Filed Pursuant to Rule 497(h)
File No. 333-102009
PROSPECTUS
[LOGO] AEW
$28,000,000
AEW Real Estate Income Fund
Auction Market Preferred Shares ("AMPS")
1,120 Shares, Series M
Liquidation Preference $25,000 per Share
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AEW Real Estate Income Fund (the "Fund") is a recently organized,
non-diversified, closed-end management investment company.
. The Fund's primary investment objective is high current income; and
. The Fund's secondary investment objective is capital appreciation.
The Offering. The Fund is offering 1,120 Series M Auction Market
Preferred Shares ("AMPS"). The AMPS will not be listed on any exchange.
Generally, investors may only buy and sell the AMPS through an order placed at
an auction with or through a broker-dealer that has entered into an agreement
with the auction agent or in a secondary market that certain broker-dealers may
maintain. These broker-dealers are not required to maintain a market in the
AMPS, and a secondary market, if one develops, may not provide investors with
liquidity.
Portfolio Contents. Under normal market conditions, the Fund will invest
at least 90% of its total assets in income-producing common shares, preferred
shares, convertible preferred shares and debt securities issued by Real Estate
Companies (companies, including real estate investment trusts ("REITs"), that
generally derive at least 50% of their revenue from the ownership,
construction, financing, management or sale of commercial, industrial or
residential real estate, or have at least 50% of their assets invested in such
real estate). The Fund will, under normal market conditions, invest at least
80% of its total assets in income-producing equity securities issued by REITs.
The Fund may invest in non-investment grade fixed income securities, such as
non-investment grade debt securities (commonly known as "junk bonds") and
non-investment grade preferred and convertible preferred shares, although the
Fund will not invest in a non-investment grade fixed income security if, as a
result of such investment, more than 25% of the Fund's total assets would be
invested in such securities. There can be no assurance that the Fund will
achieve its investment objectives. For more information on the Fund's
investment strategies, see "Investment Objectives and Policies" and "Principal
Risks of the Fund."
Investing in the AMPS involves risks that are described in the "Principal
Risks of the Fund" and "Additional Risk Considerations" beginning on page 29 of
this prospectus. Certain of these risks are summarized in "Prospectus
Summary--Principal Risks of the Fund" and "Prospectus Summary--Additional Risk
Considerations" beginning on page 9 of the prospectus. The minimum purchase
amount of the AMPS is $25,000.
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Per Share Total
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Public offering price....................... $25,000 $28,000,000
Sales load.................................. $250 $280,000
Proceeds, before expenses, to the Fund /(1)/ $24,750 $27,720,000
/(1)/ Not including offering expenses payable by the Fund estimated to be
$284,700, or $254.20 per share.
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 if
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
underwriters expect to deliver the AMPS, in book-entry form, through the
facilities of The Depository Trust Company on or about February 10, 2003.
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Merrill Lynch & Co. Prudential Securities
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The date of this prospectus is February 5, 2003.
(continued from previous page)
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 February 5, 2003 (the "SAI"), containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference in its entirety into
this prospectus. You can review the table of contents of the SAI on page 61 of
this prospectus. You may request a free copy of the SAI by calling (800)
862-4863 or by writing to the Fund. You may also obtain the SAI and other
information regarding the Fund on the SEC's web site (http://www.sec.gov).
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
dividend rate for the initial dividend period will be 1.35%. The initial
dividend period for the AMPS is from the date of issuance through February 24,
2003. For subsequent dividend periods, the AMPS will pay dividends based on a
rate generally set at auctions held every seven days. After the initial rate
period described in this prospectus, investors may generally only buy or sell
AMPS through an order placed at an auction with or through a broker-dealer in
accordance with the procedures specified in this prospectus. Prospective
purchasers should carefully review the auction procedures described in this
prospectus, and should note:
. a buy order (called a "bid") or sell order is a commitment to buy or
sell AMPS based on the results of an auction;
. purchases and sales will be settled on the next business day after
the auction; and
. ownership of the AMPS will be maintained in book-entry form by or
through The Depository Trust Company (or any successor securities
depository).
The AMPS, which have no history of public trading, are not listed on an
exchange. Broker-dealers may maintain a secondary trading market in the AMPS
outside of the auctions; however, they have no obligation to do so, and there
can be no assurance that a secondary market for the AMPS will develop or, if it
does develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers, and the
trading price will be subject to variables to be determined at the time of the
trade by such broker dealers). A general increase in the level of interest
rates may have an adverse effect on the secondary market price of the AMPS, and
an investor that sells AMPS between auctions may receive a price per share of
less than $25,000.
The AMPS will be senior to the Fund's outstanding common shares of
beneficial interest, par value $0.00001 per share ("Common Shares"), which are
traded on the American Stock Exchange under the symbol "RIF." The AMPS have a
liquidation preference of $25,000 per share, plus any accumulated, unpaid
dividends. The AMPS also have priority over the Common Shares as to
distribution of assets. See "Description of AMPS." The Fund may redeem AMPS as
described under "Description of AMPS--Redemption." It is a condition of closing
this offering that the AMPS be offered with a rating of "Aaa" from Moody's
Investors Service, Inc. ("Moody's") and of "AAA" from Fitch Ratings ("Fitch").
The AMPS do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depositary institution,
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
2
TABLE OF CONTENTS
Page
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Prospectus Summary.......................................... 4
Financial Highlights (Unaudited)............................ 21
The Fund.................................................... 22
Use of Proceeds............................................. 22
Capitalization.............................................. 22
Portfolio Composition....................................... 22
Investment Objectives and Policies.......................... 23
Interest Rate Transactions.................................. 28
Principal Risks of the Fund................................. 29
Additional Risk Considerations.............................. 38
Management of the Fund...................................... 39
Description of AMPS......................................... 41
The Auction................................................. 48
Net Asset Value............................................. 52
Description of Capital Structure............................ 53
Closed-End Structure........................................ 54
Possible Conversion to Open-End Status...................... 55
Repurchase of Shares........................................ 55
Tax Matters................................................. 55
Certain Provisions in the Declaration of Trust.............. 57
Underwriting................................................ 59
Custodian, Auction Agent and Transfer Agent................. 60
Legal Matters............................................... 60
Available Information....................................... 60
Table of Contents of the Statement of Additional Information 61
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You should rely only on the information contained or incorporated by
reference in this prospectus. The Fund has not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. The Fund is not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information in this prospectus is
accurate only as of the date of this prospectus. The Fund's business, financial
condition and prospects may have changed since that date.
3
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the
information that you should consider before investing in the Fund's AMPS. You
should review the more detailed information contained in this prospectus and in
the SAI, especially the information set forth under the headings "Principal
Risks of the Fund" and "Additional Risk Considerations."
The Fund.................. AEW Real Estate Income Fund (the "Fund") is a
recently organized, non-diversified, closed-end
management investment company. The Fund commenced
operations on November 26, 2002 in connection with
an initial public offering of 3,750,000 Common
Shares. As of January 15, 2003, the Fund had
3,832,000 Common Shares outstanding and managed
assets of approximately $54,938,000. The Fund's
Common Shares are traded on the American Stock
Exchange under the symbol "RIF." The Fund's
principal office is located at 399 Boylston
Street, Boston, Massachusetts 02116, and its
telephone number is (800) 862-4863. See "The Fund."
The Offering.............. The Fund is offering 1,120 Series M AMPS, $0.00001
par value, 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 being offered by 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 "Description of
AMPS--Dividends and Rate Periods," the dividend
period for the AMPS will be seven days. The
auction agent will determine the dividend rate for
a particular rate 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 will generally buy or sell AMPS in an
auction by submitting orders to broker-dealers
that have entered into an agreement with the
auction agent.
Generally, investors in AMPS will not receive
certificates representing ownership of their
shares. The securities depository (The Depository
Trust Company or any successor) or its nominee for
the account of the investor's broker-dealer will
maintain record ownership of AMPS in book-entry
form. An investor's broker-dealer, in turn, will
maintain records of that investor's beneficial
ownership of AMPS.
Investment Manager, Administrator
and Sub-Administrator..... AEW Management and Advisors, L.P. is the Fund's
investment manager (the "Investment Manager"). The
Investment Manager is a
4
real estate investment advisory firm that provides
investment management and related services to
institutional and retail investors. Together with
its affiliates operating under the AEW name, the
Investment Manager managed approximately $6.7
billion of client capital as of December 31, 2002.
The Investment Manager is a subsidiary of CDC IXIS
Asset Management North America, L.P., which,
together with its subsidiaries and affiliates in
the U.S., Europe and Asia, managed approximately
$312.8 billion in assets for institutions and
individuals as of December 31, 2002. An affiliate
of the Investment Manager, CDC IXIS Asset
Management Services, Inc. ("CDC IXIS Services"),
has responsibility for providing or procuring
administrative services for the Fund and assisting
the Fund with operational needs pursuant to an
Administrative Services Agreement. As permitted by
the Administrative Services Agreement, CDC IXIS
Services has entered into an agreement with
Investors Bank & Trust Company to perform certain
administrative functions subject to the
supervision of CDC IXIS Services (the
"Sub-Administration Agreement"). See "Management
of the Fund--Administrative Services and
Sub-Administration Agreements."
Fees and Expenses......... The Fund will pay the Investment Manager a monthly
fee computed at the annual rate of 0.80% of
average daily managed assets (which include the
liquidation preference of the AMPS and the
principal amount of any borrowings used for
leverage). The Investment Manager has
contractually agreed to waive a portion of its
investment management fees in the amount of 0.25%
of average daily managed assets for the first five
years of the Fund's operations (through November
29, 2007), and in declining amounts for each of
the four years thereafter (through November 29,
2011). See "Management of the Fund--Investment
Management Agreement."
Under the Administrative Services Agreement, the
Fund pays CDC IXIS Services a monthly
administration fee computed on the basis of the
average daily managed assets of the Fund at an
annual rate equal to 0.06% of the first $300
million in assets and 0.0575% of assets in excess
of $300 million, with a minimum annual fee of
$150,000. Under the Sub-Administration Agreement,
CDC IXIS Services (and not the Fund) pays
Investors Bank & Trust Company, the Fund's
sub-administrator, a monthly fee computed on the
basis of the managed assets of the Fund at an
annual rate equal to 0.015% of the first $300
million in assets and 0.012% thereafter. See
"Management of the Fund--Administrative Services
and Sub-Administration Agreements."
Investment Objectives and
Policies.................. The Fund's primary investment objective is high
current income. Capital appreciation is a
secondary investment objective. There can be no
assurance that the Fund's investment objectives
will be achieved. The Fund's investment objectives
and certain investment policies are considered
fundamental and may not be changed without
shareholder approval. See "Investment Objectives
and Policies."
5
Under normal market conditions, the Fund will
invest at least 90% of its total assets in
income-producing common shares, preferred shares,
convertible preferred shares and debt securities
issued by Real Estate Companies, including real
estate investment trusts, or "REITs." A "Real
Estate Company" is a company that generally
derives at least 50% of its revenue from the
ownership, construction, financing, management or
sale of commercial, industrial or residential real
estate (or has at least 50% of its assets invested
in such real estate). As part of this policy, the
Fund may also invest in rights or warrants to
purchase income-producing common and preferred
shares of Real Estate Companies. Under normal
market conditions, the Investment Manager expects
to invest approximately 60% to 80% of the Fund's
total assets in common shares of Real Estate
Companies and approximately 20% to 40% of its
total assets in preferred shares, including
convertible preferred shares, issued by Real
Estate Companies. Under normal market conditions,
at least 80% of the Fund's total assets will be
invested in income-producing equity securities
issued by REITs. A significant portion of the
equity securities of the Real Estate Companies in
which the Fund invests are expected to trade on a
national securities exchange or in the
over-the-counter-market. A REIT is a Real Estate
Company that pools investors' funds for investment
primarily in income-producing real estate or in
real estate-related loans (such as mortgages) or
other interests. REITs are generally not taxed on
income distributed to shareholders provided they
distribute to their shareholders substantially all
of their income and otherwise comply with the
requirements of the Internal Revenue Code of 1986,
as amended (the "Code"). As a result, REITs
generally pay relatively high dividends (as
compared to other types of companies). The Fund
intends to use these REIT dividends in an effort
to meet its primary objective of high current
income. The Fund will primarily invest in Equity
REITs, which invest the majority of their assets
directly in real property and derive their income
primarily from rents. The Fund may invest up to
20% of its total assets in U.S. Government
obligations and debt securities, including
convertible debt securities, issued by Real Estate
Companies. The preferred shares, convertible
preferred shares and debt securities in which the
Fund may invest are sometimes collectively
referred to in this prospectus as "Fixed Income
Securities." The Fund may invest in Fixed Income
Securities that are below investment grade
quality. A Fixed Income Security will be
considered to be investment grade if, at the time
of investment, such security has a rating of "BBB"
or higher by Fitch or Standard & Poor's Ratings
Services ("S&P") or "Baa" or higher by Moody's or
an equivalent rating by another nationally
recognized statistical rating agency or, if
unrated, is judged to be of comparable quality by
the Investment Manager. The Fund will not invest
in a non-investment grade Fixed Income Security
if, as a result of such investment, more than 25%
of the Fund's total assets would be invested in
non-investment grade Fixed Income Securities. The
Fund may invest up to 10% of its total assets in
securities of non-U.S. issuers located in
countries that are members of the Organisation For
Economic Co-operation and
6
Development. The Fund may invest in securities
that are illiquid so long as no more than 10% of
the total assets of the Fund (taken at market
value at the time of investment) would be invested
in such securities. The Fund will not invest more
than 15% of its total assets (taken at market
value at the time of investment) in the securities
of any one issuer other than the U.S. Government.
The Fund may invest in interest rate swap or
interest rate cap transactions in order to reduce
the interest rate risk inherent in the Fund's
underlying investments and capital structure. See
"Interest Rate Transactions." The Fund may also
purchase or sell futures or options on futures to
hedge interest rate risks. See "Investment
Objectives and Policies" and "Principal Risks of
the Fund."
In anticipation of or in response to adverse
market conditions, for cash management purposes,
or for defensive purposes, the Fund may
temporarily hold all or a portion of its assets in
cash, money market instruments, or bonds or other
debt securities. The Fund would be unable to
achieve its investment objectives if a substantial
portion of its assets consisted of such
instruments.
Leverage.................. The Fund expects to utilize financial leverage on
an ongoing basis for investment purposes. The Fund
anticipates that, immediately after the completion
of the offering of AMPS, the AMPS (together with
any other outstanding forms of leverage) will
represent approximately 35% of the Fund's managed
assets. This amount may vary, but the Fund will
not incur leverage (including AMPS and other forms
of leverage) in an amount exceeding 50% of its
managed assets. "Managed assets" means the net
asset value of the Common Shares plus the
liquidation preference of any preferred shares
(including the AMPS) and the principal amount of
any borrowings used for leverage. Although the
Fund may in the future offer other preferred
shares, the Fund does not currently intend to
offer preferred shares other than the AMPS offered
in this prospectus.
As an alternative to AMPS (during periods in which
no AMPS are outstanding), the Fund may incur
leverage through the issuance of commercial paper
or notes or other borrowings. Any AMPS or
borrowings will have seniority over the Common
Shares.
The Fund generally will not utilize leverage if it
anticipates that it would result in a lower return
to holders of the Fund's Common Shares ("Common
Shareholders") over time than if leverage were not
used. Use of financial leverage creates an
opportunity for increased income for Common
Shareholders, but, at the same time, creates the
possibility for greater loss (including the
likelihood of greater volatility of dividends on
the Common Shares and of the net asset value and
market price of the Common Shares), and there can
be no assurance that the Fund's use of leverage
will be successful. Because the fees received by
7
the Investment Manager are based on the managed
assets of the Fund (including assets represented
by the AMPS and other leverage), the Investment
Manager has a financial incentive for the Fund to
issue the AMPS and incur other leverage. See
"Principal Risks of the Fund--General Risks of
Investing in the Fund --Leverage Risk."
Interest Rate Transactions In order to reduce the interest rate risk inherent
in the Fund's underlying investments and capital
structure, the Fund may enter into interest rate
swap or cap transactions. The use of interest rate
swaps and caps is a highly specialized activity
that involves investment techniques and risks
different from those associated with ordinary
portfolio security transactions. In an interest
rate swap, the Fund would agree to pay to the
other party to the interest rate swap (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.
Depending on the state of interest rates in
general, the Fund's use of interest rate swaps or
caps could increase or decrease the value of the
Fund's investment portfolio. To the extent there
is a decline in interest rates, the value of the
interest rate swap or cap could decline, and this
could reduce asset coverage on the AMPS or
negatively impact the Fund's ability to make
dividend payments on the AMPS. In addition, 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 whether the Fund would be entitled to receive
net payments from the counterparty on the swap or
cap, which in turn would depend on, among other
things, the general state of short-term interest
rates, such a default could negatively impact the
value of the Fund's investment portfolio. In
addition, there is a risk that the Fund will not
be able to enter into suitable interest rate swap
or cap transactions, or that the terms of an
interest rate swap or cap transaction will be less
favorable to the Fund than expected. Similarly, at
the time an interest rate swap or cap transaction
terminates, the Fund may not be able to obtain a
replacement transaction, or the terms of any
replacement transaction may not be as favorable to
the Fund. If these situations occur, they could
reduce asset coverage on the AMPS or have a
negative impact on the Fund's ability to make
dividend payments on the AMPS. If the Fund fails
to maintain the required 200% asset coverage of
the liquidation value of the outstanding AMPS, or
if the Fund loses its expected AAA/Aaa rating on
the AMPS or fails to maintain other covenants, the
Fund may be required to redeem some or all of the
AMPS. Similarly, the Fund could be required to
prepay the
8
principal amount of any borrowings. Such
redemption or prepayment likely would result in
the Fund seeking to terminate early all or a
portion of any swap or cap transaction. Early
termination of a swap or cap could result in a
termination payment by the Fund. The Fund does not
intend to enter into interest rate swap or cap
transactions having a notional amount that exceeds
the outstanding amount of the Fund's leverage. In
addition to using swaps and caps, the Fund may
also purchase or sell futures contracts or options
on futures contracts in an attempt to hedge
interest rate risks. See "Principal Risks of the
Fund--General Risks of Investing in the
Fund--Leverage Risk" and "Interest Rate
Transactions" for additional information.
Principal Risks of the Fund Risk is inherent in all investing. Therefore,
before investing in the AMPS and the Fund, you
should consider certain risks carefully.
The following paragraphs summarize the principal
risks to which the Fund and the AMPS are subject.
For a more detailed discussion of these risks, see
"Principal Risks of the Fund."
Risks of Investing in the AMPS
The primary risks of investing in the AMPS include:
Interest Rate Risk. The AMPS pay dividends based
on shorter-term interest rates. The Fund purchases
real estate equity securities that pay dividends
that are based on the performance of the issuers.
The Fund also may buy real estate debt securities
that pay interest based on longer-term yields.
These dividends and interest payments are
typically, although not always, higher than
shorter-term interest rates. Real Estate Company
dividends, as well as longer-term and shorter-term
interest rates, fluctuate. If shorter-term
interest rates rise, dividend rates on AMPS may
rise so that the amount of dividends paid to
holders of AMPS exceeds the income from the
portfolio securities. Because income from the
Fund's entire investment portfolio (not just the
portion of the portfolio purchased with the
proceeds of the AMPS offering) is available to pay
dividends on AMPS, however, dividend rates on AMPS
would need to exceed the net rate of return on the
Fund's portfolio by a significant margin before
the Fund's ability to pay dividends on AMPS would
be jeopardized. If long-term interest rates rise,
this could negatively impact the value of the
Fund's investment portfolio and thus reduce the
amount of assets serving as asset coverage for the
AMPS.
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 a
bid order (an order to retain AMPS) at an auction
only at a specified rate, and that rate exceeds
the rate set at the auction, your order will be
deemed an
9
irrevocable offer to sell your AMPS, and you will
not retain your AMPS. Additionally, if you buy
AMPS or elect to retain AMPS without specifying a
rate below which you would not wish to buy or
continue to hold those shares, and the auction
sets a below-market rate, you may receive a lower
rate of return on your AMPS than the market rate
for similar investments. The dividend period for
the AMPS may be changed by the Fund, subject to
certain conditions and with notice to the holders
of the AMPS, which could also affect the liquidity
of your investment. See "Description of AMPS" and
"The Auction."
Secondary Market Risk. If you try to sell your
AMPS between auctions, you may not be able to sell
any or all of your shares, or you may not be able
to sell them for $25,000 per share or $25,000 per
share plus accumulated dividends. Changes in
interest rates could affect the price you would
receive if you sold your AMPS in the secondary
market, particularly if the Fund has designated a
special rate period (a dividend period of more
than seven days). Broker-dealers that maintain a
secondary trading market (if any) for the AMPS are
not required to maintain this market, and the Fund
is not required to redeem shares if either an
auction or an attempted secondary market sale
fails because of a lack of buyers. The AMPS are
not registered on a stock exchange or The Nasdaq
Stock Market, Inc. ("NASDAQ"). If you sell your
AMPS between auctions, you may receive less than
the price you paid for them, especially when
market interest rates have risen since the last
auction or during a special rate period.
Ratings and Asset Coverage Risk. While it is a
condition to the closing of the offering that
Moody's assigns a rating of "Aaa" and Fitch
assigns a rating of "AAA" to the AMPS, these
ratings do not eliminate or necessarily mitigate
the risks of investing in AMPS. In addition,
Moody's, Fitch or another rating agency 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 Fund may (but is not required to)
alter its portfolio in an effort to improve the
rating, although there is no assurance that it
will be able to do so to the extent necessary to
restore the prior rating. See "Additional Risk
Considerations--Portfolio Turnover." In addition,
the Fund may be forced to redeem your AMPS to meet
regulatory or rating agency requirements. The Fund
may also voluntarily redeem AMPS under certain
circumstances. See "Description of AMPS
--Redemption." The asset coverage requirements
imposed by a rating agency may limit the Fund's
ability to invest in certain securities or utilize
certain investment techniques that the Investment
Manager might otherwise consider desirable. See
"Description of AMPS -- Rating Agency Guidelines
and Asset Coverage" for a description of the
rating agency guidelines with which the Fund must
currently comply.
10
Restrictions on Dividends and Other
Distributions. Restrictions imposed on the
declaration and payment of dividends or other
distributions to the holders of the Fund's Common
Shares and AMPS, both by the 1940 Act and by
requirements imposed by rating agencies, might
impair the Fund's ability to maintain its
qualification as a regulated investment company
for federal income tax purposes. While the Fund
intends to redeem AMPS to enable the Fund to
distribute its income as required to maintain its
qualification as a regulated investment company
under the Code, there can be no assurance that
such redemptions can be effected in time to meet
the requirements of the Code. See "Tax Matters."
Portfolio Investments Risk. In certain
circumstances, the Fund may not earn sufficient
income from its investments to pay dividends on
AMPS. In addition, the value of the Fund's
investment portfolio may decline, reducing the
asset coverage for the AMPS. If an issuer whose
securities the Fund purchases experiences
financial difficulties, defaults, or is otherwise
affected by adverse market factors, there may be a
negative impact on the income and/or asset value
of the Fund's investment portfolio, which would
reduce asset coverage for the AMPS and make it
more difficult for the Fund to pay dividends on
the AMPS.
General Risks of Investing in the Fund
In addition to the risks described above, certain
general risks relating to an investment in the
Fund may under certain circumstances reduce the
Fund's ability to pay dividends and meet its asset
coverage requirements on the AMPS. These risks
include:
Limited Operating History. The Fund is a recently
organized, non-diversified, closed-end management
investment company that has been operational for
less than three months.
Investment Risk. An investment in the Fund is
subject to investment risk, including the possible
loss of the entire principal amount that you
invest.
Issuer Risk. The value of an equity or debt
security may decline for a number of reasons that
directly relate to the Real Estate Company that
issues it, such as management performance,
financial leverage and reduced demand for the Real
Estate Company's properties and services.
Interest Rate Risk. Interest rate risk is the
risk that fixed-income investments such as
preferred shares, U.S. Government obligations and
debt securities, and to a lesser extent
dividend-paying common stocks such as REIT common
shares, will decline in value because of changes
in interest rates. When interest rates rise, the
market value of such securities generally will
fall. The Fund's investment in such securities
11
means that the value of the Fund's investment
portfolio may decline if market interest rates
rise, and such a decline would reduce asset
coverage on the AMPS. Also, during periods of
declining interest rates, many mortgages may be
refinanced, which may reduce the yield from
securities of Real Estate Companies that invest
primarily in loans secured by real estate and
generally derive their income primarily from
interest payments on mortgage loans. This risk is
commonly known as "prepayment risk." The Fund's
use of leverage through the issuance of the AMPS
may tend to magnify interest rate risk. See
"Principal Risks of the Fund--General Risks of
Investing in the Fund--Leverage Risk." The Fund
may use swaps, caps, futures contracts and options
on futures contracts to help control interest rate
risk. See "Investment Objectives and
Policies--Portfolio Composition--Short Sales and
Derivatives" and "Interest Rate Transactions."
General Real Estate Risks. Because the Fund
concentrates its assets in the real estate
industry, the Fund's performance will be closely
linked to the performance of the real estate
markets. Property values may fall due to supply
and demand disparities, increasing vacancies or
declining rents resulting from economic, legal,
cultural or technological developments. Real
Estate Company prices also may drop because of the
failure of borrowers to pay their loans and poor
management. Many Real Estate Companies (including
REITs) utilize leverage, which increases
investment risk and could adversely affect a Real
Estate Company's operations and market value in
periods of unfavorable interest rate movements. In
addition, there are risks associated with
particular sectors of the real estate industry.
Retail Properties. Retail properties are affected
by the overall health of the national and relevant
local economy and may be adversely affected by the
growth of alternative forms of retailing,
bankruptcy, departure or cessation of operations
of a tenant, a shift in consumer demand due to
demographic changes, spending patterns and lease
terminations.
Office Properties. Office properties are affected
by the overall health of the national and relevant
local economy, as well as by other factors such as
a downturn in the businesses operated by their
tenants, obsolescence, non-competitiveness and the
high capital expenditures needed to operate such
properties.
Hotel Properties. The risks of hotel properties
include, among other things, the necessity of a
high level of continuing capital expenditures,
competition, increases in operating costs that may
not be offset by increases in revenues, dependence
on business and commercial travelers and tourism,
increases in fuel costs and other expenses of
travel, and adverse effects of general and local
economic conditions. Hotel properties tend to be
more sensitive to adverse economic conditions and
competition than many other commercial properties.
12
Healthcare Properties. Healthcare properties and
healthcare providers are affected by a number of
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 from private
sector health insurance providers; and competition
on a local and regional basis. The failure of any
healthcare operator to comply with governmental
laws and regulations may affect its ability to
operate its facility or receive government
reimbursements.
Multifamily/Residential Properties. The value and
successful operation of a multifamily/residential
property may be affected by a number of factors
such as the location of the property, the ability
of the management team, the type of services
provided by the property, the level of mortgage
rates, the presence of competing properties,
adverse economic conditions in the locale, the
relocation of tenants to new properties with
better amenities, oversupply, and rent control
laws or other laws affecting such properties.
Self-Storage Properties. The value and successful
operation of a self-storage property may be
affected by a number of factors, such as the
ability of the management team, the location of
the property, the presence of competing
properties, changes in traffic patterns, and
adverse effects of general and local economic
conditions.
Insurance Risk. Certain of the Real Estate
Companies in which the Fund invests may carry
comprehensive liability, fire, flood, earthquake
extended coverage and rental loss insurance with
various policy specifications, limits and
deductibles. Should any type of uninsured loss
occur (or if an insurer is unwilling or unable to
pay on a claim), the Real Estate Company could
lose its investment in, and anticipated profits
and cash flows from, a number of properties. Such
a loss would impact the value of the Fund's
investment portfolio.
Financial Leverage Risk. Real Estate Companies
may be highly leveraged and financial covenants
may affect the ability of Real Estate Companies to
operate effectively or pay dividends. 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 pay dividends or to
repay all maturing debt outstanding, which would
impact the value of the Fund's investment
portfolio.
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 Real
Estate Company may be considered an owner,
operator or responsible party of such properties
and, therefore, may be potentially liable for
removal or remediation costs as well as certain
other costs, including governmental
13
fines and liabilities for injuries to persons and
property. The existence of any such environmental
liability could have a material adverse effect on
the results of operations and cash flow of any
such Real Estate Company and, as a result, the
asset coverage on the AMPS or the amount available
to make distributions on shares of the Fund could
be reduced.
Smaller Companies. Even the larger Real Estate
Companies in the industry tend to be small to
medium-sized companies in relation to the equity
markets as a whole. Real Estate Company shares,
therefore, can be more volatile than, and perform
differently from, larger company stocks. 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.
Further, smaller companies may have fewer business
lines; changes in any one line of business,
therefore, may have a greater impact on a smaller
company's stock price than is the case for a
larger company. Smaller company shares may also
perform differently in different cycles than
larger company shares. Accordingly, Real Estate
Company shares can be more volatile than--and at
times will perform differently from--large company
shares such as those found in the Dow Jones
Industrial Average.
As of December 31, 2002, the market capitalization
of REITs ranged in size from approximately $2.7
million to approximately $10.4 billion.
REIT-related Risks. 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 that purports to be a REIT but
does not satisfy all of the conditions of REIT
status in any year. In some cases, the Real Estate
Company may still be able to qualify for REIT
status after payment of a penalty tax. Otherwise,
a Real Estate Company that fails to qualify for
REIT status would be subject to corporate-level
taxation. In either case, the return to the Fund
on its investment in such company would be
reduced. 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 Investment Company Act of 1940, as
amended (the "1940 Act"). The above factors may
also adversely affect the Fund's investment in
such a 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.
Lower-rated Securities Risk. Lower-rated
preferred shares or debt securities, or equivalent
unrated securities, which are commonly known as
"junk bonds," generally involve greater volatility
of price and risk of loss of income and principal,
and may be more susceptible to real or perceived
adverse economic and competitive industry
conditions than higher grade securities. It is
reasonable to expect that any adverse economic
conditions could disrupt the market for lower-rated
14
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.
Interest Rate Transactions Risk. The Fund may
enter into a swap or cap transaction to attempt to
protect itself from increasing dividend or
interest expenses resulting from increasing
short-term interest rates. A decline in interest
rates may result in a decline in the value of the
swap or cap, which may result in a decline in the
value of the Fund's investment portfolio. A sudden
and dramatic decline in interest rates may result
in a significant decline in the value of the
Fund's investment portfolio, which would reduce
asset coverage on the AMPS. See "Interest Rate
Transactions." These transactions may also reduce
the opportunity for gain by offsetting any
positive effect of favorable movements in the
hedged interest rates.
Risks of Futures and Options on Futures. The use
by the Fund of futures contracts and options on
futures contracts to hedge interest rate risks can
reduce the opportunity for gain by offsetting the
positive effect on favorable movements in the
hedged interest rates. The Fund could lose money
if the counterparty to a futures contract or
option on a futures contract is unwilling or
unable to honor its obligations to the Fund.
Furthermore, there is no assurance that a liquid
secondary market will exist for any particular
futures contract or option thereon at any
particular time. If the Fund were unable to
liquidate a futures contract or an option on a
futures contract position due to the absence of a
liquid secondary market or the imposition of price
limits, it could incur substantial losses. The
Fund would continue to be subject to market risk
and counterparty risk with respect to the position.
Foreign Security Risk. The prices of foreign
securities may be affected by factors not present
with U.S. securities, including currency exchange
rates, political and economic conditions, less
stringent regulation and higher volatility. As a
result, many foreign securities may be less liquid
and more volatile than U.S. securities.
Liquidity Risk. The Fund may invest in securities
that are illiquid so long as no more than 10% of
the total assets of the Fund (taken at market
value at the time of investment) would be invested
in such securities. Illiquid securities are those
that cannot be disposed of within seven days in
the ordinary course of business at approximately
the amount at which the Fund has valued the
securities. Illiquid securities may trade at a
discount from comparable, more liquid investments,
and may be subject to wide fluctuations in market
value. Also, the Fund may not be able to dispose
of illiquid securities when that would be
beneficial at a favorable time or price.
Risks of Warrants and Rights. Warrants and rights
are subject to the same market risks as stocks,
but may be more volatile in price. An investment
in warrants or rights may be considered
speculative. The
15
purchase of warrants or rights involves the risk
that the Fund could lose the purchase value of a
warrant or right if the right to subscribe to
additional shares is not exercised prior to the
warrant's or right's expiration. Also, the
purchase of warrants and rights involves the risk
that the effective price paid for the warrant or
right, added to the subscription price of the
related security, may exceed the subscribed
security's market price, such as when there is no
movement in the price of the underlying security
or when the market price of the underlying
security decreases.
Tax Risk. The Bush Administration has announced a
proposal to eliminate the federal income tax on
dividends of income previously taxed at the
corporate level. The availability of tax free
dividends may reduce the value of, and return on,
REIT securities which are part of the Fund's
investment portfolio. Moreover, the proposal may
be given a retroactive effect. This change could
adversely affect the Fund's shareholders and
distributions they receive from the Fund.
Inflation Risk. Inflation risk is the risk that
the value of assets or income from investments
will be worth less in the future as inflation
decreases the present value of future payments. As
inflation increases, the real, or
inflation-adjusted, value of the AMPS and
distributions can decline. However, during any
periods of rising inflation, AMPS dividend
payments may increase, which would tend to offset
this risk.
Additional Risk
Considerations............. In addition to the principal risks summarized
above, the Fund and the AMPS are also subject to
additional risks. See "Additional Risk
Considerations" for a more detailed description of
the additional risks described below.
Portfolio Turnover. The Fund may engage in
frequent and active portfolio trading when
considered appropriate, but it will not use
short-term trading as the primary means of
achieving its investment objectives. There are no
limits on the rate of portfolio turnover. A higher
turnover rate results in correspondingly greater
brokerage commissions and other transactional
expenses, which are borne by the Fund. High
portfolio turnover may result in the realization
of net short-term capital gains by the Fund that,
when distributed to shareholders, will be taxable
as ordinary income.
Non-Diversified Status. Because the Fund, as a
"non-diversified" investment company under the
1940 Act, can invest a greater portion of its
assets in obligations of a single issuer than, and
invest in a smaller number of individual issuers
than, a "diversified" fund, an investment in the
Fund presents greater risk to you than an
investment in a diversified company. The Fund will
be more susceptible than a diversified fund to
being adversely affected by any single corporate,
economic, political or regulatory occurrence. See
"Investment Objectives and Policies." To help
control this risk, the Fund will not invest more
than 15% of its total assets (taken at market
value at the time of investment) in the securities
of any one issuer other than the U.S. Government.
In addition, the Fund intends to diversify its
investments to the extent necessary to maintain
its status as a regulated investment company under
the Code. See "Taxation" in the SAI.
16
Anti-Takeover Provisions. The Fund's Amended and
Restated Agreement and Declaration of Trust (the
"Declaration") includes provisions that could have
the effect of limiting the ability of other
entities or persons to acquire control of the Fund
or convert the Fund to open-end status. See
"Certain Provisions in Declaration of Trust."
Recent Developments. As a result of the terrorist
attacks on the World Trade Center and the Pentagon
on September 11, 2001, some of the U.S. securities
markets were closed for a four-day period. In
addition, certain auction agents for auction rate
preferred shares similar to the AMPS were unable
to run auctions during that period. These
terrorist attacks and related events have led to
increased short-term market volatility and may
have long-term effects on U.S. and world economies
and markets. A similar disruption of the financial
markets could adversely impact the Fund in general
and the AMPS in particular by, for example,
affecting interest rates, auctions and auction
participants, such as the auction agents and
broker-dealers, secondary trading, ratings, credit
risk, inflation and other factors relating to
securities and other financial instruments.
Certain Affiliations. Certain broker-dealers may
be considered to be affiliated persons of the Fund
and/or the Investment Manager due to their
possible affiliations with the Investment
Manager's parent, CDC IXIS Asset Management North
America, L.P. Absent an exemption from the SEC or
other regulatory relief, the Fund is generally
precluded from effecting certain principal
transactions with affiliated brokers, and its
ability to purchase securities being underwritten
by an affiliated broker or a syndicate including
an affiliated broker or to utilize affiliated
brokers for agency transactions is subject to
regulatory and other restrictions. This could
limit the Fund's ability to engage in securities
transactions and take advantage of market
opportunities.
Given the risks described above, an investment in
the Fund may not be appropriate for all investors.
You should carefully consider your ability to
assume these risks before making an investment in
the AMPS.
Trading Market............ The AMPS will not be listed on a stock exchange.
Instead, you may buy or sell AMPS at a periodic
auction by submitting orders to a broker-dealer
that has entered into a separate agreement with
the auction agent (a "Broker-Dealer") or to a
broker-dealer that has entered into an agreement
with a Broker-Dealer. In addition to the auctions,
Broker-Dealers and other broker-dealers may (but
are not required to) maintain a separate secondary
trading market in AMPS, but may discontinue this
activity at any time. You may transfer shares
outside of auctions only to or through a
Broker-Dealer, a broker-dealer that has entered
into a separate agreement with a Broker-Dealer, or
other persons as the Fund permits. There can be no
assurance that a secondary trading market for the
AMPS will develop or, if it does develop, that it
will provide holders of AMPS with liquidity of
investment. See "The Auction."
17
Ratings................... The Fund will issue the AMPS only if the AMPS have
received a credit quality rating of "Aaa" from
Moody's and of "AAA" from Fitch. These ratings are
an assessment of the capacity and the willingness
of an issuer to pay preferred stock obligations,
and are not a recommendation to purchase, hold or
sell those shares inasmuch as the rating does not
comment as to the market price or suitability for
a particular investor. Ratings issued by a
nationally recognized statistical rating agency
such as Moody's or Fitch do not eliminate or
mitigate the risks of investing in the AMPS. These
ratings may be changed, suspended or withdrawn in
the rating agencies' discretion. See "Principal
Risks of the Fund" and "Additional Risk
Considerations."
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. For
subsequent dividend periods, the AMPS will
normally pay dividends based on a rate set at
auctions held every seven days. In most instances,
dividends are payable on the first business day
following the end of the rate period. The rate set
at auction will not exceed the applicable maximum
rate. See "Description of AMPS--Dividends and Rate
Periods."
Dividends on the AMPS will be cumulative from the
date the shares are first issued and will be paid
out of legally available funds.
Initial Dividend Payment Subsequent
Dividend Date for Initial Rate Dividend Payment Number of Days in
Rate Period Day Initial Rate Period
-------- --------------------- ---------------- -------------------
1.35% February 25, 2003 Every Tuesday 15
Notwithstanding the schedule above, the Fund may,
subject to certain conditions, designate special
rate periods of more than seven days for the AMPS.
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 and any amounts due with respect to
mandatory redemptions or optional redemptions must
be paid in full or deposited with the auction
agent. The Fund also must have received
confirmation from Moody's and Fitch 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
the declaration of a special rate period. The
dividend payment date for a special rate period
will be set out in the notice designating the
special rate period. See "Description of
AMPS--Dividends and Rate Periods."
Liquidation Preference.... If the Fund is liquidated, the Fund must pay to
holders of AMPS $25,000 per share, plus
accumulated but unpaid dividends, if any, whether
or not earned or declared. See "Description of
AMPS--Liquidation."
18
Asset Maintenance......... Under the Fund's Amended and Restated Bylaws (the
"Bylaws"), which establish and fix the rights and
preferences of the AMPS, the Fund must maintain:
. asset coverage on the AMPS as required by the
rating agencies rating the AMPS, and
. asset coverage of at least 200% with respect
to senior securities that are stock, including
the AMPS, as discussed in "Description of
AMPS--Rating Agency Guidelines and Asset
Coverage."
In the event that the Fund does not maintain (or
cure a failure to maintain) these coverage tests,
some or all of the AMPS will be subject to
mandatory redemption. Please see Article 11 of the
Bylaws, which is attached as Appendix B to the
SAI. See "Description of AMPS--Redemption."
Based on the composition of the Fund's portfolio
as of January 15, 2003, the Fund estimates that
the asset coverage of the AMPS, as measured
pursuant to the 1940 Act and the rules and
regulations thereunder, would be approximately
294% if the Fund were to issue all of the AMPS
offered in this prospectus, representing
approximately 35% of the Fund's managed assets
after their issuance. This asset coverage will
change from time to time.
Redemption................ The Fund will be required to redeem AMPS if it
fails to meet the asset coverage tests required by
the 1940 Act or the rating agencies rating the
AMPS and fails to correct such a failure in a
timely manner. The Fund may voluntarily redeem
AMPS, in whole or in part, under certain
circumstances. See "Description of
AMPS--Redemption." Although the AMPS are subject
to redemption under certain circumstances, unlike
the shares of an open-end investment company, the
AMPS may not be redeemed at a shareholder's option.
Voting Rights............. The 1940 Act requires that the holders of AMPS and
any other outstanding preferred shares of the
Fund, voting together as a single class separate
from the Common Shareholders, have the right to
elect at least two Trustees of the Fund at all
times and to elect a majority of the Trustees if
two years' dividends on the AMPS or any other
preferred shares are unpaid until all unpaid
dividends on the AMPS and any other preferred
shares are paid or otherwise provided for by the
Fund. The holders of AMPS and any other
outstanding preferred shares will vote as a
separate class on certain other matters as
required under the Declaration, the Bylaws, or the
1940 Act. See "Description of AMPS--Voting
Rights." Each Common Share, each share of AMPS,
and each share of any other series of preferred
shares of the Fund is entitled to one vote per
share.
19
Federal Income Taxation... In the opinion of Ropes & Gray, the AMPS will
constitute equity of the Fund for federal income
tax purposes. The distributions with respect to
the AMPS (other than certain distributions in
redemption of AMPS) will constitute dividends to
the extent of the Fund's current or accumulated
earnings and profits, as calculated for federal
income tax purposes. Such dividends generally will
be taxable as ordinary income to holders.
Distributions of net capital gains (i.e., the
excess of net long-term capital gains over net
short-term capital losses) 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 (the "IRS") currently requires that a
regulated investment company that has two or more
classes of stock allocate to each such class
proportionate amounts of each type of its income
(such as ordinary income and capital gains) based
upon the percentage of total dividends distributed
to each class for the tax year. Accordingly, the
Fund intends each year to allocate capital gain
dividends between and among its Common Shares and
AMPS in proportion to the total dividends paid to
each class during or with respect to such year.
Ordinary income dividends and dividends qualifying
for the dividends received deduction will
similarly be allocated between classes. See "Tax
Matters."
Custodian and Auction Agent Investors Bank & Trust Company serves as the
Fund's custodian. Deutsche Bank Trust Company
Americas will act as auction agent, transfer
agent, dividend paying agent and redemption agent
for the AMPS.
20
FINANCIAL HIGHLIGHTS (Unaudited)
The 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
operations on November 26, 2002 through January 15, 2003. Because the Fund is
recently organized and commenced operations on November 26, 2002, the table
covers fewer than seven weeks of operations, during which a substantial portion
of the Fund's portfolio was held in temporary investments pending investment in
real estate securities that meet the Fund's investment objectives and policies.
Accordingly, the information presented may not provide a meaningful picture of
the Fund's operating performance.
For the Period From
November 26, 2002*
through
January 15, 2003
(Unaudited)
-------------------
Per Share Operating Performance
Net Asset Value, Beginning of Period (Common Shares) (1)................. $ 14.32
Less Offering Costs Charged to Additional Paid in Capital................ (0.03)
--------
14.29
--------
Net Investment Income (2)................................................ 0.11
Net Realized and Unrealized Gain (Loss) on Investments................... (0.06)
--------
Total from Investment Operations......................................... 0.05
--------
Net Asset Value, End of Period (Common Shares)........................... $ 14.34
========
Market Value, End of Period (Common Shares).............................. $ 14.80
Total Return on Market Value (%) (3)..................................... (1.33)
Total Return on Net Asset Value (%)(3)................................... 0.14
Ratios/Supplemental Data:
Ratio of Expenses to Average Net Assets Applicable to Common Shares,
before waivers (%) (4)................................................. 1.85 (5)
Ratio of Expenses to Average Net Assets Applicable to Common Shares,
after waivers (%) (4).................................................. 1.37 (5)
Ratio of Net Investment Income to Average Net Assets, before waivers (%). 4.98 (5)
Ratio of Net Investment Income to Average Net Assets, after waivers (%).. 5.46 (5)
Portfolio Turnover Rate (%).............................................. 1
Net Assets Applicable to Common Shares, End of Period (000).............. $ 54,938
--------
* Commencement of operations.
(1)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.00 offering
price.
(2)Computed using average common shares outstanding.
(3)Total return on net asset value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $0.675 paid by the
shareholder on the first day and the ending net asset value per share.
Total return on market value is calculated assuming a purchase at the
offering price of $15.00 on the first day and a sale at the current market
price on the last day of the period.
Total return on net asset value and total return on market value are not
computed on an annualized basis.
(4)The Investment Manager and the Fund's administrator agreed to waive a
portion of their fees during the period. Without these waivers, expense
ratios would have been higher.
(5)Annualized.
21
THE FUND
The Fund is a recently organized, non-diversified, closed-end management
investment company. The Fund was organized as a Massachusetts business trust on
September 18, 2002 and is registered as an investment company under the 1940
Act. As a recently-organized entity, the Fund has a limited operating history.
The Fund's principal office is located at 399 Boylston Street, Boston,
Massachusetts 02116, and its telephone number is (800) 862-4863.
The Fund commenced operations on November 26, 2002 in connection with an
initial public offering of 3,750,000 of its Common Shares. The proceeds of such
offering were approximately $53,606,250 after the payment of organizational and
offering expenses. In connection with the initial public offering of the Fund's
Common Shares, the underwriters for the Common Shares were granted an option to
purchase up to an additional 562,500 Common Shares to cover over-allotments. On
January 13, 2003, such underwriters purchased, at a price of $14.325 per Common
Share, an additional 75,000 Common Shares of the Fund pursuant to the
over-allotment option. The Fund's Common Shares are traded on the American
Stock Exchange under the symbol "RIF."
USE OF PROCEEDS
The net proceeds of the offering of AMPS will be approximately
$27,435,300 after payment of the estimated offering costs and the sales load.
The Fund will invest the net proceeds of the offering in accordance with the
Fund's investment objectives and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in accordance with its investment objectives and policies within three
months of the completion of the offering. Pending such use, it is anticipated
that the proceeds will be invested in U.S. Government securities or other high
quality short-term securities.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund
as of January 15, 2003, and as adjusted to give effect to the issuance of the
AMPS offered hereby (including estimated offering expenses and sales load of
$564,700).
Actual As Adjusted
----------- -----------
Series M AMPS, $0.00001 par value (no shares issued;
1,120 shares issued, as adjusted, at $25,000 per share
liquidation preference)............................... $ 0 $28,000,000
Common Shares, $0.00001 par value, unlimited shares
authorized, 3,832,000 shares issued and
outstanding........................................... $54,780,525 $54,215,825
Undistributed net investment income..................... $ 409,693 $ 409,693
Accumulated net realized gain/loss on investment
transactions.......................................... $ (12,333) $ (12,333)
Net unrealized appreciation/(depreciation) on
investments........................................... $ (239,485) $ (239,485)
----------- -----------
Net assets attributable to Common Shares plus
liquidation value of AMPS............................. $54,938,400 $82,373,700
=========== ===========
PORTFOLIO COMPOSITION
As of January 15, 2003, 89.0% of the market value of the Fund's portfolio
was invested in securities of Real Estate Companies and 11.0% in short-term
investments. This information reflects the composition of the Fund's assets at
January 15, 2003, and is not necessarily representative of the Fund's portfolio
as of the date hereof or at any time in the future.
