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, the Fund may
deviate from its investment objectives and invest all or any portion of our
assets in investment grade debt securities, without regard to whether the issuer
is a real estate company or REIT. When and to the extent the Fund assumes a
temporary defensive position, the Fund may not pursue or achieve its investment
objectives.
OTHER INVESTMENTS
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which the Fund
may invest its cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and such
obligations which are subject to repurchase agreements and commercial paper. See
'Investment Objectives and Policies' in the SAI.
USE OF LEVERAGE
The Fund may issue other preferred shares, in addition to the AMPS and the
outstanding Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS, or borrow or issue short-term
debt securities to increase its assets available for investment. The Fund is
authorized to issue preferred shares, borrow or issue debt obligations. Before
issuing such preferred shares to increase its assets available for investment,
the Fund must have received confirmation from Moody's and S&P or any substitute
rating agency that the proposed issuance will not adversely affect such rating
agency's then-current rating on the AMPS. The Fund also may borrow money as a
temporary measure for extraordinary or emergency purposes, including the payment
of dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of the Fund's holdings. When the Fund leverages
its assets, the fees paid to the Investment Manager for investment management
services will be higher than if the Fund did not borrow because the Investment
Manager's fees are calculated based on the Fund's managed assets, which include
the proceeds of the issuance of preferred shares or any
34
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 with the proceeds of the issuance of preferred
shares or borrowing. Such difference in return may result from the Fund's higher
credit rating or the short-term nature of its borrowing compared to the
long-term nature of its investments. Since the total assets of the Fund
(including the assets obtained from leverage) will be invested in the higher
yielding portfolio investments or portfolio investments with the potential for
capital appreciation, the holders of common shares will be the beneficiaries of
the incremental return. Should the differential between the underlying assets
and cost of leverage narrow, the incremental return 'pick up' will be reduced.
Furthermore, if long-term rates rise or the Fund otherwise incurs losses on its
investments, the Fund's net asset value attributable to its common shares will
reflect the decline in the value of portfolio holdings resulting therefrom.
To the extent the income or capital appreciation derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return to the Fund's common shareholders ('Common Shareholders') will be
greater than if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such funds is not sufficient to
cover the cost of leverage or if the Fund incurs capital losses, the return of
the Fund to Common Shareholders will be less than if leverage had not been used.
The Investment Manager may determine to maintain the Fund's leveraged position
if it expects that the long-term benefits to the Fund's Common Shareholders of
maintaining the leveraged position will outweigh the current reduced return.
Capital raised through the issuance of preferred shares or borrowing will be
subject to dividend payments or interest costs that may or may not exceed the
income and appreciation on the assets purchased. The Fund also may be required
to maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest rate.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized rating organizations which may
issue ratings for the preferred shares or short-term debt instruments issued by
the Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act. Certain
types of borrowings may result in the Fund being subject to covenants in credit
agreements, including those relating to asset coverage, borrowing base and
portfolio composition requirements and additional covenants. The Fund may also
be required to pledge its assets to the lenders in connection with certain types
of borrowing. The Investment Manager does not anticipate that these covenants or
restrictions will adversely affect its ability to manage the Fund's portfolio in
accordance with the Fund's investment objective and policies. Due to these
covenants or restrictions, the Fund may be forced to liquidate investments at
times and at prices that are not favorable to the Fund, or the Fund may be
forced to forgo investments that the Investment Manager otherwise views as
favorable.
If and to the extent that the Fund employs leverage in addition to the AMPS
and the outstanding Series M7 AMPS, Series T7 AMPS, Series W7 AMPS, Series TH7
AMPS, Series F7 AMPS, Series W28A AMPS, Series W28B AMPS and Series W28C AMPS
will depend on many factors, the most important of which are investment outlook,
market conditions and interest rates.
35
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 PREFERRED SHARES
Leverage Risk. The Fund uses financial leverage for investment purposes by
issuing preferred shares. It is currently anticipated that, taking into account
the 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
and the AMPS' asset coverage. As long as the AMPS are outstanding, the Fund does
not intend to utilize other forms of leverage.
Because the fee paid to the Investment Manager will be calculated on the
basis of the Fund's managed assets (which equals the aggregate net asset value
('NAV') of the Common Shares plus the liquidation preference of the AMPS and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS), the fee will be higher when leverage is
utilized, giving the Investment Manager an incentive to utilize leverage.
Interest Rate Risk. The Fund issues 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 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 shareholders 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 AMPS)
at an auction only at a specified rate, and that bid rate exceeds the rate set
at the auction, you will not retain your AMPS. Additionally, if you buy shares
or elect to retain shares without specifying a rate below which you would not
wish to continue to hold those shares, and the auction sets a below-market rate,
you may receive a lower rate of return on your shares than the market rate.
Finally, the dividend period may be changed, subject to certain conditions and
with notice to the holders of the AMPS, which could also affect the liquidity of
your investment. See 'Description of AMPS' and 'The Auction.'
36
Secondary Market Risk. If you try to sell your AMPS between auctions, you
may not be able to sell any or all of your shares, or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated dividends.
If the Fund has designated a special rate period (a dividend period of more than
28 days), changes in interest rates could affect the price you would receive if
you sold your shares in the secondary market. You may transfer shares outside of
auctions only to or through a broker-dealer that has entered into an agreement
with the auction agent and the Fund or other person as the Fund permits. The
Fund does not anticipate imposing significant restrictions on transfers to other
persons. However, unless any such other person has entered into a relationship
with a broker-dealer that has entered into a broker-dealer agreement with the
Auction Agent, that person will not be able to submit bids at auctions with
respect to 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. AMPS are not listed 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.
Ratings and Asset Coverage Risk. While it is a condition to the closing of
the offering that S&P assigns a rating of 'AAA' and Moody's assigns a rating of
'Aaa' to the AMPS, the ratings do not eliminate or necessarily mitigate the
risks of investing in AMPS. In addition, Moody's, S&P or another rating agency
then rating the AMPS could downgrade the AMPS, which may make your shares less
liquid at an auction or in the secondary market. If a rating agency downgrades
the AMPS, the dividend rate on the AMPS will be the applicable maximum rate
based on the credit rating of the AMPS, which will be a rate higher than is
payable currently on the AMPS. See 'Description of AMPS -- Rating Agency
Guidelines' for a description of the asset maintenance tests the Fund must meet.
Portfolio Security Risk. Portfolio security risk is the risk that an issuer
of a security in which the Fund invests will not be able, in the case of common
stocks, to make dividend distributions at the level forecast by the Fund's
Investment Manager, or that the issuer becomes unable to meet its obligation to
pay fixed dividends at the specified rate, in the case of preferred stock, or to
make interest and principal payments in the case of debt securities. Common
stock is not rated by rating agencies and it is incumbent on the Investment
Manager to select securities of real estate companies that it believes have the
ability to pay dividends at the forecasted level. Preferred stock and debt
securities may be rated. The Fund may invest up to 10% of its total assets in
preferred stock or debt securities rated below investment grade (commonly known
as 'junk bonds') by S&P or Moody's, or unrated securities considered to be of
comparable quality by the Investment Manager. In general, lower-rated securities
carry a greater degree of risk. If rating agencies lower their ratings of
securities held in the Fund's portfolio, the value of those securities could
decline, which could jeopardize the rating agencies' ratings of the 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 M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B
37
and Series W28C AMPS, both by the 1940 Act and by requirements imposed by rating
agencies, might impair the Fund's ability to maintain its qualification as a
regulated investment company for federal income tax purposes. While the Fund
intends to redeem the AMPS and the Series M7, Series T7, Series W7, Series TH7,
Series F7, Series W28A, Series W28B and Series W28C AMPS to enable the Fund to
distribute its income as required to maintain its qualification as a regulated
investment company under the Code, there can be no assurance that such actions
can be effected in time to meet the Code requirements. See 'U.S. Federal
Taxation.'
In addition, investors should note that the Fund is not expected to generate
significant income that qualifies for the DRD or the reduced rates of tax that
apply to qualified dividend income. See 'U.S. Federal Taxation.'
GENERAL RISKS OF INVESTING IN THE FUND
The Fund is a non-diversified, closed-end management investment company
designed primarily as a long-term investment and not as a trading vehicle. The
Fund is not intended to be a complete investment program and, due to the
uncertainty inherent in all investments, there can be no assurance that the Fund
will achieve its investment objectives.
Limited Operating History. The Fund is a non-diversified, closed-end
management investment company with a limited operating history.
Investment Risk. An investment in the Fund is subject to investment risk,
including the possible loss of the entire principal amount that you invest.
Stock Market Risk. Because prices of equity securities fluctuate from
day-to-day, the value of our portfolio will vary based upon general market
conditions.
General Risks of Securities Linked to the Real Estate Market. The Fund will
not invest in real estate directly, but only in securities issued by real estate
companies, including REITs. However, because of its policy of concentration in
the securities of companies in the real estate industry, the Fund is also
subject to the risks associated with the direct ownership of real estate. These
risks include:
declines in the value of real estate;
risks related to general and local economic conditions;
possible lack of availability of mortgage funds;
overbuilding;
extended vacancies of properties;
increased competition;
increases in property taxes and operating expenses;
changes in zoning laws;
losses due to costs resulting from the clean-up of environmental problems;
liability to third parties for damages resulting from environmental
problems;
casualty or condemnation losses;
limitations on rents;
changes in neighborhood values and the appeal of properties to tenants; and
changes in interest rates.
38
Thus, the value of our portfolio securities may change at different rates
compared to the value of portfolio securities of a registered investment company
with investments in a mix of different industries and will depend on the general
condition of the economy. An economic downturn could have a material adverse
effect on the real estate markets and on real estate companies in which the Fund
invests, which in turn could result in the Fund not achieving its investment
objectives.
General Real Estate Risks. Real property investments are subject to varying
degrees of risk. The yields available from investments in real estate depend on
the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., Americans with Disabilities Act and tax laws),
interest rate levels, and the availability of financing. If the properties do
not generate sufficient income to meet operating expenses, including, where
applicable, debt service, ground lease payments, tenant improvements,
third-party leasing commissions and other capital expenditures, the income and
ability of the real estate company to make payments of any interest and
principal on its debt securities will be adversely affected. In addition, real
property may be subject to the quality of credit extended and defaults by
borrowers and tenants. The performance of the economy in each of the regions in
which the real estate owned by the portfolio company is located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the income from such properties and their underlying values. The financial
results of major local employers also may have an impact on the cash flow and
value of certain properties. In addition, real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions is
limited. A real estate company may also have joint venture investments in
certain of its properties, and, consequently, its ability to control decisions
relating to such properties may be limited.
Real property investments are also subject to risks which are specific to
the investment sector or type of property in which the real estate companies are
investing.
Retail Properties. Retail properties are affected by the overall health of
the applicable economy. A retail property may be adversely affected by the
growth of alternative forms of retailing, bankruptcy, decline in drawing power,
departure or cessation of operations of an anchor tenant, a shift in consumer
demand due to demographic changes, and/or changes in consumer preference (for
example, to discount retailers) and spending patterns. A retail property may
also be adversely affected if a significant tenant ceases operation at such
location, voluntarily or otherwise. Certain tenants at retail properties may be
entitled to terminate their leases if an anchor tenant ceases operations at such
property.
Office Properties. Office properties generally require their owners to
expend significant amounts for general capital improvements, tenant improvements
and costs of reletting space. In addition, office properties that are not
equipped to accommodate the needs of modern businesses may become functionally
obsolete and thus noncompetitive. Office properties may also be adversely
affected if there is an economic decline in the businesses operated by their
tenants. The risks of such an adverse effect is increased if the property
revenue is dependent on a single tenant or if there is a significant
concentration of tenants in a particular business or industry.
Hotel Properties. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
39
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
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
40
investment in, and anticipated profits and cash flows from, a number of
properties and, as a result, impact the Fund's investment performance.
Credit Risk. REITs may be highly leveraged and financial covenants may
affect the ability of REITs to operate effectively. The portfolio companies are
subject to risks normally associated with debt financing. If the principal
payments of a real estate company's debt cannot be refinanced, extended or paid
with proceeds from other capital transactions, such as new equity capital, the
real estate company's cash flow may not be sufficient to repay all maturing debt
outstanding.
In addition, a portfolio company's obligation to comply with financial
covenants, such as debt-to-asset ratios, secured debt-to-total asset ratios and
other contractual obligations, may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.
Environmental Issues. In connection with the ownership (direct or indirect),
operation, management and development of real properties that may contain
hazardous or toxic substances, a portfolio company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and liabilities for injuries to persons and property. The
existence of any such material environmental liability could have a material
adverse effect on the results of operations and cash flow of any such portfolio
company and, as a result, the amount available to make distributions on the
shares could be reduced.
Smaller Companies. Even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole. There may
be less trading in a smaller company's stock, which means that buy and sell
transactions in that stock could have a larger impact on the stock's price than
is the case with larger company stocks. Smaller companies also may have fewer
lines of business so that changes in any one line of business may have a greater
impact on a smaller company's stock price than is the case for a larger company.
Further, smaller company stocks may perform in different cycles than larger
company stocks. Accordingly, REIT shares can be more volatile than -- and at
times will perform differently from -- large company stocks such as those found
in the Dow Jones Industrial Average.
Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. It is possible that the Fund may invest in a real estate
company which purports to be a REIT and that the company could fail to qualify
as a REIT. In the event of any such unexpected failure to qualify as a REIT, the
company would be subject to corporate-level taxation, significantly reducing the
return to the Fund on its investment in such company. REITs could possibly fail
to qualify for tax free pass-through of income under the Code, or to maintain
their exemptions from registration under the 1940 Act. The above factors may
also adversely affect a borrower's or a lessee's ability to meet its obligations
to the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
41
SPECIAL RISKS RELATED TO PREFERRED SECURITIES
There are special risks associated with investing in preferred securities,
including:
Deferral and Omission. Preferred securities may include provisions that
permit the issuer, at its discretion, to defer or omit distributions for a
stated period without any adverse consequences to the issuer. If the Fund
owns a preferred security that is deferring or omitting its distributions,
the Fund may be required to report income for tax purposes although it has
not yet received such income.
Subordination. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure in terms of priority to
corporate income and liquidation payments, and therefore will be subject to
greater credit risk than more senior debt instruments.
Liquidity. Preferred securities may be substantially less liquid than
many other securities, such as common stocks or U.S. Government securities.
Limited Voting Rights. Generally, traditional preferred securities offer
no voting rights with respect to the issuing company unless preferred
dividends have been in arrears for a specified number of periods, at which
time the preferred security holders may elect a number of directors to the
issuer's board. Generally, once all the arrearages have been paid, the
preferred security holders no longer have voting rights. Hybrid-preferred
security holders generally have no voting rights.
Special Redemption Rights. In certain varying circumstances, an issuer
of preferred securities may redeem the securities prior to a specified date.
For instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with call
provisions, a redemption by the issuer may negatively impact the return of
the security held by the Fund.
Supply of Hybrid-Preferred Securities. The Financial Accounting
Standards Board currently is reviewing accounting guidelines relating to
hybrid-preferred securities. To the extent that a change in the guidelines
could adversely affect the market for, and availability of, these
securities, the Fund may be adversely affected. The recently enacted
legislation that reduced the federal income tax rates on dividends may also
adversely impact the market and supply of hybrid-preferred securities if the
issuance of such securities becomes less attractive to issuers.
New Types of Securities. From time to time, preferred securities,
including hybrid-preferred securities, have been, and may in the future be,
offered having features other than those described herein. The Fund reserves
the right to invest in these securities if the Investment Manager believes
that doing so would be consistent with the Fund's investment objectives and
policies. Since the market for these instruments would be new, the Fund may
have difficulty disposing of them at a suitable price and time. In addition
to limited liquidity, these instruments may present other risks, such as
high price volatility.
GENERAL RISKS OF SECURITIES LINKED TO THE FINANCIAL SERVICES INDUSTRY
The Fund intends to invest a significant portion, but less than 25%, of its
total assets in securities of companies principally engaged in the financial
services industry, which are prominent issuers of preferred securities. Because
the Fund may invest such amounts in this sector, the Fund may be susceptible to
adverse economic or regulatory occurrences affecting that sector.
42
Investing in the financial services sector includes the following risks:
regulatory actions -- financial services companies may suffer a setback if
regulators change the rules under which they operate;
changes in interest rates -- unstable interest rates can have a
disproportionate effect on the financial services sector;
concentration of loans -- financial services companies whose securities the
Fund may purchase may themselves have concentrated portfolios, such as a
high level of loans to real estate developers, which makes them vulnerable
to economic conditions that affect that sector; and
competition -- financial services companies have been affected by increased
competition, which could adversely affect the profitability or viability of
such companies.
FOREIGN SECURITIES RISKS
Under normal market conditions, the Fund may invest up to 20% of its total
assets in U.S. dollar-denominated securities of foreign issuers traded or listed
on a U.S. securities exchange or the U.S. over-the-counter market ('Foreign
Securities'). Typically, the Fund will not hold any Foreign Securities of
issuers in so-called 'emerging markets' (or lesser developed countries), but to
the extent it does, the Fund will not invest more than 10% of its total assets
in such securities. Investments in such securities are particularly speculative.
Investing in Foreign Securities involves certain risks not involved in domestic
investments, including, but not limited to:
future foreign economic, financial, political and social developments;
different legal systems;
the possible imposition of exchange controls or other foreign governmental
laws or restrictions;
less governmental supervision;
regulation changes;
changes in currency exchange rates;
less publicly available information about companies due to less rigorous
disclosure or accounting standards or regulatory practices;
high and volatile rates of inflation;
fluctuating interest rates;
less publicly available information; and
different accounting, auditing and financial record-keeping standards and
requirements.
Investments in Foreign Securities, especially in emerging market countries,
will expose the Fund to the direct or indirect consequences of political, social
or economic changes in the countries that issue the securities or in which the
issuers are located. Certain countries in which the Fund may invest, especially
emerging market countries, have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty and instability. The cost of
servicing external debt will generally be adversely affected by rising
international interest rates because many external debt obligations bear
interest at rates which are
43
adjusted based upon international interest rates. In addition, with respect to
certain foreign countries, there is a risk of:
the possibility of expropriation of assets;
confiscatory taxation;
difficulty in obtaining or enforcing a court judgment;
economic, political or social instability; and
diplomatic developments that could affect investments in those countries.
In addition, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as:
growth of gross domestic product;
rates of inflation;
capital reinvestment;
resources;
self-sufficiency; and
balance of payments position.
In addition, certain investments in Foreign Securities also may be subject
to foreign withholding taxes.
Investing in securities of companies in emerging markets may entail special
risks relating to potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions
on foreign investment, the lack of hedging instruments, and on repatriation of
capital invested. Emerging securities markets are substantially smaller, less
developed, less liquid and more volatile than the major securities markets. The
limited size of emerging securities markets and limited trading value compared
to the volume of trading in U.S. securities could cause prices to be erratic for
reasons apart from factors that affect the quality of the securities. For
example, limited market size may cause prices to be unduly influenced by traders
who control large positions. Adverse publicity and investors' perceptions,
whether or not based on fundamental analysis, may decrease the value and
liquidity of portfolio securities, especially in these markets. Many emerging
market countries have experienced substantial, and in some periods extremely
high, rates of inflation for many years. Inflation and rapid fluctuations in
inflation rates and corresponding currency devaluations have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries. Typically, the Fund will not hold any Foreign
Securities of emerging market issuers, and, if it does, such securities will not
comprise more than 10% of the Fund's total assets.
As a result of these potential risks, the Investment Manager may determine
that, notwithstanding otherwise favorable investment criteria, it may not be
practicable or appropriate to invest in a particular country. The Fund may
invest in countries in which foreign investors, including the Investment
Manager, have had no or limited prior experience.
INTEREST RATE RISK
Interest rate risk is the risk that fixed-income securities such as
preferred and debt securities, and to a lessor extent dividend-paying common
stocks and shares such as REIT common shares,
44
will decline in value because of changes in market interest rates. When market
interest rates rise, the market value of such securities generally will fall.
The Fund's investment in such securities means that the net asset value and
market price of common shares may tend to decline if market interest rates rise.
Because investors generally look to REITs for a stream of income, the prices of
REIT shares may be more sensitive to changes in interest rates than are other
equity securities.
During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled which is
generally known as call or prepayment risk. If this occurs, the Fund may be
forced to reinvest in lower yielding securities. This is known as reinvestment
risk. Preferred and debt securities frequently have call features that allow the
issuer to repurchase the security prior to its stated maturity. An issuer may
redeem an obligation if the issuer can refinance the debt at a lower cost due to
declining interest rates or an improvement in the credit standing of the issuer.
During periods of rising interest rates, the average life of certain types of
securities may be extended because of slower than expected principal payments.
This may lock in a below market interest rate, increase the security's duration
and reduce the value of the security. This is known as extension risk. Market
interest rates for investment grade fixed-income securities in which the Fund
will invest have recently declined significantly below the recent historical
average rates for such securities. This decline may have increased the risk that
these rates will rise in the future (which would cause the value of the Fund's
net assets to decline) and the degree to which asset values may decline in such
events; however, historical interest rate levels are not necessarily predictive
of future interest rate levels.
CREDIT RISK AND LOWER-RATED SECURITIES RISK
Credit risk is the risk that a preferred or debt security in the Fund's
portfolio will decline in price or fail to make dividend, interest or principal
payments when due because the issuer of the security experiences a decline in
its financial status. Preferred securities are subordinated to bonds and other
debt instruments in a company's capital structure, in terms of priority to
corporate income, and therefore will be subject to greater credit risk than debt
instruments. The Fund may invest up to 10% (measured at the time of purchase) of
its total assets in preferred or other debt securities that are rated below
investment grade. Securities rated below investment grade are regarded as having
predominately speculative characteristics with respect to the issuer's capacity
to pay interest and repay principal, and these bonds are commonly referred to as
'junk bonds.' These securities are subject to a greater risk of default. The
prices of these lower grade securities are more sensitive to negative
developments, such as a decline in the issuer's revenues or a general economic
downturn, than are the prices of higher grade securities. Lower grade securities
tend to be less liquid than investment grade securities. The market values of
lower grade securities tend to be more volatile than investment grade
securities. Preferred stock or debt securities will be considered to be
investment grade if, at the time of investment, such security has a rating of
'BBB' or higher by S&P, 'Baa' or higher by Moody's or an equivalent rating by a
nationally recognized statistical rating agency, or, if unrated, such security
is determined by the Investment Manager to be of comparable quality.
Lower-rated securities may be considered speculative with respect to the
issuer's continuing ability to make principal and interest payments. Analysis of
the creditworthiness of issuers of lower-rated securities may be more complex
than for issuers of higher quality debt securities, and our ability to achieve
our investment objectives may, to the extent the Fund is invested in lower-
rated securities, be more dependent upon such creditworthiness analysis than
would be the case if
45
the Fund was investing in higher quality securities. An issuer of these
securities has a currently identifiable vulnerability to default and the issuer
may be in default or there may be present elements of danger with respect to
principal or interest. The Fund will not invest in securities which are in
default at the time of purchase.
Lower-rated securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of lower-rated securities have been found to be less sensitive to
interest-rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. Yields on
lower-rated securities will fluctuate if the issuer of lower-rated securities
defaults, the Fund may incur additional expenses to seek recovery.
The secondary markets in which lower-rated securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the net asset value of our shares. Adverse publicity and
investor perceptions may decrease the values and liquidity of high yield
securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities and adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon. New laws and proposed
new laws may adversely impact the market for lower-rated securities.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Fund's Articles of Incorporation and By-Laws may
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the Fund's structure. These provisions may also
have the effect of depriving shareholders of an opportunity to redeem their
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 Articles of
Incorporation and conversion to open-end status. See 'Certain Provisions of the
Charter and By-Laws.'
MARKET DISRUPTION RISK
The terrorist attacks in the U.S. on September 11, 2001 had a disruptive
effect on the securities markets. The war in Iraq and instability in the Middle
East also have resulted in recent market volatility and may have long-term
effects on the U.S. and worldwide financial markets and may cause further
economic uncertainties in the U.S. and worldwide. The Fund does not know how
long the securities markets will continue to be affected by these events and
cannot predict the effects of the war or similar events in the future on the
U.S. economy and securities markets.
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed
46
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 M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS,
voting together as a single class, and the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding AMPS and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS voting as a separate class. Among other
restrictions, the Fund may not invest more than 25% of its managed assets in
securities of issuers in any one industry except for the real estate industry.
The Fund may become subject to guidelines that are more limiting than the
investment restrictions set forth above in order to obtain and maintain ratings
from S&P, Moody's or another nationally recognized rating agency on the AMPS.
The Fund does not anticipate that such guidelines would have a material adverse
effect on the Fund's ability to achieve its investment objectives. See
'Investment Restrictions' in the SAI for a complete list of the fundamental and
non-fundamental investment policies of the Fund.
INTEREST RATE TRANSACTIONS
In order to seek to reduce the interest rate risk inherent in our underlying
investments and capital structure, the Fund may enter into interest rate swap or
cap transactions.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. In an interest rate swap, the
Fund would agree to pay to the other party to the interest rate swap (which is
known as the 'counterparty') a fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a variable rate payment that is
intended to approximate the Fund's variable rate payment obligation on the 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 be obligated to make the payments that it had intended to avoid. Depending
on the general state of short-term interest rates and the returns on the Fund's
portfolio securities at that point in time, a default could negatively impact
the Fund's ability to make dividend payments on the AMPS. In addition, at the
time an interest rate swap or cap transaction reaches its scheduled termination
date, there is a risk that the Fund will not be able to obtain a replacement
transaction or that the terms of the replacement will not be as favorable as on
the expiring transaction. If this occurs, it could have a negative impact on the
Fund's ability to make dividend payments on the AMPS. To the extent there is a
decline in interest rates, the value of the interest rate swap or cap could
decline, resulting in a decline in the asset coverage for the AMPS. A sudden and
dramatic decline in interest rates may result in a significant decline in the
asset coverage. Under the terms of the AMPS, if the Fund fails to maintain the
required asset coverage on the outstanding AMPS or fails to comply with other
covenants, the Fund may be required to redeem some or all of these shares. The
Fund may also choose to redeem some or all of the AMPS. Such redemption would
likely result in the Fund seeking to terminate early all or a portion of any
swap or cap transaction. Early termination of the swap could result in the
termination payment by or to the Fund. Early termination of a cap could result
in the termination payment to the Fund.
47
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily. The Fund would not enter into interest
rate swap or cap transactions having a notional amount that exceeded the
outstanding amount of the Fund's leverage. The Fund will monitor any interest
rate swap or cap transactions with a view to ensuring that it remains in
compliance with applicable tax requirements.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreement with its Investment Manager, administrator, custodian and transfer
agent. The management of the Fund's day-to-day operations is delegated to its
officers, the Investment Manager and the Fund's administrator, subject always to
the investment objectives and policies of the Fund and to the general
supervision of the Directors. The names and business addresses of the Directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under 'Management of the Fund' in the
SAI.
INVESTMENT MANAGER
Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, has been retained to provide investment
advice, and, in general, to conduct the management and investment program of the
Fund under the overall supervision and control of the Directors of the Fund.
Cohen & Steers Capital Management, Inc., a registered investment adviser, was
formed in 1986 and had approximately $11.4 billion of assets under management as
of December 1, 2003. Its current clients include pension plans, endowment funds
and registered investment companies, including the Fund, Cohen & Steers Quality
Income Realty Fund, Inc., Cohen & Steers Advantage Income Realty Fund, Inc.,
Cohen & Steers Total Return Realty Fund, Inc. and Cohen & Steers Premium Income
Realty Fund, Inc., which are closed-end investment companies, and Cohen & Steers
Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen &
Steers Special Equity Fund, Inc. and Cohen & Steers Equity Income Fund, Inc.,
which are open-end investment companies.
INVESTMENT MANAGEMENT AGREEMENT
Under its Investment Management Agreement with the Fund (the 'Investment
Management Agreement'), the Investment Manager furnishes a continuous investment
program for the Fund's portfolio, makes the day-to-day investment decisions for
the Fund, and generally manages the Fund's investments in accordance with the
stated policies of the Fund, subject to the general supervision of the Board of
Directors of the Fund. The Investment Manager also performs certain
administrative services for the Fund and provides persons satisfactory to the
directors of the Fund to serve as officers of the Fund. Such officers, as well
as certain other employees and directors of the Fund, may be directors,
officers, or employees of the Investment Manager.
48
For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
..65% of the average daily managed assets of the Fund. Managed assets are the net
asset value of the Common Shares plus the liquidation preference of the AMPS
(and the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS). In addition to the monthly management fee,
the Fund pays all other costs and expenses of its operations, including
compensation of its directors, custodian, transfer agency and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
issuing and repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
When the Fund is utilizing leverage, the fees paid to the Investment Manager
for investment advisory and management services will be higher than if the Fund
did not utilize leverage because the fees paid will be calculated based on the
Fund's managed assets, which includes the liquidation preference of the AMPS
(and the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) for leverage.
The Fund's portfolio managers are:
Martin Cohen -- Mr. Cohen is a Director, President and Treasurer of the
Fund. He is Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager, and Vice President
of Cohen & Steers Securities, Inc., a registered broker-dealer. Mr. Cohen is
a 'controlling person' of the Investment Manager on the basis of his
ownership of the Investment Manager's stock.
Robert H. Steers -- Mr. Steers is a Director, Chairman and Secretary of
the Fund. He is Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager, and President of
Cohen & Steers Securities, Inc., a registered broker-dealer. Mr. Steers is a
'controlling person' of the Investment Manager on the basis of his ownership
of the Investment Manager's stock.
Greg E. Brooks -- Mr. Brooks joined Cohen & Steers Capital Management,
Inc., the Fund's Investment Manager, as a Vice President in April 2000 and
has been a Senior Vice President since January 2002. Prior to joining Cohen
& Steers in 2000, Mr. Brooks was an investment analyst with another real
estate securities investment manager. Mr. Brooks is a Chartered Financial
Analyst.
William F. Scapell -- Mr. Scapell joined Cohen & Steers Capital
Management, Inc., the Fund's Investment Manager, as a Senior Vice President
in February 2003. Prior to joining Cohen & Steers, Mr. Scapell was a
director in the fixed income research department of Merrill Lynch & Co.,
Inc., where he was also its chief strategist for preferred securities.
Before joining Merrill Lynch's research department, Mr. Scapell worked in
Merrill Lynch Treasury with a focus on balance sheet management. Prior to
working for Merrill Lynch, Mr. Scapell was employed at the Federal Reserve
Bank of New York in both bank supervision and monetary policy roles.
Mr. Scapell is a Chartered Financial Analyst.
ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT
Under its Administration Agreement with the Fund, the Investment Manager
provides certain administrative and accounting functions for the Fund, including
providing administrative services
49
necessary for the operations of the Fund and furnishing office space and
facilities required for conducting the business of the Fund.
In accordance with the Administration Agreement and with the approval of the
Board of Directors of the Fund, the Fund has entered into an agreement with
State Street Bank as sub-administrator under a fund accounting and
administration agreement (the 'Sub-Administration Agreement'). Under the
Sub-Administration Agreement, State Street Bank has assumed responsibility for
certain fund administration services.
Under the Administration Agreement, the Fund pays the Investment Manager an
amount equal to on an annual basis .06% of the Fund's average daily managed
assets up to $1 billion, .04% of the Fund's average daily managed assets in
excess of $1 billion up to $1.5 billion and .02% of the Fund's average daily
managed assets in excess of $1.5 billion. Under the Sub-Administration
agreement, the Fund pays State Street Bank a monthly administration fee. The
sub-administration fee paid by the Fund to State Street Bank is computed on the
basis of the average daily managed assets (including the liquidation value of
the AMPS and the Outstanding AMPS) in the Fund at an annual rate equal to .03%
of the first $200 million in assets, .02% of the next $200 million, and .01% of
assets in excess of $400 million, with a minimum fee of $120,000. The aggregate
fee paid by the Fund and the other funds advised by the Investment Manager to
State Street Bank is computed by multiplying the total number of funds by each
break point in the above schedule in order to determine the aggregate break
points to be used in calculating the total fee paid by the Cohen & Steers family
of funds (i.e., six funds at $200 million or $1.2 billion at .04%, etc.). The
Fund is then responsible for its pro rata amount of the aggregate
sub-administration fee. State Street Bank also serves as the Fund's custodian
and The Bank of New York has been retained to serve as the Fund's auction agent,
transfer agent, dividend paying agent and registrar for the Fund's AMPS. See
'Custodian, Auction Agent, Transfer Agent, Dividend Paying Agent and Registrar.'
50
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. For the
complete terms of the AMPS, please refer to the detailed description of the AMPS
in the Fund's Articles Supplementary attached as Appendix B to the SAI.
GENERAL
Under its Charter, the Fund is authorized to issue shares of preferred
stock, with rights as determined by the Board of Directors, without the approval
of holders of Common Shares. 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
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS and with shares of any other series of
preferred stock of the Fund, as to the payment of dividends and the distribution
of assets upon liquidation. The AMPS carry one vote per share on all matters on
which such shares are entitled to vote. The 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
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 28 days and
the dividend rate for this period will be the rate set out on the cover of this
prospectus. Subsequent rate periods will be 28 days, and the dividend rate will
be determined by auction, but the rates set at the auction will not exceed the
maximum rates as set forth below. 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.
