AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 2004
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-10481
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] AMENDMENT NO. 10
-------------------
COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
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757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 832-3232
ROBERT H. STEERS
COHEN & STEERS CAPITAL MANAGEMENT, INC.
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(212) 832-3232
(NAME AND ADDRESS OF AGENT FOR SERVICE)
-------------------
WITH COPIES TO:
SARAH E. COGAN, ESQ.
SIMPSON THACHER & BARTLETT LLP
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
-------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF REGISTRATION
BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(1)
Series Preferred Shares, par value
$0.001.............................. 40 $25,000 $1,000,000 $126.70
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
THIS FILING CONTAINS ONLY THE EXHIBITS THAT HAVE NOT BEEN PREVIOUSLY FILED.
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FORM N-2 REFERENCE SHEET
PART A -- PROSPECTUS
ITEM IN PART A OF FORM N-2
SPECIFIED IN PROSPECTUS LOCATION IN PROSPECTUS
----------------------- ----------------------
Item 1. Outside Front Cover.................................. Cover Page
Item 2. Inside Front and Outside Back Cover Page............. Cover Page; Inside Front Cover
Page; Outside Back Cover Page
Item 3. Fee Table and Synopsis............................... Inapplicable
Item 4. Financial Highlights................................. Financial Highlights
Item 5. Plan of Distribution................................. Cover Page; Prospectus Summary;
Underwriting
Item 6. Selling Stockholders................................. Inapplicable
Item 7. Use of Proceeds...................................... Use of Proceeds; Investment
Objectives and Policies
Item 8. General Description of the Registrant................ Cover Page; Prospectus Summary;
The Fund; Investment Objectives
and Policies; Risk Factors; How
the Fund Manages Risk
Item 9. Management........................................... Prospectus Summary; Management of
the Fund; How the Fund Manages
Risk
Item 10. Capital Stock, Long-term Debt, and Other
Securities......................................... Capitalization; Investment
Objectives and Policies; Federal
Taxation; Description of
Preferred Shares; Description of
Common Shares
Item 11. Defaults and Arrears on Senior Securities............ Inapplicable
Item 12. Legal Proceedings.................................... Inapplicable
Item 13. Table of Contents of the Statement of Additional
Information........................................ Table of Contents of the Statement
of Additional Information
PART B -- STATEMENT OF ADDITIONAL INFORMATION
LOCATION IN STATEMENT
ITEMS IN PART B OF FORM N-2 OF ADDITIONAL INFORMATION
--------------------------- -------------------------
Item 14. Cover Page........................................... Cover Page
Item 15. Table of Contents.................................... Table of Contents
Item 16. General Information and History...................... General Information
Item 17. Investment Objectives and Policies................... Additional Information about Fund
Investment Objectives and
Policies; Investment
Restrictions
Item 18. Management........................................... Management of the Fund;
Compensation of Directors
Item 19. Control Persons and Principal Holders of
Securities......................................... Management of the Fund
Item 20. Investment Advisory and Other Services............... Investment Advisory and Other
Services
Item 21. Brokerage Allocation and Other Practices............. Portfolio Transactions and
Brokerage; Determination of Net
Asset Value
Item 22. Tax Status........................................... Federal Taxation
Item 23. Financial Statements................................. Report of Independent Auditors;
Financial Statements
PART C -- OTHER INFORMATION
Item 24-33. have been answered in Part C of this Registration Statement
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2004
PROSPECTUS
[COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]
$
COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
AUCTION RATE PREFERRED SHARES
SHARES, SERIES
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') is offering
Series Auction Rate Preferred Shares. The shares are referred to in this
prospectus as 'Preferred Shares.' The Fund is a non-diversified, closed-end
management investment company. The Fund's primary investment objective is high
current income through investment in real estate securities and its secondary
investment objective is capital appreciation. Under normal market conditions,
the Fund will invest at least 90% of its total assets in common stocks,
preferred stocks and other equity securities issued by real estate companies,
such as 'real estate investment trusts' ('REITs'). At least 80% of the Fund's
total assets will be invested in income producing equity securities issued by
high quality REITs. The Fund may invest up to 10% of its total assets in debt
securities issued or guaranteed by real estate companies. The Fund will not
invest more than 20% of its total assets in non-investment grade preferred stock
or debt securities (commonly known as 'junk bonds'). There can be no assurance
that the Fund will achieve its investment objectives. See 'Investment Objectives
and Policies.' The Fund's investment manager is Cohen & Steers Capital
Management, Inc.
(continued on following page)
INVESTING IN PREFERRED SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE 'RISK
FACTORS' SECTION BEGINNING ON PAGE 24 OF THIS PROSPECTUS. THE MINIMUM PURCHASE
AMOUNT OF THE PREFERRED SHARES IS $25,000.
-----------------
PER SHARE TOTAL
--------- -----
Public offering price....................................... $25,000 $
Sales load.................................................. $ $
Proceeds to the Fund(1)..................................... $ $
(1) Not including offering expenses payable by the Fund estimated to be
$ .
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares are
first issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the Preferred Shares subject to various
conditions. The Preferred Shares will be ready for delivery in book-entry form
only through the facilities of The Depository Trust Company, on or about
, 2004.
-----------------
The date of this prospectus is , 2003.
Investors in the Preferred Shares will be entitled to receive cash dividends
at an annual rate that may vary for the successive dividend periods for the
Preferred Shares. Preferred Shares have a liquidation preference of $25,000 per
share, plus any accumulated, unpaid dividends. Preferred Shares also have
priority over the Fund's common shares as to distribution of assets as described
in this Prospectus. See 'Description of Preferred Shares.' As of ,
2004, the Fund has outstanding 13,600 shares of five other series of preferred
stock -- 2,800 Series T AMPS, par value $.001 per share (the 'Series T AMPS'),
2,800 Series W AMPS, par value $.001 per share (the 'Series W AMPS'), 2,800
Series TH AMPS, par value $.001 per share (the 'Series TH AMPS'), 2,800
Series F AMPS, par value $.001 per share (the 'Series F AMPS'), and 2,400 Series
M28 AMPS, par value $.001 per share (the 'Series M28 AMPS'). 'AMPS' refers to
Taxable Auction Market Preferred Shares. The Preferred Shares offered in this
Prospectus rank on a parity with the Series T AMPS, Series W AMPS, Series TH
AMPS Series F AMPS and Series M28 AMPS, with respect to dividends and
liquidation preference. The Preferred Shares have priority over the Fund's
common shares as to dividends and distribution of assets as described in this
Prospectus. See 'Description of Preferred Shares.' The dividend rate for the
initial dividend period will be % for the Preferred Shares. The initial
dividend period is from the date of issuance through , 2004 for the
Preferred Shares. For subsequent dividend periods, the Preferred Shares will pay
dividends based on a rate set at auction, usually held every 7 days. Prospective
purchasers should note: (1) a buy order (called a 'bid order') or sell order is
a commitment to buy or sell the Preferred Shares based on the results of an
auction; and (2) purchases and sales will be settled on the next business day
after the auction. Investors may only buy or sell the Preferred Shares through
an order placed at an auction with or through a broker-dealer in accordance with
the procedures specified in this Prospectus. Broker-dealers are not required to
maintain a secondary market in the Preferred Shares, and a secondary market may
not provide you with liquidity. The Fund may redeem the Preferred Shares as
described under 'Description of Preferred Shares -- Redemption.'
The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution,
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
The Preferred Shares will be senior to the Fund's outstanding common shares.
The Preferred Shares are not listed on an exchange. The Fund's common shares are
traded on the New York Stock Exchange (the 'NYSE') under the symbol 'RQI.' It is
a condition of closing this offering that the Preferred Shares be offered with a
rating of 'AAA' from Standard & Poor's Ratings Services Group, a division of The
McGraw-Hill Companies, Inc. ('S&P') and of 'Aaa' from Moody's Investors Service,
Inc. ('Moody's').
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 4
Financial Highlights........................................ 16
The Fund.................................................... 18
Use of Proceeds............................................. 18
Capitalization.............................................. 19
Investment Objectives and Policies.......................... 20
Use of Leverage............................................. 22
Risk Factors................................................ 24
How the Fund Manages Risk................................... 30
Management of the Fund...................................... 32
Description of Preferred Shares............................. 34
The Auction................................................. 42
Description of Common Shares................................ 46
Certain Provisions of the Charter and By-Laws............... 46
Conversion to Open-End Fund................................. 48
Repurchase of Common Shares................................. 48
U.S. Federal Taxation....................................... 49
Underwriting................................................ 53
Custodian, Auction Agent, Transfer Agent, Dividend Paying
Agent and Registrar....................................... 54
Legal Opinions.............................................. 54
Independent Registered Public Accounting Firm............... 54
Further Information......................................... 54
Table of Contents for the Statement of Additional
Information............................................... 55
-------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE 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. WE HAVE 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. OUR BUSINESS, FINANCIAL CONDITION AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE.
This Prospectus sets forth concisely information about the Fund you should
know before investing. You should read the Prospectus before deciding whether to
invest and retain it for future reference. A Statement of Additional
Information, dated , 2004, containing additional information about
the Fund, has been filed with the Securities and Exchange Commission and is
incorporated by reference in its entirety into (which means it is considered
part of) this Prospectus. You can review the table of contents of the SAI on
page 55 of this Prospectus. You may request a free copy of the SAI by calling
(800) 437-9912. You may also obtain the SAI and other information regarding the
Fund on the Securities and Exchange Commission website (http://www.sec.gov).
3
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the information
that you should consider before investing in Preferred Shares. You should review
the more detailed information contained in this Prospectus and in the SAI,
especially the information set forth under the heading 'Risk Factors.'
THE FUND..................................... The Cohen & Steers Quality Income Realty Fund, Inc.
(the 'Fund') is a non-diversified, closed-end
management investment company. The Fund was organized
as a Maryland corporation on August 22, 2001 and is
registered under the Investment Company Act of 1940,
as amended (the '1940 Act'). The Fund commenced
investment operations on February 28, 2002 upon the
closing of an initial public offering of 34,000,000
common shares, par value $.001 per share ('Common
Shares'). The Fund issued 2,800 Series T AMPS, 2,800
Series W AMPS, 2,800 Series TH AMPS and 2,800
Series F AMPS on April 4, 2002. The Fund issued
2,400 Series M28 AMPS on September 15, 2003. 'AMPS'
refers to Taxable Auction Market Preferred Shares. As
of , 2004, the Fund had Common
Shares outstanding and net assets, plus the
liquidation value of the Series T AMPS, Series W
AMPS, Series TH AMPS, Series F AMPS and Series M28
AMPS, of $ . The Fund's principal office is
located at 757 Third Avenue, New York, New York
10017, and its telephone number is (212) 832-3232.
THE OFFERING................................. The Fund is offering Series Preferred Shares, par
value $.001 (the 'Preferred Shares'), at a purchase
price of $25,000 per share plus dividends, if any,
that have accumulated from the date the Fund first
issues the Preferred Shares. The Preferred Shares are
offered through a group of underwriters led by
.
The Preferred Shares entitle their holders to receive
cash dividends at an annual rate that may vary for
the successive dividend periods for the Preferred
Shares. In general, except as described under
' -- Dividends and Rate Periods' below and
'Description of Preferred Shares -- Dividends and
Rate Periods,' the dividend period for the Preferred
Shares will be 7 days. The auction agent will
determine the dividend rate for a particular period
by an auction conducted on the
4
business day immediately prior to the start of that
rate period. See 'The Auction.'
The Preferred Shares are not listed on an exchange.
Instead, investors may buy or sell the Preferred
Shares in an auction by submitting orders to
broker-dealers that have entered into an agreement
with the auction agent and the Fund.
Generally, investors in the Preferred Shares will not
receive certificates representing ownership of their
shares. The securities depository (The Depository
Trust Company or any successor) or its nominee for
the account of the investor's broker-dealer will
maintain record ownership of the Preferred Shares in
book-entry form. An investor's broker-dealer, in
turn, will maintain records of that investor's
beneficial ownership of the Preferred Shares.
RATINGS...................................... The Fund will issue the Preferred Shares only if such
shares have received a credit quality rating of 'AAA'
from S&P and 'Aaa' from Moody's. These ratings are an
assessment of the capacity and willingness of an
issuer to pay preferred stock obligations. The
ratings are not a recommendation to purchase, hold or
sell those shares inasmuch as the rating does not
comment as to the market price or suitability for a
particular investor. The rating agency guidelines
described above also do not address the likelihood
that an owner of the Preferred Shares will be able to
sell such shares in an auction or otherwise. The
ratings are based on current information furnished to
Moody's and S&P by the Fund and the Investment
Manager and information obtained from other sources.
The ratings may be changed, suspended or withdrawn
from other sources in the rating agencies' discretion
as a result of changes in, or the unavailability of,
such information.
USE OF PROCEEDS.............................. The net proceeds of this offering, together with the
proceeds from our initial public offering and
previous offerings of our outstanding AMPS will be
invested in accordance with the policies set forth
under 'Investment Objectives and Policies.' We
estimate that the net proceeds of this offering will
be fully invested in accordance with our investment
objectives and policies within four months of the
completion of this offering.
5
We intend to invest in preferred stocks and equity
securities issued by real estate companies such as
REITs. Pending such investment, those proceeds may be
invested in U.S. Government securities or high
quality, short-term money market instruments.
INVESTMENT OBJECTIVES AND POLICIES........... Our primary investment objective is high current
income through investment in real estate securities.
Capital appreciation is a secondary investment
objective. Our investment objectives and certain
investment policies are considered fundamental and
may not be changed without stockholder approval. See
'Investment Objectives and Policies.'
Under normal market conditions, the Fund will invest
at least 90% of our total assets in common stocks,
preferred stocks and other equity securities issued
by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of the
Fund's total assets will be invested in income
producing equity securities issued by high quality
REITs, and substantially all of the equity securities
of real estate companies in which we intend to invest
are traded on a national securities exchange or in
the over-the-counter market. High quality REITs are
companies that, in the opinion of the Investment
Manager, offer excellent prospects for consistent,
above-average revenue and earnings growth. To
determine whether a company is of high quality, the
Investment Manager generally looks to a strong record
of earnings growth, as well as to a company's current
ratio of debt to capital and the quality of its
management. All of the REITs in which the Fund will
invest will have a market capitalization greater than
$100 million. A real estate company generally derives
at least 50% of its revenue from real estate or has
at least 50% of its assets in real estate. A REIT is
a company dedicated to owning, and usually operating,
income producing real estate, or to financing real
estate. REITs are generally not taxed on income
distributed to stockholders provided they distribute
to their stockholders substantially all of their
income and otherwise comply with the requirements of
the Internal Revenue Code of 1986, as amended (the
'Code'). As a result, REITs generally pay relatively
high dividends (as compared to other types of
companies) and the Fund
6
intends to use these REIT dividends in an effort to
meet its objective of high current income. The Fund
may invest up to 10% of our total assets in debt
securities issued or guaranteed by real estate
companies. The Fund currently invests approximately %
of its total assets in common stocks of real estate
companies and approximately % of the Fund's total
assets in preferred stocks of real estate companies,
although the actual percentage of common and
preferred stocks in our investment portfolio may vary
over time. The Fund will not invest more than 20% of
the Fund's total assets in preferred stock or debt
securities rated below investment grade (commonly
known as 'junk bonds') or unrated securities of
comparable quality. Preferred stock or debt
securities will be considered to be investment grade
if, at the time of investment, such security has a
rating of 'BBB' or higher by S&P, 'Baa' or higher by
Moody's or an equivalent rating by a nationally
recognized statistical rating agency. The Investment
Manager may also invest in preferred stock or debt
securities which are unrated but which, in the
opinion of the Investment Manager, are determined to
be of equivalent quality. All of the Fund's
investments will be in securities of U.S. issuers and
we will generally not invest more than 10% of the
Fund's total assets in the securities of one issuer.
There can be no assurance that the Fund's investment
objectives will be achieved. See 'Investment
Objectives and Policies.'
INVESTMENT MANAGER........................... Cohen & Steers Capital Management, Inc. (the
'Investment Manager') is the investment manager of
the Fund pursuant to an Investment Management
Agreement. The Investment Manager, which was formed
in 1986, is a leading firm specializing in the
management of real estate securities portfolios and
as of July 14, 2004 had approximately $15.1 billion
in assets under management. Its clients include
pension plans, endowment funds and mutual funds,
including some of the largest open-end and closed-end
real estate funds. The Investment Manager, whose
principal business address is 757 Third Avenue, New
York, New York 10017, is also responsible for
providing administrative services, and assisting the
Fund with operational needs pursuant to an
administration agreement (the
7
'Administration Agreement'). In accordance with the
terms of the Administration Agreement, the Fund has
entered into an agreement with State Street Bank and
Trust Company ('State Street Bank') to perform
certain administrative functions subject to the
supervision of the Investment Manager (the
'Sub-Administration Agreement'). See 'Management of
the Fund -- Administration and Sub-Administration
Agreement.'
USE OF LEVERAGE.............................. The Fund may, but is not required to, use financial
leverage for investment purposes. In addition to
issuing Preferred Shares, the Fund may borrow money
or issue debt securities such as commercial paper or
notes. Any such borrowings will have seniority over
the Preferred Shares, and payments to holders of the
Preferred Shares in liquidation or otherwise will be
subject to the prior payment of any borrowings. Since
the Investment Manager's fee is based upon a
percentage of the Fund's managed assets, which
include assets attributable to any outstanding
leverage, the investment management fee will be
higher if the Fund is leveraged and the Investment
Manager will have an incentive to be more aggressive
and leverage the Fund. See 'Use of Leverage.'
PRINCIPAL INVESTMENT RISKS................... Risk is inherent in all investing. Therefore, before
investing in the Preferred Shares and the Fund you
should consider certain risks carefully. The primary
risks of investing in the Preferred Shares are:
the Fund will not be permitted to declare dividends
or other distributions with respect to your Preferred
Shares or redeem your Preferred Shares unless the
Fund meets certain asset coverage requirements
required by the 1940 Act and the rating agencies;
if you try to sell your Preferred Shares between
auctions you may not be able to sell any or all of
your shares or you may not be able to sell them for
$25,000 per share or $25,000 per share plus
accumulated but unpaid dividends, if any, whether or
not earned or declared. If the Fund has designated a
special rate period, changes in interest rates could
affect the price you would receive if you sold your
shares in the secondary market. You may transfer
your shares outside of auctions only to or through a
broker-dealer that has entered into an agreement
with
8
the auction agent and the Fund or other person as
the Fund permits.
if an auction fails, you may not be able to sell some
or all of your Preferred Shares;
you may receive less than the price you paid for your
Preferred Shares if you sell them outside of the
auction, especially when market interest rates are
rising;
a rating agency could downgrade the rating assigned
to the Preferred Shares, which could affect
liquidity;
the Fund may be forced to redeem your Preferred
Shares to meet regulatory or rating agency
requirements or may voluntarily redeem your shares
in certain circumstances;
restrictions imposed by the 1940 Act and by rating
agencies on the declaration and payment of dividends
to the holders of the Fund's Common Shares and
Preferred Shares might impair the Fund's ability to
maintain its qualification as a regulated investment
company for federal income tax purposes;
in certain circumstances the Fund may not earn
sufficient income from its investments to pay
dividends on the Preferred Shares;
the Preferred Shares will be junior to any
borrowings;
any borrowings may constitute a substantial lien and
burden on the Preferred Shares by reason of its
priority claim against the income of the Fund and
against the net assets of the Fund in liquidation;
if the Fund leverages through borrowings, the Fund
may not be permitted to declare dividends or other
distributions with respect to the Preferred Shares
or purchase Preferred Shares unless at the time
thereof the Fund meets certain asset coverage
requirements and the payments of principal and of
interest on any such borrowings are not in default;
the value of the Fund's investment portfolio may
decline, reducing the asset coverage for the
Preferred Shares; and
if an issuer of a common stock in which the Fund
invests experiences financial difficulties or if an
issuer's preferred stock or debt security is
downgraded or
9
defaults or if an issuer in which the Fund invests
is affected by other adverse market factors, there
may be a negative impact on the income and/or asset
value of the Fund's investment portfolio.
In addition, although the offering of the Preferred
Shares is conditioned upon receipt of ratings of
'AAA' from S&P and 'Aaa' from Moody's for the
Preferred Shares, there are additional risks related
to the investment policies of the Fund, such as:
Real Estate Risks. Since we concentrate our assets in
the real estate industry, the Fund's investments will
be closely linked to the performance of the real
estate markets. Property values may fall due to
increasing vacancies or declining rents resulting
from economic, legal, cultural or technological
developments. REIT prices also may drop because of
the failure of borrowers to pay their loans and poor
management. Many REITs utilize leverage, which
increases investment risk and could adversely affect
a REIT's operations and market value in periods of
rising interest rates as well as risks normally
associated with debt financing. In addition, there
are specific risks associated with particular sectors
of real estate investments such as retail, office,
hotel, healthcare, and multifamily properties.
The Fund may also invest in preferred stocks and debt
securities of real estate companies. These securities
also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the
value of preferred stocks and debt securities may
fall.
Lower-Rated Securities Risk. Lower-rated preferred
stock or debt securities, or equivalent unrated
securities, which are commonly known as 'junk bonds,'
generally involve greater volatility of price and
risk of loss of income and principal, and may be more
susceptible to real or perceived adverse economic and
competitive industry conditions than higher grade
securities. It is reasonable to expect that any
adverse economic conditions could disrupt the market
for lower-rated securities, have an adverse impact on
the value of those securities, and adversely affect
the ability of the issuers of those securities to
repay principal and interest on those securities.
10
Market Disruption Risk. The aftermath of the war in
Iraq and the continuing occupation of Iraq,
instability in the Middle East and terrorist attacks
in the U.S. and around the world have resulted in
recent market volatility and may have long-term
effects on the U.S. and worldwide financial markets
and may cause further economic uncertainties in the
U.S. and worldwide. The Fund does not know how long
the securities markets will continue to be affected
by these events and cannot predict the effects of the
occupation or similar events in the future on the
U.S. economy and securities markets.
Anti-Takeover Provisions. Certain provisions of the
Fund's Articles of Incorporation (which, as hereafter
amended, restated or supplemented from time to time,
and together with the Articles Supplementary, is
referred to as the 'Charter') and By-Laws may have
the effect of limiting the ability of other entities
or persons to acquire control of the Fund or to
change the Fund's structure. These provisions may
also have the effect of depriving you of an
opportunity to redeem your Preferred Shares. These
include provisions for staggered terms of office for
Directors, super-majority voting requirements for
merger, consolidation, liquidation, termination and
asset sale transactions, amendments to the Charter
and conversion to open-end status. See 'Certain
Provisions of the Charter and By-Laws.'
For further discussion of the risks associated with
investing in the Preferred Shares and the Fund, see
'Risk Factors.'
DIVIDENDS AND RATE PERIODS................... The table below shows the dividend rate, the dividend
payment date and the number of days for the initial
rate period on the Preferred Shares offered in this
Prospectus. For subsequent dividend periods, the
Preferred Shares will pay dividends based on a rate
set at auctions normally held every 7 days. In most
instances, dividends are payable on the first
business day following the end of the rate period.
The rate set at auction will not exceed the
applicable maximum rate.
The dividend payment date for special rate periods
will be set out in the notice designating a special
rate period. Dividends on the Preferred Shares will
be cumulative from the date the shares are first
issued and will be paid out of legally available
funds.
11
INITIAL DIVIDEND PAYMENT DATE NUMBER OF
DIVIDEND FOR INITIAL DAYS OF INITIAL
RATE RATE PERIOD RATE PERIOD
---- ----------- -----------
Series .... % , 2004
The Fund may, subject to certain conditions,
designate special rate periods of more than 7 days.
The Fund may not designate a special rate period
unless sufficient clearing bids were made in the most
recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory
redemptions and any additional dividends payable
prior to such date must be paid in full. The Fund
also must have received confirmation from Moody's and
S&P or any substitute rating agency that the proposed
special rate period will not adversely affect such
agency's then-current rating on the Preferred Shares
and the lead Broker-Dealer designated by the Fund,
initially , must not have objected to
declaration of a special rate period.
See 'Description of Preferred Shares -- Dividends and
Rate Periods' and ' -- Designation of Special Rate
Periods' and 'The Auction.'
SECONDARY MARKET TRADING..................... Broker-dealers may, but are not obligated to,
maintain a secondary trading market in the Preferred
Shares outside of auctions. There can be no assurance
that a secondary market will provide owners with
liquidity. You may transfer shares outside of
auctions only to or through a broker-dealer that has
entered into an agreement with the auction agent and
the Fund, or other persons as the Fund permits.
INTEREST RATE TRANSACTIONS................... In order to seek to reduce the interest rate risk
inherent in the Fund's underlying investments and
capital structure, the Fund may enter into interest
rate swap or cap transactions. The use of interest
rate swaps and caps is a highly specialized activity
that involves investment techniques and risks
different from those associated with ordinary
portfolio security transactions. In an interest rate
swap, the Fund would agree to pay to the other party
to the interest rate swap (which is known as the
'counterparty') a fixed rate payment in exchange for
the counterparty agreeing to pay to the Fund a
variable rate payment that is intended to approximate
the Fund's variable rate payment obligation on the
Preferred Shares. The payment would be based on the
notional amount of
12
the swap. In an interest rate cap, the Fund would pay
a premium to the counterparty to the interest rate
cap and, to the extent that a specified variable rate
index exceeds a predetermined fixed rate, would
receive from the counterparty payments of the
difference based on the notional amount of such cap.
If the counterparty to an interest rate swap or cap
defaults, the Fund would be obligated to make the
payments that it had intended to avoid. Depending on
the general state of short-term interest rates and
the returns on the Fund's portfolio securities at
that point in time, this default could negatively
impact the Fund's ability to make dividend payments
on the Preferred Shares. In addition, at the time an
interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the
Fund will not be able to obtain a replacement
transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction.
If this occurs, it could have a negative impact on
the Fund's ability to make dividend payments on the
Preferred Shares. If the Fund fails to maintain the
required asset coverage on the outstanding Preferred
Shares or fails to comply with other covenants, the
Fund may be required to redeem some or all of these
shares. Such redemption likely would result in the
Fund seeking to terminate early all or a portion of
any swap or cap transaction. Early termination of the
swap could result in a termination payment by or to
the Fund. Early termination of a cap could result in
a termination payment to the Fund. The Fund would not
enter into interest rate swap or cap transactions
having a notional amount that exceeded the
outstanding amount of the Preferred Shares. See 'How
the Fund Manages Risk -- Interest Rate Transactions'
for additional information.
ASSET MAINTENANCE............................ Under the Fund's Articles Supplementary for the
Preferred Shares, which establishes and fixes the
rights and preferences of the shares of the Preferred
Shares and the respective Articles Supplementary for
the Series T, Series W, Series TH, Series F and
Series M28 AMPS), the Fund must maintain:
asset coverage of the Preferred Shares and the
Series T, Series W, Series TH and Series F AMPS as
required by the rating agency or agencies rating
each of those AMPS, and
13
asset coverage of at least 200% with respect to
senior securities that are stock, including the
Preferred Shares and the outstanding AMPS.
In the event that the Fund does not maintain or cure
these coverage tests, some or all of the Preferred
Shares will be subject to mandatory redemption. See
'Description of Preferred Shares -- Redemption.'
Based on the composition of the Fund's portfolio as
of , 2004, the asset coverage of the
Preferred Shares and the Series T, Series W,
Series TH, Series F and Series M28 AMPS as measured
pursuant to the 1940 Act would be approximately %
if the Fund were to issue all of the Preferred Shares
offered in this Prospectus, representing
approximately % of the Fund's managed assets (as
defined below).
REDEMPTION................................... The Fund does not expect to and ordinarily will not
redeem the Preferred Shares. However, under the
Articles Supplementary, it may be required to redeem
the Preferred Shares in order, for example, to meet
an asset coverage ratio or to correct a failure to
meet a rating agency guideline in a timely manner.
The Fund may also voluntarily redeem the Preferred
Shares without the consent of holders of the
Preferred Shares under certain conditions. See
'Description of Preferred Shares -- Redemption.'
LIQUIDATION PREFERENCE....................... The liquidation preference (that is, the amount the
Fund must pay to holders of the Preferred Shares if
the Fund is liquidated) for the Preferred Shares will
be $25,000 per share plus accumulated but unpaid
dividends, if any, whether or not earned or declared.
VOTING RIGHTS................................ The 1940 Act requires that the holders of the
Preferred Shares, and the holders of any other series
of preferred stock of the Fund, voting together as a
separate class, have the right to:
elect at least two directors at all times, and
elect a majority of the directors if at any time the
Fund fails to pay dividends on the Preferred Shares,
or any other series of preferred stock of the Fund,
for two full years and will continue to be so
represented until all dividends in arrears have been
paid or otherwise provided for.
The holders of the Preferred Shares, and the holders
of any other series of preferred stock of the Fund,
will vote
14
as a separate class or series on other matters as
required under the Fund's Charter, the 1940 Act and
Maryland law. On all other matters, holders of the
Preferred Shares will vote together with the holders
of Common Shares and each share of any other series
of preferred stock of the Fund. Each Common Share,
each share of the Preferred Shares, and each share of
any other series of preferred stock of the Fund is
entitled to one vote per share.
FEDERAL INCOME TAXATION...................... The distributions with respect to the Preferred
Shares (other than distributions in redemption of the
Preferred Shares subject to Section 302(b) of the
Code) will constitute dividends to the extent of the
Fund's current or accumulated earnings and profits,
as calculated for federal income tax purposes. Such
dividends generally will, except in the case of
distributions of qualified dividend income and net
capital gains, be taxable as ordinary income to
holders. Distributions of net capital gain that are
designated by the Fund as capital gain dividends will
be treated as long-term capital gains in the hands of
holders receiving such distributions. The Internal
Revenue Service ('IRS') currently requires that a
regulated investment company that has two or more
classes of stock allocate to each such class
proportionate amounts of each type of its income
(such as ordinary income and capital gains) based
upon the percentage of total dividends distributed to
each class for the tax year. Accordingly, the Fund
intends each year to allocate capital gain dividends,
dividends qualifying for the dividends received
deduction and dividends derived from qualified
dividend income, if any, between its Common Shares,
the Preferred Shares and the Series T, Series TH,
Series F, Series W and Series M28 AMPS in proportion
to the total dividends paid to each class or series
during or with respect to such year. See 'U.S.
Federal Taxation.'
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR.......... State Street Bank and Trust Company acts as the
Fund's custodian. The Bank of New York will act as
auction agent, transfer agent, dividend paying agent
and registrar for the Preferred Shares.
15
FINANCIAL HIGHLIGHTS
Information contained in the table below under the heading 'Per Share
Operating Performance' and 'Ratios/Supplemental Data' shows the operating
performance of the Fund for the periods indicated.
The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the Fund's
Financial Statements included in the SAI dated , 2004. The table
should be read in conjunction with the Financial Statements and notes thereto.