22
INVESTMENT OBJECTIVES AND POLICIES
General
The Fund's primary investment objective is high current income. Capital
appreciation is the Fund's secondary investment objective. There can be no
assurance that the Fund will achieve its investment objectives. The Fund's
investment objectives are fundamental and may not be changed without the
approval of shareholders. Unless otherwise indicated, the Fund's investment
policies are not fundamental and may be changed by the Board of Trustees
without the approval of shareholders. The Fund has a policy of concentrating
its investments (investing 25% or more of its assets) in the U.S. real estate
industry and not in any other industry. This investment policy is considered
fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities, as defined in the 1940 Act. Under normal
market conditions, the Fund will invest at least 90% of its total assets in
income-producing common shares, preferred shares, convertible preferred shares
(preferred shares that, during certain periods or upon the happening of certain
events, may be converted into common shares) and debt securities issued by Real
Estate Companies, including real estate investment trusts, or "REITs." Under
normal market conditions, at least 80% of the Fund's total assets will be
invested in income-producing equity securities issued by REITs. A significant
portion of the equity securities of Real Estate Companies in which the Fund
invests are expected to trade on a national securities exchange or in the
over-the-counter markets. The Fund may invest up to 20% of its total assets in
U.S. Government obligations and debt securities, including convertible debt
securities, issued by Real Estate Companies. The preferred shares, convertible
preferred shares and debt securities in which the Fund may invest are sometimes
collectively referred to in this prospectus as "Fixed Income Securities." The
Fund may invest in Fixed Income Securities that are below investment grade
quality, including securities that are unrated but judged to be of comparable
quality by the Investment Manager. A Fixed Income Security will be considered
to be investment grade if, at the time of investment, such security has a
rating of "BBB" or higher by Fitch or S&P or "Baa" or higher by Moody's or an
equivalent rating by a nationally recognized statistical rating agency or, if
unrated, is judged to be of comparable quality by the Investment Manager. The
Fund will not invest in a non-investment grade Fixed Income Security if, as a
result of such investment, more than 25% of the Fund's total assets would be
invested in non-investment grade Fixed Income Securities. At least 90% of the
Fund's total assets will be invested in securities of U.S. issuers. The Fund
may invest in securities that are illiquid so long as no more than 10% of the
total assets of the Fund (taken at market value at the time of investment)
would be invested in such securities. The Fund may invest up to 10% of its
total assets in securities of non-U.S. issuers located in countries that are
members of the Organisation For Economic Co-operation and Development. The Fund
will not invest more than 15% of its total assets (taken at market value at the
time of investment) in the securities of any one issuer other than the U.S.
Government, nor will it invest directly in real estate or in securities of Real
Estate Companies that are controlled by the Investment Manager, CDC IXIS Asset
Management North America, L.P. or their respective affiliates.
In anticipation of or in response to adverse market conditions, for cash
management purposes or for defensive purposes, the Fund may temporarily hold
all or a portion of its assets in cash, money market instruments, or bonds or
other debt securities. The Fund would be unable to achieve its investment
objectives if a substantial portion of its assets consisted of such instruments.
The Fund will not enter into short sales or invest in derivatives, except
for interest rate hedging purposes as described in this prospectus. See
"Principal Risks of the Fund--General Risks of Investing in the Fund--Leverage
Risk" and "Interest Rate Transactions."
Investment Philosophy
The Investment Manager employs a value-oriented investment strategy
designed to identify securities that are priced below what it believes is their
intrinsic value. The Investment Manager believes that ultimately the
performance of Real Estate Companies' securities is dependent upon the
performance of the underlying real estate assets and company management as well
as the overall influence of capital markets. Consequently, when selecting
securities for the Fund, the Investment Manager draws upon the combined
expertise of its real estate, research and securities professionals.
23
Investment Process
When selecting investments for the Fund, the Investment Manager generally
considers the following factors that it believes help to identify those Real
Estate Companies whose securities represent the greatest value and income
and/or price appreciation potential:
Valuation. The Investment Manager has developed a proprietary model to
assess the relative value of each security in the Fund's investment universe.
This model is designed to estimate what a Real Estate Company's anticipated
cash flows are worth to a security investor (a capital markets value) and to a
direct real estate investor (a real estate value). The model helps the
Investment Manager to identify securities that it believes trade at discounts
to either or both of these model values relative to similar securities. The
Investment Manager will generally sell a security once it is considered
overvalued or when the Investment Manager believes that there is greater
relative value in other securities in the Fund's investment universe.
Price. The Investment Manager examines the historic pricing of each Real
Estate Company in the Fund's universe of potential investments. Those
securities that have under-performed in price, either in absolute terms or
relative to the Fund's universe in general, are generally given greater weight
than those that have over-performed.
Income. The Investment Manager further evaluates Real Estate Companies
by analyzing their dividend yields as well as other factors that influence the
sustainability and growth of dividends. These factors include cash flow,
leverage and payout ratios.
Catalysts. When evaluating a security, the Investment Manager also seeks
to identify potential catalysts that, in its opinion, could cause the
marketplace to re-value the security in the near term. These catalysts can be
macroeconomic, market-driven or company-specific in nature.
In order to control risk, the Investment Manager will endeavor to
maintain a portfolio that is broadly diversified within the U.S. real estate
industry, with exposure to securities representing major property types and
geographic areas. However, the Investment Manager's stock selection disciplines
and fundamental real estate market and property type analyses may lead the
Investment Manager to overweight or underweight particular property types
and/or geographic regions from time to time.
Portfolio Composition
The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the SAI.
Real Estate Companies. For purposes of these investment policies, a Real
Estate Company is one that:
. generally 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 invested in such real estate.
Under normal market conditions, the Fund will invest at least 90% of its
total assets in income-producing common shares, preferred shares, convertible
preferred shares (preferred shares that, during certain periods or upon the
happening of certain events, may be converted into common shares) and debt
securities issued by Real Estate Companies, including REITs. As part of this
policy, the Fund may also invest in rights or warrants to purchase
income-producing common and preferred shares of Real Estate Companies.
Real Estate Investment Trusts. Under normal market conditions, at least
80% of the Fund's total assets will be invested in income-producing equity
securities issued by REITs. A REIT is a Real Estate Company that
24
pools investors' funds for investment primarily in income-producing real estate
or in real estate-related loans (such as mortgages) or other interests. A REIT
is not taxed on income distributed to shareholders if, among other things, it
distributes to its shareholders substantially all of its taxable income (other
than net capital gains) for each taxable year. As a result, REITs tend to pay
relatively higher dividends than other types of companies. The Fund intends to
use these REIT dividends in an effort to meet its primary objective of high
current income.
REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs generally invest a majority of their assets in
income-producing real estate properties in order to generate cash flow from
rental income and gradual asset appreciation. The income-producing real estate
properties in which Equity REITs invest typically include properties such as
office buildings, retail and industrial facilities, hotels, apartment buildings
and healthcare facilities. Equity REITs can realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority
of their assets in real estate mortgages and derive their income primarily from
interest payments on the mortgages. 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.
REITs can be listed and traded on national securities exchanges or can be
traded privately between individual owners. The Fund may invest in both
publicly and privately traded REITs.
Preferred Shares. Preferred shares pay fixed or floating dividends to
investors, and have a "preference" over common stock in the payment of
dividends and the liquidation of a company's assets. This means that a company
must pay dividends on preferred shares before paying any dividends on its
common shares. Preferred shareholders usually have no right to vote for
corporate directors or on other matters. Under normal market conditions, the
Investment Manager expects to invest approximately 60% to 80% of the Fund's
total assets in common shares of Real Estate Companies and approximately 20% to
40% of its total assets in preferred shares, including convertible preferred
shares, issued by Real Estate Companies. The actual percentage of common,
preferred and convertible preferred shares, rights and warrants, U.S.
Government obligations and debt securities in the Fund's portfolio may vary
over time based on the Investment Manager's assessment of market conditions.
U.S. Government Obligations. The Fund may invest in U.S. Government
obligations, provided that such investments, together with the Fund's
investments in debt securities (including convertible debt securities) do not
exceed 20% of the Fund's total assets, taken at market value at the time of
investment. Obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities include bills, notes and bonds. Obligations of
certain agencies and instrumentalities of the U.S. Government are supported by
the full faith and credit of the U.S. Treasury; others are supported by the
right of the issuer to borrow from the Treasury; others are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, though issued by an instrumentality chartered by the
U.S. Government, are supported only by the credit of the instrumentality. The
U.S. Government may choose not to provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not legally
obligated to do so.
Lower-rated Securities. The Fund may invest in non-investment grade
quality Fixed Income Securities. Non-investment grade quality Fixed Income
Securities are those that are not rated "Baa" or "BBB" or above by Moody's,
Fitch or S&P (or a comparable rating by another nationally recognized
statistical rating agency) or, if unrated, are judged to be of comparable
quality by the Investment Manager. If a Fixed Income Security is rated
differently by two or more nationally recognized statistical rating agencies,
the Investment Manager may rely on the higher rating if it believes that rating
to be more accurate. The Fund will not invest in a non-investment grade Fixed
Income Security if, as a result of such investment, more than 25% of the Fund's
total assets would be invested in non-investment grade Fixed Income Securities.
In the event that a downgrade of one or more investment grade quality Fixed
Income Securities causes the Fund to exceed this 25% limit, the Investment
Manager will determine, in its discretion, whether to sell any non-investment
grade Fixed Income Securities to reduce the percentage to below 25% of the
Fund's total assets. It is possible, therefore, that the value
25
of non-investment grade Fixed Income Securities could exceed 25% of the Fund's
total assets for an indefinite period of time. The 25% restriction described
above does not limit the Fund's ability to invest in securities other than
Fixed Income Securities (such as common shares of Real Estate Companies). The
Investment Manager will monitor the credit quality of the issuers of the Fund's
Fixed Income Securities.
Securities that are below investment grade quality are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal. Debt securities that are below investment grade
quality are commonly referred to as "junk bonds." The Fund may only invest in
non-investment grade securities that are rated "CCC" or higher by Fitch or S&P
or "Caa" or higher by Moody's (or a comparable rating by another nationally
recognized statistical rating agency), or unrated securities judged to be of
comparable quality by the Investment Manager. The issuers of these securities
may be in default or have a currently identifiable vulnerability to default on
their payments of principal and interest, or may otherwise be subject to
present elements of danger with respect to payments of principal or interest.
However, the Fund may not invest in securities that are in default as to
payment of principal and interest at the time of investment. See "Principal
Risks of the Fund--General Risks of Investing in the Fund--Risks Of Investment
In Lower-Rated Securities." For a description of security ratings, see Appendix
A to the SAI.
Illiquid Securities. The Fund may invest in securities that are illiquid
so long as no more than 10% of the total assets of the Fund (taken at market
value at the time of investment) would be invested in such securities. The term
"illiquid securities" for these purposes means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. The above
limitation applies only at the time a security is purchased, and the Fund is
not required to dispose of securities if, due to market movements, greater than
10% of the Fund's total assets are invested in illiquid securities.
The Board of Trustees 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. Certain illiquid securities may require pricing at fair value
as determined in good faith under the supervision of the Board of Trustees. See
"Net Asset Value." The Investment Manager may be subject to significant delays
in disposing of illiquid securities held by the Fund, and transactions in
illiquid securities may entail registration expenses and other transaction
costs that are higher than those for transactions in liquid securities. If
adverse market conditions were to develop during any such delay, the Fund might
obtain a less favorable price than that which prevailed when it decided to sell.
As discussed below under "Interest Rate Transactions," the Fund intends
to segregate cash or liquid securities with its custodian having a value at
least equal to the Fund's net payment obligations under any swap transaction,
as marked to market daily. The Fund will treat such amounts as illiquid for
purposes of its 10% limit on investments in illiquid securities.
Short Sales and Derivatives. The Fund will not enter into short sales or
invest in derivatives, except for interest rate hedging purposes as described
in this prospectus. See "Principal Risks of the Fund--General Risks of
Investing in the Fund--Leverage Risk" and "Interest Rate Transactions."
The Fund will only enter into futures contracts to hedge interest rate
risks. A futures contract is a two party agreement to buy or sell a specified
amount of a specified security, such as a U.S. Treasury security, for a
specified price at a designated date, time and place. Brokerage fees are
incurred when a futures contract is bought or sold, and margin deposits must be
maintained at all times when a futures contract is outstanding. The Fund may
purchase and sell futures contracts as an offset against the effect of expected
changes in interest rates. The Fund will only enter into futures contracts that
are traded on domestic futures exchanges and are standardized as to maturity
date and underlying financial instrument.
26
The Fund will only purchase or sell options on futures contracts to hedge
interest rate risks. Options on futures contracts give the purchaser the right,
in return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures contract position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures contract margin
account. If the Fund sells ("writes") options on futures contracts, it will
segregate cash or liquid securities in an amount necessary to cover its
obligations under the option, and will mark such amounts to market daily.
Non-Principal Investment Strategies
In addition to the investment strategies discussed above, the Fund may
also invest in other portfolio instruments or use other investment strategies,
including those listed below. For additional information about the Fund's
investments, please see the SAI.
Warrants and Rights. The Fund may invest in warrants or rights to
purchase income-producing common and preferred shares of Real Estate Companies.
Warrants are options to purchase equity securities at a specified price for a
specified period of time. Their prices do not necessarily move parallel to the
prices of the underlying securities. Rights are similar to warrants but
normally have a shorter duration and are typically distributed directly by the
issuer to shareholders. Rights and warrants generally have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer.
Temporary and Defensive Investments. In anticipation of or in response
to adverse market conditions, for cash management purposes or for defensive
purposes, the Fund may temporarily hold all or a portion of its assets in cash,
money market instruments, or bonds or other debt securities. The Fund would be
unable to achieve its investment objectives if a substantial portion of its
assets consisted of such instruments.
Securities Lending. The Fund may lend its portfolio securities
(generally to broker-dealers and other financial institutions) where such loans
are callable at any time and are continuously secured by segregated collateral
equal to no less than the market value, determined daily, of the loaned
securities. The Fund's net asset value would continue to reflect the value of
the loaned securities, and the Fund would continue to receive the income on the
loaned securities and would at the same time earn interest on the collateral or
on the investment of any cash collateral. The Fund presently intends to invest
such cash collateral in money market instruments listed below in "--Other
Investments." The Fund will not lend portfolio securities representing more
than one-third of its total assets. The Fund may pay lending fees to the party
arranging the loan.
Lending securities involves a risk of loss to the Fund if and to the
extent that the market value of the securities loaned increases and the
collateral is not increased accordingly. Securities lending also involves the
risk of loss of rights in the collateral or delay in recovery of the collateral
if the borrower fails to return the security loaned or becomes insolvent.
Fundamental Investment Policies
The Fund has adopted certain fundamental investment policies designed to
limit investment risk and maintain portfolio diversification. These fundamental
investment policies may not be changed without the approval of the holders of a
majority of the outstanding common shares and preferred shares (including the
AMPS), voting as a single class. A "majority of the outstanding" shares for
these purposes means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares outstanding are present or represented
by proxy, or (ii) more than 50% of the shares outstanding, whichever of (i) or
(ii) is less. The Fund may become subject to guidelines which are more limiting
than the investment restrictions set forth above or in the SAI in order to
obtain and maintain ratings from Moody's and Fitch on the AMPS. It is not
currently anticipated that these guidelines will materially impede the
Investment Manager from managing the Fund's
27
portfolio in accordance with the Fund's investment objectives and policies. See
"Description of AMPS--Rating Agency Guidelines and Asset Coverage." See
"Investment Objectives and Policies" and "Investment Restrictions" in the SAI
for a complete list of the fundamental investment policies of the Fund.
"Description of AMPS--Voting Rights" for additional information with respect to
the voting rights of holders of AMPS.
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,
repurchase agreements collateralized by such obligations, commercial paper and
shares of money market funds. Subject to certain restrictions contained in any
applicable exemptive order issued by the SEC, these instruments may include
investment companies such as money market funds advised or subadvised by the
Investment Manager or its affiliates. To the extent the Fund purchases shares
of a money market fund, the Fund will indirectly bear its proportionate share
of the advisory fees and other operating expenses of such fund.
Rating Agency Requirements
In connection with their rating the AMPS, Moody's and Fitch will impose
asset coverage tests and other restrictions that may limit the Fund's ability
to engage in certain of the transactions described above. See "Description of
AMPS--Rating Agency Guidelines and Asset Coverage."
INTEREST RATE TRANSACTIONS
In order to reduce the interest rate risk inherent in the Fund's
investments and capital structure (including the use of leverage through the
issuance of AMPS), the Fund may enter into interest rate swap or cap
transactions. The Fund would use interest rate swaps or caps only with the
intent to reduce or eliminate the risk that an increase in short-term interest
rates could have on Common Share net earnings as a result of leverage.
Interest rate swaps involve the Fund's agreement with the swap
counterparty to pay a fixed rate payment in exchange for the counterparty
paying the Fund a variable rate payment that is intended to approximate all or
a portion of the Fund's variable rate payment obligation on AMPS or any
variable rate borrowing. The payment obligation would be based on the notional
amount of the swap, which will not exceed the amount of the Fund's leverage.
The Fund intends to segregate 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 will treat such amounts as illiquid for purposes of
its 10% limit on investments in illiquid securities.
The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
payment from the counterparty of the difference based on the notional amount.
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. Common Shareholders will bear
the risks and costs associated with the Fund's use of interest rate
transactions. Depending on the state of interest rates in general, the Fund's
use of interest rate instruments could enhance or harm the value of the Fund's
investment portfolio. To the extent there is a decline in interest rates, the
net amount receivable by the Fund, if any, under the interest rate swap or cap
could decline, and this could reduce asset coverage on the AMPS or affect the
Fund's ability to pay dividends on the AMPS. In addition, if short-term
interest rates are lower than the Fund's fixed rate of payment on the interest
rate swap, the swap will reduce the Fund's net earnings. If, on the other hand,
short-term interest rates are higher than the fixed rate of payment on the
interest rate swap, the swap will enhance the Fund's net earnings. Buying
interest rate caps could enhance the Fund's performance by providing a maximum
leverage expense. Buying interest rate caps could also decrease the
28
net earnings of the Fund in the event that the premium paid by the Fund to the
counterparty exceeds the additional amount of dividends on AMPS or interest on
borrowings that the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of entering into
swaps or caps other than as described in this prospectus. The Fund would not
enter into interest rate swap or cap transactions in an aggregate notional
amount that exceeds the outstanding amount of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make. If the counterparty
defaults, the Fund would not be able to use the anticipated net receipts under
the swap or cap to offset the dividend payments on AMPS or interest payments on
borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend
on the general state of interest rates at that point in time, such a default
could negatively impact the performance of the Fund. The Fund will usually
enter into swaps or caps on a net basis; that is, the two payment streams will
be netted out in a cash settlement on the payment date or dates specified in
the instrument, with the Fund receiving or paying, as the case may be, only the
net amount of the two payments.
The Fund will not enter into an interest rate swap or cap transaction
with any counterparty that the Investment Manager believes does not have the
financial resources to honor its obligation under the interest rate swap or cap
transaction. Further, the Investment Manager will monitor the financial
stability of a counterparty to an interest rate swap or cap transaction in an
effort to protect the Fund's investments proactively. However, these measures
will not guarantee that the counterparty to a swap or cap transaction will not
default.
The Fund may not be able to enter into a suitable interest rate swap or
cap transaction when the Investment Manager believes such a transaction would
be appropriate, or the terms of the transaction may be less favorable then
expected. In addition, at the time the 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 those of the expiring transaction. If
these situations occur, they could have a negative impact on the value of the
Fund's investment portfolio.
The Fund may choose or be required to redeem some or all AMPS or prepay
any borrowings. This redemption would likely result in the Fund seeking to
terminate early all or a portion of any swap or cap transaction. Such early
termination of a swap or cap could result in a termination payment by the Fund.
There may also be penalties associated with early termination.
The Fund may also purchase and sell futures contracts and options on
futures contracts to hedge interest rate risk. See "Investment Objectives and
Policies--Portfolio Composition--Short Sales and Derivatives."
The Fund has agreed to pay the fees of a third party that will assist in
the structuring and negotiation of the Fund's interest rate transactions. The
Fund's ability to engage in interest rate transactions may be limited by tax
considerations.
PRINCIPAL RISKS OF THE FUND
Investing in the Fund involves risk, including the risk that you may
receive little or no return on your investment or that you may lose part or all
of your investment. Therefore, before investing you should consider carefully
the following risks that you assume when you invest in AMPS.
The Fund is a recently organized, 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.
29
Risks of Investing in the AMPS
Interest Rate Risk. The AMPS pay dividends based on shorter-term
interest rates. The Fund purchases real estate equity securities that pay
dividends that are based on the performance of the issuers. The Fund also may
buy real estate debt securities that pay interest based on longer-term yields.
These dividends and interest payments are typically, although not always,
higher than shorter-term interest rates. Real Estate Company dividends, as well
as longer-term and shorter-term interest rates, fluctuate. If shorter-term
interest rates rise, dividend rates on AMPS may rise so that the amount of
dividends paid to holders of AMPS exceeds the income from the Fund's 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 AMPS, however, dividend rates on
AMPS would need to exceed the net rate of return on the Fund's portfolio by a
significant margin before the Fund's ability to pay dividends on AMPS would be
jeopardized. If long-term interest rates rise, this could negatively impact the
value of the Fund's investment portfolio and thus reduce the amount of assets
serving as asset coverage for AMPS. The Fund may enter 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. However, 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 "Interest Rate
Transactions."
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 a bid order (an order to retain
AMPS) at an auction only at a specified rate, and that rate exceeds the rate
set at the auction, your order will be deemed an irrevocable offer to sell your
AMPS, and you will not retain your AMPS. Additionally, if you buy AMPS or elect
to retain AMPS without specifying a rate below which you would not wish to buy
or continue to hold those shares, and the auction sets a below-market rate, you
may receive a lower rate of return on your AMPS than the market rate for
similar investments. The dividend period for the AMPS may be changed by the
Fund, subject to certain conditions and with notice to the holders of the AMPS,
which could also affect the liquidity of your investment. See "Description of
AMPS" and "The Auction."
Secondary Market Risk. If you try to sell your AMPS between auctions,
you may not be able to sell any or all of your shares, or you may not be able
to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. Changes in interest rates could affect the price you would receive
if you sold your AMPS in the secondary market, particularly if the Fund has
designated a special rate period (a dividend period of more than seven days).
Broker-dealers that maintain a secondary trading market (if any) for the AMPS
are not required to maintain this market, and the Fund is not required to
redeem shares if either an auction or an attempted secondary market sale fails
because of a lack of buyers. The AMPS are not registered on a stock exchange or
NASDAQ. If you sell your AMPS between auctions, you may receive less than the
price you paid for them, especially when market interest rates have risen since
the last auction or during a special rate period.
Ratings and Asset Coverage Risk. While it is a condition to the closing
of the offering that Moody's assigns a rating of "Aaa" and Fitch assigns a
rating of "AAA" to the AMPS, these ratings do not eliminate or necessarily
mitigate the risks of investing in AMPS. In addition, Moody's, Fitch or another
rating agency 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 Fund may (but is not required to) alter its portfolio
in an effort to improve the rating, although there is no assurance that it will
be able to do so to the extent necessary to restore the prior rating. See
"Additional Risk Considerations --Portfolio Turnover." In addition, the Fund
may be forced to redeem your AMPS to meet regulatory or rating agency
requirements. The Fund may also voluntarily redeem AMPS under certain
circumstances. See "Description of AMPS--Redemption." The asset coverage
requirements imposed by a rating agency may limit the Fund's ability to invest
in certain securities or utilize certain investment techniques that the
Investment Manager might otherwise consider desirable. See "Description of
AMPS--Rating Agency Guidelines and Asset Coverage" for a description of the
rating agency guidelines with which the Fund must currently comply.
30
Restrictions on Dividends and Other Distributions. Restrictions imposed
on the declaration and payment of dividends or other distributions to the
holders of the Fund's Common Shares and AMPS, both by the 1940 Act and by
requirements imposed by rating agencies, might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Fund intends to redeem AMPS to enable the Fund to
distribute its income as required to maintain its qualification as a regulated
investment company under the Code, there can be no assurance that such
redemptions can be effected in time to meet the requirements of the Code. See
"Tax Matters."
Portfolio Investments Risk. In certain circumstances, the Fund may not
earn sufficient income from its investments to pay dividends on AMPS. In
addition, the value of the Fund's investment portfolio may decline, reducing
the asset coverage for the AMPS. If an issuer whose securities the Fund
purchases experiences financial difficulties, defaults, or is otherwise
affected by adverse market factors, there may be a negative impact on the
income and/or asset value of the Fund's investment portfolio, which will reduce
asset coverage for the AMPS and make it more difficult for the Fund to pay
dividends on the AMPS.
General Risks of Investing In The Fund
Limited Operating History
The Fund is a recently organized, non-diversified, closed-end management
investment company that has been operational for less than three months.
Investment Risk
An investment in the Fund is subject to investment risk, including the
possible loss of the entire principal amount that you invest.
Issuer Risk
The value of an equity or debt security may decline for a number of
reasons that directly relate to the Real Estate Company that issues it, such as
management performance, financial leverage and reduced demand for the Real
Estate Company's properties and services.
Interest Rate Risk
Interest rate risk is the risk that fixed-income investments such as
preferred shares, U.S. Government obligations and debt securities, and to a
lesser extent dividend-paying common stocks such as REIT common shares, will
decline in value because of changes in interest rates. When interest rates
rise, the market value of such securities generally will fall. The Fund's
investment in such securities means that the value of the Fund's investment
portfolio will tend to decline if market interest rates rise. Also, during
periods of declining interest rates, many mortgages may be refinanced, which
may reduce the yield from securities of Real Estate Companies that invest
primarily in loans secured by real estate and generally derive their income
primarily from interest payments on mortgage loans. This risk is commonly known
as "prepayment risk." The Fund's use of leverage through the issuance of the
AMPS may tend to magnify interest rate risk. See "--Leverage Risk" below. The
Fund may use swaps, caps, futures contracts and options on futures contracts to
help control interest rate risk. See "Investment Objectives and
Policies--Portfolio Composition--Short Sales and Derivatives" and "Interest
Rate Transactions."
31
General Risks of Securities Linked to the Real Estate Market
The Fund will not invest in real estate directly, but will invest in real
estate indirectly by purchasing securities issued by Real Estate Companies,
including REITs. However, because of the Fund's policy of concentrating in the
securities of companies in the real estate industry, it 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
. changes in interest rates
Thus, the value of the Fund's investment portfolio may change at
different rates compared to the value of the investment portfolio 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., The Americans with
Disabilities Act and tax laws), supply and demand disparities, 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 dividends or interest and principal on
its 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 Real Estate 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.
32
In addition to these risks, investments in real estate and Real Estate
Companies are also subject to risks that are specific to the investment sector
or type of property in which the Real Estate Companies are investing. Some of
these specific risks, which could have an adverse effect on the Fund's
portfolio, are discussed below.
Retail Properties. Retail properties are affected by the overall health
of the national and relevant local 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 are also affected by the overall
health of the national and relevant local economy. Office properties generally
require their owners to expend significant amounts for general capital
improvements, tenant improvements and costs of reletting space. In addition,
office properties that are not equipped to accommodate the needs of modern
businesses may become functionally obsolete and thus non-competitive. Office
properties may also be adversely affected if there is an economic decline in
the businesses operated by their tenants. The risks of such an adverse effect
are increased if the property revenue is dependent on a single tenant or if
there is a significant concentration of tenants in a particular business or
industry.
Hotel Properties. The risks of hotel properties include, among other
things, the necessity of a high level of continuing capital expenditures to
keep necessary furniture, fixtures and equipment updated, competition from
other hotels, increases in operating costs (which increases may not necessarily
be offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating, liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.
Also, hotels may be operated pursuant to franchise, management and
operating agreements that may be terminable by the franchiser, the manager or
the operator. On the other hand, it may be difficult to terminate an
ineffective operator of a hotel 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 from private sector health
insurance providers; and competition in terms of appearance, reputation,
quality and cost of care with similar properties on a local and regional basis.
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/Residential Properties. The value and successful operation
of a multifamily/residential property may be affected by a number of factors
such as the location of the property, the ability of management
33
to provide adequate maintenance and insurance, the types of services provided
by the property, the level of mortgage rates, presence of competing properties,
the relocation of tenants to new properties 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 cash flows of such properties.
Self-Storage Properties. The value and successful operation of a
self-storage property may be affected by a number of factors, such as the
ability of the management team, the location of the property, the presence of
competing properties, changes in traffic patterns, and adverse effects of
general and local economic conditions.
Insurance Issues. Certain Real Estate Companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, earthquake, extended coverage and rental loss insurance
with policy specifications, limits and deductibles customarily carried for
similar properties. However, such insurance is not uniform among Real Estate
Companies. Moreover, there are certain types of extraordinary losses that may
be uninsurable, or not insurable at economic rates. Certain properties may be
subject to catastrophic events, such as terrorism, earthquake activity, floods
or fires, for which insurance coverage cannot be economically obtained. Should
a property sustain damage as a result of a catastrophic event, even if the Real
Estate Company maintains appropriate insurance, the Real Estate Company may
incur substantial losses due to insurance deductibles, co-payments on insured
losses or uninsured losses. Should any type of uninsured loss occur (or if an
insurer is unwilling or unable to pay a claim), the Real Estate Company could
lose its investment in, and anticipated profits and cash flows from, a number
of properties, and the value of the Fund's investment in such Real Estate
Company may be impacted as a result.
Financial Leverage Risk. Real Estate Companies may be highly leveraged
and financial covenants may affect the ability of Real Estate Companies to
operate effectively. Real Estate 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 make scheduled interest payments or to repay
principal.
In addition, a Real Estate Company's obligation to comply with financial
covenants, such as debt-to-asset ratios and secured debt-to-total asset ratios,
and other contractual obligations may restrict a Real Estate Company's range of
operating activity. A Real Estate Company, therefore, may be limited from
incurring additional indebtedness, selling its assets and engaging in mergers
or making acquisitions that may be beneficial to the operation of the Real
Estate Company.
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 Real Estate 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 environmental liability could have a
material adverse effect on the results of operations and cash flow of any such
Real Estate Company and, as a result, the asset coverage on the AMPS or the
amount available to make distributions on shares of the Fund 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 differently 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.
34
REIT-related Risks. 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 that purports to be a REIT but does not satisfy all of the
conditions of REIT status in any year. In some cases, the Real Estate Company
may still be able to qualify for REIT status after payment of a penalty tax.
Otherwise, a Real Estate Company that fails to qualify for REIT status would be
subject to corporate-level taxation. In either case, the return to the Fund on
its investment in such company would be reduced. 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 the Fund's investment in such a 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.
Leverage Risk
The Fund expects to utilize financial leverage on an ongoing basis for
investment purposes. Leverage risk includes the risk associated with the
issuance of the AMPS to leverage the Fund's Common Shares. The Fund anticipates
that, immediately after the completion of the offering of AMPS, the AMPS will
represent approximately 35% of the Fund's managed assets. The precise amount of
leverage used by the Fund may vary from time to time, but the Fund will not
incur leverage (including AMPS and other forms of leverage) in an amount
exceeding 50% of its managed assets. "Managed assets" means the net asset value
of the Common Shares plus the liquidation preference of any preferred shares
(including the AMPS) and the principal amount of any borrowings used for
leverage. Although the Fund may in the future offer other preferred shares, the
Fund does not currently intend to offer preferred shares other than the AMPS
offered in this prospectus.
As an alternative to AMPS (i.e., during periods in which no AMPS are
outstanding), the Fund may incur leverage through the issuance of commercial
paper or notes or other borrowings. Any AMPS or borrowings will have seniority
over the Common Shares.
If the dividend or interest rate on the AMPS or any borrowings, as
modified by any cap, or the payment rate set by any interest rate swap, exceeds
the net return on the Fund's portfolio investments, the use of leverage will
result in a lower net asset value than if the Fund were not leveraged, and the
Fund's ability to pay dividends and meet its asset coverage requirements on the
AMPS will be reduced. Because the securities included in the Fund's portfolio
will typically pay interest based on longer-term yields (or, in the case of
common shares or preferred shares purchased by the Fund, will pay dividends
based on the longer-term performance of the issuer), while the dividend rate on
the AMPS or interest rates on other forms of leverage will be adjusted
periodically, the Fund's net asset value could be reduced as a result of using
leverage even when both long-term and short-term interest rates rise.
Similarly, any decline in the net asset value of the Fund's investments could
result in the Fund being in danger of failing to meet its asset coverage
requirements or of losing its expected "Aaa" and "AAA" ratings on the AMPS. In
an extreme case, the Fund's current investment income might not be sufficient
to meet the dividend requirements on the AMPS. In order to counteract such an
event, the Fund might need to liquidate investments in order to fund a
redemption of some or all of the AMPS, which would cause the Fund to incur
transaction expenses and other costs and could result in the realization of net
short-term capital gains that, when distributed to shareholders, will be
taxable as ordinary income. There is no assurance that the Fund's leveraging
strategy will be successful.
To the extent that the Fund is required or elects to redeem any AMPS or
prepay any borrowings, the Fund may need to liquidate investments to fund such
redemptions or prepayments. Liquidation at times of adverse economic conditions
may result in capital loss to the Fund and reduce asset coverage on the AMPS.
In addition, such redemption or prepayment 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 or cap could result in a termination payment by
the Fund. See "Interest Rate Transactions."
35
While the Fund may from time to time consider reducing leverage in
response to actual or anticipated changes in interest rates in an effort to
mitigate the increased volatility of current income and net asset value
associated with leverage, there can be no assurance that the Fund will actually
reduce leverage in the future or that any reduction, if undertaken, will be
effective. Changes in the future direction of interest rates are very difficult
to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the Fund's net asset value relative to the circumstance where the Fund had not
reduced leverage. The Fund may decide that this risk outweighs the likelihood
of achieving the desired reduction to volatility in income and Common Share
price if the prediction were to turn out to be correct, and determine not to
reduce leverage as described above.
Because the fees received by Investment Manager are based on the managed
assets of the Fund (including assets represented by the AMPS and other
leverage), the Investment Manager has a financial incentive for the Fund to
issue the AMPS and incur other leverage.
Risks of Investment in Lower-Rated Securities
Lower-rated securities, also known as "junk bonds," may be considered
speculative with respect to the issuer's continuing ability to make principal
and interest payments. Analysis of the creditworthiness of issuers of
lower-rated securities may be more complex than for issuers of higher quality
debt securities, and the Fund's ability to achieve its investment objectives
may, to the extent the Fund invests in lower-rated securities, be more
dependent upon the Investment Manager's credit analysis than would be the case
if the Fund were investing in higher quality securities. The Fund may only
invest in non-investment grade securities that are rated "CCC" or higher by
Fitch or S&P or "Caa" or higher by Moody's (or a comparable rating by another
nationally recognized statistical agency), or unrated securities judged to be
of comparable quality by the Investment Manager. The issuers of these
securities may be in default or have a currently identifiable vulnerability to
default on their payments of principal and interest or may otherwise be subject
to present elements of danger with respect to payments of principal or
interest. However, the Fund will not invest in securities that are in default
as to payment of principal and interest 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 generally
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. A lack of 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 value of the Fund's investment portfolio.
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.
While securities carrying the fourth highest quality rating ("Baa" by
Moody's or "BBB" by Fitch or S&P or an equivalent rating from another
nationally recognized statistical rating agency or, if unrated, judged to be of
comparable quality by the Investment Manager) are considered investment grade
and are viewed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of
36
risk than that associated with investments in securities in the higher rating
categories. Such securities lack outstanding investment characteristics and, in
fact, have speculative characteristics as well. For example, changes in
economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case with
higher rated securities.
Interest Rate Transactions Risk
The Fund may enter into a swap or cap transaction to attempt to protect
itself from increasing dividend or interest expenses resulting from increasing
short-term interest rates. A decline in interest rates may result in a decline
in the value of the swap or cap, which may result in a decline in the value of
the Fund's investment portfolio. A sudden and dramatic decline in interest
rates may result in a significant decline in the value of the Fund's investment
portfolio. See "Interest Rate Transactions."
Risks of Futures and Options on Futures
The use by the Fund of futures contracts and options on futures contracts
to hedge interest rate risks involves special considerations and risks.
Successful use of hedging transactions depends upon the Investment Manager's
ability to predict correctly the direction of changes in interest rates. There
can be no assurance that any particular hedging strategy will succeed or that
appropriate hedging transactions will be available on the terms desired. There
might be imperfect correlation, or even no correlation, between the price
movements of a futures or option contract and the movements of the interest
rates being hedged. Such a lack of correlation might occur due to factors
unrelated to the interest rates being hedged, such as market liquidity and
speculative or other pressures on the markets in which the hedging instrument
is traded. Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable movements in the
interest rates being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable movements
in the hedged interest rates. The Fund could lose money if the counterparty to
a futures contract or option on a futures contract is unwilling or unable to
honor its obligations to the Fund. There is no assurance that a liquid
secondary market will exist for any particular futures contract or option
thereon at any particular time. If the Fund were unable to liquidate a futures
contract or an option on a futures contract position due to the absence of a
liquid secondary market or the imposition of price limits, it could incur
substantial losses. The Fund would continue to be subject to market risk and
counterparty risk with respect to the position. There is no assurance that the
Fund will use hedging transactions. For example, if the Fund determines that
the cost of hedging will exceed the potential benefit to the Fund, the Fund
will not enter into such transactions.
Foreign Security Risk
The prices of foreign securities may be affected by factors not present
in U.S. markets. The dollar value of the Fund's foreign investments will be
affected by changes in the exchange rates between the dollar and the currencies
in which those investments are traded. The value of the Fund's foreign
investments may also be adversely affected by political and social instability
in their home countries and by changes in economic or taxation policies in
those countries. Foreign securities are also subject to the risks of
nationalization, expropriation or confiscatory taxation, currency blockage, and
adverse political changes or diplomatic developments.
Foreign companies generally are subject to less stringent regulations,
including financial and accounting controls, than are U.S. companies. As a
result, there generally is less publicly available information about foreign
companies than about U.S. companies. In addition, the securities markets of
other countries are smaller than U.S. securities markets. As a result, many
foreign securities may be less liquid and more volatile than U.S. securities.
Liquidity Risk
The Fund may invest in securities that are illiquid so long as no more
than 10% of the total assets of the Fund (taken at market value at the time of
investment) would be invested in such securities. The term "illiquid
37
securities" for these purposes means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the
amount at which the Fund has valued the securities. Illiquid securities may
trade at a discount from comparable, more liquid investments, and may be
subject to wide fluctuations in market value. Also, the Fund may not be able to
dispose of illiquid securities when that would be beneficial at a favorable
time or price.
Risks of Warrants and Rights
Warrants and rights are subject to the same market risks as stocks, but
may be more volatile in price. Warrants and rights do not carry the right to
dividends or voting rights with respect to their underlying securities, and
they do not represent any rights in the assets of the issuer. An investment in
warrants or rights may be considered speculative. In addition, the value of a
warrant or right does not necessarily change with the value of the underlying
security, and a warrant or right ceases to have value if it is not exercised
prior to its expiration date. The purchase of warrants or rights involves the
risk that the Fund could lose the purchase value of a warrant or right if the
right to subscribe to additional shares is not exercised prior to the warrant's
or right's expiration. Also, the purchase of warrants and rights involves the
risk that the effective price paid for the warrant or right, added to the
subscription price of the related security, may exceed the subscribed
security's market price. This may occur, for example, when there is no movement
in the price of the underlying security or when the market price of the
underlying security decreases.
Tax Risk
The Bush Administration has announced a proposal to eliminate the federal
tax on dividends of income previously taxed at the corporate level. The
availability of tax free dividends may reduce the value of, and return on, REIT
securities which are part of the Fund's investment portfolio. Moreover, the
proposal may be given a retroactive effect. This change could adversely affect
the Fund's shareholders and distributions they receive from the Fund.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the present
value of future payments. As inflation increases, the real, or
inflation-adjusted, value of the AMPS and distributions can decline. However,
during any periods of rising inflation, AMPS dividend payments may increase,
which would tend to offset this risk.
ADDITIONAL RISK CONSIDERATIONS
Portfolio Turnover
The Fund may engage in frequent and active portfolio trading when the
Investment Manager considers it to be appropriate, but the Fund will not use
short-term trading as the primary means of achieving its investment objectives.
Although the Fund cannot accurately predict its annual portfolio turnover rate,
it is not expected to exceed 100% under normal circumstances. However, there
are no limits on the rate of portfolio turnover, and investments may be sold
without regard to the length of time held when, in the opinion of the
Investment Manager, investment considerations warrant such action. A higher
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 that, when distributed to shareholders, will be taxable as ordinary
income. See "Tax Matters."
Non-Diversified Status
Because the Fund, as a "non-diversified" investment company under the
1940 Act, can invest a greater portion of its assets in obligations of a single
issuer than, and invest in a smaller number of individual issuers than, a
"diversified" fund, an investment in the Fund presents greater risk to you than
an investment in a diversified company. The Fund will be more susceptible than
a diversified fund to being adversely affected by
38
any single corporate, economic, political or regulatory occurrence. See
"Investment Objectives and Policies." To help control this risk, the Fund will
not invest more than 15% of its total assets (taken at market value at the time
of investment) in the securities of any one issuer other than the U.S.
Government. In addition, the Fund intends to diversify its investments to the
extent necessary to maintain its status as a regulated investment company under
the Code. See "Taxation" in the SAI.
Anti-Takeover Provisions
The Declaration includes provisions that may have the effect of limiting
the ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. See "Certain Provisions in the Declaration
of Trust."
Recent Developments
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, some of the U.S. securities markets were closed
for a four-day period. In addition, certain auction agents for auction rate
preferred shares similar to the AMPS were unable to run auctions during that
period. These terrorist attacks and related events have led to increased
short-term market volatility and may have long-term effects on U.S. and world
economies and markets. A similar disruption of the financial markets could
adversely impact the Fund in general and the AMPS in particular by, for
example, affecting interest rates, auctions and auction participants, such as
the auction agents and broker-dealers, secondary trading, ratings, credit risk,
inflation and other factors relating to securities and other investments.
Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of the
Fund and/or the Investment Manager due to their possible affiliations with CDC
IXIS Asset Management North America, L.P. Absent an exemption from the SEC or
other regulatory relief, the Fund is generally precluded from effecting certain
principal transactions with affiliated brokers, and its ability to purchase
securities being underwritten by an affiliated broker or a syndicate including
an affiliated broker or to utilize affiliated brokers for agency transactions
is subject to regulatory and other restrictions. This could limit the Fund's
ability to engage in securities transactions and take advantage of market
opportunities.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of
the Board of Trustees. Subject always to the investment objectives and policies
of the Fund and to the general supervision of the Trustees, the Investment
Manager is responsible for management of the Fund's investment portfolio. The
management of the Fund's day-to-day operations (other than investment
operations) is delegated to its officers and the Fund's administrator and
sub-administrator, subject always to the general supervision of the Trustees.
The names and business addresses of the Trustees 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
The Investment Manager has been retained to provide investment advice,
and, in general, to conduct the investment program of the Fund under the
overall supervision and control of the Trustees of the Fund. The Investment
Manager, which is registered as an investment adviser with the SEC, is a real
estate investment advisory firm that provides investment management and related
services to institutional and retail investors. Together with its affiliates
operating under the AEW name, the Investment Manager managed approximately $6.7
billion of client capital as of December 31, 2002. The Investment Manager is a
subsidiary of (and therefore may be deemed to be controlled by) CDC IXIS Asset
Management North America, L.P., which, together with its subsidiaries and
affiliates in the U.S., Europe and Asia, managed approximately $312.8 billion
in assets for institutions and individuals as of December 31, 2002. The
Investment Manager's address is Two Seaport Lane, World Trade Center East,
Boston, Massachusetts 02210.
39
A team of professionals at the Investment Manager, working under the
Fund's portfolio manager, is primarily responsible for overseeing the
day-to-day operations of the Fund. That team is led by Matthew A. Troxell, who
serves as Portfolio Manager for the Fund. Mr. Troxell joined the Investment
Manager in 1994 as a Vice President and became a Principal of the firm in 1997.
He has 19 years of securities and portfolio management experience. Prior to
joining the Investment Manager, he was a Vice President and Assistant to the
President of Landmark Land Company and a Securities Analyst at A.G. Becker
Paribas. Mr. Troxell is a graduate of Tufts University (B.A.) and holds the
designation of Chartered Financial Analyst (CFA).
Investment Management Agreement
Under its Investment Management Agreement with the Fund, 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 Trustees of the Fund. The
Investment Manager also performs certain administrative services for the Fund
and provides persons satisfactory to the Trustees of the Fund to serve as
officers of the Fund. Such officers, as well as certain other employees and
Trustees of the Fund, may be directors, officers, or employees of the
Investment Manager or its affiliates, including CDC IXIS Services.
For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
..80% of the average daily managed assets of the Fund. "Managed assets" means
the net asset value of the Common Shares plus the liquidation preference of any
preferred shares (including the AMPS) and the principal amount of any
borrowings used for leverage. In addition to the monthly management fee, the
Fund pays all other costs and expenses of its operations, including
compensation of its independent Trustees, custodian, administrator, auction
agent, Broker-Dealers, transfer agency and dividend disbursing expenses, legal
fees, expenses of independent auditors, expenses associated with interest rate
transactions (including the fees of third parties that assist in the
structuring and negotiation of the Fund's interest rate transactions), expenses
of repurchasing shares, expenses of issuing the AMPS and any other preferred
shares of the Fund, listing expenses, trading, brokerage and other investment
expenses, interest expense, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any. The offering costs of the AMPS will be netted
against paid-in capital. The Investment Manager has contractually agreed to
waive a portion of its investment management fees in the amount of 0.25% of
average daily managed assets (which include the liquidation preference of any
preferred shares and the principal amount of any borrowings used for leverage)
for the first five years of the Fund's operations, 0.20% of average daily
managed assets in year six, 0.15% of average daily managed assets in year
seven, 0.10% of daily managed assets in year eight and 0.05% of average daily
managed assets in year nine. The Investment Manager has not agreed to waive any
portion of its fees beyond year nine of the Fund's operations. When the Fund is
utilizing leverage (including during the period when the AMPS are outstanding),
the fees paid to the Investment Manager and its affiliates for investment
advisory, management and other 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 include the liquidation preference of the AMPS and the
principal amount of any borrowings used for leverage. As a result, the
Investment Manager has a financial incentive for the Fund to issue AMPS or to
otherwise incur leverage, which may create a conflict of interest. See
"Principal Risks of the Fund--General Risks of Investing in the Fund--Leverage
Risk."