If a dividend payment date is not a business day because the NYSE is closed
for business for more than three consecutive business days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications
services, or the dividend payable on such date can not be paid for any such
reason, then:
the dividend payment date for the affected dividend period will be the next
business day on which the Fund and its paying agent, if any, are able to
cause the dividend to be paid using their reasonable best efforts;
51
the affected dividend period will end on the day it would have ended had
such event not occurred and the dividend payment date had remained the
scheduled date; and
the next dividend period will begin and end on the dates on which it would
have begun and ended had such event not occurred and the dividend payment
date remained the scheduled date.
Dividends will be paid through DTC on each dividend payment date. The
dividend payment date will normally be the first business day after the dividend
period ends. DTC, in accordance with its current procedures, is expected to
distribute dividends received from the auction agent in same-day funds on each
dividend payment date to agent members (members of DTC that will act on behalf
of existing or potential holders of AMPS). These agent members are in turn
expected to distribute such dividends to the persons for whom they are acting as
agents. However, each of the current Broker-Dealers has indicated to the Fund
that dividend payments will be available in same-day funds on each dividend
payment date to customers that use a Broker-Dealer or a Broker-Dealer's designee
as agent member.
Calculation of Dividend Payment. The Fund computes the dividends per share
payable on shares of AMPS by multiplying the applicable rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the rate period and the denominator will normally be 360. This rate is then
multiplied by $25,000 to arrive at the dividends per share.
Dividends on the AMPS will accumulate from the date of their original issue,
which is December 10, 2003. For each dividend payment period after the initial
rate period, the dividend will be the dividend rate determined at auction. The
dividend rate that results from an auction will not be greater than the maximum
rate described below.
The maximum applicable rate for any regular period will be the higher of (as
set forth in the table below) the applicable percentage of the reference rate or
the applicable spread plus the reference rate. The reference rate is the
applicable LIBOR Rate (for a dividend period or a special dividend period of
fewer than 365 days), or the applicable Treasury Index Rate (for a special
dividend period of 365 days or more). In the case of a special rate period, the
maximum applicable rate will be specified by the Fund in the notice of the
special rate period for such dividend payment period. The applicable percentage
or applicable spread is determined on the day that a notice of a special rate
period is delivered if the notice specifies a maximum applicable rate for a
special rate period. The applicable percentage or applicable spread will be
determined based on the lower of the credit rating or ratings assigned to the
AMPS by Moody's and S&P. If Moody's or S&P or both shall not make such rating
available, the rate shall be determined by reference to equivalent ratings
issued by a substitute rating agency.
CREDIT RATINGS FOR AMPS APPLICABLE
------------------------------------ PERCENTAGE OF
REFERENCE APPLICABLE
MOODY'S S&P RATE: SPREAD:
------------- -------------------- --------------- ----------
Aaa AAA 125% 125 bps
Aa3 to Aa1 AA- to AA+ 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 250% 250 bps
Ba1 and below BB+ and below 300% 300 bps
52
Assuming the Fund maintains an Aaa/AAA rating on the AMPS, the practical
effect of the different methods used to calculate the Maximum Applicable Rate is
shown in the table below:
MAXIMUM MAXIMUM METHOD USED
APPLICABLE RATE APPLICABLE RATE TO DETERMINE
USING THE APPLICABLE USING THE APPLICABLE THE MAXIMUM
REFERENCE RATE PERCENTAGE SPREAD APPLICABLE RATE
-------------- -------------------- -------------------- ---------------
1% 1.25% 2.25% Spread
2% 2.50% 3.25% Spread
3% 3.75% 4.25% Spread
4% 5.00% 5.25% Spread
5% 6.25% 6.25% Either
6% 7.50% 7.25% Percentage
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 on a dividend payment date will result in the
cancellation of an auction. The Fund does not intend to establish any reserves
for the payment of dividends.
Restriction on Dividends and Other Distributions. While any of the AMPS are
outstanding, the Fund generally may not declare, pay or set apart for payment,
any dividend or other distribution in respect of its Common Shares (other than
in additional shares of common stock or rights to purchase common stock) or
repurchase any of its Common Shares (except by conversion into or exchange for
shares of the Fund ranking junior to the AMPS as to the payment of dividends and
the distribution of assets upon liquidation) unless each of the following
conditions have been satisfied:
In the case of the Moody's coverage requirements, immediately after such
transaction, the aggregate Moody's Coverage Value (i.e., the aggregate
value of the Fund's portfolio discounted according to Moody's criteria)
would be equal to or greater than the AMPS 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 AMPS Basic Maintenance Amount.
Immediately after such transaction, the 1940 Act AMPS 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
53
of the Fund ranking, as to the payment of dividends, on a parity with AMPS
through their most recent respective dividend payment dates, the amount of
dividends declared per share on 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,
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 M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) have equal voting rights of one vote per share
and vote together as a single class. In elections of directors, the holders of
the AMPS (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS), as a separate class, vote to
elect two directors, and the holders of the Common Shares and holders of the
AMPS (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS) vote together as a single class
to elect the remaining directors. In addition, during any period ('Voting
Period') in which the Fund has not paid dividends on the AMPS (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) in an amount equal to two full years
dividends, the holders of the AMPS (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS), voting as
a single class, are entitled to elect (in addition to the two directors set
forth above) the smallest number of additional directors as is necessary to
ensure that a majority of the directors has been elected by the holders of the
AMPS (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS). The holders of the AMPS (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) will continue to have these rights until all
dividends in arrears have been paid or otherwise provided for.
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the AMPS (together with
the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) of the number of directors that such holders
54
are entitled to elect. The persons elected by the holders of the AMPS (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS), together with the incumbent directors, will
constitute the duly elected directors of the Fund. When all dividends in arrears
on the AMPS have been paid or provided for, the terms of office of the
additional directors elected by the holders of the AMPS will terminate.
So long as any of the AMPS (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS) are
outstanding, the Fund will not, without the affirmative vote of the holders of a
majority of the outstanding AMPS (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS),
(i) institute any proceedings to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against it,
or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent
to the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Fund or a substantial part of its property,
or make any assignment for the benefit of creditors, or, except as may be
required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any
such action; (ii) create, incur or suffer to exist, or agree to create, incur or
suffer to exist, or consent to cause or permit in the future (upon the happening
of a contingency or otherwise) the creation, incurrence or existence of any
material lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
AMPS (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C 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, except the Fund may borrow as may be permitted by the Fund's investment
restrictions; provided, however, that transfers of assets by the Fund subject to
an obligation to repurchase will not be deemed to be indebtedness for purposes
of this provision to the extent that after any such transaction the Fund has
eligible assets with an aggregate discounted value at least equal to the AMPS
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 (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS)
shall be required to approve any plan of reorganization (as such term is used in
the 1940 Act) adversely affecting such shares or any action requiring a vote of
security holders of the Fund under Section 13(a) of the 1940 Act, including,
among other things, changes in the Fund's investment restrictions described
under 'Investment Restrictions' in the SAI and changes in the Fund's
subclassification as a closed-end investment company.
55
The affirmative vote of the holders of a majority, as defined in the 1940
Act, of the outstanding AMPS, voting separately from any other series, will be
required with respect to any matter that materially and adversely affects the
rights, preferences, or powers of the AMPS in a manner different from that of
other series or classes of the Fund's shares of capital stock. For purposes of
the foregoing, no matter will be deemed to adversely affect any right,
preference or power unless such matter (i) alters or abolishes any preferential
right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series or (iii) creates or alters (other than to abolish) any
restriction on transfer applicable to such series. The vote of holders of any
series described in this paragraph will in each case be in addition to a
separate vote of the requisite percentage of Common Shares and/or preferred
stock necessary to authorize the action in question.
The Common Shares and the AMPS (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS) also will
vote separately to the extent otherwise required under Maryland law or the 1940
Act as in effect from time to time. The class votes of holders of AMPS (together
with the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) described above will in each case be in
addition to any separate vote of the requisite percentage of Common Shares and
AMPS (together with the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS), voting together as a single
class, necessary to authorize the action in question.
For purpose of any right of the holders of the AMPS to vote on any matter,
whether the right is created by the Charter, by statute or otherwise, a holder
of 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 AMPS 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 'AMPS Basic Maintenance Amount' includes the sum
of (i) the aggregate liquidation preference of the AMPS (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C AMPS) then outstanding, (ii) the total principal of any senior debt
(plus accrued and projected dividends), (iii) certain Fund expenses and
(iv) certain other current liabilities.
The Fund also is required under rating agency guidelines to maintain, with
respect to the AMPS, as of the last business day of each month in which the AMPS
(and the Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS)
56
are outstanding, asset coverage of at least 200% with respect to senior
securities that are shares of the Fund, including the AMPS (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C AMPS) (or such other asset coverage as may in the future be
specified in or under the 1940 Act as the minimum asset coverage for senior
securities that are shares of a closed-end investment company as a condition of
declaring dividends on its Common Shares) ('1940 Act AMPS 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 December 1, 2003 and assuming the issuance of all
AMPS offered hereby and the use of the proceeds as intended, the 1940 Act AMPS
Asset Coverage with respect to the AMPS (and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS)
would be computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $1,916,952,288
---------------------------------------- = -------------- = 286%
Senior securities representing indebtedness $ 671,000,000
plus liquidation value of the AMPS
and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS
If the Fund does not timely cure a failure to maintain (1) a discounted
value of its portfolio equal to the AMPS Basic Maintenance Amount or (2) the
1940 Act AMPS 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 shareholder approval, amend, alter, add to or repeal any
or all of the definitions and related provisions that have been adopted by the
Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from S&P or Moody's, or both, as appropriate, that any such
change would not impair the ratings then assigned by S&P and Moody's to the
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, or the
percentage spread added to the Reference Rate, to determine the Maximum Rate
without the vote or consent of the holders of AMPS or any other stockholder of
the Corporation, but only with confirmation from each rating agency, and after
consultation with the broker-dealers, provided that immediately following any
such increase the Fund could meet the AMPS 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
57
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 AMPS Basic Maintenance
Amount, (2) maintain the 1940 Act AMPS Asset Coverage or (3) file a required
certificate related to asset coverage on time, the AMPS will be subject to
mandatory redemption out of funds legally available therefor in accordance with
the Articles Supplementary and applicable law, at the redemption price of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to (but not including) the date
fixed for redemption. Any such redemption will be limited to the number of the
AMPS necessary to restore the required discounted value or the 1940 Act AMPS
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 AMPS Basic Maintenance Amount or the 1940 Act AMPS 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 AMPS Basic Maintenance Amount.
Notwithstanding the foregoing, AMPS may not be redeemed at the option of the
Fund unless all dividends in arrears on the outstanding AMPS, and any other
outstanding preferred shares, have been or are being contemporaneously paid or
set aside for payment. This would not prevent the lawful purchase or exchange
offer for AMPS made on the same terms to holders of all outstanding preferred
shares.
58
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 is made on the Common
Shares, an amount equal to the liquidation preference with respect to such
shares ($25,000 per share), plus an amount equal to all dividends thereon
(whether or not earned or declared by the Fund, but excluding the interest
thereon) accumulated but unpaid to and including the date of final distribution
in same-day funds in connection with the liquidation of the Fund. After the
payment to the holders of the AMPS of the full preferential amounts provided for
as described herein, the holders of the AMPS as such will have no right or claim
to any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other entity
nor the merger or consolidation of any other entity into or with the Fund, will
be a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.
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 liquidation preference ($25,000 per share) of the AMPS held by a
Broker-Dealer's customer upon settlement in an auction.
59
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.
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
60
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
90% of the reference rate.
The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of AMPS that is different than the
number of shares specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as existing
holders or potential holders in respect of customer orders will be required to
make appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same-day funds to
DTC against delivery to their respective agent members. DTC will make payment to
the sellers' agent members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their agent members in same-day funds.
The auctions for the AMPS will normally be held every 28 days and each
subsequent rate period will normally begin on the following business day.
The first auction for the AMPS will be held on January 6, 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 28 days, and each subsequent dividend period the AMPS
normally will begin on the following business day.
61
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.
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 (i) 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 (ii) in the case of all transfers,
other
62
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 99,973,160 Common Shares, par value $.001
per share. All Common Shares have equal rights to the payment of dividends and
the distribution of assets upon liquidation. Common Shares are fully paid and
non-assessable when issued and have no preemptive, conversion, exchange,
redemption or cumulative voting rights. Holders of Common Shares are entitled to
one vote per share. Whenever the 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 have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to the 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 that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund, to cause it to engage in certain transactions or to modify its
structure. Commencing with the first annual meeting of stockholders, the Board
of Directors will be divided into three classes, having initial terms of one,
two and three years, respectively. At the annual meeting of stockholders in each
year thereafter, the term of one class will expire and directors will be elected
to serve in that class for terms of three years. This provision could delay for
up to two years the replacement of a majority of the Board of Directors. A
director may be removed from office only for cause and only by a vote of the
holders of at least 75% of the outstanding shares of the Fund entitled to vote
on the matter.
The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. Such conversion also requires the affirmative vote
of the holders of at least 75% of Common Shares and the AMPS (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) outstanding at the time, voting as a single
class, unless it is approved by a vote of at least 75% of the Continuing
Directors (as defined below), in which event such conversion requires the
approval of the holders of a majority of the votes entitled to be cast thereon
by the stockholders of the Fund. A 'Continuing Director' is any member of the
Board of Directors of the Fund who (i) is not a person or affiliate of a person
who enters or proposes to enter into a Business Combination (as defined below)
with the Fund (an 'Interested Party') and (ii) who has been a member of the
Board of Directors of the Fund for a period of at least 12 months, or has been a
member of the Board of Directors since the Fund's initial public offering of
Common Shares, or is a successor of a Continuing Director who is unaffiliated
with an Interested Party and is recommended to succeed a Continuing Director by
a majority of the Continuing Directors then on the Board of Directors of the
Fund. The affirmative vote of at least 75% of the entire Board of Directors and
at least 75% of the holders of Common Shares and the AMPS (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
63
Series W28C AMPS) outstanding at the time, voting as a single class, will be
required to amend the Charter to change any of the provisions in this paragraph
and the preceding paragraph.
The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of Common Shares and the AMPS (and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) outstanding at the time, voting as a single
class, 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 M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS)
outstanding at the time, voting as a single class, other than votes held by an
Interested Party who is (or whose affiliate is) a party to a Business
Combination (as defined below) or an affiliate or associate of the Interested
Party, are required to authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with
or into any other entity;
(ii) issuance or transfer by the Fund (in one or a series of
transactions in any 12-month period) of any securities of the Fund to any
person or entity for cash, securities or other property (or combination
thereof) having an aggregate fair market value of $1,000,000 or more,
excluding issuances or transfers of debt securities of the Fund, sales of
securities of the Fund in connection with a public offering, issuances of
securities of the Fund pursuant to a dividend reinvestment plan adopted by
the Fund, issuances of securities of the Fund upon the exercise of any stock
subscription rights distributed by the Fund and portfolio transactions
effected by the Fund in the ordinary course of business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12 month
period) to or with any person or entity of any assets of the Fund having an
aggregate fair market value of $1,000,000 or more except for portfolio
transactions (including pledges of portfolio securities in connection with
borrowings) effected by the Fund in the ordinary course of its business
(transactions within clauses (i), (ii) and (iii) above being known
individually as a 'Business Combination');
(iv) any voluntary liquidation or dissolution of the Fund or an
amendment to the Fund's Charter to terminate the Fund's existence; or
(v) any shareholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets as to which shareholder
approval is required under federal or Maryland law.
However, the shareholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of at least 75% of the Continuing Directors. In
that case, if Maryland law requires shareholder approval, the affirmative vote
of a majority of votes entitled to be cast thereon shall be required and if
Maryland law does not require shareholder approval, no shareholder approval will
be required. The Fund's By-Laws contain provisions the effect of which is to
prevent matters, including nominations of directors, from being considered at a
shareholders' meeting where the Fund has not received notice of the matters
generally at least 90 but no more than 120 days prior to the first anniversary
of the preceding year's annual meeting.
64
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 shareholders 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 shareholders of an opportunity to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. In the opinion of the Investment Manager, however, these
provisions offer several possible advantages. They may require persons seeking
control of a Fund to negotiate with its management regarding the price to be
paid for the shares required to obtain such control, they promote continuity and
stability and they enhance the Fund's ability to pursue long-term strategies
that are consistent with its investment objectives.
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and it may be converted to an
open-end investment company at any time by a vote of the outstanding shares. See
'Description of 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 M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Common Shares would no
longer be listed on the NYSE. Conversion to open-end status could also require
the Fund to modify certain investment restrictions and policies. Shareholders of
an open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or permitted under
the 1940 Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of redemption. In order to avoid maintaining
large cash positions or liquidating favorable investments to meet redemptions,
open-end investment companies typically engage in a continuous offering of their
shares. Open-end investment companies are thus subject to periodic asset
in-flows and out-flows that can complicate portfolio management. The Board of
Directors may at any time propose conversion of the Fund to open-end status,
depending upon its judgment regarding the advisability of such action in light
of circumstances then prevailing. The Board of Directors believes, however, that
the closed-end structure is desirable in light of the Fund's investment
objectives and policies and it is currently not likely that the Board of
Directors would vote to convert the Fund to an open-end fund.
REPURCHASE OF COMMON SHARES
Common shares of closed-end investment companies often trade at a discount
to net asset value, and the Fund's Common Shares may also trade at a discount to
their net asset value, although it is possible that they may trade at a premium
above net asset value. The market price of the Fund's Common Shares will be
determined by such factors as relative demand for and
65
supply of the Common Shares in the market, the Fund's net asset value, general
market and economic conditions and other factors beyond the control of the Fund.
Although Common Shareholders will not have the right to redeem the Common
Shares, the Fund may take action to repurchase Common Shares in the open market
or make tender offers for its Common Shares at net asset value.
The acquisition of Common Shares by the Fund will decrease the total assets
of the Fund and, therefore, have the effect of increasing the Fund's expense
ratio and may adversely affect the ability of the Fund to achieve its investment
objectives. To the extent the Fund may need to liquidate investments to fund
repurchases of Common Shares, this may result in portfolio turnover which will
result in additional expenses being borne by the Fund. The Board of Directors
currently considers the following factors to be relevant to a potential decision
to repurchase Common Shares: the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action on the Fund or its
shareholders and market considerations. Any share repurchases or tender offers
will be made in accordance with the requirements of the Securities Exchange Act
of 1934, as amended, and the 1940 Act. See 'U.S. Federal Taxation' for a
description of the potential tax consequences of a repurchase of Common Shares.
U.S. FEDERAL TAXATION
The following discussion offers only a brief outline of the U.S. federal
income tax consequences of investing in the Fund and is based on the U.S.
federal tax laws in effect on the date hereof. Such tax laws are subject to
change by legislative, judicial or administrative action, possibly with
retroactive effect. Investors should consult their own tax advisers for more
detailed information and for information regarding the impact of state, local
and foreign taxes on an investment in the Fund.
U.S. FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to elect to be treated as, and to qualify annually as, a
regulated investment company (a 'RIC') under Subchapter M of the Code. To
qualify, the Fund must, among other things, (a) derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived from its business of
investing in stock, securities or foreign currencies (the 'Income Requirement');
and (b) diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the value of its total assets is represented
by cash, U.S. Government securities, securities of other RICs and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer, or of two or more issuers which the
Fund controls and which are engaged in the same, similar or related trades or
businesses.
For each taxable year that the Fund otherwise qualifies as a RIC, it will
not be subject to U.S. federal income tax on that part of its investment company
taxable income (as that term is defined in the Code, but determined without
regard to any deduction for dividends paid) and net
66
capital gain (the excess of net long-term capital gain over net short-term
capital loss) that it distributes to its shareholders, if it distributes at
least 90% of the sum of its investment company taxable income and any net
tax-exempt interest income for that year (the 'Distribution Requirement'). The
Fund intends to make sufficient distributions of its investment company taxable
income each taxable year to meet the Distribution Requirement. If the Fund
failed to qualify for treatment as a RIC for any taxable year or failed to
satisfy the Distribution Requirement in any taxable year, (a) it would be taxed
as an ordinary corporation on the full amount of its taxable income for that
year without being able to deduct the distributions it makes to its
shareholders, and (b) its shareholders would treat any such distributions,
including distributions of net capital gain, as dividends (that is, ordinary
income) to the extent of the Fund's current and accumulated earnings and
profits. Such distributions generally would be eligible (i) for the DRD
available to corporate shareholders and (ii) for treatment as qualified dividend
income in the case of individual shareholders.
The Fund also currently intends to distribute all realized net capital gain
annually. If, however, the Board of Directors determines for any taxable year to
retain all or a portion of the Fund's net capital gain, that decision will not
affect the Fund's ability to qualify for treatment as a RIC, but will subject
the Fund to a 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 shareholders, who (i) will be required to include their
proportionate shares of the undistributed amount in their gross income as
long-term capital gain, and (ii) will be entitled to credit their proportionate
shares of the 35% tax paid by the Fund against their U.S. federal income tax
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned
by a Fund shareholder will be increased by an amount equal to 65% of the amount
of undistributed capital gains included in the shareholder's gross income.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of the sum of
its ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts. For this
and other purposes, a distribution will be treated as paid by the Fund and
received by the shareholders on December 31 if it is declared by the Fund in
October, November or December of such year, made payable to shareholders of
record on a date in such a month and paid by the Fund during January of the
following year. Any such distribution thus will be taxable to shareholders whose
taxable year is the calendar year in the year the distribution is declared,
rather than the year in which the distribution is received. To prevent
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.
U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF AMPS
Based in part on 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
67
qualified dividend income and capital gain dividends, as described below). If a
portion of the Fund's income consists of qualifying dividends paid by U.S.
corporations (other than REITs), a portion of the dividends paid by the Fund to
corporate shareholders, if properly designated, may qualify for the DRD. In
addition, for taxable years beginning on or before December 31, 2008,
distributions of investment income designated by the Fund as derived from
qualified dividend income will be taxed in the hands of individuals at the rates
applicable to long-term capital gain, provided holding period and other
requirements are met by both the Fund and the shareholder. The Fund does not
expect a significant portion of Fund distributions to be eligible for the DRD or
derived from qualified dividend income. The foregoing discussion relies in part
on a published ruling of the IRS stating that certain preferred stock similar in
many material respects to the AMPS represents equity. It is possible, however,
that the IRS might take a contrary position asserting, for example, that the
AMPS constitute debt of the Fund. If this position were upheld, the discussion
of the treatment of distributions above would not apply. Instead, distributions
by the Fund to holders of AMPS would constitute interest, whether or not such
distributions exceeded the earnings and profits of the Fund, would be included
in full in the income of the recipient and would be taxed as ordinary income.
Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of distributions of qualified dividend income and
capital gain dividends described below, be taxable to stockholders as ordinary
income. Distributions of net capital gain that are designated by the Fund as
capital gain dividends will be treated as long-term capital gains in the hands
of holders regardless of the holders' respective holding periods for their AMPS.
Distributions, if any, in excess of the Fund's current and accumulated earnings
and profits will first reduce the adjusted tax basis of a shareholder's shares
and, after that basis has been reduced to zero, will constitute a capital gain
to the stockholder (assuming the shares are held as a capital asset). The IRS
currently requires that a regulated investment company that has two or more
classes of stock allocate to each such class proportionate amounts of each type
of its income (such as ordinary income, capital gains, dividends qualifying for
the DRD and qualified dividend income) based upon the percentage of total
dividends paid out of current or accumulated earnings and profits to each class
for the tax year. Accordingly, the Fund intends each year to allocate capital
gain dividends, dividends qualifying for the DRD and dividends derived from
qualified dividend income, if any, between its Common Shares, the AMPS and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS in proportion to the total dividends paid out
of current or accumulated earnings and profits to each class with respect to
such tax year. Distributions in excess of the Fund's current and accumulated
earnings and profits, if any, however, will not be allocated proportionately
among the Common Shares, the AMPS and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS. Since the
Fund's current and accumulated earnings and profits will first be used to pay
dividends on its preferred shares (including the AMPS), distributions in excess
of such earnings and profits, if any, will be made disproportionately to holders
of Common Shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions.
SALE OF SHARES
The sale or other disposition of 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
68
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 the AMPS may be disallowed if other
substantially identical shares are acquired within a 61-day period beginning 30
days before and ending 30 days after the date the original shares are disposed
of. If disallowed, the loss will be reflected by an upward adjustment to the
basis of the shares acquired.
BACKUP WITHHOLDING
The Fund may be required to withhold, for U.S. federal income taxes, a
portion of all taxable dividends and redemption proceeds payable to shareholders
who fail to provide the Fund with their correct taxpayer identification numbers
or who otherwise fail to make required certifications, or if the Fund or a
Series shareholder has been notified by the IRS that such shareholder is subject
to backup withholding. Corporate shareholders and other shareholders specified
in the Code and the Treasury regulations promulgated thereunder are exempt from
such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld will be allowed as a refund or a credit against the
shareholder's federal income tax liability if the appropriate information is
provided to the IRS.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident aliens, may
be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty. Investors are
advised to consult their own tax advisers with respect to the application to
their own circumstances of the above-described general taxation rules and with
respect to the state, local, foreign and other tax consequences to them of an
investment in the AMPS.
FURTHER INFORMATION
The SAI summarizes further federal income tax considerations that may apply
to the Fund and its shareholders and may qualify the considerations discussed
herein.
69
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated
December 8, 2003, 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.................................... 1,326
A.G. Edwards & Sons, Inc. .................................. 357
UBS Securities LLC.......................................... 357
---------
Total............................................ 2,040
---------
---------
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to approval of legal
matters by counsel and to certain other conditions, including without
limitation, the receipt by the underwriters of customary closing certificates,
opinions and other documents and the receipt by the Fund of Aaa and AAA ratings
on the 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 in excess of $137.50 per share. The sales load the Fund
will pay of $250 per share is equal to 1% of the initial offering price. After
the initial public offering, the underwriters may change the public offering
price and the concession. Investors must pay for any AMPS purchased in the
initial public offering on or before December 10, 2003.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with, and
perform services for, the Fund. The underwriters, or their affiliates, may act
as a counterparty in connection with the interest rate transactions described
above after they have ceased to be underwriters.
The Fund anticipates that the underwriters or their respective affiliates
may, from time to time, act in auctions as broker-dealers and receive fees as
set forth under 'The Auction' and in the SAI.
The principal business address of 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 December 10, 2003,
as agreed upon by the underwriters, the Fund and the Investment Manager pursuant
to Rule 15c6-1 under the Securities Exchange Act of 1934.
70
CUSTODIAN, AUCTION AGENT, TRANSFER
AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Bank of New York, whose address is 100 Church Street, 8th Floor, New
York, New York 10286, will act as auction agent, transfer agent, dividend paying
agent, and registrar for the 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 shares offered hereby is being passed on for the Fund by
Simpson Thacher & Bartlett LLP, New York, New York, and certain other legal
matters will be passed on for the underwriters by 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 ACCOUNTANTS
The statement of assets and liabilities of the Fund at June 6, 2003 has been
audited by PricewaterhouseCoopers LLP, independent accountants, as set forth in
their report given upon PricewaterhouseCoopers LLP's authority as experts in
accounting and auditing. The address of PricewaterhouseCoopers LLP is 1177
Avenue of the Americas, New York, New York 10036.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the 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 Securities and Exchange Commission. The Fund's SAI dated
December 8, 2003 contains additional information about the Fund and is
incorporated by reference into (which means it is considered to be a part of)
this prospectus. The Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains the Fund's Registration Statement, the SAI,
other documents incorporated by reference, and other information the Fund has
filed electronically with the Securities and Exchange Commission, including
proxy statements and reports filed under the Securities Exchange Act of 1934, as
amended. Additional information may be found on the Internet at
http://www.cohenandsteers.com.
71
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
General Information......................................... 3
Investment Objectives and Policies, Additional Information
Regarding Fund Investments................................ 3
Investment Restrictions..................................... 11
Management of the Fund...................................... 12
Compensation of Directors and Certain Officers.............. 16
Investment Advisory and Other Services...................... 16
Portfolio Transactions and Brokerage........................ 25
Determination of Net Asset Value............................ 26
Additional Information Concerning the Auctions for AMPS..... 26
S&P and Moody's Guidelines.................................. 28
U.S. Federal Taxation....................................... 37
Performance Data and Index Returns.......................... 43
Experts..................................................... 44
Report of Independent Accountants........................... 45
Financial Information....................................... 46
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
72
[THIS PAGE INTENTIONALLY LEFT BLANK]
[THIS PAGE INTENTIONALLY LEFT BLANK]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$51,000,000
[Logo: COHEN & STEERS REIT AND PREFERRED INCOME FUND]
COHEN & STEERS
REIT AND PREFERRED INCOME FUND, INC.
AUCTION MARKET PREFERRED SHARES ('AMPS')
2,040 SHARES, SERIES T28
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
PROSPECTUS
-----------------
MERRILL LYNCH & CO.
A.G. EDWARDS & SONS, INC.
UBS INVESTMENT BANK
DECEMBER 8, 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[Logo: COHEN & STEERS REIT AND PREFERRED INCOME FUND]
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(800) 437-9912
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
December 8, 2003
THIS STATEMENT OF ADDITIONAL INFORMATION ('SAI') OF COHEN & STEERS REIT AND
PREFERRED INCOME FUND, INC. (THE 'FUND') RELATING TO THIS OFFERING OF THE FUND'S
TAXABLE AUCTION MARKET PREFERRED SHARES, SERIES T28 (THE 'AMPS') DOES NOT
CONSTITUTE A PROSPECTUS, BUT SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS RELATING TO THE AMPS DATED DECEMBER 8, 2003, AS SUPPLEMENTED FROM
TIME TO TIME (THE 'PROSPECTUS').
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
THIS PROSPECTUS OR IN THE GLOSSARY OF THIS SAI.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
General Information......................................... 3
Investment Objectives and Policies, Additional Information
Regarding Fund Investments................................ 3
Investment Restrictions..................................... 11
Management of the Fund...................................... 12
Compensation of Directors and Certain Officers.............. 16
Investment Advisory and Other Services...................... 16
Portfolio Transactions and Brokerage........................ 25
Determination of Net Asset Value............................ 26
Additional Information Concerning the Auctions for AMPS..... 26
S&P and Moody's Guidelines.................................. 28
U.S. Federal Taxation....................................... 37
Performance Data and Index Returns.......................... 43
Experts..................................................... 44
Report of Independent Accountants........................... 45
Financial Information....................................... 46
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
2
STATEMENT OF ADDITIONAL INFORMATION
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') is a
non-diversified, closed-end management investment company organized as a
Maryland corporation on March 25, 2003. Much of the information contained in
this Statement of Additional Information expands on subjects discussed in the
prospectus. Defined terms used herein have the same meanings as in the
prospectus. No investment in the shares of the Fund should be made without first
reading the prospectus.
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS
The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks as set forth in the prospectus.
Except as otherwise provided, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without the approval of
the shareholders; however, the Fund will not change its non-fundamental
investment policies without written notice to shareholders.
INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS
Under normal market conditions, the Fund will invest at least 40%, but no
more than 60%, of our total assets in common stocks issued by real estate
companies or real estate investment trusts or 'REITs.'
Real Estate Companies. For purposes of our investment policies, a real
estate company is one that derives at least 50% of its revenues from the
ownership, construction, financing, management or sale of commercial,
industrial, or residential real estate; or has at least 50% of its assets in
such real estate.
Real Estate Investment Trusts. A REIT is a company dedicated to owning, and
usually operating, income producing real estate, or to financing real estate.
REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. An Equity REIT invests primarily in the fee ownership or leasehold
ownership of land and buildings and derives its income primarily from rental
income. An Equity REIT may also realize capital gains (or losses) by selling
real estate properties in its portfolio that have appreciated (or depreciated)
in value. A Mortgage REIT invests primarily in mortgages on real estate, which
may secure construction, development or long-term loans. A Mortgage REIT
generally derives its income primarily from interest payments on the credit it
has extended. A Hybrid REIT combines the characteristics of both Equity REITs
and Mortgage REITs. It is anticipated, although not required, that under normal
market conditions at least 90% of the Fund's investments in REITs will consist
of securities issued by Equity REITs.
PREFERRED SECURITIES
Under normal market conditions, the Fund will invest at least 40%, but no
more than 60%, of its total assets in preferred securities. Initially, the
preferred component of the Fund will be comprised primarily of hybrid-preferred
and other taxable preferred securities. The taxable preferred securities in
which the Fund intends to invest do not qualify for the dividends received
deduction (the 'DRD') under Section 243 of the Internal Revenue Code of 1986, as
amended (the 'Code') and are not expected to provide significant benefits under
the rules relating to 'qualified dividend income.' The DRD generally allows
corporations to deduct from their income 70% of dividends received. Pursuant to
recently enacted legislation, individuals will generally be taxed at long-term
capital gain rates on qualified dividend income. Accordingly, any corporate
shareholder who otherwise would qualify for the DRD, and any individual
shareholder who otherwise would qualify to be taxed at long-term capital gain
rates on qualified dividend income, should assume that none of the distributions
it receives from the Fund will qualify for the DRD or provide significant
benefits under the rules relating to qualified dividend income.