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(UNAUDITED) (AUDITED) (AUDITED)
PER SHARE OPERATING PERFORMANCE: --------- ------- -------
Net asset value per common share, beginning of period..... $18.43 $13.25 $14.57
------ ------ ------
Income from investment operations:
Net investment income.................................. 0.55(b) 1.04(b) 0.78
Net realized and unrealized gain/(loss) on investments
and interest rate swap transactions................... 0.24 5.69 (0.90)
------ ------ ------
Total income from investment operations............. 0.79 6.73 (0.12)
------ ------ ------
Less dividends and distributions to preferred shareholders
from:
Net investment income.................................. (0.05) (0.07) (0.09)
Net realized gain on investments....................... -- (0.03) (0.01)
------ ------ ------
Total dividends and distributions to preferred
shareholders...................................... (0.05) (0.10) (0.10)
------ ------ ------
Total from investment operations applicable to
common shares..................................... 0.74 6.63 (0.22)
------ ------ ------
Less: Offering and organization costs charged to paid-in
capital -- common shares............................ -- -- (0.03)
Offering and organization costs charged to paid-in
capital -- preferred shares......................... -- (0.02) (0.09)
Preferred Offering Cost Adjustment.................... --(c) -- --
Dilutive effect of common share offering.............. -- -- (0.03)
------ ------ ------
Total offering and organization costs............... -- (0.02) (0.15)
------ ------ ------
Less dividends and distributions to common shareholders
from:
Net investment income.................................. (0.68) (0.76) (0.64)
Net realized gain on investments....................... -- (0.41) (0.08)
Tax return of capital.................................. -- (0.26) (0.23)
------ ------ ------
Total dividends and distributions to common
shareholders...................................... (0.68) (1.43) (0.95)
------ ------ ------
Net increase/(decrease) in net asset value per common
share.................................................... 0.06 5.18 (1.32)
------ ------ ------
Net asset value, per common share, end of period.......... $18.49 $18.43 $13.25
------ ------ ------
------ ------ ------
Market value, per common share, end of period............. $16.70 $17.85 $13.05
------ ------ ------
------ ------ ------
Net asset value total return(d)........................... 4.26%(e) 52.61% - 2.73%(e)
------ ------ ------
------ ------ ------
Market value return(d).................................... - 2.77%(e) 50.07% - 6.95%(e)
------ ------ ------
------ ------ ------
---------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) Less than $.005 per share. See Note 5.
(d) Total market value return is computed based upon the New York Stock Exchange
market price of the fund's shares and excludes the effects of brokerage
commissions. Dividends and distributions, if any, are assumed for purposes
of this calculation, to be reinvested at prices obtained under the fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends
as reinvested.
(e) Not annualized.
16
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(UNAUDITED) (AUDITED) (AUDITED)
RATIOS/SUPPLEMENTAL DATA: ------------- ----------------- -----------------
Net assets applicable to common shares, end of period
(in millions)........................................ $ 718.4 $ 716.1 $ 512.0
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (before expense
reduction)(f)........................................ 1.53%(c) 1.57% 1.52%(c)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (net of expense
reduction)(f)........................................ 1.06%(c) 1.09% 1.05%(c)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (before expense
reduction)(f)........................................ 5.53%(c) 6.39% 6.82%(c)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (net of expense
reduction)(f)........................................ 6.00%(c) 6.88% 7.29%(c)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(before expense reduction)(b,f)...................... 1.04%(c) 1.04% 1.04%(c)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(net of expense reduction)(b,f)...................... 0.72%(c) 0.72% 0.72%(c)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate............................... 2.05%(d) 20.51% 12.37%(d)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)........... $340,000 $340,000 $280,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)................... 14 14 11
-------- -------- --------
-------- -------- --------
Asset coverage per share.............................. $ 77,827 $ 77,653 $ 70,710
-------- -------- --------
-------- -------- --------
Liquidation preference per share...................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per share(e)..................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
---------
(a) Commencement of operations.
(b) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(c) Annualized.
(d) Not annualized.
(e) Based on weekly prices.
(f) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
17
THE FUND
The Fund is a non-diversified, closed-end management investment company. The
Fund was organized as a Maryland corporation on August 22, 2001 and is
registered as an investment company with the Securities and Exchange Commission
under the Investment Company Act of 1940 (the '1940 Act'). The Fund issued an
aggregate of 34,000,000 Common Shares, par value $.001 per share, pursuant to
the initial public offering thereof and commenced its operations with the
closing of this initial public offering on February 28, 2002. On March 8, 2002
and March 21, 2002, the Fund issued 2,000,000 and 1,700,000 additional Common
Shares, respectively, in connection with a partial exercise by the underwriters
of the overallotment option. On April 4, 2002, the Fund issued 2,800 Series T
AMPS, 2,800 Series W AMPS, 2,800 Series TH AMPS and 2,800 Series F AMPS. On
September 15, 2003, the Fund issued 2,400 Series M28 AMPS. The Fund's Common
Shares are traded on the NYSE under the symbol 'RQI.' The Fund's principal
office is located at 757 Third Avenue, New York, New York 10017, and our
telephone number is (212) 832-3232.
The following provides information about the Fund's outstanding shares as of
, 2004:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common........................................ 99,986,400 0
Preferred
Series T.................................. 2,800 0 2,800
Series TH................................. 2,800 0 2,800
Series F.................................. 2,800 0 2,800
Series W.................................. 2,800 0 2,800
Series M28................................ 2,400 0 2,400
Series [ ]............................... 0 0
USE OF PROCEEDS
The Fund estimates that the net proceeds of this offering of the Preferred
Shares, after payment of the sales load and offering expenses, will be
$ . The net proceeds of this offering will be invested in accordance
with the policies set forth under 'Investment Objectives and Policies.' The Fund
estimates that the net proceeds of this offering will be fully invested in
accordance with our investment objectives and policies within four months of the
completion of this offering. Pending such investment, those proceeds may be
invested in U.S. Government securities or high quality, short-term money market
instruments. See 'Investment Objectives and Policies.'
18
CAPITALIZATION (UNAUDITED)
The following table sets forth the unaudited capitalization of the Fund as
of , 2004, and as adjusted to give effect to the issuance of the
Preferred Shares offered in this Prospectus.
AS OF , 2004
---------------------------
ACTUAL AS ADJUSTED
------ -----------
(UNAUDITED)
Auction Rate Preferred Shares, $0.001 par value, $25,000 $ $
liquidation value; shares authorized (2,800
Series T AMPS, 2,800 Series W AMPS, 2,800 Series TH
AMPS, 2,800 Series F AMPS and 2,400 Series M28 AMPS,
and Series Preferred Shares, as adjusted,
respectively)..........................................
------------ ------------
Common Shares, $.001 par value per share; shares
authorized, shares outstanding................ $ $
Paid-in surplus.......................................... $ $
Balance of undistributed net investment income (loss).... $ $
Accumulated net realized gain (loss) from investment
transactions........................................... $ $
Net unrealized appreciation (depreciation) of
investments............................................ $ $
------------ ------------
Net assets applicable to common shares................... $ $
------------ ------------
Net assets, plus liquidation preference of preferred
stock.................................................. $ $
------------ ------------
------------ ------------
As used in this prospectus, unless otherwise noted, the Fund's 'managed
assets' include assets of the Fund attributable to any outstanding Preferred
Shares, with no deduction for the liquidation preference of such shares. For
financial reporting purposes, however, the Fund is required to deduct the
liquidation preference of its outstanding Preferred Shares from 'managed assets'
so long as the Preferred Shares have redemption features that are not solely
within the control of the Fund. In connection with the rating of the outstanding
Preferred Shares, the Fund has established various portfolio covenants to meet
third-party rating agency guidelines in its Charter. These covenants include,
among other things, investment diversification requirements and requirements
that investments included in the Fund's portfolio meet specific industry and
credit quality criteria. Market factors outside the Fund's control may affect
its ability to meet the criteria of third-party rating agencies set forth in the
Fund's portfolio covenants. If the Fund violates these covenants, it may be
required to cure the violation by redeeming all or a portion of the Preferred
Shares. For all regulatory purposes, the Fund's Preferred Shares will be treated
as stock (rather than indebtedness).
19
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Our primary investment objective is high current income through investment
in real estate securities. Capital appreciation is a secondary investment
objective. The Fund's investment objectives and certain other policies are
fundamental and may not be changed without the approval of stockholders. Unless
otherwise indicated, the Fund's investment policies are not fundamental and may
be changed by the Board of Directors without the approval of stockholders,
although the Fund has no current intention of doing so. The Fund has a
fundamental investment policy of concentrating its investments in the U.S. real
estate industry and not in any other industry. Under normal market conditions,
the Fund will invest at least 90% of our total assets in common stocks,
preferred stocks and other equity securities issued by real estate companies,
such as 'real estate investment trusts' ('REITs'). At least 80% of our total
assets will be invested in income producing equity securities issued by high
quality REITs and substantially all of the equity securities of real estate
companies in which the Fund intends to invest are traded on a national
securities exchange or in the over-the-counter market. High quality REITs are
companies that, in the opinion of the Investment Manager, offer excellent
prospects for consistent, above-average revenue and earnings growth. To
determine whether a company is of high quality, the Investment Manager generally
looks to a strong record of earnings growth, as well as to a company's current
ratio of debt to capital and the quality of its management. All of the REITs in
which the Fund will invest will have a market capitalization greater than $100
million. The Fund may invest up to 10% of our total assets in debt securities
issued or guaranteed by real estate companies. We will not invest more than 20%
of our total assets in preferred stock or debt securities rated below investment
grade (commonly known as 'junk bonds') or unrated securities of comparable
quality. Preferred stock or debt securities will be considered investment grade
if, at the time of investment, it is rated 'BBB' or higher by S&P, 'Baa' or
higher by Moody's or an equivalent rating by a nationally recognized statistical
rating agency, or is unrated but judged to be of comparable quality by the
Investment Manager. Preferred stock or debt securities of below investment grade
(BB/Ba or below) are commonly referred to as 'junk bonds.' The Investment
Manager may also invest in preferred stock or debt securities which are unrated
but which, in the opinion of the Investment Manager, are determined to be of
equivalent quality. See Appendix A in the SAI for a description of bond ratings.
These two policies are fundamental and cannot be changed without the approval of
a majority of the Fund's voting securities, as defined in the 1940 Act, as
amended. The Fund will invest only in securities of U.S. issuers and generally
will not invest more than 10% of the Fund's total assets in the securities of
one issuer.
The Fund will not enter into short sales or invest in derivatives, except as
described in this Prospectus in connection with the interest rate swap or
interest rate cap transactions. See 'How the Fund Manages Risk -- Interest Rate
Transactions.' There can be no assurance that the Fund's investment objectives
will be achieved.
INVESTMENT STRATEGIES
In making investment decisions on behalf of the Fund, the Investment Manager
relies on a fundamental analysis of each company. The Investment Manager reviews
each company's potential for success in light of the company's current financial
condition, its industry and sector position, and economic and market conditions.
The Investment Manager also evaluates a number of factors, including growth
potential, earnings estimates and the quality of management.
20
PORTFOLIO COMPOSITION
The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the SAI.
Real Estate Companies. For purposes of the Fund's investment policies, a
real estate company is one that:
derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential
real estate; or
has at least 50% of its assets in such real estate.
Under normal market conditions, the Fund will invest at least 90% of its
total assets in the equity securities of real estate companies. These equity
securities can consist of:
common stocks (including REIT shares);
preferred stocks;
rights or warrants to purchase common and preferred stocks; and
securities convertible into common and preferred stocks where the
conversion feature represents, in the Investment Manager's view, a
significant element of the securities' value.
Real Estate Investment Trusts. The Fund invests at least 80% of its total
assets in income producing equity securities of REITs. A REIT is a company
dedicated to owning, and usually operating, income producing real estate, or to
financing real estate. REITs pool investors' funds for investment primarily in
income producing real estate or real estate-related loans or interests. A REIT
is not taxed on income distributed to stockholders if, among other things, it
distributes to its stockholders substantially all of its taxable income (other
than net capital gains) for each taxable year. As a result, REITs tend to pay
relatively higher dividends than other types of companies and we intend to use
these REIT dividends in an effort to meet the current income goal of our
investment objectives.
REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
Preferred Stocks. Preferred stocks pay fixed or floating dividends to
investors, and have a 'preference' over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Under current market conditions, the Investment Manager
invests approximately % of the Fund's total assets in common shares of real
estate companies and approximately % in preferred shares of real estate
companies. The actual percentage of common and preferred shares in our
investment portfolio may vary over time based on the Investment Manager's
assessment of market conditions.
Debt Securities. The Fund may invest a maximum of 10% of its total assets in
investment grade and non-investment grade debt securities issued or guaranteed
by real estate companies.
21
Lower-rated Securities. The Fund will not invest more than 20% of its total
assets in preferred stock and debt securities rated below investment grade
(commonly known as 'junk bonds') and equivalent unrated securities of comparable
quality. Securities rated non-investment grade (lower than 'BBB' by S&P or lower
than 'Baa' by Moody's, are sometimes referred to as 'high yield' or 'junk'
bonds. The Fund may only invest in high yield securities that are rated 'CCC' or
higher by S&P, or rated 'Caa' or higher by Moody's, or unrated securities
determined by the Investment Manager to be of comparable quality. The issuers of
these securities have a currently identifiable vulnerability to default and such
issues may be in default or there may be present elements of danger with respect
to principal or interest. The Fund will not invest in securities that are in
default at the time of purchase. For a description of bond ratings, see
Appendix A of the SAI.
Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, we may
deviate from our investment objectives and invest all or any portion of its
assets in investment grade debt securities, without regard to whether the issuer
is a real estate company. When and to the extent, we assume a temporary
defensive position, we may not pursue or achieve our investment objectives.
OTHER INVESTMENTS
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which we may
invest our cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and such
obligations that are subject to repurchase agreements and commercial paper. See
'Additional Information about Fund Investment Objectives and Policies' in the
SAI.
USE OF LEVERAGE
The Fund may issue other preferred shares, in addition to the Preferred
Shares and the outstanding Series T, Series W, Series TH, Series F and
Series M28 AMPS, or borrow or issue short-term debt securities to increase its
assets available for investment. The Fund is authorized to issue preferred
shares, borrow or issue debt obligations. Before issuing such preferred shares
to increase its assets available for investment, the Fund must have received
confirmation from Moody's and S&P or any substitute rating agency that the
proposed issuance will not adversely affect such rating agency's then-current
rating on the Preferred Shares. The Fund also may borrow money as a temporary
measure for extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of the Fund's holdings. When the Fund leverages
its assets, the fees paid to the Investment Manager for investment management
services will be higher than if the Fund did not borrow because the Investment
Manager's fees are calculated based on the Fund's managed assets, which include
the liquidation preference of the preferred shares, including the Preferred
Shares, or any outstanding borrowings. Consequently, the Fund and the Investment
Manager may have differing interests in determining whether to leverage the
Fund's assets.
The Fund's use of leverage is premised upon the expectation that the Fund's
preferred share dividends or borrowing cost will be lower than the return the
Fund achieves on its investments with the proceeds of the issuance of preferred
shares or borrowing. Such difference in return may result from the Fund's higher
credit rating or the short-term nature of its borrowing compared to
22
the long-term nature of its investments. Since the total assets of the Fund
(including the assets obtained from leverage) will be invested in the higher
yielding portfolio investments or portfolio investments with the potential for
capital appreciation, the Fund's common stockholders ('Common Stockholders')
will be the beneficiaries of the incremental return. Should the differential
between the underlying assets and cost of leverage narrow, the incremental
return 'pick up' will be reduced. Furthermore, if long-term rates rise or the
Fund otherwise incurs losses on its investments, the Fund's net asset value
attributable to its common shares will reflect the decline in the value of
portfolio holdings resulting therefrom.
To the extent the income or capital appreciation derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return to the Fund's common stockholders ('Common Stockholders') will be
greater than if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such funds is not sufficient to
cover the cost of leverage or if the Fund incurs capital losses, the return of
the Fund to Common Stockholders will be less than if leverage had not been used.
The Investment Manager may determine to maintain the Fund's leveraged position
if it expects that the long-term benefits to the Fund's Common Stockholders of
maintaining the leveraged position will outweigh the current reduced return.
Capital raised through the issuance of preferred shares or borrowing will be
subject to dividend payments or interest costs that may or may not exceed the
income and appreciation on the assets purchased. The Fund also may be required
to maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest rate.
The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized rating organizations which may
issue ratings for the Preferred Shares, other preferred shares or short-term
debt instruments issued by the Fund. These guidelines may impose asset coverage
or portfolio composition requirements that are more stringent than those imposed
by the 1940 Act. Certain types of borrowings may result in the Fund being
subject to covenants in credit agreements, including those relating to asset
coverage, borrowing base and portfolio composition requirements and additional
covenants. The Fund may also be required to pledge its assets to the lenders in
connection with certain types of borrowing. The Investment Manager does not
anticipate that these covenants or restrictions will adversely affect its
ability to manage the Fund's portfolio in accordance with the Fund's investment
objective and policies. Due to these covenants or restrictions, the Fund may be
forced to liquidate investments at times and at prices that are not favorable to
the Fund, or the Fund may be forced to forgo investments that the Investment
Manager otherwise views as favorable.
If and the extent to which the Fund employs leverage in addition to the
Preferred Shares and the outstanding Series T, Series W Series TH, Series F and
Series M28 AMPS will depend on many factors, the most important of which are
investment outlook, market conditions and interest rates.
23
RISK FACTORS
Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in the Preferred
Shares.
RISKS OF INVESTING IN PREFERRED SHARES
Leverage Risk. The Fund uses financial leverage for investment purposes by
issuing preferred shares. It is currently anticipated that, taking into account
the Preferred Shares being offered in this Prospectus, the amount of leverage
will represent approximately 33 1/3% of the Fund's managed assets (as defined
below).
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the
Fund's Common Shares and the Preferred Shares' asset coverage. As long as the
Preferred Shares are outstanding, the Fund does not intend to utilize other
forms of leverage.
Because the fees paid to the Investment Manager will be calculated on the
basis of the Fund's managed assets (which equals the aggregate net asset value
('NAV') of the Common Shares plus the liquidation preference of the Preferred
Shares), the fee will be higher when leverage is utilized, giving the Investment
Manager an incentive to utilize leverage.
Interest Rate Risk. The Fund issues Preferred Shares, which pay dividends
based on short-term interest rates. The Fund purchases real estate equity
securities that pay dividends that are based on the performance of the issuing
companies. The Fund also may buy real estate debt securities that pay interest
based on longer-term yields. These dividends and interest payments are
typically, although not always, higher than short-term interest rates. Real
estate company dividends, as well as long-term and short-term interest rates,
fluctuate. If short-term interest rates rise, dividend rates on the Preferred
Shares may rise so that the amount of dividends to be paid to stockholders of
Preferred Shares exceeds the income from the portfolio securities. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the Preferred Shares offering) is
available to pay dividends on the Preferred Shares, however, dividend rates on
the Preferred Shares would need to greatly exceed the Fund's net portfolio
income before the Fund's ability to pay dividends on the Preferred Shares would
be jeopardized. If long-term interest rates rise, this could negatively impact
the value of the Fund's investment portfolio, reducing the amount of assets
serving as asset coverage for the Preferred Shares. The Fund anticipates
entering into interest rate swap or cap transactions with the intent to reduce
or eliminate the risk posed by an increase in short-term interest rates. There
is no guarantee that the Fund will engage in these transactions or that these
transactions will be successful in reducing or eliminating interest rate risk.
See 'How the Fund Manages Risk.'
Auction Risk. You may not be able to sell your Preferred Shares at an
auction if the auction fails, i.e., if there are more Preferred Shares offered
for sale than there are buyers for those shares. Also, if you place hold orders
(orders to retain Preferred Shares) at an auction only at a specified rate, and
that bid rate exceeds the rate set at the auction, you will not retain your
Preferred Shares. Additionally, if you buy shares or elect to retain shares
without specifying a rate below which you would not wish to continue to hold
those shares, and the auction sets a below-market rate, you may receive a lower
rate of return on your shares than the market rate. Finally, the dividend period
may be changed, subject to certain conditions and with notice to the holders
24
of the Preferred Shares, which could also affect the liquidity of your
investment. See 'Description of Preferred Shares' and 'The Auction.'
Secondary Market Risk. If you try to sell your Preferred Shares between
auctions, you may not be able to sell any or all of your shares, or you may not
be able to sell them for $25,000 per share or $25,000 per share plus accumulated
but unpaid dividends, if any, whether or not earned or declared. If the Fund has
designated a special rate period (a dividend period of more than 7 days in the
case of the Preferred Shares), changes in interest rates could affect the price
you would receive if you sold your shares in the secondary market. You may
transfer shares outside of auctions only to or through a broker-dealer that has
entered into an agreement with the auction agent and the Fund or other person as
the Fund permits. The Fund does not anticipate imposing significant restrictions
on transfers to other persons. However, unless any such other person has entered
into a relationship with a broker-dealer that has entered into a broker-dealer
agreement with the Auction Agent, that person will not be able to submit bids at
auctions with respect to Preferred Shares. Broker-dealers that maintain a
secondary trading market for the Preferred Shares are not required to maintain
this market, and the Fund is not required to redeem shares either if an auction
or an attempted secondary market sale fails because of a lack of buyers. The
Preferred Shares are not registered on a stock exchange or the National
Association of Securities Dealers Automated Quotations, Inc. ('NASDAQ') stock
market. If you sell your Preferred Shares to a broker-dealer between auctions,
you may receive less than the price you paid for them, especially when market
interest rates have risen since the last auction and during a special rate
period.
Ratings and Asset Coverage Risk. While it is a condition to the closing of
the offering that S&P assigns a rating of 'AAA' and Moody's assigns a rating of
'Aaa' to the Preferred Shares, the ratings do not eliminate or necessarily
mitigate the risks of investing in Preferred Shares. In addition, Moody's, S&P
or another rating agency then rating the Preferred Shares could downgrade the
Preferred Shares, which may make your shares less liquid at an auction or in the
secondary market. If a rating agency downgrades the Preferred Shares, the
dividend rate on the Preferred Shares will be the applicable maximum rate based
on the credit rating of the Preferred Shares, which will be a rate higher than
is payable currently on the Preferred Shares. See 'Description of Preferred
Shares -- Rating Agency Guidelines' for a description of the asset maintenance
tests the Fund must meet.
Portfolio Security Risk. Portfolio security risk is the risk that an issuer
of a security in which the Fund invests will not be able, in the case of common
stocks, to make dividend distributions at the level forecast by the Fund's
Investment Manager, or that the issuer becomes unable to meet its obligation to
pay fixed dividends at the specified rate, in the case of preferred stock, or to
make interest and principal payments in the case of debt securities. Common
stock is not rated by rating agencies and it is incumbent on the Investment
Manager to select securities of real estate companies that it believes have the
ability to pay dividends at the forecasted level. Preferred stock and debt
securities may be rated. The Fund may invest up to 20% of its total assets in
preferred stock or debt securities rated below investment grade (commonly known
as 'junk bonds') by S&P or Moody's, or unrated securities considered to be of
comparable quality by the Investment Manager. In general, lower-rated securities
carry a greater degree of risk. If rating agencies lower their ratings of
securities held in the Fund's portfolio, the value of those securities could
decline, which would jeopardize the rating agencies' ratings of the Preferred
Shares. The failure of a company to pay common stock or preferred stock
dividends, or interest payments, at forecasted or
25
contractual rates, could have a negative impact on the Fund's ability to pay
dividends on the Preferred Shares and could result in the redemption of some or
all of the Preferred Shares.
Restrictions on Dividends and other Distributions. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Fund's Common Shares, the Preferred Shares and the Series T, Series W,
Series TH, Series F and Series M28 AMPS, both by the 1940 Act and by
requirements imposed by rating agencies, might impair the Fund's ability to
maintain its qualification as a regulated investment company for federal income
tax purposes. While the Fund intends to redeem the Series T, Series W,
Series TH, Series F and Series M28 AMPS, and the Preferred Shares to enable the
Fund to distribute its income as required to maintain its qualification as a
regulated investment company under the Code, there can be no assurance that such
actions can be effected in time to meet the Code requirements. See 'U.S. Federal
Taxation.'
GENERAL RISKS OF INVESTING IN THE FUND
We are a non-diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that we will achieve our
investment objectives.
Investment Risk. An investment in the Fund is subject to investment risk,
including the possible loss of the entire principal amount that you invest.
Stock Market Risk. Because prices of equity securities fluctuate from
day-to-day, the value of our portfolio will vary based upon general market
conditions.
General Risks of Securities Linked to the Real Estate Market. The Fund will
not invest in real estate directly, but only in securities issued by real estate
companies, including REITs. However, because of the Fund's policy of
concentration in the securities of companies in the real estate industry, the
Fund is also subject to the risks associated with the direct ownership of real
estate. These risks include:
declines in the value of real estate
risks related to general and local economic conditions
possible lack of availability of mortgage funds
overbuilding
extended vacancies of properties
increased competition
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
26
Thus, the value of the Fund's portfolio securities may change at different
rates compared to the value of portfolio securities of a registered investment
company with investments in a mix of different industries and will depend on the
general condition of the economy. An economic downturn could have a material
adverse effect on the real estate markets and on real estate companies in which
the Fund invests, which in turn could result in the Fund not achieving its
investment objectives.
General Real Estate Risks. Real property investments are subject to varying
degrees of risk. The yields available from investments in real estate depend on
the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., Americans with Disabilities Act and tax laws),
interest rate levels and the availability of financing. If the properties do not
generate sufficient income to meet operating expenses, including, where
applicable, debt service, ground lease payments, tenant improvements,
third-party leasing commissions and other capital expenditures, the income and
ability of the real estate company to make payments of any interest and
principal on its debt securities will be adversely affected. In addition, real
property may be subject to the quality of credit extended and defaults by
borrowers and tenants. The performance of the economy in each of the regions in
which the real estate owned by the portfolio company is located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the income from such properties and their underlying values. The financial
results of major local employers also may have an impact on the cash flow and
value of certain properties. In addition, real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions is
limited. A real estate company may also have joint venture investments in
certain of its properties, and, consequently, its ability to control decisions
relating to such properties may be limited.
Real property investments are also subject to risks which are specific to
the investment sector or type of property in which the real estate companies are
investing.
Retail Properties. Retail properties are affected by the overall health of
the applicable economy. A retail property may be adversely affected by the
growth of alternative forms of retailing, bankruptcy, decline in drawing power,
departure or cessation of operations of an anchor tenant, a shift in consumer
demand due to demographic changes, and/or changes in consumer preference (for
example, to discount retailers) and spending patterns. A retail property may
also be adversely affected if a significant tenant ceases operation at such
location, voluntarily or otherwise. Certain tenants at retail properties may be
entitled to terminate their leases if an anchor tenant ceases operations at such
property.
Office Properties. Office properties generally require their owners to
expend significant amounts for general capital improvements, tenant improvements
and costs of reletting space. In addition, office properties that are not
equipped to accommodate the needs of modern businesses may become functionally
obsolete and thus non-competitive. Office properties may also be adversely
affected if there is an economic decline in the businesses operated by their
tenants. The risks of such an adverse effect is increased if the property
revenue is dependent on a single tenant or if there is a significant
concentration of tenants in a particular business or industry.
Hotel Properties. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
27
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.
Also, hotels may be operated pursuant to franchise, management and operating
agreements that may be terminable by the franchiser, the manager or the
operator. Contrarily, it may be difficult to terminate an ineffective operator
of a hotel property subsequent to a foreclosure of such property.
Healthcare Properties. Healthcare properties and healthcare providers are
affected by several significant factors including federal, state and local laws
governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); and competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis.
These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursement. In addition, in the event that a tenant is in default
on its lease, a new operator or purchaser at a foreclosure sale will have to
apply in its own right for all relevant licenses if such new operator does not
already hold such licenses. There can be no assurance that such new licenses
could be obtained, and consequently, there can be no assurance that any
healthcare property subject to foreclosure will be disposed of in a timely
manner.
Multifamily Properties. The value and successful operation of a multifamily
property may be affected by a number of factors such as the location of the
property, the ability of management to provide adequate maintenance and
insurance, types of services provided by the property, the level of mortgage
rates, presence of competing properties, the relocation of tenants to new
projects with better amenities, adverse economic conditions in the locale, the
amount of rent charged, and oversupply of units due to new construction. In
addition, multifamily properties may be subject to rent control laws or other
laws affecting such properties, which could impact the future cash flows of such
properties.
Insurance Issues. Certain of the portfolio companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar
properties. However such insurance is not uniform among the portfolio companies.
Moreover, there are certain types of extraordinary losses that may be
uninsurable, or not economically insurable. Certain of the properties may be
located in areas that are subject to earthquake activity for which insurance may
not be maintained. Should a property sustain damage as a result of an
earthquake, even if the portfolio company maintains earthquake insurance, the
portfolio company may incur substantial losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should any type of uninsured
loss occur, the portfolio company could lose its investment in, and anticipated
profits and cash flows from, a number of properties and, as a result, impact the
Fund's investment performance.
28
Credit Risk. REITs may be highly leveraged and financial covenants may
affect the ability of REITs to operate effectively. The portfolio companies are
subject to risks normally associated with debt financing. If the principal
payments of a real estate company's debt cannot be refinanced, extended or paid
with proceeds from other capital transactions, such as new equity capital, the
real estate company's cash flow may not be sufficient to repay all maturing debt
outstanding.
In addition, a portfolio company's obligation to comply with financial
covenants, such as debt-to-asset ratios, secured debt-to-total asset ratios and
other contractual obligations, may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.
Environmental Issues. In connection with the ownership (direct or indirect),
operation, management and development of real properties that may contain
hazardous or toxic substances, a portfolio company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and liabilities for injuries to persons and property. The
existence of any such material environmental liability could have a material
adverse effect on the results of operations and cash flow of any such portfolio
company and, as a result, the amount available to make distributions on the
shares could be reduced.
Smaller Companies. Even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole. There may
be less trading in a smaller company's stock, which means that buy and sell
transactions in that stock could have a larger impact on the stock's price than
is the case with larger company stocks. Smaller companies also may have fewer
lines of business so that changes in any one line of business may have a greater
impact on a smaller company's stock price than is the case for a larger company.
Further, smaller company stocks may perform in different cycles than larger
company stocks. Accordingly, REIT shares can be more volatile than -- and at
times will perform differently from -- large company stocks such as those found
in the Dow Jones Industrial Average.
Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. It is possible that the Fund may invest in a real estate
company which purports to be a REIT and that the company could fail to qualify
as a REIT. In the event of any such unexpected failure to qualify as a REIT, the
company would be subject to corporate-level taxation, significantly reducing the
return to the Fund on its investment in such company. REITs could possibly fail
to qualify for tax free pass-through of income under the Code, or to maintain
their exemptions from registration under the 1940 Act. The above factors may
also adversely affect a borrower's or a lessee's ability to meet its obligations
to the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
Preferred Stocks and Debt Securities Risk. In addition to the risks of
equity securities and securities linked to the real estate market, preferred
stocks and debt securities also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the value of preferred stocks and
debt securities may fall.
Lower-Rated Securities. Lower-rated securities may be considered speculative
with respect to the issuer's continuing ability to make principal and interest
payments. Analysis of the creditworthiness of issuers of lower-rated securities
may be more complex than for issuers of
29
higher quality debt securities, and the Fund's ability to achieve the Fund's
investment objectives may, to the extent the Fund is invested in lower-rated
debt securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund was investing in higher quality securities. The
Fund may invest in high yield securities that are rated 'CCC' or higher by S&P
or 'Caa' or higher by Moody's or unrated securities that are determined by the
Investment Manager to be of comparable quality. An issuer of these securities
has a currently identifiable vulnerability to default and the issues may be in
default or there may be present elements of danger with respect to principal or
interest. The Fund will not invest in securities which are in default at the
time of purchase.
Lower-rated securities, or equivalent unrated securities, which are commonly
known as 'junk bonds,' generally involve greater volatility of price and risk of
loss of income and principal and may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of lower-rated securities have been found to be less
sensitive to interest-rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments.
Yields on lower-rated securities will fluctuate. If the issuer of lower-rated
securities defaults and the Fund may incur additional expenses to seek recovery.
The secondary markets in which lower-rated securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the NAV of our shares. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of those securities, and adversely affect the ability of the issuers of
those securities to repay principal and pay interest on those securities. New
laws and proposed new laws may adversely impact the market for lower-rated
securities.
Anti-Takeover Provisions. Certain provisions of the Fund's Charter and
By-Laws could have the effect of limiting the ability of other entities or
persons to acquire control of the Fund or to change the Fund's structure. The
provisions may also have the effect of depriving stockholders of an opportunity
to redeem their Preferred Shares. These include provisions for staggered terms
of office for Directors, super-majority voting requirements for merger,
consolidation, liquidation, termination and asset sale transactions, amendments
to the Charter and conversion to open-end status. See 'Certain Provisions of the
Charter and By-Laws.'