Administrative Services And Sub-Administration Agreements
Under its Administrative Services Agreement with the Fund, CDC IXIS
Services provides certain administrative and accounting functions for the Fund,
including providing or procuring administrative services necessary for the
operations of the Fund, furnishing office space and facilities required for
conducting the business of the Fund and providing persons satisfactory to the
Trustees of the Fund to serve as officers of the Fund.
As permitted by the Administrative Services Agreement and with the
approval of the Board of Trustees of the Fund, CDC IXIS Services has entered
into the Sub-Administration Agreement with Investors Bank &
40
Trust Company, as sub-administrator. Under the Sub-Administration Agreement,
Investors Bank & Trust Company has assumed responsibility for certain fund
administration services, subject to the supervision of CDC IXIS Services.
Under the Administrative Services Agreement, the Fund pays CDC IXIS
Services a monthly administration fee computed on the basis of the average
daily managed assets of the Fund at an annual rate equal to 0.06% of the first
$300 million in assets and 0.0575% of assets in excess of $300 million, with a
minimum annual fee of $150,000. Under the Sub-Administration Agreement, CDC
IXIS Services (and not the Fund) pays Investors Bank & Trust Company a monthly
fee computed on the basis of the managed assets of the Fund at an annual rate
equal to 0.015% of the first $300 million in assets and 0.012% thereafter.
Marketing Agent
CDC IXIS Asset Management Advisors Group (the "Advisors Group"), an
affiliate of the Investment Manager, acted as marketing agent for the Fund in
connection with the offering of the Fund's Common Shares by preparing marketing
materials and providing distribution support during the offering. In this
connection, the Advisors Group agreed, pursuant to an agreement with the
Investment Manager, (i) to reimburse the Investment Manager for one-half of the
amount by which the aggregate of all of the Fund's organizational expenses and
offering costs with respect to the offering of the Common Shares (other than
the sales load) exceeds $0.03 per Common Share and (ii) to bear a portion of
any ongoing asset-based fees to be paid by the Investment Manager to the
underwriters (other than Merrill Lynch) in connection with the offering in the
amount of 21.8% of such fees in years one and two of the Fund's operations and
in declining amounts for each of the four years thereafter. As payment for
these services, the Investment Manager (and not the Fund) has agreed to pay the
Advisors Group a fee at the annual rate of 0.12% of net assets for years one
and two of the Fund's operations, 0.08% of net assets for years three and four,
and 0.05% of net assets in years five and six. The Investment Manager has not
agreed to pay any fees to the Advisors Group (and the Advisors Group has not
agreed to bear any portion of any asset-based fees payable by the Investment
Manager) beyond year six of the Fund's operations. The Advisors Group and the
Investment Manager, both of which are subsidiaries of CDC IXIS Asset Management
North America, L.P., may agree to change or eliminate these payments at any
time.
Additional Compensation Agreement
In connection with the offering of the Fund's Common Shares, the
Investment Manager has agreed to pay from its own assets additional
compensation to Merrill Lynch. This additional compensation will be payable
quarterly at the annual rate of .10% of the Fund's managed assets during the
continuance of the Investment Management Agreement or other advisory agreement
between the Investment Manager and the Fund. The total amount of these
additional payments will not exceed 4.5% of the total price to the public of
the Common Shares sold in the offering of the Fund's Common Shares; provided,
that in determining when the maximum additional compensation amount has been
paid, the value of each of the quarterly payments shall be discounted at the
annual rate of 10% to November 29, 2002, the closing date of such offering.
Merrill Lynch has agreed to provide certain after-market support services to
the Investment Manager designed to maintain the visibility of the Fund on an
ongoing basis and to provide relevant information, studies or reports regarding
the Fund and the closed-end investment company industry.
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. For a more
complete description of the AMPS, please refer to the detailed description of
the AMPS in Article 11 of the Bylaws, which is attached as Appendix B to the
SAI. Certain of the capitalized terms used herein are defined in the Bylaws.
This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Declaration and Bylaws.
The Declaration and Bylaws have been filed as exhibits to the Registration
Statement of which this prospectus is part.
41
General
Under the Declaration, the Fund is authorized to issue preferred shares
having such par value and such preferences, voting powers, terms of redemption,
if any, and special or relative rights or privileges (including conversion
rights, if any) as determined by the Board of Trustees, without the approval of
Common Shareholders. The AMPS are preferred shares of beneficial interest with
$0.00001 par value per share. 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 shares
of any other series of preferred shares 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, subject to matters discussed in
"Anti-Takeover and Other Provisions in the Declaration of Trust,"
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 preferred shares without designation as to series. The AMPS will not
be subject to any sinking fund, but will be subject to mandatory redemption and
optional 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 15 days, and
the dividend rate for this period will be 1.35%. Subsequent rate periods
generally will be seven days, and the dividend rates for those periods will
generally be determined by auction. Further description of the auction
procedures can be found below under "The Auction" and in Article 11 of the
Bylaws, which is attached as Appendix B to the SAI. The Fund, subject to
certain conditions, may change the length of subsequent rate periods by
designating them as special rate periods. See "--Designation of Special Rate
Periods" below.
Dividend Payment Dates. Dividends on AMPS will be payable when, as and
if declared by the Board, out of legally available funds in accordance with the
Declaration, the Bylaws 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 business day, or as otherwise specified in the Bylaws. The Fund, at its
discretion, may establish dividend payment dates in respect of any special rate
period of AMPS consisting of less than 30 days, provided that such dates shall
be set forth in the notice of special rate period relating to such special rate
period and certain other requirements are met. Dividends on any special rate
period consisting of more than 30 days will generally be payable on the first
business day of each calendar month within such special rate period.
Dividends will be paid through The Depository Trust Company ("DTC") on
each dividend payment date. The dividend payment date will normally be the
first business day after the dividend period ends. DTC, in accordance with its
current procedures, is expected to distribute dividends received from the
auction agent in same-day funds on each dividend payment date to members of DTC
that will act on behalf of existing or potential holders of AMPS ("Agent
Members"). These Agent Members are in turn expected to distribute such
dividends to the persons for whom they are acting as agents. Each of the
current Broker-Dealers has currently 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 dividend per
share of AMPS by multiplying the applicable rate then in effect for the AMPS by
a fraction. The numerator of this fraction will normally be seven (i.e., the
number of days in the rate period), and the denominator will normally be 360.
If the Fund has designated a special rate period, then the numerator will be
the number of days in the special rate period, and the denominator will
normally be 360. In either case, this rate is then multiplied by $25,000 to
arrive at the dividend per share.
42
Dividends on the AMPS will accumulate from the date of their original
issue, which is February 10, 2003. For each dividend payment period after the
initial rate period, the dividend rate will be the dividend rate determined at
auction, except as otherwise provided in the Bylaws. The dividend rate that
results from an auction will not be greater than the applicable maximum rate
described below.
The applicable maximum rate for any regular rate period will be the
applicable percentage (set forth in the table below) of the applicable "AA"
Financial Composite Commercial Paper Rate (as defined below). The applicable
percentage for any regular rate period will generally be determined based on
the lower of the credit rating or ratings assigned to the AMPS by Moody's and
Fitch on the auction date for such period. If Moody's or Fitch or both shall
not make such rating available, the rate shall be determined by reference to
equivalent ratings issued by a substitute rating agency. In the case of a
special rate period, the reference rate will be the applicable "AA" Financial
Composite Commercial Paper Rate (for a rate period of fewer than 184 days) or
the Treasury Index Rate (as defined below) (for a rate period of 184 days or
more).
Applicable Percentage Payment Table
----------------------------------------
Credit Ratings
----------------------------- Applicable
Moody's Fitch Percentage
---------------- ------------ ----------
"Aa3" or higher AA or higher 150%
"A3" to "A1" A to A+ 200%
"Baa3" to "Baa1" BBB to BBB+ 225%
Below "Baa3" Below BBB 275%
The "'AA' Financial Composite Commercial Paper Rate" is the rate on
commercial paper issued by corporations whose bonds are rated AA by S&P as made
available by the Federal Reserve Bank of New York or, if such rate is not made
available by the Federal Reserve Bank of New York, the arithmetical average of
such rates as quoted to the auction agent by certain commercial paper dealers
designated by the Fund.
The "Treasury Index Rate" is the average yield to maturity for certain
U.S. Treasury securities having substantially the same length to maturity as
the applicable dividend period for the AMPS. For a more detailed description,
please see Article 11 of the Bylaws.
Prior to 12:00 noon, New York City time, on each dividend payment date,
the Fund is required to deposit with the auction agent sufficient funds for the
payment of declared dividends. As specified in the Bylaws, auctions will
generally not be held if the Fund fails to make such deposit. In such a
situation, dividends for the next dividend period would normally be paid at a
higher default rate, as provided in the Bylaws. The Fund does not intend to
establish any reserves for the payment of dividends.
The Board of Trustees may amend the applicable maximum rate to increase
the percentage amount by which the reference rate described above is multiplied
to determine the applicable maximum rate shown without the vote or consent of
the holders of AMPS or any other shareholder of the Fund, but only with
confirmation from each rating agency then rating the AMPS that such action will
not impair such agency's then-current rating of the AMPS, and after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund could meet the Preferred Shares Basic Maintenance Amount
test discussed below under "--Rating Agency Guidelines and Asset Coverage."
Restrictions on Dividends and Other Distributions. Except as provided
below, while 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 Common Shares or rights to purchase
Common Shares). In addition, the Fund generally may not call for redemption or
redeem 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 on liquidation). However, the Fund is not
confined by the above restrictions if:
. immediately after such dividend declaration or payment transaction,
(i) the discounted value of the Fund's portfolio (i.e., the aggregate
value of the Fund's portfolio according to criteria set forth by
43
each rating agency then rating the AMPS) would be equal to or greater
than the Preferred Shares Basic Maintenance Amount and (ii) the 1940
Act Preferred Shares Asset Coverage would be satisfied (see "--Rating
Agency Guidelines and Asset Coverage" below);
. full cumulative dividends on the AMPS due on or prior to the Fund's
most recently ended dividend period have been paid or have been
declared and sufficient funds for the payment thereof deposited with
the auction agent; and
. the Fund has redeemed the full number of AMPS required to be redeemed
by any provision for mandatory redemption.
The Fund generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Fund ranking, as to the
payment of dividends, on a parity with the AMPS unless the Fund has declared
and paid the lesser of full cumulative dividends or the same proportionate
share of dividends on the AMPS through the most recent dividend payment date.
When the Fund has not paid dividends in full upon the AMPS through the most
recent dividend payment date or upon any class or series of shares of the Fund
ranking, as to the payment of dividends, on a parity with the 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, in consultation with the lead Broker-Dealer designated by the Fund
(initially Merrill Lynch), declare a special rate period on the AMPS. To
declare 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 of
special rate period will state the length of the special rate period, which may
not be greater than five years. The Fund may not designate a special rate
period unless sufficient clearing bids for the AMPS were made in the most
recent auction. In addition, full cumulative dividends and any amounts due with
respect to mandatory redemptions or optional redemptions must be paid in full
or deposited with the auction agent. The Fund also must have received
confirmation from Moody's and Fitch or any substitute rating agency that the
proposed special rate period will not impair such agency's then-current rating
of the AMPS and the lead Broker-Dealer designated by the Fund must not have
objected to the declaration of a special rate period. The Fund may provide
that, in order to redeem AMPS at the Fund's option during a special rate
period, the Fund must pay to holders of the AMPS a "redemption premium" in
addition to the redemption price per share of $25,000 plus an amount equal to
the accumulated but unpaid dividends. A notice of special rate period will
specify whether 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.
The Fund's declaration of a special rate period may affect the liquidity
of your investment. A special rate period would be longer than a regular rate
period, and you would be unable to sell AMPS in an auction for a corresponding
longer period of time. If you sell your AMPS between auctions, you may receive
less than the price you paid for them, especially when market interest rates
have risen. The risks described in this paragraph will become greater as the
length of the special rate period increases.
Voting Rights
Except as otherwise described in this prospectus and in the SAI or as
otherwise set forth in the Declaration or the Bylaws or required by law,
holders of AMPS will have equal voting rights with Common Shareholders and
holders of any other preferred shares of the Fund (each class having one vote
per share) and will vote together with Common Shareholders and any other
preferred shares as a single class.
Holders of outstanding preferred shares of the Fund, including AMPS,
voting as a separate class, are entitled to elect two of the Fund's Trustees.
The remaining Trustees are elected by Common Shareholders and holders of
preferred shares, including the AMPS, voting together as a single class. In
addition, if at any time,
44
dividends (whether or not earned or declared) on any outstanding preferred
shares of the Fund, including AMPS, are due and unpaid in an amount equal to
two full years of dividends, and sufficient cash or specified securities have
not been deposited with the auction agent for the payment of such dividends,
the sole remedy of holders of the outstanding preferred shares of the Fund is
that the number of Trustees will be automatically increased by the smallest
number that, when added to the two Trustees elected exclusively by the holders
of preferred shares as described above, would constitute a majority of the
Trustees. The holders of preferred shares of the Fund will be entitled to elect
such Trustees at a special meeting of holders of preferred shares held as soon
as practicable after the occurrence of such event and at all subsequent
meetings at which Trustees are to be elected. The terms of office of the
persons who are Trustees at the time of that election will continue. If the
Fund thereafter pays in full (or otherwise provides for) all dividends payable
on all outstanding preferred shares of the Fund, the special voting rights
stated above will cease and the terms of office of the additional Trustees
elected by the holders of the preferred shares will automatically terminate.
Unless a higher percentage is provided for under the Declaration or the
Bylaws or applicable law, the Fund will not, without the affirmative vote or
consent of the holders of at least a majority (as defined in the 1940 Act) of
the AMPS outstanding at the time (voting together as a separate class), except
as noted below:
(a) authorize, create or issue any class or series of shares
ranking prior to or on a parity with the AMPS with respect to payment of
dividends or the distribution of assets on liquidation, or authorize,
create or issue additional AMPS, unless, in each case, the Fund obtains
written confirmation from Moody's (if Moody's is then rating the AMPS)
and Fitch (if Fitch is then rating the AMPS) that such authorization,
creation or issuance would not impair the rating then assigned by such
rating agency to the AMPS, in which case the vote or consent of the
holders of the AMPS is not required;
(b) amend, alter or repeal the provisions of the Bylaws if such
amendment, alteration or repeal would affect adversely the preferences,
rights or powers expressly set forth in the Declaration or the Bylaws of
holders of the AMPS; or
(c) authorize the Fund's conversion from a closed-end to an
open-end investment company.
For purposes of the foregoing, no matter shall be deemed adversely to
affect any preference, right or power of a holder of AMPS unless such matter
(i) adversely alters or abolishes any preferential right of the AMPS; (ii)
creates, adversely alters or abolishes any right in respect of redemption of
such shares; or (iii) creates or adversely alters (other than to abolish) any
restriction on transfer applicable to such shares. The vote of holders of any
AMPS described in this paragraph will in each case be in addition to a separate
vote of the requisite percentage, if any, of Common Shares and/or preferred
shares necessary to authorize the action in question.
Unless a higher percentage is provided for under the Declaration or the
Bylaws or applicable law, the affirmative vote of the holders of a majority (as
defined in the 1940 Act) of the outstanding AMPS, voting together as a single
class, will be required to approve any plan of reorganization (including any
plan of reorganization arising out of bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act, including, among other things, changes in the
Fund's investment restrictions designated as fundamental under "Investment
Restrictions" in the SAI and changes in the Fund's subclassification as a
closed-end investment company. To the extent permitted by applicable law, no
vote of Common Shareholders, either separately or together with holders of
preferred shares as a single class, is necessary to take the actions
contemplated by (a) and (b) above.
The foregoing voting provisions will not apply with respect to AMPS if,
at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption and sufficient funds have been deposited
in trust to effect such redemption.
If a series of preferred shares other than the AMPS is issued in the
future, it is anticipated that such series would have voting rights comparable
to those described above.
45
Rating Agency Guidelines and Asset Coverage
In connection with the Fund's receipt of a rating of "Aaa" from Moody's
and a rating of "AAA" from Fitch with respect to the AMPS, the Fund is required
to maintain assets having in the aggregate a discounted value at least equal to
the Preferred Shares Basic Maintenance Amount. The Preferred Shares Basic
Maintenance Amount includes the sum of (a) the aggregate liquidation preference
of any preferred shares then outstanding (including the AMPS) and (b) certain
accrued and projected payment obligations of the Fund, including without
limitation certain accrued and projected dividends on any preferred shares then
outstanding (including the AMPS).
Moody's and Fitch have each established separate guidelines for
calculating discounted value. These guidelines specify discount factors that
the Fund must apply to various types of securities in its portfolio for
purposes of calculating whether the discounted value of the Fund's assets
equals the Preferred Shares Basic Maintenance Amount (with the level of
discount generally becoming greater as the credit quality of a security becomes
lower). In addition, under the guidelines, certain types of securities
(including securities in which the Fund may otherwise invest) are not eligible
for inclusion in the calculation of the discounted value of the Fund's
portfolio. Such ineligible securities include, for example, certain lower-rated
debt securities and the equity securities of issuers other than Real Estate
Companies. Accordingly, although the Fund may invest in such securities to the
extent set forth herein, it is currently anticipated that they will not
constitute a significant portion of the Fund's portfolio under normal
circumstances. The rating agency guidelines for calculating discounted value do
not impose any limitations on the percentage of the Fund's assets that may be
invested in ineligible assets, and the amount of ineligible assets included in
the Fund's portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in
the portfolio.
In addition, the Fund is required by the 1940 Act, as well as by the
rating agency guidelines, to maintain asset coverage of at least 200% with
respect to senior securities that are equity securities, including the AMPS
("1940 Act Preferred Shares Asset Coverage"). The Fund's 1940 Act Preferred
Shares Asset Coverage is tested as of the last business day of each month in
which any senior equity securities are outstanding. The minimum required 1940
Act Preferred Shares Asset Coverage amount of 200% may be increased or
decreased if the 1940 Act is amended. Based on the composition of the portfolio
of the Fund and market conditions as of January 15, 2003, the 1940 Act
Preferred Shares Asset Coverage with respect to all of the Fund's preferred
shares, assuming the issuance on that date of all AMPS offered hereby and
giving effect to the deduction of the related offering costs and sales load
estimated at $564,700, would have been computed as follows:
Value of Fund assets less liabilities not
constituting senior securities $82,373,700
----------------------------------------- = ----------- = 294.2%
Senior securities representing $28,000,000
indebtedness
plus
liquidation value of the preferred shares
In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of the eligible assets in its portfolio equal to the Preferred
Shares Basic Maintenance Amount or (b) the 1940 Act Preferred Shares Asset
Coverage, in each case in accordance with the requirements of the rating agency
or agencies then rating the AMPS, the Fund will be required to redeem AMPS as
described under "--Redemption--Mandatory Redemption" below.
In addition to the requirements described above, the rating agency
guidelines impose restrictions on the Fund's use of certain financial
instruments or investment techniques that the Fund might otherwise utilize. For
example, the guidelines limit the use of certain hedging transactions such as
futures contracts and options. The guidelines also limit the use of certain
other investment techniques, including borrowing of money, short sales, loans
of portfolio securities, and reverse repurchase agreements. For a complete
description of such restrictions, see Article 11 of the Bylaws, which is
attached as Appendix B to the SAI.
46
The Fund may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or Fitch. Failure to adopt any
such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the AMPS may, at any time, change or withdraw any such
rating. The Trustees may, without shareholder approval, amend, alter 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 Moody's and/or Fitch, as the case may be,
that any such amendment, alteration or repeal would not impair the rating then
assigned to the AMPS.
As recently described by Moody's and Fitch, a preferred stock rating is
an assessment of the capacity and willingness of an issuer to pay preferred
stock obligations. The rating on the AMPS is not a recommendation to purchase,
hold or sell those shares, inasmuch as the rating does not comment as to market
price or suitability for a particular investor. The rating agency guidelines
described above also do not address the likelihood that an owner of AMPS will
be able to sell such shares in an auction or otherwise. The ratings are based
on current information furnished to Moody's and Fitch by the Fund and the
Investment Manager and information obtained from other sources. The ratings may
be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Fund's Common Shares have not been
rated by a nationally recognized statistical rating organization.
A rating agency's guidelines will apply to the AMPS only so long as the
rating agency is rating the shares. The Fund will pay certain fees to Moody's
and Fitch for rating the AMPS. A more detailed description of how Moody's and
Fitch calculate discounted value and the other limitations imposed by the
rating agencies is contained in Article 11 of the Bylaws, which is attached as
Appendix B to the SAI.
Liquidation
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with AMPS with respect to the distribution of assets
upon liquidation of the Fund, upon a liquidation of the Fund (whether voluntary
or involuntary), the holders of AMPS then outstanding will be entitled to
receive and to be paid, out of the assets of the Fund available for
distribution to its shareholders, before any payment or distribution will be
made on the Common Shares or any other class of shares of the Fund ranking
junior to the AMPS, an amount equal to the liquidation preference with respect
to such AMPS ($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 (but not including) the date of final
distribution in same-day funds in connection with the liquidation of the Fund.
If such assets of the Fund are insufficient to make the full liquidation
payment on the outstanding AMPS, no distribution shall be made on any shares of
any other class or series of preferred shares ranking on a parity with the AMPS
with respect to the distribution of assets upon such liquidation unless
proportionate distributive amounts shall be paid on the AMPS, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such liquidation. After the
payment to the holders of AMPS of the full preferential amounts provided for as
described herein, the holders of AMPS as such will have no right or claim to
any of the remaining assets of the Fund.
For purposes of the foregoing paragraph, a liquidation of the Fund does
not include:
. the sale of all or any portion of the property or business of the
Fund;
. the merger or consolidation of the Fund into or with any business
trust or other entity; or
. the merger or consolidation of any business trust or other entity
into or with the Fund.
Redemption
Mandatory Redemption. The Fund is required to maintain (a) a discounted
value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) the 1940 Act Preferred Shares Asset
47
Coverage. Eligible portfolio securities for the purposes of (a) above will be
determined from time to time by the rating agencies then rating the AMPS. If
the Fund fails to maintain such asset coverage amounts and does not timely cure
such failure in accordance with the requirements of the Bylaws, the Fund must
redeem all or a portion of the AMPS. This mandatory redemption will take place
on a date that the Trustees specify out of legally available funds in
accordance with the Declaration, the Bylaws and applicable law, at the
redemption price of $25,000 per share, plus accumulated but unpaid dividends
(whether or not earned or declared) to (but not including) the date fixed for
redemption. In determining the number of AMPS required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro
rata among the AMPS and any other preferred shares of the Fund subject to
redemption or retirement. The mandatory redemption will be limited to the
number of AMPS and any other preferred shares necessary to restore the required
discounted value or the 1940 Act Preferred Shares Asset Coverage, as the case
may be.
Optional Redemption. The Fund, at its option, may redeem the AMPS, in
whole or in part, out of legally available funds. Any optional redemption will
occur on any dividend payment date at the optional redemption price per share
of $25,000, plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared) to (but not including) the date fixed for
redemption, plus the premium, if any, specified in a special redemption
provision. No AMPS may be redeemed if the redemption would cause the Fund to
violate the 1940 Act. The Fund has the authority to redeem the AMPS for any
reason and may redeem all or part of the outstanding AMPS if it anticipates
that the Fund's leveraged capital structure will result in a lower rate of
return to Common Shareholders for any significant period of time than that
obtainable if the Common Shares were unleveraged. The Fund may exercise such
redemption option as to some or all of the AMPS, subject to certain
limitations. The optional redemption of AMPS will, if less than all the AMPS
are redeemed, be made on a pro rata basis.
The Fund will not make any optional redemption unless (i) the Fund has
available certain deposit securities with maturities or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of the
AMPS by reason of the redemption of the AMPS on such date fixed for the
redemption and (ii) the Fund has eligible assets with an aggregate discounted
value at least equal to the Preferred Shares Basic Maintenance Amount (both
before and after giving effect to such redemption).
Notwithstanding the foregoing, if unpaid dividends exist with respect to
the AMPS (whether or not earned or declared), no AMPS shall be redeemed (by
either mandatory redemption or optional redemption) unless all outstanding AMPS
are simultaneously redeemed; provided, however, that this limitation will not
apply to an otherwise lawful purchase or exchange offer made on the same terms
to the holders of all outstanding AMPS.
Although the AMPS are subject to redemption under certain circumstances
as described above and under "--Mandatory Redemption," unlike the shares of an
open-end mutual fund, the AMPS may not be redeemed at a shareholder's option.
THE AUCTION
General
Under the Bylaws, the applicable rate for the AMPS for each rate period
after the initial rate period will generally be the rate that results from an
auction conducted as set forth in the Bylaws and summarized below. In such an
auction, persons determine to hold or offer to sell AMPS regardless of the rate
set by the auction or offer to purchase or sell AMPS based on specific dividend
rates bid by them. See Article 11 of the Bylaws, which is attached as Appendix
B of the SAI, for a more complete description of the auction process.
48
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, Deutsche Bank Trust Company
Americas) which provides, among other things, that the auction agent will
follow the auction procedures set forth in the Bylaws 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 such notice. If the auction agent
should resign, the Fund will attempt to appoint another qualified institution
to act as auction agent. The Fund may remove the auction agent provided that
prior to such removal the Fund has entered into 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 one
or more Broker-Dealers selected by the Fund that provide for the participation
of those Broker-Dealers in auctions for AMPS ("Broker-Dealer Agreements").
The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge that will generally be at the
annual rate of 1/4 of 1% of the stated value ($25,000 per share) of the AMPS
held by a Broker-Dealer's customers upon settlement in an auction.
The Fund may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that at
least one Broker-Dealer Agreement is in effect after such termination. A
Broker-Dealer or the auction agent may terminate the Broker-Dealer Agreement at
any time upon five days' written notice, subject to certain conditions. The
Broker-Dealer Agreement shall automatically terminate upon the redemption of
all outstanding AMPS or upon termination of the auction agency agreement.
Auction Procedures
Prior to the submission deadline on each auction date for the AMPS, each
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the auction agent) as a beneficial owner of AMPS may submit
the following types of orders with respect to AMPS to that Broker-Dealer:
1. Hold Order--indicating its desire to hold AMPS without regard
to the applicable rate for the next rate period.
2. Bid--indicating its desire to purchase or hold the indicated
number of AMPS at $25,000 per share if the applicable rate for
the next rate period is not less than the rate specified in the
bid. A bid order by an existing holder will be deemed an
irrevocable offer to sell AMPS at $25,000 per share if the
applicable rate for the next rate period is less than the rate
specified in the bid.
3. Sell Order--indicating its desire to sell AMPS at $25,000 per
share without regard to the applicable rate for the next rate
period.
A beneficial owner of AMPS may submit different types of orders to its
Broker-Dealer with respect to different AMPS then held by the beneficial owner.
A beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the applicable maximum 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 AMPS but that wishes to purchase AMPS or a beneficial owner
that wishes to purchase additional AMPS. A potential
49
holder may submit bids to its Broker-Dealer in which it offers to purchase AMPS
at $25,000 per share if the applicable rate for the next rate period is not
less than the rate specified in such bid. A bid placed by a potential holder
specifying a rate higher than the applicable maximum 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.
Unless otherwise permitted by the Fund, the Broker-Dealers will designate
themselves as existing holders of shares subject to orders submitted or deemed
submitted to them by beneficial owners. They will also designate themselves as
potential holders of shares subject to orders submitted to them by potential
holders. However, neither the Fund nor the auction agent will be responsible
for a Broker-Dealer's failure to comply with these procedures. Any order placed
with the auction agent by a Broker-Dealer as or on behalf of an existing holder
or a potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of AMPS held
by it. A Broker-Dealer may also submit orders to the auction agent for its own
account as an existing holder or potential holder, provided that it is not an
affiliate of the Fund.
There are sufficient clearing bids in an auction if the number of AMPS
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates equal to or lower than the
applicable maximum rate is at least equal to the sum of the number of AMPS
subject to sell orders submitted or deemed submitted to the auction agent by
Broker-Dealers for existing holders and the number of AMPS subject to bids
specifying rates higher than the applicable maximum rate 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 that, 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 such 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 applicable maximum rate on the auction date. If
there are not sufficient clearing bids, beneficial owners of AMPS that have
submitted or are deemed to have submitted sell orders may not be able to sell
in the auction all shares subject to such sell orders. If all of the
outstanding AMPS are the subject of submitted hold orders, then the rate period
following the auction will automatically be the same length as the preceding
rate period and the applicable rate for the next rate period will be 80% of the
reference rate (i.e., 80% of the applicable "AA" Financial Composite Commercial
Paper Rate (for a rate period of fewer than 184 days) or Treasury Index Rate
(for a rate period of 184 days or more)).
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
from 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
currently provide for payment against delivery by their Agent Members in
same-day funds.
The auctions for AMPS will normally be held every seven days, and each
subsequent rate period will normally begin on the following business day.
50
The first auction for the AMPS will be held on February 24, 2003, the
business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special rate periods, auctions for the AMPS
normally will be held every seven days thereafter, and each subsequent dividend
period for the AMPS normally will begin on the following business day.
If an auction date is not a business day because the New York Stock
Exchange is closed for business due to an act of God, natural disaster, extreme
weather, act of war, civil or military disturbance, act of terrorism, sabotage,
riots or a loss or malfunction of utilities or communications services, or if
the auction agent is not able to conduct an auction in accordance with the
auction procedures for any such reason, then the dividend rate for the next
dividend period will be the dividend rate determined on the previous auction
date.
If a dividend payment date is not a business day because the New York
Stock Exchange is closed for business due to an act of God, natural disaster,
extreme weather, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications
services, or if the dividend payable on such date cannot 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,
can pay the dividend using commercially reasonable best efforts;
. the affected dividend period will end on the day it otherwise would
have ended; and
. the next dividend period will begin and end on the dates on which it
otherwise would have begun and ended.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding AMPS 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 2.1% rate for all
all 500 shares if auction rate is 500 shares
less than 2.1%
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 1.9% rate for all
all 200 shares if auction rate is 200 shares
less than 1.9%
Potential Holder D Wants to buy 200 shares if Places order to buy 200 shares at
auction rate is 2.0% or greater or above 2.0%
Potential Holder E Wants to buy 300 shares if Places order to buy 300 shares at
auction rate is 1.9% or greater or above 1.9%
Potential Holder F Wants to buy 200 shares if Places order to buy 200 shares at
auction rate is 2.1% or greater or above 2.1%
The lowest dividend rate that will result in all 1,000 AMPS continuing to
be held is 2.0% (the offer by D). Therefore, the dividend rate will be 2.0%.
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.
The dividend rates used in the example above are hypothetical, and are
not necessarily indicative of the rates that may be payable on the AMPS at any
time. For further description of the auction procedures, please see Article 11
of the Bylaws, which is attached as Appendix B to the SAI.
51
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 the AMPS outside of auctions, but they are not required to do so.
There can be no assurance that a secondary trading market for AMPS will develop
or, if it does develop, that it will provide holders of AMPS with liquidity of
investment. The AMPS will not be registered on any stock exchange or on the
NASDAQ market. Investors who purchase AMPS in an auction (particularly if the
Fund has declared a special rate period) should note that, because the dividend
rate on such shares will be fixed for the length of that dividend period, the
value of such shares may fluctuate in response to the changes in interest
rates, and may be more or less than their original cost if sold on the open
market in advance of the next auction thereof, depending on market conditions.
You may sell, transfer, or otherwise dispose of AMPS only in whole shares
and only:
. pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
. to a Broker-Dealer; or
. to such other persons as may be permitted by the Fund; provided,
however, that (x) if you hold your AMPS in the name of a
Broker-Dealer, a sale or transfer of your AMPS to that Broker-Dealer,
or to another customer of that Broker-Dealer, will not be considered
a sale or transfer for purposes of the foregoing limitation if that
Broker-Dealer remains the existing holder of the AMPS immediately
after the transaction; and (y) in the case of all transfers, other
than through an auction, the Broker-Dealer (or other person, if the
Fund permits) receiving the transfer will advise the auction agent of
the transfer.
NET ASSET VALUE
The Fund determines the net asset value of its Common Shares on each day
the New York Stock Exchange is open for business at the close of regular
trading (normally 4:00 p.m. Eastern time). Domestic debt securities and non-US.
securities are normally priced using data reflecting the earlier closing of the
principal markets for those securities. Information that becomes known to the
Fund or its agent after the Fund's net asset value has been calculated on a
particular day will not be used to adjust retroactively the price of a security
or the Fund's net asset value determined earlier that day.
The Fund determines net asset value per Common Share by dividing the
value of the Fund's securities, cash and other assets (including interest
accrued but not collected) less all its liabilities (including accrued
expenses, the liquidation preference of the AMPS and dividends payable) by the
total number of Common Shares outstanding. The Fund values portfolio securities
for which market quotations are readily available at market value. The Fund's
short-term investments are valued at amortized cost when the security has 60
days or less to maturity.
In unusual circumstances, instead of valuing securities in the usual
manner, the Fund may value securities at fair value as determined in good faith
by the Board of Trustees or persons acting pursuant to procedures approved by
the Board, generally based on recommendations provided by the Investment
Manager or CDC IXIS Services. Fair valuation may also be required due to
material events that occur after the close of the relevant market but prior to
the close of the New York Stock Exchange. The effect of using fair value
pricing is that the Common Shares' net asset value will be subject to the
judgment of the Board of Trustees or its designee instead of being determined
by the market.
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
52
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.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the laws
of the Commonwealth of Massachusetts by the Declaration. The Declaration
provides that the Trustees of the Fund may authorize separate classes of shares
of beneficial interest. The Declaration authorizes an unlimited number of
Common Shares, and the Trustees have authorized 1,120 Series M Auction Market
Preferred Shares of beneficial interest. Preferred shares may be issued in one
or more series, with such par value and with such rights as determined by the
Board of Trustees, by action of the Board of Trustees without the approval of
the Common Shareholders. For a description of the AMPS, see "Description of
AMPS." The following table shows the number of (i) shares authorized and (ii)
shares outstanding for each class of authorized securities of the Fund as of
January 15, 2003.
Number Number Held by or for Number
Title of Class Authorized the Account of the Fund Outstanding
-------------- ---------- ----------------------- -----------
Common Shares. Unlimited 0 3,832,000
Series M AMPS. 1,120* 0 0
--------
* Assumes authorization of 1,120 AMPS by the Board of Trustees prior to the
issuance of the AMPS.
Common Shareholders are entitled to share equally in dividends declared
by the Board of Trustees payable to Common Shareholders and in the net assets
of the Fund available for distribution to Common Shareholders after payment of
the preferential amounts payable to holders of any outstanding preferred
shares, including the AMPS. Neither Common Shareholders nor holders of AMPS
have conversion rights or the right to cause the Fund to redeem their shares.
Upon liquidation of the Fund, after paying or adequately providing for the
payment of all liabilities of the Fund and the liquidation preference with
respect to any outstanding preferred shares, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Fund among
the Common Shareholders.
Pursuant to the Fund's Dividend Reinvestment Plan, all Common
Shareholders whose shares are registered in their own names will have all
dividends, including any capital gain dividends, reinvested automatically in
additional Common Shares by EquiServe Trust Company, N.A. as agent for the
Common Shareholders, unless the Common Shareholder elects to receive cash. The
Fund and EquiServe Trust Company, N.A. reserve the right to amend or terminate
the Dividend Reinvestment Plan.
Common Shareholders will vote with the holders of the AMPS and any other
outstanding preferred shares on each matter submitted to a vote of Common
Shareholders, except as described under "Description of AMPS--Voting Rights"
and except as otherwise required by the Declaration, the Bylaws or applicable
law.
Shareholders of each class or series are entitled to one vote for each
share held. Except as provided under "Description of AMPS--Voting Rights" and
except as otherwise required by the Declaration, the Bylaws or applicable law,
holders of preferred shares, including the AMPS, voting as a separate class,
are entitled to elect two Trustees, and the remaining Trustees will be elected
by holders of Common Shares and preferred shares, voting as a single class.
Under the 1940 Act, so long as any AMPS or any other preferred shares are
outstanding, Common Shareholders will not be entitled to receive any dividends
or other distributions from the Fund, unless at the time of such declaration,
(1) all accrued dividends on the AMPS have been paid and (2) the value of the
Fund's total assets (determined after deducting the amount of such dividend or
other distribution), less all liabilities and indebtedness of the Fund not
represented by "senior securities" (as defined in the 1940 Act), is at least
300% of
53
the aggregate amount of senior securities representing indebtedness (to the
extent any such senior securities are outstanding) and at least 200% of the
aggregate amount of any senior securities representing indebtedness plus the
aggregate liquidation value of the outstanding preferred shares. In addition to
the requirements of the 1940 Act, the Fund is required to comply with other
asset coverage requirements as a condition of the Fund obtaining a rating of
the AMPS from rating agencies. These requirements include an asset coverage
test more stringent than under the 1940 Act. See "Description of
AMPS--Dividends and Rate Periods--Restrictions on Dividends and Other
Distributions."
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Common Shares of the Fund commenced trading on the American Stock
Exchange on November 26, 2002. On January 28, 2003, the net asset value per
Common Share was $13.84, and the closing price per Common Share on the American
Stock Exchange was $14.28.
Other Issues Relating to the AMPS
Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred shares of beneficial interest as long as no single
series has priority over another series as to the distribution of assets of the
Fund or the payment of dividends. Neither Common Shareholders nor holders of
AMPS have pre-emptive rights to purchase any AMPS or any other preferred shares
that the Fund may issue.
CLOSED-END STRUCTURE
The Fund is a closed-end management investment company (commonly referred
to as a closed-end fund). Closed-end funds differ from open-end investment
companies (which are generally referred to as mutual funds) in that closed-end
funds generally list their common shares for trading on a stock exchange and do
not redeem their shares at the request of the shareholder. This means that, if
you wish to sell your common shares of a closed-end fund, you must trade them
on the market like any other stock at the prevailing market price at that time.
In contrast, 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
any redemption charge that 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. By comparison, closed-end funds are generally better able
to stay fully invested in securities that are consistent with their investment
objectives, and also have greater flexibility to make certain types of
investments and use certain investment strategies such as financial leverage
and investments in illiquid securities.
Common shares of closed-end funds frequently trade at a discount to their
net asset value. Because of this possibility and the recognition that any such
discount may not be in the best interest of shareholders, the Fund's Board of
Trustees might consider from time to time repurchases of the Fund's Common
Shares in the open market or in private transactions, tender offers for shares
at net asset value or other programs intended to reduce the discount. The Fund
cannot guarantee or assure, however, that the Fund's Board will engage in any
of these actions. Nor is there any guarantee or assurance that such actions, if
undertaken, would result in shares trading at a price equal or close to net
asset value per share. See "Repurchase of Shares." The Board of Trustees might
also consider converting the Fund to an open-end investment company, which
would also require a vote of the shareholders of the Fund. See "Possible
Conversion to Open-End Status" and "Certain Provisions in the Declaration of
Trust."
54
POSSIBLE CONVERSION TO OPEN-END STATUS
Subject to the voting and other provisions in the Declaration, the Fund
may be converted to an open-end investment company at any time by a vote of the
outstanding shares. See "Certain Provisions in the Declaration of Trust" for a
discussion of the shareholder and Trustee approval requirements applicable to
conversion of the Fund to an open-end investment company. If the Fund converted
to an open-end investment company, it would be required to redeem all AMPS then
outstanding (requiring in turn that it liquidate a portion of its investment
portfolio) and the Fund's Common Shares would likely no longer be listed on the
American Stock Exchange. Conversion to open-end status could also require the
Fund to modify certain investment restrictions and policies. The Board of
Trustees 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. However, the Fund cannot assure you that the
Board of Trustees will decide to take or propose such a conversion.
REPURCHASE OF 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 dividend levels (which are in turn
affected by the return on the Fund's portfolio and expenses), relative demand
for and supply of shares in the market, the Fund's net asset value, call
protection, dividend stability, general market and economic conditions and
other factors beyond the control of the Fund. Although Common Shareholders will
not have the right to redeem their shares, the Fund may take action to
repurchase shares in the open market or in private transactions or make tender
offers for its shares at net asset value. The Fund cannot assure you that the
Board of Trustees will decide to take or propose any of these actions, or that
share repurchases or tender offers, if undertaken, will reduce market discount.
For more information, see "Repurchase of Shares; Conversion to Open-End Fund"
in the SAI. Repurchase of the Common Shares may have the effect of reducing any
market discount to net asset value.
There is no assurance that, if action is undertaken to repurchase or
tender for Common Shares, such action will result in the Common Shares trading
at a price which approximates their net asset value. Although share repurchases
and tenders could have a favorable effect on the market price of the Common
Shares, you should be aware that the acquisition of Common Shares by the Fund
will decrease the total assets of the Fund and, therefore, will 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 shares, this may result in
portfolio turnover, which will result in additional expenses being borne by the
Fund, including brokerage commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestment in other securities. Portfolio
turnover could give rise to a greater amount of taxable capital gains. The
Board of Trustees would typically consider 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 (including the
expense) 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.
TAX MATTERS
The following federal income tax discussion is based on the advice of
Ropes & Gray, counsel to the Fund, and reflects provisions of the Code,
existing Treasury Regulations, rulings published by the IRS, and other
applicable authority, as of the date of this prospectus. These authorities are
subject to change by legislative or administrative action. The following
discussion is only a summary of some of the important tax considerations
generally applicable to investments in the Fund. For more detailed information
regarding tax considerations, see the SAI. There may be other tax
considerations applicable to particular investors. In addition, income earned
through an investment in the Fund may be subject to state and local taxes.
55
The Bush Administration has announced a proposal to eliminate the federal
income tax on dividends of income previously taxed at the corporate level. The
specific application of this proposal to a regulated investment company
investing in REITs, such as the Fund, is still unclear. In addition, it is
uncertain if, and in what form, the proposal will ultimately be adopted.
Accordingly, it is not possible to evaluate how this proposal might affect the
tax discussion below.
The Fund intends to qualify each year for taxation as a regulated
investment company eligible for treatment under the provisions of Subchapter M
of the Code. If the Fund so qualifies and satisfies certain distribution
requirements, the Fund will not be subject to federal income tax on income
distributed in a timely manner to its shareholders in the form of dividends or
capital gain distributions.
In order for any portion of any distributions to holders of AMPS to be
eligible to be treated as capital gain dividends, the AMPS must be treated as
equity for federal income tax purposes. Based in part on certain
representations made by the Fund to Ropes & Gray relating to the lack of any
present intention to redeem or purchase AMPS at any time in the future, it is
the opinion of Ropes & Gray that the AMPS will constitute equity for federal
income tax purposes. This opinion relies in part on a published ruling of the
IRS stating that certain variable rate preferred stock similar in many material
respects to the AMPS represents equity. The opinion of Ropes & Gray represents
only its best legal judgment and is not binding on the IRS or the courts. If
the IRS were to assert successfully that variable rate preferred stock such as
the AMPS should be treated as debt for federal income tax purposes,
distributions on AMPS (including distributions designated by the Fund as
capital gain dividends) would be taxable as ordinary income (as opposed to
capital gains). Ropes & Gray has advised the Fund that, should the IRS pursue
in court the position that the AMPS should be treated as debt for federal
income tax purposes, the IRS would be unlikely to prevail.
To satisfy the distribution requirement applicable to regulated
investment companies, amounts paid as dividends by the Fund to its
shareholders, including holders of its preferred shares, must qualify for the
dividends-paid deduction. If the Fund realizes a long-term capital gain, it
will be required to allocate such gain between and among the Common Shares and
any preferred shares issued by the Fund in proportion to the total dividends
paid to each class during the year in which the income is realized.
If at any time when preferred shares are outstanding the Fund does not
meet applicable asset coverage requirements, it will be required to suspend
distributions to Common Shareholders until the requisite asset coverage is
restored. Any such suspension may cause the Fund to pay a 4% federal excise tax
(imposed on regulated investment companies that fail to distribute for a given
calendar year, generally, at least 98% of their net investment income and
capital gain net income) and income tax on undistributed income or gains, and
may, in certain circumstances, prevent the Fund from qualifying for treatment
as a regulated investment company. The Fund may redeem preferred shares in an
effort to comply with the distribution requirement applicable to regulated
investment companies and to avoid income and excise taxes. The Fund may have to
dispose of portfolio securities to generate cash for such redemption, which may
result in transaction expenses and gain at the Fund level and in further
distributions.
The Fund's investments in certain debt obligations may cause the Fund to
recognize taxable income in excess of the cash generated by such obligations.
Thus, the Fund could be required at times to liquidate other investments,
including when it is not advantageous to do so, in order to satisfy its
distribution requirements.
The Fund may at times buy investments at a discount from the price at
which they were originally issued, especially during periods of rising interest
rates. For federal income tax purposes, some or all of this market discount
will be included in the Fund's ordinary income and will be taxable to
shareholders as such.
For federal income tax purposes, distributions of investment income are
taxable as ordinary income, assuming the Fund has sufficient current or
accumulated earnings and profits. Whether distributions of capital gains are
taxed as ordinary income or capital gains is determined by how long the Fund
owned the investments that generated such capital gains, rather than how long a
shareholder has owned his or her shares. Distributions of gains from the sale
of investments that the Fund owned for more than one year that are designated
by the Fund as capital gain dividends will be taxable as capital gains.
Distributions of gains from the sale of investments that the Fund owned for one
year or less will be taxable as ordinary income. Distributions are taxable to
shareholders
56
even if they are paid from income or gains earned by the Fund before a
shareholder's investment (and thus were included in the price the shareholder
paid). Any gain resulting from the sale or exchange of Fund shares will
generally also be subject to tax.
The Fund's investments 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 generally will not be entitled to claim a credit or
deduction with respect to foreign taxes. In addition, the Fund's investments in
non-U.S. securities or currencies other than the U.S. dollar may increase or
accelerate the Fund's recognition of ordinary income and may affect the timing
or amount of the Fund's distributions.
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, swap agreements, straddles and foreign
currencies will be subject to special tax rules (including mark-to-market,
constructive sale, straddle, wash sale and short sale rules), the effect of
which may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities, convert long- term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.
If, in connection with the designation of a special rate period, (i) the
Fund provides in a notice of special rate period that the Fund may redeem all
or a portion of the AMPS and that upon such redemption the holders of the AMPS
may receive a premium in addition to receipt of a redemption price per share
equal to the sum of $25,000 plus an amount equal to the accumulated but unpaid
dividends thereon during the whole or any part of the special rate period, (ii)
based on all the facts and circumstances at the time of the designation of the
special rate period the Fund is more likely than not to redeem such AMPS during
the special rate period, and (iii) the premium to be paid upon redemption
during such special rate period exceeds a specified de minimis amount, it is
possible that the holders of the AMPS will be required to accrue the premium as
a dividend (to the extent of the Fund's earnings and profits).