3
There are two basic types of preferred securities: traditional preferred
securities and hybrid-preferred securities. When used in this SAI and the
related prospectus, taxable preferred securities refer generally to
hybrid-preferred securities as well as certain types of traditional preferred
securities that are not eligible for the DRD (and are not expected to provide
significant benefits under the rules relating to qualified dividend income),
such as REIT preferred securities.
Traditional Preferred Securities. Traditional preferred securities pay fixed
or adjustable rate dividends to investors, and have a 'preference' over common
stock in the payment of dividends and the liquidation of a company's assets.
This means that a company must pay dividends on preferred stock before paying
any dividends on its common stock. In order to be payable, distributions on
preferred securities must be declared by the issuer's board of directors. Income
payments on typical preferred securities currently outstanding are cumulative,
causing dividends and distributions to accrue even if not declared by the board
of directors or otherwise made payable. There is no assurance that dividends or
distributions on the preferred securities in which the Fund invests will be
declared or otherwise made payable. Preferred stockholders usually have no right
to vote for corporate directors or on other matters. Shares of preferred
securities have a liquidation value that generally equals the original purchase
price at the date of issuance. The market value of preferred securities may be
affected by favorable and unfavorable changes impacting companies in the
utilities, real estate and financial services sectors, which are prominent
issuers of preferred securities, and by actual and anticipated changes in tax
laws, such as changes in corporate income tax rates, the rates applicable to
qualified dividend income and in the DRD. Because the claim on an issuer's
earnings represented by preferred securities may become onerous when interest
rates fall below the rate payable on such securities, the issuer may redeem the
securities. Thus, in declining interest rate environments in particular, the
Fund's holdings of higher rate-paying fixed rate preferred securities may be
reduced and the Fund would be unable to acquire securities paying comparable
rates with the redemption proceeds.
Hybrid-Preferred Securities. The hybrid-preferred securities market is
divided into the '$25 par' and the 'institutional' segments. The $25 par segment
is typified by securities that are listed on the New York Stock Exchange, trade
and are quoted 'flat,' i.e., without accrued dividend income, and are typically
callable at par value five years after their original issuance date. The
institutional segment is typified by $1,000 par value securities that are not
exchange-listed, trade and are quoted on an 'accrued income' basis, and
typically have a minimum of ten years of call protection (at premium prices)
from the date of their original issuance.
Hybrid-preferred securities are treated in a similar fashion to traditional
preferred securities by several regulatory agencies, including the Federal
Reserve Bank, and by credit rating agencies, for various purposes, such as the
assignment of minimum capital ratios, over-collateralization rates and
diversification limits.
Within the category of hybrid-preferred securities are senior debt
instruments that trade in the broader preferred securities market. These debt
instruments, which are sources of long-term capital for the issuers, have
structural features similar to preferred stock such as maturities ranging from
30 years to perpetuity, call features, exchange listings and the inclusion of
accrued interest in the trading price. Similar to other hybrid-preferred
securities, these debt instruments usually do not offer equity capital
treatment. CORTS'r' and PINES'r' are two examples of senior debt instruments
which are structured and trade as hybrid-preferred securities.
See 'Investment Objectives and Policies -- Portfolio
Composition -- Hybrid-Preferred Securities' in the Fund's prospectus for a
general description of hybrid-preferred securities.
SHORT-TERM FIXED INCOME SECURITIES
For temporary defensive purposes or to keep cash on hand fully invested, and
following the offering pending investment in securities that meet the Fund's
investment objectives, the Fund may
4
invest up to 100% of its total assets in cash equivalents and short-term fixed
income securities. Short-term fixed income investments are defined to include,
without limitation, the following:
(1) U.S. Government securities, including bills, notes and bonds differing
as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities. U.S. Government securities include securities issued
by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
and Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and
Tennessee Valley Authority, whose securities are supported by the right
of the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. Government to purchase certain
obligations of the agency or instrumentality; and (d) the Student Loan
Marketing Association, whose securities are supported only by its
credit. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it always will do so since it is not so obligated by
law. The U.S. Government, its agencies and instrumentalities do not
guarantee the market value of their securities. Consequently, the value
of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a
savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the
amount deposited plus interest to the bearer of the certificate on the
date specified thereon. Certificates of deposit purchased by the Fund
may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At
the time the Fund purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such
securities to the seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures a predetermined yield
for the Fund during its holding period, since the resale price is always
greater than the purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Fund to invest temporarily
available cash. The Fund may enter into repurchase agreements only with
respect to obligations of the U.S. Government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in
which the Fund may invest. Repurchase agreements may be considered loans
to the seller, collateralized by the underlying securities. The risk to
the Fund is limited to the ability of the seller to pay the agreed-upon
sum on the repurchase date; in the event of default, the repurchase
agreement provides that the Fund is entitled to sell the underlying
collateral. If the value of the collateral declines after the agreement
is entered into, and if the seller defaults under a repurchase agreement
when the value of the underlying collateral is less than the repurchase
price, the Fund could incur a loss of both principal and interest. The
Investment Manager monitors the value of the collateral at the time the
action is entered into and at all times during the term of the
repurchase agreement. The Investment Manager does so in an effort to
determine that the value of the collateral always equals or exceeds the
agreed-upon repurchase price to be paid to the Fund. If the seller were
to be subject to a federal bankruptcy proceeding, the ability of the
Fund to liquidate the collateral could be delayed or impaired because of
certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory
notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time.
5
The Investment Manager will consider the financial condition of the
corporation (e.g., earning power, cash flow and other liquidity ratios) and will
continuously monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the corporation
were unable to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the two highest categories by
a major rating agency or are unrated but determined to be of comparable quality
by the Investment Manager and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
LOWER RATED SECURITIES
The Fund may invest up to 10% of its total assets (measured at the time of
purchase) in securities rated below investment grade or securities comparably
rated by other rating agencies or in unrated securities determined by the
Investment Manager to be below investment grade. Securities rated Ba by Moody's
are judged to have speculative elements; their future cannot be considered as
well assured and often the protection of interest and principle payments may be
very moderate. Securities rated BB by S&P are regarded as having predominantly
speculative characteristics and, while such obligations have less near-term
vulnerability to default than other speculative grade debt, they face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Lower grade securities, though high yielding, are
characterized by high risk. They may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated securities. The retail secondary market for lower grade
securities may be less liquid than that of higher rated securities; adverse
conditions could make it difficult at times for the Fund to sell certain
securities or could result in lower prices than those used in calculating the
Fund's net asset value.
The prices of debt securities generally are inversely related to interest
rate changes; however, the price volatility caused by fluctuating interest rates
of securities also is inversely related to the coupons of such securities.
Accordingly, below investment grade securities may be relatively less sensitive
to interest rate changes than higher quality securities of comparable maturity
because of their higher coupon. This higher coupon is what the investor receives
in return for bearing greater credit risk. The higher credit risk associated
with below investment grade securities potentially can have a greater effect on
the value of such securities than may be the case with higher quality issues of
comparable maturity.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely disrupt the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principle and pay interest thereon and increase the incidence of default for
such securities.
The ratings of Moody's, S&P and other rating agencies represent their
opinions as to the quality of the obligations that they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principle payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be an
initial criterion for selection of portfolio investments, the Investment Manager
also will independently evaluate these securities and the ability for the
issuers of such securities to pay interest and principal. To the extent that the
Fund invests in lower grade securities that have not been rated by a rating
agency, the Fund's ability to achieve its investment objectives will be more
dependent on the Fund's credit analysis than would be the case when the Fund
invests in rated securities.
STRATEGIC TRANSACTIONS
Consistent with its investment objective and policies as set forth herein,
the Fund may also enter into certain hedging and risk management transactions.
In particular, the Fund may purchase and sell futures contracts, exchange-listed
and over-the-counter put and call options on securities, financial indices and
futures contracts and may enter into various interest rate transactions
6
(collectively, 'Strategic Transactions'). Strategic Transactions may be used to
attempt to protect against possible changes in the market value of the Fund's
portfolio resulting from fluctuations in the securities markets and changes in
interest rates, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes or to establish a position in the securities markets as a temporary
substitute for purchasing particular securities. Any or all of these techniques
may be used at any time. There is no particular strategy that requires use of
one technique rather than another. Use of any Strategic Transaction is a
function of market conditions. The Strategic Transactions that the Fund may use
are described below. The ability of the Fund to hedge successfully will depend
on the Investment Manager's ability to predict pertinent market movements, which
cannot be assured.
Interest Rate Transactions. Among the Strategic Transactions into which the
Fund may enter are interest rate swaps and the purchase or sale of interest rate
caps and floors. The Fund expects to enter into the transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio as a duration management technique or to protect against any increase
in the price of securities the Fund anticipates purchasing at a later date or,
as discussed in the prospectus, to hedge against increased Fund Preferred Share
dividend rates or increases in the Fund's cost of borrowing.
Futures Contracts and Options on Futures Contracts. In connection with its
hedging and other risk management strategies, the Fund may also enter into
contracts for the purchase or sale for future delivery ('future contracts') of
debt securities, aggregates of debt securities, financial indices, and U.S.
Government debt securities or options on the foregoing to hedge the value of its
portfolio securities that might result from a change in interest rates or market
movements. The Fund will engage in such transactions only for bona fide hedging
or non-hedging purposes in accordance with CFTC regulations which permit
principals of an investment company registered under the 1940 Act to engage in
such transactions without registering as commodity pool operators. The Fund will
determine that the price fluctuations in the futures contracts and options on
futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which the Fund expects to
purchase. Except as stated below, the Fund's futures transactions will be
entered into for traditional hedging purposes -- i.e., futures contracts will be
sold to protect against a decline in the price of securities that the Fund owns,
or futures contracts will be purchased to protect the Fund against an increase
in the price of securities it intends to purchase.
Although the Fund does not intend to engage in non-hedging transactions, in
accordance with CFTC regulations, the Fund is permitted to engage in non-hedging
transactions, provided that:
(i) its pro rata share of the sum of the amount of initial margin
deposits on futures contracts entered into by the Fund and premiums paid for
unexpired options with respect to such contracts does not exceed 5% of the
liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on such contracts and options (in the case of
an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation); or
(ii) the aggregate 'notional value' (i.e., the size of the contract, in
contract units, times the current market price (futures position) or strike
price (options position) of each such unit) of the contract, it does not
exceed the liquidation value of the Fund, after taking into account
unrealized profits and unrealized losses on such contracts and options.
Credit Derivatives. The Fund may engage in credit derivative transactions.
There are two broad categories of credit derivatives: default price risk
derivatives and market spread derivatives. Default price risk derivatives are
linked to the price of reference securities or loans after a default by the
issuer or borrower, respectively. Market spread derivatives are based on the
risk that changes in market factors, such as credit spreads, can cause a decline
in the value of a security, loan or index. There are three basic transactional
forms for credit derivatives: swaps, options and structured instruments. The use
of credit derivatives is a highly specialized activity that involves strategies
and risks different from those associated with ordinary portfolio security
transactions. If incorrect in its forecasts of default risks, market spreads or
other applicable factors, the investment
7
performance of the Fund would diminish compared with what it would have been if
these techniques were not used. Moreover, even if it is correct in its
forecasts, there is a risk that a credit derivative position may correlate
imperfectly with the price of the asset or liability being hedged. There is no
limit on the amount of credit derivative transactions that may be entered into
by the Fund. The Fund's risk of loss in a credit derivative transaction varies
with the form of the transaction. For example, if the Fund purchases a default
option on a security, and if no default occurs with respect to the security, the
Fund's loss is limited to the premium it paid for the default option. In
contrast, if there is a default by the grantor of a default option, the Fund's
loss will include both the premium that it paid for the option and the decline
in value of the underlying security that the default option hedged.
Calls on Securities, Indices and Futures Contracts. In order to enhance
income or reduce fluctuations in net asset value, the Fund may sell or purchase
call options ('calls') on securities, futures contracts and indices based upon
the prices of debt securities that are traded on U.S. securities exchanges and
to the over-the-counter markets. A call option gives the purchaser of the option
the right to buy, and obligates the seller to sell, the underlying security,
futures contract or index at the exercise price at any time or at a specified
time during the option period. All such calls sold by the Fund must be 'covered'
as long as the call is outstanding (i.e., the Fund must own the instrument
subject to the call or other securities or assets acceptable for applicable
segregation and coverage requirements). A call sold by the Fund exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security, index or futures
contract and may require the Fund to hold an instrument that it might otherwise
have sold. The purchase of a call gives the Fund the right to buy the underlying
instrument or index at a fixed price. Calls on futures contracts on securities
written by the Fund must also be covered by assets or instruments acceptable
under applicable segregation and coverage requirement.
Puts on Securities, Indices and Futures Contracts. As with calls, the Fund
may purchase put options ('puts') on securities (whether or not it holds such
securities in its portfolio). For the same purposes, the Fund may also sell puts
on securities, financial indices and puts on futures contracts on securities if
the Fund's contingent obligations on such puts are secured by segregated assets
consisting of cash or liquid securities having a value not less than the
exercise price. The Fund will not sell puts if, as a result, more than 50% of
the Fund's assets would be required to cover its potential obligation under its
hedging and other investment transactions. In selling puts, there is a risk that
the Fund may be required to buy the underlying instrument or index at higher
than the current market price.
The principal risks relating to the use of futures and other Strategic
Transitions are: (i) less than perfect correlation between the prices of the
hedging instrument and the market value of the securities in the Fund's
portfolio; (ii) possible lack of a liquid secondary market for closing out a
position in such instruments; (iii) losses resulting from interest rate or other
market movements not anticipated by the Investment Manager; and (iv) the
obligation to meet additional variation margin or other payment requirements.
Certain provisions of the Code may restrict or affect the ability of the
Fund to engage in Strategic Transactions. See 'U.S. Federal Taxation.'
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
open- or closed-end investment companies; including exchange traded funds that
invest primarily in securities of the types in which the Fund may invest
directly. The Fund generally expects to invest in other investment companies
either during periods when it has large amounts of uninvested cash, such as the
period shortly after the Fund receives the proceeds of the offering of its
common shares, or during periods when there is a shortage of attractive
opportunities in the market. As a shareholder in an investment company, the Fund
would bear its ratable share of that investment company's expenses, and would
remain subject to payment of the Fund's advisory and other fees and expenses
with respect to assets so invested. Holders of common shares would therefore be
subject
8
to duplicative expenses to the extent the Fund invests in other investment
companies. The Investment Manager will take expenses into account when
evaluating the investment merits of an investment in an investment company
relative to available bond investments. The securities of other investment
companies may also be leveraged and will therefore be subject to the same
leverage risks to which the Fund is subject. As described in the prospectus in
the sections entitled 'Use of Leverage' the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will tend
to fluctuate more than the yield generated by unleveraged shares. Investment
companies may have investment policies that differ from those of the Fund. In
addition, to the extent the Fund invests in other investment companies, the Fund
will be dependent upon the investment and research abilities of persons other
than the Investment Manager.
RESTRICTED AND ILLIQUID SECURITIES
When purchasing securities that have not been registered under the
Securities Act, and are not readily marketable, the Fund will endeavor, to the
extent practicable, to obtain the right to registration at the expense of the
issuer. Generally, there will be a lapse of time between the Fund's decision to
sell any such security and the registration of the security permitting sale.
During any such period, the price of the securities will be subject to market
fluctuations. In addition, the Fund may not be able to readily dispose of such
securities at prices that approximate those at which the Fund could sell such
securities if they were more widely traded and, as a result of such illiquidity,
the Fund may have to sell other investments or engage in borrowing transactions
if necessary to raise cash to meet its obligations.
The Fund may purchase certain securities eligible for resale to qualified
institutional buyers as contemplated by Rule 144A under the Securities Act
('Rule 144A Securities'). Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to certain qualified institutional buyers. One effect of Rule 144A is
that certain restricted securities may be considered liquid, though no assurance
can be given that a liquid market for Rule 144A Securities will develop or be
maintained. However, where a substantial market of qualified institutional
buyers has developed for certain unregistered securities purchased by the Fund
pursuant to Rule 144A, the Fund intends to treat such securities as liquid
securities in accordance with procedures approved by the Fund's Board of
Directors. Because it is not possible to predict with assurance how the market
for Rule 144A Securities will develop, the Fund's Board of Directors has
directed the Investment Manager to monitor carefully the Fund's investments in
such securities with particular regard to trading activity, availability of
reliable price information and other relevant information. To the extent that,
for a period of time, qualified institutional buyers cease purchasing restricted
securities pursuant to Rule 144A, the Fund's investing in such securities may
have the effect of increasing the level of illiquidity in its investment
portfolio during such period.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Fund may purchase securities on a 'when-issued' basis and may purchase
or sell securities on a 'forward commitment' basis in order to acquire the
security or to hedge against anticipated changes in interest rates and prices.
When such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery and
payment for the securities take place at a later date. When-issued securities
and forward commitments may be sold prior to the settlement date, but the Fund
will enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the Fund
disposes of the right to acquire a when-issued security prior to its acquisition
or disposes of its right to deliver or receive against a forward commitment, it
might incur a gain or loss. At the time the Fund enters into a transaction on a
when-issued or forward commitment basis, it will designate on its books and
records cash or liquid debt securities equal to at least the value of the
when-issued or forward commitment securities. The value of these assets will be
monitored daily to ensure that their marked to market value will at all times
9
equal or exceed the corresponding obligations of the Fund. There is always a
risk that the securities may not be delivered and that the Fund may incur a
loss. Settlements in the ordinary course, which may take substantially more than
three business days, are not treated by the Fund as when-issued or forward
commitment transactions and accordingly are not subject to the foregoing
restrictions.
Securities purchased on a forward commitment or when-issued basis are
subject to changes in value (generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise) based upon the public's perception of the creditworthiness of the issuer
and changes, actual or anticipated, in the level of interest rates. Securities
purchased with a forward commitment or when-issued basis may expose the Fund to
risks because they may experience such fluctuations prior to their actual
delivery. Purchasing securities on a when-issued basis can involve the
additional risks that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment or when-issued basis when the Fund
is fully invested may result in greater potential fluctuation in the value of
the Fund's net assets and its net asset value per share.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein.
Reverse repurchase agreements involve the sale of securities held by the Fund
with an agreement by the Fund to repurchase the securities at an agreed upon
price, date and interest payment. The use by the Fund of reverse repurchase
agreements involves many of the same risks of leverage described under 'Use of
Leverage,' since the proceeds derived from such reverse repurchase agreements
may be invested in additional securities. At the time the Fund enters into a
reverse repurchase agreement, it may designate on its books and records liquid
instruments having a value not less than the repurchase price (including accrued
interest). If the Fund designates liquid instruments on its books and records, a
reverse repurchase agreement will not be considered a borrowing by the Fund;
however, under circumstances in which the Fund does not designate liquid
instruments on its books and records, such reverse repurchase agreement will be
considered a borrowing for the purpose of the Fund's limitation on borrowings.
Reverse repurchase agreements involve the risk that the market value of the
securities acquired in connection with the reverse repurchase agreement may
decline below the price of the securities the Fund has sold but is obligated to
repurchase. Also, reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale by the Fund in connection with
the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Fund would bear the risk of loss to the extent that the
proceeds of the reverse repurchase agreement are less than the value of the
securities subject to such agreement.
CASH RESERVES
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments.
Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as Moody's or S&P, certificates of
deposit, bankers' acceptances
10
issued by domestic banks having total assets in excess of one billion dollars,
and money market mutual funds.
In entering into a repurchase agreement for the Fund, the Investment Manager
will evaluate and monitor the creditworthiness of the vendor. In the event that
a vendor should default on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If the vendor becomes bankrupt, the Fund might be
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral.
INVESTMENT RESTRICTIONS
The investment objectives and the general investment policies and investment
techniques of the Fund are described in the prospectus. The Fund has also
adopted certain investment restrictions limiting the following activities except
as specifically authorized:
The Fund may not:
1. Issue senior securities (including borrowing money for other than
temporary purposes) except in conformity with the limits set forth in the
1940 Act; or pledge its assets other than to secure such issuances or
borrowings or in connection with permitted investment strategies;
notwithstanding the foregoing, the Fund may borrow up to an additional 5% of
its total assets for temporary purposes;
2. Act as an underwriter of securities issued by other persons, except
insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;
3. Purchase or sell real estate, mortgages on real estate or
commodities, except that the Fund may invest in securities of companies that
deal in real estate or are engaged in the real estate business, including
REITs, and securities secured by real estate or interests therein and the
Fund may hold and sell real estate or mortgages on real estate acquired
through default, liquidation, or other distributions of an interest in real
estate as a result of the Fund's ownership of such securities;
4. Purchase or sell commodities or commodity futures contracts, except
that the Fund may invest in financial futures contracts, options thereon and
such similar instruments;
5. Make loans to other persons except through the lending of securities
held by it (but not to exceed a value of one-third of total assets), through
the use of repurchase agreements, and by the purchase of debt securities;
6. Invest more than 25% of its total assets in securities of issuers in
any one industry other than the real estate industry, in which at least 25%
of the Fund's total assets will be invested; provided, however, that such
limitation shall not apply to obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities;
7. Purchase preferred stock and debt securities rated below investment
grade and unrated securities of comparable quality, if, as a result, more
than 10% of the Fund's total assets would then be invested in such
securities;
8. Acquire or retain securities of any investment company, except that
the Fund may (a) acquire securities of investment companies up to the limits
permitted by Section 12(d)(1) of the 1940 Act, or any exemption granted
under the 1940 Act, and (b) acquire securities of any investment company as
part of a merger, consolidation or similar transaction;
9. Invest in oil, gas or other mineral exploration programs, development
programs or leases, except that the Fund may purchase securities of
companies engaging in whole or in part in such activities;
10. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowings; or
11. Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities.
11
The investment restrictions numbered 1 through 6 in this Statement of
Additional Information have been adopted as fundamental policies of the Fund.
Under the 1940 Act, a fundamental policy may not be changed without the approval
of the holders of a 'majority of the outstanding' Common Shares and AMPS (and
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS) voting together as a single class, and of the
holders of a 'majority of the outstanding' AMPS and the Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS
voting as a separate class. When used with respect to particular shares of the
Fund, a 'majority of the outstanding' shares means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
Investment restrictions numbered 7 through 11 above are non-fundamental and may
be changed at any time by vote of a majority of the Board of Directors.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance the value of the Fund's total assets is at
least 200% of the liquidation value of the outstanding preferred shares (i.e.,
such liquidation value may not exceed 50% of the Fund's total assets less
liabilities other than borrowing). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Common Shares unless, at
the time of such declaration, the value of the Fund's total assets less
liabilities other than borrowing is at least 200% of such liquidation value. The
Fund intends, to the extent possible, to purchase or redeem the AMPS from time
to time to the extent necessary in order to maintain coverage of any AMPS of at
least 200%. If the Fund has AMPS outstanding, two of the Fund's Directors will
be elected by the holders of the AMPS (and any Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS
outstanding), voting separately as a class. The remaining Directors of the Fund
will be elected by holders of Common Shares and AMPS (and Series M7, Series T7,
Series W7, Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS)
voting together as a single class. In the event the Fund failed to pay dividends
on the AMPS for two years, Preferred Shareholders would be entitled to elect a
majority of the Directors of the Fund.
Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing the value of the Fund's total assets less
liabilities other than the borrowing is at least 300% of the principal amount of
such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the value of the Fund's total assets, less liabilities other than
the borrowings, is at least 300% of such principal amount. If the Fund borrows,
the Fund intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle the debt holders to
elect a majority of the board of directors.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreements with its Investment Manager, administrator, custodian and transfer
agent. The management of the Fund's day-to-day operations is delegated to its
officers, the Investment Manager and the Fund's administrator, subject always to
the investment objectives and policies of the Fund and to the general
supervision of the Directors. As of November 30, 2003, the Directors and
officers as a group beneficially owned, directly or indirectly, less than 1% of
the outstanding shares of the Fund.
Basic information about the identity and experience of each Director and
officer is set forth in the charts below. Each such Director and officer is also
a director or officer of Cohen & Steers Advantage Income Realty Fund, Inc.,
Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers Premium Income
Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc., which are
closed-end investment companies advised by the Investment Manager, and Cohen &
Steers Equity Income Fund, Inc., Cohen & Steers Institutional Realty Shares,
Inc., Cohen & Steers Realty Shares, Inc. and Cohen & Steers Special Equity Fund,
Inc., which are open-end investment companies advised by the Investment Manager.
12
The Directors of the Fund, their addresses, their ages, the length of time
served, their principal occupations for at least the past five years, the number
of portfolios they oversee within the Fund complex, and other directorships held
by the Director are set forth below.
NUMBER OF
FUNDS WITHIN
PRINCIPAL FUND
OCCUPATION COMPLEX
DURING PAST OVERSEEN BY
5 YEARS DIRECTOR
POSITION HELD TERM OF (INCLUDING OTHER (INCLUDING LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE DIRECTORSHIPS HELD) THE FUND) TIME SERVED
--------------------- --------- ------ ------------------- --------- -----------
INTERESTED DIRECTORS
Robert H. Steers ........ Director, Chairman Until Next Co-Chairman and 9 Since
757 Third Avenue of the Board, and Election of Co-Chief Executive Inception
New York, New York Secretary Directors Officer of Cohen &
Age: 50 Steers Capital
Management, Inc.,
the Fund's
Investment Manager.
Martin Cohen* ........... Director, Until Next Co-Chairman and 9 Since
757 Third Avenue President and Election of Co-Chief Executive Inception
New York, New York Treasurer Directors Officer of Cohen &
Age: 54 Steers Capital
Management, Inc.,
the Fund's
Investment Manager.
DISINTERESTED DIRECTORS
Gregory C. Clark ........ Director Until Next Private Investor. 9 Since
99 Jane Street Election of Prior thereto, Inception
New York, New York Directors President of
Age: 56 Wellspring
Management Group
(investment
advisory firm).
Bonnie Cohen* ........... Director Until Next Consultant. Prior 9 Since
1824 Phelps Place, N.W. Election of thereto, Inception
Washington, D.C. Directors Undersecretary of
Age: 60 State, United
States Department
of State. Director
of Wellsford Real
Properties, Inc.
George Grossman ......... Director Until Next Attorney-at-law. 9 Since
17 Elm Place Election of Inception
Rye, New York Directors
Age: 49
(table continued on next page)
13
(table continued from previous page)
NUMBER OF
FUNDS WITHIN
PRINCIPAL FUND
OCCUPATION COMPLEX
DURING PAST OVERSEEN BY
5 YEARS DIRECTOR
POSITION HELD TERM OF (INCLUDING OTHER (INCLUDING LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE DIRECTORSHIPS HELD) THE FUND) TIME SERVED
--------------------- --------- ------ ------------------- --------- -----------
Richard J. Norman ....... Director Until Next Private Investor. 9 Since
7520 Hackamore Drive Election of Prior thereto, Inception
Potomac, Maryland Directors Investment
Age: 60 Representative of
Morgan Stanley Dean
Witter.
Willard H. Smith, Jr. ... Director Until Next Board member of 9 Since
7231 Encelia Drive Election of Essex Property Inception
La Jolla, California Directors Trust Inc.,
Age: 66 Highwoods
Properties, Inc.,
Realty Income
Corporation and
Crest Net Lease,
Inc. Managing
Director at Merrill
Lynch & Co., Equity
Capital Markets
Division from 1983
to 1995.
---------
* Martin Cohen and Bonnie Cohen are unrelated.
The officers of the Fund, their addresses, their ages, and their principal
occupations for at least the past five years are set forth below.
POSITION(S) HELD
NAME, ADDRESS AND AGE WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- --------- -------------------------------------------
Greg E. Brooks ............... Vice President Senior Vice President of Cohen & Steers
757 Third Avenue Capital Management, Inc., the Fund's
New York, New York Investment Manager, since 2002 and a Vice
Age: 37 President of the Fund's Investment Manager
since 2000. Prior thereto, he was an
investment analyst with another real estate
securities investment manager.
William F. Scapell ........... Vice President Senior Vice President of Cohen & Steers
757 Third Avenue Capital Management, Inc., the Fund's
New York, New York Investment Manager, since February 2003.
Age: 36 Prior thereto, he was the chief strategist
for preferred securities at Merrill Lynch &
Co.
Adam M. Derechin ............. Vice President and Chief Operating Officer of Cohen & Steers
757 Third Avenue Assistant Treasurer Capital Management, Inc., the Fund's
New York, New York Investment Manager, since August, 2003 and
Age: 39 a Senior Vice President of the Fund's
Investment Manager since 1998. Prior
thereto he was a Vice President of the
Fund's Investment Manager.
(table continued on next page)
14
(table continued from previous page)
POSITION(S) HELD
NAME, ADDRESS AND AGE WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- --------- -------------------------------------------
Lawrence B. Stoller .......... Assistant Secretary Senior Vice President and General Counsel
757 Third Avenue of Cohen & Steers Capital Management, Inc.,
New York, New York the Fund's Investment Manager, since 1999.
Age: 40 Prior to that, Associate General Counsel,
Neuberger Berman Management, Inc. (money
manager); and Assistant General Counsel,
The Dreyfus Corporation (money manager).
The following table provides information concerning the dollar range of the
Fund's equity securities owned by each Director and the aggregate dollar range
of securities owned in the Cohen & Steers Fund Complex.
AGGREGATE DOLLAR
RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN THE
EQUITY SECURITIES IN COHEN & STEERS
THE FUND AS OF FUND COMPLEX AS OF
NOVEMBER 20, 2003 NOVEMBER 20, 2003
----------------- -----------------
Robert H. Steers.......................................... over $100,000 over $100,000
Martin Cohen.............................................. over $100,000 over $100,000
Gregory C. Clark.......................................... none over $100,000
Bonnie Cohen.............................................. $ 50,001 - 100,000 over $100,000
George Grossman........................................... $ 50,001 - 100,000 over $100,000
Richard J. Norman......................................... $ 10,001 - 50,000 over $100,000
Willard H. Smith, Jr. .................................... $ 50,001 - 100,000 over $100,000
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 certain of the underwriters, Mr. Smith is technically an
`interested person' of the Fund as defined in the 1940 Act until after
completion of the offering of the AMPS. After the completion of the offering, he
will be a non-interested Director.
BOARD'S ROLE IN FUND GOVERNANCE
Committees. The Fund's Board of Directors has one standing committee of the
Board, the Audit Committee, which is composed of all of the Directors who are
not interested persons of the Fund, as defined in the 1940 Act. The function of
the Audit Committee is to assist the Board of Directors in its oversight of the
Fund's financial reporting process.
Approval of Investment Management Agreement. The Board of Directors,
including a majority of the Directors who are not parties to the Fund's
Investment Management Agreement, or interested persons of any such party
('Disinterested Directors') has the responsibility under the 1940 Act to approve
the Fund's Investment Management Agreement for its initial term and annually
thereafter at a meeting called for the purpose of voting on such matter. The
Investment Management Agreement was approved for an initial two-year term by the
Fund's Directors, including a majority of the Disinterested Directors, at a
meeting held on May 28, 2003. In determining to approve the Investment
Management Agreement, the Directors reviewed the materials provided by the
Investment Manager and considered the following: (1) the level of the management
fees and estimated expense ratio of the Fund as compared to competitive Funds of
a comparable size; (2) the nature and quality of the services rendered by the
Investment Manager; (3) anticipated benefits derived by the Investment Manager
from the relationship with the Fund; (4) the costs of providing services to the
Fund; and (5) the anticipated profitability of the Fund to the Investment
Manager. They also considered the fact that the Investment Manager agreed to pay
all organizational expenses and offering costs, other than the sales load, that
exceeded $.05 per share in connection with the Fund's common stock offering. The
Directors then took into consideration the benefits to be derived by the
Investment Manager in connection with the Investment Management Agreement,
noting particularly the research and related services, within the meaning of
Section 28(e) of the Securities Exchange Act of 1934, as amended, that the
Investment Manager would be eligible to receive by allocating the Fund's
brokerage transactions.
15
COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS
The following table sets forth estimated information regarding compensation
expected to be paid to Directors by the Fund for the current fiscal year ending
December 31, 2003 and the aggregate compensation paid by the fund complex of
which the Fund is a part for the fiscal year ended December 31, 2002. Officers
of the Fund and Directors who are interested persons of the Fund do not receive
any compensation from the Fund or any other fund in the fund complex which is a
U.S. registered investment company. Each of the other Directors is paid an
annual retainer of $5,000, and a fee of $500 for each meeting attended and is
reimbursed for the expenses of attendance at such meetings. In the column headed
'Total Compensation from Fund Complex Paid to Directors,' the compensation paid
to each Director represents the aggregate amount paid to the Director by the
Fund and the seven other funds that each Director serves in the fund complex.
The Directors do not receive any pension or retirement benefits from the fund
complex.