Market Disruption Risk. The aftermath of the war in Iraq and the continuing
occupation of Iraq, and instability in the Middle East and terrorist attacks in
the U.S. and around the world have resulted in recent market volatility and may
have long-term effects on the U.S. and worldwide financial markets and may cause
further economic uncertainties in the U.S. and worldwide. The Fund does not know
how long the securities markets will continue to be affected by these events and
cannot predict the effects of the occupation or similar events in the future on
the U.S. economy and securities markets.
30
HOW THE FUND MANAGES RISK
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding Common Shares, the
Preferred Shares and the Series T, Series W, Series TH, Series F and Series M28
AMPS, voting together as a single class, and the approval of the holders of a
majority, as defined in the 1940 Act, of the outstanding Series T, Series W,
Series TH, Series F and Series M28 AMPS, and the Preferred Shares voting as a
separate class. The Fund will not invest more than 20% of its total assets in
preferred stock or debt securities rated below investment grade (commonly known
as 'junk bonds') or unrated securities of comparable quality. All of our
investments will be in securities of U.S. issuers and we will generally not
invest more than 10% of our total assets in the securities of one issuer. The
Fund may become subject to guidelines that are more limiting than the investment
restrictions set forth above in order to obtain and maintain ratings from S&P or
Moody's on the Preferred Shares. See 'Investment Restrictions' in the SAI for a
complete list of the fundamental and non-fundamental investment policies of the
Fund.
INTEREST RATE TRANSACTIONS
In order to seek to reduce the interest rate risk inherent in the fund's
capital structure and underlying investments and capital structure, the Fund may
enter into interest rate swap or cap transactions.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. In an interest rate swap, the
Fund would agree to pay to the other party to the interest rate swap (which is
known as the 'counterparty') a fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a variable rate payment that is
intended to approximate the Fund's variable rate payment obligation on the
Preferred Shares or any variable rate borrowing. The payment would be based on
the notional amount of the swap. In an interest rate cap, the Fund would pay a
premium to the counterparty to the interest rate cap and, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, would receive
from the counterparty payments of the difference based on the notional amount of
such cap. If the counterparty to an interest rate swap or cap defaults, the Fund
would not be able to use the anticipated net receipts under the swap or cap to
offset the dividend payments on the Preferred Shares or rate of interest on
borrowings. Depending on the general state of short-term interest rates and the
returns on the Fund's portfolio securities at that point in time, a default
could negatively impact the Fund's ability to make dividend payments on the
Preferred Shares. In addition, at the time an interest rate swap or cap
transaction reaches its scheduled termination date, there is a risk that the
Fund will not be able to obtain a replacement transaction or that the terms of
the replacement will not be as favorable as on the expiring transaction. If this
occurs, it could have a negative impact on the Fund's ability to make dividend
payments on the Preferred Shares. To the extent there is a decline in interest
rates, the value of the interest rate swap or cap could decline, resulting in a
decline in the asset coverage for the Preferred Shares. A sudden and dramatic
decline in interest rates may result in a significant decline in the asset
coverage. Under the terms of the Preferred Shares, if the Fund fails to maintain
the required asset coverage on the
31
outstanding Preferred Shares or fails to comply with other covenants, the Fund
may be required to redeem some or all of the Preferred Shares. The Fund may
choose or be required to redeem some or all of the Preferred Shares or prepay
any borrowings. This redemption or prepayment 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 could result in termination payment by or to the
Fund. An early termination of a cap could result in a termination payment to the
Fund.
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily. The Fund would not enter into interest
rate swap or cap transactions having a notional amount that exceeded the
outstanding amount of the Fund's leverage. The Fund will monitor any interest
rate swap or cap transactions with a view to ensuring that it remains in
compliance with applicable tax requirements.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreement with its Investment Manager, administrator, custodian and transfer
agent. The management of the Fund's day-to-day operations is delegated to its
officers, the Investment Manager and the Fund's administrator, subject always to
the investment objectives and policies of the Fund and to the general
supervision of the Directors. The names and business addresses of the Directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under 'Management of the Fund' in the
SAI.
INVESTMENT MANAGER
Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, has been retained to provide investment
advice, and, in general, to conduct the management and investment program of the
Fund under the overall supervision and control of the Directors of the Fund.
Cohen & Steers Capital Management, Inc., a registered investment adviser, was
formed in 1986 and is a leading U.S. manager of portfolios dedicated to
investments primarily in REITs with approximately $15.1 billion of assets under
management as of July 14, 2004. Its current clients include pension plans,
endowment funds, mutual funds and registered investment companies, including the
Fund, Cohen & Steers REIT and Utility Income Fund, Inc., Cohen & Steers Select
Utility Fund, Inc., Cohen & Steers Advantage Income Realty Fund, Inc., Cohen &
Steers Premium Income Realty Fund, Inc., Cohen & Steers REIT and Preferred
Income Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc., which are
closed-end investment companies, and Cohen & Steers Institutional Realty Shares,
Inc., Cohen & Steers Realty Shares, Inc., Cohen & Steers Realty Focus Fund,
Inc., Cohen & Steers Realty Income Fund, Inc. and Cohen & Steers Utility Fund,
Inc., which are open-end investment companies. Cohen & Steers Realty Shares,
Inc. is currently the largest registered investment company that invests
primarily in real estate securities. Cohen & Steers' client accounts are
invested principally in real estate securities. The Investment Manager is a
wholly owned subsidiary
32
of Cohen & Steers, Inc., a publicly traded company whose common stock is listed
on the New York Stock Exchange under the symbol 'CNS.'
INVESTMENT MANAGEMENT AGREEMENT
Under its Investment Management Agreement with the Fund (the 'Investment
Management Agreement'), the Investment Manager furnishes a continuous investment
program for the Fund's portfolio, makes the day-to-day investment decisions for
the Fund, and generally manages the Fund's investments in accordance with the
stated policies of the Fund, subject to the general supervision of the Board of
Directors of the Fund. The Investment Manager also performs certain
administrative services for the Fund and provides persons satisfactory to the
directors of the Fund to serve as officers of the Fund. Such officers, as well
as certain other employees and directors of the Fund, may be directors,
officers, or employees of the Investment Manager.
For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
..85% of the average daily managed asset value of the Fund. Managed asset value
is the net asset value of the Common Shares plus the liquidation preference of
the Preferred Shares and the Series T, Series W, Series TH, Series F and
Series M28 AMPS. This fee is higher than the fees incurred by many other
investment companies but is comparable to fees paid by many registered
management investment companies that invest primarily in real estate securities.
The Investment Manager has contractually agreed to waive its investment
management fees in the amount of .32% of average daily managed assets for the
first five fiscal years of the Fund's operations, .26% of average daily managed
assets in year six, .20% of average daily managed assets in year seven, .14% of
average daily managed assets in year eight, .08% of average daily managed assets
in year nine and .02% of average daily managed assets in year 10. In addition to
the monthly management fee, the Fund pays all other costs and expenses of its
operations, including compensation of its directors, custodian, transfer agency
and dividend disbursing expenses, legal fees, expenses of independent auditors,
expenses of repurchasing shares, listing expenses, expenses of preparing,
printing and distributing stockholder reports, notices, proxy statements and
reports to governmental agencies, and taxes, if any.
When the Fund is utilizing leverage, the fees paid to the Investment Manager
for investment advisory and management services will be higher than if the Fund
did not utilize leverage because the fees paid will be calculated based on the
Fund's managed assets, which includes the liquidation preference of the
Preferred Shares and the Series T, Series W, Series TH, Series F and Series M28
AMPS.
The Fund's portfolio managers are:
Martin Cohen -- Mr. Cohen is a Director, President and Treasurer of the
Fund. He is Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager. Mr. Cohen is a
'controlling person' of the Investment Manager on the basis of his ownership
of common stock of the Investment Manager's parent company.
Robert H. Steers -- Mr. Steers is a Director, Chairman and Secretary of
the Fund. He is Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager. Mr. Steers is a
'controlling person' of the Investment
33
Manager on the basis of his ownership of the common stock of Investment
Manager's parent company.
Joseph M. Harvey -- Mr. Harvey has been President of Cohen & Steers
Capital Management, Inc., the Fund's Investment Manager, since 2003, and was
Senior Vice President and Director of Investment Research prior thereto.
Prior to joining Cohen & Steers in 1992, he was a vice president with Robert
A. Stanger Co. for five years, where he was an analyst specializing in real
estate and related securities for the firm's research and consulting
activities.
ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT
Under its Administration Agreement with the Fund, the Investment Manager has
responsibility for providing administrative and accounting services and
assisting the Fund, including providing administrative services necessary for
the operations of the Fund and furnishing office space and facilities required
for conducting the business of the Fund.
In accordance with the Administration Agreement and with the approval of the
Board of Directors of the Fund, the Fund has entered into an agreement with
State Street Bank as sub-administrator under a fund accounting and
administration agreement (the 'Sub-Administration Agreement'). Under the
Sub-Administration Agreement, State Street Bank has assumed responsibility for
certain fund administration services.
Under the Administration Agreement, the Fund pays the Investment Manager an
amount equal to on an annual basis .02% of the Fund's managed assets. Under the
Sub-Administration agreement, the Fund pays State Street Bank a monthly
administration fee. The sub-administration fee paid by the Fund to State Street
Bank is computed on the basis of the managed assets in the Fund at an annual
rate equal to .04% of the first $200 million in assets, .03% of the next $200
million, and .015% of assets in excess of $400 million, with a minimum fee of
$120,000. The aggregate fee paid by the Fund and the other funds advised by the
Investment Manager to State Street Bank is computed by multiplying the total
number of funds by each break point in the above schedule in order to determine
the aggregate break points to be used in calculating the total fee paid by the
Cohen & Steers family of funds (i.e., six funds at $200 million or $1.2 billion
at .04%, etc.). The Fund is then responsible for its pro rata amount of the
aggregate sub-administration fee. State Street Bank also serves as the Fund's
custodian and The Bank of New York has been retained to serve as the Fund's
auction agent, transfer agent, dividend paying agent and registrar for the
Fund's Preferred Shares. See 'Custodian, Auction Agent, Transfer Agent, Dividend
Paying Agent and Registrar.'
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, please refer to the detailed
description of the Preferred Shares in the Fund's Articles Supplementary
attached as Appendix B to the SAI.
GENERAL
Under its Charter, the Fund is authorized to issue shares of preferred
stock, with rights as determined by the Board of Directors, without the approval
of the Common Stockholders. Each Series of Preferred Shares will have a
liquidation preference of $25,000 per share, plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared). The Preferred Shares
will rank on a parity with the Series T, Series W, Series TH, Series F AMPS and
34
Series M28, and with shares of any other series of preferred stock of the Fund,
as to the payment of dividends and the distribution of assets upon liquidation.
The Preferred Shares carry one vote per share on all matters on which such
shares are entitled to vote. The Preferred Shares, when issued by the Fund and
paid for pursuant to the terms of this Prospectus, will be fully paid and
non-assessable and will have no preemptive, exchange or conversion rights. Any
Preferred Shares repurchased or redeemed by the Fund will be classified as
authorized and unissued Preferred Shares. The Board of Directors may by
resolution classify or reclassify any authorized and unissued Preferred Shares
from time to time by setting or changing the preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or conditions
of redemption of such shares. The Preferred Shares will not be subject to any
sinking fund, but will be subject to mandatory redemption under certain
circumstances described below.
DIVIDENDS AND RATE PERIODS
General. The following is a general description of dividends and rate
periods for the Preferred Shares. The initial rate period for the Preferred
Shares will be days and the initial dividend rate for this period will be the
rate set out on the cover of this Prospectus. For subsequent dividend rate
periods, the dividend rates for those periods will be determined by auction,
normally held every 7 days, but the rate set at the auction will not exceed the
Maximum Rate. The Fund, subject to certain conditions, may change the length of
subsequent rate periods by designating them as special rate periods. See
'Designation of Special Rate Periods' below.
Dividend Payment Dates. Dividends on the Preferred Shares will be payable,
when, as and if declared by the Board, out of legally available funds in
accordance with the Fund's Charter and applicable law. Dividend periods
generally will begin on the first business day after an auction. If dividends
are payable on a day that is not a business day, then dividends will generally
be payable on the next day if such day is a business day, or as otherwise
specified in the Articles Supplementary.
Dividends will be paid through the Depository Trust Company ('DTC') on each
dividend payment date. The dividend payment date will normally be the first
business day after the dividend period ends. DTC, in accordance with its current
procedures, is expected to distribute dividends received from the auction agent
in same-day funds on each dividend payment date to agent members (members of DTC
that will act on behalf of existing or potential holders of the Preferred
Shares). These agent members are in turn expected to distribute such dividends
to the persons for whom they are acting as agents. Each of the current
Broker-Dealers has indicated to the Fund that dividend payments will be
available in same-day funds on each dividend payment date to customers that use
a Broker-Dealer or a Broker-Dealer's designee as agent member.
Calculation of Dividend Payment. The Fund computes the dividends per share
payable on shares of the Preferred Shares by multiplying the applicable rate in
effect by a fraction. The numerator of this fraction will normally be the number
of days in the rate period and the denominator will normally be 360. This rate
is then multiplied by $25,000 to arrive at the dividends per share.
Dividends on the Preferred Shares will accumulate from the date of their
original issue, which is , 2004. For each dividend payment period
after the initial rate period, the dividend will be the dividend rate determined
at auction. The dividend rate that results from an auction will not be greater
than the maximum rate described below.
35
The maximum applicable rate for any regular period will be the applicable
percentage (set forth in the table below) of the applicable 'AA' Composite
Commercial Paper Rate. In the case of a special rate period, the maximum
applicable rate will be specified by the Fund in the notice of the special rate
period for such dividend payment period. The applicable percentage is determined
on the day that a notice of a special rate period is delivered if the notice
specifies a maximum applicable rate for a special rate period. The applicable
percentage will be determined based on the lower of the credit rating or ratings
assigned to the Preferred Shares by Moody's and S&P. If Moody's or S&P or both
shall not make such rating available, the rate shall be determined by reference
to equivalent ratings issued by a substitute rating agency.
APPLICABLE
CREDIT RATINGS PERCENTAGE:
MOODY'S S&P NO NOTIFICATION
------- --- ---------------
'Aa3' or higher AA - or higher 150%
'A3' to 'A1' A - to A+ 200%
'Baa3' to 'Baa1' BBB - to BBB+ 225%
Below 'Baa3' Below BBB - 275%
On or prior to each dividend payment date, the Fund is required to deposit
with the auction agent sufficient funds for the payment of declared dividends.
The failure to make such deposit, subject to applicable cure periods, will
result in a default period during which no auction will be held. The Fund does
not intend to establish any reserves for the payment of dividends.
Restriction on Dividends and Other Distributions. While any of the Preferred
Shares are outstanding, the Fund generally may not declare, pay or set apart for
payment, any dividend or other distribution in respect of its common shares
(other than in additional shares of common stock or rights to purchase common
stock) or repurchase any of its common shares (except by conversion into or
exchange for shares of the Fund ranking junior to the Preferred Shares as to the
payment of dividends and the distribution of assets upon liquidation) unless
each of the following conditions have been satisfied:
In the case of the Moody's coverage requirements, immediately after such
transaction, the aggregate Moody's Coverage Value (i.e., the aggregate
value of the Fund's portfolio discounted according to Moody's criteria)
would be equal to or greater than the Preferred Shares Basic Maintenance
Amount (i.e., the amount necessary to pay all outstanding obligations of
the Fund with respect to the Preferred Shares, any preferred stock
outstanding, expenses for the next 90 days and any other liabilities of
the Fund) (see 'Rating Agency Guidelines' below);
In the case of S&P's coverage requirements, immediately after such
transaction, the Aggregate S&P value (i.e., the aggregate value of the
Fund's portfolio discounted according to S&P criteria) would be equal to
or greater than the Preferred Shares Basic Maintenance Amount;
Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this Prospectus under 'Rating Agency Guidelines'
below) is met;
Full cumulative dividends on the Preferred Shares due on or prior to the
date of the transaction have been declared and paid or shall have been
declared and sufficient funds for the payment thereof deposited with the
auction agent; and
36
The Fund has redeemed the full number of the Preferred Shares required to
be redeemed by any provision for mandatory redemption contained in the
Articles Supplementary.
The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking as to the payment of dividends on a
parity with the Preferred Shares unless the Fund has declared and paid or
contemporaneously declares and pays full cumulative dividends on the Preferred
Shares through its most recent dividend payment date. However, when the Fund has
not paid dividends in full on the Preferred Shares through the most recent
dividend payment date or upon any shares of the Fund ranking, as to the payment
of dividends, on a parity with the Preferred Shares through their most recent
respective dividend payment dates, the amount of dividends declared per share on
the Preferred Shares and such other class or series of shares will in all cases
bear to each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund may, in certain situations, at
its sole option, declare a special rate period. Prior to declaring a special
rate period, the Fund will give notice (a 'notice of special rate period') to
the auction agent and to each Broker-Dealer. The notice will state that the next
succeeding rate period for the Preferred Shares will be a number of days as
specified in such notice. The Fund may not designate a special rate period
unless sufficient clearing bids were made in the most recent auction. In
addition, full cumulative dividends, any amounts due with respect to mandatory
redemptions and any additional dividends payable prior to such date must be paid
in full or deposited with the auction agent. The Fund also must have received
confirmation from Moody's and S&P or any substitute rating agency that the
proposed special rate period will not adversely affect such agency's
then-current rating on the Preferred Shares and the lead Broker-Dealer
designated by the Fund, initially , must not have objected to
declaration of a special rate period. A notice of special rate period also will
specify whether the shares of the Preferred Shares will be subject to optional
redemption during such special rate period and, if so, the redemption premium,
if any, required to be paid by the Fund in connection with such optional
redemption.
VOTING RIGHTS
Except as noted below, the Fund's Common Shares and the Preferred Shares
(and the Series T, Series W, Series TH, Series F and Series M28 AMPS) have equal
voting rights of one vote per share and vote together as a single class. In
elections of directors, the holders of the Preferred Shares (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS), as a separate class, vote to
elect two directors, and the holders of the Common Shares and holders of the
Preferred Shares (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS) vote together as a single class to elect the remaining
directors. In addition, during any period ('Voting Period') in which the Fund
has not paid dividends on the Preferred Shares (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS) in an amount equal to two full years
dividends, the holders of the Preferred Shares (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS), voting as a single class, are entitled
to elect (in addition to the two directors set forth above) the smallest number
of additional directors as is necessary to ensure that a majority of the
directors has been elected by the holders of the Preferred Shares (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS). The holders of the
Preferred Shares (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS) will continue to have these rights until all dividends in
arrears have been paid or otherwise provided for.
37
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the Preferred Shares
(and the Series T, Series W, Series TH, Series F and Series M28 AMPS) of the
number of directors that such holders are entitled to elect. The persons elected
by the holders of the Preferred Shares (and the Series T, Series W, Series TH,
Series F and Series M28 AMPS), together with the incumbent directors, will
constitute the duly elected directors of the Fund. When all dividends in arrears
on the Preferred Shares have been paid or provided for, the terms of office of
the additional directors elected by the holders of the Preferred Shares will
terminate.
So long as any of the Preferred Shares (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS) are outstanding, the Fund will not,
without the affirmative vote of the holders of a majority of the outstanding
Preferred Shares (together with the Series T, Series W, Series TH, Series F and
Series M28 AMPS), (i) institute any proceedings to be adjudicated bankrupt or
insolvent, or consent to the institution of bankruptcy or insolvency proceedings
against it, or file a petition seeking or consenting to reorganization or relief
under any applicable federal or state law relating to bankruptcy or insolvency,
or consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Fund or a substantial part of
its property, or make any assignment for the benefit of creditors, or, except as
may be required by applicable law, admit in writing its inability to pay its
debts generally as they become due or take any corporate action in furtherance
of any such action; (ii) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or Fund receipt or other material encumbrance of any
kind upon any of the Fund's assets as a whole, except (A) liens the validity of
which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
senior to the Preferred Shares (and the Series T, Series W, Series TH, Series F
and Series M28 AMPS), (D) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
permitted under clause (iii) below and (E) liens to secure payment for services
rendered including, without limitation, services rendered by the Fund's Paying
Agent and the auction agent; or (iii) create, authorize, issue, incur or suffer
to exist any indebtedness for borrowed money or any direct or indirect guarantee
of such indebtedness for borrowed money or any direct or indirect guarantee of
such indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Fund has eligible assets with an aggregate discounted value at least equal to
the Preferred Shares Basic Maintenance Amount as of the immediately preceding
valuation date.
In addition, the affirmative vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding Preferred Shares (together with the
Series T, Series W, Series TH, Series F and Series M28 AMPS) shall be required
to approve any plan of reorganization (as such term is used in the 1940 Act)
adversely affecting such shares or any action requiring a vote of security
holders of the Fund under Section 13(a) of the 1940 Act, including, among other
things, changes in the
38
Fund's investment restrictions described under 'Investment Restrictions' in the
SAI and changes in the Fund's subclassification as a closed-end investment
company.
The affirmative vote of the holders of a majority, as defined in the 1940
Act, of the outstanding Preferred Shares of any series, voting separately from
any other series, shall be required with respect to any matter that materially
and adversely affects the rights, preferences, or powers of that series in a
manner different from that of other series or classes of the Fund's shares of
capital stock. For purposes of the foregoing, no matter shall be deemed to
adversely affect any right, preference or power unless such matter (i) alters or
abolishes any preferential right of such series; (ii) creates, alters or
abolishes any right in respect of redemption of such series; or (iii) creates or
alters (other than to abolish) any restriction on transfer applicable to such
series. The vote of holders of any series described in this paragraph will in
each case be in addition to a separate vote of the requisite percentage of
Common Shares and/or preferred stock necessary to authorize the action in
question.
The Common Shares and the Preferred Shares (together with the Series T,
Series W, Series TH, Series F and Series M28 AMPS) also will vote separately to
the extent otherwise required under Maryland law or the 1940 Act as in effect
from time to time. The class votes of holders of the Preferred Shares (together
with the Series T, Series W, Series TH, Series F and Series M28 AMPS) described
above will in each case be in addition to any separate vote of the requisite
percentage of Common Shares and the Preferred Shares (together with the
Series T, Series W, Series TH, Series F and Series M28 AMPS), voting together as
a single class, necessary to authorize the action in question.
For purpose of any right of the holders of the Preferred Shares to vote on
any matter, whether the right is created by the Charter, by statute or
otherwise, a holder of Preferred Shares is not entitled to vote and the
Preferred Shares will not be deemed to be outstanding for the purpose of voting
or determining the number of the Preferred Shares required to constitute a
quorum, if prior to or concurrently with a determination of the Preferred Shares
entitled to vote or of the Preferred Shares deemed outstanding for quorum
purposes, as the case may be, a notice of redemption was given in respect of
those Preferred Shares and sufficient Deposit Securities (as defined in the SAI)
for the redemption of those Preferred Shares were deposited.
RATING AGENCY GUIDELINES
The Fund is required under S&P and Moody's guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount (as defined below). S&P and Moody's have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by the rating agency). The S&P and
Moody's guidelines also impose certain diversification requirements on the
Fund's overall portfolio. The 'Preferred Shares Basic Maintenance Amount'
includes the sum of (i) the aggregate liquidation preference of the Preferred
Shares (and the Series T, Series W, Series TH, Series F and Series M28 AMPS)
then outstanding (plus accrued and projected dividends), (ii) the total
principal of any senior debt (plus accrued and projected dividends),
(iii) certain Fund expenses and (iv) certain other current liabilities.
The Fund also is required under rating agency guidelines to maintain, with
respect to the AMPS, as of the last business day of each month in which the
Preferred Shares (and the Series T,
39
Series W, Series TH, Series F and Series M28 AMPS) are outstanding, asset
coverage of at least 200% with respect to senior securities that are shares of
the Fund, including the 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 that are shares of a closed-end investment company as a
condition of declaring dividends on its Common Shares) ('1940 Act Preferred
Shares Asset Coverage'). S&P and Moody's have agreed that the auditors must
certify once per year the asset coverage test on a date randomly selected by the
auditor. Based on the Fund's assets and liabilities as of , 2004, and
assuming the issuance of all of the Preferred Shares offered hereby and the use
of the proceeds as intended, the 1940 Act Preferred Shares Asset Coverage with
respect to the Preferred Shares (and the Series T, Series W, Series TH,
Series F and Series M28 AMPS) would be computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $
Senior securities representing indebtedness = $ = %
plus liquidation value of the preferred shares
If the Fund does not timely cure a failure to maintain (1) a discounted
value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or
(2) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance
with the requirements of the rating agency or agencies then rating the Preferred
Shares, the Fund will be required to redeem the Preferred Shares as described
below under ' -- Redemption.'
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change or a withdrawal of the
ratings altogether. In addition, any rating agency providing a rating for the
Preferred Shares may, at any time, change or withdraw any such rating. The Board
of Directors may, without stockholder approval, amend, alter, add to or repeal
any or all of the definitions and related provisions that have been adopted by
the Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from S&P or Moody's, or both, as appropriate, that any such
change would not impair the ratings then assigned by S&P and Moody's to the
Preferred Shares.
The Board of Directors may amend the definition of the Maximum Rate to
increase the percentage amount by which the Reference Rate is multiplied to
determine the Maximum Rate shown therein without the vote or consent of the
holders of the Preferred Shares, or any other stockholder of the Corporation,
but only with confirmation from each Rating Agency, and after consultation with
the broker-dealers, provided that immediately following any such increase the
Fund could meet the Preferred Shares Basic Maintenance Amount Test.
As described by S&P and Moody's, the Preferred Shares rating is an
assessment of the capacity and willingness of the Fund to pay the Preferred
Shares' obligations. The ratings on the Preferred Shares are not recommendations
to purchase, hold or sell the Preferred Shares, inasmuch as the ratings do not
comment as to market price or suitability for a particular investor. The rating
agency guidelines also do not address the likelihood that an owner of the
Preferred Preferred Shares will be able to sell such shares in an auction or
otherwise. The ratings are based on current information furnished to S&P and
Moody's by the Fund and the Investment Manager and information obtained from
other sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information.
40
The rating agency guidelines will apply to the Preferred Shares only so long
as such rating agency is rating these shares. The Fund will pay fees to S&P and
Moody's for rating the Preferred Shares.
REDEMPTION
Mandatory Redemption. If the Fund does not timely cure a failure to
(1) maintain a discounted value of its portfolio equal to the Preferred Shares
Basic Maintenance Amount, (2) maintain the 1940 Act Preferred Shares Asset
Coverage, or (3) file a required certificate related to asset coverage on time,
the Preferred Shares will be subject to mandatory redemption out of funds
legally available therefor in accordance with the Articles Supplementary and
applicable law, at the redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption. Any such
redemption will be limited to the number of the Preferred Shares necessary to
restore the required discounted value or the 1940 Act Preferred Shares Asset
Coverage, as the case may be.
In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, the Fund will allocate the number of shares
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the 1940 Act Preferred Shares Asset Coverage, as the case may be, pro rata
among the Preferred Shares of the Fund and any other preferred stock of the
Fund, subject to redemption or retirement. If fewer than all outstanding shares
of any series are, as a result, to be redeemed, the Fund may redeem such shares
by lot or other method that it deems fair and equitable.
Optional Redemption. To the extent permitted under the 1940 Act and Maryland
law, the Fund at its option may without the consent of the holders of the
Preferred Shares, redeem Preferred Shares having a dividend period of one year
or less, in whole or in part, on the business day after the last day of such
dividend period upon not less than 15 calendar days and not more than 40
calendar days prior notice. The optional redemption price per share will be
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date fixed for redemption.
Preferred Shares having a dividend period of more than one year are redeemable
at the option of the Fund, in whole or in part, prior to the end of the relevant
dividend period, subject to any specific redemption provisions, which may
include the payment of redemption premiums to the extent required under any
applicable specific redemption provisions. The Fund will not make any optional
redemption unless, after giving effect thereto, (i) the Fund has available
certain deposit securities with maturities or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to holders of the Preferred
Shares by reason of the redemption of the Preferred Shares on such date fixed
for the redemption and (ii) the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance
Amount.
Notwithstanding the foregoing, the Preferred Shares may not be redeemed at
the option of the Fund unless all dividends in arrears on the outstanding
Preferred Shares, including all outstanding preferred shares, have been or are
being contemporaneously paid or set aside for payment. This would not prevent
the lawful purchase or exchange offer for the Preferred Shares made on the same
terms to holders of all outstanding preferred shares.
41
LIQUIDATION
Subject to the rights of holders 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 liquidation of the Fund, upon a liquidation of the Fund, whether
voluntary or involuntary, the holders of the Preferred Shares then outstanding
will be entitled to receive and to be paid out of the assets of the Fund
available for distribution to its stockholders, before any payment or
distribution shall be made on the Common Shares, an amount equal to the
liquidation preference with respect to such shares ($25,000 per share), plus an
amount equal to all dividends thereon (whether or not earned or declared by the
Fund, but excluding the interest thereon) accumulated but unpaid to and
including the date of final distribution in same-day funds in connection with
the liquidation of the Fund. After the payment to the holders of the Preferred
Shares of the full preferential amounts provided for as described herein, the
holders of the Preferred Shares as such shall have no right or claim to any of
the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.
THE AUCTION
GENERAL
The Articles Supplementary provide that, except as otherwise described in
this prospectus, the applicable rate for the Preferred Shares for each rate
period after the initial rate period will be the rate that results from an
auction conducted as set forth in the Articles Supplementary and summarized
below. In such an auction, persons determine to hold or offer to sell or, based
on dividend rates bid by them, offer to purchase or sell the Preferred Shares.
See the Articles Supplementary for a more complete description of the auction
process.
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (initially, The Bank of New York) which
provides, among other things, that the auction agent will follow the auction
procedures to determine the applicable rate for the Preferred Shares so long as
the applicable rate for the Preferred Shares is to be based on the results of an
auction.
The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 60 days after the delivery of such notice. If the
auction agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that prior to such removal the Fund has entered into such an
agreement with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for the Preferred Shares.
The auction agent will pay to each Broker-Dealer after each auction from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the stated value ($25,000 per share) of the Preferred Shares held by a
Broker-Dealer's customer upon settlement in an auction.
42
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for the Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner of
the Preferred Shares may submit the following types of orders with respect to
the Preferred Shares to that Broker-Dealer:
1. Hold Order -- indicating its desire to hold Preferred Shares without
regard to the applicable rate for the next rate period.
2. Bid -- indicating its desire to purchase or hold the indicated number of
Preferred Shares at $25,000 per share if the applicable rate for shares
of such series for the next rate period is not less than the rate or
spread specified in the bid and which shall be deemed an irrevocable
offer to sell the Preferred Shares at $25,000 per share if the applicable
rate for shares of such series for the next rate period is less than the
rate or spread specified in the bid.
3. Sell Order -- indicating its desire to sell the Preferred Shares at
$25,000 per share without regard to the applicable rate for shares of
such series for the next rate period.