The Fund generally is required to withhold and remit to the U.S. Treasury
a percentage of the taxable dividends and other distributions paid to any
shareholder who fails to properly furnish the Fund with a correct taxpayer
identification number (TIN), who has under-reported dividend or interest
income, or who fails to certify to the Fund that he or she is not subject to
such withholding. The backup withholding tax rate will be (i) 30% for amounts
paid during 2002 and 2003, (ii) 29% for amounts paid during 2004 and 2005, and
(iii) 28% for amounts paid during 2006 through 2010. The backup withholding
rate will be 31% for amounts paid after December 31, 2010, unless Congress
enacts tax legislation providing otherwise. The Bush Administration has
announced a proposal to accelerate reductions in tax rates which may change the
backup withholding rate as well. In order for a foreign investor to qualify for
exemption from the back-up withholding tax rates and for reduced withholding
tax rates under income tax treaties, the foreign investor must comply with
special certification and filing requirements. Foreign investors in the Fund
should consult their tax advisers in this regard.
It is not expected that investors will be subject to the alternative
minimum tax as a result of an investment in the Fund. This section relates only
to federal income tax consequences of investing in the Fund; the consequences
under other tax laws may differ. Shareholders should consult their tax advisers
as to the possible application of foreign, state and local income tax laws to
Fund dividends and capital distributions. Please see the SAI for additional
information regarding the tax aspects of investing in the Fund.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. The Fund's Trustees are divided into three classes. At each
annual meeting of shareholders, the term of one class will expire and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, the Declaration provides that a Trustee may be removed only for cause
and only (i) by action of at least seventy-five percent (75%) of the
outstanding shares of the classes or series of shares entitled to vote for the
election of such Trustee, or (ii) by at least seventy-five percent (75%) of the
remaining Trustees.
57
As described below, the Declaration grants special approval rights with
respect to certain matters to members of the Board who qualify as "Continuing
Trustees," which term means a Trustee who either (i) has been a member of the
Board for a period of at least thirty-six months (or since immediately after
the initial registered public offering of the Fund's Common Shares, if less
than thirty-six months) or (ii) was nominated to serve as a member of the Board
of Trustees by a majority of the Continuing Trustees then members of the Board.
The Declaration requires the affirmative vote or consent of at least
seventy-five percent (75%) of the Board of Trustees and holders of at least
seventy-five percent (75%) of the Fund's shares (including Common Shares and
AMPS) to authorize certain Fund transactions not in the ordinary course of
business, including a merger or consolidation, or certain sales, or transfers,
of Fund assets, unless the transaction is authorized by both a majority of the
Trustees and seventy-five percent (75%) of the Continuing Trustees (in which
case no shareholder authorization would be required by the Declaration, but may
be required in certain cases under the 1940 Act). The Declaration also requires
the affirmative vote or consent of holders of at least seventy-five percent
(75%) of each class of the Fund's shares entitled to vote on the matter to
authorize a conversion of the Fund from a closed-end to an open-end investment
company, unless the conversion is authorized by both a majority of the Trustees
and seventy-five percent (75%) of the Continuing Trustees (in which case
shareholders would have only the minimum voting rights required by the 1940 Act
with respect to the conversion). Also, the Declaration provides that, subject
to the terms of any AMPS that may be set forth in the Bylaws, the Fund may be
terminated at any time by vote or consent of at least seventy-five percent
(75%) of the Fund's shares or, alternatively, by vote or consent of both a
majority of the Trustees and seventy-five percent (75%) of the Continuing
Trustees. The Declaration also requires the approval of both a majority of the
Trustees and seventy-five percent (75%) of the Continuing Trustees for certain
extraordinary distributions from the Fund to shareholders. The voting
provisions discussed in this section are more restrictive than those required
under the 1940 Act and Massachusetts law. See "Certain Provisions in the
Declaration of Trust" in the SAI for a more detailed summary of these
provisions.
The Trustees may from time to time grant other voting rights to
shareholders with respect to these and other matters as the Trustees may
consider necessary or desirable.
The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking
control of the Fund to negotiate with its management regarding the price to be
paid and facilitating the continuity of the Fund's investment objective and
policies. The provisions of the Declaration described above could have the
effect of depriving the Common Shareholders of opportunities to sell their
Common Shares at a premium over the then current market price of the Common
Shares by discouraging a third party from seeking to obtain control of the Fund
in a tender offer or similar transaction. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund and its shareholders.
The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's
Bylaws, both of which are on file with the SEC.
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts
or obligations of the Fund and requires that notice of such limited liability
be given in each note, bond, contract, instrument, certificate or undertaking
made or issued by the Trustees or any officer or officers of the Fund. The
Declaration further provides for indemnification by the Fund for all loss and
expense of any shareholder or former shareholder held personally liable on
account of being or having been a shareholder of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Fund believes that the likelihood of such circumstances is
remote.
58
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated
February 5, 2003, the underwriters named below have agreed to purchase, and the
Fund has agreed to sell to such underwriters, the number of AMPS set forth
below.
Number of
Underwriter AMPS
----------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............. 1,008
Prudential Securities Incorporated... 112
-------
Total....................... 1,120
=======
The purchase agreement provides that the obligations of the underwriters
to purchase the AMPS included in this offering are subject to the approval of
certain legal matters by counsel and to 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 from Moody's and Fitch, respectively, as of the time of the
closing of the offering. The underwriters are obligated to purchase all the
AMPS sold under the purchase agreement if any of the AMPS are purchased. 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, or to contribute 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 of the
AMPS. After the initial public offering, the underwriters may change the public
offering price and the concession. Investors must pay for any AMPS purchased on
or before February 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, although the
underwriters will not act as principals in any transaction until after they
have ceased to be underwriters.
The Fund anticipates that the underwriters or their affiliates may, from
time to time, act in auctions as broker-dealers and receive fees as set forth
under "The Auction." 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.
59
The settlement date for the purchase of the AMPS will be February 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.
The principal business address of Merrill Lynch is 4 World Financial
Center, New York, New York 10080. The principal business address of Prudential
Securities Incorporated is One New York Plaza, New York, New York 10292.
For a description of compensation paid to Merrill Lynch by the Investment
Manager in connection with the offering of the Fund's Common Shares, please see
"Management of the Fund--Additional Compensation Agreement."
CUSTODIAN, AUCTION AGENT AND TRANSFER AGENT
The custodian of the assets of the Fund is Investors Bank & Trust
Company, 200 Clarendon Street, Boston, Massachusetts 02116. The custodian
performs custodial and certain fund accounting services.
Deutsche Bank Trust Company Americas, 280 Park Avenue, New York, New York
10017, serves as the auction agent, transfer agent, registrar, dividend paying
agent and redemption agent for the AMPS.
EquiServe Trust Company, N.A. and its affiliate, EquiServe, Inc., 150
Royall Street, Canton, Massachusetts 02021, serve as the Fund's transfer agent,
registrar, dividend disbursement agent and shareholder servicing agent for the
Fund's Common Shares, as well as agent for the Fund's Dividend Reinvestment
Plan for Common Shares.
LEGAL MATTERS
The validity of the shares offered hereby is being passed on for the Fund
by Ropes & Gray, Boston, Massachusetts, and certain other legal matters will be
passed on for the underwriters by Clifford Chance US LLP, New York, New York.
Clifford Chance US LLP may rely as to certain matters of Massachusetts law on
the opinion of Ropes & Gray.
AVAILABLE INFORMATION
The Fund is subject to certain informational requirements under the
federal securities laws and in accordance therewith is required to file
reports, proxy statements and other information with the SEC. Any such reports,
proxy statements and other information can be inspected and copied at the
public reference facilities of the SEC, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Reports, proxy statements and other information
concerning the Fund can also be inspected at the offices of the American Stock
Exchange, 86 Trinity Place, New York, New York 10006.
Additional information regarding the Fund and the AMPS is contained in
the Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the SEC. This
prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference.
A copy of the Registration Statement may be inspected without charge at
the SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees
prescribed by the SEC. The SEC maintains a Web site (http://www.sec.gov) that
contains the Registration Statement, other documents incorporated by reference,
and other information the Fund has filed electronically with the SEC, including
proxy statements and reports filed under the Securities Exchange Act of 1934.
60
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Table of Contents........................................ 2
Investment Objectives and Policies....................... 3
Investment Restrictions.................................. 14
Management of the Fund................................... 16
Investment Advisory and Other Services................... 22
Portfolio Transactions and Brokerage..................... 26
Determination of Net Asset Value......................... 28
Distributions............................................ 29
Description of Shares.................................... 32
Additional Information Concerning the Auctions for AMPS.. 33
Certain Provisions in the Declaration of Trust........... 35
Repurchase of Shares; Conversion to Open-End Fund........ 37
Taxation................................................. 40
Performance-Related and Comparative and Other Information 47
Counsel and Independent Accountants...................... 48
Additional Information................................... 48
Financial Statements..................................... 49
Appendix A--Ratings of Investments....................... A-1
Appendix B--Article 11 of the Amended and Restated Bylaws B-1
61
================================================================================
$28,000,000
AEW Real Estate Income Fund
Auction Market Preferred Shares ("AMPS")
1,120 Shares, Series M
Liquidation Preference $25,000 per Share
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
Prudential Securities
February 5, 2003
================================================================================
AEW REAL ESTATE INCOME FUND
399 Boylston Street
Boston, Massachusetts 02116
(800) 862-4863
STATEMENT OF ADDITIONAL INFORMATION
February 5, 2003
AEW Real Estate Income Fund (the "Fund") is a recently organized,
non-diversified, closed-end management investment company organized as a
Massachusetts business trust on September 18, 2002.
This Statement of Additional Information relating to the Series M
Auction Market Preferred Shares ("AMPS") of the Fund is not a prospectus, but
should be read in conjunction with the prospectus of the Fund, dated February 5,
2003, as supplemented from time to time (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing AMPS, and investors should obtain and
read the Prospectus prior to purchasing such shares. This Statement of
Additional Information is incorporated by reference in its entirety into the
Prospectus. Copies of the Statement of Additional Information and Prospectus may
be obtained free of charge by writing or calling the address or phone number
shown above. You may also obtain a copy of the Prospectus on the web site
(http://www.sec.gov) of the Securities and Exchange Commission ("SEC").
Capitalized terms used but not defined herein have the same meanings ascribed to
them in the Prospectus.
TABLE OF CONTENTS
TABLE OF CONTENTS .......................................................... 2
INVESTMENT OBJECTIVES AND POLICIES ......................................... 3
INVESTMENT RESTRICTIONS .................................................... 14
MANAGEMENT OF THE FUND ..................................................... 16
INVESTMENT ADVISORY AND OTHER SERVICES ..................................... 22
PORTFOLIO TRANSACTIONS AND BROKERAGE ....................................... 26
DETERMINATION OF NET ASSET VALUE ........................................... 28
DISTRIBUTIONS .............................................................. 29
DESCRIPTION OF SHARES ...................................................... 32
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS .................... 33
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST ............................. 35
REPURCHASE OF SHARES; CONVERSION TO OPEN-END FUND .......................... 37
TAXATION ................................................................... 40
PERFORMANCE-RELATED AND COMPARATIVE AND OTHER INFORMATION .................. 47
COUNSEL AND INDEPENDENT ACCOUNTANTS ........................................ 48
ADDITIONAL INFORMATION ..................................................... 48
FINANCIAL STATEMENTS ....................................................... 49
APPENDIX A - RATINGS OF INVESTMENTS ........................................ A-1
APPENDIX B - ARTICLE 11 OF THE AMENDED AND RESTATED BYLAWS ................. B-1
This Statement of Additional Information is dated February 5, 2003.
-2-
INVESTMENT OBJECTIVES AND POLICIES
Additional Information Regarding Fund Investments
The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks set forth in the Prospectus. Except
as specifically provided herein, the Fund's investment policies are not
fundamental and may be changed by the Board of Trustees of the Fund without the
approval of the shareholders.
Investments In Real Estate Companies And Real Estate Investment Trusts
Under normal market conditions, the Fund will invest at least 90% of
its total assets in income-producing common shares, preferred shares,
convertible preferred shares (preferred shares that, during certain periods or
upon the happening of certain events, may be converted into common shares) and
debt securities issued by real estate companies, including real estate
investment trusts ("REITs"). For purposes of the Fund's investment policies, a
"Real Estate Company" is one that generally 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
invested in such real estate. Under normal market conditions, at least 80% of
the Fund's total assets will be invested in income-producing equity securities
issued by REITs. It is the Fund's fundamental policy to concentrate its
investments in the U.S. real estate industry (including REITs) and not in any
other industry.
Lower-Rated Securities
Under rating agency guidelines, medium- and lower-rated securities and
comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium- and lower-rated securities may have
poor prospects of ever attaining any real investment standing, may have a
current identifiable vulnerability to default, may be unlikely to have the
capacity to pay interest and repay principal when due in the event of adverse
business, financial or economic conditions, and/or may be likely to be in
default or not current in the payment of interest or principal. Such securities
are considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations.
Accordingly, it is possible that these types of factors could reduce the value
of securities held by the Fund, with a commensurate effect on the asset coverage
on the AMPS.
Changes by recognized rating services in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments. A
description of the ratings of certain rating agencies is set forth in Appendix
A. The ratings generally represent the opinions of those organizations as to the
quality of the securities that they rate. Such ratings, however, are relative
and subjective, are not absolute standards of quality, are subject to change and
do not evaluate the market risk or liquidity of the securities. Ratings of a
non-U.S. debt instrument, to the extent that those ratings are undertaken, are
related to evaluations of the country in which the issuer of the instrument is
located. Ratings generally take into account the currency in which a non-U.S.
debt instrument is denominated.
-3-
The secondary markets for lower-rated securities are generally not as
liquid as the secondary markets for higher rated securities. The secondary
markets for lower-rated securities are concentrated in relatively few market
makers and participants in the market are generally institutional investors,
including insurance companies, banks, other financial institutions and mutual
funds. In addition, the trading volume for lower-rated securities is generally
lower than that for higher-rated securities and the secondary markets could
contract under adverse market or economic conditions independent of any specific
adverse changes in the condition of a particular issuer. These factors may have
an adverse effect on the ability of the Fund to dispose of particular portfolio
investments, may adversely affect the value of the Fund's investment portfolio
and may limit the ability of the Fund to obtain accurate market quotations for
purposes of valuing securities and calculating net asset value. If the Fund is
not able to obtain precise or accurate market quotations for a particular
security, it will become more difficult to value its portfolio securities, and a
greater degree of judgment may be necessary in making such valuations. Less
liquid secondary markets may also affect the ability of the Fund to sell
securities at their fair value. If the secondary markets for lower-rated
securities contract due to adverse economic conditions or for other reasons,
certain liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may
significantly increase.
Prices for lower-rated securities may be affected by legislative and
regulatory developments to a greater extent than higher-rated securities. These
laws could adversely affect the Fund's investment practices and the value of its
investment portfolio, the secondary market for lower-rated securities, the
financial condition of issuers of these securities and the value of outstanding
lower-rated securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in lower-rated bonds and limiting the deductibility of interest by
certain corporate issuers of lower-rated bonds adversely affected the market in
the past.
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher rated securities. In
addition, such securities present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and subordinated to the prior payment of
senior indebtedness. The Fund also may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of principal
or interest on its portfolio holdings.
The Fund may only invest in non-investment grade securities that are
rated CCC or higher by Fitch Ratings ("Fitch") or Standard & Poor's Ratings
Services ("S&P") or Caa or higher by Moody's Investors Service, Inc. ("Moody's")
(or a comparable rating by another nationally recognized statistical rating
agency), or unrated securities determined to be of comparable quality by the
Investment Manager. The issuers of these securities may be in default or have a
currently identifiable vulnerability to default on their payments of principal
and
-4-
interest, or may otherwise be subject to present elements of danger with respect
to payments of principal or interest. The Fund will not invest in securities
that are in default as to payment of principal and interest at the time of
purchase.
Swap Agreements
The Fund may enter into interest rate swap or cap transactions for
purposes of attempting to reduce or eliminate the impact that an increase in
short-term interest rates could have on the Fund's investments and capital
structure. Swap transactions are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged (or
"swapped") between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate or in a "basket" of securities
representing a particular index. Commonly used swap transactions include: (i)
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; (ii) interest rate floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
fall below a specified level, or "floor"; and (iii) interest rate collars, under
which a party sells a cap and purchases a floor or vice versa in an attempt to
protect itself against interest rate movements exceeding given minimum or
maximum levels.
The "notional amount" of the swap transaction is only a fictitious
basis on which to calculate the obligations that the parties to a swap
transaction have agreed to exchange. Most swap transactions entered into by the
Fund would calculate the obligations on a "net basis." Consequently, the Fund's
obligations (or rights) under a swap transaction will generally be equal only to
the net amount to be paid or received under the transaction based on the
relative values of the positions held by each party to the transaction (the "net
amount"). Obligations under a swap transaction will be accrued daily (offset
against amounts owing to the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by segregating liquid assets. The Fund
will not enter into a swap transaction with any single party if the net amount
owed to or to be received under existing contracts with that party would exceed
5% of the Fund's total assets.
To the extent that the use of swaps and related transactions reduces
the value of the Fund's investment portfolio, such transactions could reduce
asset coverage on the AMPS or have a negative impact on the Fund's
ability to make dividend payments on the AMPS.
Foreign Securities
The Fund may invest up to 10% of its total assets in the securities of
non-U.S. issuers located in countries that are members of the Organisation For
Economic Co-operation and Development.
-5-
Investors should recognize that investing in the securities of foreign
issuers involves special considerations which are not typically associated with
investing in the securities of U.S. issuers. Investments in securities of
foreign issuers may involve risks arising from differences between U.S. and
foreign securities markets, including less volume, much greater price volatility
in and illiquidity of certain foreign securities markets, different trading and
settlement practices and less (or different) governmental supervision and
regulation, from changes in currency exchange rates, from high and volatile
rates of inflation, from economic, social and political conditions and, as with
domestic multinational corporations, from fluctuating interest rates.
Other investment risks include the possible imposition of foreign
withholding taxes on certain amounts of the Fund's income, the possible seizure
or nationalization of foreign assets and the possible establishment of exchange
controls, expropriation, confiscatory taxation, other foreign governmental laws
or restrictions which might affect adversely payments due on securities held by
the Fund, the lack of extensive operating experience of eligible foreign
sub-custodians and legal limitations on the ability of the Fund to recover
assets held in custody by a foreign sub-custodian or depository in the event of
the sub-custodian's or depository's bankruptcy or other event adversely
affecting such sub-custodian or depository.
In addition, there may be less publicly available information about a
foreign issuer than about a U.S. issuer, and foreign issuers may not be subject
to the same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of a foreign issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets. Finally, in the event of a default in any
such foreign obligations, it may be more difficult for the Fund to obtain or
enforce a judgment against the issuers of such obligations.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, in some jurisdictions there may be no comparable provisions
under certain foreign laws to insider trading and similar investor protection
securities laws that apply with respect to securities transactions consummated
in the United States. Further, brokerage commissions and other transaction costs
on foreign securities exchanges generally are higher than in the United States.
The manner in which foreign investors may invest in companies in
certain foreign countries, as well as limitations on such investments, also may
have an adverse impact on the operations of the Fund. For example, the Fund may
be required in some countries to invest initially through a local broker or
other entity and then have the purchased shares re-registered in the name of the
Fund. Re-registration may be costly and may in some instances not occur on a
timely basis, resulting in a delay during which the Fund may be denied certain
of its rights as an investor.
-6-
Foreign markets have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in the Fund incurring additional costs and delays in
transporting such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of the Fund are uninvested
and no return is earned thereon. The inability of the Fund to make intended
security purchases due to settlement problems or the risk of intermediary
counterparty failures could cause the Fund to forego attractive investment
opportunities. The inability to dispose of a portfolio security due to
settlement problems could result either in losses to the Fund due to subsequent
declines in the value of such portfolio security or, if the Fund has entered
into a contract to sell the security, could result in possible liability to the
purchaser.
Rules adopted under the Investment Company Act of 1940, as amended (the
"1940 Act"), permit the Fund to maintain its foreign securities and cash in the
custody of certain eligible non-U.S. banks and securities depositories. Certain
banks in foreign countries may not be "eligible sub-custodians," as defined in
the 1940 Act, for the Fund, in which event the Fund may be precluded from
purchasing securities in certain foreign countries in which it otherwise would
invest or may incur additional costs and delays in providing transportation and
custody services for such securities outside of such countries. The Fund may
encounter difficulties in effecting, on a timely basis, portfolio transactions
with respect to any securities of issuers held outside their countries. Other
banks that are eligible foreign sub-custodians may be recently organized or
otherwise lack extensive operating experience. In addition, in certain countries
there may be legal restrictions or limitations on the ability of the Fund to
recover assets held in custody by foreign sub-custodians in the event of the
bankruptcy of the sub-custodian.
Illiquid Securities
The Fund may invest in securities that are illiquid so long as no more
than 10% of the total assets of the Fund (taken at market value at the time of
investment) would be invested in such securities. The above limitation applies
only at the time a security is purchased, and the Fund is not required to
dispose of securities if, due to market movements, greater than 10% of the
Fund's total assets are invested in illiquid securities. The term "illiquid
securities" for these purposes means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the securities. The staff of the SEC is presently
of the view that repurchase agreements maturing in more than seven days are
subject to this restriction. Until that position is revised, modified or
rescinded, the Fund will conduct its operations in a manner consistent with this
view. This limitation on investment in illiquid securities does not apply to
certain restricted securities, including securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial paper, that AEW
Management and Advisors, L.P. (the "Investment Manager") has determined to be
liquid under procedures approved by the Board of Trustees.
The Board of Trustees 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. Certain illiquid securities may
-7-
require pricing at fair value as determined in good faith under the supervision
of the Board of Trustees. See "Determination of Net Asset Value." The Investment
Manager may be subject to significant delays in disposing of illiquid securities
held by the Fund, and transactions in illiquid securities may entail
registration expenses and other transaction costs that are higher than those for
transactions in liquid securities. If adverse market conditions were to develop
during any such delay, the Fund might obtain a less favorable price than that
which prevailed when it decided to sell.
As discussed in the Prospectus under "Interest Rate Transactions," the
Fund intends to segregate cash or liquid securities with its custodian having a
value at least equal to the Fund's net payment obligations under any swap
transaction, as marked to market daily. The Fund will treat such amounts as
illiquid for purposes of its 10% limit on investments in illiquid securities.
Other Investment Companies
The Fund may invest in securities of open- or closed-end investment
companies that invest primarily in investments of the types in which the Fund
may invest directly. The Fund may 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 the AMPS, during
periods when there is a shortage of attractive, real estate-related investments
available in the market, to gain exposure to foreign markets, when the
Investment Manager believes share prices of other investment companies offer
attractive values or when it believes such investments are attractive investment
opportunities. The Fund may invest in investment companies that are advised by
the Investment Manager or its affiliates (including affiliated money market and
short-term bond funds) to the extent permitted by applicable law and/or pursuant
to exemptive relief from the SEC. As a stockholder in an investment company, the
Fund will bear its ratable share of that investment company's expenses and Fund
shareholders would remain subject to payment of the Fund's management fees with
respect to assets so invested. Holders of Common Shares ("Common Shareholders")
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 other investments. In addition, the securities of
other investment companies may also be leveraged and will therefore be subject
to the same leverage risks described in the Prospectus and herein. As described
in the Prospectus in the section entitled "Principal Risks of the Fund--General
Risks of Investing in the Fund--Leverage Risks," because the Fund utilizes
leverage, the value of the Fund's investment portfolio will tend to fluctuate
more than if it did not use leverage.
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the
U.S. Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Fund's shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association, are supported by the full faith
and credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the
-8-
Student Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government-sponsored instrumentalities if it is not
obligated to do so by law. U.S. Government securities include securities that
have no coupons, or have been stripped of their unmatured interest coupons,
individual interest coupons from such securities that trade separately and
evidences of receipt of such securities. Such securities may pay no cash income,
and are purchased at a deep discount from their value at maturity. Custodial
receipts issued in connection with so-called trademark zero-coupon securities,
such as CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore
not U.S. Government securities, although the underlying bond represented by such
receipt is a debt obligation of the U.S. Treasury. Other zero-coupon Treasury
securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
Corporate Bonds
The Fund may invest in a wide variety of debt obligations of varying
maturities issued by U.S. and foreign corporations and other business entities,
including REITs. Bonds are fixed or variable rate debt obligations, including
bills, notes, debentures and similar instruments and securities. Bonds generally
are used by corporations and other issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and normally must
repay the amount borrowed on or before maturity. Certain bonds are "perpetual"
in that they have no maturity date. The Fund will invest in U.S.
dollar-denominated corporate bonds and may also invest in bonds denominated in
foreign currencies in accordance with the Fund's investment objectives and
policies as described in the Prospectus. The Fund has the flexibility to invest
in corporate bonds that are below investment grade quality. See "- Lower-Rated
Securities" above.
Many bonds, especially those issued at high interest rates, provide
that the issuer may repay them early. Issuers often exercise this right when
interest rates decline. Accordingly, holders of securities that may be called or
prepaid may not benefit fully from the increase in value that other fixed income
securities experience when rates decline. Furthermore, the Fund reinvests the
proceeds of the payoff at current yields, which typically are lower than those
paid by the security that was paid off. This is commonly known as "prepayment
risk."
Convertible Securities
The Fund may invest in convertible securities. A convertible debt
security is a bond, debenture, note, or other security that entitles the holder
to acquire common stock or other equity securities of the same or a different
issuer. Similarly, certain classes of preferred stock are convertible, meaning
the preferred stock is convertible into shares of common stock of the issuer. A
convertible security generally entitles the holder to receive interest or
dividends paid or accrued until the convertible security matures or is redeemed,
converted or exchanged. By holding a convertible security, the Fund can receive
a steady stream of interest payments or dividends and still have the option to
convert the security to common stock.
As a fixed income security, a convertible debt or equity security
tends to increase in market value when interest rates decline and to decrease
in value when interest rates rise. While
-9-
convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality, their value tends to increase as
the market value of the underlying stock increases and to decrease when the
value of the underlying stock decreases.
Convertible securities generally rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock. A convertible security may be subject to
redemption at the option of the issuer at a predetermined price. If a
convertible security held by the Fund is called for redemption, the Fund would
be required to permit the issuer to redeem the security and convert it to
underlying common stock, or would sell the convertible security to a third
party.
The Fund may also invest in so-called "synthetic convertible
securities," which are composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, the Fund may purchase a non-convertible debt security
and a warrant or option. The synthetic convertible differs from the true
convertible security in several respects. Unlike a true convertible security,
which is a single security having a unitary market value, a synthetic
convertible comprises two or more separate securities, each with its own market
value. Therefore, the "market value" of a synthetic convertible is the sum of
the values of its fixed income component and its convertible component. For this
reason, the values of a synthetic convertible and a true convertible security
may respond differently to market fluctuations.
Short Sales
A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will
decline. The Fund will not enter into short sales except for interest rate
hedging purposes as described in the Prospectus.
When the Fund makes a short sale on a security, it must borrow the
security sold short and deliver it to the broker-dealer through which it made
the short sale as collateral for its obligation to deliver the security upon
conclusion of the sale. The Fund may have to pay a fee to borrow particular
securities and is often obligated to pay over any accrued interest and dividends
on such borrowed securities.
If the price of the security sold short increases between the time of
the short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer. A short sale is "against the box" to the extent
that the Fund contemporaneously owns, or has the right to obtain at no added
cost, securities identical to those sold short. The Fund may also engage in
so-called "naked" short sales (i.e., short sales that are not "against the
box"), in which case the Fund's losses could theoretically be unlimited, in
cases where the Fund is unable for whatever reason to close out its short
position.
-10-
Derivative Instruments
The Fund may invest in derivatives for interest rate hedging purposes
as described in the Prospectus. The Fund may purchase and sell (write) both put
options and call options on securities, swap agreements, and securities indexes,
and enter into interest rate and index futures contracts and purchase and sell
options on such futures contracts ("futures options") for these purposes. The
Fund may also use other types of instruments that are currently available or
that may be introduced in the future, including other types of options, futures
contracts or futures options, provided that their use is consistent with the
Fund's investment objectives.
The value of some derivative instruments in which the Fund may invest
may be particularly sensitive to changes in prevailing interest rates, and, like
the other investments of the Fund, the ability of the Fund to utilize these
instruments successfully may depend in part upon the ability of the Investment
Manager to forecast interest rates and other economic factors correctly. If the
Investment Manager incorrectly forecasts such factors and has taken positions in
derivative instruments contrary to prevailing market trends, the Fund could be
exposed to the risk of loss.
The Fund might not employ any derivatives, and no assurance can be
given that any strategy used will succeed. If the Investment Manager incorrectly
forecasts interest rates, market values or other economic factors in utilizing a
derivatives strategy for the Fund, the Fund might have been in a better position
if it had not entered into the transaction at all. Also, suitable derivative
transactions may not be available in all circumstances. The use of these
strategies involves certain special risks, including a possible imperfect
correlation, or even no correlation, between price movements of derivative
instruments and price movements of related investments. While some strategies
involving derivative instruments can reduce the risk of loss, they can also
reduce the opportunity for gain or even result in losses by offsetting favorable
price movements in related investments or otherwise, due to the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable or the possible need to sell a portfolio security
at a disadvantageous time because the Fund is required to maintain asset
coverage or offsetting positions in connection with transactions in derivative
instruments and due to the possible inability of the Fund to close out or to
liquidate its derivatives positions.
Short-Term Investments and Borrowings
In anticipation of or in response to adverse market conditions, for
cash management purposes, or for defensive purposes, the Fund may invest up to
100% of its net assets in cash equivalents and short-term fixed-income
securities. The Fund would be unable to achieve its investment objectives if a
substantial portion of its assets consisted of such investments. Short-term
fixed income investments 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 agency securities include securities issued
by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration and the
Government National
-11-
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 the 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. Under current FDIC
regulations, the maximum insurance payable as to any one certificate of deposit
is $100,000; therefore, certificates of deposit purchased by the Fund may not be
fully insured.
(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. Investments in commercial paper will be
limited to commercial paper rated in the highest categories by a major rating
agency and which mature within one year of the date of purchase or carry a
variable or floating rate of interest. Master demand notes are direct lending
arrangements between the Fund and a corporation. There is no secondary market
for such notes.
-12-
However, they are redeemable by the Fund at any time. The Investment Manager
will consider the financial condition of the corporation (e.g., earning power,
cash flow, and other liquidity measures) 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.
(5) Shares of other investment companies that in turn invest in
short-term investments, such as money market mutual funds. Subject to certain
restrictions contained in any applicable exemptive order issued by the SEC,
these investments may include investment companies such as money market funds
advised or subadvised by the Investment Manager or its affiliates.
The Fund may borrow money for temporary administrative purposes.
Subject to the terms of any applicable exemptive relief granted by the SEC, the
Fund may borrow for such purposes from other investment companies advised by the
Investment Manager or its affiliates in an inter-fund loan program. In such a
program, the Fund and affiliated funds would be permitted to lend and borrow
money for certain temporary purposes directly to and from one another.
Participation in such an inter-fund lending program would be voluntary for both
borrowing and lending funds, and the Fund would participate in an inter-fund
loan program only if the Board of Trustees determined that doing so would
benefit the Fund. Should the Fund participate in such an inter-fund lending
program, the Board of Trustees would establish procedures for the operation of
the program by the Investment Manager or an affiliate.
Portfolio Turnover
The Fund may engage in frequent and active portfolio trading when the
Investment Manager considers it to be appropriate, but the Fund will not use
short-term trading as the primary means of achieving its investment objectives.
Although the Fund cannot accurately predict its annual portfolio turnover rate,
it is not expected to exceed 100% under normal circumstances. However, there are
no limits on the rate of portfolio turnover, and investments may be sold without
regard to the length of time held when, in the opinion of the Investment
Manager, investment considerations warrant such action. A higher 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
increased realization of net short-term capital gains by the Fund that, when
distributed to shareholders, will be taxable as ordinary income. See "Taxation."
Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of
the Fund and/or the Investment Manager due to their possible affiliations with
CDC IXIS Asset Management North America, L.P. Absent an exemption from the SEC
or other regulatory relief, the Fund is generally precluded from effecting
certain principal transactions with affiliated brokers, and its ability to
purchase securities being underwritten by an affiliated broker or a syndicate
including an affiliated broker or to utilize affiliated brokers for agency
transactions is subject to regulatory and other restrictions. This could limit
the Fund's ability to engage in securities transactions and take advantage of
market opportunities.
-13-
Other Investments; New Securities and Other Investment Techniques.
Although the Fund invests primarily in the securities of Real Estate
Companies, it may from time to time also invest in equity or debt securities of
issuers in other industries. Such investments may be subject to different or
additional risks, including, among others, the risk that market prices of equity
securities may rise and fall rapidly and unpredictably and the risk that debt
securities may lose value when interest rates rise.
New types of securities and other investment and hedging practices are
developed from time to time. The Investment Manager expects, consistent with the
Fund's investment objectives and policies, to invest in such new types of
securities and to engage in such new types of investment practices if the
Investment Manager believes that these investments and investment techniques may
assist the Fund in achieving its investment objectives. In addition, the
Investment Manager may use investment techniques and instruments that are not
specifically described herein.
INVESTMENT RESTRICTIONS
The investment objectives and the general investment policies and
investment techniques of the Fund are described in the Prospectus. The Fund's
investment objectives are fundamental, and the Fund has also adopted the
following investment restrictions as fundamental policies. The Fund's investment
objectives and the following investment restrictions may not be changed without
the approval of the holders of a majority of the outstanding shares (as defined
in the 1940 Act) of the Fund.
Under these policies:
(1) The Fund may not make short sales of securities or maintain a short
position or purchase securities on margin, except that the Fund may obtain
short-term credits as necessary for the clearance of security transactions, and
the Fund may make any short sales or maintain any short positions where the
short sales or short positions would not constitute "senior securities" under
the 1940 Act.
(2) The Fund may borrow money to the maximum extent permitted by law,
including without limitation (i) borrowing from banks or entering into reverse
repurchase agreements, or employing similar investment techniques, and pledging
its assets in connection therewith, and (ii) entering into reverse repurchase
agreements and transactions in options, futures, options on futures, and forward
foreign currency contracts.
(3) The Fund may not make loans, except that the Fund may purchase or
hold debt instruments in accordance with its investment objectives and policies.
This restriction does not apply to repurchase agreements or loans of portfolio
securities.
(4) The Fund may not act as an underwriter of securities of other
issuers except that, in the disposition of portfolio securities, it may be
deemed to be an underwriter under the federal securities laws.
-14-
(5) The Fund may not purchase or sell real estate, although it may
purchase securities of real estate investment trusts, issuers which deal in real
estate, securities which are secured by interests in real estate, and securities
which represent interests in real estate, and it may acquire and dispose of real
estate or interests in real estate acquired through the exercise of its rights
as a holder of debt obligations secured by real estate or interests therein.
(6) The Fund may not purchase or sell commodities, except that the Fund
may purchase and sell futures contracts and options, may enter into foreign
exchange contracts and may enter into swap agreements and other financial
transactions not requiring the delivery of physical commodities.
(7) The Fund may not issue senior securities, except for permitted
borrowings or as otherwise permitted under the 1940 Act.
In addition to these investment restrictions, the Fund will make
investments that will result in the concentration (as that term may be defined
by or interpreted under the 1940 Act and the rules and regulations thereunder)
of its investments in the securities of issuers primarily engaged in the real
estate industry (including real estate investment trusts) and not in any other
industry. This restriction does not apply to U.S. Government securities. For
purposes of this restriction, telephone, gas and electric public utilities are
each regarded as separate industries and finance companies whose financing
activities are related primarily to the activities of their parent companies are
classified in the industry of their parents. For purposes of this restriction
with regard to bank obligations, bank obligations are considered to be one
industry, and asset-backed securities are not considered to be bank obligations.
This policy may not be changed without the approval of the holders of a
"majority of the outstanding shares" (as defined in the 1940 Act) of the Fund.
In addition to the fundamental investment policies identified as such
above, the Fund has adopted, among others, the following non-fundamental
investment policy. Under normal market conditions, the Fund will invest at least
90% of its total assets in common shares, preferred shares, convertible
preferred shares and debt securities issued by Real Estate Companies (as defined
in this Statement of Additional Information) ("Basket Investments"). The Board
of Trustees of the Fund may change the preceding policy without shareholder
approval. However, so long as it is required by applicable law, the Fund will
not change the policy in order to reduce below 80% the portion of its net assets
(plus any borrowings for investment purposes) that the Fund will invest, under
normal market conditions, in Basket Investments unless it provides shareholders
with at least 60 days' written notice of such change.
The percentages and percentage limitations set forth above or in the
Prospectus, other than with respect to restriction (2) pertaining to borrowing,
will apply at the time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs or exists immediately after and
as a result of a purchase of such security. Restrictions (1) and (7) shall be
interpreted based upon no-action letters and other pronouncements of the SEC or
its staff. Under current pronouncements, certain Fund positions are excluded
from the definition of "senior security" so long as the Fund maintains adequate
cover, segregation of assets or otherwise.
-15-
It is a condition of closing this offering that the AMPS be offered with a
credit quality rating of "Aaa" from Moody's and of "AAA" from Fitch. In order to
obtain and maintain the required ratings, the Fund may be required to comply
with investment quality, diversification and other guidelines established by
such rating agencies. Such guidelines will likely be more restrictive than the
restrictions set forth above. The Fund does not anticipate that such guidelines
would have a material adverse effect on Common Shareholders or the Fund's
ability to achieve its investment objectives. Moody's and Fitch receive fees in
connection with their ratings issuances.
MANAGEMENT OF THE FUND
The Fund is governed by a Board of Trustees, which is responsible for
generally overseeing the conduct of Fund business and for protecting the
interests of shareholders. Subject to Massachusetts law and the provisions of
the Fund's Amended and Restated Agreement and Declaration of Trust and Amended
and Restated Bylaws (the "Bylaws"), the Trustees have all power necessary and
convenient to carry out this responsibility, including the election and removal
of the Fund's officers. The Trustees meet periodically throughout the year to
oversee the Fund's activities, review contractual arrangements with companies
that provide services to the Fund and review the Fund's performance.
The table below provides certain information regarding the Trustees and
officers of the Fund. For purposes of this table and for purposes of this
Statement, the term "Independent Trustee" means those Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Fund and, when
applicable, who have no direct or indirect financial interest in the approval of
a matter being voted on by the Board of Trustees. For purposes of this Statement
of Additional Information, the term "Interested Trustee" means those Trustees
who are "interested persons" of the Fund and, when applicable, who have a direct
or indirect financial interest in the approval of a matter being voted on by the
Board of Trustees.
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Term of Number of
Office and Portfolios
Position(s) Length of Principal Occupation(s) in Fund
Held with Time During Past Complex
Name, Age and Address Fund Served 5 Years Overseen Other Directorships Held
---------------------- ---- ------ ------- -------- ------------------------
---------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
---------------------------------------------------------------------------------------------------------------------------
Graham T. Allison, Jr. (63) Trustee Term Douglas Dillon Professor 27 Director, Taubman Centers,
399 Boylston Street Contract expires and Director for the Inc.
Boston, MA 02116 Review and in 2003* Belfer Center of Science Board Member, USEC Inc.
Governance and International
Committee Since Affairs, John F. Kennedy
Member inception School of Government,
(October Harvard University
2002)
---------------------------------------------------------------------------------------------------------------------------
Daniel M. Cain (58) Trustee Term President and CEO, Cain 27 Trustee, Universal Health
452 Fifth Avenue Chairman expires Brothers & Company, Realty Income Trust
New York, NY 10018 of the in 2004* Incorporated (investment Director, eBenX, Inc.
Audit banking) Director, PASC
Committee Since
inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
Kenneth J. Cowan (71) Trustee Term Retired 27 None
399 Boylston Street Chairman expires
Boston, MA 02116 of the in 2004*
Contract
Review and
---------------------------------------------------------------------------------------------------------------------------
-16-
---------------------------------------------------------------------------------------------------------------------------
Term of Number of
Office and Portfolios
Position(s) Length of Principal Occupation(s) in Fund
Held with Time During Past Complex
Name, Age and Address Fund Served 5 Years Overseen Other Directorships Held
---------------------- ---- ------ ------- -------- ------------------------
---------------------------------------------------------------------------------------------------------------------------
Governance Since
Committee inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
Richard Darman (59) Trustee Term Partner, The Carlyle 27 Director and Vice Chairman,
399 Boylston Street Contract expires Group (investments); AES Corporation
Boston, MA 02116 Review and in 2003* formerly Professor,
Governance John F. Kennedy School of
Committee Since Government, Harvard
Member inception University
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
Sandra O. Moose (61) Trustee Term Senior Vice President 27 Director, Verizon
Exchange Place Audit expires and Director, The Boston Communications
Boston, MA 02109 Committee in 2005* Consulting Group, Inc. Director, Rohm and Haas
Member (management Company
Since consulting)
inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
John A. Shane (70) Trustee Term President, Palmer 27 Director, Eastern Bank
200 Unicorn Park Drive Audit expires Service Corporation Corporation; Director,
Woburn, MA 01801 Committee in 2005* (venture capital Gensym Corporation;
Member organization) Director, Overland
Since Storage, Inc.; Director
inception ABT Associates, Inc.
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
Pendleton P. White (72) Trustee Term Retired 27 None
6 Breckenridge Lane Contract expires
Savannah, GA 31411 Review and in 2003*
Governance
Committee Since
Member inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
---------------------------------------------------------------------------------------------------------------------------
John T. Hailer** (42) President Term as President and Chief 27 None
399 Boylston Street and Chief Trustee Executive Officer, CDC
Boston, MA 02116 Executive expires IXIS Asset Management
Officer in 2004* Distributors, L.P.;
Trustee Director and Executive
Since Vice President of CDC
inception IXIS Asset Management
(October Distribution Corporation
2002) ("CDC IXIS Distribution
Corporation"); and
President and Chief
Executive Officer of CDC
IXIS Asset Management
Advisers, L.P. ("CDC
IXIS Advisers");
formerly, Senior Vice
President, Fidelity
Investments
---------------------------------------------------------------------------------------------------------------------------
Peter S. Voss*** (56) Chairman Term Director, President and 27 Trustee, Harris Associates
399 Boylston Street of the expires Chief Executive Officer, Investment Trust****
Boston, MA 02116 Board in 2005* CDC IXIS Asset
Trustee Since Management North
inception America, L.P.
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
OFFICERS
---------------------------------------------------------------------------------------------------------------------------
James J. Finnegan (42) Chief Not AEW Management and N/A N/A
399 Boylston Street Operating Applicable Advisors, L.P., -
---------------------------------------------------------------------------------------------------------------------------
-17-
---------------------------------------------------------------------------------------------------------------------------
Term of Number of
Office and Portfolios in
Position(s) Length of Principal Occupation(s) Fund
Held with Time During Past Complex
Name, Age and Address Fund Served 5 Years Overseen Other Directorships Held
---------------------- ---- ------ ------- -------- ------------------------
---------------------------------------------------------------------------------------------------------------------------
Boston, MA 02116 Officer (October Counsel,
2002) Managing Director, Vice
President and Clerk,
December 1996 to
present; AEW Capital
Management, L.P. -
General Counsel and
Principal, January 2000
to present, Assistant
General Counsel and Vice
President, December 1996
to January 2000; AEW
Advisors, Inc. -
Managing Director and
Vice President, December
1996 to Present; AEW
Investment Group, Inc. -
Vice President and
Assistant Clerk,
December 1996 to
Present; AEW Real Estate
Advisors, Inc. - Vice
President and Assistant
Clerk, December 1996 to
Present.
---------------------------------------------------------------------------------------------------------------------------
Mark E. Bradley (42) Treasurer Not Senior Vice President N/A N/A
399 Boylston Street Applicable CDC IXIS Asset
Boston, MA 02116 Management Services,
Since Inc.; Senior Vice
inception President, CDC IXIS
(October Advisers; Vice President
2002) and Assistant Treasurer,
MFS Investment Management,
1997-2002; Vice President,
Putnam Investments, 1994
to 1997.
---------------------------------------------------------------------------------------------------------------------------
John E. Pelletier (38) Secretary Not Senior Vice President, N/A N/A
399 Boylston Street and Clerk Applicable General Counsel,
Boston, MA 02116 Secretary and Clerk, CDC
Since IXIS Distribution
inception Corporation; Senior Vice
(October President, General
2002) Counsel, Secretary and
Clerk, CDC IXIS Asset
Management Distributors,
L.P.; Senior Vice
President, General
Counsel, Secretary and
Clerk, CDC IXIS Asset
Management Advisers,
L.P.; Executive Vice
President, General
Counsel, Secretary,
Clerk, and Director, CDC
IXIS Asset Management
Services, Inc.
---------------------------------------------------------------------------------------------------------------------------
-18-
*Subject to a Trustee's earlier retirement, resignation, disqualification
or removal from the Board. The current retirement age is 72.
**Mr. Hailer is an "interested person" of the Fund because he holds the
following positions with affiliated persons of the Fund: President and
Chief Executive Officer of CDC IXIS Asset Management Distributors, L.P.;
Director and Executive Vice President of CDC IXIS Distribution Corporation;
and President and Chief Executive Officer of CDC IXIS Advisers.
***Mr. Voss is an "interested person" of the Fund because he holds the
following positions with affiliated persons of the Fund: Director of CDC
IXIS Asset Management Services, Inc.; Director of CDC IXIS Distribution
Corporation; Director, President and Chief Executive Officer of CDC IXIS
Asset Management North America, L.P.; Director and Chairman of CDC IXIS
Asset Management Associates, Inc.; Director of AEW Capital Management,
Inc.; Director of Harris Associates, Inc.; Director of Jurika & Voyles,
Inc.; Director of Loomis, Sayles & Company, Inc.; Director of Reich & Tang
Asset Management Inc.; Director of Westpeak Investment Advisors, Inc.; and
Director of Vaughan, Nelson, Scarborough & McCullough, Inc.
****As of December 31, 2002, Harris Associates Investment Trust had seven
series that were overseen by its Board of Trustees.
Each Trustee of the Fund also serves as a trustee for CDC Nvest Funds
Trust I, II and III, CDC Nvest Companies Trust I, CDC Nvest Cash Management
Trust-Money Market Series and CDC Nvest Tax Exempt Money Market Trust
(collectively, the "CDC Nvest Trusts"), each of which is advised by affiliates
of the Investment Manager. Previous positions during the past five years with
CDC IXIS Asset Management Distributors, L.P. or CDC IXIS Advisers are omitted,
if not materially different from a trustee's or officer's current position with
such entity.
The Common Shareholders and the holders of the AMPS ("Preferred
Shareholders") will elect Trustees to fill the vacancies of Trustees whose term
expires at each annual meeting of shareholders. While the AMPS are outstanding,
the Preferred Shareholders will be entitled to elect two Trustees and the
remaining Trustees shall be elected by Common Shareholders and Preferred
Shareholders, voting together as a single class, in each case in accordance with
the Fund's staggered board structure (see "Anti-Takeover and Other Provisions in
the Declaration of Trust"). Preferred Shareholders will be entitled to elect a
majority of the Fund's Trustees under certain circumstances.
The following table states the dollar range of equity securities
beneficially owned by each Trustee in the Fund and, on an aggregate basis, in
any registered investment companies overseen by the Trustees in the Fund's
"family of investment companies," which includes CDC Nvest AEW Real Estate Fund
(a series of CDC Nvest Companies Trust I), an open-end investment company that
is managed by the Investment Manager.