TOTAL
COMPENSATION
AGGREGATE FROM FUND
COMPENSATION COMPLEX PAID TO
NAME OF PERSON, POSITION OF FUND DIRECTORS FROM FUND DIRECTORS
------------------------------------------ --------- ---------
Gregory C. Clark,* Director................................. $3,500 $52,500
Bonnie Cohen,* Director..................................... $3,500 $49,000
Martin Cohen,** Director and President...................... $ 0 $ 0
George Grossman,* Director.................................. $3,500 $52,500
Richard J. Norman,* Director................................ $3,500 $52,500
Willard H. Smith, Jr.,* Director............................ $3,500 $52,000
Robert H. Steers,** Director and Chairman................... $ 0 $ 0
---------
* Member of the Audit Committee.
** 'Interested person,' as defined in the 1940 Act, of the Fund because of
affiliation with Cohen & Steers Capital Management, Inc., the Fund's
Investment Manager.
PRINCIPAL STOCKHOLDERS
To the knowledge of the Fund, as of December 1, 2003, no current director of
the Fund owned 1% or more of the outstanding Common Shares, and the officers and
directors of the Fund owned, as a group, less than 1% of the Common Shares.
As of December 1, 2003, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares.
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT MANAGER
Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, is the Investment Manager to the Fund. The
Investment Manager, a registered investment adviser, was formed in 1986. Its
current clients include pension plans of leading corporations, endowment funds
and registered funds, including the Fund, Cohen & Steers Advantage Income Realty
Fund, Inc., Cohen & Steers Quality Income Realty Fund, Inc., Cohen & Steers
Premium Income Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund,
Inc., which are closed-end investment companies, and Cohen & Steers Equity
Income Fund, Inc., Cohen & Steers Institutional Realty Shares, Inc., Cohen &
Steers Realty Shares, Inc. and Cohen & Steers Special Equity Fund, Inc., which
are open-end investment companies. Mr. Cohen and Mr. Steers are 'controlling
persons' of the Investment Manager on the basis of their ownership of the
Investment Manager's stock.
Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and
16
generally manages the Fund's investments in accordance with the stated policies
of the Fund, subject to the general supervision of the Board of Directors of the
Fund.
Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of .65% of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares, including the liquidation preference on the AMPS and the
Series M7, Series T7, Series W7, Series TH7, Series F7, Series W28A,
Series W28B and Series W28C AMPS, plus the principal amount on any borrowings)
of the Fund.
The Investment Manager also provides the Fund with such personnel as the
Fund may from time to time request for the performance of clerical, accounting
and other office services, such as coordinating matters with the
sub-administrator, the transfer agent and the custodian. The personnel rendering
these services, who may act as officers of the Fund, may be employees of the
Investment Manager or its affiliates. These services are provided at no
additional cost to the Fund. The Fund does not pay any additional amounts for
services performed by officers of the Investment Manager or its affiliates.
ADMINISTRATIVE SERVICES
Pursuant to an Administration Agreement, the Investment Manager also
performs certain administrative and accounting functions for the Fund, including
(i) providing office space, telephone, office equipment and supplies for the
Fund; (ii) paying compensation of the Fund's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of the Fund; (iv) supervising preparation of the periodic updating of the Fund's
registration statement, including prospectus and Statement of Additional
Information, for the purpose of filings with the Securities and Exchange
Commission and state securities administrators and monitoring and maintaining
the effectiveness of such filings, as appropriate; (v) supervising preparation
of periodic reports to the Fund's shareholders and filing of these reports with
the Securities and Exchange Commission, Forms N-SAR filed with the Securities
and Exchange Commission, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual shareholders; (vi) supervising the daily pricing of the Fund's
investment portfolio and the publication of the net asset value of the Fund's
shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to the Company, including
the Custodian, Transfer Agent and printers; (viii) providing trading desk
facilities for the Fund; (ix) supervising compliance by the Fund with
record-keeping requirements under the Act and regulations thereunder,
maintaining books and records for the Fund (other than those maintained by the
Custodian and Transfer Agent) and preparing and filing of tax reports other than
the Fund's income tax returns; and (x) providing executive, clerical and
secretarial help needed to carry out these responsibilities. Under the
Administration Agreement, the Fund pays the Investment Manager an amount equal
to, on an annual basis, .06% of the Fund's average daily managed assets up to $1
billion, .04% of the Fund's average daily managed assets in excess of $1 billion
up to $1.5 billion and .02% of the Fund's average daily managed assets in excess
of $1.5 billion.
In accordance with the terms of the Administration Agreement and with the
approval of the Fund's Board of Directors, the Investment Manager has caused the
Fund to retain State Street Bank and Trust Company ('State Street Bank') as
sub-administrator under a fund accounting and administration agreement (the
'Sub-Administration Agreement'). Under the Sub-Administration Agreement, State
Street Bank has assumed responsibility for performing certain of the foregoing
administrative functions, including (i) determining the Fund's net asset value
and preparing these figures for publication; (ii) maintaining certain of the
Fund's books and records that are not maintained by the Investment Manager,
custodian or transfer agent; (iii) preparing financial information for the
Fund's income tax returns, proxy statements, shareholders reports, and
Securities and Exchange Commission filings; and (iv) responding to shareholder
inquiries.
Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank
17
is computed on the basis of the average daily managed assets in the Fund at an
annual rate equal to .030% of the first $200 million in assets, .020% of the
next $200 million, and .010% of assets in excess of $400 million, with a minimum
fee of $120,000. The aggregate fee paid by the Fund and the other funds advised
by the Investment Manager to State Street Bank is computed by multiplying the
total number of funds by each break point in the above schedule in order to
determine the aggregate break points to be used in calculating the total fee
paid by the Cohen & Steers family of funds (i.e., six funds at $200 million or
$1.2 billion at .030%, etc.). The Fund is then responsible for its pro rata
amount of the aggregate administration fee.
The Investment Manager remains responsible for monitoring and overseeing the
performance by State Street Bank, as custodian, and EquiServe Trust Company, NA,
as transfer and disbursing agent, of their obligations to the Fund under their
respective agreements with the Fund, subject to the overall authority of the
Fund's Board of Directors.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank, which has its principal business office at 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments and EquiServe Trust Company, NA, which has its principal business
office at 150 Royall Street, Canton, MA 02021, as the Fund's transfer and
dividend disbursing agent. Neither State Street nor EquiServe has any part in
deciding the Fund's investment policies or which securities are to be purchased
or sold for the Fund's portfolio.
CODE OF ETHICS
The Fund and Investment Manager have adopted codes of ethics in compliance
with Rule 17j-1 under the 1940 Act. The codes of ethics of the Fund and the
Investment Manager, among other things, prohibit management personnel from
investing in REITs, real estate securities and preferred securities, prohibit
purchases in an initial public offering and require pre-approval for investments
in private placements. The Fund's Independent Directors are prohibited from
purchasing or selling any security if they knew or reasonably should have known
at the time of the transaction that, within the most recent 15 days, the
security is being or has been considered for purchase or sale by the Fund, or is
being purchased or sold by the Fund.
PRIVACY POLICY
The Fund is committed to maintaining the privacy of its shareholders and to
safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information the Fund collects, how
the Fund protects that information, and why in certain cases the Fund may share
this information with others.
The Fund does not receive any nonpublic personal information relating to the
shareholders who purchase shares through an intermediary that acts as the record
owner of the shares. In the case of shareholders who are record owners of the
Fund, the Fund receives nonpublic personal information on account applications
or other forms. With respect to these shareholders, the Fund also has access to
specific information regarding their transactions in the Fund.
The Fund does not disclose any nonpublic personal information about its
shareholders or former shareholders to anyone, except as permitted by law or as
is necessary to service shareholder accounts. The Fund restricts access to
nonpublic personal information about its shareholders to Cohen & Steers
employees with a legitimate business need for the information.
PROXY VOTING
The Fund's Board of Directors has delegated to the Investment Manager the
responsibility for voting proxies on behalf of the Fund, and has determined that
proxies with respect to the Fund's portfolio companies shall be voted in
accordance with Cohen & Steers Capital Management, Inc.'s Statement of Policies
and Procedures Regarding the Voting of Securities (the 'Proxy Voting
18
Policies and Procedures'). The following is a summary of the Proxy Voting
Policies and Procedures.
Voting rights are an important component of corporate governance. The
Investment Manager has three overall objectives in exercising voting rights:
A. Responsibility. The Investment Manager shall seek to ensure that
there is an effective means in place to hold companies accountable for their
actions. While management must be accountable to its board, the board must
be accountable to a company's shareholders. Although accountability can be
promoted in a variety of ways, protecting shareholder voting rights may be
among our most important tools.
B. Rationalizing Management and Shareholder Concerns. The Investment
Manager seeks to ensure that the interests of a company's management and
board are aligned with those of the company's shareholders. In this respect,
compensation must be structured to reward the creation of shareholder value.
C. Shareholder Communication. Since companies are owned by their
shareholders, the Investment Manager seeks to ensure that management
effectively communicates with its owners about the company's business
operations and financial performance. It is only with effective
communication that shareholders will be able to assess the performance of
management and to make informed decisions on when to buy, sell or hold a
company's securities.
In exercising voting rights, the Investment Manager shall conduct itself in
accordance with the general principles set forth below.
1. The ability to exercise a voting right with respect to a security is
a valuable right and, therefore, must be viewed as part of the asset
itself.
2. In exercising voting rights, the Investment Manager shall engage in a
careful evaluation of issues that may materially affect the rights of
shareholders and the value of the security.
3. Consistent with general fiduciary principles, the exercise of voting
rights shall always be conducted with reasonable care, prudence and
diligence.
4. In exercising voting rights on behalf of clients, the Investment
Manager conduct itself in the same manner as if it were the
constructive owner of the securities.
5. To the extent reasonably possible, the Investment Manager participate
in each shareholder voting opportunity.
6. Voting rights shall not automatically be exercised in favor of
management-supported proposals.
7. The Investment Manager, and its officers and employees, shall never
accept any item of value in consideration of a favorable proxy voting
decision.
Set forth below are general guidelines that the Investment Manager shall
follow in exercising proxy voting rights:
Prudence. In making a proxy voting decision, the Investment Manager
shall give appropriate consideration to all relevant facts and
circumstances, including the value of the securities to be voted and the
likely effect any vote may have on that value. Since voting rights must be
exercised on the basis of an informed judgment, investigation shall be a
critical initial step.
Third Party Views. While the Investment Manager may consider the views
of third parties, it shall never base a proxy voting decision solely on the
opinion of a third party. Rather, decisions shall be based on a reasonable
and good faith determination as to how best to maximize shareholder value.
Shareholder Value. Just as the decision whether to purchase or sell a
security is a matter of judgment, determining whether a specific proxy
resolution will increase the market value of
19
a security is a matter of judgment as to which informed parties may differ.
In determining how a proxy vote may affect the economic value of a security,
The Investment Manager shall consider both short-term and long-term views
about a company's business and prospects, especially in light of our
projected holding period on the stock (e.g., the Investment Manager may
discount long-term views on a short-term holding).
Set forth below are guidelines as to how specific proxy voting issues shall
be analyzed and assessed. While these guidelines will provide a framework for
our decision making process, the mechanical application of these guidelines can
never address all proxy voting decisions. When new issues arise or old issues
present nuances not encountered before, the Investment Manager must be guided by
its reasonable judgment to vote in a manner that the Investment Manager deems to
be in the best interests of the Fund and its shareholders.
Stock-Based Compensation
Approval of Plans or Plan Amendments. By their nature, compensation plans
must be evaluated on a case-by-case basis. As a general matter, the Investment
Manager always favors compensation plans that align the interests of management
and shareholders. The Investment Manager generally approves compensation plans
under the following conditions:
10% Rule. The dilution effect of the newly authorized shares, plus the
shares reserved for issuance in connection with all other stock related
plans, generally should not exceed 10%.
Exercise Price. The minimum exercise price of stock options should be at
least equal to the market price of the stock on the date of grant.
Plan Amendments. Compensation plans should not be materially amended
without shareholder approval.
Non-Employee Directors. Awards to non-employee directors should not be
subject to management discretion, but rather should be made under
non-discretionary grants specified by the terms of the plan.
Repricing/Replacement of Underwater Options. Stock options generally
should not be re-priced, and never should be re-priced without shareholder
approval. In addition, companies should not issue new options, with a lower
strike price, to make up for previously issued options that are
substantially underwater. The Investment Manager will vote against the
election of any slate of directors that, to its knowledge, has authorized a
company to re-price or replace underwater options during the most recent
year without shareholder approval.
Reload/Evergreen Features. The Investment Manager will generally vote
against plans that enable the issuance of reload options and that provide an
automatic share replenishment ('evergreen') feature.
Measures to Increase Executive Long-Term Stock Ownership. The Investment
Manager supports measures to increase the long-term stock ownership by a
company's executives. These include requiring senior executives to hold a
minimum amount of stock in a company (often expressed as a percentage of
annual compensation), requiring stock acquired through option exercise to be
held for a certain minimum amount of time, and issuing restricted stock
awards instead of options. In this respect, we support the expensing of
option grants because it removes the incentive of a company to issue options
in lieu of restricted stock. The Investment Manager also supports employee
stock purchase plans, although the Investment Manager generally believe the
discounted purchase price should be at least 85% of the current market
price.
Vesting. Restricted stock awards normally should vest over at least a
two-year period.
Other Stock Awards. Stock awards other than stock options and restricted
stock awards should be granted in lieu of salary or a cash bonus, and the
number of shares awarded should be reasonable.
20
Change of Control Issues
While the Investment Manager recognizes that a takeover attempt can be a
significant distraction for the board and management to deal with, the simple
fact is that the possibility of a corporate takeover keeps management focused on
maximizing shareholder value. As a result, the Investment Manager opposes
measures that are designed to prevent or obstruct corporate takeovers because
they can entrench current management. The following are the Investment Manager's
guidelines on change of control issues:
Shareholder Rights Plans. The Investment Manager acknowledges that there
are arguments for and against shareholder rights plans, also known as
'poison pills.' Companies should put their case for rights plans to
shareholders. The Investment Manager generally votes against any directors
who, without shareholder approval, to our knowledge have instituted a new
poison pill plan, extended an existing plan, or adopted a new plan upon the
expiration of an existing plan during the past year.
Golden Parachutes. The Investment Manager opposes the use of accelerated
employment contracts that result in cash grants of greater than three times
annual compensation (salary and bonus) in the event of termination of
employment following a change in control of a company. In general, the
guidelines call for voting against 'golden parachute' plans because they
impede potential takeovers that shareholders should be free to consider. The
Investment Manager generally withholds votes at the next shareholder meeting
for directors who to its knowledge approved golden parachutes.
Approval of Mergers. The Investment Manager votes against proposals that
require a super-majority of shareholders to approve a merger or other
significant business combination. The Investment Manager supports proposals
that seek to lower super-majority voting requirements.
Routine Issues
Director Nominees in a Non-Contested Election -- The Investment Manager
generally votes in favor of management proposals on director nominees.
Director Nominees in a Contested Election -- By definition, this type of
board candidate or slate runs for the purpose of seeking a significant change in
corporate policy or control. Therefore, the economic impact of the vote in favor
of or in opposition to that director or slate must be analyzed using a higher
standard normally applied to changes in control. Criteria for evaluating
director nominees as a group or individually should include: performance;
compensation, corporate governance provisions and takeover activity; criminal
activity; attendance at meetings; investment in the company; interlocking
directorships; inside, outside and independent directors; whether the chairman
and CEO titles are held by the same person; number of other board seats; and
other experience. It is impossible to have a general policy regarding director
nominees in a contested election.
Board Composition -- The Investment Manager supports the election of a board
that consists of at least a majority of independent directors. The Investment
Manager generally withholds support for non-independent directors who serve on a
company's audit, compensation and/or nominating committees. The Investment
Manager also generally withholds support for director candidates who have not
attended a sufficient number of board or committee meetings to effectively
discharge their duties as directors.
Classified Boards -- Because a classified board structure prevents
shareholders from electing a full slate of directors at annual meetings, the
Investment Manager generally votes against classified boards. The Investment
Manager votes in favor of shareholder proposals to declassify a board of
directors unless a company's charter or governing corporate law allows
shareholders, by written consent, to remove a majority of directors at any time,
with or without cause.
21
Barriers to Shareholder Action -- The Investment Manager votes to support
proposals that lower the barriers to shareholder action. This includes the right
of shareholders to call a meeting and the right of shareholders to act by
written consent.
Cumulative Voting -- Having the ability to cumulate votes for the election
of directors -- that is, cast more than one vote for a director about whom they
feel strongly -- generally increases shareholders' rights to effect change in
the management of a corporation. The Investment Manager therefore generally
supports proposals to adopt cumulative voting.
Ratification of Auditors -- Votes generally are cast in favor of proposals
to ratify an independent auditor, unless there is a reason to believe the
auditing firm is no longer performing its required duties or there are exigent
circumstances requiring us to vote against the approval of the recommended
auditor. For example, the Investment Manager's general policy is to vote against
an independent auditor that receives more than 50% of its total fees from a
company for non-audit services.
Stock Related Items
Increase Additional Common Stock -- The Investment Manager's guidelines
generally call for approval of increases in authorized shares, provided that the
increase is not greater than three times the number of shares outstanding and
reserved for issuance (including shares reserved for stock-related plans and
securities convertible into common stock, but not shares reserved for any poison
pill plan).
Votes generally are cast in favor of proposals to authorize additional
shares of stock except where the proposal:
1. creates a blank check preferred stock; or
2. establishes classes of stock with superior voting rights.
Blank Check Preferred Stock -- Votes generally are cast in opposition to
management proposals authorizing the creation of new classes of preferred stock
with unspecific voting, conversion, distribution and other rights, and
management proposals to increase the number of authorized blank check preferred
shares. The Investment Manager may vote in favor of this type of proposal when
it receives assurances to its reasonable satisfaction that (i) the preferred
stock was authorized by the board for the use of legitimate capital formation
purposes and not for anti-takeover purposes, and (ii) no preferred stock will be
issued with voting power that is disproportionate to the economic interests of
the preferred stock. These representations should be made either in the proxy
statement or in a separate letter from the company to the Investment Manager.
Preemptive Rights -- Votes are cast in favor of shareholder proposals
restoring limited preemptive rights.
Dual Class Capitalizations -- Because classes of common stock with unequal
voting rights limit the rights of certain shareholders, the Investment Manager
votes against adoption of a dual or multiple class capitalization structure.
Social Issues
The Investment Manager believes that it is the responsibility of the board
and management to run a company on a daily basis. With this in mind, in the
absence of unusual circumstances, the Investment Manager does not believe that
shareholders should be involved in determining how a company should address
broad social and policy issues. As a result, the Investment Manager generally
votes against these types of proposals, which are generally initiated by
shareholders, unless the Investment Manager believes the proposal has
significant economic implications.
Other Situations
No set of guidelines can anticipate all situations that may arise. The
Investment Manager's portfolio managers and analysts will be expected to analyze
proxy proposals in an effort to gauge
22
the impact of a proposal on the financial prospects of a company, and vote
accordingly. These policies are intended to provide guidelines for voting. They
are not, however, hard and fast rules because corporate governance issues are so
varied.
Proxy Voting Procedures
The Investment Manager maintains a record of all voting decisions for the
period required by applicable laws. In each case in which the Investment Manager
votes contrary to the stated policies set forth in these guidelines, the record
shall indicate the reason for such a vote.
The Investment Committee of the Investment Manager shall have responsibility
for voting proxies, under the supervision of the Director of Research. The
Director of Research's designee (the 'Designee') shall be responsible for
ensuring that the Investment Committee is aware of all upcoming proxy voting
opportunities. The Designee shall ensure that proxy votes are properly recorded
and that the requisite information regarding each proxy voting opportunity is
maintained. The Investment Manager's General Counsel shall have overall
responsibility for ensuring that the Investment Manager complies with all proxy
voting requirements and procedures.
Recordkeeping
The Designee shall be responsible for recording and maintaining the
following information with respect to each proxy voted by the Investment
Manager:
Name of the company
Ticker symbol
CUSIP number
Shareholder meeting date
Brief identification of each matter voted upon
Whether the matter was proposed by management or a shareholder
Whether the Investment Manager voted on the matter
If the Investment Manager voted, then how the Investment Manager voted
Whether the Investment Manager voted with or against management
The Investment Manager's General Counsel shall be responsible for
maintaining and updating the Policies and Procedures, and for maintaining any
records of written client requests for proxy voting information and documents
that were prepared by the Investment Manager and were deemed material to making
a voting decision or that memorialized the basis for the decision.
The Investment Manager shall rely on the Securities and Exchange
Commission's EDGAR filing system with respect to the requirement to maintain
proxy materials regarding client securities.
Conflicts of Interest
There may be situations in which the Investment Manager may face a conflict
between its interests and those of its clients or fund shareholders. Potential
conflicts are most likely to fall into three general categories:
Business Relationships -- This type of conflict would occur if the
Investment Manager or an affiliate has a substantial business relationship
with the company or a proponent of a proxy proposal relating to the company
(such as an employee group) such that failure to vote in favor of management
(or the proponent) could harm the relationship of the Investment Manager or
its affiliate with the company or proponent. In the context of the
Investment Manager, this could occur if an affiliate of the Investment
Manager has a material business relationship with a company that Investment
Manager has invested in on behalf of the Fund, and the Investment Manager is
encouraged to vote in favor of management as an inducement to acquire or
maintain the affiliate's relationship.
23
Personal Relationships -- The Investment Manager or an affiliate could
have a personal relationship with other proponents of proxy proposals,
participants in proxy contests, corporate directors or director nominees.
Familial Relationships -- The Investment Manager or an affiliate could
have a familial relationship relating to a company (e.g., spouse or other
relative who serves as a director or nominee of a public company).
The next step is to identify if a conflict is material. A material matter is
one that is reasonably likely to be viewed as important by the average
shareholder. Materiality will be judged under a two-step approach:
Financial Based Materiality -- The Investment Manager presumes a
conflict to be non-material unless it involves at least $500,000.
Non-Financial Based Materiality -- Non-financial based materiality would
impact the members of the Investment Manager's Investment Committee, who are
responsible for making proxy voting decisions.
Finally, if a material conflict exists, the Investment Manager shall vote in
accordance with the advice of a proxy voting service.
The Investment Manager's General Counsel shall have responsibility for
supervising and monitoring conflicts of interest in the proxy voting process
according to the following process:
Identifying Conflicts -- The Investment Manager is responsible for
monitoring the relationships of the Investment Manager's affiliates for
purposes of the Investment Manager's Inside Information Policy and
Procedures. The general counsel (or his designee) maintains a watch list and
a restricted list. The Investment Manager's Investment Committee is unaware
of the content of the watch list and therefore it is only those companies on
the restricted list, which is made known to everyone at the Investment
Manager, for which potential concerns might arise. When a company is placed
on the restricted list, the general counsel (or his designee) shall promptly
inquire of the Designee as to whether there is a pending proxy voting
opportunity with respect to that company, and continue to inquire on a
weekly basis until such time as the company is no longer included on the
restricted list. When there is a proxy voting opportunity with respect to a
company that has been placed on the restricted list, the general counsel
shall inform the Investment Committee that no proxy vote is to be submitted
for that company until the general counsel completes the conflicts analysis.
For purposes of monitoring personal or familial relationships, the
general counsel (or his designee) shall receive on at least an annual basis
from each member of the Investment Manager's Investment Committee written
disclosure of any personal or familial relationships with public company
directors that could raise potential conflict of interest concerns.
Investment Committee members also shall agree in writing to advise if (i)
there are material changes to any previously furnished information, (ii) a
person with whom a personal or familial relationship exists is subsequently
nominated as a director or (iii) a personal or familial relationship exists
with any proponent of a proxy proposal or a participant in a proxy contest.
Identifying Materiality -- The General Counsel (or his designee) shall
be responsible for determining whether a conflict is material. He shall
evaluate financial based materiality in terms of both actual and potential
fees to be received. Non-financial based items impacting a member of the
Investment Committee shall be presumed to be material.
Communication with Investment Committee; Voting of Proxy -- If the
General Counsel determines that the relationship between the Investment
Manager's affiliate and a company is financially material, he shall
communicate that information to the members of the Investment Manager's
Investment Committee and instruct them, and the Designee, that the
Investment Manager will vote its proxy based on the advice of a consulting
firm engaged by the Investment Manager. Any personal or familial
relationship, or any other business relationship, that exists between a
company and any member of the Investment Committee shall be
24
presumed to be material, in which case the Investment Manager again will
vote its proxy based on the advice of a consulting firm engaged by the
Investment Manager. The fact that a member of the Investment Committee
personally owns securities issued by a company will not disqualify the
Investment Manager from voting common stock issued by that company, since
the member's personal and professional interests will be aligned.
In cases in which the Investment Manager will vote its proxy based on
the advice of a consulting firm, the general counsel (or his designee) shall
be responsible for ensuring that the Designee votes proxies in this manner.
The General Counsel will maintain a written record of each instance when a
conflict arises and how the conflict is resolved (e.g., whether the conflict
is judged to be material, the basis on which the materiality is decision is
made and how the proxy is voted).
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Directors, decisions to buy and sell
securities for the Fund and negotiation of its brokerage commission rates are
made by the Investment Manager. Transactions on U.S. stock exchanges involve the
payment by the Fund of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Fund usually includes an undisclosed dealer
commission or markup. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, the Investment
Manager will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the Directors may
determine, the Investment Manager shall not be deemed to have acted unlawfully
or to have breached any duty solely by reason of its having caused the Fund to
pay a broker that provides research services to the Investment Manager an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, if the Investment Manager determines in good faith that such amount
of commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
the Investment Manager's ongoing responsibilities with respect to the Fund.
Research and investment information is provided by these and other brokers at no
cost to the Investment Manager and is available for the benefit of other
accounts advised by the Investment Manager and its affiliates, and not all of
the information will be used in connection with the Fund. While this information
may be useful in varying degrees and may tend to reduce the Investment Manager's
expenses, it is not possible to estimate its value and in the opinion of the
Investment Manager it does not reduce the Investment Manager's expenses in a
determinable amount. The extent to which the Investment Manager makes use of
statistical, research and other services furnished by brokers is considered by
the Investment Manager in the allocation of brokerage business but there is no
formula by which such business is allocated. The Investment Manager does so in
accordance with its judgment of the best interests of the Fund and its
shareholders. The Investment Manager may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the
Fund for services provided to it for which it would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Investment Manager may consider sales of shares of
the Fund as a factor in the selection of brokers and dealers to enter into
portfolio transactions with the Fund.
25
DETERMINATION OF NET ASSET VALUE
The Fund will determine the net asset value of its shares daily, as of the
close of trading on the NYSE (currently 4:00 p.m. New York time). Net asset
value is computed by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses and dividends declared but unpaid), by the total number of shares
outstanding. Any swap transaction that the Fund enters into may, depending on
the applicable interest rate environment, have a positive or negative value for
purposes of calculating net asset value. Any cap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have no
value or a positive value. In addition, accrued payments to the Fund under such
transactions will be assets of the Fund and accrued payments by the Fund will be
liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') National List are
valued in a like manner (NASDAQ traded securities are valued at the NASDAQ
official closing price). Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the official closing price as reported
by NASDAQ or, in the case of securities not quoted by NASDAQ, the National
Quotation Bureau or such other comparable source as the Directors deem
appropriate to reflect their fair market value. However, certain fixed-income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed by the Board of Directors to reflect the fair
market value of such securities. The prices provided by a pricing service take
into account institutional size trading in similar groups of securities and any
developments related to specific securities. Where securities are traded on more
than one exchange and also over-the-counter, the securities will generally be
valued using the quotations the Board of Directors believes reflect most closely
the value of such securities.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS
FOR 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 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.
26
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in shares of the AMPS, whether for its
own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The auction agent will act as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its part,
the auction agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
the auction agency agreement between the Fund and the auction agent and will not
be liable for any error of judgment made in good faith unless the auction agent
was grossly negligent in ascertaining the pertinent facts.
The auction agent may conclusively rely upon, as evidence of the identities
of the holders of the AMPS, the auction agent's registry of holders, and the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under 'The
Auction-Secondary Market Trading and Transfers of the AMPS' in the prospectus
and notices from the Fund. The auction agent is not required to accept any such
notice for an auction unless it is received by the auction agent by 3:00 p.m.,
New York City time, on the business day preceding such Auction.
The auction agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 60 days after such notice. If
the auction agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.
BROKER-DEALERS
The auction agent after each auction for the AMPS will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any auction immediately preceding the dividend
period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealer in the case of any auction immediately preceding a dividend period
of one year or longer, of the purchase price of the 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 Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.
27
S&P AND MOODY'S GUIDELINES
The descriptions of the S&P and Moody's Guidelines contained in this SAI do
not purport to be complete and are subject to and qualified in their entireties
by reference to the Articles Supplementary. A copy of the Articles Supplementary
is filed as an exhibit to the registration statement of which the prospectus and
this SAI are a part and may be inspected, and copies thereof may be obtained, as
described under 'Further Information' in the prospectus.
The composition of the Fund's portfolio reflects guidelines (referred to
herein as the 'Rating Agency Guidelines') established by S&P and Moody's in
connection with the Fund's receipt of a rating of 'AAA' and 'Aaa' from S&P and
Moody's, respectively, for the AMPS. These Rating Agency Guidelines relate,
among other things, to industry and credit quality characteristics of issuers
and diversification requirements and specify various Discount Factors for
different types of securities (with the level of discount greater as the rating
of a security becomes lower). Under the Rating Agency Guidelines, certain types
of securities in which the Fund may otherwise invest consistent with its
investment strategy are not eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio. Such instruments include, for example,
private placements (other than Rule 144A Securities) and other securities not
within the investment guidelines. Accordingly, although the Fund reserves the
right to invest in such securities to the extent set forth herein, they have not
and it is anticipated that they will not constitute a significant portion of the
Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the AMPS (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C AMPS) plus specified liabilities, payment obligations and other
amounts, as of periodic Valuation Dates. The Rating Agency Guidelines also
require the Fund to maintain asset coverage for the AMPS (and the Series M7,
Series T7, Series W7, Series TH7, Series F7, Series W28A, Series W28B and
Series W28C AMPS) on a non-discounted basis of at least 200% as of the end of
each month, and the 1940 Act requires this asset coverage as a condition to
paying dividends or other distributions on Common Shares. S&P and Moody's have
agreed that the auditors must certify once per year the asset coverage test on a
date randomly selected by the auditor. The effect of compliance with the Rating
Agency Guidelines may be to cause the Fund to invest in higher quality assets
and/or to maintain relatively substantial balances of highly liquid assets or to
restrict the Fund's ability to make certain investments that would otherwise be
deemed potentially desirable by the Investment Manager, including private
placements of other than Rule 144A Securities (as defined herein). The Rating
Agency Guidelines are subject to change from time to time with the consent of
the relevant rating agency and would not apply if the Fund in the future elected
not to use investment leverage consisting of senior securities rated by one or
more rating agencies, although other similar arrangements might apply with
respect to other senior securities that the Fund may issue.
The Fund intends to maintain, at specified times, a Discounted Value for its
portfolio at least equal to the amount specified by each rating agency (the
'Preferred Shares Basic Maintenance Amount'). S&P and Moody's have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable Rating Agency's
Guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency).
The Rating Agency Guidelines do not impose any limitations on the percentage
of Fund assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio. The amount of
such assets included in the portfolio at any time may vary depending upon the
rating, diversification and other characteristics of the assets included in the
portfolio which are eligible for inclusion in the Discounted Value of the
portfolio under the Rating Agency Guidelines.
As described by S&P, a preferred stock rating of AAA indicates strong asset
protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. A S&P or Moody's credit
rating of preferred stock does not address the
28
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.
S&P GUIDELINES
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the AMPS 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 AMPS Basic Maintenance Amount includes the sum of (1) $25,000 times the
number of AMPS (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS) then outstanding and (2) certain
accrued and projected payment obligations of the Fund. Upon any failure to
maintain the required Discounted Value, the Fund would seek to alter the
composition of its portfolio to reestablish required asset coverage within the
specified ten Business Day cure period, thereby incurring additional transaction
costs and possible losses and/or gains on dispositions of portfolio securities.
To the extent any such failure is not cured in a timely manner, the holders of
the 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.