A beneficial owner of the Preferred Shares may submit different types of
orders to its Broker-Dealer with respect to the Preferred Shares then held by
the beneficial owner. A beneficial owner that submits a bid to its Broker-Dealer
having a rate higher than the maximum applicable rate on the auction date will
be treated as having submitted a sell order to its Broker-Dealer. A beneficial
owner that fails to submit an order to its Broker-Dealer will ordinarily be
deemed to have submitted a hold order to its Broker-Dealer. However, if a
beneficial owner fails to submit an order for some or all of its shares to its
Broker-Dealer for an auction relating to a rate period of more than 91 days,
such beneficial owner will be deemed to have submitted a sell order for such
shares to its Broker-Dealer. A sell order constitutes an irrevocable offer to
sell the Preferred Shares subject to the sell order. A beneficial owner that
offers to become the beneficial owner of additional Preferred Shares is, for the
purposes of such offer, a potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of the Preferred Shares but that wishes to purchase the
Preferred Shares or a beneficial owner that wishes to purchase additional
Preferred Shares. A potential holder may submit bids to its Broker-Dealer in
which it offers to purchase the Preferred Shares at $25,000 per share if the
applicable rate for the next rate period is not less than the rate specified in
such bid. A bid placed by a potential holder specifying a rate higher than the
maximum applicable rate on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
However, neither the Fund nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any Preferred
Shares held by it or customers who are beneficial owners will be treated as a
beneficial owner's failure to submit to its Broker-Dealer an order in respect of
the Preferred Shares held by it. A Broker-Dealer may also submit orders to the
auction agent for
43
its own account as an existing holder or potential holder, provided it is not an
affiliate of the Fund.
There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to the number of Preferred
Shares subject to sell orders submitted or deemed submitted to the auction agent
by Broker-Dealers for existing holders. If there are sufficient clearing bids,
the applicable rate for the Preferred Shares for the next succeeding rate period
thereof will be the lowest rate specified in the submitted bids which, taking
into account such rate and all lower rates bid by Broker-Dealers as or on behalf
of existing holders and potential holders, would result in existing holders and
potential holders owning the Preferred Shares available for purchase in the
auction.
If there are not sufficient clearing bids, the applicable rate for the next
rate period will be the maximum rate on the auction date. However, if the Fund
has declared a special rate period and there not sufficient clearing bids, the
applicable rate for the next rate period will be the same as during the current
rate period. If there are not sufficient clearing bids, beneficial owners of the
Preferred Shares that have submitted or are deemed to have submitted sell orders
may not be able to sell in the auction all shares subject to such sell orders.
If all of the outstanding Preferred Shares are the subject of submitted hold
orders, then the rate period following the auction will automatically be the
same length as the preceding rate period and the applicable rate for the next
rate period will be the 30 day 'AA' Composite Commercial Paper Rate in the case
of a standard dividend period for the Preferred Shares. The 'AA' Composite
Commercial Paper Rate is the rate on commercial paper issued by financial
corporations whose bonds are rated AA by S&P as made available by the Federal
Reserve Bank of New York or, if such rate is not made available by the Federal
Reserve Bank of New York, the arithmetical average of such rates as quoted to
the auction agent by a commercial paper dealer as may be appointed by the Fund.
The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of Preferred Shares that is different
than the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same-day funds to
DTC against delivery to their respective agent members. DTC will make payment to
the sellers' agent members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their agent members in same-day funds.
The auctions for the Preferred Shares will normally be held every 7 days,
and each subsequent rate period will normally begin on the following business
day.
The first auction for the Preferred Shares will be held on ,
2004, the business day preceding the dividend payment date for the initial
dividend period. Thereafter, except during special rate periods, auctions for
the Preferred Shares normally will be held every 7 days, and each subsequent
dividend period for the Preferred Shares normally will begin on the following
business day.
44
The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding Preferred Shares of any series, and three
current holders. The three current holders and three potential holders submit
orders through Broker-Dealers at the auction:
Current Holder A...... Owns 500 shares, wants to sell Bid order of 4.1% rate for all
all 500 shares if auction rate 500 Shares
is less than 4.1%
Current Holder B...... Owns 300 shares, wants to hold Hold order -- will take the
auction rate
Current Holder C...... Owns 200 shares, wants to sell Bid order of 3.9% rate for all
all 200 shares 200 shares if auction rate is
less than 3.9%
Potential Holder D.... Wants to buy 200 shares Places order to buy at or
above 4.0%
Potential Holder E.... Wants to buy 300 shares Places order to buy at or
above 3.9%
Potential Holder F.... Wants to buy 200 shares Places order to buy at or
above 4.1%
The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 4.0% (the offer by D). Therefore, the dividend rate
will be 4.0%. Current holders B and C will continue to own their shares. Current
holder A will sell its shares because A's dividend rate bid was higher than the
dividend rate. Potential holder D will buy 200 shares and potential holder E
will buy 300 shares because their bid rates were at or below the dividend rate.
Potential holder F will not buy any shares because its bid rate was above the
dividend rate.
SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES
The underwriters are not required to make a market in the Preferred Shares.
The Broker-Dealers (including the underwriters) may maintain a secondary trading
market for outside of auctions, but they are not required to do so. There can be
no assurance that a secondary trading market for the Preferred Shares will
develop or, if it does develop, that it will provide owners with liquidity of
investment. The Preferred Shares will not be registered on any stock exchange or
on the NASDAQ market. Investors who purchase the Preferred Shares in an auction
for a special rate period should note that because the dividend rate on such
shares will be fixed for the length of that dividend period, the value of such
shares may fluctuate in response to the changes in interest rates, and may be
more or less than their original cost if sold on the open market in advance of
the next auction thereof, depending on market conditions.
You may sell, transfer, or otherwise dispose of the Preferred Shares only in
whole shares and only
pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
to a Broker-Dealer; or
to such other persons as may be permitted by the Fund; provided, however,
that (x) if you hold your Preferred Shares in the name of a Broker-Dealer,
a sale or transfer of your Preferred Shares to that Broker-Dealer, or to
another customer of that Broker-Dealer, will not be considered a sale or
transfer for purposes of the foregoing if that Broker-Dealer
45
remains the existing holder of the Preferred Shares immediately after the
transaction; and (y) in the case of all transfers, other than through an
auction, the Broker-Dealer (or other person, if the Fund permits)
receiving the transfer will advise the auction agent of the transfer.
Further description of the auction procedures can be found in the Articles
Supplementary.
DESCRIPTION OF COMMON SHARES
The Fund is authorized to issue Common Shares, par value $.001 per
share. Common Shares have equal rights to the payment of dividends and the
distribution of assets upon liquidation. Common Shares are fully paid and
non-assessable when issued and have no preemptive, conversion, exchange,
redemption or cumulative voting rights. Holders of Common Shares are entitled to
one vote per share. Whenever the Preferred Shares and the other outstanding AMPS
are outstanding, holders of Common Shares will not be entitled to receive any
distributions from the Fund unless all accrued dividends on the Preferred Shares
and the other outstanding AMPS have been paid, and unless the applicable asset
coverage requirements under the 1940 Act with respect to the Preferred Shares
and the other outstanding AMPS would be at least 200% after giving effect to the
distributions. Under the rules of the NYSE applicable to listed companies, the
Fund is required to hold an annual meeting of stockholders each year.
CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS
The Fund has provisions in its Charter and By-Laws ('By-Laws') that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions or to modify
its structure. Commencing with the first annual meeting of stockholders, the
Board of Directors will be divided into three classes, having initial terms of
one, two and three years, respectively. At the annual meeting of stockholders in
each year thereafter, the term of one class will expire and directors will be
elected to serve in that class for terms of three years. This provision could
delay for up to two years the replacement of a majority of the Board of
Directors. A director may be removed from office only for cause and only by a
vote of the holders of at least 75% of the outstanding shares of the Fund
entitled to vote on the matter.
The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. Such conversion also requires the affirmative vote
of the holders of at least 75% of Common Shares and the Preferred Shares (and
the Series T, Series W, Series TH, Series F and Series M28 AMPS) outstanding at
the time, voting together as a single class, unless it is approved by a vote of
at least 75% of the Continuing Directors (as defined below), in which event such
conversion requires the approval of the holders of a majority of the votes
entitled to be cast thereon by the stockholders of the Fund. A 'Continuing
Director' is any member of the Board of Directors of the Fund who (i) is not a
person or affiliate of a person who enters or proposes to enter into a Business
Combination (as defined below) with the Fund (an 'Interested Party') and (ii)
who has been a member of the Board of Directors of the Fund for a period of at
least 12 months, or has been a member of the Board of Directors since the Fund's
initial public offering of Common Shares, or is a successor of a Continuing
Director who is unaffiliated with an Interested Party and is recommended to
succeed a Continuing Director by a majority of the Continuing Directors then
46
on the Board of Directors of the Fund. The affirmative vote of at least 75% of
the entire Board of Directors and at least 75% of the holders of Common Shares
and the Preferred Shares (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS) outstanding at the time, voting as a single class, will be
required to amend the Charter to change any of the provisions in this paragraph
and the preceding paragraph.
The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of Common Shares and the Preferred Shares (and
the Series T, Series W, Series TH, Series F and Series M28 AMPS) outstanding at
the time, voting as a single class, and (ii) in the case of a Business
Combination (as defined below), 66 2/3% of the Common Shares and the Preferred
Shares (and the Series T, Series W, Series TH, Series F and Series M28 AMPS)
outstanding at the time, voting together as a single class, other than votes
held by an Interested Party who is (or whose affiliate is) a party to a Business
Combination (as defined below) or an affiliate or associate of the Interested
Party, are required to authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with
or into any other entity;
(ii) issuance or transfer by the Fund (in one or a series of
transactions in any 12-month period) of any securities of the Fund to any
person or entity for cash, securities or other property (or combination
thereof) having an aggregate fair market value of $1,000,000 or more,
excluding (a) issuances or transfers of debt securities of the Fund,
(b) sales of securities of the Fund in connection with a public offering,
(c) issuances of securities of the Fund pursuant to a dividend reinvestment
plan adopted by the Fund, (d) issuances of securities of the Fund upon the
exercise of any stock subscription rights distributed by the Fund and
(e) portfolio transactions effected by the Fund in the ordinary course of
business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12 month
period) to or with any person or entity of any assets of the Fund having an
aggregate fair market value of $1,000,000 or more except for portfolio
transactions (including pledges of portfolio securities in connection with
borrowings) effected by the Fund in the ordinary course of its business
(transactions within clauses (i), (ii) and (iii) above being known
individually as a 'Business Combination');
(iv) any voluntary liquidation or dissolution of the Fund or an
amendment to the Fund's Charter to terminate the Fund's existence; or
(v) any stockholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets as to which stockholder
approval is required under federal or Maryland law.
However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of at least 75% of the Continuing Directors (as
defined above). In that case, if Maryland law requires stockholder approval, the
affirmative vote of a majority of votes entitled to be cast thereon shall be
required and if Maryland law does not require stockholder approval, no
stockholder approval will be required. The Fund's By-Laws contain provisions the
effect of which is to prevent matters, including nominations of directors, from
being considered at a stockholders' meeting where the Fund has not received
notice of the matters generally at least 90 but no more than 120 days prior to
the first anniversary of the preceding year's annual meeting.
47
These provisions are in addition to any special voting rights granted to the
holders of the Preferred Shares in the Charter. See 'Description of Preferred
Shares -- Voting Rights.' The Board of Directors has determined that the
foregoing voting requirements, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interest of
the Fund's stockholders generally.
Reference is made to the Charter and By-Laws of the Fund, on file with the
Securities and Exchange Commission, for the full text of these provisions. These
provisions could have the effect of depriving stockholders of an opportunity to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. In the opinion of the Investment Manager, however, these
provisions offer several possible advantages. They may require persons seeking
control of a Fund to negotiate with its management regarding the price to be
paid for the shares required to obtain such control, they promote continuity and
stability and they enhance the Fund's ability to pursue long-term strategies
that are consistent with its investment objectives.
CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and it may be converted to an
open-end investment company at any time by a vote of the outstanding shares. See
'Description of Preferred Shares -- Voting Rights' and 'Certain Provisions of
the Charter and By-Laws' for a discussion of voting requirements applicable to
conversion of the Fund to an open-end investment company. If the Fund converted
to an open-end investment company, it would be required to redeem all the
Preferred Shares (and the Series T, Series W, Series TH, Series F and Series M28
AMPS) then outstanding (requiring in turn that it liquidate a portion of its
investment portfolio), and the Common Shares would no longer be listed on the
NYSE. Conversion to open-end status could also require the Fund to modify
certain investment restrictions and policies. Stockholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or permitted under the 1940
Act) at their net asset value, less such redemption charge, if any, as might be
in effect at the time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet redemptions, open-end
investment companies typically engage in a continuous offering of their shares.
Open-end investment companies are thus subject to periodic asset in-flows and
out-flows that can complicate portfolio management. The Board of Directors may
at any time propose conversion of the Fund to open-end status, depending upon
its judgment regarding the advisability of such action in light of circumstances
then prevailing. The Board of Directors believes, however, that the closed-end
structure is desirable in light of the Fund's investment objectives and policies
and it is currently not likely that the Board of Directors would vote to convert
the Fund to an open-end fund.
REPURCHASE OF COMMON SHARES
Common shares of closed-end investment companies often trade at a discount
to net asset value, and the Fund's Common Shares may also trade at a discount to
their net asset value, although it is possible that they may trade at a premium
above net asset value. The market price of the Fund's Common Shares will be
determined by such factors as relative demand for and supply of the Common
Shares in the market, the Fund's net asset value, general market and economic
conditions and other factors beyond the control of the Fund. Although Common
48
Stockholders will not have the right to redeem the Common Shares, the Fund may
take action to repurchase Common Shares in the open market or make tender offers
for its Common Shares at net asset value.
The acquisition of Common Shares by the Fund will decrease the total assets
of the Fund and, therefore, have the effect of increasing the Fund's expense
ratio and may adversely affect the ability of the Fund to achieve its investment
objectives. To the extent the Fund may need to liquidate investments to fund
repurchases of Common Shares, this may result in portfolio turnover which will
result in additional expenses being borne by the Fund. The Board of Directors
currently considers the following factors to be relevant to a potential decision
to repurchase Common Shares: the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action on the Fund or its
stockholders and market considerations. Any share repurchases or tender offers
will be made in accordance with the requirements of the Securities Exchange Act
of 1934, as amended, and the 1940 Act. See 'U.S. Federal Taxation' for a
description of the potential tax consequences of a repurchase of Common Shares.
U.S. FEDERAL TAXATION
The following discussion offers only a brief outline of the U.S. federal
income tax consequences of investing in the Fund and is based on the U.S.
federal tax laws in effect on the date hereof. Such tax laws are subject to
change by legislative, judicial or administrative action, possibly with
retroactive effect. Investors should consult their own tax advisers for more
detailed information and for information regarding the impact of state, local
and foreign taxes on an investment in the Fund.
U.S. FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to elect to be treated as, and to qualify annually as, a
regulated investment company (a 'RIC') under Subchapter M of the Code. To
qualify, the Fund must, among other things, (a) derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived from its business of
investing in stock, securities or foreign currencies (the 'Income Requirement');
and (b) diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the value of its total assets is represented
by cash, U.S. Government securities, securities of other RICs and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer, or of two or more issuers which the
Fund controls and which are engaged in the same, similar or related trades or
businesses.
For each taxable year that the Fund otherwise qualifies as a RIC, it will
not be subject to U.S. federal income tax on that part of its investment company
taxable income (as that term is defined in the Code, but determined without
regard to any deduction for dividends paid) and net capital gain (the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its stockholders, if it distributes at least 90% of the sum of its investment
company taxable income and any net tax-exempt interest income for that year (the
'Distribution Requirement'). The Fund intends to make sufficient distributions
of its investment company
49
taxable income each taxable year to meet the Distribution Requirement. If the
Fund failed to qualify for treatment as a RIC for any taxable year or failed to
satisfy the Distribution Requirement in any taxable year, (a) it would be taxed
as an ordinary corporation on the full amount of its taxable income for that
year without being able to deduct the distributions it makes to its
stockholders, and (b) its stockholders would treat any such distributions,
including distributions of net capital gain, as dividends (that is, ordinary
income) to the extent of the Fund's current and accumulated earnings and
profits. Such distributions generally would be eligible (i) for the dividends
received deduction available to corporate stockholders and (ii) for treatment as
qualified dividend income in the case of individual stockholders.
The Fund also currently intends to distribute all realized net capital gain
annually. If, however, the Board of Directors determines for any taxable year to
retain all or a portion of the Fund's net capital gain, that decision will not
affect the Fund's ability to qualify for treatment as a RIC, but will subject
the Fund to a maximum tax rate of 35% of the amount retained. In that event, the
Fund expects to designate the retained amount as undistributed capital gains in
a notice to its stockholders, who (i) will be required to include their
proportionate shares of the undistributed amount in their gross income as
long-term capital gain, and (ii) will be entitled to credit their proportionate
shares of the 35% tax paid by the Fund against their U.S. federal income tax
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned
by a Fund stockholder will be increased by an amount equal to 65% of the amount
of undistributed capital gains included in the stockholder's gross income.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year at least 98% of the sum of
its ordinary income for that year and capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts. For this
and other purposes, a distribution will be treated as paid by the Fund and
received by the stockholders on December 31 if it is declared by the Fund in
October, November or December of such year, made payable to stockholders of
record on a date in such a month and paid by the Fund during January of the
following year. Any such distribution thus will be taxable to stockholders whose
taxable year is the calendar year in the year the distribution is declared,
rather than the year in which the distribution is received. To prevent
application of the excise tax, the Fund intends to make its distributions in
accordance with the calendar year distribution requirement.
U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF PREFERRED SHARES
Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the Preferred Shares at any time in the future, the Fund
believes that under present law the Preferred Shares will constitute stock of
the Fund and distributions with respect to the Preferred Shares (other than
distributions in redemption of the Preferred Shares that are treated as
exchanges of stock under Section 302(b) of the Code) thus will constitute
dividends to the extent of the Fund's current or accumulated earnings and
profits as calculated for U.S. federal income tax purposes. Such dividends
generally will be taxable as ordinary income to holders (other than
distributions of qualified dividend income and capital gain dividends, as
described below). If a portion of the Fund's income consists of qualifying
dividends paid by U.S. corporations (other than REITs), a portion of the
dividends paid by the Fund to corporate stockholders, if properly designated,
may qualify for the dividends received deduction. In addition, for taxable years
beginning on or before December 31, 2008, distributions of investment income
designated by the Fund as derived from qualified dividend income will be taxed
in the hands of individuals at the rates applicable to long-term capital gain,
provided holding period and other requirements are met.
50
The Fund does not expect a significant portion of Fund distributions to be
eligible for the dividends received deduction or derived from qualified dividend
income. The foregoing discussion relies in part on a published ruling of the IRS
stating that certain preferred stock similar in many material respects to the
Preferred Shares represents equity. The following discussion assumes such
treatment will apply. It is possible, however, that the IRS might take a
contrary position asserting, for example, that the Preferred Shares constitute
debt of the Fund. If this position were upheld, the discussion of the treatment
of distributions above would not apply. Instead, distributions by the Fund to
holders of Preferred Shares would constitute interest, whether or not such
distributions exceeded the earnings and profits of the Fund, would be included
in full in the income of the recipient, would be taxed as ordinary income and
none of the distributions would be treated as capital gain dividends or as
qualified dividend income.
Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of distributions of qualified dividend income and
capital gain dividends described below, be taxable to stockholders as ordinary
income. Distributions of net capital gain that are designated by the Fund as
capital gain dividends will be treated as long-term capital gains in the hands
of holders regardless of the holders' respective holding periods for their
Preferred Shares. Distributions, if any, in excess of the Fund's current and
accumulated earnings and profits will first reduce the adjusted tax basis of a
stockholder's shares and, after that basis has been reduced to zero, will
constitute a capital gain to the stockholder (assuming the shares are held as a
capital asset). The IRS currently requires that a regulated investment company
that has two or more classes of stock allocate to each such class proportionate
amounts of each type of its income (such as ordinary income, capital gains,
dividends qualifing for the dividends received deduction and qualified dividend
income) based upon the percentage of total dividends paid out of current or
accumulated earnings and profits to each class for the tax year. Accordingly,
the Fund intends each year to allocate capital gain dividends, dividends
qualifying for the dividends received deduction and dividends derived from
qualifying dividend income, if any, between its Common Shares, the Preferred
Shares and the Series T, Series W, Series TH, Series F and Series M28 AMPS in
proportion to the total dividends paid out of current or accumulated earnings
and profits to each class or series with respect to such tax year. Distributions
in excess of the Fund's current and accumulated earnings and profits, if any,
however, will not be allocated proportionately among the Common Shares, the
Preferred Shares Series T, Series W, Series TH, Series F and Series M28 AMPS.
Since the Fund's current and accumulated earnings and profits will first be used
to pay dividends on the Preferred Shares, and the Series T, Series W,
Series TH, Series F and Series M28 AMPS distributions in excess of such earnings
and profits, if any, will be made disproportionately to holders of Common
Shares.
Stockholders will be notified annually as to the U.S. federal tax status of
distributions.
SALE OF SHARES
The sale or other disposition of the Preferred Shares generally will be a
taxable transaction for U.S. federal income tax purposes. Selling holders of the
Preferred Shares generally will recognize gain or loss in an amount equal to the
difference between the amount received in exchange therefor and their respective
bases in such Preferred Shares. If the Preferred Shares are held as a capital
asset, the gain or loss generally will be a capital gain or loss. Similarly, a
redemption (including a redemption resulting from liquidation of the Fund), if
any, of the Preferred Shares by the Fund generally will give rise to capital
gain or loss if the holder does not own (and is not regarded under certain tax
law rules of constructive ownership as owning) any shares of Common Shares in
the Fund and provided that the redemption proceeds do not represent declared but
unpaid dividends.
51
Generally, a holder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. Capital gains of individuals are
generally taxed at a maximum rate of tax of 15% for taxable years beginning on
or before December 31, 2008 (after which time the maximum rate will increase to
20%). However, any loss realized upon a taxable disposition of the Preferred
Shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received by the holder (or amounts
credited to the holder as undistributed capital gains) with respect to such
shares. Also, any loss realized upon a taxable disposition of Preferred Shares
may be disallowed if other Preferred Shares are acquired within a 61-day period
beginning 30 days before and ending 30 days after the date the shares are
disposed of. If disallowed, the loss will be reflected by an upward adjustment
to the basis of the Preferred Shares acquired.
BACKUP WITHHOLDING
The Fund may be required to withhold at a current rate of 28%, for U.S.
federal income taxes, a portion of all taxable dividends and redemption proceeds
payable to stockholders who fail to provide the Fund with their correct taxpayer
identification numbers or who otherwise fail to make required certifications, or
if the Fund or a Series stockholder has been notified by the IRS that such
stockholder is subject to backup withholding. Corporate stockholders and other
stockholders specified in the Code and the Treasury regulations promulgated
thereunder are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld will be allowed as a refund or a credit
against the stockholder's federal income tax liability if the appropriate
information is provided to the IRS.
OTHER TAXATION
Foreign stockholders, including stockholders who are nonresident aliens, may
be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty. Investors are
advised to consult their own tax advisers with respect to the application to
their own circumstances of the above-described general taxation rules and with
respect to the state, local, foreign and other tax consequences to them of an
investment in the Preferred Shares.
FURTHER INFORMATION
The SAI summarizes further federal income tax considerations that may apply
to the Fund and its stockholders and may qualify the considerations discussed
herein.
52
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated
, 2004, each underwriter named below, acting through
, has severally agreed to
purchase, and the Fund has agreed to sell, the number of Preferred Shares set
forth opposite the name of such underwriter.
NUMBER OF PREFERRED SHARES
UNDERWRITER --------------------------
......................................
..........................................
..................................
...............................
--------------------------
Total............................................
--------------------------
--------------------------
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to approval of legal
matters by counsel and to certain other conditions, including without
limitation, the receipt by the underwriters of customary closing certificates,
opinions and other documents and the receipt by the Fund of Aaa and AAA ratings
on the Preferred Shares by Moody's and S&P, respectively, as of the time of the
offering. The underwriters are obligated to purchase all the Preferred Shares if
they purchase any of the Preferred Shares. In the purchase agreement, the Fund
and the Investment Manager have agreed to indemnify the underwriters against
certain liabilities, including liabilities arising under the Securities Act of
1933, as amended, or to contribute to payments the underwriters may be required
to make for any of those liabilities.
The underwriters propose to initially offer some of the Preferred Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Preferred Shares to certain dealers at the
public offering price less a concession not to exceed of $ per share. The
sales load the Fund will pay of $250 per share is equal to 1% of the initial
offering price of the Preferred Shares. After the initial public offering, the
underwriters may change the public offering price and the concession. Investors
must pay for any Preferred Shares purchased in the initial public offering on or
before , 2004.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions and that the
underwriters, or their affiliates, may act as counterparties in connection with
the interest rate transactions described above after they have ceased to be
underwriters. The underwriters are active underwriters of, and dealers in,
securities and act as market makers in a number of such securities, and
therefore can be expected to engage in portfolio transactions with, and perform
services for, the Fund.
The Fund anticipates that the Underwriters or their respective affiliates
may, from time to time, act in auctions as broker-dealers and receive fees as
set forth under 'The Auction' and in the SAI.
The principal business address of
is
.
The settlement date for the purchase of the Preferred Shares will be
, 2004, as agreed upon by the underwriters, the Fund and the
Investment Manager pursuant to Rule 15c6-1 under the Securities Exchange Act of
1934.
53
CUSTODIAN, AUCTION AGENT, TRANSFER
AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Bank of New York, whose address is 100 Church Street, 8th Floor, New
York, NY 10286, will act as auction agent, transfer agent, dividend paying
agent, and registrar for the Preferred Shares. State Street Bank, whose
principal business address is 225 Franklin Street, Boston, Massachusetts 02110,
has been retained to act as custodian of the Fund's investments. Neither The
Bank of New York nor State Street Bank has any part in deciding the Fund's
investment policies or which securities are to be purchased or sold for the
Fund's portfolio.
LEGAL OPINIONS
The validity of the shares offered hereby is being passed on for the Fund by
Simpson Thacher & Bartlett LLP, New York, New York, and certain other legal
matters will be passed on for the Underwriters by .
Venable LLP will opine on certain matters pertaining to Maryland law. Simpson
Thacher & Bartlett LLP and may rely as to certain matters
of Maryland law on the opinion of Venable LLP.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The financial statements of the Fund for the year ended December 31, 2003,
have been audited by PricewaterhouseCoopers LLP, independent registered public
accountants, as set forth in their report given upon the authority of said firm
as experts in auditing and accounting. The address of PricewaterhouseCoopers LLP
is 300 Madison Avenue, New York, NY 10017.
FURTHER INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the Securities and Exchange Commission.
These documents can be inspected and copied for a fee at the Securities and
Exchange Commission's public reference room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Reports, proxy statements, and other information about the Fund can
be inspected at the offices of the NYSE.
This Prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and the Preferred Shares can be found
in the Fund's Registration Statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the Securities and Exchange Commission. The
Fund's SAI dated , 2004 contains additional information about the
Fund and is incorporated by reference into (which means it is considered to be a
part of) this prospectus. The Securities and Exchange Commission maintains a
website (http://www.sec.gov) that contains the Fund's Registration Statement,
the SAI, other documents incorporated by reference, and other information the
Fund has filed electronically with the Securities and Exchange Commission,
including proxy statements and reports filed under the Securities Exchange Act
of 1934. Additional information may be found on the Internet at
http://www.cohenandsteers.com.
54
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
General Information......................................... 3
Additional Information about Fund Investment Objectives and
Policies.................................................. 3
Investment Restrictions..................................... 4
Management of the Fund...................................... 7
Compensation of Directors................................... 11
Investment Advisory and Other Services...................... 11
Portfolio Transactions and Brokerage........................ 20
Determination of Net Asset Value............................ 21
Additional Information Concerning the Auctions for Preferred
Shares.................................................... 22
S&P and Moody's Guidelines.................................. 23
U.S. Federal Taxation....................................... 30
Performance Data and Index Returns.......................... 35
Experts..................................................... 36
Report of Independent Auditors.............................. 37
Financial Statements........................................ 38
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
55
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2004 (25 days after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
$
[COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]
COHEN & STEERS
QUALITY INCOME REALTY FUND, INC.
AUCTION RATE PREFERRED SHARES
SHARES, SERIES
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------------
PROSPECTUS
-----------------
, 2004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED , 2004
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION ('STATEMENT OF
ADDITIONAL INFORMATION') IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL
THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]
757 THIRD AVENUE
NEW YORK, NEW YORK 10017
(800) 437-9912
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
Auction Rate Preferred Shares
Shares, Series
, 2004
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF COHEN & STEERS QUALITY INCOME REALTY
FUND, INC. DATED , 2004, AS SUPPLEMENTED FROM TIME TO TIME (THE
'PROSPECTUS').
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.
CAPITALIZED TERMS USED IN THIS STATEMENT OF ADDITIONAL INFORMATION HAVE THE
MEANINGS ASSIGNED TO THEM IN THE PROSPECTUS OR IN THIS STATEMENT OF ADDITIONAL
INFORMATION, INCLUDING THE APPENDICES.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
General Information......................................... 3
Additional Information about Fund Investment Objectives and
Policies.................................................. 3
Investment Restrictions..................................... 4
Management of the Fund...................................... 7
Compensation of Directors................................... 11
Investment Advisory and Other Services...................... 11
Portfolio Transactions and Brokerage........................ 20
Determination of Net Asset Value............................ 21
Additional Information Concerning the Auctions for Preferred
Shares.................................................... 22
S&P and Moody's Guidelines.................................. 23
U.S. Federal Taxation....................................... 30
Performance Data and Index Returns.......................... 35
Experts..................................................... 36
Report of Independent Auditors.............................. 37
Financial Statements........................................ 38
Appendix A: Ratings of Investments.......................... A-1
Appendix B: Articles Supplementary.......................... B-1
2
GENERAL INFORMATION
The Fund is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940 (the '1940 Act'). Cohen &
Steers Capital Management, Inc. (the 'Investment Manager') serves as the Fund's
investment manager. The Fund's primary investment objective is high current
income through investment in real estate securities and its secondary investment
objective is capital appreciation. No assurance can be given that the Fund will
achieve its investment objectives. Much of the information contained in this SAI
expounds on subjects discussed in the Prospectus. Defined terms used herein have
the same meaning as in the Prospectus. No investment in the Preferred Shares
should be made without first reading the Prospectus.
ADDITIONAL INFORMATION ABOUT
FUND INVESTMENT OBJECTIVES AND POLICIES
The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks as set forth in the Prospectus.
Except as otherwise provided, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without the approval of
the stockholders; however, the Fund will not change its non-fundamental
investment policies without written notice to stockholders.
INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS
It is the Fund's fundamental policy to concentrate its investments in the
U.S. real estate market and not in any other industry. Under normal market
conditions, the Fund invests at least 90% of its total assets in common stocks,
preferred stocks and other equity securities issued by real estate companies,
such as real estate investment trusts ('REITs').
REAL ESTATE COMPANIES
For purposes of the Fund's investment policies, a real estate company is one
that derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential real
estate; or has at least 50% of its assets in real estate.
REAL ESTATE INVESTMENT TRUSTS
A REIT is a company dedicated to owning, and usually operating, income
producing real estate, or to financing real estate. REITs can generally be
classified as Equity REITs, Mortgage REITs and Hybrid REITs. An Equity REIT
invests primarily in the fee ownership or leasehold ownership of land and
buildings and derives its income primarily from rental income. An Equity REIT
may also realize capital gains (or losses) by selling real estate properties in
its portfolio that have appreciated (or depreciated) in value. A Mortgage REIT
invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A Mortgage REIT generally derives its income
primarily from interest payments on the credit it has extended. A Hybrid REIT
combines the characteristics of both Equity REITs and Mortgage REITs. It is
anticipated, although not required, that under normal market conditions at least
90% of the Fund's investments in REITs consist of securities issued by Equity
REITs. At least 80% of our total assets will be invested in income producing
equity securities issued by REITs.
PREFERRED STOCKS
Preferred stocks pay fixed or floating dividends to investors, and have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. Preferred stockholders
usually have no right to vote for corporate directors or on other matters. Under
current market conditions, the Investment Manager invests approximately 70% of
our total assets in common shares of real estate companies and approximately 30%
in preferred
3
shares of REITs. The actual percentage of common and preferred shares in our
investment portfolio may vary over time based on the Investment Manager's
assessment of market conditions.