-19-
----------------------------------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in All Funds Overseen by
Dollar Range of Equity Trustee in Family of Investment
Name of Trustee/1/ Securities in the Fund Companies
----------------- ------------------------ ------------
----------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
----------------------------------------------------------------------------------------------------------------------
Graham T. Allison, Jr. $0 More than $100,000 (2)
Kenneth J. Cowan $0 $10,001-50,000 (2)
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
----------------------------------------------------------------------------------------------------------------------
Peter S. Voss $0 More than $100,000
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
(1) Except as disclosed above, no Trustee of the Fund owns securities of the
Fund or CDC Nvest AEW Real Estate Fund. Information about ownership is shown as
of December 31, 2002 for the CDC Nvest AEW Real Estate Fund. Because the Fund is
recently organized, information about ownership of its securities is shown as
of December 31, 2002.
(2) Includes ownership of CDC Nvest AEW Real Estate Fund through a deferred
compensation arrangement in connection with service as a Trustee of CDC Nvest
Companies Trust I.
Standing Board Committees
The Contract Review and Governance Committee of the Fund is comprised
solely of Independent Trustees and considers matters relating to advisory,
subadvisory and distribution arrangements, potential conflicts of interest
between the Investment Manager and the Fund, and governance matters relating to
the Fund.
The Audit Committee of the Fund is comprised solely of Independent
Trustees and considers matters relating to the scope and results of the Fund's
audits and serves as a forum in which the independent accountants can raise any
issues or problems identified in the audit with the Board of Trustees. This
Committee also reviews and monitors compliance with stated investment objectives
and policies, SEC and Treasury regulations as well as operational issues
relating to the transfer agent, auction agent, administrator, sub-administrator
and custodian.
Each Committee of the Board has held two meetings to date.
Trustee Fees
The Fund pays no compensation to its officers or to its Interested
Trustees. Each other Trustee of the Fund receives a fee of $2,000 annually for
serving as a Trustee of the Fund, and a fee of $375 and related expenses for
each meeting of the Board of Trustees attended. Each Committee member receives a
fee of $2,000 annually for Committee service, and will also receive a meeting
fee of $200 for each additional meeting after the first four meetings of a
Committee during a given year. In addition, the Chairpersons of the Contract
Review and Governance and Audit Committees each receive an additional fee of
$1,000 per year.
During the year ended December 31, 2002 (the fiscal year ended January
31, 2003, for CDC Nvest Companies Trust I), the Trustees of the Fund received
the amounts set forth in the following table for serving as trustees of the CDC
Nvest Trusts. The table also includes amounts paid to the Trustees by the Fund
for service as Trustees during the partial fiscal year ended January 31, 2003.
-20-
Pension or Total
Compensation from Retirement Estimated Compensation
the Fund for the Benefits Annual from the
Fiscal Year Accrued as Benefits CDC Nvest
Ending January Part of Fund Upon Trusts and the
Name of Trustee 31, 2003 Expenses* Retirement* Fund*+
--------------- -------- ---------- ----------- ------
INDEPENDENT
Graham T. Allison, Jr. $1,285 $0 $0 $74,535
Daniel M. Cain $1,887 $0 $0 $76,887
Kenneth J. Cowan $1,887 $0 $0 $81,637
Richard Darman $1,660 $0 $0 $76,410
Sandra O. Moose $1,285 $0 $0 $71,285
John A. Shane $1,660 $0 $0 $71,660
Pendleton P. White $1,660 $0 $0 $76,410
INTERESTED
Peter S. Voss $0 $0 $0 $0
John T. Hailer $0 $0 $0 $0
-----------------------------------------
+Total Compensation represents amounts paid during 2002 (during the
fiscal year ended January 31, 2003, for CDC Nvest Companies Trust I) to a
trustee for serving on the board of trustees of 6 trusts with a total of 26
funds as of December 31, 2002, as well as amounts paid by the Fund during the
fiscal year ended January 31, 2003. Amounts include payments deferred by
Trustees for 2002 (for the year ended January 31, 2003, for CDC Nvest Companies
Trust I).
The Fund provides no pension or retirement benefits to its Trustees.
Shareholders
As of January 17, 2003, the following person owned of record the number
of Common Shares noted below, representing the indicated percentage of the
Fund's outstanding shares as of such date and, except as noted below, no other
person owned of record or, to the knowledge of the Fund, owned beneficially 5%
or more of any class of shares of the Fund.
Shareholder Number of Common Percentage of the Fund's
Shares Outstanding Shares as of
January 17, 2003
Cede & Co. 3,824,799 99.8%
55 Water Street, 25/th/ Floor
New York, New York 10041-0001
-21-
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager
The Investment Manager 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 Trustees of the Fund. The
Investment Manager is a real estate investment advisory firm that provides
investment management and related services to institutional and retail
investors. The Investment Manager employs 180 investment professionals in
offices located in Boston, Los Angeles, Washington, DC, and London and utilizes
the resources of a dedicated in-house research group in place since 1988.
Together with its affiliates operating under the AEW name, the Investment
Manager managed approximately $6.7 billion of client capital as of December 31,
2002 (approximately $7.0 billion as of June 30, 2002), including the assets of
some of the nation's leading public and private pension funds, union retirement
funds, and university endowments. The Investment Manager managed approximately
$2.24 billion in REIT securities as of December 31, 2002. The Investment
Manager's address is Two Seaport Lane, World Trade Center East, Boston,
Massachusetts 02210.
The Investment Manager is a registered investment adviser whose origins
date back to 1981. The Investment Manager is a limited partnership that is a
controlled affiliate of AEW Capital Management, L.P., which in turn is a
wholly-owned subsidiary of CDC IXIS Asset Management Holdings, LLC, which in
turn is a wholly-owned subsidiary of CDC IXIS Asset Management North America,
L.P. ("CDC IXIS North America"). CDC IXIS North America owns the entire limited
partnership interest in the Investment Manager. CDC IXIS North America, together
with its subsidiaries and affiliates in the U.S., Europe and Asia, managed
approximately $312.8 billion in assets for institutions and individuals as of
December 31, 2002.
Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Trustees of the Fund.
Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of .80% of the
average daily value of the managed assets (which include the liquidation
preference on any preferred shares of the Fund (including the AMPS) and the
principal amount on any borrowings used for leverage) of the Fund, subject to
certain fee waivers described in the Prospectus. During the time in which the
Fund is utilizing leverage, the fees paid to the Investment Manager and its
affiliates for investment management, administrative and other 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 include the liquidation
preference of any preferred shares of the Fund (including the AMPS) and the
principal amount of any borrowings used for leverage. Only the Fund's Common
Shareholders bear the Fund's fees and expenses.
-22-
Trustee Approval of the Investment Management Agreement
The Board of Trustees approved the Investment Management Agreement at a
meeting held on October 10, 2002. As noted above, each Trustee also serves as a
trustee for the CDC Nvest Funds, including the CDC Nvest AEW Real Estate Fund,
an open-end investment company managed by the Investment Manager that
principally invests in the securities of real estate companies. As a result, the
Trustees, in their collective years of service as trustees of such funds, have
gained significant knowledge regarding matters such as the fees and expenses of
investment companies; the services generally provided by investment advisors to
an investment company; the benefits of the advisory relationship to an
investment advisor; and the operations and prior performance of the Investment
Manager.
In connection with their meeting, the Trustees met with representatives
of the Investment Manager, including investment advisory personnel, and reviewed
materials specifically relating to the Investment Management Agreement,
including materials prepared by Fund counsel and counsel to the Independent
Trustees. In considering the Investment Management Agreement, the Board of
Trustees, including the Independent Trustees, did not identify any single factor
as determinative. Matters considered by the Board of Trustees, including the
Independent Trustees, in connection with its approval of the Investment
Management Agreement included the following:
. the economic outlook and the general investment outlook in the
markets in which the Fund proposes to invest, as well as the
investment performance of a peer group of funds (including other
funds advised by the Investment Manager) and the performance of
an appropriate index.
. the Investment Manager's investment philosophy and process,
operational stability and financial condition, as well as the
size and experience of the Investment Manager's investment staff.
. the expected quality of the Investment Manager's services with
respect to compliance with the Fund's investment policies and
restrictions and its policies on personal securities
transactions.
. the nature, quality, and extent of services to be performed by
the Investment Manager pursuant to the Investment Management
Agreement.
. the Fund's expected expense ratio and the expense ratios of a
peer group of funds. They also considered (i) the Investment
Manager's agreement to waive a portion of its investment
management fees and the financial impact on the Investment
Manager of such waiver, and (ii) the amount and nature of fees
paid by shareholders, including the fact that the Investment
Manager has agreed to pay organizational expenses and offering
costs of the Fund (other than the sales load) that exceed $0.03
per Common Share. For these purposes, the Trustees took into
account not only the fees paid by the Fund, but also so-called
"fallout benefits" to the Investment Manager, such as the
engagement of CDC IXIS Asset Management Services, Inc., an
affiliate of the Investment Manager, to provide administrative
-23-
services to the Fund, and the expected benefits of research
made available to the Investment Manager by reason of
brokerage commissions generated by the Fund's securities
transactions. In evaluating the Fund's investment management
fees, the Trustees also took into account the demands,
complexity and expected quality of the investment management
of the Fund. The Trustees also noted the fact that, because
the advisory fees paid to the Investment Manager (as well as
the fees paid to CDC IXIS Asset Management Services, Inc.) by
the Fund are based on the Fund's managed assets, which include
the liquidation preference on any AMPS and the principal
amount of any borrowings used for leverage, the Investment
Manager has a financial incentive for the Fund to issue AMPS
and use other forms of leverage, which may create a conflict
of interest between the Investment Manager and the Fund's
shareholders.
. the level of profits expected to be realized by the Investment
Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Trustees considered certain
ongoing commissions that are expected to be paid by the
Investment Manager out of its own assets to the underwriters for
the offering of the Common Shares and the Investment Manager's
agreement to waive a portion of its investment management fees.
. whether there is potential for realization of any economies of
scale with respect to the management of the Fund and whether the
Fund will appropriately benefit from such economies of scale.
Based on their evaluation of all factors that they deemed to be
material, including, but not limited to, those factors described above, and
assisted by the advice of independent counsel, the Trustees, including the
Independent Trustees, concluded that the proposed investment management fee
structure was fair and reasonable, and that approval of the Investment
Management Agreement was in the best interest of the Fund and its shareholders.
Administrative Services
Pursuant to an Administrative Services Agreement between the Fund and
CDC IXIS Asset Management Services, Inc. ("CDC IXIS Services"), an affiliate of
the Investment Manager, CDC IXIS Services also performs or arranges for the
performance of certain administrative and accounting functions for the Fund,
including: (i) providing persons satisfactory to the Trustees of the Fund to
serve as officers and, in that capacity, manage the daily operations of the
Fund; (ii) processing the payment of expenses for the Fund; (iii) supervising
the preparation of periodic reports to the Fund's shareholders; (iv) preparing
materials for Fund Board and Committee meetings; (v) supervising the 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; (vi) monitoring
relationships with organizations providing services to the Fund, including the
custodian, transfer agent, auction agent and printers; (vii) supervising
compliance by the Fund with record-keeping requirements under the 1940 Act and
regulations thereunder, maintaining books and records for the Fund (other than
those maintained by the Investment Manager, custodian and/or transfer agent) and
preparing and filing of tax
-24-
reports other than the Fund's income tax returns; and (viii) providing
executive, clerical and secretarial help needed to carry out these
responsibilities.
Under the terms of the Administrative Services Agreement, the Fund pays CDC
IXIS Services a monthly administration fee computed on the basis of the average
daily managed assets of the Fund at an annual rate equal to 0.06% of the first
$300 million in assets and 0.0575% of assets in excess of $300 million, with a
minimum annual fee of $150,000.
In accordance with the terms of the Administrative Services Agreement and
with the approval of the Fund's Board of Trustees, CDC IXIS Services has
retained Investors Bank & Trust Company as sub-administrator under a
sub-administration agreement (the "Sub-Administration Agreement"). Under the
Sub-Administration Agreement, Investors Bank & Trust Company has assumed
responsibility for performing certain of the foregoing administrative functions,
including (i) determining, together with the Fund's custodian, 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, CDC IXIS Services, the custodian or transfer agent; (iii)
preparing financial information for the Fund's income tax returns, proxy
statements, shareholder reports, and SEC filings; and (iv) responding to
shareholder inquiries.
Under the terms of the Sub-Administration Agreement, CDC IXIS Services (and
not the Fund) pays Investors Bank & Trust Company a monthly sub-administration
fee computed on the basis of the managed assets of the Fund at an annual rate
equal to 0.015% of the first $300 million in managed assets and 0.012%
thereafter. As discussed below under "Custodian and Auction Agent," Investors
Bank & Trust Company is also the Fund's custodian.
The personnel acting as officers of the Fund are employees or officers of
the Investment Manager, CDC IXIS Services or their affiliates. The Fund does not
pay for services performed by officers of the Investment Manager, CDC IXIS
Services or their affiliates, other than amounts payable under the Investment
Management and Administrative Services Agreements.
Marketing Agent
CDC IXIS Asset Management Advisors Group (the "Advisors Group"), an
affiliate of the Investment Manager, acted as marketing agent for the Fund in
connection with the offering of the Fund's Common Shares by preparing marketing
materials and providing distribution support during the offering. In this
connection, the Advisors Group agreed, pursuant to an agreement with the
Investment Manager, (i) to reimburse the Investment Manager for one-half of the
amount by which the aggregate of all of the Fund's organizational expenses and
offering costs with respect to the offering of the Common Shares (other than the
sales load) exceeds $0.03 per Common Share and (ii) to bear a portion of any
ongoing asset-based fees to be paid by the Investment Manager to the
underwriters (other than Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch")) in connection with the offering in the amount of 21.8% of
such fees in years one and two of the Fund's operations and in declining amounts
for each of the four years thereafter. As payment for these services, the
Investment Manager (and not the Fund) has agreed to pay the Advisors Group a fee
at the annual rate of 0.12% of net assets for years one and two of the Fund's
operations, 0.08% of net assets for years three and four, and 0.05% of net
assets in years
-25-
five and six. The Investment Manager has not agreed to pay any fees to the
Advisors Group (and the Advisors Group has not agreed to bear any portion of any
asset-based fees payable by the Investment Manager) beyond year six of the
Fund's operations. The Advisors Group and the Investment Manager, both of which
are subsidiaries of CDC IXIS Asset Management North America, L.P., may agree to
change or eliminate these payments at any time.
Custodian And Auction Agent
Investors Bank & Trust Company, which has its principal business office at
200 Clarendon Street, Boston, Massachusetts 02116, has been retained to act as
custodian of the Fund's investments. Deutsche Bank Trust Company Americas, 280
Park Avenue, New York, New York 10017, serves as auction agent, transfer agent,
registrar, dividend paying agent and redemption agent for the AMPS. Neither
Investors Bank & Trust Company nor Deutsche Bank Trust Company Americas has any
part in deciding the Fund's investment policies or which securities are to be
purchased or sold for the Fund's portfolio.
CDC IXIS Services remains responsible for monitoring and overseeing the
performance by Investors Bank & Trust Company and Deutsche Bank Trust Company
Americas, as sub-administrator and custodian and auction agent, respectively, of
their obligations to the Fund under their respective agreements with the Fund,
subject to the overall authority of the Fund's Board of Trustees.
Code Of Ethics
The Fund and the Investment Manager have adopted Codes of Ethics pursuant
to Rule 17j-1 under the 1940 Act. The Codes of Ethics permit employees to invest
in securities for their own accounts, under certain circumstances, including
securities that may be purchased or held by the Fund. Text-only versions of the
codes of ethics may be viewed online or downloaded from the EDGAR Database on
the SEC's internet web site at www.sec.gov. You may also review and copy those
documents by visiting the SEC's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. In addition, copies of the Codes of Ethics may
be obtained, after mailing the appropriate duplicating fee, by writing to the
SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102
or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board and the oversight of the
Investment Manager, the Investment Manager is primarily responsible for the
Fund's portfolio decisions and the placing of the Fund's portfolio transactions.
Fixed-income securities, certain short-term securities and certain equities
normally will be purchased or sold from or to issuers directly or to dealers
serving as market makers for the securities at a net price, which may include
dealer spreads and underwriting commissions. Equity securities may also be
purchased or sold through brokers who will be paid a commission.
The general policy of the Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker
-26-
or dealer, the stability of the broker or dealer, execution and settlement
capabilities, time required to negotiate and execute the trade, research
services and the Investment Manager's arrangements related thereto (as described
below), overall performance, the dealer's risk in positioning the securities
involved, and the broker's commissions and dealer's spread or mark-up. While the
Investment Manager generally seeks the best price in placing its orders, the
Fund may not necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, as amended, the Investment Manager may select
brokers who charge a commission in excess of that charged by other brokers if
the Investment Manager determines in good faith that the commission to be
charged is reasonable in relation to the brokerage and research services
provided to the Investment Manager by such brokers. Research services generally
consist of research or statistical reports or oral advice from brokers and
dealers regarding particular companies, industries or general economic
conditions. The Investment Manager may also have arrangements with brokers
pursuant to which such brokers provide research services to the Investment
Manager in exchange for a certain volume of brokerage transactions to be
executed by such broker. While the payment of higher commissions increases the
Fund's costs, the Investment Manager does not believe that the receipt of such
brokerage and research services significantly reduces its expenses as the
Investment Manager. Arrangements for the receipt of research services from
brokers may create conflicts of interest.
Research services furnished to the Investment Manager by brokers who effect
securities transactions for the Fund may be used by the Investment Manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the Investment Manager by brokers who effect
securities transactions for other investment companies and accounts which the
Investment Manager manages may be used by the Investment Manager in servicing
the Fund. Not all of these research services are used by the Investment Manager
in managing any particular account, including the Fund.
Under the 1940 Act, "affiliated persons" of the Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
the Fund may purchase securities from underwriting syndicates of which the
Investment Manager or any of its affiliates (as defined in the 1940 Act) is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act. See "Investment Objectives and Policies - Certain Affiliations."
The Fund contemplates that, consistent with the policy of obtaining the
best net results, brokerage transactions may be conducted through "affiliated
broker/dealers," as defined in the 1940 Act. The Board of Trustees has adopted
procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to
ensure that all brokerage commissions paid to such affiliates are reasonable and
fair in the context of the market in which such affiliates operate. Any such
compensation will be paid in accordance with applicable SEC regulations.
Investment decisions for the Fund are made independently from those of
other funds or accounts managed by the Investment Manager. Such other funds or
accounts may also invest in the same securities as the Fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as the Fund, however, transactions in such
-27-
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security.
DETERMINATION OF NET ASSET VALUE
The method for determining the net asset value per Common Share is
summarized in the Prospectus.
The total net asset value of the Common Shares (the excess of the assets of
the Fund over the Fund's liabilities) is determined at the close of regular
trading (normally 4:00 p.m. Eastern time) on each day that the New York Stock
Exchange (the "Exchange") is open for trading. In addition, in the Investment
Manager's discretion, the Fund's shares may be priced on a day the Exchange is
closed for trading if the Investment Manager in its discretion determines that
it is advisable to do so based primarily upon factors such as whether (i) there
has been enough trading in that Fund's portfolio securities to affect materially
the net asset value of the Fund's shares and (ii) whether in the Investment
Manager's view sufficient information (e.g., prices reported by pricing
services) is available for the Fund's shares to be priced. The Fund does not
expect to price its shares on the following holidays: New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Securities listed on a national
securities exchange or on the NASDAQ National Market System are valued at their
last sale price, or, if there is no reported sale during the day, the last
reported bid price estimated by a broker. Unlisted securities traded in the
over-the-counter market are valued at the last reported bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make a market in the securities. U.S. government
securities are traded in the over-the-counter market. Options, interest rate
futures and options thereon that are traded on exchanges are valued at their
last sale price as of the close of such exchanges. Securities for which current
market quotations are not readily available and all other assets are taken at
fair value as determined in good faith by the Board of Trustees, although the
actual calculations may be made by persons acting pursuant to procedures
approved by the Board.
Generally, trading in foreign government securities and other fixed-income
securities, as well as trading in equity securities in markets outside the
United States, is substantially completed each day at various times prior to the
close of the Exchange. Securities traded on a foreign exchange will be valued at
their last sale price (or the last reported bid price, if there is no reported
sale during the day), on the exchange on which they principally trade, as of the
close of regular trading on such exchange, except for securities traded on the
London Stock Exchange ("British Equities"). British Equities will be valued at
the mean between the last bid and last asked prices on the London Stock
Exchange. The value of other securities principally traded outside the United
States will be computed as of the completion of substantial trading for the day
on the markets on which such securities principally trade. Securities
principally traded outside the United States will generally be valued several
hours before the close of regular trading on the Exchange, generally 4:00 p.m.
Eastern time, when the Fund computes the net asset value of its Common Shares.
Occasionally, events affecting the value of securities principally traded
outside
-28-
the United States may occur between the completion of substantial trading of
such securities for the day and the close of the Exchange, which events will not
be reflected in the computation of the Fund's net asset value. If, in the
determination of the Board of Trustees or persons acting at their direction,
events materially affecting the value of the Fund's securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by or in accordance with procedures approved by the Fund's
Trustees. The effect of fair value pricing is that securities may not be priced
on the basis of quotations from the primary market in which they are traded, but
rather may be priced by another method that the Board of Trustees believes
accurately reflects fair value.
DISTRIBUTIONS
See "Description of AMPS - Dividends and Rate Periods" and "Description of
Capital Structure" in the Prospectus for information related to distributions
made to Fund shareholders.
For tax purposes, the Fund is currently required to allocate net capital
gain and other categories of income between the Common Shares and the AMPS in
proportion to total dividends paid to each class for the year in which such
capital gain or other category of income is realized.
While any AMPS are outstanding, the Fund may not declare any cash dividend
or other distribution on its Common Shares unless at the time of such
declaration (1) all accrued dividends on the AMPS have been paid, (2) the net
asset value of the Fund's portfolio (determined after deducting the amount of
such dividend or other distribution) is at least 200% of the liquidation value
of any outstanding AMPS, (3) the Fund has redeemed the full number of AMPS and
any other preferred shares outstanding required to be redeemed by any provision
in the Bylaws requiring mandatory redemption, and (4) other requirements imposed
by any rating agencies rating any AMPS issued by the Fund have been met.
These limitations on the Fund's ability to make distributions on its Common
Shares could cause the Fund to incur income and excise tax and, under certain
circumstances, impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Taxation."
Level Rate Dividend Policy
Subject to the determination of the Board of Trustees to implement a
Managed Dividend Policy, as discussed below, commencing with the Fund's first
dividend, the Fund intends to make regular monthly cash distributions to Common
Shareholders at a level rate based on the projected performance of the Fund,
which rate may be adjusted from time to time ("Level Rate Dividend Policy").
Distributions can only be made from net investment income after paying accrued
dividends on the AMPS and interest and required principal payments on
borrowings, if any, as well as making any required payments on any interest rate
transactions. The Fund's ability to maintain a Level Rate Dividend Policy will
depend on a number of factors, including the stability of income received from
its investments and dividends payable on the AMPS and interest and required
principal payments on borrowings, if any. Over time,
-29-
the Fund intends to distribute all of its net investment income (after payment
of expenses, dividends on the AMPS and interest on any borrowings). At least
annually, the Fund intends to distribute all of its net capital gain and
ordinary taxable income after paying expenses and paying any accrued dividends
on, or redeeming or liquidating, the AMPS, or making interest and required
principal payments on borrowings, if any. The net income of the Fund consists of
all interest income accrued on portfolio assets less all expenses of the Fund.
Expenses of the Fund are accrued each day. In addition, the Fund currently
expects that a portion of its distributions will consist of amounts in excess of
investment company taxable income and net capital gain derived from the
non-taxable components of the cash flow from the real estate underlying the
Fund's portfolio investments. It is possible that amounts distributed to the
Fund from Real Estate Companies would be recharacterized as a return of capital,
in which case amounts distributed to Fund shareholders may also be
recharacterized as a return of capital. To permit the Fund to maintain a more
stable monthly distribution, the Fund will initially distribute less than the
entire amount of net investment income earned in a particular period. The
undistributed net investment income would be available to supplement future
distributions. As a result, the distributions paid by the Fund for any
particular monthly period may be more or less than the amount of net investment
income actually earned by the Fund during the period. Undistributed net
investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value. See "Taxation."
Managed Dividend Policy
The Fund intends to file an exemptive application with the Securities and
Exchange Commission seeking an order under the 1940 Act facilitating the
implementation of a Managed Dividend Policy. If and when the Fund receives the
requested relief, the Fund may, subject to the determination of its Board of
Trustees, implement a Managed Dividend Policy. Under a Managed Dividend Policy,
the Fund would intend to distribute a monthly fixed percentage of net asset
value to Common Shareholders. As with the Level Dividend Rate Policy,
distributions would be made only after paying expenses and paying dividends on
the AMPS, and interest and required principal payments on borrowings, if any.
Under a Managed Dividend Policy, if, for any monthly distribution, net
investment income and net realized capital gain were less than the amount of the
distribution, the difference would be distributed from the Fund's assets. It is
possible that amounts distributed to the Fund from Real Estate Companies would
be recharacterized as a return of capital, in which case amounts distributed to
Fund shareholders may also be recharacterized as a return of capital. The Fund's
final distribution for each calendar year would include any remaining net
investment income and net realized capital gain undistributed during the year.
Pursuant to the requirements of the 1940 Act and other applicable laws, a notice
would accompany each monthly distribution with respect to the estimated source
of the distribution made. In the event the Fund distributed in any calendar year
amounts in excess of net investment income and net realized capital gain (such
excess, the "Excess"), such distribution would decrease the Fund's total assets
and, therefore, have the likely effect of increasing the Fund's expense ratio.
There is a risk that the Fund would not eventually realize capital gains in an
amount corresponding to a distribution of the Excess. In addition, in order to
make such distributions, the Fund may have to sell a portion of its investment
portfolio at a time when independent investment judgment might not dictate such
action. There is no guarantee that the Fund will receive an exemptive order
facilitating the implementation of a Managed Dividend
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Policy or, if received, that the Fund will determine to implement a Managed
Dividend Policy. The Board of Trustees reserves the right to change the dividend
policy from time to time.
Dividend Reinvestment Plan
The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred to
as an "opt-out" plan. Each Common Shareholder will have all distributions of
dividends and capital gains automatically reinvested in additional Common Shares
by EquiServe Trust Company, N.A., as agent for shareholders pursuant to the Plan
(the "Plan Agent"), unless they elect to receive cash. The Plan Agent will
either (i) effect purchases of Common Shares under the Plan in the open market
or (ii) distribute newly issued Common Shares of the Fund. Shareholders who
elect not to participate in the Plan will receive all distributions in cash paid
by check mailed directly to the shareholder of record (or if the shares are held
in street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent. Common Shareholders whose Common Shares are held in
the name of a broker or nominee should contact the broker or nominee to
determine whether and how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or makes a capital gain distribution,
the Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy Common Shares in the open market, on the American
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued Common Shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy Common Shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued Common
Shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Common Share
credited to such account. In the alternative, upon receipt of the participant's
instructions, Common Shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes confirmations of all acquisitions made for the participant. Common
Shares in the account of each Plan participant will be held by the Plan Agent on
behalf of the participant. Proxy material relating to shareholders' meetings of
the Fund will include those shares purchased as well as shares held pursuant to
the Plan.
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In the case of shareholders, such as banks, brokers or nominees, which hold
Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan.
The Plan Agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the Fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions; however, the Fund reserves the right to amend the Plan to
include a service charge payable by the participants.
The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions. See "Taxation."
The Fund and the Plan Agent reserve the right to amend or terminate the
Plan. All correspondence concerning the Plan should be directed to the Plan
Agent by telephone at 1-800-730-6001.
On January 31, 2003, the Fund paid a dividend in the amount of $.115 per
Common Share to shareholders of record as of January 20, 2003.
DESCRIPTION OF SHARES
Common Shares
The Fund's Declaration authorizes the issuance of an unlimited number of
Common Shares, par value $0.00001 per share. All Common Shares of the Fund have
equal rights as to the payment of dividends and the distribution of assets upon
liquidation of the Fund. The Common Shares currently outstanding have been fully
paid and, subject to matters discussed in "Certain Provisions in the Declaration
of Trust - Shareholder Liability" below, are non-assessable, and have no
pre-emptive or conversion rights or rights to cumulative voting. At any time
when the AMPS are outstanding, Common Shareholders will not be entitled to
receive any distributions from the Fund unless all accrued dividends on AMPS
have been paid, asset coverage (as defined in the 1940 Act) with respect to AMPS
and certain forms of indebtedness would be at least 200% and 300%, respectively,
after giving effect to such distributions, and other requirements imposed by any
rating agencies rating the AMPS have been met. See " - AMPS" below. See
"Description of AMPS - Rating Agency Guidelines and Asset Coverage" and
"Description of Capital Structure" in the Prospectus.
-32-
The Common Shares are listed on the American Stock Exchange under the
symbol "RIF." The Fund intends to hold annual meetings of shareholders, as
required under the rules of the American Stock Exchange currently applicable to
listed companies.
Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund that invest primarily in securities of real estate companies have during
some periods traded at prices higher than net asset value and during other
periods traded at prices lower than net asset value. There can be no assurance
that the Common Shares or shares of other similar funds will trade at a price
higher than net asset value in the future. The net asset value of the Common
Shares was reduced immediately following the offering of the Common Shares after
payment of the sales load and organizational and offering expenses. Whether
investors will realize gains or losses upon the sale of Common Shares will
depend entirely upon whether the market price of the Common Shares at the time
of sale is above or below the original purchase price for the shares. Since the
market price of the Fund's Common Shares will be determined by factors beyond
the control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Repurchase of Shares; Conversion to
Open-End Fund."
AMPS
See "Description of AMPS" and Description of Capital Structure" in the
Prospectus for information relating to the AMPS. Article 11 of the Bylaws, which
establishes many of the terms of the AMPS, is set forth in its entirety in
Appendix B to this Statement of Additional Information.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR AMPS
General
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, Deutsche Bank Trust Company
Americas) which provides, among other things, that the auction agent will
follow the auction procedures set forth in the Bylaws for purposes of
determining the applicable rate for AMPS so long as the applicable rate for such
shares is to be based on the results of an auction.
Broker-Dealer Agreements. Each auction requires the participation of one or
more broker-dealers that have entered into a separate agreement with the auction
agent (each, a "Broker-Dealer"). The auction agent will enter into broker-dealer
agreements with one or more Broker-Dealers selected by the Fund that provide for
the participation of those Broker-Dealers in auctions for AMPS.
Securities Depository. The Depository Trust Company ("DTC") will act as
securities depository for the agent members (defined below) with respect to the
AMPS. One
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certificate for the AMPS will be registered in the name of Cede & Co., as
nominee of DTC. Such certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of AMPS
contained in the Bylaws. Prior to the commencement of the right of Preferred
Shareholders to elect a majority of the Fund's Trustees, as described under
"Description of AMPS - Voting Rights" in the Prospectus, Cede & Co. will be the
holder of record of all AMPS, and owners of the AMPS will not be entitled to
receive certificates representing their ownership interest in the AMPS.
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 (the "agent member") in AMPS, whether
for its own account or as a nominee for another person. Additional information
concerning DTC and the DTC depository system is included as an Exhibit to the
Registration Statement of which this Statement of Additional Information forms a
part.
Auction Agent
The auction agent will act as agent for the Fund in connection with
auctions. In the absence of bad faith or 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.
The auction agent may rely upon, as evidence of the identities of the
existing holders of AMPS, the auction agent's registry of existing holders, 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"
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 the auction agency agreement 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 attempt to appoint a successor auction agent.
The Fund may remove the auction agent provided that prior to such removal the
Fund shall have entered into an agreement with a successor auction agent.
Broker-Dealers
After each auction for the AMPS, the auction agent will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge that will
generally be at the annual rate of 1/4 of 1% of the stated value ($25,000) of
the AMPS held by such Broker-Dealer's customers upon settlement in such auction.
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
-34-
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.
The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time upon five days' notice, provided that at
least one Broker-Dealer agreement is in effect after such termination. A
Broker-Dealer or the auction agent may terminate the Broker-Dealer agreement at
any time upon five days' written notice; provided, however, that if the
Broker-Dealer is Merrill Lynch or Prudential Securities Incorporated, neither
the Broker-Dealer nor the auction agent may terminate the Broker-Dealer
agreement without first obtaining the prior written consent of the Fund to such
termination, which consent shall not be withheld unreasonably. The Broker-Dealer
agreement shall automatically terminate upon the redemption of all outstanding
AMPS or upon termination of the auction agency agreement.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Shareholder Liability
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the Fund's
Amended and Restated Declaration of Trust (the "Declaration") contains an
express disclaimer of shareholder liability for acts or obligations of the Fund
and requires that notice of such disclaimer be given in each note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or any officer or officers of the Fund. The Declaration also provides for
indemnification by the Fund for all loss and expense of any shareholder or
former shareholder held personally liable on account of being or having been a
shareholder of the Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
such disclaimer is inoperative or the Fund is unable to meet its obligations,
and thus should be considered remote.
Anti-Takeover Provisions
As described below, the Declaration includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees, and could
have the effect of depriving shareholders of opportunities to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund.
The Fund's Trustees are divided into three classes (Class I, Class II and
Class III), having initial terms of one, two and three years, respectively. At
each annual meeting of shareholders, the term of one class will expire and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, subject to any voting powers of Common Shareholders or the Preferred
Shareholders, the Declaration provides that a Trustee may be removed only for
"cause" (as defined below) and only (i) by action of at least seventy-five
percent (75%) of the outstanding shares of the classes or series of shares
entitled to vote for the election of such Trustee, at a meeting called for such
purpose, or (ii) by a written instrument signed by at least seventy-five percent
(75%) of the remaining Trustees specifying the date when such removal shall
become effective. "Cause" for these
-35-
purposes means willful misconduct, dishonesty or fraud on the part of the
Trustee in the conduct of his or her office or such Trustee being convicted of a
felony.
Except as provided in the next paragraph, the affirmative vote or
consent of at least seventy-five percent (75%) of the Board of Trustees and at
least seventy-five percent (75%) of the shares of the Fund outstanding and
entitled to vote thereon are required to authorize any of the following
transactions (each a "Material Transaction"): (1) a merger, consolidation or
share exchange of the Fund or any series or class of shares of the Fund with or
into any other person or company, or of any such person or company with or into
the Fund or any such series or class of shares; (2) the issuance or transfer by
the Fund or any series or class of shares (in one or a series of transactions in
any twelve-month period) of any securities issued by the Fund or such series or
class to any other 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 sales of securities of the Fund or such series or class in
connection with a public offering, issuances of securities of the Fund or such
series or class pursuant to a dividend reinvestment plan adopted by the Fund,
issuances of securities of the Fund or such series or class upon the exercise of
any stock subscription rights distributed by the Fund and issuances of
securities of the Fund or a series or class to all shareholders of the Fund or
such series or class on a pro rata basis; (3) a sale, lease, exchange, mortgage,
pledge, transfer or other disposition by the Fund or any series or class of
shares (in one or a series of transactions in any twelve-month period) to or
with any person of any assets of the Fund or such series or class having an
aggregate fair market value of $1,000,000 or more, except for transactions in
securities effected by the Fund or such series or class in the ordinary course
of its business or (4) any shareholder proposal as to specific investment
decisions made or to be made with respect to the assets of the Fund or a series
or class of shares. The same affirmative votes are required with respect to any
shareholder proposal as to specific investment decisions made or to be made with
respect to the Fund's assets or the assets of any series or class of shares of
the Fund.
Notwithstanding the approval requirements specified in the preceding
paragraph, the Declaration requires no vote or consent of the Fund's
shareholders to authorize a Material Transaction if the transaction is approved
by a vote of both a majority of the Board of Trustees and seventy-five percent
(75%) of the Continuing Trustees (as defined below), so long as all other
conditions and requirements, if any, provided for in the Fund's Bylaws and
applicable law (including any shareholder voting rights under the 1940 Act) have
been satisfied.
In addition, the Declaration provides that, subject to the voting power
of one or more classes of shares as set forth in the Bylaws, the Fund may be
terminated at any time by vote or consent of at least seventy-five percent (75%)
of the Fund's shares entitled to vote or, alternatively, by vote or consent of
both a majority of the Board of Trustees and seventy-five percent (75%) of the
Continuing Trustees (as defined below). A vote of both a majority of the Board
of Trustees and seventy-five percent (75%) of the Continuing Trustees (as
defined below) is required for distributions to the Fund's shareholders (in one
or a series of distributions) during any twelve-month period of any property (in
cash, shares or otherwise) with an aggregate fair market value in excess of 125%
of the income and gains (accrued or realized) of the Fund during such
twelve-month period.
-36-
In certain circumstances, the Declaration also imposes shareholder
voting requirements that are more demanding than those required under the 1940
Act in order to authorize a conversion of the Fund from a closed-end to an
open-end investment company. See "Possible Conversion to Open-End Status" and
"Certain Provisions in the Declaration of Trust" in the Prospectus.
The Trustees may from time to time grant other voting rights to
shareholders with respect to these and other matters as the Trustees may
consider necessary or desirable.
As noted, the voting provisions described above could have the effect
of depriving Common Shareholders of an opportunity to sell their Common 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 view of the Fund's Board of Trustees, however, these provisions offer
several possible advantages, including: (1) requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid for the
amount of Common Shares required to obtain control; (2) promoting continuity and
stability; and (3) enhancing the Fund's ability to pursue long-term strategies
that are consistent with its investment objectives and management policies. The
Board of Trustees has determined that the voting requirements described above,
which are generally greater than the minimum requirements under the 1940 Act,
are in the best interests of the Fund's shareholders generally.
A "Continuing Trustee," as used in the discussion above, is any member
of the Fund's Board of Trustees who either (i) has been a member of the Board
for a period of at least thirty-six months (or since immediately after the
initial registered public offering of the Fund's Common Shares, if less than
thirty-six months) or (ii) was nominated to serve as a member of the Board of
Trustees by a majority of the Continuing Trustees then members of the Board.
The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's Bylaws,
both of which have been filed as exhibits to the Fund's registration statement
on file with the SEC.
Liability of Trustees
The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
REPURCHASE OF SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders do not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and
-37-
economic conditions and other factors beyond the control of the Fund. Common
shares of closed-end investment companies frequently trade at prices lower than
net asset value. They sometimes also trade at a premium to net asset value. The
Fund's Board of Trustees regularly monitors the relationship between the market
price and net asset value of the Common Shares. If the Common Shares were to
trade at a substantial discount to net asset value for an extended period of
time, the Fund's Board may consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of shares, which
may include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares at net asset value,
the conversion of the Fund to an open-end investment company, or other programs
intended to reduce the discount. The Board of Trustees currently considers the
following factors to be relevant to a consideration of any of the actions noted
above: 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 general
market considerations. The Board of Trustees may decide not to take any of these
actions. The Fund has no present intention to repurchase its Common Shares and
generally would do so only in the circumstances described in this section.
Notwithstanding the foregoing, at any time when the AMPS are
outstanding, the Fund may not purchase, redeem or otherwise acquire any of its
Common Shares unless (1) full cumulative dividends on the AMPS and any other
preferred shares outstanding due on or prior to the date of the transaction have
been declared and paid or have been declared and sufficient funds for the
payment thereof deposited with the auction agent. (2) at the time of such
purchase, redemption or acquisition, the net asset value of the Fund's portfolio
(determined after deducting the acquisition price of the Common Shares) is at
least 200% of the liquidation value of the outstanding AMPS (expected to equal
the original purchase price per share plus any accrued and unpaid dividends
thereon), (3) the Fund has redeemed the full number of AMPS and any other
preferred shares outstanding required to be redeemed by any provision in the
Bylaws requiring mandatory redemption, and (4) other requirements imposed by any
rating agencies rating any AMPS issued by the Fund have been met.
Subject to its investment limitations, the Fund may borrow or use the
accumulation of cash to finance repurchase of shares or to make a tender offer.
Interest on any borrowings to finance share repurchase transactions or the
accumulation of cash by the Fund in anticipation of share repurchases or tenders
will reduce the Fund's income. Any share repurchase, tender offer or borrowing
that might be approved by the Board of Trustees would have to comply with the
Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and
regulations under each of those Acts.
The Fund's Board of Trustees may also from time to time consider
submitting to the holders of the shares of beneficial interest of the Fund a
proposal to convert the Fund to an open-end investment company. In determining
whether to exercise its sole discretion to submit this issue to shareholders,
the Board of Trustees would consider all factors then relevant, including the
relationship of the market price of the Common Shares to net asset value, the
extent to which the Fund's capital structure is leveraged and the possibility of
re-leveraging, the spread, if any, between the yields on securities in the
Fund's portfolio and interest and dividend charges on AMPS or other forms of
leverage and general market and economic conditions.
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The Declaration requires the affirmative vote or consent of holders of
at least seventy-five percent (75%) of each class of the Fund's shares entitled
to vote on the matter to authorize a conversion of the Fund from a closed-end to
an open-end investment company, unless the conversion is authorized by both a
majority of the Board of Trustees and seventy-five percent (75%) of the
Continuing Trustees (as defined above under "Certain Provisions in the
Declaration of Trust--Anti-Takeover Provisions"). This seventy-five percent
(75%) shareholder approval requirement is higher than is required under the 1940
Act. In the event that a conversion is approved by the Trustees and the
Continuing Trustees as described above, the minimum shareholder vote required
under the 1940 Act would be necessary to authorize the conversion. Currently,
the 1940 Act would require approval of the holders of a "majority of the
outstanding" Common Shares and, if issued, AMPS, voting together as a single
class, and the holders of a "majority of the outstanding" AMPS voting as a
separate class, in order to authorize a conversion.
The Fund anticipates that it would not charge any sales or redemption
fees upon conversion to an open-end fund. The Fund also currently anticipates
that after any such conversion, shareholder redemptions would generally be made
in cash. However, if the Fund were to meet shareholder redemptions "in kind"
through the distributions of securities, shareholders would bear the risks of
holding such securities directly and would bear any brokerage costs or other
transactional expenses in connection with the sale of such securities.
If the Fund converted to an open-end company, it would be required to
redeem all AMPS then outstanding (requiring in turn that it liquidate a portion
of its investment portfolio), and the Fund's Common Shares likely would no
longer be listed on the American Stock Exchange. Shareholders of an open-end
investment company may require the company to redeem their shares on any
business day (except in certain circumstances as authorized by or 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
companies typically engage in a continuous offering of their shares. Open-end
companies are thus subject to periodic asset in-flows and out-flows that can
complicate portfolio management.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the shares
may be the subject of repurchase or tender offers at net asset value from time
to time, or that the Fund may be converted to an open-end investment company,
may reduce any spread between market price and net asset value that might
otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets, which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when AMPS are outstanding will increase the leverage applicable to the
outstanding Common Shares then remaining. See the Fund's Prospectus under
"Principal Risks of the Fund - General Risks of Investing in the Fund - Leverage
Risk."
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Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of Trustees would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact (including the expense) of any action that might be
taken on the Fund or its shareholders and market considerations. Based on these
considerations, even if the Fund's shares should trade at a discount, the Board
of Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisers with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
The Bush Administration has announced a proposal to eliminate the
federal income tax on dividends of income previously taxed at the corporate
level. The specific application of this proposal to a regulated investment
company investing in REITs, such as the Fund, is still unclear. In addition, it
is uncertain if, and in what form, the proposal will ultimately be adopted.
Accordingly, it is not possible to evaluate how this proposal might affect the
tax discussion below.
Taxation of the Fund
The Fund intends to elect to be treated as, and to qualify annually as,
a regulated investment company under Subchapter M of the Code.
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income 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 with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, 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 regulated investment companies) of a single issuer, or
two or more issuers which the Fund controls and are engaged in the same, similar
or related trades or businesses; and (c) distribute at least 90% of the sum of
its investment company taxable income (as that term is defined in the Code, but
without regard to the deduction for dividends paid) and net tax-exempt interest
each taxable year.
As a regulated investment company that is accorded special tax
treatment, the Fund generally will not be subject to U.S. federal income tax on
its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gain in
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excess of net long-term capital loss) and net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, that it
distributes to shareholders. The Fund intends to distribute to its shareholders,
at least annually, all or substantially all of its investment company taxable
income and net capital gain. However, if the Fund retains any net capital gain
or any investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, it may designate the retained amount as undistributed capital gains in a
notice to its shareholders who, if subject to federal income tax on long-term
capital gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their share of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund on such undistributed amount against their federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For federal income tax purposes the tax basis of shares owned by a
shareholder of the Fund will be increased by an amount equal under current law
to the difference between the amount of undistributed capital gains included in
the shareholder's gross income and the tax deemed paid by the shareholder under
clause (ii) of the preceding sentence.
If the Fund fails to distribute in a calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the one-year period ending on October 31 of the calendar year, and (3) any
ordinary income and capital gains for previous years that was not distributed
during those years, the Fund will be subject to a 4% excise tax on the
undistributed amount. 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 taxable 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 application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
If the Fund failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, the Fund
would be subject to tax on its taxable income at corporate rates (even if such
income were distributed to its shareholders), and all distributions out of
earnings and profits (including distributions of net capital gain) would be
taxed to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying as a regulated investment
company that is accorded special tax treatment.
Distributions
Dividends paid out of the Fund's current and accumulated earnings and
profits will, except in the case of capital gain dividends described below, be
taxable to a U.S. shareholder as ordinary income to the extent of the Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
Although such dividends generally will not qualify for the dividends received
deduction available to corporations under Section 243 of the Code, if a portion
of the Fund's income consists of qualifying dividends paid by U.S. corporations
(other than REITs), a portion of the dividends paid by the Fund to corporate
shareholders may be eligible for the corporate dividends received deduction.
Distributions of net capital gain (the
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excess of net long-term capital gain over net short-term capital loss), if any,
properly designated as capital gain dividends are taxable to a shareholder as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. A distribution of an amount in excess of the Fund's current and
accumulated earnings and profits will be treated by a shareholder as a return of
capital which is applied against and reduces the shareholder's basis in his or
her shares. A return of capital is not taxable, but it reduces a shareholder's
tax basis in his or her shares, thus reducing any loss or increasing any gain on
a subsequent taxable disposition by the shareholder of his or her shares. To the
extent that the amount of any such distribution exceeds the shareholder's basis
in his or her shares, the excess will be treated by the shareholder as gain from
a sale or exchange of the shares.
Dividends and distribution on the Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Distributions are taxable to a shareholder even if they are paid from
income or gains earned by the Fund prior to the shareholder's investment (and
thus included in the price paid by the shareholders).
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
paid out of earnings or profits to each class for the tax year. Accordingly, the
Fund intends each year to allocate capital gain dividends between its Common
Shares and AMPS in proportion to the total dividends paid out of earnings or
profits to each class with respect to such tax year. Dividends qualifying and
not qualifying for the dividends received deduction will similarly be allocated
between and among these classes. 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 and AMPS. Since the Fund's current and
accumulated earnings and profits will first be used to pay dividends on the
AMPS, distributions in excess of such earnings and profits, if any, will be made
disproportionately to Common Shareholders.