With respect to an S&P Eligible Asset specified below, the following
applicable number is the S&P Discount Factor (used to determine the Discounted
Value of any S&P Eligible Asset) provided that the S&P Exposure Period is 25
Business Days or less:
(a) Types of S&P Eligible Assets
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Common Stock of REITs and other real estate companies 162%
DRD Eligible Preferred Stock with a senior or preferred
stock rating of at least BBB- 245%
REIT and Non-DRD eligible Preferred Stock with a senior or
preferred stock rating of at least BBB- 164%
DRD Eligible Preferred Stock with a senior or preferred
stock rating below BBB- 250%
REIT and non-DRD Eligible Preferred Stock with a senior or
preferred stock rating below BBB- 169%
Un-rated DRD Eligible Preferred Stock 255%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock 174%
Convertible bonds rated AAA to AAA- 165%
Convertible bonds rated AA+ to AA- 170%
Convertible bonds rated A+ to A- 175%
Convertible bonds rated BBB+ to BBB- 180%
Convertible bonds rated BB+ to BB- 185%
29
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Convertible bonds rated B+ to B 190%
Convertible bonds rated B- 195%
Convertible bonds rated CCC+ 205%
Convertible bonds rated CCC 220%
U.S. Short-Term Money Market Investments with maturities of
180 days or less 104%
U.S. Short-Term Money Market Investments with maturities of
between 181 and 360 days 113%
U.S. Government Obligations (52 week Treasury Bills) 102%
U.S. Government Obligations (Two-Year Treasury Notes) 104%
U.S. Government Obligations (Five-Year Treasury Notes) 110%
U.S. Government Obligations (Ten-Year Treasury Notes) 117%
U.S. Government Obligations (Thirty-Year Treasury Bonds) 130%
Agency Mortgage Collateral (Fixed 15-Year) 129%
Agency Mortgage Collateral (Fixed 30-Year) 132%
Agency Mortgage Collateral (ARM 1/1) 122%
Agency Mortgage Collateral (ARM 3/1) 123%
Agency Mortgage Collateral (ARM 5/1) 123%
Agency Mortgage Collateral (ARM 10/1) 123%
Mortgage Pass-Through Fixed (15 Year) 131%
Mortgage Pass-Through Fixed (30 Year) 134%
Debt securities of REIT's and other real estate
companies according to the following corporate bond
schedule
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA- 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A- 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB- 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB- 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B- 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC- 350%
Cash and Cash Equivalents 100%
(b) Interest rate swaps entered into according to International Swap Dealers
Association ('ISDA') standards if
(i) the counterparty to the swap transaction has a short-term rating of
not less than A-1 or, if the counterparty does not have a short-term rating,
the counterparty's senior unsecured long-term debt rating is A- or higher.
(ii) the original aggregate notional amount of the interest rate swap
transaction or transactions is not to be greater than the liquidation
preference of the AMPS (and the Series M7, Series T7, Series W7,
Series TH7, Series F7, Series W28A, Series W28B and Series W28C AMPS).
30
(iii) The interest rate swap transaction will be marked-to-market weekly
by the swap counterparty.
(iv) If the Fund fails to maintain an aggregate discounted value at
least equal to the basic maintenance amount on two consecutive valuation
dates then the agreement shall terminate immediately.
(v) For the purpose of calculating the asset coverage test 90% of any
positive mark-to-market valuation of the Fund's rights will be eligible
assets. 100% of any negative mark-to-market valuation of the Fund's rights
will be included in the calculation of the AMPS Basic Maintenance Amount.
(vi) The Fund must maintain liquid assets with a value at least equal to
the net amount of the excess, if any, of the Fund's obligations over its
entitlement with respect to each swap. For caps/floors, must maintain liquid
assets with a value at least equal to the Fund's obligations with respect to
such caps or floors.
(c) Cash and Cash Equivalents
(i) Cash and Cash Equivalents Cash and demand deposits in an 'A-1+'
rated institution are valued at 100%. 'A-1+' rated commercial paper, with
maturities no greater than 30 days and held instead of cash until maturity,
is valued at 100%. Securities with next-day maturities invested in 'A-1+'
rated institutions re considered cash equivalents and are valued at 100%.
Securities maturing in 181 to 360 calendar days are valued at 114.2%.
(ii) The S&P Discount Factor for shares of unrated Money Market Funds
affiliated with the Fund used as 'sweep' vehicles will be 110%. Money Market
Funds rated 'AAAm' will be discounted at the appropriate level as dictated
by the exposure period. No S&P Discount Factor will be applied to Money
Market Funds rated AAAm by S&P with effective next day maturities.
'S&P Eligible Assets' shall mean:
(A) Deposit Securities;
(B) U.S. Government Obligations and U.S. Government Agencies;
(C) Corporate Indebtedness. Evidences of indebtedness other than Deposit
Securities, U.S. Government Obligations and Municipal Obligations that are
not convertible into or exchangeable or exercisable for stock of a
corporation (except to the extent of ten percent (10%) in the case of a
share exchange or tender offer) ('Other Debt') and that satisfy all of the
following conditions:
(1) be no more than 10% of total assets may be below a S&P rating of
BBB-, or comparable Moody's or Fitch rating, or unrated;
(2) the remaining term to maturity of such Other Debt shall not
exceed fifty (50) years;
(3) such Other Debt must provide for periodic interest payments in
cash over the life of the security;
(4) no more than 10% of the issuers of such evidences of indebtedness
do not file periodic financial statements with the U.S. Securities and
Exchange Commission;
(5) which, in the aggregate, have an average duration of not more
than 12 years.
(D) Convertible Corporate Indebtedness. Evidences of indebtedness other
than Deposit Securities, U.S. Government Obligations and Municipal
Obligations that are convertible into or exchangeable or exercisable for
stock of a corporation and that satisfy all of the following conditions:
(1) such evidence of indebtedness is rated at least CCC by S&P; and
(2) if such evidence of indebtedness is rated BBB or lower by S&P,
the market capitalization of the issuer of such evidence of indebtedness
is at least $100 million;
31
(E) Agency Mortgage Collateral. Certificates guaranteed by U.S.
Government Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC) for
timely payment of interest and full and ultimate payment of principal.
Agency Mortgage Collateral also evidence undivided interests in pools of
level-payment, fixed, variable, or adjustable rate, fully amortizing loans
that are secured by first liens on one- to four-family residences
residential properties (or in the case of Plan B FHLMC certificates, five or
more units primarily designed for residential use) ('Agency Mortgage
Collateral'). Agency Mortgage Collateral the following conditions apply:
(1) For GNMA certificates backed by pools of graduated payment
mortgages, levels are 20 points above established levels;
(2) Qualifying 'large pool' FNMA mortgage-backed securities and FHLMC
participation certificates are acceptable as eligible collateral. The
eligible fixed-rate programs include FNMA MegaPools, FNMA Majors, FHLMC
Multilender Swaps, and FHLMC Giant certificates. Eligible adjustable rate
mortgage ('ARMs') programs include nonconvertible FNMA ARM MegaPools and
FHLMC weighted average coupon ARM certificates. Eligible FHLMC Giant
programs exclude interest-only and principal only stripped securities;
(3) FNMA certificates backed by multifamily ARMs pegged to the 11th
District Cost of Funds Index are acceptable as eligible collateral at 5
points above established levels; and
(4) Multiclass REMICs issued by FNMA and FHLMC are acceptable as
eligible collateral at the collateral levels established for CMOs.
(F) Mortgage Pass-Through Certificates. Publicly issued instruments
maintaining at least a AA- ratings by S&P. Certificates evidence
proportional, undivided interests in pools of whole residential mortgage
loans. Pass-through certificates backed by pools of convertible ARMs are
acceptable as eligible collateral at 5 points above the levels established
for pass-through certificates backed by fixed or non-convertible ARM pools.
(G) Preferred Stocks. Preferred stocks that satisfy all of the following
conditions:
1. The preferred stock issue has a senior rating from S&P, or the
preferred issue must be rated. In the case of Yankee preferred stock, the
issuer should have a S&P senior rating of at least 'BBB-', or the
preferred issue must be rated at least 'BBB-'.
2. The issuer -- or if the issuer is a special purpose corporation,
its parent -- is listed on either the New York Stock Exchange, the
American Stock Exchange or NASDAQ if the traded par amount is less than
$1,000. If the traded par amount is $1,000 or more exchange listing is
not required.
3. The collateral pays cash dividends denominated in U.S. dollars.
4. Private placement 144A with registration rights are eligible
assets.
5. The minimum market capitalization of eligible issuers is US$100
million.
Restrictions for floating-rate preferred stock:
1. Holdings must be limited to stock with a dividend period of
less than or equal to 49 days, except for a new issue, where the
first dividend period may be up to 64 days.
2. The floating-rate preferred stock may not have been subject to
a failed auction.
Restrictions for adjustable -- or auction-rate preferred stock:
1. The total fair market value of adjustable-rate preferred stock
held in the portfolio may not exceed 10% of eligible assets.
32
Concentration Limits:
2. Total issuer exposure in preferred stock of any one issuer is
limited to 10% of the fair market value of eligible assets.
3. Preferred stock rated below B- (including non-rated preferred
stock) and preferred stock with a market cap of less than US$100
million are limited to no more than 15% of the fair market value of
the eligible assets.
4. Add 5 points to over-collateralization level for issuers with
a senior rating or preferred stock rating of less than BBB-.
5. Add 10 point to over-collateralization level of issuers with
no senior rating, preferred stock rating or dividend history.
(H) Common Stocks of REITs and Other Real Estate Companies. Common
stocks of REITs and Other Real Estate Companies that satisfy all of the
following conditions:
(1) such common stock (including the common stock of any predecessor
or constituent issuer) has been traded on a recognized national
securities exchange or quoted on the National Market System (or any
equivalent or successor thereto) of NASDAQ, but excluding '144a' or 'pink
sheet' stock not carried in daily newspaper over-the-counter listings;
(2) the market capitalization of such issuer of common stock exceeds
$100 million;
(3) the issuer of such common stock is not an entity that is treated
as a partnership for federal income taxes;
(4) if such issuer is organized under the laws of any jurisdiction
other than the United States, any state thereof, any possession or
territory thereof or the District of Columbia, the common stock of such
issuer held by the Fund is traded on a recognized national securities
exchange or quoted on the National Market System of NASDAQ either
directly or in the form of depository receipts.
Escrow Bonds may comprise 100% of the Fund's S&P Eligible Assets. Bonds
that are legally defeased and secured by direct U.S. government obligations
are not required to meet any minimum issuance size requirement. Bonds that
are economically defeased or secured by other U.S. agency paper must meet
the minimum issuance size requirement for the Fund described above. Bonds
initially rated or rerated as an escrow bond by another Rating Agency are
limited to 50% of the Fund's S&P Eligible Assets, and carry one full rating
lower than the equivalent S&P rating for purposes of determining the
applicable discount factors. Bonds economically defeased and either
initially rated or rerated by S&P or another Rating Agency are assigned that
same rating level as its debt issuer, and will remain in its original
industry category unless it can be demonstrated that a legal defeasance has
occurred.
With respect to the above, the Fund portfolio must consist of no less
than 20 issues representing no less than 10 industries as determined by the
S&P Industry Classifications and S&P Real Estate Industry/Property sectors.
For purposes of determining the discount factors applicable to
collateral not rated by S&P, the collateral will carry an S&P rating one
full rating level lower than the equivalent S&P rating.
'S&P Exposure Period' shall mean the sum of (i) that number of days from
the last Valuation Date on which the Fund's Discounted Value of S&P Eligible
Assets were greater than the AMPS Basic Maintenance Amount to the Valuation
Date on which the Fund's Discounted Value of S&P Eligible Assets failed to
exceed the AMPS Basic Maintenance Amount, (ii) the maximum number of days
following a Valuation Date that the Fund has under this Statement to cure
any failure to maintain a Discounted Value of S&P Eligible Assets at least
equal to the AMPS Basic Maintenance Amount, and (iii) the maximum number of
days the Fund has to effect a mandatory redemption under Section 3(a)(ii) of
Part I of the Articles Supplementary.
33
MOODY'S GUIDELINES
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ('Moody's Eligible Assets')
must be discounted by certain discount factors set forth below ('Moody's
Discount Factors'). The Discounted Value of a portfolio security under Moody's
guidelines is the Market Value thereof, determined as specified by Moody's,
divided by the Moody's Discount Factor. The Moody's Discount Factor with respect
to securities other than those described below will be the percentage provided
in writing by Moody's.
The following Discount Factors apply to portfolio holdings as described
below, subject to diversification, issuer size and other requirements, in order
to constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
(a) Preferred Stock and Common Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR
(1)(2)(3)
---------
Common stock of REITs and other real estate companies....... 154%
Preferred stock of REITs
with Senior Implied Moody's (or S&P or Fitch) rating:... 154%
without Senior Implied Moody's (or S&P or Fitch)
rating:............................................... 208%
Preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P or Fitch) rating:... 208%
without Senior Implied Moody's (or S&P or Fitch)
rating:............................................... 250%
Preferred Securities of non-real estate companies (4)(5)....
The Moody's Discount Factor for non-real estate preferred
securities will be
(A) for taxable preferred securities issued by a
utility, industrial, financial issuer or other
non-real estate related issuers with Moody's or
equivalent S&P or Fitch ratings:.................... Aaa 150%
Aa 155%
A 160%
Baa 165%
Ba 196%
B 216%
>B, NR 250%
(B) for DRD eligible preferred securities issued by a
utility, industrial, financial issuer, or other
non-real estate related issuers
(i) Investment grade................................ 165%
(ii) non-investment grade........................... 216%
(C) for auction rate preferred securities............... 350%
---------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed 30%
of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
Assets.
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of a real estate issuer is
below $500 million.
(4) Applies to preferred securities which have a minimum issue size of
$50 million.
(5) Non-real estate eligible preferred securities will be issued by investment
grade companies having a senior unsecured debt rating that is Baa3 or higher
by Moody's or BBB- by S&P or Fitch and pay dividends in U.S. dollars or
Euros. The market value of eligible non-cumulative preferred issues are
subject to standard preferred stock discount factors multiplied by a factor
of 1.10.
34
(b) Debt Securities(1)(2)(3):
The percentage determined by reference to the rating on such asset with
reference to the remaining term to maturity of such assets, in accordance
with the table set forth below.
TERM OF MATURITY OF DEBT SECURITY(1) Aaa Aa A Baa Ba B UNRATED(2,3)
------------------------------------ --- -- - --- -- - ------------
1 year or less................... 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1
year).......................... 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than 2
years)......................... 120% 123% 127% 131% 153% 168% 250%
4 years or less (but longer than 3
years)......................... 126% 129% 133% 138% 161% 176% 250%
5 years or less (but longer than 4
years)......................... 132% 135% 139% 144% 168% 185% 250%
7 years or less (but longer than 5
years)......................... 139% 143% 147% 152% 179% 197% 250%
10 years or less (but longer than 7
years)......................... 145% 150% 155% 160% 189% 208% 250%
15 years or less (but longer than 10
years)......................... 150% 155% 160% 165% 196% 216% 250%
20 years or less (but longer than 15
years)......................... 150% 155% 160% 165% 196% 228% 250%
30 years or less (but longer than 20
years)......................... 150% 155% 160% 165% 196% 229% 250%
Greater than 30 years............ 165% 173% 181% 189% 205% 240% 250%
---------
(1) The Moody's Discount Factors for debt securities shall also be applied to
any interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) Corporate debt securities if (A) securities that do not pay interest in U.S.
dollars, the Fund sponsor will contact Moody's to obtain the applicable
currency conversion rates; (B) for debt securities rated B and below taken
together with 'Unrated' securities, no more than 10% of the original amount
of such issue may constitute Moody's Eligible Assets; (C) such securities
have been registered under the Securities Act or are restricted as to resale
under federal securities laws but are eligible for resale pursuant to Rule
144A under the Securities Act as determined by the Fund's investment manager
or portfolio manager acting pursuant to procedures approved by the Board of
Directors, except that such securities that are not subject to U.S. federal
securities laws shall be considered Moody's Eligible Assets if they are
publicly traded; and (D) such securities are not subject to extended
settlement.
(3) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Fund's assets can be derived
from other sources as well as combined with a number of sources as presented
by the Fund to Moody's, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch,
are limited to 10% of Moody's Eligible Assets. If a corporate debt security
is unrated by Moody's, S&P or Fitch, the Fund will use the percentage set
forth under 'Below B and Unrated' in this table. Ratings assigned by S&P or
Fitch are generally accepted by Moody's at face value. However, adjustments
to face value may be made to particular categories of credits for which the
S&P and/or Fitch rating does not seem to approximate a Moody's rating
equivalent.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY DISCOUNT FACTOR U.S. TREASURY STRIPS
-------------------------- --------------- --------------------
1 year or less................................. 107% 107%
2 years or less (but longer than 1 year)....... 113% 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%
35
(d) Short-Term Instruments and Cash.
The Moody's Discount Factor applied to Moody's Eligible Assets that are
short term money instruments (as defined by Moody's) will be (i) 100%, so long
as such portfolio securities mature or have a demand feature at par exercisable
within 49 days of the relevant valuation date, (ii) 102%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within 49 days of the relevant valuation date, and (iii) 125%, if such
securities are not rated by Moody's, so long as such portfolio securities are
rated at least A-1 by S&P and mature or have a demand feature at par exercisable
within 49 days of the relevant valuation date. A Moody's Discount Factor of 100%
will be applied to cash.
(e) Rule 144A Debt or Preferred Securities:
The Moody's Discount Factor applied to Rule 144A debt or preferred
securities will be
(i) 130% of the Moody's Discount Factor, which would apply if the
securities have registration rights under the Securities Act after 365 days,
and
(ii) 120% of the Moody's Discount Factor if the securities have
registration rights within 365 days of calculation of the Basic Maintenance
Amount.
(f) Convertible Securities:
MOODY'S RATING CATEGORY(1)
INDUSTRY CATEGORY Aaa Aa A Baa Ba B NR
----------------- --- -- - --- -- - --
Utility.............. 162% 167% 172% 188% 195% 199% 300%
Industrial........... 256% 261% 266% 282% 290% 293% 300%
Financial............ 233% 238% 243% 259% 265% 270% 300%
Transportation....... 250% 265% 275% 285% 290% 295% 300%
---------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Fund's assets can be derived
from other sources as well as combined with a number of sources as presented
by the Fund to Moody's, securities rated below B by Moody's and unrated
securities, which are securities rated by neither Moody's, S&P nor Fitch,
are limited to 10% of Moody's Eligible Assets. If a corporate debt security
is unrated by Moody's, S&P or Fitch, the Fund will use the percentage set
forth under 'Below B and Unrated' in this table. Ratings assigned by S&P or
Fitch are generally accepted by Moody's at face value. However, adjustments
to face value may be made to particular categories of credits for which the
S&P and/or Fitch rating does not seem to approximate a Moody's rating
equivalent.
Under current Moody's guidelines, the following are considered to be Moody's
Eligible Assets:
(i) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies and Preferred Stock and debt securities of non
real estate companies: (A) which comprise at least 7 of the total number of
Moody's Real Estate Industry/ Property Sector Classifications ('Moody's
Sector Classifications') and Moody's Industry Classification, of which no
more than 35% may constitute a single such classification; (B) which in the
aggregate constitute at least 40 separate issues of common stock, preferred
stock, and debt securities, issued by at least 30 issuers; (C) issued by a
single issuer which in the aggregate constitute no more than 6.0% of the
Market Value of Moody's Eligible Assets, and (D) issued by a single issuer
which, with respect to 50% of the Market Value of Moody's Eligible Assets,
constitute in the aggregate no more than 5% of Market Value of Moody's
Eligible Assets;
(ii) Unrated debt securities issued by an issuer which: (A) has not
filed for bankruptcy within the past three years; (B) is current on all
principal and interest on its fixed income obligations; (C) is current on
all preferred stock dividends; (D) possesses a current, unqualified
auditor's report without qualified, explanatory language; and (E) in the
aggregate taken together with securities rated Ba1 by Moody's, or comparable
by S&P or Fitch, and below do not exceed 10% of the discounted Moody's
Eligible Assets;
(iii) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (A) the counterparty to the swap
transaction has a short-term rating of P-1 by Moody's or A-1 by S&P or, if
the counterparty does not have a short-term rating, the
36
counterparty's senior unsecured long-term debt rating is A3 or higher by
Moody's or A- or higher by S&P or Fitch; (B) the original aggregate
notional amount of the interest rate swap transaction or transactions is not
to be greater than the liquidation preference of the AMPS originally issued;
(C) the interest rate swap transaction will be marked-to-market daily;
(D) an interest rate swap that is in-the-money is discounted at the
counterparty's corporate debt rating for the maturity of the swap for
purposes of calculating Moody's Eligible Assets; and (E) an interest rate
swap that is out-of-the money includes that negative mark-to-market amount
as indebtedness for purposes of calculating the AMPS Basic Maintenance
amount.
(iv) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(v) Short-Term Money Market Instruments so long as (A) such securities
are rated at least P-1, (B) in the case of demand deposits, time deposits
and overnight funds, the supporting entity is rated at least A2, or (C) in
all other cases, the supporting entity (1) is rated A2 and the security
matures within one month, (2) is rated A1 and the security matures within
three months or (3) is rated at least Aa3 and the security matures within
six months; provided, however, that for purposes of this definition, such
instruments (other than commercial paper rated by S&P and not rated by
Moody's) need not meet any otherwise applicable Moody's rating criteria; and
(vi) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within 49 days of the relevant valuation date) and
receivables for Moody's Eligible Assets sold if the receivable is due within
five Business Days of the Valuation Date, and if the trades which generated
such receivables are (1) settled through clearing house firms with respect
to which the Corporation has received prior written authorization from
Moody's or (2) with counterparties having a Moody's long-term debt rating of
at least Baa3 or (3) with counterparties having a Moody's Short-Term Money
Market Instrument rating of at least P-1.
See the Articles Supplementary of the Fund for further detail on the above
Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.
The foregoing Rating Agency Guidelines are subject to change from time to
time. The Fund may, but it is not required to, adopt any such change. Nationally
recognized rating agencies other than S&P and Moody's may also from time to time
rate the Preferred Securities; any nationally recognized rating agency providing
a rating for the Preferred Securities may, at any time, change or withdraw any
such rating.
U.S. FEDERAL TAXATION
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Fund and its shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its
shareholders, and the following discussion is not intended as a substitute for
careful tax planning. Shareholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Fund.
TAXATION OF THE FUND
The Fund intends to elect to be taxed as, and to qualify annually as, a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, the Fund generally is not subject to U.S. federal income tax
on the portion of its investment company taxable income (as that term is defined
in the Code, but determined without regard to any deduction for dividends paid)
and net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss) that it distributes to shareholders, provided that it
distributes at least 90% of the sum of its investment company taxable income and
any net tax-exempt interest income for the taxable year (the 'Distribution
Requirement'), and satisfies certain other
37
requirements of the Code that are described below. The Fund intends to make
sufficient distributions of its investment company taxable income each taxable
year to meet the Distribution Requirement.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of any such issuer and as to which the Fund
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities (other than U.S. Government securities and securities of other
regulated investment companies) of any one issuer, or of two or more issuers
which the Fund controls and which are engaged in the same or similar or related
trades or businesses.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund will be required (i) to suspend distributions to Common Shareholders,
and (ii) under certain circumstances to partially redeem the AMPS in order to
maintain or restore the requisite asset coverage, either of which could prevent
the Fund from making distributions required to qualify as a regulated investment
company for U.S. federal income tax purposes and to avoid the excise taxes
discussed below. Depending on the size of the Fund's assets relative to its
outstanding senior securities, redemption under certain circumstances of the
AMPS might restore asset coverage. If asset coverage were restored, the Fund
would again be able to pay dividends and depending on the circumstances, could
requalify or avoid disqualification as a regulated investment company and avoid
the excise taxes discussed below.
If for any taxable year the Fund does not qualify as a regulated investment
company or satisfy the Distribution Requirement, all of its taxable income
(including its net capital gain) will be subject to U.S. federal income tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. Such distributions
generally will be eligible (i) for the DRD in the case of corporate shareholders
and (ii) for treatment as qualified dividend income in the case of individual
shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in a calendar year an amount equal to the sum of
(1) 98% of its ordinary taxable income for the calendar year, (2) 98% of its
capital gain net income (i.e., capital gains in excess of capital losses) for
the one-year period ended on October 31 of such calendar year, and (3) any
ordinary taxable income and capital gain net income for previous years that was
not distributed or taxed to the regulated investment company during those years.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by the Fund in October, November or December with a
record date in such a month and paid by the Fund during January of the following
calendar year. Such distributions will be taxed to shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received. To prevent the application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar
year distribution requirement.
38
DISTRIBUTIONS
Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of distributions of qualified dividend income and
capital gain dividends described below, be taxable to shareholders as ordinary
income. If a portion of the Fund's income consists of qualifying dividends paid
by U.S. corporations (other than REITs), a portion of the dividends paid by the
Fund to corporate shareholders, if properly designated, may be eligible for the
DRD. In addition, for taxable years beginning on or before December 31, 2008,
distributions of investment income designated by the Fund as derived from
qualified dividend income will be taxed in the hands of individuals at the rates
applicable to long-term capital gain, provided holding period and other
requirements are met by both the Fund and the shareholder. The Fund does not
expect a significant portion of Fund distributions to be eligible for the DRD or
derived from qualified dividend income.
The Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it generally will be taxable to individual shareholders at long-term
capital gains rates regardless of the length of time the shareholders have held
their shares. Conversely, if the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital loss
carryovers) at the applicable corporate tax rate. In such event, it is expected
that the Fund also will elect to treat such gain as having been distributed to
shareholders. As a result, each shareholder will be required to report his or
her pro rata share of such gain on his or her tax return as long-term capital
gain, will be entitled to claim a tax credit for his or her pro rata share of
tax paid by the Fund on the gain, and will increase the tax basis for his or her
shares by an amount equal to the deemed distribution less the tax credit.
Long-term capital gain rates for individuals have been temporarily reduced
to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for
taxable years beginning on or before December 31, 2008.
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the shareholder's tax basis in his or her shares; any such
return of capital distributions in excess of the shareholder's tax basis will be
treated as gain from the sale of his or her shares, as discussed below.
If the NAV at the time a shareholder purchases shares of the Fund reflects
undistributed income or gain, distributions of such amounts will be taxable to
the shareholder in the manner described above, even though such distributions
economically constitute a return of capital to the shareholder.
The IRS currently requires that a regulated investment company that has two
or more classes of stock allocate to each such class proportionate amounts of
each type of its income (such as ordinary income, capital gains, dividends
qualifying for the DRD and qualified dividend income) based upon the percentage
of total dividends paid out of current or accumulated earnings and profits to
each class for the tax year. Accordingly, the Fund intends each year to allocate
capital gain dividends, dividends qualifying for the DRD and dividends derived
from qualified dividend income, if any, between its Common Shares, the AMPS, and
the Series M7 AMPS, Series T7 AMPS, Series W7 AMPS, Series TH7 AMPS, Series F7
AMPS, Series W28A AMPS, Series W28B AMPS and Series W28C AMPS 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 M7
AMPS, Series T7 AMPS, Series W7 AMPS, Series TH7 AMPS, Series F7 AMPS,
Series W28A AMPS, Series W28B AMPS and Series W28C AMPS. Since the Fund's
current and accumulated earnings and profits will first be used to pay dividends
on the AMPS (and the Series M7, Series T7, Series W7, Series TH7, Series F7,
Series W28A, Series W28B and Series W28C AMPS),
39
distributions in excess of such earnings and profits, if any, will be made
disproportionately to holders of Common Shares.
SALE OF SHARES
A shareholder generally will recognize gain or loss on the sale or exchange
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale and the shareholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the shareholder's holding period for the shares. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. However, any capital loss arising from the
sale of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder (or amounts credited to the shareholder as undistributed capital
gains) with respect to such shares. Also, any loss realized on a sale or
exchange of shares will be disallowed to the extent the shares disposed of are
replaced with other substantially identical shares within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such case, the tax basis of the acquired shares will be adjusted to reflect the
disallowed loss.
NATURE OF FUND'S INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things,
(i) disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited),
(iv) cause the Fund to recognize income or gain without a corresponding receipt
of cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
provisions.
ORIGINAL ISSUE DISCOUNT SECURITIES
Investments by the Fund in zero coupon or other discount securities will
result in income to the Fund equal to a portion of the excess of the face value
of the securities over their issue price (the 'original issue discount') each
year that the securities are held, even though the Fund receives no cash
interest payments. This income is included in determining the amount of income
which the Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its shareholders.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits ('REMICs'). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an 'excess inclusion') will be subject to U.S.
federal income tax in all events. These regulations are also expected to provide
that excess inclusion income of a regulated investment company, such as the
Fund, will be allocated to shareholders of the regulated investment company in
proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to shareholders
(i) cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to
40
tax on unrelated business income, thereby potentially requiring such an entity
that is allocated excess inclusion income, and otherwise might not be required
to file a tax return, to file a tax return and pay tax on such income, and
(iii) in the case of a foreign shareholder, will not qualify for any reduction
in U.S. federal withholding tax. In addition, if at any time during any taxable
year a 'disqualified organization' (as defined in the Code) is a record holder
of a share in a regulated investment company, then the regulated investment
company will be subject to a tax equal to that portion of its excess inclusion
income for the taxable year that is allocable to the disqualified organization,
multiplied by the highest U.S. federal income tax rate imposed on corporations.
The Investment Manager does not intend on behalf of the Fund to invest in REITs,
a substantial portion of the assets of which consists of residual interests in
REMICs.
INVESTMENTS IN SECURITIES OF UNCERTAIN TAX CHARACTER
The Fund may invest in preferred securities or other securities the U.S.
federal income tax treatment of which may not be clear or may be subject to
recharacterization by the IRS. To the extent the tax treatment of such
securities or the income from such securities differs from the tax treatment
expected by the Fund, it could affect the timing or character of income
recognized by the Fund, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Code.
BORROWINGS
If the Fund utilizes leverage through borrowing, it may be restricted by
loan covenants with respect to the declaration of, and payment of, dividends in
certain circumstances. Limits on the Fund's payments of dividends may prevent
the Fund from meeting the distribution requirements, described above, and may,
therefore, jeopardize the Fund's qualification for taxation as a regulated
investment company and possibly subject the Fund to the 4% excise tax. The Fund
will endeavor to avoid restrictions on its ability to make dividend payments.
INVESTMENT IN NON-U.S. SECURITIES
The Fund's investment in non-U.S. securities may be subject to non-U.S.
withholding taxes. In that case, the Fund's yield on those securities would be
decreased. Shareholders will generally not be entitled to claim a credit or
deduction with respect to foreign taxes paid by the Fund.
In addition, if the Fund acquires an equity interest in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties or capital
gains) or that hold at least 50% of their assets in investments producing such
passive income ('passive foreign investment companies'), the Fund could be
subject to U.S. federal income tax and additional interest charges on gains and
certain distributions with respect to those equity interests, even if all the
income or gain is timely distributed to its shareholders. The Fund will not be
able to pass through to its shareholders any credit or deduction for such taxes.
An election would generally be available to ameliorate these adverse tax
consequences, but any such election could require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. These investments could
also result in the treatment of capital gains as ordinary income. The Fund
intends to manage its holdings to limit the tax liability from these
investments.
BACKUP WITHHOLDING
If a shareholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that he
or she has provided a correct taxpayer identification number and that he or she
is not subject to 'backup withholding' the shareholder may be subject to a
'backup withholding' tax with respect to (1) taxable dividends and (2) the
proceeds of any sales or repurchases of AMPS. An individual's taxpayer
identification number is generally his or her social security number. Corporate
shareholders and other shareholders specified in the Code or the Treasury
regulations promulgated thereunder are exempt from backup
41
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 SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ('foreign shareholder') 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 shareholder.
Income Not Effectively Connected. If the income from the Fund is not
'effectively connected' with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income, 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
inclusion income allocated to the shareholder (see 'U.S. Federal
Taxation -- Investments in Real Estate Investment Trusts' above)), which tax is
generally withheld from such distributions.
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will generally not be subject to U.S.
federal withholding tax at the rate of 30% (or lower treaty rate) unless the
foreign shareholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would 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
shareholder who is a nonresident alien individual, the Fund may be required to
backup withhold U.S. federal income tax on distributions of net capital gain
unless the foreign shareholder certifies his or her non-U.S. status under
penalties of perjury or otherwise establishes an exemption. See 'U.S. Federal
Taxation -- Backup Withholding' above. Any gain that a foreign shareholder
realizes upon the sale or exchange of such shareholder's shares of the Fund will
ordinarily be exempt from U.S. federal withholding tax unless (i) in the case of
a shareholder that is a nonresident alien individual, the gain is U.S. source
income and such shareholder is physically present in the United States for more
than 182 days during the taxable year and meets certain other requirements, or
(ii) at any time during the shorter of the period during which the foreign
shareholder held such shares of the Fund and the five year period ending on the
date of the disposition of those shares, the Fund was a 'U.S. real property
holding corporation' and the foreign shareholder actually or constructively held
more than 5% of the shares of the same class, in which event described in (ii),
the gain would be taxed in the same manner as for a U.S. shareholder as
discussed above and a 10% U.S. federal withholding tax generally would be
imposed on the amount realized on the disposition of such shares and credited
against the foreign shareholder's U.S. federal income tax liability on such
disposition. A corporation is a 'U.S. real property holding corporation' if the
fair market value of its U.S. real property interests equals or exceeds 50% of
the fair market value of such interests plus its interests in real property
located outside the United States plus any other assets used or held for use in
a business. In the case of the Fund, U.S. real property interests include
interests in stock in U.S. real property holding corporations (other than stock
of a REIT controlled by U.S. persons and holdings of 5% or less in the stock of
publicly traded U.S. real property holding corporations) and certain
participating debt securities.
Income Effectively Connected. If the income from the Fund is 'effectively
connected' with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will generally be subject to U.S. federal income tax at the
graduated rates
42
applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate shareholders may also be subject to the branch profits tax imposed by
the Code.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
TAX SHELTER REPORTING REGULATIONS
Under recently promulgated Treasury regulations, if a shareholder recognizes
a loss with respect to shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder in any single
taxable year (or a greater loss over a combination of years), the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a regulated investment
company are not excepted. Future guidance may extend the current exception from
this reporting requirement to shareholders of most or all regulated investment
companies. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's treatment of the loss
is proper. Shareholders should consult their tax advisors to determine the
applicability of these regulations in light of their individual circumstances.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions and considerations discussed herein.