LOWER-RATED SECURITIES
Securities rated non-investment grade (lower than BBB by Standard & Poor's
Rating Services ('S&P') or lower than Baa by Moody's Investors Service Inc.
('Moody's')) are sometimes referred to as 'high yield' or 'junk' bonds. We may
only invest in securities rated 'CCC' or higher by S&P, or rated 'caa' or higher
by Moody's, or unrated securities of comparable quality. The issuers of these
securities have a currently identifiable vulnerability to default and the issues
may be in default or there may be present elements of danger with respect to
principal or interest. We may invest no more than 20% of our assets in preferred
stock and debt securities rated below investment grade and unrated securities of
comparable quality. This is a fundamental investment policy. We will not invest
in securities which are in default at the time of purchase.
ILLIQUID SECURITIES
A security is illiquid if, for legal or market reasons, it cannot be
promptly sold (i.e., within seven days) at a price which approximates its fair
value. Although substantially all of the equity securities of real estate
companies in which we intend to invest are traded on a national securities
exchange or in the over-the-counter market, there are no limitations on our
ability to invest in illiquid securities.
CASH RESERVES
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments.
Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as S&P or Moody's, certificates of
deposit, bankers' acceptances issued by domestic banks having total assets in
excess of one billion dollars, and money market mutual funds.
In entering into a repurchase agreement for the Fund, the Investment Manager
will evaluate and monitor the creditworthiness of the vendor. In the event that
a vendor should default on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If the vendor becomes bankrupt, the Fund might be
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral.
INVESTMENT RESTRICTIONS
The investment objectives and the general investment policies and investment
techniques of the Fund are described in the Prospectus. The Fund has also
adopted certain investment restrictions limiting the following activities except
as specifically authorized:
The Fund may not:
1. Issue senior securities (including borrowing money for other than
temporary purposes) except in conformity with the limits set forth in the
1940 Act; or pledge its assets other than to secure such issuances or
borrowings or in connection with permitted investment strategies;
notwithstanding the foregoing, the Fund may borrow up to an additional 5% of
its total assets for temporary purposes;
4
2. Act as an underwriter of securities issued by other persons, except
insofar as the Fund may be deemed an underwriter in connection with the
disposition of securities;
3. Purchase or sell real estate, mortgages on real estate or
commodities, except that the Fund may invest in securities of companies that
deal in real estate or are engaged in the real estate business, including
REITs, and securities secured by real estate or interests therein and the
Fund may hold and sell real estate or mortgages on real estate acquired
through default, liquidation, or other distributions of an interest in real
estate as a result of the Fund's ownership of such securities;
4. Purchase or sell commodities or commodity futures contracts, except
that the Fund may invest in financial futures contracts, options thereon and
such similar instruments;
5. Make loans to other persons except through the lending of securities
held by it (but not to exceed a value of one-third of total assets), through
the use of repurchase agreements, and by the purchase of debt securities,
all in accordance with its investment policies;
6. Purchase preferred stock and debt securities rated below investment
grade and unrated securities of comparable quality, if, as a result, more
than 20% of the Fund's total assets would then be invested in such
securities;
7. Acquire or retain securities of any investment company, except that
the Fund may (a) acquire securities of investment companies up to the limits
permitted by Section 12(d)(1) of the 1940 Act, or any exemption granted
under the 1940 Act and (b) acquire securities of any investment company as
part of a merger, consolidation or similar transaction;
8. Invest in puts, calls, straddles, spreads or any combination thereof;
9. Enter into short sales;
10. Invest in the securities of a non-U.S. issuer;
11. Invest in oil, gas or other mineral exploration programs,
development programs or leases, except that the Fund may purchase securities
of companies engaging in whole or in part in such activities;
12. Pledge, mortgage or hypothecate its assets except in connection with
permitted borrowings; or
13. Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities.
The investment restrictions numbered 1 through 7 in this SAI have been
adopted as fundamental policies of the Fund. Under the 1940 Act, a fundamental
policy may not be changed without the approval of a 'majority of the
outstanding' Common Shares, the Preferred Shares and the outstanding AMPS voting
together as a single class, and the holders of a 'majority of the outstanding'
preferred shares voting as a separate class. When used with respect to
particular shares of the Fund, a 'majority of the outstanding' means (1) 67% or
more of the shares present at a meeting, if the holders of more than 50% of the
shares are present or represented by proxy, or (2) more than 50% of the shares,
whichever is less. Investment restrictions numbered 8 through 13 above are
non-fundamental and may be changed at any time by vote of a majority of the
Board of Directors.
Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance, the value of the Fund's total assets is
at least 200% of the liquidation value of the outstanding preferred shares
(i.e., such liquidation value may not exceed 50% of the Fund's total assets less
liabilities other than borrowing). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Common Shares unless, at
the time of such declaration, the value of the Fund's total assets less
liabilities other than borrowing is at least 200% of such liquidation value. The
Fund intends, to the extent possible, to purchase or redeem the Preferred Shares
and the outstanding AMPS from time to time to the extent necessary in order to
maintain coverage of any Preferred Shares and the outstandig AMPS of at least
200%. If the Fund has Preferred Shares and AMPS outstanding, two of the Fund's
Directors will be elected
5
by the holders of the Preferred Shares and the outstanding AMPS voting together
as a separate class. The remaining Directors of the Fund will be elected by
holders of Common Shares, Preferred Shares and the outstanding AMPS voting
together as a single class. In the event the Fund failed to pay dividends on the
Preferred Shares and the outstanidng AMPS for two years, holders of the
Preferred Shares and the outstanding AMPS voting together as a separate class,
would be entitled to elect a majority of the Directors of the Fund.
Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing, the value of the Fund's total assets less
liabilities other than the borrowing is at least 300% of the principal amount of
such borrowing (i.e., such principal amount may not exceed 33 1/3% of the Fund's
total assets). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless, at the time of such
declaration, the value of the Fund's total assets, less liabilities other than
the borrowings, is at least 300% of such principal amount. If the Fund borrows,
the Fund intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle the debt holders to
elect a majority of the board of directors.
6
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of the
Board of Directors. The directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreements with its Investment Manager, administrator, auction agent, custodian
and transfer agent. The management of the Fund's day-to-day operations is
delegated to its officers, the Investment Manager and the Fund's administrator,
subject always to the investment objectives and policies of the Fund and to the
general supervision of the Directors. As of , 2004, the Directors and
officers as a group beneficially owned directly or indirectly less than 1% of
the outstanding shares of the Fund.
DIRECTORS AND OFFICERS
Basic information about the identity and experience of each director and
officer is set forth in the charts below. Each such director and officer is also
a director or officer of Cohen & Steers Select Utility Fund, Inc., Cohen &
Steers REIT and Utility Income Fund, Inc., Cohen & Steers Advantage Income
Realty Fund, Inc., Cohen & Steers Premium Income Realty Fund, Inc., Cohen &
Steers REIT and Preferred Income Fund, Inc. and Cohen & Steers Total Return
Realty Fund, Inc., which are closed-end investment companies advised by the
Investment Manager, and Cohen & Steers Realty Income Fund, Inc., Cohen & Steers
Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen &
Steers Realty Focus Fund, Inc. and Cohen & Steers Utility Fund, Inc., which are
open-end investment companies advised by the Investment Manager. The directors
identified below as 'Interested Directors' are each an 'interested person' of
the Fund, as such term is defined in the 1940 Act, by virtue of such person's
affiliation with the Fund or the Investment Manager.
NUMBER OF
FUNDS
WITHIN FUND
PRINCIPAL OCCUPATION COMPLEX
DURING PAST OVERSEEN BY
5 YEARS DIRECTOR
POSITION HELD TERM OF (INCLUDING OTHER (INCLUDING LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE DIRECTORSHIPS HELD) THE FUND) TIME SERVED
--------------------- --------- ------ ------------------- --------- -----------
INTERESTED DIRECTORS
Robert H. Steers ........ Director, Chairman Until Next Co-Head of Cohen & 12 Since
757 Third Avenue of the Board, and Election of Steers Capital Inception
New York, New York Secretary Directors Management, Inc.,
Age: 51 the Fund's
Investment Manager.
Martin Cohen *, ** ...... Director, Until Next Co-Head of Cohen & 12 Since
757 Third Avenue President and Election of Steers Capital Inception
New York, New York Treasurer Directors Management, Inc.,
Age: 55 the Fund's
Investment Manager.
DISINTERESTED DIRECTORS
Bonnie Cohen ** ......... Director Until Next Consultant. Prior 12 Since
1824 Phelps Place, N.W. Election of thereto, Inception
Washington, D.C. Directors Undersecretary of
Age: 61 State, United States
Department of State.
George Grossman ......... Director Until Next Attorney-at-law. 12 Since
17 Elm Place Election of Inception
Rye, New York Directors
Age: 50
(table continued on next page)
7
(table continued from previous page)
NUMBER OF
FUNDS
WITHIN FUND
PRINCIPAL OCCUPATION COMPLEX
DURING PAST OVERSEEN BY
5 YEARS DIRECTOR
POSITION HELD TERM OF (INCLUDING OTHER (INCLUDING LENGTH OF
NAME, ADDRESS AND AGE WITH FUND OFFICE DIRECTORSHIPS HELD) THE FUND) TIME SERVED
--------------------- --------- ------ ------------------- --------- -----------
Richard J. Norman ....... Director Until Next Private Investor. 12 Since
7520 Hackamore Drive Election of Prior thereto, Inception
Potomac, Maryland Directors Investment
Age: 61 Representative of
Morgan Stanley Dean
Witter.
Frank K. Ross ........... Director Until Next Board member of 12 Since
10130 Darmuid Green Election of NCRIC Group, Inc. March
Drive Directors (insurance) and 2004
Potomac, Maryland various non-profit
Age: 61 organizations.
Formerly,
Midatlantic Area
Managing Partner for
Audit and Risk
Advisory Services at
KPMG LLP and
Managing Partner of
its Washington, DC
Office.
Willard H. Smith Jr.* ... Director Until Next Board member of 12 Since
7231 Encelia Drive Election of Essex Property Trust Inception
La Jolla, California Directors Inc., Highwoods
Age: 67 Properties, Inc.,
and Realty Income
Corporation.
Managing Director at
Merrill Lynch & Co.,
Equity Capital
Markets Division
from 1983 to 1995.
---------
* These directors have been designated as preferred stock directors
** Martin Cohen and Bonnie Cohen are unrelated
The officers of the Fund, their addresses, their ages, and their principal
occupations for at least the past five years are set forth below.
POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- ---- -------------------------------------------
Joseph M. Harvey.............. Vice President President of Cohen & Steers Capital
757 Third Avenue Management, Inc., the Fund's Investment
New York, New York Manager, since 2003. Prior thereto, he was
Age: 40 Senior Vice President and Director of
Investment Research of the Fund's Investment
Manager.
Adam M. Derechin ............. Vice President and Chief Operating Officer of Cohen & Steers
757 Third Avenue Assistant Treasurer Capital Management, Inc., the Fund's
New York, New York Investment Manager, since August 2003. Prior
Age: 40 thereto, he was a Senior Vice President of
the Fund's Investment Manager.
(table continued on next page)
8
(table continued from previous page)
POSITION(S)
HELD WITH
NAME, ADDRESS AND AGE FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- ---- -------------------------------------------
Lawrence B. Stoller .......... Assistant Secretary Senior Vice President and General Counsel of
757 Third Avenue Cohen & Steers Capital Management, Inc., the
New York, New York Fund's Investment Manager, since 1999. Prior
Age: 40 to that, Associate General Counsel, Neuberger
Berman Management, Inc. (money manager); and
Assistant General Counsel, The Dreyfus
Corporation (money manager).
The following table provides information concerning the dollar range of the
Fund's equity securities owned by each Director and the aggregate dollar range
of securities owned in the Cohen & Steers Fund Complex is set forth below.
AGGREGATE DOLLAR
RANGE OF EQUITY
DOLLAR RANGE OF SECURITIES IN THE
EQUITY SECURITIES IN COHEN & STEERS FUND
THE FUND AS OF COMPLEX AS OF
, 2004 , 2004
------ ------
Robert H. Steers........................................ Over $100,000 Over $100,000
Martin Cohen............................................ Over $100,000 Over $100,000
Bonnie Cohen............................................ $10,001 - $50,000 $50,001 - $100,000
George Grossman......................................... $10,001 - $50,000 $50,001 - $100,000
Richard J. Norman....................................... $10,001 - $50,000 Over $100,000
Frank K. Ross........................................... $10,001 - $50,000 $50,001 - $100,000
Willard H. Smith Jr..................................... none $10,001 - $50,000
Conflicts of Interest. No Director who is not an 'interested person' of the
Fund as defined in the 1940 Act, and no immediate family members, owns any
securities issued by the Investment Manager, or any person or entity (other than
the Fund) directly or indirectly controlling, controlled by, or under common
control with the Investment Manager. Solely as a result of his ownership of
securities of one of the underwriters, Mr. Smith is technically an 'interested
person' of the Fund as defined in the 1940 Act until after completion of this
offering of the Preferred Shares. After the completion of this offering, he will
be a non-interested Director.
BOARD'S ROLE IN FUND GOVERNANCE
Committees. The Fund's Board of Directors has two standing committees of the
Board, the Audit Committee and the Nominating Committee, each of which is
composed of all of the directors who are not interested persons of the Fund, as
defined in the 1940 Act. The members of the Audit Committee and Nominating
Committee are Ms. Cohen and Messrs. Grossman, Norman, Ross and Smith.
The main function of the Audit Committee is to oversee the Fund's accounting
and financial reporting policies and practices and its internal controls,
including by assisting with the Board's oversight of the integrity of the Fund's
financial statements, the Fund's compliance with legal and regulatory
requirements, the selection, retention, qualification and independence of the
Fund's independent auditors, and the performance of the Fund's internal control
systems and independent auditors.
The main functions of the Nominating Committee are to identify individuals
qualified to become members of the Board of Directors in the event that a
position is vacated or created, to select the director nominees for the next
annual meeting of stockholders and to set any necessary standards or
qualifications for service on the Board of Directors. The Nominating Committee
will consider nominees properly recommended by the Fund's stockholders.
Stockholders who wish to recommend a nominee should send nominations that
include, among other things, biographical data and the qualifications of the
proposed nominee to the Fund's Secretary.
9
Approval of Investment Management Agreement. The Board of Directors,
including a majority of the Directors who are not parties to the Fund's
Investment Management Agreement, or interested persons of any such party
('Disinterested Directors') has the responsibility under the 1940 Act to approve
the Fund's Investment Management Agreement for its initial term and annually
thereafter at a meeting called for the purpose of voting on such matter. The
Investment Management Agreement was approved for an initial two-year term by the
Fund's Directors, including a majority of the Disinterested Directors, at their
meetings held on December 2, 2003.
In connection with the Board's consideration of the Investment Management
Agreement, the Board reviewed information reasonably necessary to evaluate the
terms of the Investment Management Agreement derived from a number of sources,
including materials provided by the Investment Manager and by the directors'
independent counsel, and considered the following: (1) the level of the
management fees and estimated expense ratio of the Fund as compared to
competitive Funds of a comparable size; (2) the nature and quality of the
services to be rendered by the Investment Manager; (3) anticipated benefits
derived by the Investment Manager from the relationship with the Fund, including
not only the Investment Manager's compensation for investment advisory services
but also compensation paid to the Investment Manager for administrative
services; (4) the anticipated costs of providing services to the Fund; and
(5) the anticipated profitability of the Fund to the Investment Manager. The
Directors considered the fact that the Investment Manager agreed to waive a
portion of its investment management fee in the amount of .32% of the Fund's
average daily managed assets for the first 5 fiscal years of the Fund's
operations, and then declining amounts in years 6 through 10. The Directors took
note of the fact that the Fund's net investment management fee for the initial
term of the contract was projected to compare favorably to the average
investment management fee charged to competitive funds of a comparable size. The
Directors also noted that the Investment Manager agreed to pay from its own
resources an additional commission to the lead underwriter of the Fund's common
stock offering at an annual rate of .10% of the Fund's managed assets. They also
considered the fact that the Investment Manager agreed to pay all organizational
expenses and offering costs, other than the sales load, that exceeded $.03 per
share in connection with the Fund's common stock offering. The Directors then
took into consideration the benefits to be derived by the Investment Manager in
connection with the Investment Management Agreement, noting particularly the
research and related services, within the meaning of Section 28(e) of the
Securities Exchange Act of 1934, that the Investment Manager would be eligible
to receive by allocating the Fund's brokerage transactions.
In reviewing the nature and quality of services to be provided by the
Investment Manager, the directors noted that, in addition to the investment
advisory services to be provided to the Fund, the Investment Manager will
provide administrative services, oversight of fund accounting, marketing
services, assistance in meeting legal and regulatory requirements and other
services necessary for the operation of the Fund. In addition, the directors,
based on their experience as directors of other investment companies managed by
the Investment Manager, also focused on the anticipated role of senior
management in the day-to-day operations of the Fund and on the quality of the
compliance and administrative staff at the Investment Manager. Moreover, the
Directors noted the Investment Manager's ability to attract quality and
experienced personnel to manage the Fund and its continuing efforts to expand
its capabilities.
In considering the fees and estimated expenses of the Fund in comparison to
the fees and expenses of funds with similar characteristics, the directors noted
that the Fund compared favorably within this competitive universe.
Based on the foregoing and such other matters as were deemed relevant, the
directors, including a majority of the Disinterested Directors, concluded that
the management fee rate was reasonable in relation to the services to be
rendered and approved the Investment Management Agreement. The Disinterested
Directors were represented by independent counsel in their deliberations.
10
COMPENSATION OF DIRECTORS
Directors of the Fund who are not interested persons of the Fund are paid an
annual retainer of $4,500 and a fee of $500 for each regular meeting attended
and are reimbursed for the expenses of attendance at such meetings and, for the
fiscal year ended December 31, 2003, such fees and expenses paid by the Fund
totaled $38,033.
The following table sets forth information regarding compensation of
Directors by the Fund and by the fund complex of which the Fund is a part for
the fiscal year ended December 31, 2003. Officers of the Fund and Directors who
are interested persons of the Fund do not receive any compensation from the Fund
or any other fund in the fund complex which is a U.S. registered investment
company. In the column headed 'Total Compensation to Directors by Fund Complex,'
the compensation paid to each director represents the nine funds that each
director served in the fund complex during 2003. The Directors do not receive
any pension or retirement benefits from the fund complex.
COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 2003*
TOTAL
AGGREGATE COMPENSATION
COMPENSATION PAID TO
FROM DIRECTORS BY
NAME OF PERSON, POSITION REGISTRANT FUND COMPLEX
------------------------ ---------- ------------
Gregory C. Clark****, Director.............................. $7,250 $61,500
Bonnie Cohen**, Director.................................... $7,250 $61,500
Martin Cohen***, Director and President..................... $ 0 $ 0
George Grossman**, Director................................. $7,250 $61,500
Richard J. Norman**, Director............................... $7,250 $61,500
Frank K. Ross*,............................................. $ 0 $ 0
Willard H. Smith Jr.***,'D', Director....................... $7,250 $61,500
Robert H. Steers***, Director and Chairman.................. $ 0 $ 0
---------
* Frank K. Ross was elected as a Director by the Fund's Board of Directors
effective March 5, 2004 and, therefore, did not receive any compensation
during the fiscal year ended December 31, 2003.
** Member of the Audit Committee and Nominating Committee.
*** 'Interested person,' as defined in the Act, of the Fund because of the
affiliation with Cohen & Steers Capital Management, Inc., the Fund's
investment manager.
**** Effective June 3, 2004, Mr. Clark resigned as a Director.
'D' Solely as a result of his ownership of securities of one of the
underwriters, Mr. Smith is technically an 'interested person' of the Fund
as defined in the 1940 Act until after completion of this offering of the
Preferred Shares. After the completion of this offering, he will be a
non-interested director, and will become a member of the Audit Committee
at such time.
PRINCIPAL STOCKHOLDERS
To the knowledge of the Fund, as of , 2004, no current director
of the Fund owned 1% or more of the outstanding Common Shares, and the officers
and directors of the Fund owned, as a group, less than 1% of the Common Shares
and no Preferred Shares.
As of , 2004, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares. As of , 2004, CEDE
& Co. c/o Depository Trust Company, Box 20, New York, New York was the record
owner of % of the outstanding Common Shares.
INVESTMENT ADVISORY AND OTHER SERVICES
THE INVESTMENT MANAGER
Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, is the Investment Manager to the Fund. The
Investment Manager, a
11
registered investment adviser, was formed in 1986 and is a wholly owned
subsidiary of Cohen & Steers, Inc., a publicly traded company whose common stock
is listed on the New York Stock Exchange under the symbol 'CNS.' Its current
clients include pension plans of leading corporations, endowment funds and
mutual funds, including the Fund, Cohen & Steers Select Utility Fund, Inc.,
Cohen & Steers REIT and Utility Income Fund, Inc., Cohen & Steers Advantage
Income Realty Fund, Inc., Cohen & Steers Premium Income Realty Fund, Inc., Cohen
& Steers REIT and Preferred Income Fund, Inc. and Cohen & Steers Total Return
Realty Fund, Inc., which are closed-end investment companies, and Cohen & Steers
Realty Income Fund, Inc., Cohen & Steers Institutional Realty Shares, Inc.,
Cohen & Steers Realty Shares, Inc., Cohen & Steers Realty Focus Fund, Inc. and
Cohen & Steers Utility Fund, Inc., which are open-end investment companies. Mr.
Cohen and Mr. Steers are 'controlling persons' of the Investment Manager on the
basis of their ownership of the Investment Manager's stock.
Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Directors of the Fund.
Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of .85% of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares including the liquidation preference on the Preferred Shares
and the Series T, Series W, Series TH, Series F and Series M28 AMPS, plus the
principal amount on any borrowings) of the Fund. The Investment Manager has
contractually agreed to waive its investment management fees in the amount of
..32% of average daily managed assets for the first five fiscal years of the
Fund's operations, .26% of average daily managed assets in year six, .20% of
average daily managed assets in year seven, .14% of average daily managed assets
in year eight, .08% of average daily managed assets in year nine and .02% of
average daily managed assets in year ten. For the fiscal year ended
December 31, 2003, the Fund incurred management fees of $ and the
Investment Manager waived management fees of $ .
The Investment Manager also provides the Fund with such personnel as the
Fund may from time to time request for the performance of clerical, accounting
and other office services, such as coordinating matters with the
sub-administrator, the transfer agent and the custodian. The personnel rendering
these services, who may act as officers of the Fund, may be employees of the
Investment Manager or its affiliates. These services are provided at no
additional cost to the Fund. The Fund does not pay any additional amounts for
services performed by officers of the Investment Manager or its affiliates.
ADMINISTRATIVE SERVICES
Pursuant to an Administration Agreement, the Investment Manager also
performs certain administrative and accounting functions for the Fund, including
(i) providing office space, telephone, office equipment and supplies for the
Fund; (ii) paying compensation of the Fund's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of the Fund; (iv) supervising preparation of the periodic updating of the Fund's
registration statement, including prospectus and statement of additional
information, for the purpose of filings with the Securities and Exchange
Commission and state securities administrators and monitoring and maintaining
the effectiveness of such filings, as appropriate; (v) supervising preparation
of periodic reports to the Fund's stockholders and filing of these reports with
the Securities and Exchange Commission, Forms N-SAR filed with the Securities
and Exchange Commission, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual stockholders; (vi) supervising the daily pricing of the Fund's
investment portfolio and the publication of the net asset value of the Fund's
shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to the Fund, including the
Custodian, Transfer Agent and printers;
12
(viii) providing trading desk facilities for the Fund; (ix) supervising
compliance by the Fund with record-keeping requirements under the 1940 Act and
regulations thereunder, maintaining books and records for the Fund (other than
those maintained by the Custodian and Transfer Agent) and preparing and filing
of tax reports other than the Fund's income tax returns; and (x) providing
executive, clerical and secretarial help needed to carry out these
responsibilities. Under the Administration Agreement, the Fund pays the
Investment Manager an amount equal to, on an annual basis, .02% of the Fund's
managed assets.
In accordance with the terms of the Administration Agreement and with the
approval of the Fund's Board of Directors, the Investment Manager has caused the
Fund to retain State Street Bank and Trust Company ('State Street Bank') as
sub-administrator under a fund accounting and administration agreement (the
'Sub-Administration Agreement'). Under the Sub-Administration Agreement, State
Street Bank has assumed responsibility for performing certain of the foregoing
administrative functions, including (i) determining the Fund's net asset value
and preparing these figures for publication; (ii) maintaining certain of the
Fund's books and records that are not maintained by the Investment Manager,
custodian or transfer agent; (iii) preparing financial information for the
Fund's income tax returns, proxy statements, stockholders reports, and
Securities and Exchange Commission's filings; and (iv) responding to stockholder
inquiries.
Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank is computed on the basis of the managed assets in
the Fund at an annual rate equal to .04% of the first $200 million in assets,
..03% of the next $200 million, and .015% of assets in excess of $400 million,
with a minimum fee of $120,000. The aggregate fee paid by the Fund and the other
funds advised by the Investment Manager to State Street Bank is computed by
multiplying the total number of funds by each break point in the above schedule
in order to determine the aggregate break points to be used in calculating the
total fee paid by the Cohen & Steers family of funds (i.e., six funds at $200
million or $1.2 billion at .04%, etc.). The Fund is then responsible for its pro
rata amount of the aggregate administration fee. For the fiscal year ended
December 31, 2003, the Fund paid $ in administration fees to the Investment
Manager.
The Investment Manager remains responsible for monitoring and overseeing the
performance by State Street Bank, and EquiServe Trust Company, NA as custodian
and transfer and disbursing agent, of their obligations to the Fund under their
respective agreements with the Fund, subject to the overall authority of the
Fund's Board of Directors.
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
State Street Bank, which has its principal business office at 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments and EquiServe Trust Company, NA, which has its principal business
office at 150 Royall Street, Canton, MA 02021, as the Fund's transfer and
dividend disbursing agent for the Fund's Common Shares. Neither State Street nor
EquiServe has any part in deciding the Fund's investment policies or which
securities are to be purchased or sold for the Fund's portfolio. The Depository
Trust Company ('DTC') will act as securities depository for the Preferred
Shares. The Bank of New York, whose principal place of business is 101 Barclay
Street, Floor 7W, New York, New York 10286, will act as auction agent, transfer
agent, dividend paying agent and registrar for the Preferred Shares.
CODE OF ETHICS
The Fund and the Investment Manager have adopted codes of ethics in
compliance with Rule 17j-1 under the 1940 Act. The codes of ethics of the Fund
and the Investment Manager, among other things, prohibit management personnel
from investing in REITs and real estate securities, prohibit purchases in an
initial public offering and require pre-approval for investments in any Cohen &
Steers closed-end fund and in private placements. The Fund's Independent
Directors are prohibited from purchasing or selling any security if they knew or
reasonably should have known
13
at the time of the transaction that, within the most recent 15 days, the
security is being or has been considered for purchase or sale by the Fund, or is
being purchased or sold by the Fund.
PRIVACY POLICY
The Fund is committed to maintaining the privacy of its stockholders and to
safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information the Fund collects, how
we protect that information, and why in certain cases we may share this
information with others.
The Fund does not receive any nonpublic personal information relating to the
stockholders who purchase shares through an intermediary that acts as the record
owner of the shares. In the case of stockholders who are record owners of the
Fund, we receive nonpublic personal information on account applications or other
forms. With respect to these stockholders, the Fund also has access to specific
information regarding their transactions in the Fund.
The Fund does not disclose any nonpublic personal information about its
stockholders or former stockholders to anyone, except as permitted by law or as
is necessary to service stockholder accounts. The Fund restricts access to
nonpublic personal information about its stockholders to Cohen & Steers
employees with a legitimate business need for the information.
PROXY VOTING
The Fund's Board of Directors has delegated to the Investment Manager the
responsibility for voting proxies on behalf of the Fund, and has determined that
proxies with respect to the Fund's portfolio companies shall be voted in
accordance with Cohen & Steers Capital Management, Inc.'s Statement of Policies
and Procedures Regarding the Voting of Securities (the 'Proxy Voting Policies
and Procedures'). The following is a summary of the Proxy Voting Policies and
Procedures.
Voting rights are an important component of corporate governance. The
Investment Manager has three overall objectives in exercising voting rights:
A. Responsibility. The Investment Manager shall seek to ensure that
there is an effective means in place to hold companies accountable for their
actions. While management must be accountable to its board, the board must
be accountable to a company's stockholders. Although accountability can be
promoted in a variety of ways, protecting stockholder voting rights may be
among our most important tools.
B. Rationalizing Management and Stockholder Concerns. The Investment
Manager seeks to ensure that the interests of a company's management and
board are aligned with those of the company's stockholders. In this respect,
compensation must be structured to reward the creation of stockholder value.
C. Stockholder Communication. Since companies are owned by their
stockholders, the Investment Manager seeks to ensure that management
effectively communicates with its owners about the company's business
operations and financial performance. It is only with effective
communication that stockholders will be able to assess the performance of
management and to make informed decisions on when to buy, sell or hold a
company's securities.
In exercising voting rights, the Investment Manager shall conduct itself
in accordance with the general principles set forth below.
1. The ability to exercise a voting right with respect to a security is
a valuable right and, therefore, must be viewed as part of the asset
itself.
2. In exercising voting rights, the Investment Manager shall engage in a
careful evaluation of issues that may materially affect the rights of
stockholders and the value of the security.
14
3. Consistent with general fiduciary principles, the exercise of voting
rights shall always be conducted with reasonable care, prudence and
diligence.
4. In exercising voting rights on behalf of clients, the Investment
Manager conduct itself in the same manner as if it were the
constructive owner of the securities.
5. To the extent reasonably possible, the Investment Manager participate
in each stockholder voting opportunity.
6. Voting rights shall not automatically be exercised in favor of
management-supported proposals.
7. The Investment Manager, and its officers and employees, shall never
accept any item of value in consideration of a favorable proxy voting
decision.
Set forth below are general guidelines that the Investment Manager shall
follow in exercising proxy voting rights:
Prudence. In making a proxy voting decision, the Investment Manager
shall give appropriate consideration to all relevant facts and
circumstances, including the value of the securities to be voted and the
likely effect any vote may have on that value. Since voting rights must be
exercised on the basis of an informed judgment, investigation shall be a
critical initial step.
Third Party Views. While the Investment Manager may consider the views
of third parties, it shall never base a proxy voting decision solely on the
opinion of a third party. Rather, decisions shall be based on a reasonable
and good faith determination as to how best to maximize stockholder value.
Stockholder Value. Just as the decision whether to purchase or sell a
security is a matter of judgment, determining whether a specific proxy
resolution will increase the market value of a security is a matter of
judgment as to which informed parties may differ. In determining how a proxy
vote may affect the economic value of a security, the Investment Manager
shall consider both short-term and long-term views about a company's
business and prospects, especially in light of our projected holding period
on the stock (e.g., the Investment Manager may discount long-term views on a
short-term holding).
Set forth below are guidelines as to how specific proxy voting issues shall
be analyzed and assessed. While these guidelines will provide a framework for
our decision making process, the mechanical application of these guidelines can
never address all proxy voting decisions. When new issues arise or old issues
present nuances not encountered before, the Investment Manager must be guided by
its reasonable judgment to vote in a manner that the Investment Manager deems to
be in the best interests of the Fund and its stockholders.
STOCK-BASED COMPENSATION
Approval of Plans or Plan Amendments. By their nature, compensation plans
must be evaluated on a case-by-case basis. As a general matter, the Investment
Manager always favors compensation plans that align the interests of management
and stockholders. The Investment Manager generally approves compensation plans
under the following conditions:
10% Rule. The dilution effect of the newly authorized shares, plus the
shares reserved for issuance in connection with all other stock related
plans, generally should not exceed 10%.