Distributions will be treated in the manner described above regardless
of whether such distributions are paid in cash or in additional shares of the
Fund. A shareholder whose distributions are reinvested in shares will be treated
as having received a dividend equal to the fair market value of the new shares
issued to the shareholder or the amount of cash allocated to the shareholder for
the purchase of shares on its behalf.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions.
Sale Or Exchange of Fund Shares
Upon the sale, exchange or redemption of shares of the Fund which a
shareholder holds as a capital asset, such shareholder may realize a capital
gain or loss which will be long-term or
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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, all or a portion of any loss realized upon a taxable
disposition of Fund shares will be disallowed to the extent the shares disposed
of are replaced (including through reinvestment of dividends) within a period of
61 days beginning 30 days before and ending 30 days after the disposition. In
such a case, the basis of the newly purchased shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on a taxable
disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gain received by the shareholder (or amounts credited as undistributed
capital gains) with respect to such shares.
From time to time, the Fund may make a tender offer for its Common
Shares. It is expected that the terms of any such offer will require a tendering
shareholder to tender all Common Shares and dispose of all AMPS held, or
considered under certain attribution rules of the Code to be held, by such
shareholder. Shareholders who tender all Common Shares and dispose of all AMPS
held, or considered to be held, by them will be treated as having sold their
shares and generally will realize a capital gain or loss. If a shareholder
tenders fewer than all of its Common Shares, or retains a substantial portion of
its AMPS, such shareholder may be treated as having received a taxable dividend
upon the tender of its Common Shares. In such a case there is a risk that
non-tendering shareholders will be treated as having received taxable
distributions from the Fund. Likewise, if the Fund redeems some but not all of
the AMPS held by a Preferred Shareholder and such shareholder is treated as
having received a taxable dividend upon such redemption, there is a risk that
Common Shareholders and non-redeeming Preferred Shareholders will be treated as
having received taxable distributions from the Fund. To the extent that the Fund
recognizes net gains on the liquidation of portfolio securities to meet such
tenders of Common Shares, the Fund will be required to make additional
distributions to its Common Shareholders.
Nature of Fund's Investments
Certain of the Fund's investment practices are subject to special and
complex 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.
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Original Issue Discount Securities and Payment-in-Kind Securities
The Fund may acquire debt obligations that are treated as issued
originally at a discount or having acquisition discount. Current federal tax law
requires a regulated investment company that holds a U.S. Treasury or other
fixed income zero-coupon security to accrue as income each year a portion of the
discount at which the security was issued, even though the holder receives no
interest payment in cash on the security during the year. In addition,
payment-in-kind securities will give rise to income which is required to be
distributed and is taxable even though the Fund holding the security receives no
interest payment in cash on the security during the year. Generally, the amount
of the discount is treated as interest income and is included in income over the
term of the debt security, even though payment of that amount is not received
until a later time, usually when the debt security matures. A portion of the
original issue discount includable in income with respect to certain high-yield
corporate debt obligations (including certain payment-in-kind securities) may be
treated as a dividend for certain U.S. federal income tax purposes. With respect
to certain short-term debt obligations, the Fund may make one or more elections
which could affect the character and timing of recognition of income.
Some of the debt obligations (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
obligations having market discount, which could affect the character and timing
of recognition of income.
If the Fund holds the foregoing kinds of securities, it may be required
to pay out as an income distribution each year an amount which is greater than
the total amount of cash interest the Fund actually received. Such distributions
may be made from the cash assets of the Fund or by liquidation of portfolio
securities, if necessary. The Fund may realize gains or losses from such
liquidations. In the event the Fund realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain distribution
than they would in the absence of such transactions.
Investment in Real Estate Investment Trusts
If the Fund invests in REITs that hold residual interests in real
estate mortgage investment conduits ("REMICs"), 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 federal
income tax in all events. 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
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retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity)
subject to tax on unrelated business income, thereby potentially requiring such
an entity that is allocated excess inclusion income, and otherwise might not be
required to file a tax return, to file a tax return and pay tax on such income,
and (iii) in the case of a foreign shareholder, will not qualify for any
reduction in U.S. federal withholding tax. In addition, if at any time during
any taxable year a "disqualified organization" (as defined in the Code) is a
record holder of a share in a regulated investment company, then the regulated
investment company will be subject to a tax equal to that portion of its excess
inclusion income for the taxable year that is allocable to the disqualified
organization, multiplied by the highest 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.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("foreign shareholder") depends on whether the income of
the Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the shareholder (see "Taxation--Investment in Real
Estate Investment Trusts" above)), which tax is generally withheld from such
distributions.
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will not be subject to U.S. tax at the
rate of 30% (or lower treaty rate) unless the foreign shareholder is a
nonresident alien individual and is physically present in the United States for
more than 182 days during the taxable year and meets certain other requirements.
However, this 30% tax on capital gains of nonresident alien individuals who are
physically present in the United States for more than the 182 day period only
applies in exceptional cases because any individual present in the United States
for more than 182 days during the taxable year is generally treated as a
resident for U.S. income tax purposes; in that case, he or she would be subject
to U.S. income tax on his or her worldwide income at the graduated rates
applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a
foreign shareholder who is a nonresident alien individual, the Fund may be
required to withhold U.S. 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 "Taxation-Backup
Withholding," below. 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. tax unless (i) in the case of a shareholder that is a nonresident
alien individual, the gain is U.S. source income and such shareholder is
physically present in the United States for more than 182 days during the
taxable year and meets certain other requirements, or (ii) at any time during
the shorter of the period during which the foreign shareholder held shares of
the Fund and the five year period ending on the date of the disposition of those
shares, the Fund was a "U.S. real property holding corporation" and the foreign
shareholder held more than 5% of the shares of the
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Fund, in which event the gain would be taxed in the same manner as for a U.S.
shareholder as discussed above and a 10% U.S. withholding tax would be imposed
on the amount realized on the disposition of such shares to be credited against
the foreign shareholder's U.S. 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 an
interest in stock of a REIT controlled by U.S. persons at all times during the
five-year period prior to the disposition and holdings of 5% or less in the
stock of publicly traded U.S. real property holding corporations) and certain
participating debt securities.
Income Effectively Connected. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a foreign
shareholder, then distributions of investment company taxable income and capital
gain dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate shareholders may also be subject to the branch profits tax imposed by
the Code.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Fund.
Backup Withholding
The Fund generally is required to withhold U.S. federal income tax on
all taxable distributions and redemption proceeds payable to any non-corporate
shareholder who fails to provide the Fund with a correct taxpayer identification
number (TIN) or to make required certifications to the Fund that he or she is
not subject to withholding, or who has been notified by the IRS that he or she
is subject to backup withholding. Pursuant to tax legislation enacted in 2001,
the backup withholding tax rate will be (i) 30% for amounts paid during 2002 and
2003, (ii) 29% for amounts paid during 2004 and 2005, and (iii) 28% for amounts
paid during 2006 through 2010. This legislation will expire and the backup
withholding rate will be 31% for amounts paid after December 31, 2010, unless
Congress enacts tax legislation providing otherwise. The Bush Administration has
announced a proposal to accelerate reductions in tax rates which may change the
backup withholding rate as well.
In order for a foreign shareholder to qualify for exemption from the
backup withholding tax rates and for reduced withholding tax rates under income
tax treaties, the foreign shareholder must comply with special certification and
filing requirements. Foreign shareholders in the Fund should consult their tax
advisers in this regard.
Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. Backup withholding is
not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
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Other Taxation
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
PERFORMANCE-RELATED AND COMPARATIVE AND OTHER INFORMATION
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.
From time to time, the Fund and/or the Investment Manager may report to
shareholders or to the public in advertisements concerning the performance of
the Investment Manager or on the comparative performance or standing of the
Investment Manager in relation to other money managers. The Investment Manager
also may provide current or prospective private account clients, in connection
with standardized performance information for the Fund, performance information
for the Fund gross and/or net of fees and expenses for the purpose of assisting
such clients in evaluating similar performance information provided by other
investment managers or institutions. Comparative information may be compiled or
provided by independent ratings services or by news organizations. Any
performance information, whether related to the Fund or the Investment Manager,
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the Fund, and the market conditions during the
time period indicated, and should not be considered to be representative of what
may be achieved in the future. Performance information for the Fund may be
compared to various unmanaged indexes.
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar
Inc. or other independent services. Comparison of the Fund to an alternative
investment should be made with consideration of differences in features and
expected performance. The Fund may obtain data from sources or reporting
services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund
believes to be generally accurate.
Past performance is not indicative of future results.
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From the period from November 26, 2002 (commencement of the Fund's
operations) through January 15, 2003, the Fund's net increase in net
assets resulting from investment operations was $157,875.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Ropes & Gray serves as counsel to the Fund, and is located at One
International Place, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP,
located at 160 Federal Street, Boston, Massachusetts 02110, has been appointed
as independent accountants for the Fund. The Statement of Assets and Liabilities
of the Fund as of November 8, 2002 and the Statement of Operations for the one
day then ended incorporated by reference into this Statement of Additional
Information have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
the firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby has been filed by the Fund with the SEC,
Washington, DC The Prospectus and this Statement of Additional Information do
not contain all the information set forth in the Registration Statement,
including any exhibits and schedules thereto. For further information with
respect to the Fund and the shares offered hereby, reference is made to the
Registration Statement. Statements contained in the Prospectus and this
Statement of Additional Information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. You may also review and copy the Registration Statement by
visiting the SEC's Public Reference Room in Washington, DC. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
202-942-8090. In addition, copies of the Registration Statement may be obtained,
after mailing the appropriate duplicating fee, by writing to the SEC's Public
Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail
request at publicinfo@sec.gov.
-48-
FINANCIAL STATEMENTS
The Statement of Assets and Liabilities of the Fund dated as of November 8,
2002, and the Statement of Operations for the one-day period ending November 8,
2002, including the Notes thereto, and the report of PricewaterhouseCoopers LLP
thereon dated November 8, 2002, included in the Fund's Statement of Additional
Information dated November 25, 2002, relating to the Common Shares, is hereby
incorporated by reference into this Statement of Additional Information, which
means that such Statement of Assets and Liabilities and the Notes thereto are
considered to be a part of this Statement of Additional Information. The
Statement of Additional Information for the Common Shares was filed
electronically with the SEC on November 27, 2002 (Accession No.
0000927016-02-005717). You may request a free copy of the Statement of
Additional Information for the Common Shares by calling (800) 862-4863 or by
writing to the Fund.
AEW Real Estate Income Fund - SCHEDULE OF INVESTMENTS
Investments as of January 15, 2003 (unaudited)
Shares Description Value (a)
------------------------------------------------------------------------------
Common Stocks - 73.0% of Total Net Assets
REAL ESTATE INVESTMENT TRUSTS -- 73.0%
REITs - Apartments -- 12.0%
60,000 Apartment Investment & Management Co. $ 2,289,600
45,000 Camden Property Trust 1,480,500
65,000 Gables Residential Trust 1,638,000
66,500 Summit Properties, Inc. 1,192,345
-------------
6,600,445
-------------
REITs - Diversified -- 7.1%
17,500 Entertainment Properties Trust 414,750
40,000 iStar Financial, Inc. 1,131,200
80,000 Lexington Corporate Properties Trust 1,300,800
35,000 Liberty Property Trust 1,072,750
-------------
3,919,500
-------------
REITs - Factory Outlets -- 1.1%
20,000 Tanger Factory Outlet Centers, Inc. 594,600
-------------
REITs - Healthcare -- 8.2%
45,700 Health Care Property Investors, Inc. 1,753,509
45,000 Healthcare Realty Trust, Inc. 1,282,500
130,000 Senior Housing Properties Trust 1,492,400
-------------
4,528,409
-------------
REITs - Hotels -- 3.5%
42,000 Hospitality Properties Trust 1,377,600
50,000 RFS Hotel Investors, Inc. 550,000
-------------
1,927,600
-------------
REITs - Malls -- 2.6%
70,000 Crown American Realty Trust 665,700
25,000 Macerich Co. (The) 742,500
-------------
1,408,200
-------------
REITs - Manufactured Homes -- 2.4%
60,000 Chateau Communities, Inc. 1,332,000
-------------
REITs - Office Buildings -- 22.0%
75,000 Arden Realty, Inc. 1,665,000
65,000 CarrAmerica Realty Corp. 1,593,800
47,000 Crescent Real Estate Equities Co. 756,230
70,000 Highwoods Properties, Inc. 1,524,600
178,000 HRPT Properties Trust 1,482,740
48,000 Kilroy Realty Corp. 1,095,360
60,000 Mack-Cali Realty Corp. 1,733,400
60,000 Prentiss Properties Trust 1,600,800
30,000 Reckson Associates Realty Corp. (c) 620,700
-------------
12,072,630
-------------
REITs - Shopping Centers -- 13.5%
50,000 Commercial Net Lease Realty 765,000
75,000 Equity One, Inc. (c) 999,000
75,700 Glimcher Realty Trust 1,313,395
85,000 Heritage Property Investment Trust 2,125,000
70,000 New Plan Excel Realty Trust 1,337,000
43,800 Ramco-Gershenson Properties Trust 862,860
-------------
7,402,255
-------------
REITs - Industrial Buildings -- 0.6%
14,000 EastGroup Properties, Inc. 349,580
-------------
Total Real Estate Investment Trusts 40,135,219
-------------
Total Common Stocks (Identified Cost $40,556,786) 40,135,219
-------------
AEW Real Estate Income Fund - SCHEDULE OF INVESTMENTS
Preferred Stocks -- 19.2%
REAL ESTATE INVESTMENT TRUSTS -- 19.2%
REITs - Apartments -- 0.5%
3,200 Apartment Investment & Management Co., Series G $ 83,520
6,600 Apartment Investment & Management Co. 173,052
--------------
256,572
--------------
REITs - Hotels -- 6.0%
55,000 Boykin Lodging Co. 1,441,000
18,000 FelCor Lodging Trust, Inc. (c) 432,000
55,000 Hospitality Properties Trust (d) 1,402,500
--------------
3,275,500
--------------
REITs - Malls -- 4.8%
35,500 Mills Corp. (The), Series B 910,575
25,000 Mills Corp. (The), Series C (d) 625,000
45,000 Taubman Centers, Inc. 1,104,750
--------------
2,640,325
--------------
REITs - Office Buildings -- 5.5%
34,800 Crescent Real Estate Equities Co. 904,800
30,000 Highwoods Properties, Inc. 720,000
55,000 HRPT Properties Trust 1,424,500
--------------
3,049,300
--------------
REITs - Shopping Centers -- 2.4%
28,300 Developers Diversified Realty Corp. 730,140
10,000 Federal Realty Investment Trust 262,000
12,100 Ramco-Gershenson Properties Trust 313,390
--------------
1,305,530
--------------
Total Real Estate Investment Trusts 10,527,227
--------------
Total Preferred Stocks (Identified
Cost $10,345,145) 10,527,227
--------------
Principal
Amount
----------------
Short Term Investments -- 11.4%
$ 4,319,267 Repurchase Agreement with Investors Bank &
Trust Co. dated 1/15/2003 at 0.54% to be
repurchased at $4,319,329 on 1/16/03,
collateralized by $4,218,820 Small Business
Administration Bond, 5.375%, due 6/25/2014
valued at $4,535,230 4,319,267
--------------
37,920 Galaxy Funding, 1.353%, due 2/07/03 (e) 37,920
272,555 Bank of Montreal, 1.320%, due 1/30/03 (e) 272,555
341,280 Dreyfus Cash Management Plus Fund, 1.352%,
due 1/16/03 (e) 341,280
409,535 Merrimac Cash Fund, 1.350%, due 1/16/03 (e) 409,535
113,760 Credit Agricole Indosuez, 1.250%,
due 1/28/03 (e) 113,760
75,840 Comerica Bank, 1.400%, due 11/19/03 (e) 75,840
227,520 Canadian Imperial Bank of Commerce,
1.365%, due 5/19/03 (e) 227,520
379,200 BNP Paribas, 1.320%, due 2/07/03 (e) 379,200
75,840 Liberty Lighthouse Funding, 1.311%,
due 2/14/03 (e) 75,840
--------------
Total Short Term Investments (Identified
Cost $6,252,717) 6,252,717
--------------
Total Investments -- 103.6% (Identified
Cost $57,154,648)(b) 56,915,163
Other assets less liabilities (1,976,763)
--------------
Total Net Assets -- 100% $ 54,938,400
==============
(a) See Note 2a of Notes to Financial Statements.
(b) Federal Tax Information:
At January 15, 2003, the net unrealized
depreciation on investments based on cost of
$57,154,648 for federal income tax purposes was
as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of
value over tax cost ........................... $ 458,061
Aggregate gross unrealized depreciation for all
investments in which there is an excess of
tax cost over value ........................... (697,546)
--------------
Net unrealized depreciation ................... $ (239,485)
===============
(c) All or a portion of this security was on loan
to brokers at January 15, 2003.
(d) Non-income producing security.
(e) Represents investments of securities lending collateral.
See accompanying notes to financial statements.
-49-
AEW Real Estate Income Fund
STATEMENT OF ASSETS & LIABILITIES
January 15, 2003
(Unaudited)
ASSETS
Investments at cost $ 57,154,648
Net unrealized (depreciation) (239,485)
---------------
Investments at value (including $1,828,450
of securities loaned) 56,915,163
Dividends and interest receivable 419,420
Securities lending income receivable 459
---------------
TOTAL ASSETS 57,335,042
---------------
LIABILITIES
Collateral on securities loaned, at value 1,933,450
Payable for securities purchased 325,778
Management fees payable 10,018
Accrued Trustees' fees 6,551
Transfer agent fees payable 5,543
Accounting and administrative fees payable 3,203
Other accounts payable and accrued expenses 112,099
---------------
TOTAL LIABILITIES 2,396,642
---------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 54,938,400
===============
NET ASSETS CONSIST OF:
Common Shares, $0.00001 par value; unlimited number $ 38
of shares authorized, 3,832,000 shares issued and
outstanding
Additional paid in capital 54,780,487
Undistributed net investment income 409,693
Accumulated net realized gain (loss) on investments (12,333)
Net unrealized depreciation of investments (239,485)
---------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 54,938,400
===============
COMPUTATION OF NET ASSET VALUE PER COMMON SHARE
Net assets $ 54,938,400
===============
Shares issued and outstanding 3,832,000
===============
Net asset value per share $ 14.34
===============
Market Value (Closing price per share on American Stock
Exchange) $ 14.80
===============
See accompanying notes to financial statements.
50
AEW Real Estate Income Fund
STATEMENT OF OPERATIONS
For the Period November 26, 2002 (commencement of operations) through
January 15, 2003 (unaudited)
INVESTMENT INCOME
Dividends $ 495,571
Interest 16,500
Securities Lending income 459
-------------
512,530
-------------
Expenses
Management fees 60,059
Trustees' fees and expenses 9,429
Accounting and administrative 18,904
Custodian 7,897
Transfer agent fees 8,744
Audit and tax services 22,412
Legal 1,398
Reports to shareholders 6,429
Miscellaneous 3,293
-------------
Total expenses before reductions 138,565
Less waiver (35,728)
-------------
Net expenses 102,837
-------------
Net investment income 409,693
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) on:
Investments - net (12,333)
Change in unrealized appreciation (depreciation) of:
Investments - net (239,485)
-------------
Net realized and unrealized gain (loss) on investments (251,818)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 157,875
=============
See accompanying notes to financial statements
51
AEW Real Estate Income Fund
STATEMENT OF CHANGES IN NET ASSETS
For the period
November 26, 2002*
to
January 15, 2003
(unaudited)
-----------------
FROM OPERATIONS:
Net investment income $ 409,693
Net realized gain (loss) on investments (12,333)
Net change on unrealized appreciation (depreciation)
of investments (239,485)
------------
Increase in net assets resulting from operations 157,875
------------
INCREASE (DECREASE) IN NET ASSETS DERIVED FROM CAPITAL
SHARE TRANSACTIONS: 54,780,525
------------
Total increase in net assets 54,938,400
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period --
------------
End of period $ 54,938,400
============
UNDISTRIBUTED NET INVESTMENT INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 409,693
============
* Commencement of operations
52
FINANCIAL HIGHLIGHTS (Unaudited)
For the Period From
November 26, 2002*
through
January 15, 2003
(Unaudited)
-------------------
Per Share Operating Performance
Net Asset Value, Beginning of Period (Common Shares) (1)................. $ 14.32
Less Offering Costs Charged to Additional Paid in Capital................ (0.03)
--------
14.29
--------
Net Investment Income (2)................................................ 0.11
Net Realized and Unrealized Gain (Loss) on Investments................... (0.06)
--------
Total from Investment Operations......................................... 0.05
--------
Net Asset Value, End of Period (Common Shares)........................... $ 14.34
========
Market Value, End of Period (Common Shares).............................. $ 14.80
Total Return on Market Value (%) (3)..................................... (1.33)
Total Return on Net Asset Value (%) (3)...................................... 0.14
Ratios/Supplemental Data:
Ratio of Expenses to Average Net Assets Applicable to Common Shares,
before waivers (%) (4)................................................. 1.85 (5)
Ratio of Expenses to Average Net Assets Applicable to Common Shares,
after waivers (%) (4).................................................. 1.37 (5)
Ratio of Net Investment Income to Average Net Assets, before waivers (%). 4.98 (5)
Ratio of Net Investment Income to Average Net Assets, after waivers (%).. 5.46 (5)
Portfolio Turnover Rate (%).............................................. 1
Net Assets Applicable to Common Shares, End of Period (000).............. $ 54,938
--------
* Commencement of operations.
(1)Net asset value at beginning of period reflects the deduction of the sales
load of $0.675 per share paid by the shareholder from the $15.00 offering
price.
(2)Computed using average common shares outstanding.
(3)Total return on net asset value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $0.675 paid by the
shareholder on the first day and the ending net asset value per share.
Total return on market value is calculated assuming a purchase at the offering
price of $15.00 on the first day and a sale at the current market price on
the last day of the period.
Total return on net asset value and total return on market value are not
computed on an annualized basis.
(4)The Investment Manager and the Fund's administrator agreed to waive a
portion of their fees during the period. Without these waivers, expense
ratios would have been higher.
(5)Annualized.
See accompanying notes to financial statements.
53
Notes to Financial Statements
For the Period Ended January 15, 2003 (unaudited)
1. Organization. AEW Real Estate Income Fund (the "Fund") is registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified closed-end management investment company. The Fund was organized
under the laws of the Commonwealth of Massachusetts by an Agreement and
Declaration of Trust dated September 18, 2002. The Fund commenced operations on
November 26, 2002. The Fund's primary investment objective is high current
income; the Fund's secondary investment objective is capital appreciation. The
Fund seeks to achieve its objectives by concentrating its investments in the
U.S. real estate industry.
2. Significant Accounting Policies. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The Fund's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America,
which require the use of management estimates that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
a. Security Valuation. As authorized by the Trustees, equity securities are
valued on the basis of valuations furnished to the Fund by a pricing service.
The pricing service provides the last reported sale price for securities listed
on an applicable securities exchange or on the NASDAQ national market system,
or, if no sale was reported (and in the case of over-the-counter securities not
so listed), the last reported bid price. Short-term obligations with a remaining
maturity of less than sixty days are stated at amortized cost, which
approximates market value. All other securities and assets are valued at their
fair value as determined in good faith by the Fund's investment adviser and
officers, under the supervision of the Fund's Trustees.
b. Security Transactions and Related Investment Income. Security transactions
are accounted for on trade date. Dividend income is recorded on ex-dividend date
and interest income is recorded on an accrual basis. Interest income is
increased by the accretion of discount and decreased by the amortization of
premium. In determining net gain or loss on securities sold, the cost of
securities has been determined on an identified cost basis.
c. Federal Income Taxes. The Fund intends to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies, and to
distribute to its shareholders substantially all of its net investment income
and any net realized capital gains at least annually. Accordingly, no provision
for federal income tax has been made.
d. Dividends and Distributions to Shareholders. The Fund intends to make regular
monthly cash distributions to common shareholders at a level rate based on the
projected performance of the Fund. In addition, at least annually, the Fund
intends to distribute net realized capital gains, if any. A portion of the
Fund's distribution may consist of amounts in excess of net investment income,
derived from non-taxable components of the dividends from the Fund's portfolio
investments. The timing and characterization of certain income and capital gains
distributions are determined in accordance with federal tax regulations, which
may differ from accounting principles generally accepted in the United States of
America. These differences are primarily due to differing treatments for
distributions from real estate investment trusts for book and tax purposes.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to the capital accounts. Distributions from net
investment income and short-term capital gains are considered to be ordinary
income for tax purposes.
e. Expenses. Most expenses of the Fund can be directly attributable to the Fund.
Expenses that cannot be directly attributable to the Fund are allocated based on
relative net assets among the fund and certain other affiliated registered
investment companies.
3. Purchases and Sales of Securities. For the period ended January 15, 2003,
purchases and sales of securities (excluding short-term investments) were
$51,344,081 and $429,817 respectively.
4. Management Fees and Other Transactions with Affiliates.
54
a. Management Fees. AEW Management and Advisors, L. P. ("AEW") serves as
investment adviser to the Fund. AEW is an affiliate of AEW Capital Management,
L. P., a wholly owned subsidiary of CDC IXIS Asset Management North America,
L.P. Under the terms of the management agreement, the Fund pays a monthly
management fee computed at the annual rate of 0.80% of the average daily managed
assets of the Fund (which include the liquidation preference of any preferred
shares and the principal amount of any borrowings used for leverage).
The investment adviser has contractually agreed to waive a portion of its
management fees in the amount of 0.25% of average daily managed assets during
the first five years of the Fund's operations, 0.20% of average daily managed
assets in year six, 0.15% of average daily managed assets in year seven, 0.10%
of average daily managed assets in year eight, and 0.05% of average daily
managed assets in year nine.
The investment adviser has also agreed to voluntarily waive an additional
portion of its management fee. This waiver is voluntary and may be terminated by
the investment adviser at any time without notice.
For the period ended January 15, 2003, management fee and waiver for the Fund
were as follows:
Annualized
Percentage of Average
Gross Waiver of Net Daily Managed Assets
Management Management Management ------------------------
Fee Fee Fee Gross Net
------------- ------------- ------------- --------- ------------
$60,059 $26,276 $33,783 0.800% 0.450%
b. Administrative Services. CDC IXIS Asset Management Services, Inc. ("CIS"), a
wholly owned subsidiary of CDC IXIS Asset Management North America, L.P.,
performs certain administrative services for the Fund and has subcontracted with
Investors Bank & Trust Company to serve as sub-administrator. The Fund pays CIS
a fee for these services based on the Fund's average daily managed assets or, if
higher, the minimum fee set forth below:
(1) Percentage of Average Daily Managed Assets
First Over
$300 $300
million million
------- -------
0.0600% 0.0575%
or
(2) An annual aggregate minimum fee of $150,000.
CIS has agreed to voluntarily waive a portion of its administrative services
fee. This waiver is voluntary and may be terminated by CIS at any time without
notice.
For the period ended January 15, 2003, the administrative fee and waiver for the
Fund were as follows:
Annualized
Gross Waiver of Net Percentage of Average
Accounting Accounting Accounting Daily Managed Assets
And And And -----------------------
Administrative Administrative Administrative Gross Net
-------------- -------------- -------------- ----------- ----------
$18,904 $9,452 $9,452 0.252% 0.126%
c. Trustees Fees and Expenses. The Fund does not pay any compensation directly
to its officers or Trustees who are directors, officers or employees of CDC IXIS
Asset Management North America L.P. or its affiliates. Each other Trustee
receives a retainer fee at the annual rate of $2,000 and a meeting attendance
55
fee of $375 for each meeting of the Board of Trustees attended. Each committee
member receives an additional retainer fee at the annual rate of $2,000 while
each committee chairman receives a retainer fee (beyond the $2,000 fee) at the
annual rate of $1,000. The retainer fees assume four Board or Committee meetings
per year; Trustees are compensated for each additional committee and board
meeting, in excess of four meetings per year, at the rate of $200 and $375,
respectively.
5. Shares of Beneficial Interest. The Declaration of Trust permits the Fund's
Trustees to issue an unlimited number of common shares, $0.00001 par value per
share, and an unlimited number of preferred shares. There were no transactions
in preferred shares during the period. Transactions in common shares were as
follows:
For the
period
November 26, 2002
To
January 15, 2003
-----------------
Shares
-----------------
Shares purchased by
investment adviser 7,000
Initial Public Offering 3,750,000
Purchase of Additional
Shares by Underwriters 75,000
-----------------
Increase derived from
capital shares transactions 3,832,000
=================
6. Security Lending. The Fund has entered into an agreement with Investors Bank
& Trust Company, as agent of the Fund, to lend securities to certain designated
borrowers. The loans are collateralized at all times with cash or securities
with a market value at least equal to the market value of the securities on
loan. The Fund receives fees for lending its securities. At January 15, 2003,
the Fund loaned securities having a market value of $1,828,450 and
collateralized by cash in the amount of $1,933,450 which was invested in a
short-term investment. Upon the expected issuance of the Fund's auction market
preferred shares, the Fund's ability to lend portfolio securities will be
limited pursuant to restrictions imposed by the nationally recognized
statistical rating organizations rating such shares.
7. Subsequent Events. On January 10, 2003, the Board of Trustees declared three
monthly dividends of $0.115 per common share for the months of January, February
and March payable on January 31, 2003, February 28, 2003 and March 28, 2003,
respectively to shareholders of record on January 20, 2003, February 14, 2003
and March 14, 2003, respectively.
56
APPENDIX A
RATINGS OF INVESTMENTS
Description of certain ratings assigned by S&P, Moody's and Fitch:
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.
A-1
"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 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.
A-2
"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.
"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.
A-3
"Caa"--Bonds rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
"Ca"--Bonds rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
"C"--Bonds rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
PREFERRED STOCK
Because of the fundamental differences between preferred stocks and bonds,
Moody's employs a variation of our familiar bond rating symbols in the quality
ranking of preferred stock.
These symbols, presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind that preferred
stock occupies a junior position to bonds within a particular capital structure
and that these securities are rated within the universe of preferred stocks.
"aaa"--An issue rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
"aa"--An issue rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
"a"--An issue rated "a" is considered to be an upper-medium-grade preferred
stock. While risks are judged to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
"baa"--An issue rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present, but may be questionable over any great
length of time.
"ba"--An issue rated "ba" is considered to have speculative elements. Its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
"b"--An issue rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
A-4
"caa"--An issue rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
"ca"--An issue rated "ca" is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.
"c"--This is the lowest-rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: As in the case of bond ratings, Moody's applies to preferred stock
ratings the numerical modifiers 1, 2, and 3 in rating classifications "aa"
through "b". The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
PRIME RATING SYSTEM (SHORT-TERM)
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-5
FITCH RATINGS
A brief description of the applicable Fitch Ratings ("Fitch") ratings symbols
and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
Investment Grade
AAA
Highest credit quality. `AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. `AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB
Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB
Speculative. `BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B
Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for
A-6
continued payment is contingent upon a sustained, favorable business and
economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A `CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD, DD, and D
Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. `DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. `DD' indicates
potential recoveries in the range of 50%-90%, and `D' the lowest recovery
potential, i.e., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated `DDD' have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated `DD' and `D' are generally undergoing a
formal reorganization or liquidation process; those rated `DD' are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
`D' have a poor prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality . Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
A-7
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
`Rating Watch': Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a
one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are `stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.
A-8
APPENDIX B
AEW REAL ESTATE INCOME FUND
ARTICLE 11 OF THE AMENDED AND RESTATED BYLAWS
ARTICLE 11
Preferred Shares of Beneficial Interest
DESIGNATION
SERIES M: A series of 1,120 preferred shares of beneficial interest,
par value $0.00001 per share, liquidation preference $25,000 per share, is
hereby designated "Series M Auction Market Preferred Shares" and is referred to
below as the "Preferred Shares" or "Series M." Each of the 1,120 Preferred
Shares may be issued on a date to be determined by the Board of Trustees of the
Trust or pursuant to their delegated authority; have an Initial Dividend Rate
and an Initial Dividend Payment Date as shall be determined in advance of the
issuance thereof by the Board of Trustees of the Trust or pursuant to their
delegated authority; and have such other preferences, voting powers, terms of
redemption and special or relative rights or privileges as are set forth in
these Bylaws, in addition to those required by applicable law or set forth in
the Declaration of Trust. The Preferred Shares shall constitute a separate
series of preferred shares of beneficialinterest of the Trust, and each
Preferred Share shall be identical except as provided in these Bylaws.
Section 11.1 Statement Creating One Series of Auction Market Preferred
Shares.
B-1
DEFINITIONS
As used in Parts I and II of this Section 11.1, the following terms
shall have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:
(a) "'AA' Financial Composite Commercial Paper Rate" on any
date shall mean (i) (A) in the case of any Rate Period of 7 Rate Period
Days or fewer, the interest equivalent of the 7-day rate and, in the
case of any Rate Period of eight or more but fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; and (B) in the case
of any Special Rate Period of (1) 49 or more but fewer than 70 Rate
Period Days, the interest equivalent of the 60-day rate, (2) 70 or more
but fewer than 85 Rate Period Days, the arithmetic average of the
interest equivalent of the 60-day and 90-day rates, (3) 85 or more but
fewer than 99 Rate Period Days, the interest equivalent of the 90-day
rate, (4) 99 or more but fewer than 120 Rate Period Days, the
arithmetic average of the interest equivalent of the 90-day and 120-day
rates, (5) 120 or more but fewer than 141 Rate Period Days, the
interest equivalent of the 120-day rate, (6) 141 or more but fewer than
162 Rate Period Days, the arithmetic average of the 120-day and 180-day
rates, and (7) 162 or more but fewer than 184 Rate Period Days, the
interest equivalent of the 180-day rate, in each of the above cases on
commercial paper placed on behalf of financial issuers whose corporate
bonds are rated "AA" by S&P or the equivalent of such rating by S&P or
another Rating Agency selected by the Trust, as made available on a
discount basis or otherwise by the Federal Reserve Bank of New York for
the Business Day next preceding such date; or (ii) in the event that
the Federal Reserve Bank of New York does not make available any such
rate, then the arithmetic average of such rates, as quoted on a
discount basis or otherwise, by the Commercial Paper Dealers to the
Auction Agent for the close of business on the Business Day next
preceding such date. If any Commercial Paper Dealer does not quote a
rate required to determine the "AA" Financial Composite Commercial
Paper Rate, the "AA" Financial Composite Commercial Paper Rate shall be
determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers and any
Substitute Commercial Paper Dealer or Substitute Commercial Paper
Dealers selected by the Trust to provide such rate or rates not being
supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as
the case may be, or, if the Trust does not select any such Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the
remaining Commercial Paper Dealer or remaining Commercial Paper
Dealers. For purposes of this definition, the "interest equivalent" of
a rate stated on a discount basis (a "discount rate") for commercial
paper of a given number of days' maturity shall be equal to the
quotient (rounded upwards to the next higher one-thousandth (.001) of
1%) of (A) the discount
B-2
rate divided by (B) the difference between (x) 1.00 and (y) a fraction,
the numerator of which shall be the product of the discount rate times
the number of days until such commercial paper matures and the
denominator of which shall be 360.
(b) "Accountant's Confirmation" shall have the meaning
specified in paragraph 6(c) of Part I of this Section 11.1.
(c) "Affected Series" shall have the meaning specified in
paragraph 4(c)(i) of Part I of this Section 11.1.
(d) "Affiliate" shall mean, when used with respect to the
Trust, any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Trust; provided, however,
that no corporation or Person controlled by, in control of or under
common control with such corporation, a trustee, director or executive
officer of which is a Trustee, shall be deemed to be an Affiliate
solely because such trustee, director or executive officer is also a
Trustee.
(e) "Agent Member" shall mean a member of or participant in
the Securities Depository that will act on behalf of a Bidder.
(f) "Applicable Rate" shall have the meaning specified in
paragraph 2(e)(i) of Part I of this Section 11.1.
(g) "Auction" shall mean each periodic implementation of the
Auction Procedures.
(h) "Auction Agent" means Deutsche Bank Trust Company Americas
unless and until another commercial bank, trust company or other
institution appointed by a resolution of the Board of Trustees of the
Trust or a duly authorized committee thereof enters into an agreement
with the Trust to follow the Auction Procedures for the purpose of
determining the Applicable Rate and to act as transfer agent,
registrar, dividend disbursing agent and redemption agent for the
Preferred Shares.
(i) "Auction Date," with respect to any Rate Period, shall
mean the Business Day next preceding the first day of such Rate Period.
(j) "Auction Procedures" shall mean the procedures for
conducting Auctions set forth in Part II of this Section 11.1, as such
procedures may be amended from time to time.
(k) "Available Preferred Shares" shall have the meaning
specified in paragraph 3(a) of Part II of this Section 11.1.
B-3
(l) "Beneficial Owner," with respect to any Preferred Shares,
means a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder
of such Preferred Shares.
(m) "Bid" and "Bids" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 11.1.
(n) "Bidder" and "Bidders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Section 11.1; provided,
however, that neither the Trust nor any Affiliate thereof shall be
permitted to be a Bidder in an Auction, except that any Broker-Dealer
that is an Affiliate of the Trust may be a Bidder in an Auction, but
only if the Orders placed by such Broker-Dealer are not for its own
account.
(o) "Broker-Dealer" shall mean any broker-dealer, commercial
bank or other entity permitted by law to perform the functions required
of a Broker-Dealer in Part II of this Section 11.1, that is a member
of, or a participant in, the Securities Depository or is an affiliate
of such member or participant, has been selected or approved by the
Trust and has entered into a Broker-Dealer Agreement that remains
effective.
(p) "Broker-Dealer Agreement" shall mean an agreement between
the Auction Agent on behalf of the Trust and a Broker-Dealer pursuant
to which such Broker-Dealer agrees to follow the procedures specified
in Part II of this Section 11.1.
(q) "Business Day" shall mean a day on which the New York
Stock Exchange is open for trading and which is neither a Saturday nor
a Sunday nor any other day on which banks in The City of New York, New
York, are authorized by law to close.
(r) "Commercial Paper Dealers" shall mean Lehman Commercial
Paper Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated and any other commercial paper dealer selected by
the Trust as to which Moody's, Fitch or any Substitute Rating Agency
then rating the Preferred Shares shall not have objected or, in lieu of
any thereof, their respective affiliates or successors, if such
entities are commercial paper dealers.
(s) "Common Shares" shall mean the common shares of beneficial
interest of the Trust.
(t) "Cure Date" shall mean the Preferred Shares Basic
Maintenance Cure Date or the 1940 Act Cure Date, as the case may be.
(u) "Date of Original Issue," with respect to the Preferred
Shares, shall mean the date on which the Trust initially issues the
Preferred Shares.
B-4
(v) "Declaration of Trust" shall mean the Trust's Amended and
Restated Agreement and Declaration of Trust dated October 10, 2002, as
from time to time amended and supplemented.
(w) "Default" has the meaning set forth in paragraph 2(e)(ii)
of Part I of this Section 11.1.
(x) "Default Period" has the meaning set forth in paragraph
2(e) of Part I of this Section 11.1.
(y) "Default Rate" has the meaning set forth in paragraph
2(e)(ii) of Part I of this Section 11.1.
(z) "Deposit Securities" shall mean cash and any obligations
or securities, including Short Term Money Market Instruments that are
Eligible Assets, rated at least AAA, A-1 or SP-1 by S&P, except that,
for purposes of the restriction set forth in paragraph 8(a)(iii) of
Part I of this Section 11.1, obligations or securities will be
considered "Deposit Securities" only if they also are rated at least
P-1 by Moody's.
(aa) "Discounted Value," as of any Valuation Date, shall mean
with respect to a Fitch Eligible Asset or Moody's Eligible Asset the
quotient of the Market Value of an Eligible Asset divided by the Fitch
Discount Factor for a Fitch Eligible Asset or the Moody's Discount
Factor for a Moody's Eligible Asset, 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 face value, whichever is lower.
(bb) "Dividend Default" has the meaning set forth in paragraph
2(e)(ii) of Part I of this Section 11.1.
(cc) "Dividend Payment Date" with respect to the Preferred
Shares shall mean, for the Initial Rate Period, the Initial Dividend
Payment Date, and for any Subsequent Rate Period, any date on which
dividends are payable on the Preferred Shares pursuant to the
provisions of paragraph 2(d) of Part I of this Section 11.1.
(dd) "Dividend Period," with respect to the Preferred Shares,
shall mean the period from and including the Date of Original Issue to
but excluding the initial Dividend Payment Date and any period
thereafter from and including one Dividend Payment Date to but
excluding the next succeeding Dividend Payment Date.
(ee) "Eligible Asset" means a Fitch Eligible Asset or a
Moody's Eligible Asset, as applicable.
B-5
(ff) "Existing Holder" shall mean a Broker-Dealer (or any such
other Person as may be permitted by the Trust) that is listed on the
records of the Auction Agent as a holder of Preferred Shares.
(gg) "Exposure Period" shall mean the period commencing on a
given Valuation Date and ending 41 days thereafter.
(hh) "Fitch" shall mean Fitch Ratings and its successors.
(ii) "Fitch Discount Factor" shall mean, for purposes of
determining the Discounted Value of any Fitch Eligible Asset, the
percentage determined as follows.
(i) Common stock and preferred stock of REITs and
Other Real Estate Companies:
Discount
Factor
--------------
REIT or Other Real Estate Company Preferred Stock............. 154%
REIT or Other Real Estate Company Common Stock................ 196%
(ii) Debt Securities of REITs and Other Real Estate
Companies:
Term to Maturity AAA AA A BBB BB B CCC
---------------- ---- ---- ---- ---- ---- ---- ----
1 year 111% 114% 117% 120% 121% 127% 227%
2 year 116% 125% 125% 127% 132% 137% 137%
3 year 121% 123% 127% 131% 133% 140% 225%
4 year 126% 126% 129% 132% 136% 140% 164%
5 year 131% 132% 135% 139% 144% 149% 185%
7 year 140% 143% 146% 152% 159% 167% 228%
10 year 141% 143% 147% 153% 160% 168% 232%
12 year 144% 144% 150% 157% 165% 174% 249%
15 year 148% 151% 155% 163% 172% 182% 274%
20-30 year 152% 156% 160% 169% 180% 191% 306%
(1) The Fitch Discount Factors will also apply to
interest rate swaps and caps, whereby the rating on the
counterparty will determine the appropriate Fitch Discount
Factor to apply.
(2) If a security is unrated by Fitch, but is rated
by two other Rating Agencies, then the lower of the ratings on
the security from the two other Rating Agencies should be used
to determine the Fitch Discount Factor. If the security is not
rated by Fitch, but has a rating from only one other Rating
Agency, and the security is above investment grade, then the
security will be reduced one rating category for purposes of
computing the Fitch Discount Factor; e.g., where the S&P
rating is AAA+, a Fitch rating
B-6
of AAA will be used; where the S&P rating is AA+, a Fitch
rating of AA will be used. If the security is not rated by
Fitch, but has a rating from only one other Rating Agency, and
the security is below investment grade, then the security will
be reduced two rating categories for purposes of computing the
Fitch Discount Factor; e.g., where the S&P rating is BB+, a
Fitch rating of BB- will be used; where the S&P rating is B+,
a Fitch rating of B- will be used.
(iii) Convertible Debt Securities:
The Fitch Discount Factor applied to convertible debt
securities is (A) 200% for investment grade convertibles and (B) 222%
for below investment grade convertibles so long as such convertible
debt securities have neither (x) conversion premiums greater than 100%
nor (y) a yield to maturity or yield to worst of greater than 15.00%
above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt
securities which have conversion premiums of greater than 100% is (A)
152% for investment grade convertibles, and (B) 179% for below
investment grade convertibles so long as such convertible debt
securities do not have a yield to maturity or yield to worst of greater
than 15.00% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt
securities which have a yield to maturity or yield to worst of greater
than 15.00% above the relevant Treasury curve is 370%.
(iv) U.S. Government Securities:
Discount
Remaining Term to Maturity Factor
-------------------------- ------
1 year................................. 101.5%
2 year................................. 103%
3 year................................. 105%
4 year................................. 107%
5 year................................. 109%
5-7 year............................... 112%
7-10 year.............................. 114%
15 year................................ 122%
20 year................................ 130%
25 year................................ 146%
30 year................................ 154%
B-7
(v) Short-Term Money Market Instruments and Cash:
The Fitch Discount Factor applied to Short-Term Money Market
Instruments will be (A) 100%, so long as such portfolio securities
mature or have a demand feature at par exercisable within the Exposure
Period and (B) 125%, so long as such portfolio securities neither
mature nor have a demand feature at par exercisable within the Exposure
Period and are rated at least F1/AA by Fitch, A-1/AA by Moody's, or
A1/AA by S&P. A Fitch Discount Factor of 100% will be applied to cash.
(vi) Other Securities:
The Fitch Discount Factor with respect to securities other
than those described above will be the percentage provided in writing
by Fitch.
(jj) "Fitch Eligible Assets" shall mean:
(i) Common stock, preferred stock, and any debt
securities of REITs and Other Real Estate Companies.
(ii) Unrated debt securities issued by an issuer
which (1) has not filed for bankruptcy in the past three
years; (2) is current on all payments of interest and
principal on its fixed income obligations; (3) is current on
all preferred stock dividends.
(iii) Interest rate swaps entered into according to
International Swap Dealers Association standards if (1) the
counterparty to the swap transaction has a short-term rating
of not less than F1, or, if the swap counterparty does not
have a short-term rating, the counterparty's senior unsecured
long-term debt rating is AA or higher by Fitch or the
equivalent by another Rating Agency and (2) the original
aggregate notional amount of the interest rate swap
transaction or transactions is not greater than the
Liquidation Preference of the Preferred Shares as of the Date
of Original Issue.
(iv) U.S Treasury Securities and U.S. Treasury
Strips.
(v) Short-Term Money Market Instruments as long as
(i) such securities are rated at least 'F1' by Fitch or the
equivalent by another Rating Agency, (ii) in the case of
demand deposits, time deposits and overnight funds, the
supporting entity is rated at least 'A' by Fitch or the
equivalent by another Rating Agency, or (iii) in all other
cases, the supporting entity (1) is rated at least 'A' by
Fitch and the security matures in one month or (2) is rated at
least 'AA' by Fitch and matures in six months or less.
(vi) Cash (including, for this purpose, interest and
dividends due on assets rated (i) BBB or higher by Fitch or
the equivalent by another Rating
B-8
Agency if the payment date is within 5 Business Days of the
Valuation Date, (ii) A or higher by Fitch or the equivalent by
another Rating Agency if the payment is within thirty days of
the Valuation Date (iii) A+ or higher by Fitch or the
equivalent by another Rating Agency if the payment date is
within the Exposure Period) and receivables for Fitch Eligible
Assets sold if the receivable is due within five Business Days
of the Valuation Date, and if the trades which are generated
by such receivables are (A) settled through clearing house
firms or (B)(1) with counterparties rated BBB or higher by
Fitch, or (2) with counterparties having a Fitch short-term
rating of at least 'F1'.