Distributions to shareholders also may be subject to state, local and
foreign taxes, depending upon each shareholder's particular situation.
Shareholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Fund.
PERFORMANCE DATA AND INDEX RETURNS
From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to shareholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.
AVERAGE ANNUAL TOTAL RETURN
The Fund's 'average annual total return' figures described in the prospectus
are computed according to a formula prescribed by the Securities and Exchange
Commission. The formula can be expressed as follows:
43
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 shareholders of the Fund or in
advertising materials, the Fund may compare its performance with that of
(i) other investment companies listed in the rankings prepared by Lipper
Analytical Services, Inc., publications such as Barrons, Business Week, Forbes,
Fortune, Institutional Investor, Kiplinger's Personal Finance, Money,
Morningstar Mutual Fund Values, The New York Times, The Wall Street Journal and
USA Today or other industry or financial publications or (ii) the Standard and
Poor's Index of 500 Stocks, the Dow Jones Industrial Average, Dow Jones Utility
Index, the National Association of Real Estate Investment Trusts (NAREIT) Equity
REIT Index, the Salomon Brothers Broad Investment Grade Bond Index (BIG), Morgan
Stanley Capital International Europe Australia Far East (MSCI EAFE) Index, the
NASDAQ Composite Index, and other relevant indices and industry publications.
The Fund may also compare the historical volatility of its portfolio to the
volatility of such indices during the same time periods. (Volatility is a
generally accepted barometer of the market risk associated with a portfolio of
securities and is generally measured in comparison to the stock market as a
whole -- the beta -- or in absolute terms -- the standard deviation.)
Marketing materials for the Fund may make reference to other closed-end
investment companies for which the Investment Manager serves as investment
adviser. The past performance of any other Cohen & Steers Fund is not a
guarantee of future performance for the Fund.
EXPERTS
PricewaterhouseCoopers LLP has been appointed as independent accountants for
the Fund. The statement of assets and liabilities of the Fund as of June 6, 2003
included in this statement of additional information has been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given the authority of the firm as experts in auditing and accounting.
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.:
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Cohen & Steers REIT
and Preferred Income Fund, Inc. (the 'Fund') at June 6, 2003 in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Fund's management; our
responsibility is to express an opinion on this financial statement based on our
audit. We conducted our audit of this financial statement in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
June 9, 2003
45
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 6, 2003
(AUDITED)
Assets:
Cash.................................................... $100,275
Deferred Offering Costs................................. 885,000
--------
Total Assets........................................ 985,275
--------
Liabilities
Accrued expenses........................................ 885,000
--------
Total Liabilities................................... 885,000
--------
Net Assets applicable to 4,200 shares of $.001 par value
common stock outstanding.................................. $100,275
--------
--------
Net asset value per Common Shares outstanding ($100,275
divided by 4,200 Common shares outstanding)............... $ 23.88
--------
--------
NOTES TO FINANCIAL STATEMENT
NOTE 1: ORGANIZATION
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'Fund') was
incorporated under the laws of the State of Maryland on March 25, 2003 and is
registered under the Investment Company Act of 1940 (the 'Act'), as amended, as
a closed-end non-diversified management investment company. The Fund has been
inactive since that date except for matters relating to the Fund's
establishment, designation, registration of the Fund's shares of common stock
('Shares') under the Securities Act of 1933, and the sale of 4,200 shares
('Initial Shares') for $100,275 to Cohen & Steers Capital Management, Inc. (the
'Adviser'). The proceeds of such Initial Shares in the Fund were invested in
cash. There are 100,000,000 shares of $.001 par value common stock authorized.
Cohen & Steers Capital Management, Inc. has agreed to pay all organization
expenses (approximately $15,000) and pay all offering costs (other than the
sales load) that exceed $.05 per Common Share.
NOTE 2: ACCOUNTING POLICIES
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statement. Actual results could differ from these
estimates. In the normal course of business, the Fund enters into contracts that
contain a variety of representations which provide general indemnifications. The
Fund's maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Fund that have not yet
occurred. However, the Fund expects the risk of loss to be remote.
NOTE 3: INVESTMENT MANAGEMENT AGREEMENT
The Fund has entered into an Investment Management Agreement with the
Adviser, under which the Adviser will provide general investment advisory and
administrative services for the Fund. For providing these services, facilities
and for bearing the related expenses, the Adviser will receive a fee from the
Fund, accrued daily and paid monthly, at an annual rate equal to .65% of the
average daily managed assets. Managed assets is the net asset value of the
Common Shares plus the liquidation preference of any AMPS and the principal
amount of any borrowings used for leverage.
46
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD(a)
--------- ----- -----
Common Stock 82.23%
Diversified 6.95%
Colonial Properties Trust...................... 225,000 $ 8,106,750 7.38%
Crescent Real Estate Equities Co............... 1,490,500 21,612,250 10.34
iStar Financial................................ 936,900 36,492,255 6.80
Newcastle Investment Corp...................... 149,000 3,425,510 8.70
Vornado Realty Trust........................... 274,100 13,167,764 5.66
------------
82,804,529
------------
Health Care 11.90%
Health Care Property Investors................. 1,450,300 67,729,010 7.11
Health Care REIT............................... 1,441,500 44,470,275 7.59
Nationwide Health Properties................... 1,362,200 23,824,878 8.46
Ventas......................................... 335,000 5,735,200 6.25
------------
141,759,363
------------
Hotel 0.92%
Hospitality Properties Trust................... 312,000 10,944,960 8.21
------------
Industrial 3.97%
First Industrial Realty Trust.................. 1,472,200 47,213,454 8.54
------------
Office 23.16%
Arden Realty................................... 1,444,200 40,322,064 7.23
Brandywine Realty Trust........................ 656,500 16,865,485 6.85
CarrAmerica Realty Corp. ...................... 982,300 29,321,655 6.70
Equity Office Properties Trust................. 2,943,300 81,029,049 7.26
Highwoods Properties........................... 910,200 21,717,372 7.12
Mack-Cali Realty Corp.......................... 1,240,000 48,608,000 6.43
Maguire Properties............................. 1,286,100 26,365,050 7.80
Prentiss Properties Trust...................... 374,900 11,621,900 7.23
------------
275,850,575
------------
Office/Industrial 4.84%
Liberty Property Trust......................... 1,243,300 45,977,234 6.54
Mission West Properties........................ 939,500 11,612,220 7.77
------------
57,589,454
------------
---------
(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.
See accompanying notes to unaudited financial statements.
47
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Residential -- Apartment 17.53%
AMLI Residential Properties Trust.............. 541,700 $ 14,192,540 7.33%
Apartment Investment & Management Co. ......... 984,700 38,757,792 8.33
Archstone-Smith Trust.......................... 2,374,000 62,626,120 6.48
AvalonBay Communities.......................... 170,800 7,993,440 5.98
Camden Property Trust.......................... 647,800 24,894,954 6.61
Equity Residential............................. 200,000 5,856,000 5.91
Gables Residential Trust....................... 1,186,100 38,334,752 7.46
Mid-America Apartment Communities.............. 308,300 9,304,494 7.75
Post Properties................................ 100,000 2,723,000 6.61
Town & Country Trust........................... 173,400 4,073,166 7.32
------------
208,756,258
------------
Self Storage 0.61%
Sovran Self Storage............................ 220,100 7,296,315 7.27
------------
Shopping Center 12.35%
Community Center 7.37%
Heritage Property Investment Trust............. 1,456,100 42,052,168 7.27
New Plan Excel Realty Trust.................... 1,538,100 35,837,730 7.08
Ramco-Gershenson Properties Trust.............. 390,000 9,925,500 6.60
------------
87,815,398
------------
Regional Mall 4.98%
Glimcher Realty Trust.......................... 2,074,000 43,699,180 9.11
Macerich Co. .................................. 215,200 8,123,800 6.04
Mills Corp..................................... 190,200 7,484,370 5.74
------------
59,307,350
------------
Total Shopping Center.......................... 147,122,748
------------
Total Common Stock (Identified cost --
$932,716,456)............................ 979,337,656
------------
See accompanying notes to unaudited financial statements.
48
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Preferred Securities -- $25 Par Value 21.58%
Agricultural Chemicals 0.09%
Agrium, 8.00% (COPrS)(a)....................... 43,300 $ 1,092,892 7.92%
------------
Automotive 0.88%
DaimlerChrysler, 7.50% (CBTCS)(b).............. 34,200 877,230 7.33
DaimlerChrysler, 7.875% (CORTS)(c)............. 9,600 249,504 7.58
DaimlerChrysler, 8.00% (CORTS)(c).............. 10,000 261,000 7.66
Ford Motor Co., 7.40% (CORTS)(c)............... 33,000 810,150 7.54
Ford Motor Co., 7.50%, Note.................... 172,251 4,280,437 7.57
Ford Motor Co., 8.00% (CORTS)(c)............... 125,000 3,156,250 7.92
Ford Motor Co., 8.125%, Series F (SATURNS)(d).. 32,200 817,880 7.99
General Motors Corp., 7.375%, Senior Notes..... 3,100 77,965 7.32
------------
10,530,416
------------
Bank 1.59%
ASBC Capital I, 7.625%, Series A (TOPrS)(e).... 65,300 1,742,204 7.16
BAC Captial Trust III, 7.00%................... 11,800 317,892 6.50
Chittenden Capital Trust I, 8.00%, Capital
Securities................................... 13,700 367,160 7.46
Colonial Capital Trust IV, 7.875%.............. 300,000 7,641,000 7.73
Compass Capital III, 7.35%, Capital
Securities................................... 8,600 228,330 6.93
Countrywide Capital II, 8.00% (CORTS)(c)....... 5,500 147,730 7.45
Countrywide Capital IV, 6.75%.................. 74,600 1,879,920 6.71
Fleet Capital Trust VII, 7.20% Series.......... 94,800 2,484,708 6.87
Fleet Capital Trust VIII, 7.20% Series......... 87,900 2,335,503 6.77
Old Second Bancorp Capital Trust I, 7.80%...... 90,000 967,500 7.26
VNB Capital Trust I, 7.75% (TOPrS)(e).......... 9,300 251,100 7.19
Zions Capital Trust B, 8.00%................... 18,600 502,758 7.40
------------
418,865,805
------------
Bank -- Foreign 1.42%
Abbey National PLC, 7.25%, Perpetual
Subordinated Notes........................... 11,800 310,340 6.88
Abbey National PLC, 7.375%, Series B........... 130,700 3,555,040 6.76
Abbey National PLC, 7.375%, Series C........... 493,264 13,096,159 6.93
------------
16,961,539
------------
---------
(a) (COPrS) Canadian Origin Preferred Securities.
(b) (CBTCS) Corporate Backed Trust Certificates.
(c) (CORTS) Corporate Backed Trust Securities.
(d) (SATURNS) Structured Asset Trust Unit Repackagings.
(e) (TOPrS) Trust Originated Preferred Securities.
See accompanying notes to unaudited financial statements.
49
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Electric -- Integrated 1.04%
Energy East Capital Trust I, 8.25%............. 61,000 $ 1,645,170 7.64%
Entergy Louisiana, 7.60% Series, due 4/1/32.... 11,900 315,945 7.16
Georgia Power Capital Trust V, 7.128%.......... 20,200 537,522 6.69
Gulf Power Capital Trust III, 7.375%
(TruPS)(a)................................... 11,199 293,526 7.02
Northern States Power Co., 8.00%, Notes
(PINES)(b)................................... 38,200 1,027,580 7.43
PSEG Funding Trust II, 8.75% Series............ 170,100 4,626,720 8.05
Puget Sound Energy Capital Trust II, 8.40%
(TOPrS)(c)................................... 77,500 2,070,800 7.86
Southern Company Capital Trust VI, 7.125%
Series....................................... 7,800 209,508 6.63
Virginia Power Capital Trust II, 7.375%,
(TruPS)(a)................................... 62,061 1,666,338 6.85
------------
12,393,109
------------
Finance 2.56%
Auto Loan 0.49%
Ford Motor Credit Co., 7.375%, Note............ 88,000 2,173,600 7.45
Ford Motor Credit Co., 7.60%, Note............. 39,300 993,111 7.52
General Motors Acceptance Corp., 7.25%,
Notes........................................ 104,900 2,627,745 7.23
------------
5,794,456
------------
Credit Card 0.68%
MBNA Capital, 8.125%, Series D (TruPS)(a)...... 189,800 5,029,700 7.66
MBNA Capital, 8.10%, Series E (TOPrs)(c)....... 115,900 3,099,166 7.59
------------
8,128,866
------------
Diversified Financial Services 0.12%
Household Capital Trust VII, 7.50%............. 6,400 173,440 6.94
National Rural Utilities, 7.40% (QUICS)(d)..... 48,300 1,297,821 6.89
------------
1,471,261
------------
Investment Banker/Broker 1.27%
JP Morgan Chase Capital Co. X, 7.00%
Series J..................................... 5,900 155,701 6.63
Lehman Brothers Holdings, 6.50%, Series F...... 550,000 14,492,500 6.19
Merrill Lynch Perferred Capital Trust V, 7.28%
(TOPrS)(c)................................... 16,500 440,880 6.81
------------
15,089,081
------------
Total Finance.................................. 30,483,664
------------
---------
(a) (TruPS) Trust Preferred Securities.
(b) (PINES) Public Income Notes
(c) (TOPrS) Trust Originated Preferred Securities.
(d) (QUICS) Quarterly Income Capital Securities.
See accompanying notes to unaudited financial statements.
50
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Gas - Distribution 1.61%
Dominion CNG Capital, 7.80%.................... 3,300 $ 89,727 7.72%
Dominion CNG Capital, 8.40%.................... 78,700 2,140,640 7.17
Laclede Capital Trust I, 7.70% (TOPrS)(a)...... 47,400 1,279,800 7.15
Southwest Gas Capital Trust II, 7.70%.......... 600,000 15,690,000 7.38
------------
19,200,167
------------
Insurance 2.97%
Brokers 0.05%
Aon Capital, 7.50%, Class A (SATURNS)(b)....... 22,528 559,821 7.57
------------
Life/Health Insurance 0.30%
Lincoln National Capital V, 7.65%, Series E
(TruPS)(c)................................... 52,300 1,393,795 7.17
PLC Capital Trust III, 7.50% (TOPrS)(a)........ 42,000 1,109,640 7.12
Torchmark Capital Trust I, 7.75%............... 41,000 1,103,310 7.21
------------
3,606,745
------------
Multi-Line 1.12%
ING Groep NV, 7.05% Series..................... 341,600 8,908,928 6.75
ING Groep NV, 7.20% Series..................... 165,700 4,379,451 6.81
------------
13,288,379
------------
Property/Casualty 1.12%
ACE Ltd., 7.80%, Series C...................... 380,400 9,966,480 7.44
St. Paul Capital Trust I, 7.60% (TruPS)(c)..... 114,130 3,030,151 7.16
XL Capital Ltd., 7.625%, Series B.............. 12,800 346,240 7.06
------------
13,342,871
------------
Reinsurance -- Foreign 0.38%
Everest Re Capital Trust, 7.85%................ 12,700 345,567 7.20
PartnerRe Ltd., 6.75%, Series C................ 65,000 1,638,000 6.71
RenaissanceRE Holdings Ltd., 8.10%, Series A... 30,900 830,901 7.55
RenaissanceRE Holdings Ltd., 7.30%, Series B... 65,900 1,756,235 6.87
------------
4,570,703
------------
Total Insurance................................ 35,368,519
------------
---------
(a) (TOPrS) Trust Originated Preferred Securities.
(b) (SATURNS) Structured Asset Trust Unit Repackagings.
(c) (TruPS) Trust Preferred Securities.
See accompanying notes to unaudited financial statements.
51
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Media 1.24%
Cable Television 0.67%
Shaw Communications, 8.45%, Series A
(COPrS)(a)................................... 146,092 $ 3,646,456 8.45%
Shaw Communications, 8.50%, Series B
(COPrS)(a)................................... 173,500 4,332,295 8.53
------------
7,978,751
------------
Diversified Services 0.57%
AOL Time Warner, 7.625%, Series A-1 (CABCO)(b). 53,200 1,373,624 7.40
Liberty Media Corp., 8.75% (CBTCS)(c).......... 143,300 3,814,646 8.23
Liberty Media Corp., 8.75% (PPLUS)(d).......... 44,145 1,191,915 8.11
Viacom, 7.25%, Senior Notes.................... 16,500 436,095 6.85
------------
6,816,280
------------
Total Media.................................... 14,795,031
------------
Medical -- HMO 0.05%
Aetna, 8.50%, Senior Notes..................... 23,800 644,266 7.87
------------
Real Estate 6.20%
Apartment Investment and Management Co., 8.00%,
Series T..................................... 93,700 2,342,500 8.00
CBL & Associates Properties, 7.75%, Series C... 200,000 5,140,000 7.55
CarrAmerica Realty Corp., 7.50%, Series E...... 300,000 7,590,000 7.43
Cousins Properties, 7.75%, Series A............ 457,500 11,629,650 7.63
Developers Diversified Realty Corp., 8.00%,
Series G..................................... 88,700 2,328,375 7.62
Glimcher Realty Trust, 8.75%, Series F......... 280,000 7,168,000 8.55
Health Care REIT, 7.875%, Series D............. 100,000 2,550,000 7.73
iStar Financial, 7.875%, Series E.............. 400,000 10,180,000 7.74
iStar Financial, 7.80%, Series F............... 168,000 4,242,000 7.72
Mid-America Apartment Communities, 8.30%,
Series H..................................... 690,600 18,024,660 7.97
Mills Corp., 8.75%, Series E................... 100,000 2,645,000 8.28
------------
73,840,185
------------
Retail -- Department Store 0.41%
Sears Roebuck Acceptance Corp., 7.00%, Notes... 166,500 4,240,755 6.87
Sears Roebuck Acceptance Corp., 7.40%, Notes... 22,417 593,602 6.99
------------
4,834,357
------------
---------
(a) (COPrS) Canadian Origin Preferred Securities.
(b) (CABCO) Corporate Assets Backed Corporation.
(c) (CBTCS) Corporate Backed Trust Certificates.
(d) (PPLUS) Preferred Plus Trust.
See accompanying notes to unaudited financial statements.
52
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Telecommunication Services 1.42%
Centaur Funding Corp., 9.08%(a)................ 11,028 $ 12,802,685 7.82%
Telephone & Data Systems, 7.60%, Series A...... 156,000 4,110,600 7.21
------------
16,913,285
------------
Telephone -- Integrated 0.10%
Bellsouth Telecommunications, 6.75% (CABCO)(b). 3,700 93,906 6.66
Bellsouth Telecommunications, 7.00% (CBTCS)(c). 7,300 190,895 6.69
Bellsouth Telecommunications, 7.00% (CORTS)(d). 2,000 53,500 6.54
Bellsouth Telecommunications, 7.125%
(SATURNS)(d)................................. 2,600 67,132 6.89
Verizon Global Funding Trust, 7.75% (CBTCS)(c). 2,000 54,000 7.07
Verizon Global Trust, 7.375% (CORTS)(d)........ 4,600 123,510 6.85
Verizon New England, 7.00% (QUIBS)(f).......... 11,900 315,707 6.60
Verizon South, 7.00%, Series F................. 10,200 270,402 6.60
------------
1,169,052
------------
Total Preferred Securities -- $25 Par Value
(Identified cost -- $252,929,000)........ 257,092,287
------------
Preferred Securities -- Capital Trust 22.75%
Bank 2.35%
Astoria Capital Trust I, 9.75%, due 11/1/29,
Series B..................................... 12,500,000 14,750,000 8.26
BankBoston Capital Trust II, 7.75%, due
12/15/26..................................... 1,500,000 1,692,150 6.87
BT Capital Trust B, 7.90%, due 1/15/27......... 365,000 406,618 7.09
Great Western Financial Trust II, 8.206%, due
2/1/27, Series A............................. 5,232,000 6,013,305 7.14
NB Capital Trust IV, 8.25%, due 4/15/27........ 570,000 679,474 6.92
Republic New York Capital I, 7.75%, due
11/15/26 (TruPS)(g).......................... 1,000,000 1,105,193 7.01
Sky Financial Capital Trust I, 9.75%, due
5/1/30, Series B............................. 3,000,000 3,359,355 8.34
------------
28,006,095
------------
---------
(a) As of September 30, 2003, this security is subject to Rule 144A and is
pending registration with the Securities and Exchange Commission. The fund
prices this security at fair value using procedures approved by the fund's
board of directors.
(b) (CABCO) Corporate Assets Backed Corporation.
(c) (CBTCS) Corporate Backed Trust Certificates.
(d) (CORTS) Corporate Backed Trust Securities.
(e) (SATURNS) Structured Asset Trust Unit Repackagings.
(f) (QUIBS) Quarterly Interest Bonds.
(g) (TruPS) Trust Preferred Securities.
See accompanying notes to unaudited financial statements.
53
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Bank -- Foreign 7.23%
BNP Paribas Capital Trust V, 7.20%............. 12,000,000 $ 12,368,040 6.99%
CA Preferred Fund Trust, 7.00%, due 1/29/49
(Eurobond)................................... 25,700,000 25,947,285 6.93
HBOS Capital Funding LP, 6.85%................. 19,500,000 19,546,781 6.83
HSBC Capital Funding LP, 10.176%............... 9,680,000 14,539,360 6.78
RBS Capital Trust B, 6.80%..................... 13,700,000 13,733,866 6.78
------------
86,135,332
------------
Electric -- Integrated 1.07%
Dominion Resources Capital Trust III, 8.40%,
due 1/15/31.................................. 10,421,000 12,767,257 6.86
------------
Finance 4.13%
Credit Card 0.18%
MBNA Capital, 8.278%, due 12/1/26, Series A.... 2,000,000 2,167,806 7.64
------------
Diversified Financial Services 1.99%
Old Mutual Capital Funding, 8.00%, due 5/29/49
(Eurobond)................................... 23,500,000 23,676,250 7.94
------------
Investment Banker/Broker 0.85%
Chase Capital I, 7.67%, due 12/1/06............ 2,519,000 2,817,862 6.86
JPM Capital Trust II, 7.95%, due 2/27/07....... 6,400,000 7,289,235 6.98
------------
10,107,097
------------
Mortgage Loan/Broker 1.11%
Countrywide Capital III, 8.05%, due 6/15/27,
Series B (SKIS)(a)........................... 11,285,000 13,295,874 6.83
------------
Total Finance.................................. 49,247,027
------------
Insurance 7.02%
Brokers 0.53%
Aon Capital Trust A, 8.205%, due 1/1/27........ 5,500,000 6,319,395 7.15
------------
Life/Health 0.35%
AmerUS Capital, 8.85%, due 2/1/27, Series A.... 4,000,000 4,203,392 8.42
------------
Multi-Line 5.67%
AXA, 7.10%, due 5/29/49 (Eurobond)............. 25,000,000 25,053,750 7.08
GenAmerica Capital I, 8.525%, due 6/30/27...... 10,000,000 11,300,060 7.55
USF&G Capital, 8.312%, due 7/1/46.............. 2,000,000 2,137,170 7.78
Zurich Capital Trust I, 8.376%, due 6/1/37..... 25,212,000 28,991,657 7.29
------------
67,482,637
------------
---------
(a) (SKIS) Subordinated Capital Income Securities.
See accompanying notes to unaudited financial statements.
54
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
NUMBER DIVIDEND
OF SHARES VALUE YIELD
--------- ----- -----
Property/Casuality 0.47%
W.R. Berkley Capital Trust, 8.197% due
12/15/45..................................... 5,100,000 $ 5,582,144 7.49%
------------
Total Insurance................................ 83,587,568
------------
Pipelines 0.95%
K N Capital Trust I, 8.56%, due 4/15/27
(TruPS)(a)................................... 9,513,000 11,266,094 7.23
------------
Total Preferred Securities -- Capital Trust
(Identified cost -- $263,966,314)........ 271,009,373
------------
Corporate Bond 5.62%
Automotive 4.33%
Ford Holdings, 9.30%, due 3/1/30............... 2,500,000 2,676,998
Ford Motor Co., 9.98%, due 2/15/47............. 14,400,000 16,078,032
General Motors Corp., 7.375%, due 5/23/48...... 18,500,000 17,132,924
General Motors Corp, 8.25%, due 7/15/23........ 15,000,000 15,725,550
------------
51,613,504
------------
Media -- Diversified Services 1.20%
Liberty Media, 8.25%, due 2/1/30............... 12,250,000 14,231,389
------------
Real Estate 0.09%
Highwoods/Forsyth Limited Partnership, 7.50%,
due 4/15/18.................................. 1,000,000 1,034,604
------------
Total Corporate Bond (Identified cost --
$64,029,651)............................. 66,879,497
------------
---------
(a) (TruPS) Trust Preferred Securities.
See accompanying notes to unaudited financial statements.
55
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
SEPTEMBER 30, 2003 (UNAUDITED)
PRINCIPAL
AMOUNT VALUE
------ -----
Commercial Paper 21.16%
American General Financial Corp., 0.90% due 10/1/03.... $ 50,000,000 $ 50,000,000
BNP Paribas Financial, 0.90% due 10/1/03............... 50,000,000 50,000,000
General Electric Capital Corp., 0.90% due 10/1/03...... 1,969,000 1,969,000
San Paolo U.S. Finance Co., 0.90% due 10/1/03.......... 50,000,000 50,000,000
San Paolo U.S. Finance Co., 0.90% due 10/1/03.......... 50,000,000 50,000,000
UBS Financial, 0.90% due 10/1/03....................... 50,000,000 50,000,000
--------------
Total Commercial Paper (Identified
cost -- $251,969,000)............................ 251,969,000
--------------
Total Investments (Identified
cost -- $1,765,610,421) 153.34% 1,826,287,813
Liabilities in Excess of Other Assets (1.28)% (15,284,779)
Liquidation Value of Taxable Auction Market Preferred Shares:
Series M7, Series T7, Series W7, Series TH7, Series F7
(Equivalent to $25,000 per share based on 3,280 shares
outstanding per class) Series W28A, Series W28B and Series
W28C (Equivalent to $25,000 per share based on 2,800 shares
outstanding per class)..................................... (52.06)% (620,000,000)
--------------
Net Assets applicable to Common Stock (Equivalent to $24.68
per share based on 48,251,666 shares of capital stock
outstanding) 100.00% $1,191,003,034
------ --------------
------ --------------
See accompanying notes to unaudited financial statements.
56
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS:
Investments in securities, at value (Identified
cost -- $1,765,610,421) (Note 1)...................... $1,826,287,813
Cash.................................................... 18,089
Dividends and interest receivable....................... 13,771,012
Other assets............................................ 1,991
--------------
Total Assets........................................ 1,840,078,905
--------------
LIABILITIES:
Payable for investment securities purchased............. 14,754,967
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 9,991,350
Payable for offering expenses........................... 1,002,742
Payable to investment manager........................... 955,552
Payable for dividends declared on common shares......... 1,356,369
Payable for dividends declared on preferred shares...... 391,409
Other liabilities....................................... 623,482
--------------
Total Liabilities................................... 29,075,871
--------------
LIQUIDATION VALUE OF PREFERRED SHARES:
Taxable auction market preferred shares, Series M7,
($25,000 liquidation value, $0.001 par value, 3,280
shares issued and outstanding) (Notes 1 and 5)........ 82,000,000
Taxable auction market preferred shares, Series T7,
($25,000 liquidation value, $0.001 par value, 3,280
shares issued and outstanding) (Notes 1 and 5)........ 82,000,000
Taxable auction market preferred shares, Series W7,
($25,000 liquidation value, $0.001 par value, 3,280
shares issued and outstanding)
(Notes 1 and 5)....................................... 82,000,000
Taxable auction market preferred shares, Series TH7,
($25,000 liquidation value, $0.001 par value, 3,280
shares issued and outstanding)
(Notes 1 and 5)....................................... 82,000,000
Taxable auction market preferred shares, Series F7,
($25,000 liquidation value, $0.001 par value, 3,280
shares issued and outstanding)
(Notes 1 and 5)....................................... 82,000,000
Taxable auction market preferred shares, Series W28A,
($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 W28B,
($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 W28C,
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding)
(Notes 1 and 5)....................................... 70,000,000
--------------
620,000,000
--------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES................ $1,191,003,034
--------------
--------------
TOTAL NET ASSETS APPLICABLE TO COMMON SHARES consist of:
Common stock ($0.001 par value, 48,251,666 shares issued
and outstanding) (Notes 1 and 5)...................... $1,142,417,769
Distributions in excess of net investment income........ (2,454,486)
Accumulated net realized gain on investments............ 353,709
Net unrealized appreciation/(depreciation) on
investments and interest rate swap transactions....... 50,686,042
--------------
$1,191,003,034
--------------
--------------
NET ASSET VALUE PER COMMON SHARE:
($1,191,003,034 [div] 48,251,666 shares outstanding).... $ 24.68
--------------
--------------
MARKET PRICE PER COMMON SHARE............................... $ 24.57
--------------
--------------
MARKET PRICE DISCOUNT TO NET ASSET VALUE PER COMMON SHARE... 0.45%
--------------
--------------
See accompanying notes to unaudited financial statements.
57
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 27, 2003(a) THROUGH SEPTEMBER 30, 2003
(UNAUDITED)
Investment Income (Note 1):
Dividend income (net of $3,062 of foreign witholding
tax).................................................. $13,521,238
Interest income......................................... 4,392,784
-----------
Total Income........................................ 17,914,022
-----------
Expenses:
Investment management fees (Note 2)..................... 2,379,700
Administration fees (Note 2)............................ 240,259
Preferred remarketing fee............................... 186,850
Reports to shareholders................................. 61,277
Custodian fees and expenses............................. 55,915
Professional fees....................................... 41,106
Directors' fees and expenses (Note 2)................... 12,511
Transfer agent fees and expenses........................ 7,660
Miscellaneous........................................... 4,701
-----------
Total Expenses...................................... 2,989,979
-----------
Net Investment Income....................................... 14,924,043
-----------
Net Realized and Unrealized Gain/(Loss) on Investments (Note
1):
Net realized gain on investments........................ 992,370
Net realized loss on interest rate swap transactions.... (638,661)
Net change in unrealized appreciation on investments.... 60,677,392
Net change in unrealized depreciation on interest rate
swap transactions..................................... (9,991,350)
-----------
Net realized and unrealized gain/(loss) on
investments....................................... 51,039,751
-----------
Net Increase in Net Assets Resulting from Operations........ 65,963,794
Less Distributions to Preferred Shareholders................ (982,732)
-----------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $64,981,062
-----------
-----------
--------
(a) Commencement of operations.
See accompanying notes to unaudited financial statements.
58
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
FOR THE PERIOD JUNE 27, 2003(a) THROUGH SEPTEMBER 30, 2003
(UNAUDITED)
FOR THE PERIOD
JUNE 27, 2003(a)
THROUGH
SEPTEMBER 30, 2003
------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income............................... $ 14,924,043
Net realized gain on investments and interest rate
swap transactions................................. 353,709
Net unrealized appreciation/(depreciation) on
investments and interest rate swap transactions... 50,686,042
--------------
Net increase in net assets resulting from
operations........................................ 65,963,794
Less Distributions to Preferred Shareholders............ (982,732)
--------------
Net increase in net assets from operations
applicable to common shares....................... 64,981,062
--------------
Less Distributions to Common Shareholders............... (16,395,797)
--------------
Capital Stock Transactions (Note 5):
Increase in net assets from common share
transactions...................................... 1,148,126,750
Increase in net assets from shares issued to common
shareholders for reinvestment of dividends........ 1,375,744
Decrease in net assets from underwriting commissions
and offering expenses from issuance of preferred
shares............................................ (7,185,000)
--------------
Net increase in net assets from capital stock
transactions.................................. 1,142,317,494
--------------
Total increase in net assets applicable to
commmon shares................................ 1,190,902,759
Net Assets Applicable to Common Shares:
Beginning of period................................. 100,275
--------------
End of period....................................... $1,191,003,034
--------------
--------------
--------
(a) Commencement of Operations.
See accompanying notes to unaudited financial statements.