Exercise Price. The minimum exercise price of stock options should be at
least equal to the market price of the stock on the date of grant.
Plan Amendments. Compensation plans should not be materially amended
without stockholder approval.
Non-Employee Directors. Awards to non-employee directors should not be
subject to management discretion, but rather should be made under
non-discretionary grants specified by the terms of the plan.
15
Repricing/Replacement of Underwater Options. Stock options generally
should not be re-priced, and never should be re-priced without stockholder
approval. In addition, companies should not issue new options, with a lower
strike price, to make up for previously issued options that are
substantially underwater. The Investment Manager will vote against the
election of any slate of directors that, to its knowledge, has authorized a
company to re-price or replace underwater options during the most recent
year without stockholder approval.
Reload/Evergreen Features. The Investment Manager will generally vote
against plans that enable the issuance of reload options and that provide an
automatic share replenishment ('evergreen') feature.
Measures to Increase Executive Long-Term Stock Ownership. The Investment
Manager supports measures to increase the long-term stock ownership by a
company's executives. These include requiring senior executives to hold a
minimum amount of stock in a company (often expressed as a percentage of
annual compensation), requiring stock acquired through option exercise to be
held for a certain minimum amount of time, and issuing restricted stock
awards instead of options. In this respect, the Investment Manager supports
the expensing of option grants because it removes the incentive of a company
to issue options in lieu of restricted stock. The Investment Manager also
supports employee stock purchase plans, although the Investment Manager
generally believes the discounted purchase price should be at least 85% of
the current market price.
Vesting. Restricted stock awards normally should vest over at least a
two-year period.
Other stock awards. Stock awards other than stock options and restricted
stock awards should be granted in lieu of salary or a cash bonus, and the
number of shares awarded should be reasonable.
CHANGE OF CONTROL ISSUES
While the Investment Manager recognizes that a takeover attempt can be a
significant distraction for the board and management to deal with, the simple
fact is that the possibility of a corporate takeover keeps management focused on
maximizing stockholder value. As a result, the Investment Manager opposes
measures that are designed to prevent or obstruct corporate takeovers because
they can entrench current management. The following are the Investment Manager's
guidelines on change of control issues:
Stockholder Rights Plans. The Investment Manager acknowledges that there
are arguments for and against stockholder rights plans, also known as
'poison pills.' Companies should put their case for rights plans to
stockholders. The Investment Manager generally votes against any directors
who, without stockholder approval, to our knowledge have instituted a new
poison pill plan, extended an existing plan, or adopted a new plan upon the
expiration of an existing plan during the past year.
Golden Parachutes. The Investment Manager opposes the use of accelerated
employment contracts that result in cash grants of greater than three times
annual compensation (salary and bonus) in the event of termination of
employment following a change in control of a company. In general, the
guidelines call for voting against 'golden parachute' plans because they
impede potential takeovers that stockholders should be free to consider. The
Investment Manager generally withholds votes at the next stockholder meeting
for directors who to its knowledge approved golden parachutes.
Approval of Mergers. The Investment Manager votes against proposals that
require a super-majority of stockholders to approve a merger or other
significant business combination. The Investment Manager supports proposals
that seek to lower super-majority voting requirements.
16
ROUTINE ISSUES
Director Nominees in a Non-Contested Election -- The Investment Manager
generally votes in favor of management proposals on director nominees.
Director Nominees in a Contested Election -- By definition, this type of
board candidate or slate runs for the purpose of seeking a significant change in
corporate policy or control. Therefore, the economic impact of the vote in favor
of or in opposition to that director or slate must be analyzed using a higher
standard normally applied to changes in control. Criteria for evaluating
director nominees as a group or individually should include: performance;
compensation, corporate governance provisions and takeover activity; criminal
activity; attendance at meetings; investment in the company; interlocking
directorships; inside, outside and independent directors; whether the chairman
and CEO titles are held by the same person; number of other board seats; and
other experience. It is impossible to have a general policy regarding director
nominees in a contested election.
Board Composition -- The Investment Manager supports the election of a board
that consists of at least a majority of independent directors. The Investment
Manager generally withholds support for non-independent directors who serve on a
company's audit, compensation and/or nominating committees. The Investment
Manager also generally withholds support for director candidates who have not
attended a sufficient number of board or committee meetings to effectively
discharge their duties as directors.
Classified Boards -- Because a classified board structure prevents
stockholders from electing a full slate of directors at annual meetings, the
Investment Manager generally votes against classified boards. The Investment
Manager votes in favor of stockholder proposals to declassify a board of
directors unless a company's charter or governing corporate law allows
stockholders, by written consent, to remove a majority of directors at any time,
with or without cause.
Barriers to Stockholder Action -- The Investment Manager votes to support
proposals that lower the barriers to stockholder action. This includes the right
of stockholders to call a meeting and the right of stockholders to act by
written consent.
Cumulative Voting -- Having the ability to cumulate votes for the election
of directors -- that is, cast more than one vote for a director about whom they
feel strongly -- generally increases stockholders' rights to effect change in
the management of a corporation. The Investment Manager therefore generally
supports proposals to adopt cumulative voting.
Ratification of Auditors -- Votes generally are cast in favor of proposals
to ratify an independent auditor, unless there is a reason to believe the
auditing firm is no longer performing its required duties or there are exigent
circumstances requiring the Investment Manager to vote against the approval of
the recommended auditor. For example, the Investment Manager's general policy is
to vote against an independent auditor that receives more than 50% of its total
fees from a company for non-audit services.
STOCK RELATED ITEMS
Increase Additional Common Stock -- The Investment Manager's guidelines
generally call for approval of increases in authorized shares, provided that the
increase is not greater than three times the number of shares outstanding and
reserved for issuance (including shares reserved for stock-related plans and
securities convertible into common stock, but not shares reserved for any poison
pill plan).
Votes generally are cast in favor of proposals to authorize additional
shares of stock except where the proposal:
1. creates a blank check preferred stock; or
2. establishes classes of stock with superior voting rights.
Blank Check Preferred Stock -- Votes generally are cast in opposition to
management proposals authorizing the creation of new classes of preferred stock
with unspecific voting, conversion,
17
distribution and other rights, and management proposals to increase the number
of authorized blank check preferred shares. The Investment Manager may vote in
favor of this type of proposal when it receives assurances to its reasonable
satisfaction that (i) the preferred stock was authorized by the board for the
use of legitimate capital formation purposes and not for anti-takeover purposes,
and (ii) no preferred stock will be issued with voting power that is
disproportionate to the economic interests of the preferred stock. These
representations should be made either in the proxy statement or in a separate
letter from the company to the Investment Manager.
Preemptive Rights -- Votes are cast in favor of stockholder proposals
restoring limited preemptive rights.
Dual Class Capitalizations -- Because classes of common stock with unequal
voting rights limit the rights of certain stockholders, the Investment Manager
votes against adoption of a dual or multiple class capitalization structure.
SOCIAL ISSUES
The Investment Manager believes that it is the responsibility of the board
and management to run a company on a daily basis. With this in mind, in the
absence of unusual circumstances, the Investment Manager does not believe that
stockholders should be involved in determining how a company should address
broad social and policy issues. As a result, the Investment Manager generally
votes against these types of proposals, which are generally initiated by
stockholders, unless the Investment Manager believes the proposal has
significant economic implications.
OTHER SITUATIONS
No set of guidelines can anticipate all situations that may arise. The
Investment Manager's portfolio managers and analysts will be expected to analyze
proxy proposals in an effort to gauge the impact of a proposal on the financial
prospects of a company, and vote accordingly. These policies are intended to
provide guidelines for voting. They are not, however, hard and fast rules
because corporate governance issues are so varied.
PROXY VOTING PROCEDURES
The Investment Manager maintains a record of all voting decisions for the
period required by applicable laws. In each case in which the Investment Manager
votes contrary to the stated policies set forth in these guidelines, the record
shall indicate the reason for such a vote.
The Investment Committee of the Investment Manager shall have responsibility
for voting proxies, under the supervision of the Director of Research. The
Director of Research's designee (the 'Designee') shall be responsible for
ensuring that the Investment Committee is aware of all upcoming proxy voting
opportunities. The Designee shall ensure that proxy votes are properly recorded
and that the requisite information regarding each proxy voting opportunity is
maintained. The Investment Manager's General Counsel shall have overall
responsibility for ensuring that the Investment Manager complies with all proxy
voting requirements and procedures.
RECORDKEEPING
The Designee shall be responsible for recording and maintaining the
following information with respect to each proxy voted by the Investment
Manager:
Name of the company
Ticker symbol
CUSIP number
Stockholder meeting date
Brief identification of each matter voted upon
Whether the matter was proposed by management or a stockholder
18
Whether the Investment Manager voted on the matter
If the Investment Manager voted, then how the Investment Manager voted
Whether the Investment Manager voted with or against management
The Investment Manager's General Counsel shall be responsible for
maintaining and updating the Policies and Procedures, and for maintaining any
records of written client requests for proxy voting information and documents
that were prepared by the Investment Manager and were deemed material to making
a voting decision or that memorialized the basis for the decision.
The Investment Manager shall rely on the Securities and Exchange
Commission's EDGAR filing system with respect to the requirement to maintain
proxy materials regarding client securities.
CONFLICTS OF INTEREST
There may be situations in which the Investment Manager may face a conflict
between its interests and those of its clients or fund stockholders. Potential
conflicts are most likely to fall into three general categories:
Business Relationships -- This type of conflict would occur if the
Investment Manager or an affiliate has a substantial business relationship
with the company or a proponent of a proxy proposal relating to the
company (such as an employee group) such that failure to vote in favor of
management (or the proponent) could harm the relationship of the
Investment Manager or its affiliate with the company or proponent. In the
context of the Investment Manager, this could occur if an affiliate of the
Investment Manager has a material business relationship with a company
that Investment Manager has invested in on behalf of the Fund, and the
Investment Manager is encouraged to vote in favor of management as an
inducement to acquire or maintain the affiliate's relationship.
Personal Relationships -- The Investment Manager or an affiliate could
have a personal relationship with other proponents of proxy proposals,
participants in proxy contests, corporate directors or director nominees.
Familial Relationships -- The Investment Manager or an affiliate could
have a familial relationship relating to a company (e.g., spouse or other
relative who serves as a director or nominee of a public company).
The next step is to identify if a conflict is material. A material matter is
one that is reasonably likely to be viewed as important by the average
stockholder. Materiality will be judged under a two-step approach:
Financial Based Materiality -- The Investment Manager presumes a conflict
to be non-material unless it involves at least $500,000.
Non-Financial Based Materiality -- Non-financial based materiality would
impact the members of the Investment Manager's Investment Committee, who
are responsible for making proxy voting decisions.
Finally, if a material conflict exists, the Investment Manager shall vote in
accordance with the advice of a proxy voting service.
The Investment Manager's General Counsel shall have responsibility for
supervising and monitoring conflicts of interest in the proxy voting process
according to the following process:
Identifying Conflicts -- The Investment Manager is responsible for
monitoring the relationships of the Investment Manager's affiliates for
purposes of the Investment Manager's Inside Information Policy and
Procedures. The General Counsel (or his designee) maintains a watch list and
a restricted list. The Investment Manager's Investment Committee is unaware
of the content of the watch list and therefore it is only those companies on
the restricted list, which is made known to everyone at the Investment
Manager, for which potential concerns might arise. When a company is placed
on the restricted list, the general counsel (or his designee) shall promptly
inquire of the Designee as to whether there is a pending proxy voting
opportunity with respect to that company, and continue to inquire on a
weekly basis
19
until such time as the company is no longer included on the restricted list.
When there is a proxy voting opportunity with respect to a company that has
been placed on the restricted list, the general counsel shall inform the
Investment Committee that no proxy vote is to be submitted for that company
until the general counsel completes the conflicts analysis.
For purposes of monitoring personal or familial relationships, the general
counsel (or his designee) shall receive on at least an annual basis from each
member of the Investment Manager's Investment Committee written disclosure of
any personal or familial relationships with public company directors that could
raise potential conflict of interest concerns. Investment Committee members also
shall agree in writing to advise if (i) there are material changes to any
previously furnished information, (ii) a person with whom a personal or familial
relationship exists is subsequently nominated as a director or (iii) a personal
or familial relationship exists with any proponent of a proxy proposal or a
participant in a proxy contest.
Identifying Materiality -- The General Counsel (or his designee) shall be
responsible for determining whether a conflict is material. He shall evaluate
financial based materiality in terms of both actual and potential fees to be
received. Non-financial based items impacting a member of the Investment
Committee shall be presumed to be material.
Communication with Investment Committee; Voting of Proxy -- If the General
Counsel determines that the relationship between the Investment Manager's
affiliate and a company is financially material, he shall communicate that
information to the members of the Investment Manager's Investment Committee and
instruct them, and the Designee, that the Investment Manager will vote its proxy
based on the advice of a consulting firm engaged by the Investment Manager. Any
personal or familial relationship, or any other business relationship, that
exists between a company and any member of the Investment Committee shall be
presumed to be material, in which case the Investment Manager again will vote
its proxy based on the advice of a consulting firm engaged by the Investment
Manager. The fact that a member of the Investment Committee personally owns
securities issued by a company will not disqualify the Investment Manager from
voting common stock issued by that company, since the member's personal and
professional interests will be aligned.
In cases in which the Investment Manager will vote its proxy based on the
advice of a consulting firm, the general counsel (or his designee) shall be
responsible for ensuring that the Designee votes proxies in this manner. The
General Counsel will maintain a written record of each instance when a conflict
arises and how the conflict is resolved (e.g., whether the conflict is judged to
be material, the basis on which the materiality decision is made and how the
proxy is voted).
The Fund's proxy voting record for the most recent 12-month period ended
June 30 will be available (1) without charges upon request, by calling (800)
437-9912 or (2) on the SEC's website at http://www.sec.gov after June 30, 2005.
Information as of June 30 each year will generally be available by the following
August 31.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Directors, decisions to buy and sell
securities for the Fund and negotiation of its brokerage commission rates are
made by the Investment Manager. Transactions on U.S. stock exchanges involve the
payment by the Fund of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, the Investment
Manager will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other
20
aspects of the portfolio execution services offered. Subject to such policies
and procedures as the directors may determine, the Investment Manager shall not
be deemed to have acted unlawfully or to have breached any duty solely by reason
of its having caused the Fund to pay a broker that provides research services to
the Investment Manager an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission another broker
would have charged for effecting that transaction, if the Investment Manager
determines in good faith that such amount of commission was reasonable in
relation to the value of the research service provided by such broker viewed in
terms of either that particular transaction or the Investment Manager's ongoing
responsibilities with respect to the Fund. Research and investment information
is provided by these and other brokers at no cost to the Investment Manager and
is available for the benefit of other accounts advised by the Investment Manager
and its affiliates, and not all of the information will be used in connection
with the Fund. While this information may be useful in varying degrees and may
tend to reduce the Investment Manager's expenses, it is not possible to estimate
its value and in the opinion of the Investment Manager it does not reduce the
Investment Manager's expenses in a determinable amount. The extent to which the
Investment Manager makes use of statistical, research and other services
furnished by brokers is considered by the Investment Manager in the allocation
of brokerage business but there is no formula by which such business is
allocated. The Investment Manager does so in accordance with its judgment of the
best interests of the Fund and its stockholders. The Investment Manager may also
take into account payments made by brokers effecting transactions for the Fund
to other persons on behalf of the Fund for services provided to it for which it
would be obligated to pay (such as custodial and professional fees). In
addition, consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc., and subject to seeking best price and execution, the
Investment Manager may consider sales of shares of the Fund as a factor in the
selection of brokers and dealers to enter into portfolio transactions with the
Fund.
DETERMINATION OF NET ASSET VALUE
The Fund will determine the net asset value of its Common Shares daily, as
of the close of trading on the New York Stock Exchange (currently 4:00 p.m. New
York time). Net asset value is computed by dividing the value of all assets of
the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses, the liquidation preference of the Preferred Shares
and the Series T, Series W, Series TH, Series F and Series M28 AMPS, and
dividends declared but unpaid), by the total number of Common Shares
outstanding. Any swap transaction that the Fund enters into may, depending on
the applicable interest rate environment, have a positive or negative value for
purposes of calculating net asset value. Any cap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have no
value or a positive value. In addition, accrued payments to the Fund under such
transactions will be assets of the Fund and accrued payments by the Fund will be
liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the official closing
21
price as reported by NASDAQ or, in the case of securities not quoted by NASDAQ,
the National Quotation Bureau or such other comparable source as the directors
deem appropriate to reflect their fair market value. However, certain
fixed-income securities may be valued on the basis of prices provided by a
pricing service when such prices are believed by the Board of Directors to
reflect the fair market value of such securities. The prices provided by a
pricing service take into account institutional size trading in similar groups
of securities and any developments related to specific securities. Where
securities are traded on more than one exchange and also over-the-counter, the
securities will generally be valued using the quotations the Board of Directors
believes reflect most closely the value of such securities.
Any securities for which market quotations are not readily available shall
be valued in accordance with procedures approved by the Board of Directors.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES
GENERAL
Securities Depository. The Depository Trust Company ('DTC') will act as the
Securities Depository with respect to the Preferred Shares. One certificate for
all of the Preferred Shares will be registered in the name of Cede & Co., as
nominee of the Securities Depository. Such certificate will bear a legend to the
effect that such certificate is issued subject to the provisions restricting
transfers of shares of the Preferred Shares contained in the Articles
Supplementary. The Fund will also issue stop-transfer instructions to the
transfer agent for the Preferred Shares. Prior to the commencement of the right
of holders of the Preferred Shares to elect a majority of the Fund's Directors,
as described under 'Description of the Preferred Shares -- Voting Rights' in the
prospectus, Cede & Co. will be the holder of record of the Preferred Shares and
owners of such shares will not be entitled to receive certificates representing
their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in shares of the Preferred Shares,
whether for its own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The auction agent will act as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its part,
the auction agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
the auction agency agreement between the Fund and the auction agent and will not
be liable for any error of judgment made in good faith unless the auction agent
was grossly negligent in ascertaining the pertinent facts.
The auction agent may conclusively rely upon, as evidence of the identities
of the holders of the Preferred Shares, the auction agent's registry of holders,
and the results of auctions and notices from any Broker-Dealer (or other person,
if permitted by the Fund) with respect to transfers described under 'The
Auction-Secondary Market Trading and Transfers of the Preferred Shares' in the
prospectus and notices from the Fund. The auction agent is not required to
accept any such notice for an auction unless it is received by the auction agent
by 3:00 p.m., New York City time, on the business day preceding such Auction.
The auction agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 45 days after such notice. If
the auction agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.
22
BROKER-DEALERS
The auction agent after each auction for the Preferred Shares will pay to
each Broker-Dealer, from funds provided by the Trust, a service charge at the
annual rate of 1/4 of 1% in the case of any auction immediately preceding the
dividend period of less than one year, or a percentage agreed to by the Fund and
the Broker-Dealer in the case of any auction immediately preceding a dividend
period of one year or longer, of the purchase price of the Preferred Shares
placed by such Broker-Dealer at such auction. For the purposes of the preceding
sentence, the Preferred Shares will be placed by a Broker-Dealer if such shares
were (a) the subject of hold orders deemed to have been submitted to the auction
agent by the Broker-Dealer and were acquired by such Broker-Dealer for its
customers who are beneficial owners or (b) the subject of an order submitted by
such Broker-Dealer that is (i) a submitted bid of an existing holder that
resulted in the existing holder continuing to hold such shares as a result of
the auction or (ii) a submitted bid of a potential bidder that resulted in the
potential holder purchasing such shares as a result of the auction or (iii) a
valid hold order.
The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account, unless
the Trust notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.
S&P AND MOODY'S GUIDELINES
The descriptions of the S&P and Moody's Guidelines contained in this SAI do
not purport to be complete and are subject to and qualified in their entireties
by reference to the Articles Supplementary. A copy of the Articles Supplementary
is filed as an exhibit to the registration statement of which the Prospectus and
this SAI are a part and may be inspected, and copies thereof may be obtained, as
described under 'Further Information' in the Prospectus.
The composition of the Fund's portfolio reflects guidelines (referred to
herein as the 'Rating Agency Guidelines') established by S&P and Moody's in
connection with the Fund's receipt of a rating of 'AAA' and 'Aaa' from S&P and
Moody's, respectively, for the Preferred Shares. These Rating Agency Guidelines
relate, among other things, to industry and credit quality characteristics of
issuers and diversification requirements and specify various Discount Factors
for different types of securities (with the level of discount greater as the
rating of a security becomes lower). Under the Rating Agency Guidelines, certain
types of securities in which the Fund may otherwise invest consistent with its
investment strategy are not eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio. Such instruments include, for example,
private placements (other than Rule 144A Securities) and other securities not
within the investment guidelines. Accordingly, although the Fund reserves the
right to invest in such securities to the extent set forth herein, they have not
and it is anticipated that they will not constitute a significant portion of the
Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the Preferred Shares (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) plus specified
liabilities, payment obligations and other amounts, as of periodic Valuation
Dates. The Rating Agency Guidelines also require the Fund to maintain asset
coverage for the Preferred Shares (and the Series T, Series W, Series TH,
Series F and Series M28 AMPS) on a non-discounted basis of at least 200% as of
the end of each month, and the 1940 Act requires this asset coverage as a
condition to paying dividends or other distributions on Common
23
Shares. S&P and Moody's have agreed that the auditors must certify once per year
the asset coverage test on a date randomly selected by the auditor. The effect
of compliance with the Rating Agency Guidelines may be to cause the Fund to
invest in higher quality assets and/or to maintain relatively substantial
balances of highly liquid assets or to restrict the Fund's ability to make
certain investments that would otherwise be deemed potentially desirable by the
Investment Manager, including private placements of other than Rule 144A
Securities (as defined herein). The Rating Agency Guidelines are subject to
change from time to time with the consent of the relevant rating agency and
would not apply if the Fund in the future elected not to use investment leverage
consisting of senior securities rated by one or more rating agencies, although
other similar arrangements might apply with respect to other senior securities
that the Fund may issue.
The Fund intends to maintain, at specified times, a Discounted Value for its
portfolio at least equal to the amount specified by each rating agency (the
'Preferred Shares Basic Maintenance Amount'). S&P and Moody's have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable Rating Agency's
Guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency).
The Rating Agency Guidelines do not impose any limitations on the percentage
of Fund assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio. The amount of
such assets included in the portfolio at any time may vary depending upon the
rating, diversification and other characteristics of the assets included in the
portfolio which are eligible for inclusion in the Discounted Value of the
portfolio under the Rating Agency Guidelines.
As described by S&P, a preferred stock rating of AAA indicates strong asset
protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. An S&P or Moody's
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful. As described by Moody's, an
issue of preferred stock which is rated 'Aaa' is considered to be top-quality
preferred stock with good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.
Ratings are not recommendations to purchase, hold or sell Preferred Shares,
inasmuch as the rating does not comment as to market price or suitability for a
particular investor. The rating is based on current information furnished to S&P
and Moody's by the Fund and obtained by S&P and Moody's from other sources. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information.
S&P GUIDELINES
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Shares
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the Discounted Value of the Fund's portfolio, and,
among the requirements, the amount of such assets included in the portfolio at
any time, if any, may vary depending upon the credit quality (and related
Discounted Value) of the Fund's eligible assets at such time.
The Preferred Shares Basic Maintenance Amount includes the sum of
(1) $25,000 times the number of Preferred Shares (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS) then outstanding and (2) certain
accrued and projected payment obligations of the Fund. Upon any failure to
maintain the required Discounted Value, the Fund would seek to alter the
composition of its portfolio to reestablish required asset coverage within the
specified ten Business Day cure period, thereby incurring additional transaction
costs and possible losses and/or gains on dispositions of portfolio securities.
To the extent any such failure is not cured in a timely manner, the holders of
the Preferred Shares will acquire certain rights. See 'Description of Preferred
Shares -- Asset Maintenance.' 'Business Day,' as used in the Prospectus and this
SAI, means each Monday, Tuesday, Wednesday, Thursday and Friday that is a day on
which the New York Stock
24
Exchange is open for trading and that is not a day on which banks in New York
City are authorized or required by law or executive order to close.
Under S&P guidelines, for purposes of determining the Discounted Value of
any S&P Eligible Asset, the percentage determined as follows:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
Minimum Number Of:
Issuers(1)...................................... 44 40 44 30
Real Estate Industry/Property Sectors(2)........ 10 8 7 7
Percent of Assets in:
Largest Real Estate Industry/Property Sector.... 17% 25% 30% 30%
2nd Largest Real Estate Industry/Property
Sector........................................ 15% 20% 25% 25%
3rd Largest Real Estate Industry/Property
Sector........................................ 12% 15% 15% 15%
4th Largest Real Estate Industry/Property
Sector........................................ 12% 12% 12% 12%
S&P Discount Factor:
common stock.................................... 190% 208% 223% 231%
preferred stock(3).............................. 157% 167% 174% 178%
---------
(1) Three issuers may each constitute 6% of assets and four issuers may each
constitute 5% of assets.
(2) As defined by the National Association of Real Estate Investment Trusts
('NAREIT').
(3) Applies to preferred stock of real estate companies, subject to
diversification guidelines whereby at least 34% of the preferred assets are
rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
Moody's equivalent) or greater; and the balance of the preferred assets is
rated B - (or Moody's equivalent) or is unrated. The Discount Factor for
common stock will apply to preferred stock which is not in compliance with
the diversification standard.
(b) Debt Securities:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
Bond Rating(1):
A............................................... 116% 117% 119% 118%
A -............................................. 117% 119% 120% 120%
BBB+............................................ 119% 121% 122% 122%
BBB............................................. 121% 122% 124% 124%
BBB -........................................... 122% 124% 126% 126%
BB+............................................. 127% 130% 133% 132%
BB.............................................. 133% 137% 141% 139%
BB -............................................ 139% 144% 149% 147%
B+.............................................. 152% 159% 166% 164%
B............................................... 163% 172% 182% 179%
B -............................................. 176% 188% 202% 197%
CCC+............................................ 198% 212% 230% 224%
CCC............................................. 236% 262% 295% 284%
---------
(1) The S&P Discount Factors for debt securities shall also be applied to any
interest rate swap or cap, in which case the rating of the counterparty
shall determine the appropriate rating category.
(2) If a security is unrated by S&P but is rated by Moody's, the conversion
chart under S&P OC Test Rating chart will apply.
S&P's Diversification Standard Levels 1 through 4 correspond to the portfolio's
diversification and impact the level of asset coverage needed to qualify for a
particular rating from S&P. The diversification of the Fund is measured by the
number of issuers and REIT sub-sectors within the Fund's portfolio. A high
number of issuers and sub-sectors corresponds to a more diversified Fund. The
more diversified the Fund is, the lower the asset coverage needed to qualify for
a particular S&P rating. The Fund must fall within Level 4, at a minimum, to
qualify for the AAA rating and, accordingly, must have a minimum number of
issuers and property sub-sectors in its portfolio.
25
(c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:
52-week Treasury Bills*..................................... 102%
Two-Year Treasury Notes..................................... 104%
Three-Year Treasury Notes................................... 108%
Five-Year Treasury Notes.................................... 109%
10-Year Treasury Notes...................................... 115%
30-Year Treasury Bonds...................................... 126%
---------
* Treasury Bills with maturities of less than 52 weeks will be discounted at the
appropriate Short-Term Money Market Instrument levels. Treasury Bills that
mature the next day are considered cash equivalents and are valued at 100%.
Treasury Strips: Treasury interest-only Strips will apply the discount
factor for the Treasury category set forth above following the maturity of the
Treasury Strip, e.g., a Treasury interest-only Strip with a maturity of seven
years will apply the discount factor for the U.S. Treasury securities with a
10-year maturity. Treasury principal-only Strips will apply the discount factor
that is two categories greater than its maturity, e.g., a Treasury
principal-only Strip with a maturity of seven years will apply the discount
factor for U.S. Treasury securities with a 30-year maturity.
(d) Cash and Cash Equivalents.
The S&P Discount Factor applied to Cash and Cash Equivalents will be (A)
100%, and (B) 102% for those portfolio securities which mature in 181 to 360
calendar days.
Under current S&P guidelines, the following are considered to be S&P
Eligible Assets:
(a) Common Stock, Preferred Stock and any debt securities of REITs and
Real Estate Companies;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the swap
transaction has a short-term rating of not less than A-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is A+ or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
Preferred Shares (and the Series T, Series W, Series TH, Series F and Series
M28 AMPS) originally issued. The interest rate swap transaction will be
marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);
(d) Short-Term Money Market Instruments so long as (A) such securities
are issued by an institution, which, at the time of investment, is a
permitted bank (including commercial paper issued by a corporation which
complies with the applicable assumptions that follow) ('permitted bank'
means any bank, domestic or foreign, whose commercial paper is rated
A-1+) provided, however, that Short-Term Money Market Instruments with
maturities of 30 days of less, invested in an institution rated A-1 may
comprise up to 20% of eligible portfolio assets; and
(e) Cash, which is any immediately available funds in U.S. dollars or
any currency other than U.S. dollars which is a freely convertible currency
and Cash Equivalents, which means investments (other than Cash) that are one
or more of the following obligations or Securities: (i) U.S. Government
Securities; (ii) certificates of deposit of, banker's acceptances issued by
or money market accounts in any depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof and subject to supervision and examination by Federal and/or state
banking authorities, so long as the deposits offered by such depository
institution or trust company at the time of such investments are rated and
have a rating of at least 'P-1' by Moody's and 'A-1+' by S&P (or, in the
case of the principal depository institution in a holding company system
whose deposits are not so rated, the long term debt obligations of such
holding company are rated and such rating is at least 'A-1' by Moody's and
'A+' by S&P); (iii) commercial paper issued by any depository
26
institution or trust company incorporated under the laws of the United
States of America or any state thereof and subject to supervision and
examination by Federal and/or state banking authorities, or any corporation
incorporated under the laws of the United States of America or any state
thereof, so long as the commercial paper of such issuer is rated and has at
the time of such investment a short term rating of at least 'P-1' by Moody's
and 'A-1+' by S&P on its commercial paper; (iv) securities bearing interest
or sold at a discount issued by any corporation incorporated under the laws
of the United States of America or any state thereof the obligations of
which at the time of such investment are rated and that have a credit rating
of at least 'P-1' by Moody's and 'A-1+' by S&P either at the time of such
investment or the making of a contractual commitment providing for such
investment; (v) shares of any money market fund organized under the laws of
a jurisdiction other than the United States, so long as such money market
fund is rated and has at the time of such investment a short-term rating of
at least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and ownership of such
investments will not cause the issuer to become engaged in a trade or
business within the United States for U.S. Federal income tax purposes or
subject the issuer to tax on a net income basis; and (vi) unleveraged
overnight repurchase obligations on customary terms with respect to
investments described in clauses (i) through (iv) above entered into a
depository institution, trust company or corporation that has a short-term
rating of at least 'A-1+' by S&P; provided, that (i) in no event shall Cash
Equivalents include any obligation that provides for payment of interest
alone; (ii) Cash Equivalents referred to in clauses (ii) and (iii) above
shall mature within 183 days of issuance; (iii) if either Moody's or S&P
changes its rating system, then any ratings included in this definition
shall be deemed to be an equivalent rating in a successor rating category of
Moody's or S&P, as the case may be; (iv) if either Moody's or S&P is not in
the business of rating securities, then any ratings included in this
definition shall be deemed to be an equivalent rating from another Rating
Agency; (v) Cash Equivalents (other than U.S. Government Securities or money
market funds maintained by the Custodian) shall not include any such
investment of more than $100 million in any single issuer; and (vi) in no
event shall Cash Equivalents include any obligation that is not denominated
in Dollars, any synthetic securities, any Securities with ratings containing
an 'r' subscript, any IOs or any POs (other than commercial paper with a
maturity within 183 days of issuance).