(kk) "Holder," with respect to any Preferred Shares, shall
mean the registered holder of such shares as the same appears on the
record books of the Trust.
(ll) "Hold Order" and "Hold Orders" shall have the respective
meanings specified in paragraph 1(a) of Part II of this Section 11.1.
(mm) "Independent Accountant" shall mean a nationally
recognized accountant, or firm of accountants, retained by the Trust
that is with respect to the Trust an independent public accountant or
firm of independent public accountants under the Securities Act of
1933, as amended from time to time.
(nn) "Initial Dividend Payment Date" means the date on which
dividends are payable on the Preferred Shares with respect to the
Initial Rate Period, as determined by the Trustees of the Trust or
pursuant to their delegated authority.
(oo) "Initial Dividend Rate" shall mean the rate per annum
applicable to the Initial Rate Period for the Preferred Shares, as
determined by the Trustees or pursuant to their delegated authority.
(pp) "Initial Rate Period," with respect to the Preferred
Shares, shall be the period from and including the Date of Original
Issue thereof to but excluding the Initial Dividend Payment Date.
(qq) "Late Charge" shall have the meaning specified in
paragraph 2(e)(iii) of Part I of this Section 11.1.
(rr) "Lead Broker-Dealer" shall mean a Broker-Dealer
designated as such (solely for purposes of this Section 11.1) by the
Trust from time to time in its discretion. Initially, the Lead
Broker-Dealer shall be Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
(ss) "Liquidation Preference," with respect to a given number
of Preferred Shares, means $25,000 times that number.
B-9
(tt) "Market Value" of any asset of the Trust shall mean the
fair market value of such asset as computed as follows: securities
listed on the New York Stock Exchange are valued 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 last reported bid price estimated by a
broker; 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
Trustees or persons acting pursuant to procedures approved by the
Trustees shall determine in good faith to reflect its fair market
value. Readily marketable securities not listed on the New York Stock
Exchange but listed on other domestic or foreign securities exchanges
or admitted to trading on the National Association of Securities
Dealers Automated Quotations, Inc. ("NASDAQ") National List are valued
in a like manner. Portfolio securities traded on more than one
securities exchange are valued at the last sale price on the business
day as of which such value is being determined, as reflected on the
tape at the close of the exchange representing the principal market for
such securities. Readily marketable securities traded in the
over-the-counter market are valued at the last reported bid price in
the over-the-counter market or on the basis of yield equivalents as
obtained from one or more dealers that make a market in the securities
or by reference to such other comparable source as the Trustees or
persons acting pursuant to procedures approved by the Trustees 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, in each
case with interest accrued added to such computation for those assets
of the Trust where such computation does not include interest accrued.
The independent dealers from whom bids are sought shall be either (a)
market makers in the securities being valued or (b) members of the
National Association of Securities Dealers, Inc. Where securities are
traded on more than one exchange and also over-the-counter, the
securities will generally be valued using the quotations the Trustees
or persons acting pursuant to procedures approved by the Trustees
believe reflect most closely the value of such securities.
(uu) "Maximum Rate" means, on any date on which the Applicable
Rate is determined, the applicable percentage (as determined pursuant
to the chart immediately below) of the Reference Rate on such date
determined as set forth below based on the lower of the credit rating
assigned to the Preferred Shares by Moody's or Fitch, subject to upward
but not downward adjustment in the discretion of the Trustees after
consultation with the Broker-Dealers and subject to paragraph 4(d) of
Part I of this Section 11.1; provided that immediately following any
such increase the Trust would be in compliance with the Preferred
Shares Basic Maintenance Amount. If Moody's or Fitch or both shall not
make such ratings available, the rate shall be determined by reference
to equivalent ratings issued by a Substitute Rating Agency.
B-10
Credit Ratings
--------------------------------------------------- Applicable
Moody's Fitch Percentage:
-------------------- --------------------- ----------------
"Aa3" or higher AA- or higher 150%
"A3" to "A1" A- to A+ 200%
"Baa3" to "Baa1" BBB- to BBB+ 225%
Below "Baa3" Below BBB- 275%
(vv) "Minimum Rate Period" shall mean any Rate Period
consisting of 7 Rate Period Days.
(ww) "Moody's" shall mean Moody's Investors Service, Inc., a
Delaware corporation, and its successors.
(xx) "Moody's Discount Factor" shall mean, 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.
(i) Common stock and preferred stock of REITs and
Other Real Estate Companies:
Discount
Factor/(1)(2)(3)/
-----------------
Common Stock of REITs 154%
Preferred Stock of REITs
with Senior Unsecured Moody's (or S&P) rating 154%
without Senior Unsecured Moody's (or S&P) rating: 208%
Preferred Stock of Other Real Estate Companies
with Senior Unsecured Moody's (or S&P) rating: 208%
without Senior Unsecured Moody's (or S&P) rating: 250%
(1) A Discount Factor of 250% will be applied to those
assets in a single Moody's Real Estate
Industry/Property Sector Classification which exceed
30% of Moody's Eligible Assets but are not greater than
35% of Moody's Eligible Assets.
(2) A Discount Factor of 250% will be applied if dividends
on such securities have not been paid consistently
(either quarterly or annually) over the previous three
years, or for such shorter time period that such
securities have been outstanding.
(3) A Discount Factor of 250% will be applied if the market
capitalization (including common stock and preferred
stock) of an issuer is below $500 million.
B-11
(ii) Debt Securities of REITs and Other Real Estate Companies(1):
------------------- -------- ------- -------- ------- -------- -------- -------
Maturity in Years Aaa Aa A Baa Ba B NR(2)
------------------- -------- ------- -------- ------- -------- -------- -------
1 109% 112% 115% 118% 119% 125% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
2 115% 118% 122% 125% 127% 133% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
3 120% 123% 127% 131% 133% 140% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
4 126% 129% 133% 138% 140% 147% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
5 132% 135% 139% 144% 146% 154% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
7 139% 143% 147% 152% 156% 164% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
10 145% 150% 155% 160% 164% 173% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
15 150% 155% 160% 165% 170% 180% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
20 150% 155% 160% 165% 170% 190% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
30 150% 155% 160% 165% 170% 191% 250%
------------------- -------- ------- -------- ------- -------- -------- -------
(1) The Moody's Discount Factors for debt securities shall
also be applied to any interest rate swap or cap, in
which case the rating of the counterparty shall determine
the appropriate rating category.
(2) Unrated debt securities are limited to 10% of discounted
Moody's Eligible Assets. If a security is unrated by
Moody's but is rated by S&P, a rating two numeric ratings
below the S&P rating will be used, e.g., where the S&P
rating is AAA, a Moody's rating of Aa2 will be used;
where the S&P rating is AA+, a Moody's rating of Aa3 will
be used. If a security is unrated by either Moody's or
S&P, the percentage set forth under "NR" in this table
will be used.
(iii) U.S. Treasury Securities and U.S. Treasury Strips:
-------------------------------------------------------- ------------------- ------------------
U.S Treasury U.S. Treasury
Securities Strips
Discount Factor Discount Factor
-------------------------------------------------------- ------------------- ------------------
1 year or less......................................... 107% 107%
-------------------------------------------------------- ------------------- ------------------
2 years or less (but longer than 1 year)............... 113% 114%
-------------------------------------------------------- ------------------- ------------------
3 years or less (but longer than 2 years).............. 118% 120%
-------------------------------------------------------- ------------------- ------------------
4 years or less (but longer than 3 years).............. 123% 127%
-------------------------------------------------------- ------------------- ------------------
5 years or less (but longer than 4 years).............. 128% 133%
-------------------------------------------------------- ------------------- ------------------
7 years or less (but longer than 5 years).............. 135% 145%
-------------------------------------------------------- ------------------- ------------------
10 years or less (but longer than 7 years)............. 141% 159%
-------------------------------------------------------- ------------------- ------------------
15 years or less (but longer than 10 years)............ 146% 184%
-------------------------------------------------------- ------------------- ------------------
20 years or less (but longer than 15 years)............ 154% 211%
-------------------------------------------------------- ------------------- ------------------
30 years or less (but longer than 20 years)............ 154% 236%
-------------------------------------------------------- ------------------- ------------------
B-12
(iv) Short-Term Money Market Instruments and Cash. The Moody's
Discount Factor applied to Moody's Eligible Assets that are Short-Term
Money Market Instruments will be
(1) 100%, so long as such portfolio securities mature
or have a demand feature at par exercisable within 49 days of
the relevant Valuation Date,
(2) 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
(3) 125%, if such securities are not rated by
Moody's, so long as such portfolio securities are rated at
least A-1+/AA or SP- 1+/AA by S&P and mature or have a demand
feature at par exercisable within 49 days of the relevant
Valuation Date.
(4) A Moody's Discount Factor of 100% will be applied
to cash.
(yy) "Moody's Eligible Assets" means
(i) Common stock, preferred stock and any debt security of
REITs and Other Real Estate Companies.
(1) Common stock of REITs and preferred stock and any
debt security of REITs and Other Real Estate Companies: (A)
which comprise at least 7 of the 14 Moody's Real Estate
Industry/Property Sector Classifications listed below and of
which no more than 35% may constitute a single such
classification; (B) which in the aggregate constitute at least
40 separate classes of common stock, preferred stock, and debt
securities, issued by at least 30 issuers; (C) issued by a
single issuer which in the aggregate constitute no more than
7.0% of the Market Value of Moody's Eligible Assets, and (D)
issued by a single issuer which, with respect to 50% of the
Market Value of Moody's Eligible Assets, constitute in the
aggregate no more than 5% of the Market Value of Moody's
Eligible Assets; and
(2) Unrated debt securities issued by an issuer
which: (A) has not filed for bankruptcy within the past three
years; (B) is current on all payments of principal and
interest on its fixed income obligations; (C) is current on
all preferred stock dividends; and (D) possesses a current,
unqualified auditor's report without qualified, explanatory
language; which unrated debt securities in the aggregate do
not exceed 10% of the discounted Moody's Eligible Assets;
B-13
(ii) Interest rate swaps entered into according to
International Swap Dealers Association standards if:
(1) the counterparty to the swap transaction has a
short-term rating of not less than P-1 or, if the counterparty
does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is Aa3 or higher; and
(2) the original aggregate notional amount of the
interest rate swap transaction or transactions is not to be
greater than the Liquidation Preference of the Preferred
Shares on the Date of Original Issue. Interest rate swap
transactions will be marked-to-market daily;
(iii) U.S. Treasury Securities and Treasury Strips;
(iv) 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
(v) Cash (including, for this purpose, interest and dividends
due on assets rated (A) Baa3 or higher by Moody's if the payment date
is within five Business Days of the Valuation Date, (B) A2 or higher if
the payment date is within thirty days of the Valuation Date, and (C)
A1 or higher if the payment date is within 49 days of the relevant
valuation date) and receivables for Moody's Eligible Assets sold if the
receivable is due within five Business Days of the Valuation Date, and
if the trades which generated such receivables are (A) settled through
clearing house firms or (B) (1) with counterparties having a Moody's
long-term debt rating of at least Baa3 or (2) with counterparties
having a Moody's Short-Term Money Market Instrument rating of at least
P-1.
(zz) "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
B-14
(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
The Trust will use its discretion in determining which NAREIT Industry
Classification is applicable to a particular investment in consultation with the
Independent Accountant and/or Moody's, as necessary.
(aaa) "1940 Act" shall mean the Investment Company Act of 1940, as
amended from time to time.
(bbb) "1940 Act Cure Date," with respect to the failure by the Trust to
maintain the 1940 Act Preferred Shares Asset Coverage (as required by paragraph
5 of Part I of this Section 11.1) as of the last Business Day of each month,
shall mean the last Business Day of the following month.
(ccc) "1940 Act Preferred Shares Asset Coverage" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200% with
respect to all outstanding senior securities of the Trust which are shares of
beneficial interest, including all outstanding Preferred Shares (or such other
asset coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are shares or stock of a
closed-end investment company as a condition of declaring dividends on its
common shares or stock), 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.
B-15
(ddd) "Non-Call Period" has the meaning set forth under the definition
of "Special Redemption Provisions."
(eee) "Notice of Redemption" shall mean any notice with respect to the
redemption of Preferred Shares pursuant to paragraph 8(c) of Part I of this
Section 11.1.
(fff) "Notice of Special Rate Period" shall mean any notice with
respect to a Special Rate Period of Preferred Shares pursuant to paragraph 3(b)
of Part I of this Section 11.1.
(ggg) "Order" and "Orders" shall have the respective meanings specified
in paragraph 1(a) of Part II of this Section 11.1.
(hhh) "Other Real Estate Companies" means companies (other than REITs)
which, in the judgment of the Trust's investment manager, generally derive at
least 50% of their revenue from real estate or have at least 50% of their assets
in real estate.
(iii) "Outstanding" shall mean, as of any date, the number of Preferred
Shares theretofore issued by the Trust except, without duplication, (i) any
Preferred Shares theretofore canceled, redeemed or repurchased by the Trust, or
delivered to the Auction Agent for cancellation, redemption or repurchase or
with respect to which the Trust has given notice of cancellation, redemption or
repurchase and irrevocably deposited with the Auction Agent sufficient funds to
redeem or repurchase such shares and (ii) any Preferred Shares represented by
any certificate in lieu of which a new certificate has been executed and
delivered by the Trust. Notwithstanding the foregoing, (A) in connection with
any Auction, any Preferred Shares as to which the Trust or an Affiliate (other
than an Affiliate that is a Broker-Dealer) is the Existing Holder will be
disregarded and not deemed Outstanding; (B) for purposes of determining the
Preferred Shares Basic Maintenance Amount, Preferred Shares held by the Trust
will be disregarded and not deemed Outstanding.
(jjj) "Person" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
(kkk) "Potential Beneficial Owner" with respect to the Preferred
Shares, shall mean a customer of a Broker-Dealer that is not a Beneficial Owner
of Preferred Shares but that wishes to purchase Preferred Shares, or that is a
Beneficial Owner of Preferred Shares that wishes to purchase additional
Preferred Shares.
(lll) "Potential Holder" with respect to the Preferred Shares, shall
mean a Broker-Dealer (or any such other person as may be permitted by the Trust)
that is not an Existing Holder of Preferred Shares or that is an Existing Holder
of Preferred Shares that wishes to become the Existing Holder of additional
Preferred Shares.
B-16
(mmm) "Preferred Shares" shall have the meaning set forth under
"DESIGNATION" above.
(nnn) "Preferred Shares Basic Maintenance Amount" as of any Valuation
Date, shall mean the dollar amount equal to the sum of:
(i) the sum of (A) the products resulting from multiplying the
number of Outstanding Preferred Shares on such date by the Liquidation
Preference (and applicable redemption premium, if any) per share; (B)
the aggregate amount of dividends that will have accumulated at the
Applicable Rate (whether or not earned or declared) for each
Outstanding Preferred Share to the 30th day after such Valuation Date
(or, with respect to a Special Rate Period, to the next Dividend
Payment Date); (C) the amount of anticipated non-interest expenses of
the Trust for the 90 days subsequent to such Valuation Date; (D) the
amount of the current outstanding balances of any indebtedness which is
senior to the Preferred Shares plus interest thereon actually accrued
to such Valuation Date, together with 30 days' additional interest on
the current outstanding balances calculated at the current rate; and
(E) any other current liabilities payable during the 30 days subsequent
to such Valuation Date, including, without limitation, other
indebtedness due within one year and any redemption premium due with
respect to a redemption of the Preferred Shares for which a Notice of
Redemption has been given, as of such Valuation Date, to the extent not
reflected in any of (i)(A) through (i)(D);
less
(ii) the sum of any cash plus the value of any of the Trust's
assets irrevocably deposited by the Trust for the payment of any (i)(B)
through (i)(E) ("value," for purposes of this clause (ii), means the
Discounted Value of the security, except that if a security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated at least P-1 by Moody's,
it will be valued at its face value).
(ooo) "Preferred Shares Basic Maintenance Cure Date," with respect to
the failure by the Trust to satisfy the Preferred Shares Basic Maintenance
Amount (as required by paragraph 6(a) of Part I of this Section 11.1) as of a
given Valuation Date, shall mean the tenth Business Day following such Valuation
Date.
(ppp) "Preferred Shares Basic Maintenance Report" shall mean a report
signed by the President, Chief Operating Officer, Treasurer or any Vice
President of the Trust which sets forth, as of the related Valuation Date, the
assets of the Trust, the Market Value and the Discounted Value thereof (seriatim
and in aggregate), and the Preferred Shares Basic Maintenance Amount.
B-17
(qqq) "Premium Call Period" has the meaning set forth under the
definition of "Special Redemption Provisions."
(rrr) "Pricing Service" means any of the following: Bloomberg, Bridge
Information Services, Chanin Capital Partners, CIBC World Markets, Thomson
Financial Securities Management, Data Resources Inc., FRI Corporation, FT
Interactive Data, International Securities Market Association, JP Morgan Pricing
Services, Loan Pricing Corporation, Meenan, Mcdevitt & Co,. Inc., Merrill Lynch
Securities Pricing Service, Muller Data Corp., Reuters, S&P/J.J. Kenny, Thomson
Financial Securities Management, Telerate, Trepp Pricing, Van Kampen Merritt
Investment Advisory Corp Pricing Service and Wood Gundy.
(sss) "Quarterly Valuation Date" shall mean the last Valuation Date of
each fiscal quarter of the Trust.
(ttt) "Rate Period" shall mean the Initial Rate Period and any
Subsequent Rate Period, including any Special Rate Period.
(uuu) "Rate Period Days," for any Rate Period or Dividend Period, means
the number of days that would constitute such Rate Period or Dividend Period but
for the application of paragraph 2(d) of Part I of this Section 11.1.
(vvv) "Rating Agency" means a nationally recognized statistical rating
organization.
(www) "Redemption Default" has the meaning set forth in paragraph
2(e)(ii) of Part I of this Section 11.1.
(xxx) "Redemption Price" shall mean the applicable redemption price
specified in paragraph 8(a) or paragraph 8(b), as the case may be, of Part I of
this Section 11.1.
(yyy) "Reference Rate" means the applicable "AA" Financial Composite
Commercial Paper Rate (for a Dividend Period of fewer than 184 days) or the
applicable Treasury Index Rate (for a Dividend Period of 184 days or more).
(zzz) "REIT" means a real estate investment trust.
(aaaa) "Remaining Shares" shall have the meaning specified in paragraph
4(a)(iv) of Part II of this Section 11.1.
(bbbb) "S&P" shall mean Standard & Poor's, a division of The
McGraw-Hill Companies, Inc., or its successors.
(cccc) "Securities Act" shall mean the Securities Act of 1933, as
amended from time to time.
B-18
(dddd) "Securities Depository" shall mean The Depository Trust Company
and its successors and assigns or any other securities depository selected by
the Trust which agrees to follow the procedures required to be followed by such
securities depository in connection with the Preferred Shares.
(eeee) "Sell Order" and "Sell Orders" shall have the respective
meanings specified in paragraph 1(a) of Part II of this Section 11.1.
(ffff) "Senior Unsecured Rating" shall mean the opinion of a Rating
Agency of the ability of an entity to honor senior unsecured financial
obligations and contracts denominated in foreign and/or domestic currency.
(gggg) "Series M" shall mean the Series M Auction Market Preferred
Shares.
(hhhh) "Short-Term Money Market Instruments" shall mean the following
types of instruments if, on the date of purchase or other acquisition thereof by
the Trust, the remaining term to maturity thereof is not in excess of 180 days:
(i) commercial paper rated A-1 if such commercial paper
matures in 30 days or A-1+ if such commercial paper matures in over 30
days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust
company incorporated under the laws of the United States of America or
any state thereof or the District of Columbia or (B) a United States
branch office or agency of a foreign depository institution (provided
that such branch office or agency is subject to banking regulation
under the laws of the United States, any state thereof or the District
of Columbia);
(iii) overnight funds; and
(iv) U.S. Government Securities.
(iiii) "Special Rate Period" shall have the meaning specified in
paragraph 3(a) of Part I of this Section 11.1. For the avoidance of doubt, a
Minimum Rate Period shall not be deemed to be a Special Rate Period.
(jjjj) "Special Redemption Provisions" means, with respect to any
Special Rate Period of more than one year, either, or any combination of (i) a
period (a "Non-Call Period") determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the shares subject to such
Special Rate Period are not subject to redemption at the option of the Trust and
(ii) a period (a "Premium Call Period"), consisting of a number of whole years
as determined by the Board of Trustees after consultation with the
Broker-Dealers, during each year of which the shares subject to such Special
Rate Period will be redeemable at the Trust's option at a price per share equal
to $25,000 plus
B-19
accumulated but unpaid dividends (whether or not earned or declared) to (but not
including) the date fixed for redemption plus a premium expressed as a
percentage or percentages of $25,000 or expressed as a formula using specified
variables, in each case as determined by the Board of Trustees after
consultation with the Broker-Dealers.
(kkkk) "Submission Deadline" shall mean 1:30 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
(llll) "Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph 3(a) of Part II of this Section 11.1.
(mmmm) "Submitted Hold Order" and "Submitted Hold Orders" shall have
the respective meanings specified in paragraph 3(a) of Part II of this Section
11.1.
(nnnn) "Submitted Order" and "Submitted Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Section 11.1.
(oooo) "Submitted Sell Order" and "Submitted Sell Orders" shall have
the respective meanings specified in paragraph 3(a) of Part II of this Section
11.1.
(pppp) "Subsequent Rate Period" shall mean the period from and
including the first day following the Initial Rate Period to but excluding the
next Dividend Payment Date and any period thereafter from and including one
Dividend Payment Date to but excluding the next succeeding Dividend Payment
Date; provided, however, that if any Subsequent Rate Period is also a Special
Rate Period, such term shall mean the period commencing on the first day of such
Special Rate Period and ending on the last day of the last Dividend Period
thereof.
(qqqq) "Substitute Commercial Paper Dealer" shall mean Credit Suisse
First Boston or Morgan Stanley & Co., Incorporated or their respective
affiliates or successors, if such entities are commercial paper dealers;
provided, however, that none of the entities named above shall be a Commercial
Paper Dealer.
(rrrr) "Substitute Rating Agency" means a Rating Agency selected by the
Trust to act as a substitute Rating Agency to determine the credit rating of the
Preferred Shares.
(ssss) "Sufficient Clearing Bids" shall have the meaning specified in
paragraph 3(a) of Part II of this Section 11.1.
(tttt) "Treasury Bill" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or less.
B-20
(uuuu) "Treasury Index Rate" shall mean 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 applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity, treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15 (519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, then the foregoing computations shall be
based upon the average of comparable data as quoted to the Trust by at least
three U.S. Government Securities Dealers.
(vvvv) "Trust" shall mean AEW Real Estate Income Fund.
(wwww) "Trustees" shall mean the trustees of the Trust.
(xxxx) "U.S. Government Securities" shall mean direct obligations of
the United States or of its agencies or instrumentalities that are entitled to
the full faith and credit of the United States and that, other than Treasury
Bills, provide for the periodic payment of interest and the full payment of
principal at maturity or call for redemption, including, without limitation,
U.S. Treasury Securities and U.S. Treasury Strips.
(yyyy) "U.S. Government Securities Dealer" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc., Morgan
Guaranty Trust Company of New York and any other U.S. Government Securities
dealer selected by the Trust as to which Moody's (if Moody's is then rating the
Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares) shall
not have objected, and in each case their respective affiliates or successors,
if such entities are U.S. Government Securities dealers.
(zzzz) "U.S. Treasury Securities" shall mean direct obligations of the
United States Treasury that are entitled to the full faith and credit of the
United States.
(aaaaa) "U.S. Treasury Strips" shall mean securities based on U.S.
Treasury Securities created through the Separate Trading of Registered Interest
and Principal of Securities program of the U.S. Treasury.
(bbbbb) "Valuation Date" shall mean, for purposes of determining
whether the Trust is maintaining the Preferred Shares Basic Maintenance Amount,
the last Business Day of each week or such other date as the Trust and Fitch (if
Fitch is then rating the Preferred Shares) and Moody's (if Moody's is then
rating the Preferred Shares) may agree to for purposes of determining the
Preferred Shares Basic Maintenance Amount.
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(ccccc) "Voting Period" shall have the meaning specified in paragraph
4(b)(i) of Part I of this Section 11.1.
(ddddd) "Winning Bid Rate" shall have the meaning specified in
paragraph 3(a) of Part II of this Section 11.1.
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PART 1.
1. Number of Authorized Shares.
The number of authorized shares constituting Series M shall be
1,120 shares.
2. Dividends.
(a) Ranking. The Preferred Shares shall rank on a parity with
one another and with shares of any other series of preferred shares of
beneficial interest issued by the Trust as to the payment of dividends
by the Trust and the distribution of assets upon liquidation of the
Trust.
(b) Cumulative Cash Dividends. The Holders of Preferred Shares
shall be entitled to receive, when, as and if declared by the Trustees,
out of funds legally available therefor in accordance with the
Declaration of Trust and applicable law, cumulative cash dividends at
the Applicable Rate, determined as set forth in paragraph 2(e) of this
Part I, and no more, payable on the Dividend Payment Dates determined
pursuant to paragraph 2(d) of this Part I. Holders of Preferred Shares
shall not be entitled to any dividend, whether payable in cash,
property or shares, in excess of full cumulative dividends, as herein
provided, on the Preferred Shares. No interest, or sum of money in lieu
of interest, shall be payable in respect of any dividend payment or
payments on the Preferred Shares which may be in arrears, and, except
to the extent set forth in paragraph 2(e)(iii) of this Part I, no
additional sum of money shall be payable in respect of any such
arrearage.
(c) Dividends Cumulative from Date of Original Issue.
Dividends on the Preferred Shares shall accumulate at the Applicable
Rate from the Date of Original Issue thereof.
(d) Dividend Payment Dates and Adjustment Thereof. Dividends
shall be payable on the Preferred Shares for the Initial Rate Period on
the Initial Dividend Payment Date, and on each 7th day thereafter (each
date being a "Dividend Payment Date"); provided, however, that:
(i) if the day on which dividends would otherwise be
payable is not a Business Day, then such dividends shall be
payable on the first Business Day that falls after such day
(subject to paragraph 7 of Part II of this Section 11.1); and
(ii) notwithstanding this paragraph 2(d), the
Dividend Payment Dates with respect to a Special Rate Period
shall be determined in the discretion of the Trust and set
forth in the Notice of Special Rate Period relating to such
Special Rate Period, as delivered to the Auction Agent, which
Notice of Special Rate Period shall be filed with the
Secretary of the Trust; provided, however, that with respect
to any Special Rate Period consisting of more than 30 days,
dividends shall be payable on first Business Day of each
calendar month within such Special
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Rate Period, if applicable, and on the Business Day following
the last day of such Special Rate Period.
(iii) Each Dividend Payment Date determined pursuant
to this paragraph 2(d) shall be a Business Day when determined
(and if not a Business Day at the time of payment, the
provisions of clause (i) above will apply, subject to
paragraph 7 of Part II of this Section 11.1);
(iv) Although any particular Dividend Payment Date
may not occur on the originally scheduled date because of the
provisions hereof, the next succeeding Dividend Payment Date,
subject to such provisions, will occur on the next following
originally scheduled date; and
(v) notwithstanding the above, if for any reason a
Dividend Period for the Preferred Shares is scheduled to begin
on the same day and end on the same day as a Dividend Period
for any other series of preferred shares of beneficial
interest of the Trust, then the last day of such Dividend
Period for such other series of preferred shares of beneficial
interest shall be the second Business Day next succeeding such
scheduled day unless the Trust obtains the opinion of tax
counsel referred to in this paragraph. Subject to the
limitation in the next sentence, if for any reason a Dividend
Payment Date cannot be fixed as described above, then the
Trustees shall otherwise fix the Dividend Payment Date. In no
event, however, may the Dividend Period of the Preferred
Shares be co-extensive with any dividend period of any other
series of preferred shares of beneficial interest unless the
Trust has received an opinion of tax counsel that having such
co-extensive periods will not affect the deductibility, for
federal income tax purposes, of dividends paid on the
different series of preferred shares of beneficial interest.
(e) Dividend Rates and Calculation of Dividends.
(i) Dividend Rates. The dividend rate on the
Preferred Shares during the period from and after the Date of
Original Issue to and including the last day of the Initial
Rate Period shall be the Initial Dividend Rate. For each
Subsequent Rate Period thereafter, the dividend rate on the
Preferred Shares shall be equal to the rate per annum that
results from an Auction (but the rate set at the Auction may
not exceed the Maximum Rate) on the Auction Date next
preceding such Subsequent Rate Period; provided, however, that
if an Auction for any such Subsequent Rate Period is not held
for any reason (except as provided in paragraph 7 of Part II
of this Section 11.1), the dividend rate for such Subsequent
Rate Period will be the Maximum Rate on the Auction Date
therefore (except (A) during a Default Period when the
dividend rate shall be the Default Rate, as set forth in
paragraph 2(e)(ii) below, or (ii) after a Default Period and
prior to the beginning of the next Dividend Period, when the
dividend rate shall be the
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Maximum Rate at the close of business on the last day of such
Default Period). The rate per annum at which dividends are
payable on the Preferred Shares for any Rate Period thereof in
accordance with this Section 11.1 is herein referred to as the
"Applicable Rate."
(ii) Default Period. Subject to the cure provisions
in paragraph 2(e)(iii) below, a "Default Period" will commence
on any date the Trust fails to deposit irrevocably in trust
with the Auction Agent, not later than 12:00 Noon, New York
City time, (A) on any Dividend Payment Date, in funds
available on such Dividend Payment Date in The City of New
York, New York, the full amount of any dividend (whether or
not earned or declared) to be paid on such Dividend Payment
Date on the Preferred Shares (a "Dividend Default") or (B) on
any redemption date set by the Trust with respect to any
Preferred Shares, in funds available on such redemption date
in The City of New York, New York, the full amount of any
Redemption Price to be paid on such redemption date for any
Preferred Shares with respect to which a Notice of Redemption
has been mailed pursuant to paragraph 8(c) of Part I of this
Section 11.1 (a "Redemption Default," and together with a
Dividend Default, hereinafter referred to as a "Default");
provided, however, that the foregoing clause (B) shall not
apply to the Trust's failure to pay the Redemption Price in
respect of Preferred Shares when the related Notice of
Redemption provides that redemption of such shares is subject
to one or more conditions precedent and any such condition
precedent shall not have been satisfied at the time or times
and in the manner specified in such Notice of Redemption.
Subject to the cure provisions of paragraph 2(e)(iii)
below, a Default Period with respect to a Dividend Default or
a Redemption Default shall end on the Business Day on which,
by 12:00 noon, New York City time, all unpaid dividends and
any unpaid Redemption Price, as applicable, shall have been
deposited irrevocably in trust in same-day funds with the
Auction Agent. 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
during a Default Period shall be a Minimum Rate Period;
provided, however, that the commencement of a Default Period
will not by itself cause the commencement of a new Dividend
Period. No Auction shall be held during a Default Period. The
"Default Rate" shall be equal to the Reference Rate multiplied
by three (3).
(iii) Curing a Default. No Default Period with
respect to a Dividend Default or Redemption Default shall be
deemed to commence if the amount of any dividend or any
Redemption Price due (if such default is not solely due to the
willful failure of the Trust to pay such dividend or
Redemption Price) is deposited irrevocably in trust, in
same-day funds with the Auction Agent by 12:00 noon, New York
City time, within three Business Days after the applicable
Dividend
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Payment Date or redemption date set by the Trust, 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 the period beginning on the applicable Dividend
Payment Date or redemption date and ending on the date of such
deposit, divided by 360 (a "Late Charge"). In the case of a
default that is solely due to the willful failure of the Trust
to pay a dividend or Redemption Price when due, the provisions
of paragraph 2(e)(ii) above shall apply.
(iv) Calculation of Dividends. The amount of
dividends per share payable on the Preferred Shares on any
date on which dividends shall be payable on the Preferred
Shares shall be computed by multiplying the Applicable Rate in
effect for such Dividend Period or Dividend Periods or part
thereof for which dividends have not been paid by a fraction,
the numerator of which shall be the number of days in such
Dividend Period or Dividend Periods or part thereof that such
share was outstanding and the denominator of which shall be
360; and multiplying the rate obtained by $25,000, and
rounding the amount so obtained to the nearest cent.
(f) Dividend Payments by Trust to Auction Agent. The Trust
shall pay to the Auction Agent, not later than 12:00 noon, New York
City time on each Dividend Payment Date for the Preferred Shares, an
aggregate amount of funds available on such Dividend Payment Date equal
to the dividends to be paid to all Holders of the Preferred Shares on
such Dividend Payment Date. The Trust shall not be required to
establish any reserves for payment of dividends on the Preferred
Shares.
(g) Auction Agent as Trustee of Dividend Payments by Trust.
All moneys paid to the Auction Agent for the payment of dividends or
any Redemption Price (or for the payment of any Late Charge) shall be
held in trust for the payment of such dividends or any Redemption Price
(and any such Late Charge) by the Auction Agent for the benefit of the
Holders specified in paragraph 2(i) of this Part I of this Section
11.1. Any moneys paid to the Auction Agent in accordance with the
foregoing but not applied by the Auction Agent to the payment of such
dividends or Redemption Price (and any such Late Charge) will, to the
extent permitted by law, be repaid to the Trust at the end of 90 days
from the date on which such moneys were so to have been applied.
(h) Dividends Paid to Holders. Each dividend on Preferred
Shares shall be paid on the Dividend Payment Date therefor to the
Holders thereof as their names appear on the record books of the Trust
on the Business Day next preceding such Dividend Payment Date.
(i) Dividends Credited Against Earliest Accumulated But Unpaid
Dividends. Any dividend payment made on Preferred Shares shall first be
credited against the earliest accumulated but unpaid dividends due with
respect to such shares. Dividends in arrears for any past Dividend
Period may be declared and paid on any date as may be
B-26
fixed by the Trustees, without reference to any regular Dividend
Payment Date, to the Holders as their names appear on the record books
of the Trust on the record date fixed by the Trustees, not exceeding 15
days preceding the payment date thereof.
3. Designation of Special Rate Periods.
(a) Length of and Preconditions for Special Rate Period. The
Trust, in consultation with the Lead Broker-Dealer, may designate any
succeeding Subsequent Rate Period for the Preferred Shares as a
"Special Rate Period" consisting of a specified number of Rate Period
Days evenly divisible by 7 and not more than 1,820. A designation of a
Special Rate Period shall be effective only if (A) notice thereof shall
have been given as provided herein, (B) an Auction shall have been held
on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids shall have
existed in such Auction, (C) if any Notice of Redemption shall have
been mailed by the Trust pursuant to paragraph 8(c) of this Part I with
respect to any Preferred Shares, the Redemption Price with respect to
such shares shall have been deposited with the Auction Agent and, if
such redemption is subject to one or more conditions precedent, each
such condition shall have been satisfied at the time or times and in
the manner specified in such Notice of Redemption, (D) full cumulative
dividends on the Preferred Shares shall have been paid in full or
deposited with the Auction Agent, (E) the Trust shall have obtained
written confirmation from Moody's and Fitch, if Moody's and Fitch are
then rating the Preferred Shares, and from any Substitute Rating Agency
then rating the Preferred Shares, that such proposed Special Rate
Period will not impair the rating then assigned by Moody's, Fitch or
such Substitute Rating Agency to the Preferred Shares, and (F) the Lead
Broker-Dealer shall not have objected to the declaration of the
proposed Special Rate Period in writing.
(b) Notice of Proposed Special Rate Period. If the Trust
proposes to designate any succeeding Rate Period as a Special Rate
Period pursuant to paragraph 3(a) of this Part I, not fewer than seven
Business Days (or two Business Days in the event the duration of the
Dividend Period prior to such Special Rate Period is fewer than eight
days) nor more than 30 Business Days prior to the date the Trust
proposes to designate as the first day of such Special Rate Period,
notice shall be (i) made by press release and (ii) communicated by the
Trust by telephonic or other means to the Auction Agent and each
Broker-Dealer and confirmed in writing promptly thereafter. Each such
notice (a "Notice of Special Rate Period") shall state (A) that the
Trust proposes to exercise its option to designate a Special Rate
Period, specifying the first and last days thereof and the Maximum Rate
for such Special Rate Period and (B) that the Trust will by 3:00 P.M.,
New York City time, on the second Business Day next preceding the first
day of such Special Rate 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 Rate
Period, subject to the terms of any Special Redemption Provisions, or
(y) its determination not to proceed with such Special Rate Period, in
which latter event the succeeding Dividend Period shall be a Minimum
Rate Period. No later than 3:00 P.M.,
B-27
New York City time, on the second Business Day next preceding the first
day of any proposed Special Rate Period, the Trust shall deliver to the
Auction Agent, who will promptly deliver to the Broker-Dealers and
Existing Holders, either:
(I) a notice stating (A) that the Trust has
determined to designate the next succeeding Rate Period as a
Special Rate Period, specifying the first and last days
thereof and (B) the terms of any Special Redemption
Provisions; or
(II) a notice stating that the Trust has determined
not to exercise its option to designate a Special Rate Period.
If the Trust fails to deliver the notices required by this provision
with respect to any designation of any proposed Special Rate Period to the
Auction Agent by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Rate Period, the Trust shall be
deemed to have delivered a notice to the Auction Agent with respect to such
Dividend Period to the effect set forth in clause (II) above.
(c) Special Redemption Provisions. Subject to the next
sentence, the Notice of Special Rate Period relating to a Special Rate
Period of the Preferred Shares, as delivered to the Auction Agent and
Broker-Dealers and filed with the Secretary of the Trust, shall set
forth any Special Redemption Provisions with respect to such Special
Rate Period. A Notice of Special Rate Period may contain Special
Redemption Provisions only if the Trustees, after consultation with the
Broker-Dealers, determine that such Special Redemption Provisions are
in the best interest of the Trust.
4. Voting Rights.
(a) One Vote Per Share of Preferred Shares. Except as
otherwise provided herein or in the Declaration of Trust or as
otherwise required by law, (i) each Holder of Preferred Shares shall be
entitled to one vote for each Preferred Share held by such Holder on
each matter submitted to a vote of shareholders of the Trust, and (ii)
the holders of outstanding preferred shares of beneficial interest of
the Trust, including the Preferred Shares, and of Common Shares shall
vote together as a single class; provided, however, that, subject to
the division of the Trustees into classes with respect to their
respective terms of office, as provided in the Declaration of Trust, at
any meeting of the shareholders of the Trust held for the election of
Trustees, the holders of outstanding preferred shares of beneficial
interest of the Trust, including the Preferred Shares, represented in
person or by proxy at said meeting shall be entitled, as a class, to
the exclusion of the holders of all other securities and classes of
shares of beneficial interest of the Trust, to elect two Trustees of
the Trust, each Preferred Share entitling the holder thereof to one
vote. Subject to paragraph 4(b) of this Part I, the holders of
outstanding Common Shares and preferred shares of beneficial interest,
including the Preferred Shares, voting together as a single class,
shall elect the balance of the Trustees.
(b) Voting for Additional Trustees.
B-28
(i) Voting Period. Except as otherwise provided in the
Declaration of Trust or as otherwise required by law, during any period
in which any one or more of the conditions described in subparagraphs
(A) or (B) of this subparagraph (b)(i) shall exist (such period being
referred to herein as a "Voting Period"), the number of trustees
constituting the Trustees shall be automatically increased by the
smallest number that, when added to the two Trustees elected
exclusively by the holders of preferred shares of beneficial interest,
including the Preferred Shares, would constitute a majority of the
Trustees as so increased by such smallest number, and the holders of
preferred shares of beneficial interest, including the Preferred
Shares, shall be entitled, voting as a class on a one-vote-per-share
basis (to the exclusion of the holders of all other securities and
classes of shares of beneficial interest of the Trust), to elect such
smallest number of additional Trustees, together with the two Trustees
that such holders are in any event entitled to elect. A Voting Period
shall commence:
(A) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or
declared) on any outstanding preferred shares of beneficial
interest, including the Preferred Shares, equal to at least
two full years' dividends shall be due and unpaid and
sufficient cash or specified securities shall not have been
deposited with the Auction Agent for the payment of such
accumulated dividends; or
(B) if at any time holders of preferred shares of
beneficial interest, including the Preferred Shares, are
entitled under the 1940 Act to elect a majority of the
Trustees of the Trust.
Upon the termination of a Voting Period, the voting rights
described in this subparagraph (b)(i) shall cease, subject always,
however, to the revesting of such voting rights in the holders of
preferred shares of beneficial interest upon the further occurrence of
any of the events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after
the accrual of any right of the holders of preferred shares of
beneficial interest, including the Preferred Shares, to elect
additional Trustees as described in paragraph 4(b)(i) of this Part I,
the Trust shall so notify the Auction Agent and a special meeting of
such holders shall be called by mailing a notice of such special
meeting to such holders, such meeting to be held not less than 10 nor
more than 90 days after the date of mailing of such notice. If the
Trust fails to send such notice to the Auction Agent or if such special
meeting is not called, it may be called by any such holder on like
notice. The record date for determining the holders entitled to notice
of and to vote at such special meeting shall be the close of business
on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting of holders of
preferred shares of beneficial interest, including the Preferred
Shares, held during a Voting Period at which
B-29
Trustees are to be elected, such holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of
shares of beneficial interest of the Trust), shall be entitled to elect
the number of Trustees prescribed in paragraph 4(b)(i) of this Part I
on a one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of
office of all persons who are Trustees of the Trust at the time of a
special meeting of Holders and holders of other preferred shares of
beneficial interest to elect Trustees shall continue, notwithstanding
the election at such meeting by the Holders and such other holders of
the number of Trustees that they are entitled to elect, and the persons
so elected by the Holders and such other holders, together with the two
incumbent Trustees elected by the Holders and such other holders of
preferred shares of beneficial interest and the remaining incumbent
Trustees elected by the holders of the Common Shares and preferred
shares of beneficial interest, shall constitute the duly elected
Trustees.
(iv) Terms of Office of Certain Trustees to Terminate upon
Termination of Voting Period. Simultaneously with the termination of a
Voting Period, the terms of office of the additional Trustees elected
by the Holders and holders of other Preferred Shares pursuant to
paragraph 4(b)(i) of this Part I shall automatically terminate, the
remaining Trustees shall constitute the Trustees of the Trust and the
voting rights of the Holders and such other holders to elect additional
Trustees pursuant to paragraph 4(b)(i) of this Part I shall cease,
subject to the provisions of the last sentence of paragraph 4(b)(i) of
this Part I.
(c) Holders of Preferred Shares to Vote on Certain Other Matters.
(i) Increase in Capitalization; Voluntary Petition for
Bankruptcy. So long as any Preferred Shares are outstanding, the Trust
shall not, without the affirmative vote or consent of the Holders of at
least a "majority of the outstanding" Preferred Shares (unless a higher
percentage is provided for herein or in the Declaration of Trust or by
applicable law), in person or by proxy, either in writing or at a
meeting, voting as a separate class, authorize, create or issue any
class or series of shares ranking prior to or on a parity with the
Preferred Shares with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust, or authorize, create or issue additional
Preferred Shares (except that, notwithstanding the foregoing, but
subject to the provisions of these Bylaws, the Trustees, without the
vote or consent of the Holders of Preferred Shares, may from time to
time authorize and create, and the Trust may from time to time issue,
additional Preferred Shares or classes or series of other preferred
shares of beneficial interest ranking on a parity with Preferred Shares
with respect to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Trust
if the Trust receives written confirmation from
B-30
Moody's (if Moody's is then rating the Preferred Shares) and Fitch (if
Fitch is then rating the Preferred Shares) and from any Substitute
Rating Agency then rating the Preferred Shares that such authorization,
creation or issuance would not impair the rating then assigned by such
Rating Agency to the Preferred Shares). So long as any Preferred Shares
are outstanding, the Trust shall not, without the affirmative vote or
consent of the Holders of at least a "majority of the outstanding"
Preferred Shares (unless a higher percentage is provided for herein or
in the Declaration of Trust or by applicable law), in person or by
proxy, either in writing or at a meeting, voting as a separate class,
file a voluntary application for relief under Federal bankruptcy law or
any similar application under state law for so long as the Trust is
solvent and does not foresee becoming insolvent.
For purposes of paragraph 4 of this Part I, "majority of the
outstanding" Preferred Shares (or any other series of preferred shares
of beneficial interest of the Trust, as applicable) means (i) 67% or
more of such shares present at a meeting or represented by proxy, if
the Holders of more than 50% of such shares are present or represented
by proxy, or (ii) more than 50% of such shares, whichever is less.
To the extent not prohibited by these Bylaws, the Declaration
of Trust or applicable law, in the event more than one series of
preferred shares of beneficial interest of the Trust is outstanding, if
any action with respect to which Holders of Preferred Shares or of
other preferred shares of beneficial interest of the Trust are granted
voting rights under paragraph 4 of this Part I (including without
limitation paragraphs 4(c) and 4(d)) would adversely affect the rights
of one or more series of the Trust's preferred shares of beneficial
interest (including the Preferred Shares) (each an "Affected Series")
in a manner different from any other series of preferred shares of
beneficial interest of the Trust, the Trust will not approve any such
action without the affirmative vote or consent of the Holders of at
least a "majority of outstanding" shares of each such Affected Series
outstanding at the time, in person or by proxy, either in writing or at
a meeting (each such Affected Series voting as a separate class).
(ii) 1940 Act Matters. Unless a higher percentage is provided
for herein or in the Declaration of Trust or by applicable law, (A) the
affirmative vote of the Holders of at least a "majority of the
outstanding" Preferred Shares, voting as a separate class, shall be
required to approve any conversion of the Trust from a closed-end to an
open-end investment company and (B) the affirmative vote of the Holders
of a "majority of the outstanding" Preferred Shares, voting as a
separate class, shall be required to approve any plan of
"reorganization" (as such term is defined in Section 2(a)(33) of the
1940 Act) adversely affecting such shares. The affirmative vote of the
Holders of at least a "majority of the outstanding" Preferred Shares,
voting as a separate class, shall be required to approve any action not
described in the first sentence of this paragraph 4(c)(ii)
B-31
requiring a vote of security holders of the Trust under section 13(a)
of the 1940 Act. In the event a vote of Holders of Preferred Shares is
required pursuant to the provisions of Section 13(a) of the 1940 Act,
the Trust shall, not later than ten Business Days prior to the date on
which such vote is to be taken, notify Moody's (if Moody's is then
rating the Preferred Shares) and Fitch (if Fitch is then rating the
Preferred Shares) that such vote is to be taken and the nature of the
action with respect to which such vote is to be taken. The Trust shall,
not later than ten Business Days after the date on which such vote is
taken, notify Moody's (if Moody's is then rating the Preferred Shares)
and Fitch (if Fitch is then rating the Preferred Shares) of the results
of such vote.