59
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
FOR THE PERIOD JUNE 27, 2003(a) THROUGH SEPTEMBER 30, 2003
(UNAUDITED)
FOR THE PERIOD
JUNE 27, 2003(a)
THROUGH
SEPTEMBER 30, 2003
PER SHARE OPERATING PERFORMANCE: ------------------
Net asset value per common share, beginning of period....... $ 23.88
--------
Income from investment operations:
Net investment income................................... 0.33(e)
Net realized and unrealized gain on investments......... 1.05(e)
--------
Total income from investment operations............. 1.38
Less distributions to preferred shareholders................ (0.02)
--------
Total from investment operations applicable to
common shares..................................... 1.36
--------
Less: Offering costs charged to paid-in capital -- common
shares.............................................. (0.05)(e)
Offering costs charged to paid-in capital -- preferred
shares.............................................. (0.16)(e)
Dilutive effect of common share offering.............. (0.01)(e)
--------
Total offering costs................................ (0.22)
--------
Less: distributions to common shareholders.................. (0.34)
--------
Net increase in net asset value............................. 0.80
--------
Net asset value, per common share, end of period............ $ 24.68
--------
--------
Market value, per common share, end of period............... $ 24.57
--------
--------
Net asset value total return(b)............................. 4.83%(c)
--------
--------
Market value returnb........................................ (0.34)%(c)
--------
--------
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of period
(in millions)............................................. 1,191.0
--------
--------
Ratio of expenses to average daily net assets applicable to
common shares............................................. 1.02%(d)
--------
--------
Ratio of net investment income to average daily net assets
applicable to common shares............................... 5.09%(d)
--------
--------
Ratio of expenses to average daily managed assets........... 0.82%(d)
--------
--------
Portfolio turnover rate..................................... 1.22%(c)
--------
--------
60
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD JUNE 27, 2003(a) THROUGH SEPTEMBER 30, 2003
(UNAUDITED)
PREFERRED SHARES:
Liquidation value, end of period (in 000's). $620,000
--------
--------
Total shares outstanding (in 000's)............................. 25
--------
--------
Asset coverage per share........................................ $ 73,024
--------
--------
Liquidation preference per share................................ $ 25,000
--------
--------
Average market value per share.................................. $ 25,000
--------
--------
---------
(a) Commencement of operations.
(b) Total market value return is computed based upon the New York Stock
Exchange market price of the fund's shares and excludes the effects of
brokerage commissions. Dividends and distributions, if any, are assumed
for purposes of this calculation, to be reinvested at prices obtained
under the fund's dividend reinvestment plan. Total net asset value return
measures the changes in value over the period indicated, taking into
account dividends as reinvested.
(c) Not annualized.
(d) Annualized.
(e) Based on average shares outstanding during the period.
See accompanying notes to unaudited financial statements.
61
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers REIT and Preferred Income Fund, Inc. (the 'fund') was
incorporated under the laws of the State of Maryland on March 25, 2003 and is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, nondiversified management investment company. The fund had no
operations until June 6, 2003 when it sold 4,200 shares of common stock for
$100,275 to Cohen & Steers Capital Management, Inc. (the investment manager).
Investment operations commenced on June 27, 2003.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq national list, are valued at the mean of the official closing prices
as reported by Nasdaq, the National Quotations Bureau or such other comparable
sources as the board of directors deems appropriate to reflect their fair market
value. However, certain fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed by the board
of directors to reflect the fair market value of such securities. Where
securities are traded on more than one exchange and also over-the-counter, the
securities will generally be valued using the quotations the board of directors
believes reflect most closely the value of such securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost for accounting and tax purposes.
Interest income is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date. Discounts and premiums of securities purchased are
amortized using the scientific method over their respective lives.
The fund estimates the amount of income included in distributions received
from the REIT investments. Distributions received in excess of income are
recorded as a reduction of cost of investments and/or realized gain. The actual
amounts of income, realized gain and return of capital may differ from the
estimated amounts and the Fund adjusts the estimated amounts of the
62
breakdown of distribution type (and consequently its net investment income) as
necessary once REITs inform their shareholders of the actual breakdown of
distribution type.
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of taxable auction market preferred shares. 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 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.
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
distributions may consist of amounts 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.
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated polices of the fund, subject to
the general supervision of the board of directors of the fund. The investment
manager also performs certain administrative services for the fund.
For the services under the management agreement, the fund pays the
investment manager a monthly management fee, computed daily and payable monthly
at an annual rate of 0.65% of the fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of any fund preferred shares. For the period June 27,
2003 (commencement of operations) through September 30, 2003, the fund incurred
investment management fees of $2,379,700.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee equal to, on an annual basis, .06% of the Fund's average
daily managed assets up to $1 billion, .04% of the Fund's average daily managed
assets in excess of $1 billion up to $1.5 billion and .02% of the Fund's average
daily managed assets in excess of $1.5 billion. For the period June 27, 2003
(commencement of operations) through September 30, 2003, the fund incurred
$240,259 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
63
compensation for their services. For the period June 27, 2003 (commencement of
operations) through September 30, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $12,511.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments, for the
period June 27, 2003 (commencement of operations) through September 30, 2003,
totaled $1,528,316,954 and $11,973,575, respectively.
NOTE 4. INCOME TAXES
At September 30, 2003 the cost of investments and net unrealized
appreciation for federal income tax purposes were as follows:
Aggregate cost.............................................. $1,767,784,704
--------------
--------------
Gross unrealized appreciation............................... $ 61,095,594
Gross unrealized depreciation............................... (2,592,485)
--------------
Net unrealized appreciation on investments.................. 58,503,109
Net unrealized depreciation on interest rate swap
transactions.............................................. (9,817,440)
--------------
Net unrealized appreciation................................. $ 48,685,669
--------------
--------------
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to return of capital and capital gain
distributions received by the fund on portfolio securities. To the extent such
differences are permanent in nature, such amounts are reclassified within the
capital accounts. Short-term capital gains are reflected in the financial
statements as realized gains on investments but are typically reclassified as
ordinary income for tax purposes.
NOTE 5. CAPITAL STOCK
On June 27, 2003, the fund completed the initial public offering of
42,750,000 shares of common stock. Proceeds paid to the fund amounted to
$1,018,518,750 after deduction of underwriting commissions and offering expenses
of $50,231,250.
On July 17, 2003, the fund completed a subsequent offering of 2,500,000
shares of common stock. Proceeds paid to the fund amounted to $59,562,500 after
deduction of underwriting commissions and offering expenses of $2,937,500.
On August 5, 2003, the fund completed a subsequent offering of 2,940,000
shares of common stock. Proceeds paid to the fund amounted to $70,045,500 after
deduction of underwriting commissions and offering expenses of $2,937,500.
During the period June 27, 2003 (commencement of operations) through
September 30, 2003, the fund issued 57,466 shares of common stock for the
reinvestment of dividends.
On August 18, 2003, the fund issued 3,280 taxable auction market preferred
shares, Series M7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series T7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series W7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series TH7 (par value $0.001), 3,280 taxable auction market preferred
shares, Series F7 (par value $0.001), 2,800 taxable auction market preferred
shares, Series W28A (par value $0.001), 2,800 taxable auction market preferred
shares, Series W28B (par value $0.001), and 2,800 taxable auction market
preferred shares, Series W28C (par value $0.001) (together referred to as
preferred shares). Proceeds paid to the fund amounted to $612,815,000 after
deduction of underwriting commissions and offering expenses of $7,185,000. This
issue has received a 'AAA/Aaa' rating from Standard & Poor's and Moody's.
64
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, all of the foregoing as defined in the articles supplementary
of the fund, 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) 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 and UBS Warburg. Under the agreements the fund receives a
floating rate and pays a respective fixed rate. Details of the swaps at
September 30, 2003 are as follows:
NOTIONAL FIXED FLOATING RATE(a) UNREALIZED
COUNTERPARTY AMOUNT RATE (RESET MONTHLY) TERMINATION DATE DEPRECIATION
------------ ------ ---- --------------- ---------------- ------------
Royal Bank of Canada...... $43,250,000 3.4520% 1.120% September 16, 2008 $(1,477,479)
Royal Bank of Canada...... $58,125,000 3.3980% 1.120% August 25, 2007 (652,591)
UBS Warburg............... $58,125,000 2.8320% 1.120% August 25, 2006 (977,552)
UBS Warburg............... $58,125,000 3.9900% 1.120% August 25, 2009 (1,694,812)
UBS Warburg............... $58,125,000 4.3970% 1.120% August 25, 2010 (2,500,485)
UBS Warburg............... $58,125,000 4.5950% 1.120% August 25, 2011 (2,688,431)
-----------
$(9,991,350)
-----------
-----------
--------
(a) Based on LIBOR (London Interbank Offered Rate).
65
APPENDIX A
RATINGS OF INVESTMENTS
Description of certain ratings assigned by S&P and Moody's:
S&P
LONG-TERM
'AAA' -- An obligation rated 'AAA' has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
'AA' -- An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
'A' -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
'BBB' -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
'BB,' 'B,' 'CCC,' 'CC,' and 'C' -- Obligations rated 'BB' 'B,' 'CCC,' 'CC,'
and 'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
'BB' -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
'B' -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB,' but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
'CCC' -- An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
'CC' -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
'C' -- A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
'D' -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
'r' -- The symbol 'r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
A-1
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
'N.R.' -- The designation 'N.R.' indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter of policy.
Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a
plus (+) or minus (-) sign designation to show relative standing within the
major rating categories.
SHORT-TERM
'A-1' -- A short-term obligation rated 'A-1' is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
'A-2' -- A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
'A-3' -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
'B' -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.
'C' -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
'D' -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
MOODY'S
LONG-TERM
'Aaa' -- Bonds rated 'Aaa' are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
'Aa' -- Bonds rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 'Aaa'
securities.
'A' -- Bonds rated 'A' possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
A-2
'Baa' -- Bonds rated 'Baa' are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
'Ba' -- Bonds rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
'B' -- Bonds rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
'Caa' -- Bonds rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
'Ca' -- Bonds rated 'Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
'C' -- Bonds rated 'C' are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from 'Aa' through 'Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
PRIME RATING SYSTEM (SHORT-TERM)
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-3
APPENDIX B
ARTICLES SUPPLEMENTARY
COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC.
Articles Supplementary Creating And Fixing The Rights of Series T28
Taxable Auction Market Preferred Shares
Cohen & Steers REIT and Preferred Income Fund, Inc., a Maryland corporation
having its principal office in the City of Baltimore in the State of Maryland
(the 'Corporation'), certifies to the State Department of Assessments and
Taxation of Maryland that:
First: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article FIFTH of its Articles of Incorporation, as amended
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, 2,040 shares of the Corporation's
Taxable Auction Market Preferred Shares (par value $.001 per share) (the 'AMPS')
and has further classified all of such shares as 'Series T28 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 T28 AMPS: A series of T28 AMPS, par value $.001 per share,
liquidation preference $25,000 per share, is hereby designated 'Series T28
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.
B-1
PART I: TERMS OF AMPS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Series is 2,040
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 the first Business
Day of each calendar month within such period, and on the Business Day
following the last day of such Dividend Period; and
(B) with respect to any Dividend Period of more than one year, on the
first Business Day of each calendar month within such Dividend Period and on
the Business Day following the last day of such Dividend Period.
(ii) If a day for payment of dividends resulting from the application of
subparagraph (b) above is not a Business Day, then the Dividend Payment Date
will be the first Business Day following such day for payment of dividends.
(iii) The Corporation will pay to the Paying Agent not later than 12:00
noon, New York City time, on each Dividend Payment Date for the 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 (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.
B-3
(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) The Series will rank on a parity with all other series of Outstanding
AMPS. 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 their most recent Dividend Payment Date. When dividends are not paid in
full upon the Series through its most recent Dividend Payment Dates or upon any
other series of stock ranking on a parity as to the payment of dividends with
the Series through its most recent respective Dividend Payment Dates, 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 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
B-4
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 the 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 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
B-5
of shares to be redeemed will be redeemed pro rata from the Holders of such
shares in proportion to the number of 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 and Rating
Agencies (the 'Notice of Redemption') containing the information set forth below
(i) in the case of an optional redemption pursuant to Section 3(a)(i) above, one
Business Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the 10th
day preceding the Mandatory Redemption Date. Only with respect to shares held by
the Securities Depository, the Auction Agent will use its reasonable efforts to
provide telephonic notice to each Holder of shares of the 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 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 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
B-6
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 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
B-7
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, 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, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, or any successor Broker-Dealer designated by the Corporation, will
have notified the Corporation in writing that it does not object to the
designation of such Special Dividend Period and (vi) each Rating Agency will
have confirmed in writing to the Corporation that such designation will not
adversely affect their respective then-current ratings of the 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
(ii) communicated by the Corporation by telephonic or other means to the Auction
Agent and each Broker-Dealer and confirmed in writing promptly thereafter. Each
such notice will state (A) that the Corporation proposes to exercise its option
to designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Applicable Rate for such Special Dividend Period
and (B) that the Corporation will by 3:00 P.M., New York City time, on the
second Business Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Dividend Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Dividend
Period, in which latter event the succeeding Dividend Period will be a Standard
Dividend Period. No later than 3:00 P.M., New York City time, on the second
Business Day next preceding the first day of any proposed Special Dividend
Period, the Corporation will deliver to the Auction Agent, who will promptly
deliver to the Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Corporation has determined to
designate the next succeeding Dividend Period as a Special Dividend Period,
specifying the first and last days thereof and (B) the terms of any Specific
Redemption Provisions; or
(ii) a notice stating that the Corporation has determined not to
exercise its option to designate a Special Dividend Period.
If the Corporation fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of paragraph (a) of this
Section 4 by 3:00 P.M., New York City time, on the 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.
B-8
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, 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 together as a class (to the
exclusion of the holders of all other securities and classes of capital
B-9
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, (i) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Corporation or a substantial part of its property, or
make any assignment for the benefit of creditors, or, except as may be required
by applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Corporation's assets as a whole, except (A) liens the validity of
which are being contested in good faith by appropriate proceedings,
B-10
(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 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
B-11
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,
B-12
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 edn 17 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 is 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
rating the Series); (G) where delivery may be made to
B-13
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 and Moody's, the Corporation
will not purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities unless it receives
written confirmation from S&P and Moody's that engaging in such transactions
will not impair the ratings then assigned to the Series by S&P and Moody's.
(h) Change the pricing service referred to in the definition of Market
Value.
(i) Enter into reverse repurchase agreements.
12. Compliance Procedures for Asset Maintenance Tests. For so long as any
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) The Corporation will deliver to each Rating Agency a certificate which
sets forth a determination of items (i)-(iii) of paragraph (a) of this Section
12 (a 'Preferred Shares Basic Maintenance Certificate') as of (A) on or before
the 5th business day after the Date of Original Issue, (B) the last Valuation
Date of each month (such monthly report to include the net asset value and trade
price as of that date), (C) any date requested by any Rating Agency, (D) a
Business Day on or before any Asset Coverage Cure Date relating to the
Corporation's cure of a failure to meet the Preferred Shares Basic Maintenance
Amount Test, (E) any day that Common Shares or AMPS are redeemed and (F) any day
the S&P Eligible Assets have an aggregate discounted value less than or equal to
110% of the Preferred Shares Basic Maintenance Amount. Such Preferred Shares
Basic Maintenance Certificate will be delivered in the case of clause (i)(A) on
the Date of Original Issue and in the case of all other clauses above on or
before the seventh Business Day after the relevant Valuation Date or Asset
Coverage Cure Date.
(e) The Corporation will deliver to each Rating Agency a certificate which
sets forth a determination of items (iv) and (v) of paragraph (a) of this
Section 12 (a '1940 Act Preferred Shares Asset Coverage Certificate') (i) as of
the Date of Original Issue, and (ii) as of (A) the last Valuation Date of each
quarter thereafter, and (B) as of a Business Day on or before any Asset Coverage
Cure Date relating to the failure to meet the 1940 Act Preferred Shares Asset
Coverage. Such 1940 Act Preferred Shares Asset Coverage Certificate will be
delivered in the case of clause (i) on the Date of Original Issue and in the
case of clause (ii) on or before the seventh Business Day after the relevant
Valuation Date or the Asset Coverage Cure Date. The certificates required by
paragraphs (d) and (e) of this Section 12 may be combined into a single
certificate.
B-14
(f) Within fifteen Business Days of the Date of Original Issue and any
redemption of the Series, the Corporation will deliver to each Rating Agency a
letter prepared by the Corporation's independent auditors (an 'Auditor's
Certificate') regarding the accuracy of the calculations made by the Corporation
in the Preferred Shares Basic Maintenance Certificate and the 1940 Act Preferred
Shares Asset Coverage Certificate required to be delivered by the Corporation on
the Date of Original Issue. Within fifteen Business Days after delivery of the
Preferred Shares Basic Maintenance Certificate and the 1940 Act Preferred Shares
Asset Coverage Certificate relating to the last Valuation Date of each fiscal
year of the Corporation, the Corporation will deliver to 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 year. In addition, the Corporation will
deliver to the persons specified in the preceding sentence an Auditor's
Certificate regarding the accuracy of the calculations made by the Corporation
on each Preferred Shares Basic Maintenance Certificate and 1940 Act Preferred
Shares Asset Coverage Certificate delivered in relation to an Asset Coverage
Cure Date within ten days after the relevant Asset Coverage Cure Date. If an
Auditor's Certificate shows that an error was made in any such report, the
calculation or determination made by the Corporation's independent auditors will
be conclusive and binding on the Corporation.
(g) The Auditor's Certificates referred to in paragraph (f) above will
confirm, based upon the independent auditor's review of portfolio data provided
by the Corporation, (i) the mathematical accuracy of the calculations reflected
in the related Preferred Shares Basic Maintenance Amount Certificates and 1940
Act Preferred Shares Asset Coverage Certificates and (ii) that, based upon such
calculations, the Corporation had, at such Valuation Date, met the Preferred
Shares Basic Maintenance Amount Test.
(h) In the event that a Preferred Shares Basic Maintenance Certificate or
1940 Act Preferred Shares Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified in
this Section 12, the Corporation will be deemed to have failed to meet the
Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred Shares
Asset Coverage, as the case may be, on such Valuation Date for purposes of
Section 12(b) of Part I of these Articles Supplementary. In the event that a
Preferred Shares Basic Maintenance Certificate, a 1940 Act Preferred Shares
Asset Coverage Certificate or an applicable Auditor's Certificate with respect
to an Asset Coverage Cure Date is not delivered within the time periods
specified herein, the Corporation will be deemed to have failed to meet the
Preferred Shares Basic Maintenance Amount Test or the 1940 Preferred Shares
Asset Coverage, as the case may be, as of the related Valuation Date.
(i) The Corporation will provide S&P and Moody's with no less than 30 days'
notification of: (i) any material changes to the Corporation's organizational
documents and material contracts, (ii) any redemptions, or (iii) any failed
auctions.
(j) The Corporation will provide to S&P and Moody's an audited financial
statement for its fiscal year.
13. Notice. All notices or communications hereunder, unless otherwise
specified in these Articles Supplementary, will be sufficiently given if in
writing and delivered in person, by telecopier or mailed by first-class mail,
postage prepaid. Notices delivered pursuant to this Section 13 will be deemed
given on the earlier of the date received or the date five-days after which such
notice is mailed, except as otherwise provided in these Articles Supplementary
or by the MGCL for notices of stockholders' meetings.
14. Waiver. To the extent permitted by Maryland Law, Holders of at least
two-thirds of the Outstanding 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.
B-15
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.
16. Amendment. Subject to the provisions of these Articles Supplementary,
the Board of Directors may, by resolution duly adopted without stockholder
approval (except as otherwise provided by these Articles Supplementary or
required by applicable law), amend these Articles Supplementary to reflect any
amendments hereto which the Board of Directors is entitled to adopt pursuant to
the terms of Section 6(k) of Part I of these Articles Supplementary without
stockholder approval. To the extent permitted by applicable law, the Board of
Directors may interpret, amend or adjust the provisions of these Articles
Supplementary to resolve any inconsistency or ambiguity or to remedy any patent
defect.
17. Definitions. As used in Part I and Part II of these Articles
Supplementary, the following terms will have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:
'Affiliate' means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Corporation; provided,
however, that no Broker-Dealer controlled by, in control of or under common
control with the Corporation will be deemed to be an Affiliate nor will any
corporation or any Person controlled by, in control of or under common
control with such corporation, one of the directors or executive officers of
which is a director of the Corporation be deemed to be an Affiliate solely
because such director or executive officer is also a director of the
Corporation.
'Agent Member' means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.
'AMPS' has the meaning set forth in paragraph FIRST in the preamble of
these Articles Supplementary.
'Applicable Percentage' means the percentage determined based on the
credit rating assigned to the Series on such date by Moody's (if Moody's is
then rating the Series) and S&P (if S&P is then rating the Series) as
follows:
CREDIT RATINGS
-------------- APPLICABLE
MOODY'S S&P PERCENTAGE
------- --- ----------
Aaa AAA 125%
Aa3 to Aa1 AA- to AA+ 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to 250%
BBB+
Ba1 and lower BB+ and 300%
lower
For purposes of this definition, the 'prevailing rating' of shares of
the Series will be (i) AAA if such shares have a rating of AAA by Moody's or
S&P or the equivalent of such ratings by such agencies or substitute rating
agencies selected as provided below; (ii) if not AAA, then AA- if such
shares have a rating of AA- or better by Moody's or S&P or the equivalent
of such ratings by such agencies or substitute rating agencies selected as
provided below, (iii) if not AA- or higher, than A- if such shares have a
rating of A- or better by Moody's or S&P or the equivalent of such ratings
by such agencies or substitute rating agencies selected as provided below,
(iv) if not A- or higher then BBB- if such shares have a rating of BBB-
or better by Moody's or S&P or the equivalent of such ratings by such
agencies or substitute rating agencies selected as provided below, (v) if
not BBB- or higher, then below BBB-; provided, however, that if such
shares are rated by only one rating agency, the prevailing rating will be
determined without reference to the rating of any other rating agency.
The Applicable Percentage as so determined will be further subject to
upward but not downward adjustment in the discretion of the Board of
Directors after consultation with the Broker-Dealers, provided that that
immediately following any such increase the Corporation would be in
compliance with the Preferred Shares Basic Maintenance Amount. The
B-16
Corporation will take all reasonable action necessary to enable either
Moody's or S&P to provide a rating for the Series. If neither Moody's nor
S&P will make such a rating available, the Corporation will select another
Rating Agency to act as a substitute Rating Agency.
'Applicable Rate' means, with respect to the Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Rate, and (iii) in the
case of any Dividend Period if all the shares of the Series are the subject
of Submitted Hold Orders for the Auction in respect thereof, 90% of the
Reference Rate.
'Applicable Spread' means the spread determined based on the credit
rating assigned to the Series on such date by Moody's (if Moody's is then
rating the Series) and S&P (if S&P is then rating the Series) as follows:
CREDIT RATINGS
-------------- APPLICABLE
MOODY'S FITCH SPREAD
------- ----- ------
Aaa AAA 125 bps
Aa3 to Aa1 AA- to AA+ 150 bps
A3 to A1 A- to A+ 200 bps
Baa3 to Baa1 BBB- to 250 bps
BBB+
Ba1 and lower BB+ and 300 bps
lower
For purposes of this definition, the 'prevailing rating' of shares of
the Series will be (i) AAA if such shares have a rating of AAA by Moody's or
S&P or the equivalent of such ratings by such agencies or substitute rating
agencies selected as provided below; (ii) if not AAA, then AA- if such
shares have a rating of AA- or better by Moody's or S&P or the equivalent
of such ratings by such agencies or substitute rating agencies selected as
provided below, (iii) if not AA- or higher, than A- if such shares have a
rating of A- or better by Moody's or S&P or the equivalent of such ratings
by such agencies or substitute rating agencies selected as provided below,
(iv) if not A- or higher then BBB- if such shares have a rating of BBB-
or better by Moody's or S&P or the equivalent of such ratings by such
agencies or substitute rating agencies selected as provided below, (v) if
not BBB- or higher, then below BBB-; provided, however, that if such
shares are rated by only one rating agency, the prevailing rating will be
determined without reference to the rating of any other rating agency.
The Applicable Spread as so determined will be further subject to upward
but not downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers, provided that that immediately
following any such increase the Corporation would be in compliance with the
Preferred Shares Basic Maintenance Amount. The Corporation will take all
reasonable action necessary to enable either Moody's or S&P to provide a
rating for the Series. If neither Moody's nor S&P will make such a rating
available, the Corporation will select another Rating Agency to act as a
substitute Rating Agency.
'Approved Price' means the 'fair value' as determined by the Corporation
in accordance with the valuation procedures adopted from time to time by the
Board of Directors and for 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.
B-17
'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.
'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'
B-18
(a) for Moody's means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor, provided that with respect
to an Eligible Asset that is currently callable, Discounted Value will be
equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable,
Discounted Value will be equal to the quotient as calculated above or the
par value, whichever is lower.
(b) for S&P means the quotient of the Market Value of an Eligible Asset
divided by the applicable Discount Factor.
'Dividend Default' has the meaning set forth in Section 2(c)(ii) of Part
I of these Articles Supplementary.
'Dividend Payment Date' 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.
'LIBOR Dealers' means Merrill Lynch, Pierce, Fenner & Smith Incorporated
and such other dealer or dealers as the Corporation may from time to time
appoint, or, in lieu of any thereof, their respective affiliates or
successors.
'LIBOR Rate,' on any Auction Date, means (i) the rate for deposits in
U.S. dollars for the designated Dividend Period, which appears on display
page 3750 of Moneyline's Telerate Service ('Telerate Page 3750') (or such
other page as may replace that page on that service, or such other service
as may be selected by the LIBOR Dealer or its successors that are LIBOR
Dealers) as of 11:00 a.m., London time, on the day that is the London
Business Day preceding the Auction Date (the 'LIBOR Determination Date'), or
(ii) if such rate does not appear on Telerate Page 3750 or such other page
as may replace such Telerate Page 3750, (A) the LIBOR Dealer will determine
the arithmetic mean of the offered quotations of the Reference Banks to
leading banks in the London interbank market for deposits in U.S. dollars
for the designated Dividend Period in an amount determined by such LIBOR
Dealer by reference to requests for quotations as of approximately 11:00
a.m. (London time) on such date made by such LIBOR Dealer to the Reference
Banks, (B) if at least two of the Reference Banks provide such quotations,
LIBOR Rate will equal such arithmetic mean of such quotations, (C) if only
one or none of the Reference Banks provide such quotations, LIBOR Rate will
be deemed to be the arithmetic mean of the offered quotations that leading
banks in The City of New York selected by the LIBOR Dealer (after obtaining
the Corporation's approval) are quoting on the relevant LIBOR Determination
Date for deposits in U.S. dollars for the designated Dividend Period in an
amount determined by the LIBOR Dealer (after obtaining the Corporation's
approval) that is representative of a single transaction in such market at
such time by reference to the principal London offices of leading banks in
the London interbank market; provided, however, that if one of the LIBOR
Dealers does not quote a rate required to determine the LIBOR Rate, the
LIBOR Rate will
B-19
be determined on the basis of the quotation or quotations furnished by any
Substitute LIBOR Dealer or Substitute LIBOR Dealers selected by the
Corporation to provide such rate or rates not being supplied by the LIBOR
Dealer; provided further, that if the LIBOR Dealer and Substitute LIBOR
Dealers are required but unable to determine a rate in accordance with at
least one of the procedures provided above, LIBOR Rate will be LIBOR Rate as
determined on the previous Auction Date. If the number of Dividend Period
days will be (i) 7 or more but fewer than 21 days, such rate will be the
seven-day LIBOR rate; (ii) more than 21 but fewer than 49 days, such rate
will be the one-month LIBOR rate; (iii) 49 or more but fewer than 77 days,
such rate will be the two-month LIBOR rate; (iv) 77 or more but fewer than
112 days, such rate will be the three-month LIBOR rate; (v) 112 or more but
fewer than 140 days, such rate will be the four-month LIBOR rate; (vi) 140
or more but fewer than 168 days, such rate will be the five-month LIBOR
rate; (vii) 168 or more but fewer than 189 days, such rate will be the
six-month LIBOR rate; (viii) 189 or more but fewer than 217 days, such rate
will be the seven-month LIBOR rate; (ix) 217 or more but fewer than 252
days, such rate will be the eight-month LIBOR rate; (x) 252 or more but
fewer than 287 days, such rate will be the nine-month LIBOR rate; (xi) 287
or more but fewer than 315 days, such rate will be the ten-month LIBOR rate;
(xii) 315 or more but fewer than 343 days, such rate will be the
eleven-month LIBOR rate; and (xiii) 343 or more but fewer than 365 days,
such rate will be the twelve-month LIBOR rate.
'Liquidation Preference' means $25,000 per share of the Series.
'London Business Day' means any day on which commercial banks are
generally open for business in London.
'Mandatory Redemption Date' has meaning set forth in Section 3(a)(iii)
of Part I of these Articles Supplementary.
'Mandatory Redemption Price' has the meaning set forth in Section
3(a)(iii) of Part I of these Articles Supplementary.
'Market Value' means the fair market value of an asset of the
Corporation as computed as follows: Securities listed on the New York Stock
Exchange at the last sale price reflected on the consolidated tape at the
close of the New York Stock Exchange on the business day as of which such
value is being determined provided that, if there has been no sale on such
day, the securities are valued at the closing bid prices on such day and
provided further that, if no bid prices are quoted on such day, then the
security is valued by such method as the Board of Directors will determine
in good faith to reflect its fair market value. Readily marketable
securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the
National Association of Securities Dealers Automated Quotations, Inc.
('NASDAQ') National List are valued in a like manner. Portfolio securities
traded on more than one securities exchange are valued at the last sale
price on the business day as of which such value is being determined as
reflected on the tape at the close of the exchange representing the
principal market for such securities. Readily marketable securities traded
in the over-the-counter market, including listed securities whose primary
market is believed by the Investment Manager to be over-the-counter, but
excluding securities admitted to trading on the NASDAQ National List, are
valued at the current bid prices as 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
B-20
be valued using the quotations the Board of Directors believes reflect most
closely the value of such securities.
'Maximum Rate,' for shares of the Series on any Auction Date for such
shares, will mean for any Rate Period, the greater of the Applicable
Percentage of the Reference Rate or the Applicable Spread plus the Reference
Rate. The Auction Agent will round each applicable Maximum Rate to the
nearest one-thousandth (0.001) of one percent per annum, with any such
number ending in five ten-thousandths of one percent being rounded upwards
to the nearest one-thousandth (0.001) of one percent.
'Moody's' means Moody's Investors Service, Inc. and its successors at
law.
'Moody's Discount Factor' means, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined as
follows. The Moody's Discount Factor for any Moody's Eligible Asset other
than the securities set forth below will be the percentage provided in
writing by Moody's.
(a) Preferred Stock and Common Stock of REITs, Other Real Estate
Companies and non-Real Estate Companies:
DISCOUNT FACTOR
(1)(2)(3)
---------
Common stock of REITs and other real estate companies 154%
Preferred stock of REITs
with Senior Implied Moody's (or S&P or Fitch)
rating: 154%
without Senior Implied Moody's (or S&P or Fitch)
rating: 208%
Preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P or Fitch)
rating: 208%
without Senior Implied Moody's (or S&P or Fitch)
rating: 250%
Preferred Securities of non-real estate companies
(4)(5):
The Moody's Discount Factor for non-real estate
preferred securities will be
(A) for taxable preferred securities issued by a
utility, industrial, financial issuer or other
non-real estate related issuers with Moody's or
equivalent S&P or Fitch ratings: Aaa 150%
Aa 155%
A 160%
Baa 165%
Ba 196%
B 216%
>B, NR 250%
(B) for DRD eligible preferred securities issued by
a utility, industrial, financial issuer, or
other non-real estate related issuers
(i) Investment grade 165%
(ii) non-investment grade 216%
(C) for auction rate preferred securities, 350%
---------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed 30%
of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
Assets.
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of a real estate issuer is
below $500 million.
(4) Applies to preferred securities which have a minimum issue size of $50
million.
(footnote continued on next page)
B-21
(footnote continued from previous page)
(5) Non-real estate eligible preferred securities will be issued by investment
grade companies having a senior unsecured debt rating that is Baa3 or higher
by Moody's or BBB- by S&P or Fitch and pay dividends in U.S. Dollars or
Euros. The market value of eligible non-cumulative preferred issues are
subject to standard preferred stock discount factors multiplied by a factor
of 1.10.
(b) Debt securities (1)(2)(3):
The percentage determined by reference to the rating on such asset with
reference to the remaining term to maturity of such asset, in accordance with
the table set forth below.
Terms of Maturity of Debt Security Aaa Aa A Baa Ba B Unrated(3)
TERMS OF MATURITY OF DEBT SECURITY(1) Aaa Aa A Baa Ba B UNRATED(2,3)
------------------------------------- --- -- - --- -- - ------------
1 year or less 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than 2 years) 120% 123% 127% 131% 153% 168% 250%
4 years or less (but longer than 3 years) 126% 129% 133% 138% 161% 176% 250%
5 years or less (but longer than 4 years) 132% 135% 139% 144% 168% 185% 250%
7 years or less (but longer than 5 years) 139% 143% 147% 152% 179% 197% 250%
10 years or less (but longer than 7
years) 145% 150% 155% 160% 189% 208% 250%
15 years or less (but longer than 10
years) 150% 155% 160% 165% 196% 216% 250%
20 years or less (but longer than 15
years) 150% 155% 160% 165% 196% 228% 250%
30 years or less (but longer than 20
years) 150% 155% 160% 165% 196% 229% 250%
Greater than 30 years 165% 173% 181% 189% 205% 240% 250%
---------
(1) The Moody's Discount Factors for debt securities will also be applied to any
interest rate swap or cap, in which case the rating of the counterparty will
determine the appropriate rating category.