MOODY'S GUIDELINES
For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ('Moody's Eligible Assets')
must be discounted by certain discount factors set forth below ('Moody's
Discount Factors'). The Discounted Value of a portfolio security under Moody's
guidelines is the Market Value thereof, determined as specified by Moody's,
divided by the Moody's Discount Factor. The Moody's Discount Factor with respect
to securities other than those described below will be the percentage provided
in writing by Moody's.
The following Discount Factors apply to portfolio holdings as described
below, subject to diversification, issuer size and other requirements, in order
to constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common Stock of REITs....................................... 154%
Preferred Stock of REITs
with Senior Implied Moody's (or S&P) rating:............ 154%
without Senior Implied Moody's (or S&P) rating:......... 208%
Preferred Stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P) rating:............ 208%
without Senior Implied Moody's (or S&P) rating:......... 250%
---------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed 30%
of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
Assets.
(footnotes continued on next page)
27
(footnotes continued from previous page)
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is below $500
million.
(b) Debt Securities of REITs and Other Real Estate Companies:
TERMS OF
MATURITY OF
NON-INVESTMENT
GRADE BONDS AAA AA A BAA BA B NR(1)
----------- --- -- - --- -- - -----
1 year or less 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than 2
years) 120% 123% 127% 131% 153% 168% 250%
4 years or less (but longer than 3
years) 126% 129% 133% 138% 161% 176% 250%
5 years or less (but longer than 4
years) 132% 135% 139% 144% 168% 185% 250%
7 years or less (but longer than 5
years) 139% 143% 147% 152% 179% 197% 250%
10 years or less (but longer than 7
years) 145% 150% 155% 160% 189% 208% 250%
15 years or less (but longer than 10
years) 150% 155% 160% 165% 196% 216% 250%
20 years or less (but longer than 15
years) 150% 155% 160% 165% 196% 228% 250%
30 years or less (but longer than 20
years) 150% 155% 160% 165% 196% 229% 250%
Greater than 30 years 165% 173% 181% 189% 205% 240% 250%
---------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the corporation's or municipal
issuer's assets can be derived from other sources as well as combined with a
number of sources as presented by the Corporation to Moody's, securities
rated below B by Moody's and unrated securities, which are securities rated
by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
Assets. If a corporate or municipal debt security is unrated by Moody's, S&P
or Fitch, the Corporation will use the percentage set forth under 'Below B
and Unrated' in the Corporate or Municipal Debt Tables. Ratings assigned by
S&P or Fitch are generally accepted by Moody's at face value. However,
adjustments to face value may be made to particular categories of credits
for which the S&P and/or Fitch rating does not seem to approximate a Moody's
rating equivalent. Split rated securities assigned by S&P and Fitch will be
accepted at the lower of the two ratings.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 115%
3 years or less (but longer than 2 years) 118% 121%
4 years or less (but longer than 3 years) 123% 128%
5 years or less (but longer than 4 years) 128% 135%
7 years or less (but longer than 5 years) 135% 147%
10 years or less (but longer than 7 years) 141% 163%
15 years or less (but longer than 10 years) 146% 191%
20 years or less (but longer than 15 years) 154% 218%
30 years or less (but longer than 20 years) 154% 244%
(d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P or Fitch and
mature or have a demand feature at par exercisable within 49 days of the
relevant valuation date. A Moody's Discount Factor of 100% will be applied to
cash.
28
Under current Moody's guidelines, the following are considered to be Moody's
Eligible Assets:
(a) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies. (i) Common stock of REITs and preferred
stock and any debt security of REITs and Other Real Estate Companies: (A)
which comprise at least 7 of the 14 Moody's Real Estate Industry/Property
Sector Classifications ('Moody's Sector Classifications') listed below
and of which no more than 35% may constitute a single such
classification; (B) which in the aggregate constitute at least 40
separate issues of common stock, preferred stock, and debt securities,
issued by at least 30 issuers; (C) issued by a single issuer which in the
aggregate constitute no more than 7.0% of the Market Value of Moody's
Eligible Assets, and (D) issued by a single issuer which, with respect to
50% of the Market Value of Moody's Eligible Assets, constitute in the
aggregate no more than 5% of Market Value of Moody's Eligible Assets; and
(ii) Unrated debt securities issued by an issuer which: (A) has not
filed for bankruptcy within the past three years; (B) is current on all
principal and interest on its fixed income obligations; (C) is current on
all preferred stock dividends; (D) possesses a current, unqualified
auditor's report without qualified, explanatory language and (E) in the
aggregate do not exceed 10% of the discounted Moody's Eligible Assets;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the
swap transaction has a short-term rating of not less than P-1 by Moody's
or A-1 by S&P or, if the counterparty does not have a short-term rating,
the counterparty's senior unsecured long-term debt rating is A3 or higher
by Moody's or A+ or higher by S&P; (ii) the original aggregate notional
amount of the interest rate swap transaction or transactions is not to be
greater than the liquidation preference of the Preferred Shares (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) originally
issued; (iii) the interest rate swap transaction will be marked-to-market
daily; (iv) an interest rate swap that is in-the-money is discounted at
the counterparty's corporate debt rating for the maturity of the swap for
purposes of calculating Moody's Eligible Assets; and (v) an interest rate
swap that is out-of-the money includes that negative mark-to-market
amount as indebtedness for purposes of calculating the Preferred Shares
Basic Maintenance amount;
(c) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(d) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2, or (C) in all other cases, the supporting entity (1) is rated
A2 and the security matures within one month, (2) is rated A1 and the
security matures within three months or (3) is rated at least Aa3 and the
security matures within six months; provided, however, that for purposes
of this definition, such instruments (other than commercial paper rated
by S&P and not rated by Moody's) need not meet any otherwise applicable
Moody's rating criteria; and
(e) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within 49 days of the relevant valuation date) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades which
generated such receivables are (A) settled through clearing house firms
with respect to which the Corporation has received prior written
authorization from Moody's or (B) (1) with counterparties having a
Moody's long-term debt rating of at least Baa3 or (2) with counterparties
having a Moody's Short-Term Money Market Instrument rating of at least
P-1.
See the Articles Supplementary of the Fund for further detail on the above
Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.
29
The foregoing Rating Agency Guidelines are subject to change from time to
time. The Fund may, but it is not required to, adopt any such change. Nationally
recognized rating agencies other than S&P and Moody's may also from time to time
rate the Preferred Shares; any nationally recognized rating agency providing a
rating for the Preferred Shares may, at any time, change or withdraw any such
rating.
U.S. FEDERAL TAXATION
The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Fund and its stockholders. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its
stockholders, and the following discussion is not intended as a substitute for
careful tax planning. Stockholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Fund.
TAXATION OF THE FUND
The Fund intends to elect to be taxed as, and to qualify annually as, a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, the Fund generally is not subject to U.S. federal income tax
on the portion of its investment company taxable income (as that term is defined
in the Code, but determined without regard to any deduction for dividends paid)
and net capital gain (i.e., the excess of net long-term capital gain over net
short-term capital loss) that it distributes to stockholders, provided that it
distributes at least 90% of the sum of its investment company taxable income and
any net tax-exempt interest income for the taxable year (the 'Distribution
Requirement'), and satisfies certain other requirements of the Code that are
described below. The Fund intends to make sufficient distributions of its
investment company taxable income each taxable year to meet the Distribution
Requirement.
In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of any such issuer and as to which the Fund
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities (other than U.S. Government securities and securities of other
regulated investment companies) of any one issuer, or of two or more issuers
which the Fund controls and which are engaged in the same or similar or related
trades or businesses.
Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund will be required (i) to suspend distributions to Common Stockholders,
and (ii) under certain circumstances to partially redeem the Preferred Shares in
order to maintain or restore the requisite asset coverage, either of which could
prevent the Fund from making distributions required to qualify as a regulated
investment company for U.S. federal income tax purposes and to avoid the excise
taxes discussed below. Depending on the size of the Fund's assets relative to
its outstanding senior securities, redemption under certain circumstances of the
Preferred Shares might restore asset coverage. If asset coverage were restored,
the Fund would again be able to pay dividends and
30
depending on the circumstances, could requalify or avoid disqualification as a
regulated investment company and avoid the excise taxes discussed below.
If for any taxable year the Fund does not qualify as a regulated investment
company or satisfy the Distribution Requirement, all of its taxable income
(including its net capital gain) will be subject to U.S. federal income tax at
regular corporate rates without any deduction for distributions to stockholders,
and such distributions will be taxable as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. Such distributions
generally will be eligible (i) for the dividends received deduction in the case
of corporate stockholders and (ii) for treatment as qualified dividend income in
the case of individual stockholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in a calendar year an amount equal to the sum of (1)
98% of its ordinary taxable income for the calendar year, (2) 98% of its capital
gain net income (i.e., capital gains in excess of capital losses) for the
one-year period ended on October 31 of such calendar year, and (3) any ordinary
taxable income and capital gain net income for previous years that was not
distributed or taxed to the regulated investment company during those years. A
distribution will be treated as paid on December 31 of the current calendar year
if it is declared by the Fund in October, November or December with a record
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions will be taxed to stockholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received. To prevent the application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar
year distribution requirement.
DISTRIBUTIONS
Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of distributions of qualified dividend income and
capital gain dividends described below, be taxable to stockholders as ordinary
income. If a portion of the Fund's income consists of qualifying dividends paid
by U.S. corporations (other than REITs), a portion of the dividends paid by the
Fund to corporate stockholders, if properly designated, may be eligible for the
corporate dividends received deduction. In addition, for taxable years beginning
on or before December 31, 2008, distributions of investment income designated by
the Fund as derived from qualified dividend income will be taxed in the hands of
individuals at the rates applicable to long-term capital gain, provided holding
period and other requirements are met. The Fund does not expect a significant
portion of Fund distributions to be eligible for the dividends received
deduction or derived from qualified dividend income.
The Fund may either retain or distribute to stockholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it generally will be taxable to individual stockholders at long-term
capital gains rates regardless of the length of time the stockholders have held
their shares. Conversely, if the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital loss
carryovers) at the applicable corporate tax rate. In such event, it is expected
that the Fund also will elect to treat such gain as having been distributed to
stockholders. As a result, each stockholder will be required to report his or
her pro rata share of such gain on his or her tax return as long-term capital
gain, will be entitled to claim a tax credit for his or her pro rata share of
tax paid by the Fund on the gain, and will increase the tax basis for his or her
shares by an amount equal to the deemed distribution less the tax credit.
Long-term capital gain rates for individuals have been temporarily reduced
to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for
taxable years beginning on or before December 31, 2008.
31
Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the stockholder's tax basis in his or her shares; any such
return of capital distributions in excess of the stockholder's tax basis will be
treated as gain from the sale of his or her shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund. If the NAV at the time a stockholder purchases
shares of the Fund reflects undistributed income or gain, distributions of such
amounts will be taxable to the stockholder in the manner described above, even
though such distributions economically constitute a return of capital to the
stockholder.
The IRS currently requires that a regulated investment company that has two
or more classes of stock allocate to each such class proportionate amounts of
each type of its income (such as ordinary income, capital gains, dividends
qualifying for the dividends received deduction and qualified dividend income)
based upon the percentage of total dividends paid out of current or accumulated
earnings and profits to each class for the tax year. Accordingly, the Fund
intends each year to allocate capital gain dividends, dividends qualifying for
the dividends received deduction and dividends derived from qualified dividend
income, if any, between its Common Shares, the Preferred Shares and the
Series T, Series W, Series TH, Series F and Series M28 AMPS in proportion to the
total dividends paid out of current or accumulated earnings and profits to each
class with respect to such tax year. Distributions in excess of the Fund's
current and accumulated earnings and profits, if any, however, will not be
allocated proportionately among the Common Shares, the Preferred Shares and the
Series T, Series W, Series TH, Series F and Series M28 AMPS. Since the Fund's
current and accumulated earnings and profits will first be used to pay dividends
on the Preferred Shares (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS) distributions in excess of such earnings and profits, if any,
will be made disproportionately to holders of Common Shares.
SALE OF SHARES
A stockholder generally will recognize gain or loss on the sale or exchange
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale and the stockholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the stockholder's holding period for the shares. Generally, a
stockholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. However, any capital loss arising from the
sale of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
stockholder (or amounts credited to the stockholder as undistributed capital
gains) with respect to such shares. Also, any loss realized on a sale or
exchange of shares will be disallowed to the extent the shares disposed of are
replaced with other substantially identical shares within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such case, the tax basis of the acquired shares will be adjusted to reflect the
disallowed loss.
NATURE OF FUND'S INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
provisions.
32
ORIGINAL ISSUE DISCOUNT SECURITIES
Investments by the Fund in zero coupon or other discount securities will
result in income to the Fund equal to a portion of the excess of the face value
of the securities over their issue price (the original issue discount') each
year that the securities are held, even though the Fund receives no cash
interest payments. This income is included in determining the amount of income
which the Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its stockholders.
INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits ('REMICs'). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an 'excess inclusion') will be subject to U.S.
federal income tax in all events. These regulations are also expected to provide
that excess inclusion income of a regulated investment company, such as the
Fund, will be allocated to stockholders of the regulated investment company in
proportion to the dividends received by such stockholders, with the same
consequences as if the stockholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to stockholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign stockholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
'disqualified organization' (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest U.S. federal income tax rate imposed on corporations.
The Investment Manager does not intend on behalf of the Fund to invest in REITs,
a substantial portion of the assets of which consists of residual interests in
REMICs.
BACKUP WITHHOLDING
If a stockholder fails to furnish a correct taxpayer identification number,
fails to report fully dividend or interest income, or fails to certify that he
or she has provided a correct taxpayer identification number and that he or she
is not subject to 'backup withholding,' the stockholder may be subject to a
'backup withholding' tax at a current rate of 28% with respect to (1) taxable
dividends and (2) the proceeds of any sales or repurchases of Preferred Shares.
An individual's taxpayer identification number is generally his or her social
security number. Corporate stockholders and other stockholders specified in the
Code or the Treasury regulations promulgated thereunder are exempt from backup
withholding. Backup withholding is not an additional tax and any amounts
withheld will be allowed as a refund or a credit against a taxpayer's U.S.
federal income tax liability if the appropriate information is provided to the
IRS.
FOREIGN STOCKHOLDERS
U.S. taxation of a stockholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ('foreign stockholder') as defined in the Code, depends
on whether the income of the Fund is 'effectively connected' with a U.S. trade
or business carried on by the stockholder.
33
Income Not Effectively Connected. If the income from the Fund is not
'effectively connected' with a U.S. trade or business carried on by the foreign
stockholder, distributions of investment company taxable income, including any
dividends designated as qualified dividend income, will generally be subject to
a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the stockholder (see 'U.S. Federal
Taxation -- Investments in Real Estate Investment Trusts' above)), which tax is
generally withheld from such distributions.
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will generally not be subject to U.S.
federal withholding tax at the rate of 30% (or lower treaty rate) unless the
foreign stockholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would generally be subject to U.S. federal income tax on
his or her worldwide income at the graduated rates applicable to U.S. citizens,
rather than the 30% U.S. federal withholding tax. In the case of a foreign
stockholder who is a nonresident alien individual, the Fund may be required to
backup withhold U.S. federal income tax on distributions of net capital gain
unless the foreign stockholder certifies his or her non-U.S. status under
penalties of perjury or otherwise establishes an exemption. See 'U.S. Federal
Taxation -- Backup Withholding' above. Any gain that a foreign stockholder
realizes upon the sale or exchange of such stockholder's shares of the Fund will
ordinarily be exempt from U.S. federal withholding tax unless (i) in the case of
a stockholder that is a nonresident alien individual, the gain is U.S. source
income and such stockholder is physically present in the United States for more
than 182 days during the taxable year and meets certain other requirements, or
(ii) at any time during the shorter of the period during which the foreign
stockholder held such shares of the Fund and the five year period ending on the
date of the disposition of those shares, the Fund was a 'U.S. real property
holding corporation' and the foreign stockholder actually or constructively held
more than 5% of the shares of the same class, in which event described in (ii),
the gain would be taxed in the same manner as for a U.S. stockholder as
discussed above and a 10% U.S. federal withholding tax generally would be
imposed on the amount realized on the disposition of such shares and credited
against the foreign stockholder's U.S. federal income tax liability on such
disposition. A corporation is a 'U.S. real property holding corporation' if the
fair market value of its U.S. real property interests equals or exceeds 50% of
the fair market value of such interests plus its interests in real property
located outside the United States plus any other assets used or held for use in
a business. In the case of the Fund, U.S. real property interests include
interests in stock in U.S. real property holding corporations (other than stock
of a REIT controlled by U.S. persons and holdings of 5% or less in the stock of
publicly traded U.S. real property holding corporations) and certain
participating debt securities.
Income Effectively Connected. If the income from the Fund is 'effectively
connected' with a U.S. trade or business carried on by a foreign stockholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will generally be subject to U.S. federal income tax at the
graduated rates applicable to U.S. citizens, residents and domestic
corporations. Foreign corporate stockholders may also be subject to the branch
profits tax imposed by the Code.
The tax consequences to a foreign stockholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
stockholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
34
TAX SHELTER REPORTING REGULATIONS
Under recently promulgated Treasury regulations, if a stockholder recognizes
a loss with respect to shares of $2 million or more for an individual
stockholder or $10 million or more for a corporate stockholder in any single
taxable year (or a greater loss over a combination of years), the stockholder
must file with the IRS a disclosure statement on Form 8886. Direct stockholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, stockholders of a regulated investment
company are not excepted. Future guidance may extend the current exception from
this reporting requirement to stockholders of most or all regulated investment
companies. The fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's treatment of the loss
is proper. Stockholders should consult their advisors to determine the
applicability of these regulations in light of their individual circumstances.
EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions and considerations discussed herein.
Income received by the Fund from foreign sources may be subject to
withholding and other taxes imposed by foreign jurisdictions, absent treaty
relief. Distributions to stockholders also may be subject to state, local and
foreign taxes, depending upon each stockholder's particular situation.
Stockholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Fund.
PERFORMANCE DATA AND INDEX RETURNS
From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to stockholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.
AVERAGE ANNUAL TOTAL RETURN
The Fund's 'average annual total return' figures described in the Prospectus
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:
P(1 + T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
35
YIELD
Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ('net investment income') and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
a-b
---
2[( cd + 1)'pp'6 - 1]
Where: a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the
period.
In reports or other communications to stockholders of the Fund or in
advertising materials, the Fund may compare its performance with that of (i)
other investment companies listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or (ii) the Standard and Poor's Index of 500
Stocks, the Dow Jones Industrial Average, Dow Jones Utility Index, the National
Association of Real Estate Investment Trusts (NAREIT) Equity REIT Index, the
Salomon Brothers Broad Investment Grade Bond Index (BIG), Morgan Stanley Capital
International Europe Australia Far East (MSCI EAFE) Index, the NASDAQ Composite
Index, and other relevant indices and industry publications. The Fund may also
compare the historical volatility of its portfolio to the volatility of such
indices during the same time periods. (Volatility is a generally accepted
barometer of the market risk associated with a portfolio of securities and is
generally measured in comparison to the stock market as a whole -- the
beta -- or in absolute terms -- the standard deviation.)
EXPERTS
Simpson Thacher & Bartlett LLP serves as counsel to the Fund, and is located
at 425 Lexington Avenue, New York, New York 10017-3909. PricewaterhouseCoopers
LLP have been appointed as independent registered public accountants for the
Fund. The audited financial statements for the year ended December 31, 2003
included in this statement of additional information have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent registered
public accountants, given on the authority of said firm as experts in auditing
and accounting.
36
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Cohen & Steers Quality Income Realty Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Cohen & Steers Quality Income
Realty Fund, Inc. (the 'Fund') at December 31, 2003, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and the period February 28, 2002
(commencement of operations) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
As explained in Note 1, the Fund has revised amounts previously reported as
net investment income to reflect the reclassification of distributions received
in excess of income from underlying investments. Also as explained in Note 1, as
a result of a recent FASB Emerging Issues Task Force consensus which requires
that periodic payments under interest rate swap transactions be reported as a
component of realized and unrealized gains/losses in the Fund's statement of
operations, the Fund has reclassified amounts previously reported as interest
expense on interest rate swap transactions. These reclassifications had no
effect on net assets or the net increase in net assets resulting from
operations.
PricewaterhouseCoopers LLP
New York, New York
February 17, 2004
37
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)(a)
--------- -------- ------------
Equities 148.01%(b)
Common Stock 115.40%
Diversified 16.56%
Colonial Properties Trust...................... 582,300 $ 23,059,080 6.72%
Crescent Real Estate Equities Co............... 1,396,200 23,916,906 8.76
iStar Financial................................ 400,500 15,579,450 6.81
Newcastle Investment Corp...................... 678,528 18,388,109 7.38
Vornado Realty Trust........................... 687,443 37,637,504 5.19
--------------
118,581,049
--------------
Health Care 17.82%
Health Care Property Investors................. 595,200 30,236,160 6.54
Health Care REIT............................... 969,625 34,906,500 6.50
Nationwide Health Properties................... 1,205,300 23,563,615 7.57
Ventas......................................... 1,766,500 38,863,000 4.86
--------------
127,569,275
--------------
Hotel 2.00%
Hospitality Properties Trust................... 346,400 14,299,392 6.98
--------------
Industrial 4.39%
First Industrial Realty Trust.................. 614,500 20,739,375 8.12
Keystone Property Trust........................ 484,900 10,711,441 5.98
--------------
31,450,816
--------------
Office 32.51%
Arden Realty................................... 826,800 25,085,112 6.66
Brandywine Realty Trust........................ 1,140,900 30,541,893 6.57
CarrAmerica Realty Corp........................ 1,010,600 30,095,668 6.72
Equity Office Properties Trust................. 1,314,400 37,657,560 6.98
Highwoods Properties........................... 670,400 17,028,160 6.69
Mack-Cali Realty Corp.......................... 1,073,800 44,691,556 6.05
Maguire Properties............................. 604,800 14,696,640 6.58
Prentiss Properties Trust...................... 1,000,200 32,996,598 6.79
--------------
232,793,187
--------------
---------
(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange or market, on
which such security trades. The dividend yield has not been audited.
(b) Percentages indicated are based on the net assets of the fund.
See accompanying notes to financial statements.
38
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------- -----------
Office/Industrial 8.69%
Kilroy Realty Corp............................. 142,600 $ 4,670,150 6.05
Liberty Property Trust......................... 1,065,200 41,436,280 6.22
Reckson Associates Realty Corp................. 663,800 16,130,340 6.99
--------------
62,236,770
--------------
Residential -- Apartment 14.44%
AMLI Residential Properties Trust.............. 77,000 2,063,600 7.16
Apartment Investment & Management Co........... 114,500 3,950,250 6.96
Archstone-Smith Trust.......................... 754,100 21,099,718 6.11
AvalonBay Communities.......................... 307,200 14,684,160 5.86
Camden Property Trust.......................... 366,600 16,240,380 5.73
Gables Residential Trust....................... 586,900 20,388,906 6.94
Home Properties................................ 361,600 14,605,024 6.14
Mid-America Apartment Communities.............. 309,400 10,389,652 6.97
--------------
103,421,690
--------------
Self Storage 0.45%
Sovran Self Storage.............................. 87,300 3,243,195 6.49
--------------
Shopping Center 18.54%
Community Center 6.70%
Cedar Shopping Centers......................... 200,000 2,484,000 7.25
Heritage Property Investment Trust............. 449,100 12,776,895 7.38
Kramont Realty Trust........................... 1,293,300 23,408,730 7.18
New Plan Excel Realty Trust.................... 65,800 1,623,286 6.69
Urstadt Biddle Properties -- Class A........... 544,000 7,697,600 5.94
--------------
47,990,511
--------------
Regional Mall 11.84%
CBL & Associates Properties.................... 50,000 2,825,000 5.13
Glimcher Realty Trust.......................... 605,200 13,544,376 8.58
Macerich Co.................................... 807,857 35,949,637 5.48
Mills Corp..................................... 737,400 32,445,600 5.14
--------------
84,764,613
--------------
Total Shopping Center.......................... 132,755,124
--------------
Total Common Stock (Identified cost --
$661,283,955)............................ 826,350,498
--------------
See accompanying notes to financial statements.
39
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------- -----------
Preferred Stock 32.61%
Diversified 7.06%
Colonial Properties Trust, 8.125%, Series D.... 64,900 $ 1,762,684 7.47%
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible))(a)................... 1,826,000 42,710,140 7.23
iStar Financial, 7.80%, Series F............... 94,600 2,473,790 7.46
iStar Financial, 7.65%, Series G............... 80,000 2,020,000 7.56
Newcastle Investment Corp., 9.75%, Series B.... 56,000 1,558,480 8.77
--------------
50,525,094
--------------
Health Care 0.29%
LTC Properties, 8.50%, Series E................ 65,600 2,057,872 6.79
--------------
Hotel 6.90%
FelCor Lodging Trust, 9.00%, Series B.......... 652,500 16,351,650 8.98
Host Marriott Corp., 10.00%, Series A.......... 7,000 187,180 9.35
Host Marriott Corp., 10.00%, Series B.......... 14,100 380,700 9.26
Host Marriott Corp., 10.00%, Series C.......... 30,700 837,189 9.17
Innkeepers USA Trust, 8.625%, Series A......... 68,200 1,712,502 8.60
Innkeepers USA Trust, 8.00%, Series C.......... 56,000 1,416,800 7.91
LaSalle Hotel Properties, 10.25%, Series A..... 1,000,000 28,550,000 8.97
--------------
49,436,021
--------------
Industrial 0.28%
Keystone Property Trust, 9.125%, Series D...... 75,000 2,036,250 8.40
--------------
Office 2.33%
HRPT Properties Trust, 8.75%, Series B......... 120,000 3,342,000 7.86
Highwoods Properties, 8.625%, Series A......... 13,195 13,359,938 8.52
--------------
16,701,938
--------------
Office/Industrial 0.09%
PS Business Parks, 9.25%, Series A............. 10,800 274,968 9.07
PS Business Parks, 8.75%, Series F............. 4,100 110,126 8.15
ProLogis, 8.54%, Series C...................... 4,000 233,500 7.31
--------------
618,594
--------------
---------
(a) 410,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
40
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
NUMBER VALUE YIELD
OF SHARES (NOTE 1) (UNAUDITED)
--------- -------- -----------
Residential -- Apartment 4.88%
Apartment Investment & Management Co.,
8.75%, Series D.............................. 5,530 $ 139,634 8.67%
Apartment Investment & Management Co.,
10.10%, Series R............................. 950,000 25,811,500 9.20
Home Properties, 9.00%, Series F............... 196,000 5,399,800 8.17
Mid-America Apartment Communities, 8.30%,
Series H..................................... 138,100 3,607,172 7.96
--------------
34,958,106
--------------
Shopping Center 10.78%
Community Center 5.52%
Commercial Net Lease Realty, 9.00%, Series A... 25,000 685,000 8.21
Developers Diversified Realty Corp.,
8.60%, Series F.............................. 1,039,400 27,751,980 8.05
Federal Realty Investment Trust, 8.50%,
Series B..................................... 310,300 8,533,250 7.75
Urstadt Biddle Properties, 8.50%, Series C..... 24,000 2,526,000 8.08
--------------
39,496,230
--------------
Outlet Center 0.11%
Chelsea Property Group, 8.375%, Series A....... 14,000 772,625 7.59
--------------
Regional Mall 5.15%
CBL & Associates Properties, 8.75%,
Series B(b).................................. 430,000 23,564,000 7.99
Glimcher Realty Trust, 8.75%, Series F......... 40,000 1,059,200 8.27
Mills Corp., 9.00%, Series B................... 55,300 1,522,962 8.17
Mills Corp., 9.00%, Series C................... 159,600 4,412,142 8.14
Mills Corp., 8.75%, Series E................... 84,000 2,276,400 8.08
Simon Property Group, 8.75%, Series F.......... 30,000 819,000 8.02
Taubman Centers, 8.30%, Series A............... 127,600 3,243,591 8.18
--------------
36,897,295
--------------
Total Shopping Center.......................... 77,166,150
--------------
Total Preferred Stock (Identified cost --
$209,248,013)............................ 233,500,025
--------------
Total Equities (Identified
cost -- $870,531,968).................... 1,059,850,523
--------------
---------
(b) 158,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
41
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2003 (AUDITED)
DIVIDEND
PRINCIPAL VALUE YIELD
AMOUNT (NOTE 1) (UNAUDITED)
------ -------- -----------
Commercial Paper 0.92%
UBS Financial, 0.75%, due 01/02/04 (Identified
cost -- $6,605,862).......................... $6,606,000 6,605,862
--------------
Total Investments (Identified cost -- $877,137,830)
. 148.93% 1,066,456,385
Liabilities in Excess of Other Assets ........ (1.45)% (10,372,698)
Liquidation Value of Taxable Auction Market Preferred
Shares: Series T, Series W, Series TH and
Series F .................................. (39.10)% (280,000,000)
Liquidation Value of Auction Market Preferred Shares:
Series M28, (Equivalent to $25,000 per share based on
2,400 shares outstanding) .................. (8.38)% (60,000,000)
Net Assets -- Applicable to Common Shares (Equivalent
to $18.43 per share based on 38,856,074 shares of
capital stock outstanding) ................. 100.00% $ 716,083,687
--------------
--------------
See accompanying notes to financial statements.
42
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003 (AUDITED)
Assets:
Investments in securities, at value (Identified
cost -- $877,137,830) (Note 1)........................ $1,066,456,385
Cash.................................................... 63
Dividends receivable.................................... 6,906,282
Receivable for investment securities sold............... 294,738
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6).......................... 128,059
Other assets............................................ 40,126
--------------
Total Assets........................................ 1,073,825,653
--------------
Liabilities:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 14,681,022
Payable for investment securities purchased............. 1,400,000
Payable for dividends declared on common shares......... 772,846
Payable to investment manager........................... 468,125
Payable for dividends declared on preferred shares...... 206,900
Other liabilities....................................... 213,073
--------------
Total Liabilities................................... 17,741,966
--------------
Liquidation Value of Preferred Shares:
Taxable auction market preferred shares, Series T
($25,000 liquidation value,
$0.001 par value, 2,800 shares issued and outstanding)
(Notes 1 and 5)....................................... 70,000,000
Taxable auction market preferred shares, Series W
($25,000 liquidation value,
$0.001 par value, 2,800 shares issued and outstanding)
(Notes 1 and 5)....................................... 70,000,000
Taxable auction market preferred shares, Series TH
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series F
($25,000 liquidation value, $0.001 par value,
2,800 shares issued and outstanding) (Notes 1 and 5).. 70,000,000
Auction market preferred shares, Series M28 ($25,000
liquidation value, $0.001 par value, 2,400 shares
issued and outstanding) (Notes 1 and 5)............... 60,000,000
--------------
340,000,000
--------------
Total Net Assets Applicable to Common Shares................ $ 716,083,687
--------------
--------------
Total Net Assets Applicable to Common Shares consist of:
Common stock ($0.001 par value, 38,856,074 shares issued
and outstanding)
(Notes 1 and 5)....................................... $ 541,197,061
Undistributed net investment income..................... 543,697
Accumulated net realized loss on investments............ (422,663)
Net unrealized appreciation/(depreciation) on
investments and interest rate swap transactions....... 174,765,592
--------------
$ 716,083,687
--------------
--------------
Net Asset Value Per Common Share:
($716,083,687[div]38,856,074 shares outstanding)........ $ 18.43
--------------
--------------
Market Price Per Common Share............................... $ 17.85
--------------
--------------
Market Price Discount to Net Asset Value per Common Share... (3.15)%
--------------
--------------
See accompanying notes to financial statements.