(d) Board May Take Certain Actions Without Shareholder Approval. The
Trustees, without the vote or consent of the shareholders of the Trust, may from
time to time amend, alter or repeal any provision of this Section 11.1 if such
amendment, alteration or repeal would not adversely affect the preferences,
rights or powers of the Holders of Preferred Shares or the holders of any other
preferred shares of beneficial interest of the Trust expressly set forth in the
Declaration of Trust or Bylaws; provided, however, that the Trustees receive
written confirmation from Moody's (such confirmation being required to be
obtained only in the event Moody's is then rating the Preferred Shares) or Fitch
(such confirmation being required to be obtained only in the event that Fitch is
then rating the Preferred Shares) that any such amendment, alteration or repeal
would not impair the ratings then assigned by Moody's (if Moody's is then rating
the Preferred Shares) or Fitch (if Fitch is then rating the Preferred Shares) to
the Preferred Shares. To the extent any shareholder vote is required under
paragraph 4(d) of this Part I, (i) the affirmative vote of the Holders of at
least a "majority of outstanding" Preferred Shares (or other series of preferred
shares of beneficial interest of the Trust, as applicable) shall be required
(unless a higher percentage is provided for herein or in the Declaration of
Trust or by applicable law) and (ii) holders of Common Shares will have no
rights unless required by law, the Declaration of Trust or these Bylaws.
For purposes of the foregoing and paragraph 4(c) above, no matter shall
be deemed adversely to affect any preference, right or power of a Holder of
Preferred Shares or a holder of any other preferred shares of beneficial
interest of the Trust unless such matter (a) adversely alters or abolishes any
preferential right of such shares; (b) creates, adversely alters or abolishes
any right in respect of redemption of such shares; or (c) creates or adversely
alters (other than to abolish) any restriction on transfer applicable to such
shares.
Notwithstanding the foregoing, the Trustees may, without the vote or
consent of the Holders of the Preferred Shares, from time to time amend, alter
or repeal any or all of the provisions of paragraph 10 of this Part I, as well
as any or all of the definitions contained within this Section 11.1 (and any
terms defined within, or related to, such definitions), and any such amendment,
alteration or repeal will be deemed not to affect the preferences, rights or
powers of the Preferred Shares or the Holders thereof, provided
B-32
the Trustees receive written confirmation from Moody's (if Moody's is then
rating the Preferred Shares) and Fitch (if Fitch is then rating the Preferred
Shares) that any such amendment, alteration or repeal would not impair the
ratings then assigned to the Preferred Shares by Moody's (if Moody's is then
rating the Preferred Shares) or Fitch (if Fitch is then rating the Preferred
Shares); provided, however, that such confirmation shall in no event be required
to be obtained from a particular Rating Agency with respect to definitions or
other provisions relevant only to and adopted in connection with another Rating
Agency's rating of the Preferred Shares.
(e) Voting Rights Set Forth Herein Are Sole Voting Rights. Unless
otherwise required by law, the Holders of Preferred Shares shall not have any
relative rights or preferences or other special rights other than those
specifically set forth herein.
(f) No Preemptive Rights or Cumulative Voting. The Holders of Preferred
Shares shall have no preemptive rights or rights to cumulative voting.
(g) Voting for Trustees Sole Remedy for Trust's Failure to Pay
Dividends. In the event that the Trust fails to pay any dividends on the
Preferred Shares, the exclusive remedy of the Holders shall be the right to vote
for Trustees pursuant to the provisions of this paragraph 4.
(h) Holders Entitled to Vote. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by this Section
11.1, by provisions of the Declaration of Trust, by statute or otherwise, no
Holder shall be entitled to vote any Preferred Share and no Preferred Share
shall be deemed to be "outstanding" for the purpose of voting or determining the
number of shares required to constitute a quorum if, prior to or concurrently
with the time of determination of shares entitled to vote or shares deemed
outstanding for quorum purposes, as the case may be, the requisite Notice of
Redemption with respect to such shares shall have been mailed as provided in
paragraph 8(c) of this Part I and the Redemption Price for the redemption of
such shares shall have been deposited in trust with the Auction Agent for that
purpose. No Preferred Shares held by the Trust shall have any voting rights or
be deemed to be outstanding for voting or other purposes.
5. 1940 Act Preferred Shares Asset Coverage.
The Trust shall maintain, as of the last Business Day of each month in
which any Preferred Shares are outstanding, the 1940 Act Preferred Shares Asset
Coverage.
6. Preferred Shares Basic Maintenance Amount.
(a) So long as Preferred Shares are outstanding, the Trust shall
maintain, on each Valuation Date, and shall verify to its satisfaction that it
is maintaining on such Valuation Date, Fitch Eligible Assets having an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic Maintenance
Amount (if Fitch is then rating the
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Preferred Shares) and Moody's Eligible Assets having an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount (if Moody's is then rating the Preferred Shares).
(b) (i) On or before 5:00 P.M., New York City time, on the
third Business Day after a Valuation Date on which the Trust fails to
satisfy the Preferred Shares Basic Maintenance Amount, and on the third
Business Day after the Preferred Shares Basic Maintenance Cure Date
with respect to such Valuation Date, the Trust shall complete and
deliver to Moody's (if Moody's is then rating the Preferred Shares) and
Fitch (if Fitch is then rating the Preferred Shares) and the Auction
Agent (if either Moody's or Fitch is then rating the Preferred Shares)
a Preferred Shares Basic Maintenance Report as of the date of such
failure or such Preferred Shares Basic Maintenance Cure Date, as the
case may be, which will be deemed to have been delivered to each such
party if such party receives a copy or telecopy, telex or other
electronic transcription thereof and on the same day the Trust mails to
such party for delivery on the next Business Day the full Preferred
Shares Basic Maintenance Report.
(i) The Trust shall also deliver a Preferred Shares
Basic Maintenance Report to Moody's (if Moody's is then rating
the Preferred Shares) and Fitch (if Fitch is then rating the
Preferred Shares):
(A) As of the last Valuation Date of each
calendar month (or, if such day is not a Business
Day, the immediately preceding Business Day), and
(B) As of any Quarterly Valuation Date, in
each case on or before the third Business Day after
such day.
A failure by the Trust to deliver a Preferred Shares Basic Maintenance
Report pursuant to the preceding sentence shall be deemed to be delivery of a
Preferred Shares Basic Maintenance Report indicating the Discounted Value for
all assets of the Trust is less than the Preferred Shares Basic Maintenance
Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a
Preferred Shares Basic Maintenance Report in accordance with paragraph
6(b)(ii)(B) of this Part I relating to a Quarterly Valuation Date, the
Trust shall deliver to Moody's (if Moody's is then rating the Preferred
Shares), Fitch (if Fitch is then rating the Preferred Shares) and the
Auction Agent (if either Moody's or Fitch is then rating the Preferred
Shares) a letter from the Independent Accountant (an "Accountant's
Confirmation") regarding the mathematical accuracy of the calculations
reflected in such Preferred Shares Basic Maintenance Report (and in any
other Preferred Shares Basic Maintenance Report, randomly selected by
the Independent Accountant, that was prepared by the Trust during the
quarter ending on such Quarterly Valuation Date).
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(d) Within ten Business Days after the date of delivery of a
Preferred Shares Basic Maintenance Report in accordance with paragraph
6(b)(i) of this Part I relating to any Valuation Date on which the
Trust failed to satisfy the Preferred Shares Basic Maintenance Amount,
and relating to the Preferred Shares Basic Maintenance Cure Date with
respect to such failure to satisfy the Preferred Shares Basic
Maintenance Amount, the Trust shall cause the Independent Accountant to
provide to Moody's (if Moody's is then rating the Preferred Shares),
Fitch (if Fitch is then rating the Preferred Shares) and the Auction
Agent (if either Moody's or Fitch is then rating the Preferred Shares)
an Accountant's Confirmation regarding the mathematical accuracy of the
calculations set forth in such Preferred Shares Basic Maintenance
Report.
(e) If any Accountant's Confirmation delivered pursuant to
paragraph 6(c) or 6(d) of this Part I shows that an error was made in
the Preferred Shares Basic Maintenance Report for a particular
Valuation Date for which such Accountant's Confirmation was required to
be delivered, or shows that a lower aggregate Discounted Value for the
aggregate of all Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) or Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares), as the case may be, of the Trust was determined by
the Independent Accountant, the calculation or determination made by
such Independent Accountant shall be final and conclusive and shall be
binding on the Trust, and the Trust shall accordingly amend and deliver
the Preferred Shares Basic Maintenance Report to Moody's (if Moody's is
then rating the Preferred Share), Fitch (if Fitch is then rating the
Preferred Shares) and the Auction Agent (if either Moody's or Fitch is
then rating the Preferred Shares) promptly following receipt by the
Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first
Business Day after the Date of Original Issue of the Preferred Shares,
the Trust shall complete and deliver to Moody's (if Moody's is then
rating the Preferred Shares) and Fitch (if Fitch is then rating the
Preferred Shares) a Preferred Shares Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within ten Business
Days of such Date of Original Issue, the Trust shall cause the
Independent Accountant to deliver in writing to Moody's (if Moody's is
then rating the Preferred Shares) and Fitch (if Fitch is then rating
the Preferred Shares) an Accountant's Confirmation regarding the
mathematical accuracy of the calculations reflected in such Preferred
Shares Basic Maintenance Report.
(g) On or before 5:00 p.m., New York City time, on the third
Business Day after:
(i) the Trust shall have redeemed Common Shares,
(ii) the ratio of the Discounted Value of Moody's
Eligible Assets to the Preferred Shares Basic Maintenance
Amount is less than or equal to 115%, if Moody's is then
rating the Preferred Shares,
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(iii) the ratio of the Discounted Value of Fitch
Eligible Assets to the Preferred Shares Basic Maintenance
Amount is less than or equal to 115%, if Fitch is then rating
the Preferred Shares, or
(iv) a written request by Moody's (if Moody's is then
rating the Preferred Shares) or Fitch (if Fitch is then rating
the Preferred Shares),
the Trust shall complete and deliver to Moody's (if Moody's is then
rating the Preferred Shares) or Fitch (if Fitch is then rating the
Preferred Shares), as the case may be, a Preferred Shares Basic
Maintenance Report as of the date of such event.
7. Restrictions on Dividends and Other Distributions.
(a) Dividends on Parity Shares. Except as set forth in the
next sentence, no dividends shall be declared or paid or set apart for
payment on the shares of any class or series of shares of beneficial
interest of the Trust ranking, as to the payment of dividends, on a
parity with the Preferred Shares for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the
Preferred Shares through their most recent Dividend Payment Date. When
dividends are not paid in full upon the Preferred Shares through their
most recent Dividend Payment Date or upon the shares of any other class
or series of shares of beneficial interest of the Trust ranking on a
parity as to the payment of dividends with the Preferred Shares through
their most recent respective dividend payment dates, all dividends
declared upon the Preferred Shares and any other such class or series
of shares of beneficial interest ranking on a parity as to the payment
of dividends with the Preferred Shares shall be declared pro rata so
that the amount of dividends declared per share on the Preferred Shares
and such other class or series of shares of beneficial interest shall
in all cases bear to each other the same ratio that accumulated
dividends per share on the Preferred Shares and such other class or
series of shares of beneficial interest bear to each other.
(b) Dividends and Other Distributions with Respect to Common
Shares Under the 1940 Act. The Trustees shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other
distribution, upon the Common Shares, or purchase Common Shares, unless
in every such case the Trust maintains, at the time of any such
declaration or purchase, the 1940 Act Preferred Shares Asset Coverage
after deducting the amount of such dividend, distribution or purchase
price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions.
For so long as any Preferred Shares are outstanding, and except as
otherwise contemplated by these Bylaws, (A) the Trust shall not
declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of,
or in options, warrants or rights to subscribe for or purchase, Common
Shares or other shares, if any, ranking junior to the Preferred Shares
as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of the Common Shares
or
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any other shares of the Trust ranking junior to the Preferred Shares as
to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or
any other such junior shares (except by conversion into or exchange for
shares of the Trust ranking junior to the Preferred Shares as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless (i) full cumulative dividends on the
Preferred Shares through their most recently ended Dividend Period
shall have been paid or shall have been declared and sufficient funds
for the payment thereof deposited with the Auction Agent and (ii) the
Trust has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption pertaining thereto,
and (iii) immediately after such transaction the Discounted Value of
Moody's Eligible Assets (if Moody's is then rating the Preferred
Shares) and Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares) would each at least equal the Preferred Shares Basic
Maintenance Amount.
8. Redemption.
(a) Optional Redemption.
(i) Subject to the provisions of subparagraph (iii)
of this paragraph 8(a) and to any applicable Special
Redemption Provisions, Preferred Shares may be redeemed from
time to time, at the option of the Trust, in whole or in part,
on any Dividend Payment Date, out of funds legally available
therefor, at a redemption price per share equal to the sum of
$25,000 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; provided,
however, that Preferred Shares may not be redeemed at the
option of the Trust during the Initial Rate Period.
(ii) If fewer than all of the outstanding Preferred
Shares are to be redeemed pursuant to subparagraph (i) of this
paragraph 8(a), the number of shares to be redeemed shall be
determined by the Trustees, and such shares shall be redeemed
pro rata from the Holders of Preferred Shares in proportion to
the number of Preferred Shares held by such Holders.
(iii) The Trust may not on any date give a Notice of
Redemption pursuant to paragraph 8(c) of this Part I in
respect of a redemption contemplated to be effected pursuant
to this paragraph (a) unless on such date (1) the Trust 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 Preferred Shares by
reason of the redemption of such shares on such redemption
date and (2) the Discounted Value of Moody's Eligible Assets
(if Moody's is then rating the Preferred Shares) and Fitch
Eligible Assets (if Fitch is then rating the Preferred
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Shares) each at least equals the Preferred Shares Basic
Maintenance Amount and would at least equal the Preferred
Shares Basic Maintenance Amount immediately subsequent to such
redemption if such redemption were to occur on such date. The
Trust shall not be required to have available Deposit
Securities as described in clause (1) of this subparagraph
(iii) in respect of a redemption of the Preferred Shares, in
whole or in part, contemplated to be effected pursuant to
paragraph 8(a) where such redemption is subject to the
issuance of shares of any other series of preferred shares of
beneficial interest of the Trust.
(b) Mandatory Redemption. The Trust shall redeem Preferred
Shares, at a redemption price equal to $25,000 per share plus
accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed by the Trustees for
redemption, if the Trust fails to have either Moody's Eligible Assets
(if Moody's is then rating the Preferred Shares) or Fitch Eligible
Assets (if Fitch is then rating the Preferred Shares) with a Discounted
Value greater than or equal to the Preferred Shares Basic Maintenance
Amount or fails to maintain the 1940 Act Preferred Shares Asset
Coverage, in each case in accordance with the terms of this Section
11.1, and such failure is not cured on or before the Preferred Shares
Basic Maintenance Cure Date or the 1940 Act Cure Date, as the case may
be. The number of Preferred Shares to be redeemed shall be equal to the
lesser of:
(i) the minimum number of Preferred Shares, together
with all other preferred shares of beneficial interest subject
to redemption or retirement, the redemption of which, if
deemed to have occurred immediately prior to the opening of
business on the Preferred Shares Basic Maintenance Cure Date
or the 1940 Act Cure Date, as the case may be, would have
resulted in the Trust's (A) having Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares) and Fitch
Eligible Assets (if Fitch is then rating the Preferred Shares)
with a Discounted Value greater than or equal to the Preferred
Shares Basic Maintenance Amount or (B) maintaining the 1940
Act Preferred Shares Asset Coverage, as the case may be, on
such Cure Date (provided, however, that if there is no such
minimum number of Preferred Shares and other preferred shares
of beneficial interest the redemption or retirement of which
would have had such result, all Preferred Shares and other
preferred shares of beneficial interest then outstanding shall
be redeemed), and
(ii) the maximum number of Preferred Shares, together
with all other preferred shares of beneficial interest subject
to redemption or retirement, that can be redeemed out of funds
expected to be legally available therefor in accordance with
the Declaration of Trust and applicable law.
In determining the Preferred Shares required to be redeemed in
accordance with the foregoing, the Trust shall allocate the number
required to be redeemed to satisfy the Preferred Shares Basic
Maintenance Amount or the 1940 Act Preferred Shares Asset
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Coverage, as the case may be, pro rata among Preferred Shares and other
preferred shares of beneficial interest (and, then, pro rata among the
Preferred Shares) subject to redemption or retirement.
The Trust shall effect such redemption on the date fixed by
the Trust therefor, which date shall not be earlier than 20 days nor
later than 40 days after such Cure Date, except that if the Trust does
not have funds legally available for the redemption of all of the
required number of the Preferred Shares and other preferred shares of
beneficial interest that are required to be redeemed pursuant to (i)
above but which cannot be redeemed because of the operation of (ii)
above or the Trust otherwise is unable to effect such redemption on or
prior to 40 days after such Cure Date, the Trust shall redeem those
Preferred Shares and other preferred shares which it was unable to
redeem on the earliest practicable date on which it is able to effect
such redemption. If fewer than all of the outstanding Preferred Shares
are to be redeemed pursuant to this paragraph 8(b), the number of
Preferred Shares to be redeemed shall be redeemed pro rata from the
Holders of Preferred Shares in proportion to the number of Preferred
Shares held by such Holders.
(c) Notice of Redemption. If the Trust shall determine or be
required to redeem Preferred Shares pursuant to paragraph 8(a) or 8(b)
of this Part I, it shall mail a notice (a "Notice of Redemption") with
respect to such redemption by first-class mail, postage prepaid, to
each Holder of the Preferred Shares, at such Holder's address as the
same appears on the record books of the Trust on the record date
established by the Trustees, and shall provide such notice to the
Auction Agent. Such Notice of Redemption shall be so mailed not less
than 20 nor more than 45 days prior to the date fixed for redemption.
Each such Notice of Redemption shall state:
(1) the redemption date;
(2) the number of Preferred Shares to be redeemed;
(3) the CUSIP number for the Preferred Shares;
(4) the Redemption Price;
(5) that dividends on the Preferred Shares to be
redeemed will cease to accumulate on such redemption date; and
(6) the provisions of this paragraph 8 under which
such redemption is made.
If fewer than all the Preferred Shares held by any Holder are
to be redeemed, the Notice of Redemption mailed to such Holder shall
also specify the number of Preferred Shares to be redeemed from such
Holder. The Trust may provide in any Notice of Redemption relating to
a redemption contemplated to be effected pursuant to paragraph 8(a) of
this Part I that such redemption is subject to one or more conditions
precedent and
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that the Trust shall not be required to effect such redemption unless
each such condition shall have been satisfied at the time or times and
in the manner specified in such Notice of Redemption. 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.
(d) No Redemption Under Certain Circumstances.
(i) Notwithstanding the provisions of paragraphs 8(a)
or 8(b) of this Part I, if any dividends on the Preferred
Shares (whether or not earned or declared) are in arrears, no
Preferred Shares shall be redeemed unless all outstanding
Preferred Shares are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any Preferred Shares;
provided, however, that the foregoing shall not prevent the
purchase or acquisition of outstanding Preferred Shares
pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to Holders
of all outstanding Preferred Shares.
(ii) To the extent that any redemption for which a
Notice of Redemption has been mailed is not made by reason of
the absence of legally available funds therefor in accordance
with the Declaration of Trust and applicable law, such
redemption shall be made as soon as practicable to the extent
such funds become available. Failure to redeem Preferred
Shares shall be deemed to exist at any time there is a
Redemption Default with respect to a redemption specified in a
Notice of Redemption.
Notwithstanding the fact that the Trust may not have redeemed
Preferred Shares for which a Notice of Redemption has been mailed,
dividends may be declared and paid on Preferred Shares and shall
include those Preferred Shares for which a Notice of Redemption has
been mailed.
(e) Auction Agent as Trustee of Redemption Payments by Trust.
All moneys paid to the Auction Agent for payment of the Redemption
Price of Preferred Shares called for redemption shall be held in trust
by the Auction Agent for the benefit of Holders of shares so to be
redeemed.
(f) Shares for Which Notice of Redemption Has Been Given Are
No Longer Outstanding. Provided a Notice of Redemption has been mailed
pursuant to paragraph 8(c) of this Part I, upon the deposit with the
Auction Agent (not later than 12:00 Noon, New York City time, on the
date fixed for redemption thereby, in funds available on such date in
The City of New York, New York) of funds sufficient to redeem the
Preferred Shares that are the subject of such notice, dividends on such
shares shall cease to accumulate and such shares shall no longer be
deemed to be Outstanding for any purpose, and all rights of the Holders
of the shares so called for redemption shall cease and terminate
(including without limitation voting rights), except the right of such
Holders to
B-40
receive the Redemption Price, but without any interest or other
additional amount, except as provided in subparagraph 2(e)(iii) of this
Part I. Upon surrender in accordance with the Notice of Redemption of
the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Trustees shall so require and the Notice
of Redemption shall so state), the Redemption Price shall be paid by
the Auction Agent to the Holders of Preferred Shares subject to
redemption. In the case that fewer than all of the shares represented
by any such certificate are redeemed, a new certificate shall be
issued, representing the unredeemed shares, without cost to the Holder
thereof. The Trust shall be entitled to receive from the Auction Agent,
promptly after the date fixed for redemption, any cash deposited with
the Auction Agent in excess of:
(i) the aggregate Redemption Price of the Preferred
Shares called for redemption on such date, and
(ii) all other amounts to which Holders of Preferred
Shares called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end
of 90 days from such redemption date shall, to the extent
permitted by law, be repaid to the Trust, after which time
the Holders of Preferred Shares so called for redemption may
look only to the Trust for payment of the Redemption Price
and all other amounts to which they may be entitled. The
Trust shall be entitled to receive, from time to time after
the date fixed for redemption, any interest on the funds so
deposited.
(g) Compliance with Applicable Law. In effecting any
redemption pursuant to this paragraph 8, the Trust shall use its best
efforts to comply with all applicable conditions precedent to effecting
such redemption under the 1940 Act and any applicable Massachusetts
law, and shall effect no redemption except in accordance with the 1940
Act and any applicable Massachusetts law.
(h) Only Whole Preferred Shares May Be Redeemed. In the case
of any redemption pursuant to this paragraph 8, only whole Preferred
Shares shall be redeemed, and in the event that any provision of the
Declaration of Trust would require redemption of a fractional share,
the Auction Agent shall be authorized to round up so that only whole
shares are redeemed.
9. Liquidation Rights.
(a) Ranking. The Preferred Shares shall rank on a parity with
one another and with shares of any other series of preferred shares of
beneficial interest as to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust.
(b) Distributions upon Liquidation. Upon the dissolution,
liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, the Holders of
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Preferred Shares then outstanding shall be entitled to receive and to
be paid out of the assets of the Trust available for distribution to
its shareholders, before any payment or distribution shall be made on
the Common Shares or on any other class of shares of the Trust ranking
junior to the Preferred Shares upon dissolution, liquidation or winding
up, an amount equal to the Liquidation Preference with respect to such
shares plus an amount equal to all dividends thereon (whether or not
earned or declared) accumulated but unpaid to (but not including) the
date of final distribution in same-day funds. After the payment to the
Holders of the Preferred Shares of the full preferential amounts
provided for in this paragraph 9(b), the Holders of Preferred Shares as
such shall have no right or claim to any of the remaining assets of the
Trust.
(c) Pro Rata Distributions. In the event the assets of the
Trust available for distribution to the Holders of Preferred Shares
upon any dissolution, liquidation, or winding up of the affairs of the
Trust, whether voluntary or involuntary, shall be insufficient to pay
in full all amounts to which such Holders are entitled pursuant to
paragraph 9(b) of this Part I, no such distribution shall be made on
account of any shares of any other class or series of preferred shares
of beneficial interest ranking on a parity with the Preferred Shares
with respect to the distribution of assets upon such dissolution,
liquidation or winding up unless proportionate distributive amounts
shall be paid on account of the Preferred Shares, ratably, in
proportion to the full distributable amounts for which holders of all
such parity shares are respectively entitled upon such dissolution,
liquidation or winding up.
(d) Rights of Junior Shares. Subject to the rights of the
holders of shares of any series or class or classes of shares ranking
on a parity with the Preferred Shares with respect to the distribution
of assets upon dissolution, liquidation or winding up of the affairs of
the Trust, after payment shall have been made in full to the Holders of
the Preferred Shares as provided in paragraph 9(b) of this Part I, but
not prior thereto, any other series or class or classes of shares
ranking junior to the Preferred Shares with respect to the distribution
of assets upon dissolution, liquidation or winding up of the affairs of
the Trust shall, subject to the respective terms and provisions (if
any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the Holders of the Preferred
Shares shall not be entitled to share therein.
(e) Certain Events Not Constituting Liquidation. Neither the
sale of all or substantially all, or any portion of, the property or
business of the Trust, nor the merger or consolidation of the Trust
into or with any business trust or other entity nor the merger or
consolidation of any business trust or other entity into or with the
Trust shall be a dissolution, liquidation or winding up, whether
voluntary or involuntary, for the purposes of this paragraph 9.
10. Certain Other Restrictions. So long as any Preferred Shares are
Outstanding and Fitch or Moody's so requires, the Trust will not, unless it has
received written confirmation from Fitch (if Fitch is then rating the Preferred
Shares) and Moody's (if Moody's is then rating the Preferred
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Shares) that any such action would not impair the rating then assigned by such
Rating Agency to the Preferred Shares, engage in any one or more of the
following transactions:
(a) purchase or sell futures contracts or options thereon with
respect to portfolio securities or write put or call options on
portfolio securities;
(b) except in connection with a refinancing of the Preferred
Shares, issue additional shares of any series of preferred shares of
beneficial interest, including the Preferred Shares, or reissue any
preferred shares of beneficial interest, including any Preferred
Shares, previously purchased or redeemed by the Trust;
(c) engage in any short sales of securities;
(d) lend portfolio securities; or
(e) merge or consolidate into or with any other fund.
For purposes of determining Moody's Eligible Assets: (i) if the Trust
writes a call option, the underlying asset will be valued as follows: (A) if the
option is exchange-traded and may be offset readily or if the option expires
before the earliest possible redemption of the Preferred Shares, at the lower of
the Discounted Value of the underlying security of the option and the exercise
price of the option or (B) otherwise, it will be considered to have a value of
$0; (ii) if the Trust writes a put option, the underlying asset will be valued
as follows: the lesser of (A) the exercise price and (B) the Discounted Value of
the underlying security; and (iii) call or put option contracts which the Trust
buys will be considered to have a value of $0.
For so long as the Preferred Shares are rated by Moody's: (A) the Trust
will not engage in options transactions for leveraging or speculative purposes,
(B) the Trust will not write or sell any anticipatory contracts pursuant to
which the Trust hedges the anticipated purchase of an asset prior to completion
of such purchase; (C) the Trust will not enter into an option transaction with
respect to portfolio securities unless, after giving effect thereto, the Trust
would continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance Amount;
(D) the Trust will not enter into an option transaction with respect to
portfolio securities unless after giving effect to such transaction the Trust
would continue to be in compliance with the provisions of this Section 11.1
relating to the Preferred Shares Basic Maintenance Amount; (E) for purposes of
the Preferred Shares Basic Maintenance Amount, assets in margin accounts are not
Moody's Eligible Assets; (F) the Trust shall write only exchange-traded options
on exchanges approved by Moody's; (G) where delivery may be made to the Trust
with any one or more of a class of securities, the Trust shall assume for
purposes of the Preferred Shares Basic Maintenance Amount that it takes delivery
of that security which yields the lowest valuation; (H) the Trust will not
engage in forward contracts; and (I) there shall be a quarterly audit made of
the Trust's options transactions by the Independent Accountant to confirm that
the Trust is in compliance with these standards; provided, however, that the
audit referenced in the preceding clause shall not be required, with
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respect to a quarterly period, if the Trust has not engaged in options
transactions during such quarterly period.
11. Miscellaneous.
(a) No Fractional Shares. No fractional Preferred Shares shall
be issued.
(b) Status of Preferred Shares Redeemed, Exchanged or
Otherwise Acquired by the Trust. Preferred Shares which are redeemed,
exchanged or otherwise acquired by the Trust shall return to the status
of authorized and unissued preferred shares of beneficial interest
without designation as to series.
(c) Board May Resolve Ambiguities. To the extent permitted by
applicable law, the Trustees may interpret or adjust the provisions of
this Section 11.1 to resolve any inconsistency or ambiguity or to
remedy any formal defect, and may amend this Section 11.1 with respect
to the Preferred Shares prior to the issuance of the Preferred Shares.
(d) Heading Not Determinative. The headings contained in this
Section 11.1 are for convenience of reference only and shall not affect
the meaning or interpretation of this Section 11.1.
(e) Notices. All notices or communications to be given
pursuant to this Section 11.1, unless otherwise specified in this
Section 11.1, shall be sufficiently given if in writing and delivered
in person or mailed by first-class mail, postage prepaid.
PART II.
1. Orders. Unless otherwise permitted by the Trust, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through
their Broker-Dealers. Broker-Dealers will submit the Orders of their
respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves as Existing Holders
in respect of shares subject to Orders submitted or deemed submitted to
them by Beneficial Owners and as Potential Holders in respect of shares
subject to Orders submitted to them by Potential Beneficial Owners. A
Broker-Dealer may also hold in its own account as a Beneficial Owner;
provided, however, that a Broker-Dealer that is an Affiliate of the
Trust may not hold Preferred Shares in its own account as a Beneficial
Owner. A Broker-Dealer may thus submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore
participate in an Auction as an Existing Holder or Potential Holder on
behalf of both itself and its customers. A Broker-Dealer that is an
Affiliate of the Trust may submit Orders to the Auction Agent as
provided herein, but only if such Orders are not for its own account.
(a) Prior to the Submission Deadline on each Auction Date for
the Preferred Shares:
B-44
(i) each Beneficial Owner of Preferred Shares may submit to
its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding Preferred Shares, if
any, held by such Beneficial Owner which such Beneficial Owner
desires to continue to hold without regard to the Applicable
Rate for Preferred Shares for the next succeeding Rate Period;
(B) the number of Outstanding Preferred Shares, if
any, held by such Beneficial Owner which such Beneficial Owner
offers to sell if the Applicable Rate for Preferred Shares for
the next succeeding Rate Period for the Preferred Shares shall
be less than the rate per annum specified by such Beneficial
Owner; and/or
(C) the number of Outstanding Preferred Shares, if
any, held by such Beneficial Owner which such Beneficial Owner
offers to sell without regard to the Applicable Rate for the
Preferred Shares for the next succeeding Rate Period; and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith, for the purpose of conducting a
competitive Auction in a commercially reasonable manner, contact
Potential Beneficial Owners (by telephone or otherwise), including
Persons that are not Beneficial Owners, on such lists to determine the
number of Preferred Shares, if any, which each such Potential
Beneficial Owner offers to purchase if the Applicable Rate for
Preferred Shares for the next succeeding Rate Period shall not be less
than the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C) or
(ii) of this paragraph 1(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."
Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder or
a Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.
B-45
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of
Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding Preferred Shares
specified in such Bid if the Applicable Rate for Preferred
Shares determined on such Auction Date shall be less than the
rate specified therein;
(B) such number or a lesser number of Outstanding
Preferred Shares to be determined as set forth in clause (iv)
of paragraph 4(a) of this Part II if the Applicable Rate for
Preferred Shares determined on such Auction Date shall be
equal to the rate specified therein; or
(C) the number of Outstanding Preferred Shares
specified in such Bid if the rate specified therein shall be
higher than the Maximum Rate for Preferred Shares, or such
number or a lesser number of Outstanding Preferred Shares to
be determined as set forth in clause (iii) of paragraph 4(b)
of this Part II if the rate specified therein shall be higher
than the Maximum Rate for Preferred Shares and Sufficient
Clearing Bids for the Preferred Shares do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder
of Preferred Shares Preferred Shares subject to an Auction on any
Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding Preferred Shares
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding
Preferred Shares as set forth in clause (iii) of paragraph
4(b) of this Part II if Sufficient Clearing Bids for the
Preferred Shares do not exist; provided, however, that a
Broker-Dealer that is an Existing Holder with respect to
Preferred Shares shall not be liable to any Person for failing
to sell such shares pursuant to a Sell Order described in the
proviso to paragraph 2(c) 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
Trust) with the provisions of paragraph 5 of this Part II or
(2) such Broker-Dealer reasonably believes it is not the
Existing Holder of such shares, and such Broker-Dealer has
informed the Auction Agent of such belief pursuant to the
terms of its Broker-Dealer Agreement.
(iii) A Bid by a Potential Beneficial Holder or a Potential
Holder of Preferred Shares subject to an Auction on any Auction Date
shall constitute an irrevocable offer to purchase:
B-46
(A) the number of Outstanding Preferred Shares
specified in such Bid if the Applicable Rate for Preferred
Shares determined on such Auction Date shall be higher than
the rate specified therein; or
(B) such number or a lesser number of Outstanding
Preferred Shares as set forth in clause (v) of paragraph 4(a)
of this Part II if the Applicable Rate for Preferred Shares
determined on such Auction Date shall be equal to the rate
specified therein.
(c) No Order for any number of Preferred Shares other than
whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing or through the
Auction Agent's auction processing system to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for Preferred
Shares subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the
Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it
by Potential Beneficial Owners, and shall specify with respect to each
Order for such shares:
(i) the name of the Bidder placing such Order (which
shall be the Broker- Dealer unless otherwise permitted by the
Trust);
(ii) the aggregate number of Outstanding Preferred
Shares that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing
Holder of Preferred Shares:
(A) the number of Preferred Shares, if any,
subject to any Hold Order of such Existing Holder;
(B) the number of Preferred Shares, if any,
subject to any Bid of such Existing Holder and the
rate specified in such Bid; and
(C) the number of Preferred Shares, if any,
subject to any Sell Order of such Existing Holder;
and
(iv) to the extent such Bidder is a Potential Holder
of Preferred Shares, the rate and number of Preferred Shares
specified in such Potential Holder's Bid.
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(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the outstanding
Preferred Shares held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted by or on behalf of such
Existing Holder covering the number of Outstanding Preferred Shares
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 Preferred Shares held by any Existing Holder is
not submitted to the Auction Agent prior to the Submission Deadline for
an Auction relating to a Special Rate Period consisting of more than 91
Rate Period Days, the Auction Agent shall deem a Sell Order to have
been submitted by or on behalf of such Existing Holder covering the
number of Outstanding Preferred Shares 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 are submitted
to the Auction Agent covering in the aggregate more than the number of
Outstanding Preferred Shares subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following
order of priority:
(i) all Hold Orders shall be considered valid, but
only up to and including in the aggregate the number of
Outstanding Preferred Shares held by such Existing Holder, and
if the number of Preferred Shares subject to such Hold Orders
exceeds the number of Outstanding Preferred Shares held by
such Existing Holder, the number of shares subject to each
such Hold Order shall be reduced pro rata to cover exactly the
number of Outstanding Preferred Shares held by such Existing
Holder;
(ii) (A) any Bid shall be considered valid up to and
including the excess of the number of Outstanding Preferred
Shares held by such Existing Holder over the Preferred Shares
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 Preferred Shares is
submitted to the Auction Agent with the same rate and
the number of Outstanding Preferred Shares subject to
such Bids is greater than the excess of the number of
Outstanding Preferred Shares held by such Existing
Holder over the Preferred Shares subject to any Hold
Orders referred to in clause (i) above, such Bids
shall be considered valid up to and including the
amount of such excess, and the number of Preferred
Shares subject to each Bid with the same rate shall
be
B-48
reduced pro rata to cover exactly the number of
Preferred Shares equal to such excess;
(C) subject to subclauses (A) and (B), if
more than one Bid of an Existing Holder for Preferred
Shares is submitted to the Auction Agent with
different rates, such Bids shall be considered valid
in the ascending order of their respective rates up
to and including the amount of the excess of the
number of Outstanding Preferred Shares held by such
Existing Holder over the Preferred Shares subject to
any Hold Orders referred to in clause (i) above; and
(D) in any such event, the number, if any,
of such Outstanding Preferred Shares subject to any
portion of Bids considered not valid in whole or in
part under this clause (ii) shall be treated as the
subject of a Bid for Preferred Shares by or on behalf
of a Potential Holder at the rate therein specified;
and
(iii) all Sell Orders shall be considered valid up to
and including the excess of the number of Outstanding
Preferred Shares held by such Existing Holder over the sum of
the Preferred Shares 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 is submitted to the Auction Agent by
or on behalf of any Potential Holder, each such Bid submitted shall be
a separate Bid, with the rate and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date,
shall be irrevocable.
(g) The Trust shall not be responsible for a Broker-Dealer's
failure to act in accordance with the instructions of Beneficial Owners
or Potential Beneficial Owners or failure to comply with the Auction
Procedures contained in this Part II of Section 11.1.
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction
Date for the Preferred Shares, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers
(each such Order as submitted or deemed submitted by a Broker-Dealer
being hereinafter referred to individually as a "Submitted Hold Order,"
a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order" and collectively as "Submitted Hold Orders,"
"Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine:
B-49
(i) the excess of the number of Outstanding Preferred Shares
over the number of Outstanding Preferred Shares subject to Submitted
Hold Orders (such excess being hereinafter referred to as the
"Available Preferred Shares");
(ii) from the Submitted Orders whether:
(A) the number of Outstanding Preferred Shares
subject to Submitted Bids of Potential Holders specifying one
or more rates equal to or lower than the Maximum Rate; exceeds
or is equal to the sum of:
(B) the number of Outstanding Preferred Shares
subject to Submitted Bids of Existing Holders specifying one
or more rates higher than the Maximum Rate; and
(C) the number of Outstanding Preferred Shares
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of Preferred Shares in subclauses (B) and
(C) above is zero because all of the Outstanding Preferred
Shares are subject to Submitted Hold Orders), such Submitted
Bids in subclause (A) above being hereinafter referred to
collectively as "Sufficient Clearing Bids"); and
(iii) if Sufficient Clearing Bids exist, the lowest rate
specified in such Submitted Bids (the "Winning Bid Rate") which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying the Winning Bid 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 Preferred Shares that are subject to such Submitted
Bids; and
(B) (I) each such Submitted Bid of Potential Holders
specifying such Winning Bid Rate and (II) all other such
Submitted Bids of Potential Holders specifying lower rates
were accepted, thus entitling such Potential Holders to
purchase the number of Preferred Shares that are subject to
such Submitted Bids;
would result in such Existing Holders described in subclause
(A) above continuing to hold an aggregate number of
Outstanding Preferred Shares which, when added to the number
of Outstanding Preferred Shares to be purchased by such
Potential Holders described in subclause (B) above, would
equal not less than the Available Preferred Shares.
B-50
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph 3(a) of this Part II, the Auction
Agent shall advise the Trust of the Maximum Rate for the Preferred
Shares for which an Auction is being held on the Auction Date and,
based on such determination, the Applicable Rate for Preferred Shares
for the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for Preferred Shares
exist, that the Applicable Rate for all Preferred Shares for
the next Succeeding Rate Period thereof shall be equal to the
Winning Bid Rate so determined;
(ii) if Sufficient Clearing Bids do not exist (other
than because all of the Outstanding Preferred Shares are
subject to Submitted Hold Orders), that the Applicable Rate
for all Preferred Shares for the next succeeding Rate Period
thereof shall be equal to the Maximum Rate; or
(iii) if all of the Outstanding Preferred Shares are
subject to Submitted Hold Orders, that the Dividend Period
next succeeding the Auction shall automatically be the same
length as the immediately preceding Dividend Period and the
Applicable Rate for all Preferred Shares for the next
succeeding Dividend Period thereof shall be 80% of the
Reference Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares.
Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph 3(a) of this Part II, the Submitted Bids and Submitted Sell Orders
shall be accepted or rejected by the Auction Agent and the Auction Agent shall
take such other action as set forth below:
(a) If Sufficient Clearing Bids have been made, all Submitted
Sell Orders shall be accepted and, subject to the provisions of
paragraphs 4(d) and 4(e) of this Part II, Submitted Bids shall be
accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(i) Existing Holders' Submitted Bids specifying any
rate that is higher than the Winning Bid Rate shall be
accepted, thus requiring each such Existing Holder to sell the
Preferred Shares subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids specifying any
rate that is lower than the Winning Bid Rate shall be
rejected, thus entitling each such Existing Holder to continue
to hold the Preferred Shares subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids specifying
any rate that is lower than the Winning Bid Rate shall be
accepted;
B-51
(iv) Each Existing Holder's Submitted Bid specifying
a rate that is equal to the Winning Bid Rate shall be
rejected, thus entitling such Existing Holder to continue to
hold the Preferred Shares subject to such Submitted Bid,
unless the number of Outstanding Preferred Shares subject to
all such Submitted Bids shall be greater than the number of
Preferred Shares ("Remaining Shares") equal to the excess of
the Available Preferred Shares over the number of Preferred
Shares subject to Submitted Bids described in clauses (ii) and
(iii) of this paragraph 4(a), in which event such Submitted
Bid of such Existing Holder shall be rejected in part, and
such Existing Holder shall be entitled to continue to hold
Preferred Shares subject to such Submitted Bid, but only in an
amount equal to the number of Preferred Shares obtained by
multiplying the number of Remaining Shares by a fraction, the
numerator of which shall be the number of Outstanding
Preferred Shares held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding Preferred Shares subject to
such Submitted Bids made by all such Existing Holders that
specified a rate equal to the Winning Bid Rate; and
(v) each Potential Holder's Submitted Bid specifying
a rate that is equal to the Winning Bid Rate shall be accepted
but only in an amount equal to the number of Preferred Shares
obtained by multiplying the number of shares in the excess of
the Available Preferred Shares over the number of Preferred
Shares subject to Submitted Bids described in clauses (ii)
through (iv) of this paragraph 4(a) by a fraction, the
numerator of which shall be the number of Outstanding
Preferred Shares subject to such Submitted Bid and the
denominator of which shall be the aggregate number of
Outstanding Preferred Shares subject to such Submitted Bids
made by all such Potential Holders that specified a rate equal
to the Winning Bid Rate.
(b) If Sufficient Clearing Bids have not been made (other than
because all of the Outstanding Preferred Shares are subject to
Submitted Hold Orders), subject to the provisions of paragraph 4(d) of
this Part II, Submitted Orders shall be accepted or rejected as follows
in the following order of priority and all other Submitted Bids shall
be rejected:
(i) Existing Holders' Submitted Bids specifying any
rate that is equal to or lower than the Maximum Rate shall be
rejected, thus entitling such Existing Holders to continue to
hold the Preferred Shares subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids specifying any
rate that is equal to or lower than the Maximum Rate shall be
accepted; and
(iii) Each Existing Holder's Submitted Bid specifying
any rate that is higher than the Maximum Rate and the
Submitted Sell Orders of each Existing Holder shall be
accepted, thus entitling each Existing Holder that submitted
or on
B-52
whose behalf was submitted any such Submitted Bid or Submitted
Sell Order to sell the shares subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount
equal to the number of Preferred Shares obtained by
multiplying the number of Preferred Shares subject to
Submitted Bids described in clause (ii) of this paragraph (b)
by a fraction, the numerator of which shall be the number of
Outstanding Preferred Shares held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the aggregate number of
Outstanding Preferred Shares subject to all such Submitted
Bids and Submitted Sell Orders.
(c) If all of the Outstanding Preferred Shares are subject to
Submitted Hold Orders, all Submitted Bids shall be rejected.
(d) If, as a result of the procedures described in clause (iv)
or (v) of paragraph 4(a) or clause (iii) of paragraph 4(b) of this Part
II, 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 Preferred Share on any Auction Date, the Auction Agent shall, in
such manner as it shall determine in its sole discretion, round up or
down the number of Preferred Shares to be purchased or sold by any
Existing Holder or Potential Holder on such Auction Date as a result of
such procedures so that the number of shares so purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be
whole Preferred Shares.
(e) If, as a result of the procedures described in clause (v)
of paragraph 4(a) of this Part II, any Potential Holder would be
entitled or required to purchase less than a whole Preferred Share on
any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, allocate Preferred Shares for
purchase among Potential Holders so that only whole shares of Preferred
Shares are purchased on such Auction Date as a result of such
procedures by any Potential Holder, even if such allocation results in
one or more Potential Holders not purchasing Preferred Shares on such
Auction Date.
(f) Based on the results of each Auction, the Auction Agent
shall determine the aggregate number of Preferred Shares to be
purchased and the aggregate number of Preferred Shares to be sold by
Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of shares to
be sold differ, determine to which other Potential Holder(s) or
Existing Holder(s) they shall deliver, or from which other Potential
Holder(s) or Existing Holder(s) they shall receive, as the case may be,
Preferred Shares. Notwithstanding any provision of the Auction
Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner 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
B-53
shares against payment therefor, partial deliveries of Preferred Shares
that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids that have been accepted in whole or
in part shall constitute good delivery to such Potential Holders and
Potential Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate
of either shall have any responsibility or liability with respect to
the failure of an Existing Holder, a Potential Holder, a Beneficial
Owner, a Potential Beneficial Owner or its respective Agent Member to
deliver Preferred Shares or to pay for Preferred Shares sold or
purchased pursuant to the Auction Procedures or otherwise.
5. Transfer of Preferred Shares.
Unless otherwise permitted by the Trust, a Beneficial Owner or an
Existing Holder may sell, transfer or otherwise dispose of Preferred Shares only
in whole shares and only pursuant to a Bid or Sell Order placed with the Auction
Agent in accordance with the procedures described in this Part II or to a
Broker-Dealer; provided, however, that (a) a sale, transfer or other disposition
of Preferred Shares from a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer as the holder of such shares to that Broker-Dealer
or another customer of that Broker-Dealer shall not be deemed to be a sale,
transfer or other disposition for purposes of this paragraph 5 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 Trust) to whom such transfer is made shall
advise the Auction Agent of such transfer.
6. Global Certificate.
Prior to the commencement of a Voting Period, (i) all of the Preferred
Shares outstanding from time to time shall be represented by one global
certificate registered in the name of the Securities Depository or its nominee
and (ii) no registration of transfer of Preferred Shares shall be made on the
books of the Trust to any Person other than the Securities Depository or its
nominee.
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 due to an act of God, natural disaster, extreme
weather, act of war, civil or military disturbance, act of terrorism,
sabotage, riots or a loss or malfunction of utilities or communications
services, or if the Auction Agent is not able to conduct an Auction in
accordance with the Auction Procedures for any such reason, then the
Applicable Rate for the next Dividend Period shall be the Applicable
Rate determined on the previous 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
B-54
due to an act of God, natural disaster, extreme weather, act of war,
civil or military disturbance, act of terrorism, sabotage, riots or a
loss or malfunction of utilities or communications services, or if 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 shall be the next Business Day on which the
Trust and the Auction Agent are able to cause the dividend to
be paid using commercially reasonable best efforts;
(ii) The affected Dividend Period shall 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
8. Auction Agent. For so long as any Preferred Shares are outstanding,
the Auction Agent, duly appointed by the Trust so to act, shall be in each case
a commercial bank, trust company or other institution independent of the Trust
and its Affiliates (which, however, may engage or have engaged in business
transactions with the Trust or its Affiliates), and at no time shall the Trust
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 Preferred Shares are outstanding, the
Trustees shall attempt to appoint another qualified commercial bank, trust
company or other institution to act as the Auction Agent. The Auction Agent's
registry of Existing Holders of the Preferred Shares shall be conclusive and
binding on the Broker-Dealers.
B-55