(2) Corporate debt securities if (A) securities that do not pay interest in U.S.
dollars, the Corporation will contact Moody's to obtain the applicable
currency conversion rates; (B) for debt securities rated B and below taken
together with 'Unrated' securities, no more than 10% of the original amount
of such issue may constitute Moody's Eligible Assets; (C) such securities
have been registered under the Securities Act or are restricted as to resale
under federal securities laws but are eligible for resale pursuant to Rule
144A under the Securities Act as determined by the Corporation's investment
manager or portfolio manager acting pursuant to procedures approved by the
Board of Directors, except that such securities that are not subject to U.S.
federal securities laws will be considered Moody's Eligible Assets if they
are publicly traded; and (D) such securities are not subject to extended
settlement.
(3) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Corporation's assets can be
derived from other sources as well as combined with a number of sources as
presented by the Corporation to Moody's, securities rated below B by Moody's
and unrated securities, which are securities rated by neither Moody's, S&P
nor Fitch, are limited to 10% of Moody's Eligible Assets. If a corporate
debt security is unrated by Moody's, S&P or Fitch, the Corporation will use
the percentage set forth under 'Below B and Unrated' in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's at face value.
However, adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate a
Moody's rating equivalent.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY DISCOUNT FACTOR U.S. TREASURY STRIPS
-------------------------- --------------- --------------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 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.
B-22
The Moody's Discount Factor applied to Moody's Eligible Assets that are
short term money instruments (as defined by Moody's) will be (i) 100%, so long
as such portfolio securities mature or have a demand feature at par exercisable
within 49 days of the relevant valuation date, (ii) 102%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within 49 days of the relevant valuation date, and (iii) 125%, if such
securities are not rated by Moody's, so long as such portfolio securities are
rated at least A- 1 by S&P and mature or have a demand feature at par
exercisable within 49 days of the relevant valuation date. A Moody's Discount
Factor of 100% will be applied to cash.
(e) Rule 144A Debt or Preferred Securities:
The Moody's Discount Factor applied to Rule 144A debt or preferred
securities will be
(i) 130% of the Moody's Discount Factor, which would apply if the securities
have registration rights under the Securities Act after 365 days, and
(ii) 120% of the Moody's Discount Factor if the securities have registration
rights within 365 days of calculation of the Basic Maintenance Amount.
(f) Convertible Securities:
MOODY'S RATING CATEGORY(1)
INDUSTRY CATEGORY Aaa Aa A Baa Ba B NR
----------------- --- -- - --- -- - --
Utility 162% 167% 172% 188% 195% 199% 300%
Industrial 256% 261% 266% 282% 290% 293% 300%
Financial 233% 238% 243% 259% 265% 270% 300%
Transportation 250% 265% 275% 285% 290% 295% 300%
---------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the Corporation's assets can be
derived from other sources as well as combined with a number of sources as
presented by the Corporation to Moody's, securities rated below B by Moody's
and unrated securities, which are securities rated by neither Moody's, S&P
nor Fitch, are limited to 10% of Moody's Eligible Assets. If a corporate
debt security is unrated by Moody's, S&P or Fitch, the Corporation will use
the percentage set forth under 'Below B and Unrated' in this table. Ratings
assigned by S&P or Fitch are generally accepted by Moody's at face value.
However, adjustments to face value may be made to particular categories of
credits for which the S&P and/or Fitch rating does not seem to approximate a
Moody's rating equivalent.
'Moody's Eligible Assets' means the following:
(i) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies, and Preferred Stock and debt securities of non
real estate companies:
(A) which comprise at least 7 of the total number of Moody's Real
Estate Industry/Property Sector Classifications ('Moody's Sector
Classifications') and Moody's Industry Classifications, of which no more
than 35% may constitute a single such classification;
(B) which in the aggregate constitute at least 40 separate issues of
common stock, preferred stock, and debt securities issued by at least 30
issuers;
(C) issued by a single issuer which in the aggregate constitute no
more than 6.0% of the Market Value of Moody's Eligible Assets, and
(D) issued by a single issuer which, with respect to 50% of the
Market Value of Moody's Eligible Assets, constitute in the aggregate no
more than 5% of Market Value of Moody's Eligible Assets;
(ii) Unrated debt securities issued by an issuer which:
(A) has not filed for bankruptcy within the past three years
B-23
(B) is current on all principal and interest on its fixed income
obligations;
(C) is current on all preferred stock dividends;
(D) possesses a current, unqualified auditor's report without
qualified, explanatory language; and (E) in the aggregate taken together
with securities rated Ba1 by Moody's, or comparable by S&P or Fitch, and
below do not exceed 10% of the discounted Moody's Eligible Assets;
(iii) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if
(A) the counterparty to the swap transaction has a short-term rating
of not less than P-1 by Moody's or A-1 by S&P or, if the counterparty
does not have a short-term rating, the counterparty's senior unsecured
long-term debt rating is A3 or higher by Moody's or A- or higher by S&P
or Fitch;
(B) the original aggregate notional amount of the interest rate swap
transaction or transactions is not to be greater than the liquidation
preference of the Series originally issued;
(C) the interest rate swap transaction will be marked-to-market
daily;
(D) an interest rate swap that is in-the-money is discounted at the
counterparty's corporate debt rating for the maturity of the swap for
purposes of calculating Moody's Eligible Assets; and
(E) an interest rate swap that is out-of-the money includes that
negative mark-to-market amount as indebtedness for purposes of
calculating the Preferred Shares Basic Maintenance amount.
(iv) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(v) Short-Term Money Market Instruments so long as
(A) such securities are rated at least P-1,
(B) in the case of demand deposits, time deposits and overnight
funds, the supporting entity is rated at least A2, or
(C) in all other cases, the supporting entity (1) is rated A2 and the
security matures within one month, (2) is rated A1 and the security
matures within three months or (3) is rated at least Aa3 and the security
matures within six months; provided, however, that for purposes of this
definition, such instruments (other than commercial paper rated by S&P
and not rated by Moody's) need not meet any otherwise applicable Moody's
rating criteria.
(vi) Cash including, for this purpose, interest and dividends due on
assets rated
(A) Baa3 or higher by Moody's if the payment date is within five
Business Days of the Valuation Date,
(B) A2 or higher if the payment date is within thirty days of the
Valuation Date, and
(C) A1 or higher if the payment date is within 49 days of the
relevant valuation date and receivables for Moody's Eligible Assets sold
if the receivable is due within five Business Days of the Valuation Date,
and if the trades which generated such receivables are (1) settled
through clearing house firms with respect to which the Corporation has
received prior written authorization from Moody's or (2) with
counterparties having a Moody's long-term debt rating of at least Baa3 or
(3) with counterparties having a Moody's Short-Term Money Market
Instrument rating of at least P-1.
'Moody's Industry Classifications' means, for the purposes of
determining Moody's Eligible Assets, each of the following Industry
Classifications:
1. Aerospace & Defense
2. Automobile
B-24
3. Banking
4. Beverage, Food & Tobacco
5. Buildings & Real Estate
6. Chemicals, Plastics & Rubber
7. Containers, Packaging & Glass
8. Personal & Nondurable Consumer Projects (Manufacturing Only)
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals & Minerals
12. Ecological
13. Electronics
14. Finance
15. Farming & Agriculture
16. Grocery
17. Healthcare, Education & Childcare
18. Home & Office Furnishings, Housewares & Durable Consumer Products
19. Hotels, Motels, Inns and Gaming
20. Insurance
21. Leisure, Amusement, Entertainment
22. Machinery (Nonagriculture, Nonconstruction, Nonelectronic)
23. Mining, Steel, Iron & Nonprecious Metals
24. Oil & Gas
25. Personal, Food & Misc. Services
26. Printing & Publishing
27. Cargo Transport
28. Retail Stores
29. Telecommunications
30. Textiles & Leather
31. Personal Transportation
32. Utilities
33. Broadcasting & Entertainment
'Moody's Real Estate Industry/Property Sector Classification' means, for
the purposes of determining Moody's Eligible Assets, each of the following
Industry Classifications (as defined by the National Association of Real
Estate Investment Trusts, 'NAREIT'):
(i) Office
(ii) Industrial
(iii) Mixed
(iv) Shopping Centers
(v) Regional Malls
(vi) Free Standing
(vii) Apartments
(viii) Manufactured Homes
(ix) Diversified
(x) Lodging/Resorts
(xi) Health Care
(xii) Home Financing
(xiii) Commercial Financing
(xiv) Self Storage
(xv) Specialty
B-25
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment in
consultation with the independent auditor and/or Moody's, as necessary.
'1933 Act' means the Securities Act of 1933, as amended.
'1940 Act' means the Investment Company Act of 1940, as amended.
'1940 Act Preferred Shares Asset Coverage' means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least
200% with respect to all outstanding senior securities of the Corporation
which are stock, including all Outstanding AMPS (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its common
shares), determined on the basis of values calculated as of a time within 48
hours (not including Sundays or holidays) next preceding the time of such
determination.
'1940 Act Preferred Shares Asset Coverage Certificate' means the
certificate required to be delivered by the Corporation pursuant to Section
12(f) 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.
'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 'Person' means and includes an individual, a partnership,
the corporation, a trust, a corporation, a limited liability company, an
unincorporated association, a joint venture or other entity or a government
or any agency or political subdivision thereof.
'Potential Beneficial Owner or Holder' has the meaning set forth in
Section 1 of Part II of these Articles Supplementary.
B-26
'Preferred Shares Basic Maintenance Amount' means as of any Valuation
Date as the dollar amount equal to the sum of:
(i)(A) the product of the number of shares of the Series outstanding
on such date multiplied by $25,000 (plus the product of the number of
shares of any other series of preferred shares outstanding on such date
multiplied by the liquidation preference of such shares), plus any
redemption premium applicable to the shares of the Series (or other
preferred shares) then subject to redemption; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or
not earned or declared) to (but not including) the first Dividend Payment
Date for the shares of the Series outstanding that follows such Valuation
Date (plus the aggregate amount of dividends, whether or not earned or
declared, that will have accumulated in respect of other outstanding
preferred shares to, but not including, the first respective dividend
payment date for such other shares that follows such Valuation Date); (C)
the aggregate amount of dividends that would accumulate on shares of the
Series outstanding from such first Dividend Payment 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); (D) the amount of anticipated expenses of the
Corporation for the 90 days subsequent to such Valuation Date; (E) the
amount of any indebtedness or obligations of the Corporation senior in
right of payment to the Series; and (F) any current liabilities as of
such Valuation Date, to the extent not reflected in any of (i)(A) through
(i)(F) less
(ii) the value (i.e., for purposes of current Moody's guidelines, the
face value of cash and short-term securities that are the direct
obligation of the U.S. government, provided in each case that such
securities mature on or prior to the date upon which any of
(i)(A) through (i)(F) become payable, otherwise the Moody's Discounted
Value) (i.e., for the purposes of the current S&P guidelines, the face
value of cash, and short term securities that are the direct obligations
of the U.S. government, provided in each case that such securities mature
on or prior to the date upon which any of (i)(A) through (i)(F) becomes
payable, otherwise the S&P Discounted Value) of any of the Corporation's
assets irrevocably deposited by the Corporation for the payment of any of
(i)(A) through (i)(F).
'Preferred Shares Basic Maintenance Amount Test' means a test which is met
if the lower of the aggregate Discounted Values of the Moody's Eligible Assets
or the S&P Eligible Assets meets or exceeds the Preferred Shares Basic
Maintenance Amount. The Corporation will notify Moody's if coverage declines
below 1.30X the Preferred Shares Basic Maintenance Amount.
'Preferred Shares Basic Maintenance Certificate' has the meaning set forth
in Section 12(d) of Part I of these Articles Supplementary.
'Pricing Service' means any of the following:
Bloomberg
Bridge Global Pricing
Chanin Capital Partners
Data Resources Inc. (a McGraw-Hill company)
FT Interactive Data
J.J. Kenny Drake
JP Morgan Pricing Services
Loan Pricing Corporation (owned by Reuters)
Meenan, Mcdevitt & Co., Inc
Reuters
Securities Evaluation Services
Standard & Poor's Evaluation Services
Thomson Financial Securities Management
B-27
Telerate
Telekurs
Trepp Pricing Service
Van Kampen Merritt Investment Advisory Corp Pricing Service
CIBC World Markets
'Rating Agency' means Moody's and S&P as long as such rating 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 Banks' means four major banks in the London interbank market
selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its affiliates
or successors or such other party as the Corporation may from time to time
appoint.
'Reference Rate' means, with respect to the determination of the Default
Rate, the applicable LIBOR Rate (for a Dividend Period of fewer than 365 days)
or the applicable Treasury Index Rate (for a Dividend Period of 365 days or
more).
'Registrar' means The Bank of New York, unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Corporation to serve as transfer agent.
'REIT' or real estate investment trust, means a company dedicated to owning,
and usually operating, income producing real estate, or to financing real
estate.
'S&P' means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors at law.
'S&P Discount Factor' means, with respect to an S&P Eligible Asset specified
below, the following applicable number, provided that the S&P Exposure Period is
25 Business Days or less:
(a) Types of S&P Eligible Assets
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Common Stock of REITs and other real estate companies 162%
DRD Eligible Preferred Stock with a senior or preferred
stock rating of at least BBB- 245%
REIT and Non-DRD eligible Preferred Stock with a senior or
preferred stock rating of at least BBB- 164%
DRD Eligible Preferred Stock with a senior or preferred
stock rating below BBB- 250%
REIT and non-DRD Eligible Preferred Stock with a senior or
preferred stock rating below BBB- 169%
Un-rated DRD Eligible Preferred Stock 255%
Un-rated Non-DRD Eligible and un-rated REIT Preferred Stock 174%
Convertible bonds rated AAA to AAA- 165%
Convertible bonds rated AA+ to AA- 170%
Convertible bonds rated A+ to A- 175%
Convertible bonds rated BBB+ to BBB- 180%
Convertible bonds rated BB+ to BB- 185%
Convertible bonds rated B+ to B 190%
(table continued on next page)
B-28
(table continued from previous page)
DISCOUNT FACTOR FOR
TYPE OF S&P ELIGIBLE ASSET AAA RATING
-------------------------- ----------
Convertible bonds rated B- 195%
Convertible bonds rated CCC+ 205%
Convertible bonds rated CCC 220%
U.S. Short-Term Money Market Investments with maturities of
180 days or less 104%
U.S. Short-Term Money Market Investments with maturities of
between 181 and 360 days 113%
U.S. Government Obligations (52 week Treasury Bills) 102%
U.S. Government Obligations (Two-Year Treasury Notes) 104%
U.S. Government Obligations (Five-Year Treasury Notes) 110%
U.S. Government Obligations (Ten-Year Treasury Notes) 117%
U.S. Government Obligations (Thirty-Year Treasury Bonds) 130%
Agency Mortgage Collateral (Fixed 15-Year) 129%
Agency Mortgage Collateral (Fixed 30-Year) 132%
Agency Mortgage Collateral (ARM 1/1) 122%
Agency Mortgage Collateral (ARM 3/1) 123%
Agency Mortgage Collateral (ARM 5/1) 123%
Agency Mortgage Collateral (ARM 10/1) 123%
Mortgage Pass-Through Fixed (15 Year) 131%
Mortgage Pass-Through Fixed (30 Year) 134%
Debt securities of REIT's and other real estate
companies according to the following corporate bond
schedule
Corporate Bonds rated at least AAA 110%
Corporate Bonds rated at least AA+ 111%
Corporate Bonds rated at least AA 113%
Corporate Bonds rated at least AA- 115%
Corporate Bonds rated at least A+ 116%
Corporate Bonds rated at least A 117%
Corporate Bonds rated at least A- 118%
Corporate Bonds rated at least BBB+ 120%
Corporate Bonds rated at least BBB 122%
Corporate Bonds rated at least BBB- 124%
Corporate Bonds rated at least BB+ 129%
Corporate Bonds rated at least BB 135%
Corporate Bonds rated at least BB- 142%
Corporate Bonds rated at least B+ 156%
Corporate Bonds rated at least B 169%
Corporate Bonds rated at least B- 184%
Corporate Bonds rated at least CCC+ 202%
Corporate Bonds rated at least CCC 252%
Corporate Bonds rated at least CCC- 350%
Cash and Cash Equivalents 100%
(b) Interest rate swaps entered into according to International Swap Dealers
Association ('ISDA') standards if
B-29
(i) the counterparty to the swap transaction has a short-term rating of
A-1 or equivalent by S&P or, if the counterparty does not have a
short-term rating, the counterparty's senior unsecured long-term debt rating
is A-, or equivalent by S&P, or higher.
(ii) the original aggregate notional amount of the interest rate swap
transaction or transactions is not to be greater than the liquidation
preference of the Series.
(iii) The interest rate swap transaction will be marked-to-market weekly
by the swap counterparty.
(iv) If the Corporation fails to maintain an aggregate discounted value
at least equal to the basic maintenance amount on two consecutive valuation
dates then the agreement will terminate immediately.
(v) For the purpose of calculating the asset coverage test 90% of any
positive mark-to-market valuation of the Corporation's rights will be
eligible assets. 100% of any negative mark-to-market valuation of the
Corporation's rights will be included in the calculation of the Preferred
Shares Basic Maintenance Amount.
(vi) The Corporation must maintain liquid assets with a value at least
equal to the net amount of the excess, if any, of the Corporation's
obligations over its entitlement with respect to each swap. For caps/floors,
must maintain liquid assets with a value at least equal to the Corporation's
obligations with respect to such caps or floors.
(c) Cash and Cash Equivalents
(i) Cash and Cash Equivalents and demand deposits in an 'A- 1+' rated
institution are valued at 100%. 'A- 1+' rated commercial paper, with
maturities no greater than 30 days and held instead of cash until maturity,
is valued at 100%. Securities with next-day maturities invested in 'A- 1+'
rated institutions re considered cash equivalents and are valued at 100%.
Securities maturing in 181 to 360 calendar days are valued at 114.2%.
(ii) The S&P Discount Factor for shares of unrated Money Market Funds
affiliated with the Corporation used as 'sweep' vehicles will be 110%. Money
Market Funds rated 'AAAm' will be discounted at the appropriate level as
dictated by the exposure period. No S&P Discount Factor will be applied to
Money Market Funds rated AAAm by S&P with effective next day maturities.
'S&P Eligible Assets' will mean:
(A) Deposit Securities;
(B) U.S. Government Obligations and U.S. Government Agencies;
(C) Corporate Indebtedness. Evidences of indebtedness other than
Deposit Securities, U.S. Government Obligations and Municipal Obligations
that are not convertible into or exchangeable or exercisable for stock of
a corporation (except to the extent of ten percent (10%) in the case of a
share exchange or tender offer) ('Other Debt') and that satisfy all of
the following conditions:
(1) be no more than 10% of total assets may be below a S&P rating
of BBB-, or comparable Moody's or Fitch rating, or unrated;
(2) the remaining term to maturity of such Other Debt will not
exceed fifty (50) years;
(3) such Other Debt must provide for periodic interest payments
in cash over the life of the security;
(4) no more than 10% of the issuers of such evidences of
indebtedness do not file periodic financial statements with the U.S.
Securities and Exchange Commission;
(5) which, in the aggregate, have an average duration of not more
than 12 years.
(D) Convertible Corporate Indebtedness. Evidences of indebtedness
other than Deposit Securities, U.S. Government Obligations and Municipal
Obligations that are convertible
B-30
into or exchangeable or exercisable for stock of a corporation and that
satisfy all of the following conditions:
(1) such evidence of indebtedness is rated at least CCC by S&P;
and
(2) if such evidence of indebtedness is rated BBB or lower by
S&P, the market capitalization of the issuer of such evidence of
indebtedness is at least $100 million;
(E) Agency Mortgage Collateral. Certificates guaranteed by U.S.
Government Agencies (as defined below) (e.g., FNMA, GNMA and FHLMC) for
timely payment of interest and full and ultimate payment of principal.
Agency Mortgage Collateral also evidence undivided interests in pools of
level-payment, fixed, variable, or adjustable rate, fully amortizing
loans that are secured by first liens on one- to four-family residences
residential properties (or in the case of Plan B FHLMC certificates, five
or more units primarily designed for residential use) ('Agency Mortgage
Collateral'). Agency Mortgage Collateral the following conditions apply:
(1) For GNMA certificates backed by pools of graduated payment
mortgages, levels are 20 points above established levels;
(2) Qualifying 'large pool' FNMA mortgage-backed securities and
FHLMC participation certificates are acceptable as eligible
collateral. The eligible fixed-rate programs include FNMA MegaPools,
FNMA Majors, FHLMC Multilender Swaps, and FHLMC Giant certificates.
Eligible adjustable rate mortgage ('ARMs') programs include
nonconvertible FNMA ARM MegaPools and FHLMC weighted average coupon
ARM certificates. Eligible FHLMC Giant programs exclude interest-only
and principal only stripped securities;
(3) FNMA certificates backed by multifamily ARMs pegged to the
11th District Cost of Funds Index are acceptable as eligible
collateral at 5 points above established levels; and
(4) Multiclass REMICs issued by FNMA and FHLMC are acceptable as
eligible collateral at the collateral levels established for CMOs.
(F) Mortgage Pass-Through Certificates. Publicly issued instruments
maintaining at least a AA- ratings by S&P. Certificates evidence
proportional, undivided interests in pools of whole residential mortgage
loans. Pass-through certificates backed by pools of convertible ARMs are
acceptable as eligible collateral at 5 points above the levels
established for pass-through certificates backed by fixed or
non-convertible ARM pools.
(G) Preferred Stocks. Preferred stocks that satisfy all of the
following conditions:
1. The preferred stock issue has a senior rating from S&P, or the
preferred issue must be rated. In the case of Yankee preferred stock,
the issuer should have a S&P senior rating of at least 'BBB-', or
the preferred issue must be rated at least 'BBB-'.
2. The issuer -- or if the issuer is a special purpose
corporation, its parent -- is listed on either the New York Stock
Exchange, the American Stock Exchange or NASDAQ if the traded par
amount is less than $1,000. If the traded par amount is $1,000 or
more exchange listing is not required.
3. The collateral pays cash dividends denominated in U.S.
dollars.
4. Private placement 144A with registration rights are eligible
assets.
5. The minimum market capitalization of eligible issuers is
US$100 million.
Restrictions for floating-rate preferred stock:
1. Holdings must be limited to stock with a dividend period of
less than or equal to 49 days, except for a new issue, where the
first dividend period may be up to 64 days.
B-31
2. The floating-rate preferred stock may not have been subject to
a failed auction.
Restrictions for adjustable -- or auction-rate preferred stock:
1. The total fair market value of adjustable-rate preferred stock
held in the portfolio may not exceed 10% of eligible assets.
Concentration Limits:
2. Total issuer exposure in preferred stock of any one issuer is
limited to 10% of the fair market value of eligible assets.
3. Preferred stock rated below B- (including non-rated
preferred stock) and preferred stock with a market cap of less than
US$100 million are limited to no more than 15% of the fair market
value of the eligible assets.
4. Add 5 points to over-collateralization level for issuers with
a senior rating or preferred stock rating of less than BBB-.
5. Add 10 point to over-collateralization level of issuers with
no senior rating, preferred stock rating or dividend history.
(H) Common Stocks of REITs and Other Real Estate Companies. Common
stocks of REITs and Other Real Estate Companies that satisfy all of the
following conditions:
(1) such common stock (including the common stock of any
predecessor or constituent issuer) has been traded on a recognized
national securities exchange or quoted on the National Market System
(or any equivalent or successor thereto) of NASDAQ, but excluding
'144a' or 'pink sheet' stock not carried in daily newspaper
over-the-counter listings;
(2) the market capitalization of such issuer of common stock
exceeds $100 million;
(3) the issuer of such common stock is not an entity that is
treated as a partnership for federal income taxes;
(4) if such issuer is organized under the laws of any
jurisdiction other than the United States, any state thereof, any
possession or territory thereof or the District of Columbia, the
common stock of such issuer held by the Corporation is traded on a
recognized national securities exchange or quoted on the National
Market System of NASDAQ either directly or in the form of depository
receipts.
Escrow Bonds may comprise 100% of the Corporation's S&P Eligible Assets.
Bonds that are legally defeased and secured by direct U.S. government
obligations are not required to meet any minimum issuance size requirement.
Bonds that are economically defeased or secured by other U.S. agency paper must
meet the minimum issuance size requirement for the Trust described above. Bonds
initially rated or rerated as an escrow bond by another Rating Agency are
limited to 50% of the Corporation's S&P Eligible Assets, and carry one full
rating lower than the equivalent S&P rating for purposes of determining the
applicable discount factors. Bonds economically defeased and either initially
rated or rerated by S&P or another Rating Agency are assigned that same rating
level as its debt issuer, and will remain in its original industry category
unless it can be demonstrated that a legal defeasance has occurred.
With respect to the above, the Corporation portfolio must consist of no less
than 20 issues representing no less than 10 industries as determined by the S&P
Industry Classifications and S&P Real Estate Industry/Property sectors.
For purposes of determining the discount factors applicable to collateral
not rated by S&P, the collateral will carry an S&P rating one full rating level
lower than the equivalent S&P rating.
'S&P Exposure Period' will mean the sum of (i) that number of days from the
last Valuation Date on which the Corporation's Discounted Value of S&P Eligible
Assets were greater than the Preferred Shares Basic Maintenance Amount to the
Valuation Date on which the Corporation's
B-32
Discounted Value of S&P Eligible Assets failed to exceed the Preferred Shares
Basic Maintenance Amount, (ii) the maximum number of days following a Valuation
Date that the Corporation has under this Statement to cure any failure to
maintain a Discounted Value of S&P Eligible Assets at least equal to the
Preferred Shares Basic Maintenance Amount, and (iii) the maximum number of days
the Corporation has to effect a mandatory redemption under Section 3(a)(ii) of
Part I of these Articles Supplementary.
'S&P Industry Classifications' will mean, for the purposes of determining
S&P Eligible Assets, each of the following industry classifications (as defined
by the S&P global industry classification):
Aerospace & Defense
Air Freight and Logistics Airlines
Automobiles
Automobile Components
Beverages
Biotechnology
Building Products
Cable
Capital Markets
Computers & Peripherals
Commercial Banks
Commercial Services & Supplies
Communications Equipment
Construction & Engineering
Consumer Finance
Containing & Packaging
Distributors
Diversified Financial Services
Diversified Telecommunication Services
Electric Utilities
Electrical Equipment
Electronic Equipment & Instrument
Energy Equipment & Services
Food & Staples Retailing
Food Products
Gas Utilities
Healthcare Equipment & Supplies
Healthcare Providers & Services
Hotels, Restaurants & Leisure
Household Durables
Household Products
Industrial Conglomerates
Insurance
Internet & Catalog Retail
Internet software & Services
IT Services
Leisure Equipment & Products
Machinery
Marine
Media
Metals & Mining
Office Electronics
Oil & Gas
Packaging and Containers
Paper & Forest Products
Personal Products
B-33
Pharmaceuticals
Real Estate
Retail
Road & Rail
Software
Specialty Retail
Semiconducters and Semi Conducter Equipment
Textiles, Apparel and Luxury Goods
Thrift & Mortgage Finance
Tobacco
Trading Companies & Distributors
Transportation and Infrastructure
Transportation Utilities
Water Utilities
Wireless Telecommunication Services
'S&P Real Estate Industry/Property Sector Classification' means, for the
purposes of determining S&P Eligible Assets, each of the following Industry
Classifications (as defined by NAREIT):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
15. Specialty
The Corporation will use its discretion in determining which NAREIT Industry
Classification is applicable to a particular investment, and, when necessary
will consult with the independent auditor and/or S&P, as necessary.
'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(a)(ii) of Part II of
these Articles Supplementary.
'Short-Term Money Market Instrument' means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Corporation, the remaining term to maturity thereof is not in excess of 180
days:
(i) commercial paper rated A-1 if such commercial paper matures in 30
days or A-1+ if such commercial paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the 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);
B-34
(iii) overnight funds;
(iv) U.S. Government Securities; and
(v) Rule 2a-7 eligible money market funds.
'Special Dividend Period' means a Dividend Period that is not a Standard
Dividend Period.
'Specific Redemption Provisions' means, with respect to any Special Dividend
Period of more than one year, either, or any combination of (i) a period (a
'Non-Call Period') determined by the Board of Directors after consultation with
the Broker-Dealers, during which the shares subject to such Special Dividend
Period are not subject to redemption at the option of the Corporation and (ii) a
period (a 'Premium Call Period'), consisting of a number of whole years as
determined by the Board of Directors after consultation with the Broker-Dealers,
during each year of which the shares subject to such Special Dividend Period
will be redeemable at the Corporation's option at a price per share equal to the
Liquidation Preference plus accumulated but unpaid dividends (whether or not
earned or declared) plus a premium expressed as a percentage or percentages of
the Liquidation Preference or expressed as a formula using specified variables
as determined by the Board of Directors after consultation with the
Broker-Dealers.
'Standard Dividend Period' means a Dividend Period of 28 days unless the day
after such 28th 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 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
B-35
contained in this Part I or Part II hereof, as the case may be, unless
specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Certain Definitions. As used in Part II of these Articles Supplementary,
the following terms will have the following meanings, unless the context
otherwise requires and all section references below are to Part II of these
Articles Supplementary except as otherwise indicated: Capitalized terms not
defined in Section 1 of Part II of these Articles Supplementary will have the
respective meanings specified in Part I of these Articles Supplementary.
'Agent Member' means a member of or participant in the Securities
Depository that will act on behalf of existing or potential holders of
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 AMPS or (b) any other person who may be interested
in acquiring AMPS and who has signed a Master Purchaser's Letter or whose
shares will be listed under such person's Broker-Dealer's name on the
records of the Auction Agent which Broker-Dealer will have executed a Master
Purchaser's Letter.
'Sell Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Submitted Bid Order' has the meaning set forth in Section 4(a) of Part
II of these Articles Supplementary.
'Submitted Hold Order' has the meaning set forth in Section 4(a) of Part
II of these Articles Supplementary.
'Submitted Order' has the meaning set forth in Section 4(a) of Part II
of these Articles Supplementary.
'Submitted Sell Order' has the meaning set forth in Section 4(a) of Part
II of these Articles Supplementary.
'Sufficient Clearing Orders' means that all the 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
B-36
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, 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 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
B-37
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 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;
(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-38
(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
(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.
B-39
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
such 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 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
B-40
(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 90% of the reference
rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders will continue to hold the 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 such series will be accepted
and, subject to the provisions of paragraphs (d) and (e) of this Section 5,
Submitted Bids with respect to shares of 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 such series obtained by multiplying the number of 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) 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:
B-41
(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, 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 such
series that have been accepted in whole or in part will constitute good delivery
to such Potential Holders and Potential Beneficial Owners.
B-42
(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.
7. Force Majeure.
(a) Notwithstanding anything else set forth herein, if an Auction Date is
not a Business Day because the New York Stock Exchange is closed for business
for more than three consecutive Business Days due to an act of God, natural
disaster, act of war, civil or military disturbance, act of terrorism, sabotage,
riots or a loss or malfunction of utilities or communications services or the
Auction Agent is not able to conduct an Auction in accordance with the Auction
Procedures for any reason, then the Applicable Rate for the next Dividend Period
will be the Applicable Rate determined on the previous Auction Date, provided
that, if the New York Stock Exchange is closed for such reason for three or less
than three consecutive Business Days, then the Applicable Rate for the next
Dividend Period will be the Applicable Rate determined by auction on the first
Business Day following such Auction Date.
(b) Notwithstanding anything else set forth herein, if a Dividend Payment
Date is not a Business Day because the New York Stock Exchange is closed for
business for more than three consecutive Business Days due to an act of God,
natural disaster, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications services
or the dividend payable on such date can not be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend Period will be
the next Business Day on which the Corporation and its paying agent, if any,
are able to cause the dividend to be paid using their reasonable best
efforts;
(ii) the affected Dividend Period will end on the day it would have
ended had such event not occurred and the Dividend Payment Date had remained
the scheduled date; and
(iii) the next Dividend Period will begin and end on the dates on which
it would have begun and ended had such event not occurred and the Dividend
Payment Date remained the scheduled date.
[Remainder of page left blank]
B-43
IN WITNESS WHEREOF, COHEN & STEERS REIT AND PREFERRED INCOME FUND, INC. has
caused these presents to be signed in its name and on its behalf by its Vice
President and witnessed by its Assistant Secretary as of this 8th day of
December, 2003.
WITNESS:
By:
..................................
Name: Lawrence B. Stoller
Title: Assistant Secretary
COHEN & STEERS REIT AND PREFERRED
INCOME FUND, INC.
By:
..................................
Name: Adam M. Derechin
Title: Vice President
THE UNDERSIGNED, Vice President of the COHEN & STEERS REIT AND PREFERRED
INCOME FUND, INC., who executed on behalf of the Corporation the foregoing
Articles Supplementary hereby acknowledges the foregoing Articles Supplementary
to be the corporate act of the Corporation and hereby certifies to the best of
his knowledge, information, and belief that the matters and facts set forth
herein with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
.....................................
Name: Adam M. Derechin
Title: Vice President
B-44
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as......................'r'
The service mark symbol shall be expressed as..............................'sm'
Characters normally expressed as superscript shall be preceded by..........'pp'