43
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003(a) (AUDITED)
Investment Income (Note 1):
Dividend income......................................... $ 46,451,092
Interest income......................................... 126,415
------------
Total Income........................................ 46,577,507
------------
Expenses:
Investment management fees (Note 2)..................... 7,499,290
Preferred remarketing fees.............................. 744,384
Administration fees (Note 2)............................ 340,661
Reports to shareholders................................. 212,620
Professional fees....................................... 101,814
Custodian fees and expenses............................. 86,286
Directors' fees and expenses (Note 2)................... 42,312
Transfer agent fees and expenses........................ 22,338
Miscellaneous........................................... 141,796
------------
Total Expenses...................................... 9,191,501
Reduction of Expenses (Note 2).......................... (2,823,262)
------------
Net Expenses........................................ 6,368,239
------------
Net Investment Income....................................... 40,209,268
------------
Net Realized and Unrealized Gain/(Loss) on Investments (Note
1):
Net realized gain on investments........................ 16,665,842
Net realized loss on interest rate swap transactions.... (8,126,956)
Net change in unrealized appreciation on investments.... 207,953,973
Net change in unrealized depreciation on interest rate
swap transactions..................................... 4,360,791
------------
Net realized and unrealized gain/(loss) on
investments....................................... 220,853,650
------------
Net Increase Resulting from Operations...................... 261,062,918
------------
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (3,743,228)
------------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $257,319,690
------------
------------
---------
(a) See Note 1.
See accompanying notes to financial statements.
44
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
(AUDITED)
FOR THE PERIOD
FOR THE FEBRUARY 28, 2002(a)
YEAR ENDED THROUGH
DECEMBER 31, 2003(b) DECEMBER 31, 2002(b)
-------------------- --------------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income........................... $ 40,209,268 $ 32,953,127
Net realized gain on investments and interest
rate swap transactions........................ 8,538,886 (1,286,027)
Net change in unrealized appreciation/
(depreciation) on investments and interest
rate swap transactions........................ 212,314,764 (37,549,172)
------------ ------------
Net increase/(decrease) in net assets
resulting from operations................. 261,062,918 (5,882,072)
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income........................... (2,449,183) (3,509,955)
Net realized gain on investments................ (1,294,045) (434,405)
------------ ------------
Total dividends and distributions to
preferred shareholders.................... (3,743,228) (3,944,360)
------------ ------------
Net increase/(decrease) in net assets from
operations applicable to common shares........ 257,319,690 (9,826,432)
------------ ------------
Less Dividends and Distributions to Common
Shareholders from:
Net investment income........................... (29,555,562) (24,413,662)
Net realized gain on investments................ (15,615,873) (3,021,534)
Tax return of capital........................... (10,118,665) (8,942,086)
------------ ------------
Total dividends and distributions to common
shareholders.............................. (55,290,100) (36,377,282)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from common share
transactions.................................. -- 557,997,269
Increase in net assets from shares issued to
common shareholders for reinvestment of
dividends..................................... 3,038,014 3,417,272
Decrease in net assets from underwriting
commissions and offering expenses from
issuance of preferred shares.................. (935,773) (3,360,947)
------------ ------------
Net increase in net assets from capital
stock transactions........................ 2,102,241 558,053,594
------------ ------------
Total increase in net assets applicable to
common shares............................. 204,131,831 511,849,880
Net Assets Applicable to Common Shares:
Beginning of period............................. 511,951,856 101,976
------------ ------------
End of period................................... $716,083,687 $511,951,856
------------ ------------
------------ ------------
---------
(a) Commencement of operations.
(b) See Note 1.
See accompanying notes to financial statements.
45
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS
Information contained in the table below under the heading 'Per Share
Operating Performance' and 'Ratios/Supplemental Data' shows the operating
performance of the Fund for the periods indicated.
The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the Fund's
Financial Statements included in the SAI dated , 2004. The table
should be read in conjunction with the Financial Statements and notes thereto.
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(UNAUDITED) (AUDITED) (AUDITED)
PER SHARE OPERATING PERFORMANCE: --------- ------- -------
Net asset value per common share, beginning of period..... $18.43 $13.25 $14.57
------ ------ ------
Income from investment operations:
Net investment income.................................. 0.55(b) 1.04(b) 0.78
Net realized and unrealized gain/(loss) on investments
and interest rate swap transactions................... 0.24 5.69 (0.90)
------ ------ ------
Total income from investment operations............. 0.79 6.73 (0.12)
------ ------ ------
Less dividends and distributions to preferred shareholders
from:
Net investment income.................................. (0.05) (0.07) (0.09)
Net realized gain on investments....................... -- (0.03) (0.01)
------ ------ ------
Total dividends and distributions to preferred
shareholders...................................... (0.05) (0.10) (0.10)
------ ------ ------
Total from investment operations applicable to
common shares..................................... 0.74 6.63 (0.22)
------ ------ ------
Less: Offering and organization costs charged to paid-in
capital -- common shares............................ -- -- (0.03)
Offering and organization costs charged to paid-in
capital -- preferred shares......................... -- (0.02) (0.09)
Preferred Offering Cost Adjustment.................... --(c) -- --
Dilutive effect of common share offering.............. -- -- (0.03)
------ ------ ------
Total offering and organization costs............... -- (0.02) (0.15)
------ ------ ------
Less dividends and distributions to common shareholders
from:
Net investment income.................................. (0.68) (0.76) (0.64)
Net realized gain on investments....................... -- (0.41) (0.08)
Tax return of capital.................................. -- (0.26) (0.23)
------ ------ ------
Total dividends and distributions to common
shareholders...................................... (0.68) (1.43) (0.95)
------ ------ ------
Net increase/(decrease) in net asset value per common
share.................................................... 0.06 5.18 (1.32)
------ ------ ------
Net asset value, per common share, end of period.......... $18.49 $18.43 $13.25
------ ------ ------
------ ------ ------
Market value, per common share, end of period............. $16.70 $17.85 $13.05
------ ------ ------
------ ------ ------
Net asset value total return(d)........................... 4.26%(e) 52.61% - 2.73%(e)
------ ------ ------
------ ------ ------
Market value return(d).................................... - 2.77%(e) 50.07% - 6.95%(e)
------ ------ ------
------ ------ ------
---------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) Less than $.005 per share. See Note 5.
(d) Total market value return is computed based upon the New York Stock Exchange
market price of the fund's shares and excludes the effects of brokerage
commissions. Dividends and distributions, if any, are assumed for purposes
of this calculation, to be reinvested at prices obtained under the fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends as
reinvested.
(e) Not annualized.
46
FINANCIAL HIGHLIGHTS -- (CONTINUED)
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(f)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
(UNAUDITED) (AUDITED) (AUDITED)
RATIOS/SUPPLEMENTAL DATA: ------------- ----------------- -----------------
Net assets applicable to common shares, end of period
(in millions)........................................ $ 718.4 $ 716.1 $ 512.0
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (before expense
reduction)(k)........................................ 1.53%(h) 1.57% 1.52%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (net of expense
reduction)(k)........................................ 1.06%(h) 1.09% 1.05%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (before expense
reduction)(k)........................................ 5.53%(h) 6.39% 6.82%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average daily net
assets applicable to common shares (net of expense
reduction)(k).......................................... 6.00%(h) 6.88% 7.29%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(before expense reduction)(g,k)...................... 1.04%(h) 1.04% 1.04%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed assets
(net of expense reduction)(g,k)...................... 0.72%(h) 0.72% 0.72%(h)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate............................... 2.05%(i) 20.51% 12.37%(i)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)........... $340,000 $340,000 $280,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)................... 14 14 11
-------- -------- --------
-------- -------- --------
Asset coverage per share.............................. $ 77,827 $ 77,653 $ 70,710
-------- -------- --------
-------- -------- --------
Liquidation preference per share...................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per sharej....................... $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
---------
(f) Commencement of operations.
(g) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(h) Annualized.
(i) Not annualized.
(j) Based on weekly prices.
(k) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
47
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
closed-end management investment company. The fund had no operations until
February 15, 2002 when it sold 7,000 shares of common stock for $100,275 to
Cohen & Steers Capital Management, Inc. (the investment manager). In addition,
on February 27, 2002, the investment manager made a capital contribution of
$1,701 to the fund. Investment operations commenced on February 28, 2002.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq national list, are valued at the official closing prices as reported
by Nasdaq, the National Quotations Bureau or such other comparable sources as
the board of directors deems appropriate to reflect their fair market value.
However, certain fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by the board of
directors to reflect the fair market value of such securities. Where securities
are traded on more than one exchange and also over-the-counter, the securities
will generally be valued using the quotations the board of directors believes
reflect most closely the value of such securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of taxable auction market preferred shares. The interest rate swaps are
intended to reduce or eliminate the risk that an increase in short-term interest
rates could have on the performance of the fund's common shares as a result of
the floating rate nature of leverage. In an interest rate swap, the fund agrees
to pay the other party to the interest rate swap (which is known as the
counterparty) a fixed rate payment in exchange for the counterparty agreeing to
pay the fund a variable rate payment that is intended to approximate the fund's
variable rate payment obligation on the taxable auction market preferred shares.
The payment obligation is based on the notional amount of the swap. Depending on
the state of interest rates in general, the use of interest rate swaps could
enhance or harm the overall performance of the common shares. The market value
of interest rate
48
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
swaps is based on pricing models that consider the time value of money,
volatility, the current market and contractual prices of the underlying
financial instrument.
Swap agreements involve, to varying degrees, elements of market and
counterparty risk, and exposure to loss in excess of the related amounts
reflected in the Statement of Assets and Liabilities.
Revision of Financial Information: As a result of a recent FASB Emerging
Issues Task Force consensus, which requires that periodic payments under
interest rate swap transactions be reported as a component of realized and
unrealized gains/losses in the fund's Statement of Operations, the fund has
reclassified amounts previously reported as interest expense on interest rate
swap transactions, thereby revising certain amounts in the Statement of Changes
in Net Assets and the Financial Highlights. For the year ended December 31, 2003
net investment income was increased by $8,204,532 ($0.21 per share), and net
realized loss on interest rate swap transactions and net change in unrealized
depreciation on interest rate swap transactions were increased by $8,126,956 and
$77,576, respectively (a total of $0.21 per share). For the period ended
December 31, 2002, net investment income was increased by $5,029,510 ($0.13 per
share), and net realized loss on interest rate swap transactions and net change
in unrealized depreciation on interest rate swap transactions were increased by
$4,563,379 and $466,131, respectively (a total of $0.13 per share).
Additionally, the ratio of net investment income to average daily net assets
applicable to common shares (before expense reduction and net of expense
reduction) increased 1.40% and 1.11% for the year ended December 31, 2003 and
the period ended December 31, 2002, respectively; the ratio of expenses to
average daily net assets applicable to common shares (before expense reduction
and net of expense reduction) decreased 1.40% and 1.11% for the year ended
December 31, 2003 and the period ended December 31, 2002, respectively; and the
ratio of expenses to average daily managed assets (before expense reduction and
net of expense reduction) decreased 0.93% and 0.75% for the year ended December
31, 2003 and the period ended December 31, 2002, respectively. The
reclassifications had no effect on net assets or the net increase in net assets
from operations applicable to common shares.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such amounts are
based on estimates if actual amounts are not available, and actual amounts of
income, realized gain and return of capital may differ from the estimated
amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as necessary once the
issuers provide information about the actual composition of the distributions.
Revision of Financial Information: Due to the nature of commercial real
estate and the REIT structure, which generally is not subject to corporate tax,
REIT dividends can be characterized as a combination of net income, capital
gains (from asset dispositions) and return of capital (which generally relates
to property depreciation). To date, it has been the fund's policy to distribute
to its shareholders all dividends received, regardless of dividend
characterization, from the securities it holds in the year that such dividends
were received. The fund has reclassified a portion of its net investment income
as an increase to net realized gain on investments and as an increase to
unrealized appreciation/(depreciation) on investments for the current year and
for prior periods. These reclassifications are being done to recognize the
return of capital and realized gains that
49
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
have been reported by the securities held in the portfolio of investments. These
changes for the year ended December 31, 2002 are reflected in the Statement of
Changes in Net Assets as follows:
PREVIOUSLY AS
REPORTED REVISED
-------- -------
Net investment income............................ $ 42,419,421 $ 32,953,127
Net realized gains on investments and interest
rate swap transactions......................... (2,358,962) (1,286,027)
Net change in unrealized appreciation/
(depreciation) on investments and interest
rate swap transactions......................... (45,942,531) (37,549,172)
------------ ------------
Net increase/(decrease) in net assets
resulting from operations.................. $ (5,882,072) $ (5,882,072)
------------ ------------
------------ ------------
On the Financial Highlights, the net investment income per share figures
have been reduced and the net realized gain/(loss) on investments per share have
been correspondingly increased. In addition, the ratios of net investment income
have been reduced. These reclassifications do not change the actual dividends
that were received by the fund, nor do they alter any taxpayer records, as such
adjustments have historically been captured in the fund's tax reporting to its
shareholders.
The reclassifications for the Financial Highlights are as follows:
DECREASE IN
RATIOS OF NET
INCREASE IN INVESTMENT
NET REALIZED INCOME TO
AND AVERAGE DAILY
UNREALIZED NET ASSETS
DECREASE IN NET GAIN/(LOSS) (BEFORE EXPENSE
INVESTMENT ON REDUCTION AND
YEAR ENDED INCOME INVESTMENTS NET OF EXPENSE
DECEMBER 31, PER SHARE PER SHARE REDUCTION)
------------ --------- --------- ----------
2002 $0.35 $0.35 3.20%
These reclassifications had no effect on net assets or the net increase in
net assets resulting from operations or cash received from the underlying
investments.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. Dividends to
shareholders are recorded on the ex-dividend date. A portion of the fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable components of the dividends from the fund's portfolio investments.
Net realized capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from generally accepted accounting principles.
Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are declared
and recorded for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.
Series M28 and Series W preferred shares pay dividends based on a variable
interest rate set at auctions, normally held every 28 days. Dividends for Series
M28 and Series W preferred shares are declared and recorded for the subsequent
28 day period on the auction date. In most instances, dividends are payable
every 28 days, on the first business day following the end of the dividend
period.
50
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated polices of the fund, subject to
the general supervision of the board of directors of the fund. The investment
manager also performs certain administrative services for the fund.
For the services under the management agreement, the fund pays the
investment manager a monthly management fee, computed daily and payable monthly
at an annual rate of 0.85% of the fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of the preferred shares. For the year ended December 31,
2003, the fund incurred investment management fees of $7,499,290.
The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine and 0.02% of average daily
managed asset value in year 10. As long as this waiver continues, it may lower
the fund's expenses and increase its total return. For the year ended
December 31, 2003, the investment manager waived management fees of $2,823,262.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the year ended December 31, 2003, the fund incurred $176,454 in
administration fees.
Director's Fees: Certain directors and officers of the fund are also
directors, officers and/or employees of the investment manager. None of the
directors and officers so affiliated received compensation for their services.
For the year ended December 31, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $42,312.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
year ended December 31, 2003, totaled $237,550,482 and $179,574,976,
respectively.
NOTE 4. INCOME TAXES
The fund had a return of capital of $10,118,665 ($0.26 per common share) for
year ended December 31, 2003 which has been deducted from paid-in capital.
Short-term capital gains are reflected in the financial statements as realized
gains on investments but are typically treated as ordinary income for tax
purposes.
51
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
For the year ended December 31, 2003 the dividends and distributions to
shareholders are characterized for tax purposes as follows:
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2003 2002
---- ----
Preferred shareholders:
Ordinary income........................................ $ 2,449,183 $ 3,509,955
Long-term capital gains................................ 1,294,045 434,405
----------- -----------
Total dividends and distributions to preferred
shareholders..................................... $ 3,743,228 $ 3,944,360
----------- -----------
----------- -----------
Common shareholders:
Ordinary income........................................ $29,555,562 $24,413,662
Long-term capital gains................................ 15,615,873 3,021,534
Tax return of capital.................................. 10,118,665 8,942,086
----------- -----------
Total dividends and distributions to common
shareholders..................................... $55,290,100 $36,377,282
----------- -----------
----------- -----------
At December 31, 2003 the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:
Aggregate cost.............................................. $877,016,796
------------
------------
Gross unrealized appreciation............................... $192,448,512
Gross unrealized depreciation............................... (3,008,923)
------------
Net unrealized appreciation on investments.................. 189,439,589
Net unrealized depreciation on interest rate swap
transactions.............................................. (14,552,963)
------------
Net unrealized depreciation................................. $174,886,626
------------
------------
Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to differing treatments of interest rate swap
payments and wash sales on Portfolio Securities. To the extent such differences
are permanent in nature, such amounts are reclassified within the capital
accounts. During the year ended December 31, 2003 the fund decreased
undistributed net investment income by $7,660,825 and increased accumulated net
realized gain on investments by $7,660,825.
The components of distributable earnings on a tax basis consist of
undistributed ordinary income of $0 and undistributed captial gains of $0.
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.
During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
On February 28, 2002, the fund completed the initial public offering of
34,000,000 shares of common stock. Proceeds paid to the fund amounted to
$494,292,000 after deduction of underwriting commissions and offering expenses
of $15,708,000.
On March 8, 2002, the fund completed a subsequent offering of 2,000,000
shares of common stock. Proceeds paid to the fund amounted to $29,076,000 after
deduction of underwriting commissions and offering expenses of $924,000.
52
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
On March 21, 2002, the fund's underwriters exercised an option to purchase
an additional 1,700,000 shares. Proceeds paid to the fund amounted to
$24,714,600 after deduction of underwriting commissions and offering expenses of
$785,400.
On April 8, 2002, the fund's underwriters exercised an option to purchase an
additional 681,983 shares. Proceeds paid to the fund amounted to $9,914,669
after deduction of underwriting commissions and offering expenses of $315,076.
During the period February 28, 2002 (commencement of operations) through
December 31, 2002, the fund issued 247,339 shares of common stock for the
reinvestment of dividends.
On September 15, 2003, the fund issued 2,400 auction market preferred
shares, Series M28 (par value $0.001). Proceeds paid to the fund amounted to
$59,064,267 after deduction of underwriting commissions and offering expenses of
$935,733. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.
On April 4, 2002, the fund issued 2,800 taxable auction market preferred
shares, Series T (par value $0.001), 2,800 taxable auction market preferred
shares, Series W (par value $0.001), 2,800 taxable auction market preferred
shares, Series TH (par value $0.001), and 2,800 taxable auction market preferred
shares, Series F (par value $0.001) (together referred to as preferred shares).
Proceeds paid to the fund amounted to $276,639,053 after deduction of
underwriting commissions and offering expenses of $3,360,947. These issues have
received a 'AAA/Aaa' rating from Standard & Poor's and Moody's.
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, (2) maintain the 1940 Act preferred
shares asset coverage, or (3) file a required certificate related to asset
coverage on time, the preferred shares will be subject to a mandatory redemption
at the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon to the date fixed for redemption. To the extent
permitted under the 1940 Act and Maryland Law, the fund at its option may
without consent of the holders of preferred shares, redeem preferred shares
having a dividend period of one year or less, in whole, or in part, on the
business day after the last day of such dividend period upon not less than 15
calendar days and not more than 40 calendar days prior to notice. The optional
redemption price is $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon to the date fixed for redemption.
The fund's common shares and preferred shares have equal voting rights of
one vote per share and vote together as a single class. In addition, the
affirmative vote of the holders a majority, as defined in the 1940 Act, of the
outstanding preferred shares shall be required to (1) approve any plan of
reorganization that would adversely affect the taxable auction market preferred
shares and (2) approve any matter that materially and adversely affects the
rights, preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products, UBS AG, Fleet Global Markets, and Royal Bank of Canada.
Under the agreements the
53
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)
fund receives a floating rate of interest and pays a respective fixed rate of
interest on the nominal value of the swaps. Details of the swaps at December 31,
2003 are as follows:
UNREALIZED
NOTIONAL FLOATING RATE(a) APPRECIATION/
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) TERMINATION DATE (DEPRECIATION)
------------ ------ ---------- --------------- ---------------- --------------
Merrill Lynch Derivative
Products $46,000,000 4.5600% 1.1700% April 5, 2005 $ (1,812,882)
Merrill Lynch Derivative
Products $46,000,000 5.2100% 1.1700% April 5, 2007 (3,517,438)
Merrill Lynch Derivative
Products $46,000,000 5.5800% 1.1700% April 6, 2009 (4,425,903)
UBS AG $24,000,000 4.4500% 1.1620% April 15, 2005 (900,935)
UBS AG $24,000,000 5.1200% 1.1620% April 15, 2007 (1,731,909)
UBS AG $24,000,000 5.4950% 1.1620% April 15, 2009 (2,151,539)
Fleet Global Markets $14,000,000 3.2125% 1.1700% October 22, 2008 128,059
Royal Bank of Canada $14,000,000 3.6800% 1.1488% October 22, 2008 (140,416)
------------
$(14,552,963)
------------
------------
-------------------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at December 31, 2003.
54
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD(a)
--------- -------------- ------------
Equities 147.54%(b)
Common Stock 116.69%
Diversified 13.76%
Colonial Properties Trust..................... 582,300 $ 22,436,019 6.96%
Crescent Real Estate Equities Co.............. 1,396,200 22,506,744 9.31
iStar Financial............................... 400,500 16,020,000 6.98
Vornado Realty Trust.......................... 663,443 37,889,230 4.97
--------------
98,851,993
--------------
Health Care 17.59%
Health Care Property Investors................ 1,190,400 28,617,216 6.95
Health Care REIT.............................. 969,625 31,512,812 7.38
LTC Properties................................ 131,200 2,177,920 6.63
Nationwide Health Properties.................. 1,205,300 22,780,170 7.83
Ventas........................................ 1,766,500 41,247,775 5.57
--------------
126,335,893
--------------
Hotel 2.29%
Hospitality Properties Trust.................. 389,200 16,463,160 6.81
--------------
Industrial 3.15%
First Industrial Realty Trust................. 614,500 22,662,760 7.43
--------------
Mortgage 2.83%
Newcastle Investment Corp..................... 678,528 20,321,914 8.01
--------------
Office 33.62%
Arden Realty.................................. 826,800 24,316,188 6.87
Brandywine Realty Trust....................... 1,140,900 31,021,071 6.47
CarrAmerica Realty Corp....................... 1,010,600 30,550,438 6.62
Equity Office Properties Trust................ 1,314,400 35,751,680 7.35
Highwoods Properties.......................... 670,400 15,754,400 7.23
HRPT Properties Trust......................... 635,400 6,360,354 7.99
Kilroy Realty Corp. .......................... 142,600 4,862,660 5.81
Mack-Cali Realty Corp. ....................... 1,073,800 44,433,844 6.09
Maguire Properties............................ 604,800 14,980,896 6.46
Prentiss Properties Trust..................... 1,000,200 33,526,704 6.68
--------------
241,558,235
--------------
-------------------
(a) Dividend yield is computed by dividing the security's current annual
dividend rate by the last sale price on the principal exchange or market,
on which such security trades.
(b) Percentages indicated are based on the net assets of the fund.
See accompanying notes to financial statements.
55
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Office/Industrial 9.00%
Liberty Property Trust........................ 1,065,200 $ 42,831,692 6.02%
Reckson Associates Realty Corp. .............. 794,100 21,805,986 6.18
--------------
64,637,678
--------------
Residential 15.21%
Apartment 14.69%
AMLI Residential Properties Trust............. 77,000 2,259,180 6.54
Archstone-Smith Trust......................... 754,100 22,117,753 5.86
AvalonBay Communities......................... 307,200 17,362,944 4.95
Camden Property Trust......................... 366,600 16,790,280 5.55
Gables Residential Trust...................... 586,900 19,942,862 7.09
Home Properties............................... 361,600 14,095,168 6.36
Mid-America Apartment Communities............. 309,400 11,723,166 6.18
Town & Country Trust.......................... 50,000 1,262,000 6.81
--------------
105,553,353
--------------
Manufactured Home 0.52%
Affordable Residential Communities............ 225,200 3,738,320 7.53
--------------
Total Residential............................. 109,291,673
--------------
Self Storage 0.46%
Sovran Self Storage........................... 87,300 3,333,114 6.31
--------------
Shopping Center 18.78%
Community Center 6.74%
Cedar Shopping Centers........................ 200,000 2,298,000 7.83
Heritage Property Investment Trust............ 449,100 12,152,646 7.76
Kramont Realty Trust.......................... 1,293,300 20,692,800 8.13
New Plan Excel Realty Trust................... 222,700 5,202,272 7.06
Urstadt Biddle Properties -- Class A.......... 544,000 8,056,640 5.81
--------------
48,402,358
--------------
See accompanying notes to financial statements.
56
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Regional Mall 12.04%
Glimcher Realty Trust......................... 605,200 $ 13,387,024 8.69%
Macerich Co................................... 807,857 38,672,115 5.10
Mills Corp.................................... 737,400 34,436,580 5.10
--------------
86,495,719
--------------
Total Shopping Center......................... 134,898,077
--------------
Total Common Stock
(Identified cost -- $660,580,498)....... 838,354,497
--------------
Preferred Stock 30.85%
Diversified 5.90%
Colonial Properties Trust, 8.125%, Series D... 64,900 1,663,387 7.93
Crescent Real Estate Equities Co., 6.75%,
Series A (Convertible)(a)................... 1,826,000 36,483,480 8.45
iStar Financial, 7.80%, Series F.............. 94,600 2,242,020 8.23
iStar Financial, 7.65%, Series G.............. 80,000 1,938,000 7.90
--------------
42,326,887
--------------
Health Care 0.14%
Omega Healthcare Investors, 8.375%, Series D.. 40,000 1,004,000 8.34
--------------
Hotel 6.41%
FelCor Lodging Trust, 9.00%, Series B......... 652,500 16,312,500 9.00
Host Marriott Corp., 10.00%, Series A......... 7,000 178,850 9.77
Host Marriott Corp., 10.00%, Series B......... 14,100 363,921 9.69
Host Marriott Corp., 10.00%, Series C......... 30,700 807,410 9.51
Host Marriott Corp., 8.875%, Series E......... 10,000 254,500 8.72
Innkeepers USA Trust, 8.00%, Series C......... 56,000 1,349,600 8.30
LaSalle Hotel Properties, 10.25%, Series A.... 1,000,000 26,775,000 9.57
--------------
46,041,781
--------------
Industrial 0.23%
Keystone Property Trust, 9.125%, Series D..... 64,400 1,667,960 8.81
--------------
Mortgage 0.21%
Newcastle Investment Corp., 9.75%, Series B... 56,000 1,534,400 8.90
--------------
-----------------
(a) 410,000 shares segregated as collateral for the interest rate swap
transactions.
See accompanying notes to financial statements.
57
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Office 2.64%
HRPT Properties Trust, 8.75%, Series B........ 120,000 $ 3,156,000 8.32%
Highwoods Properties, 8.625%, Series A........ 13,195 13,227,988 8.60
Maguire Properties, 7.625%, Series A.......... 106,600 2,574,390 7.89
--------------
18,958,378
--------------
Office/Industrial 0.05%
PS Business Parks, 8.75%, Series F............ 4,100 107,830 8.32
ProLogis, 8.54%, Series C..................... 4,000 225,500 7.57
--------------
333,330
--------------
Residential -- Apartment 4.74%
Apartment Investment & Management Co.,
8.75%, Series D............................. 5,530 138,858 8.71
Apartment Investment & Management Co.,
10.10%, Series R............................ 950,000 25,042,000 9.48
Home Properties, 9.00%, Series F.............. 196,000 5,424,300 8.23
Mid-America Apartment Communities, 8.30%,
Series H.................................... 138,100 3,473,215 8.25
--------------
34,078,373
--------------
Shopping Center 10.53%
Community Center 5.25%
Developers Diversified Realty Corp., 8.60%,
Series F.................................... 1,039,400 26,868,490 8.33
Federal Realty Investment Trust, 8.50%,
Series B.................................... 310,300 8,207,435 8.03
Urstadt Biddle Properties, 8.50%, Series C.... 24,000 2,628,000 7.76
--------------
37,703,925
--------------
Free Standing 0.09%
Commercial Net Lease Realty, 9.00%, Series
A........................................... 25,000 658,000 8.55
--------------
Outlet Center 0.11%
Chelsea Property Group, 8.375%, Series A...... 14,000 793,625 7.39
--------------
See accompanying notes to financial statements.
58
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
SCHEDULE OF INVESTMENTS -- (CONTINUED)
JUNE 30, 2004 (UNAUDITED)
NUMBER VALUE DIVIDEND
OF SHARES (NOTE 1) YIELD
--------- -------------- ------------
Regional Mall 5.08%
CBL & Associates Properties, 8.75%,
Series B.................................... 430,000 $ 22,704,000 8.29%
Glimcher Realty Trust, 8.75%, Series F........ 40,000 1,012,000 8.65
Glimcher Realty Trust, 8.125%, Series G....... 40,000 950,000 8.55
Mills Corp., 9.00%, Series B.................. 55,300 1,473,192 8.45
Mills Corp., 9.00%, Series C.................. 159,600 4,233,390 8.52
Mills Corp., 8.75%, Series E.................. 84,000 2,201,640 8.35
Simon Property Group, 8.75%, Series F......... 30,000 786,000 8.35
Taubman Centers, 8.30%, Series A.............. 127,600 3,170,860 8.35
--------------
36,531,082
--------------
Total Shopping Center......................... 75,686,632
--------------
Total Preferred Stock
(Identified cost -- $210,286,023)....... 221,631,741
--------------
Total Equities
(Identified cost -- $870,866,521)....... 1,059,986,238
--------------
PRINCIPAL
AMOUNT
----------
Commercial Paper 0.40%
State Street Corp., 1.10%, due 07/01/04
(Identified cost -- $2,851,000).............. $2,851,000 2,851,000
-------------
Total Investments (Identified cost --
$873,717,521)............................. 147.94% 1,062,837,238
Liabilities In Excess of Other Assets....... (0.61)% (4,388,460)
Liquidation Value of Taxable Auction Market
Preferred Shares: Series T, Series W,
Series TH, and Series F (Equivalent to
$25,000 per share based on 2,800 shares
outstanding for Series T, Series W,
Series TH and Series F).................... (38.98)% (280,000,000)
Liquidation Value of Auction Market
Preferred Shares: Series M28 (Equivalent
to $25,000 per share based on 2,400 shares
outstanding).............................. (8.35)% (60,000,000)
------ -------------
Net Assets Applicable to Common Shares
(Equivalent to $18.49 per share based on
38,856,074 shares of capital stock
outstanding).............................. 100.00% $ 718,448,778
------ -------------
------ -------------
See accompanying notes to financial statements.
59
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2004 (UNAUDITED)
Assets:
Investments in securities, at value (Identified
cost -- $873,717,521) (Note 1)........................ $1,062,837,238
Cash.................................................... 330
Dividends receivable.................................... 5,495,603
Unrealized appreciation on interest rate swap
transactions (Notes 1 and 6).......................... 568,264
Other assets............................................ 65,760
--------------
Total Assets........................................ 1,068,967,195
--------------
Liabilities:
Unrealized depreciation on interest rate swap
transactions (Notes 1 and 6).......................... 9,089,970
Payable to investment manager........................... 453,833
Payable for dividends declared on common shares......... 337,192
Payable for investment securities purchased............. 293,878
Payable for dividends declared on preferred shares...... 212,552
Payable to administrator................................ 30,607
Other liabilities....................................... 100,385
--------------
Total Liabilities................................... 10,518,417
--------------
Liquidation Value of Preferred Shares:
Taxable auction market preferred shares, Series T
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series W
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series TH
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Taxable auction market preferred shares, Series F
($25,000 liquidation value, $0.001 par value, 2,800
shares issued and outstanding) (Notes 1 and 5)........ 70,000,000
Auction market preferred shares, Series M28 ($25,000
liquidation value, $0.001 par value, 2,400 shares
issued and outstanding) (Notes 1 and 5)............... 60,000,000
--------------
340,000,000
--------------
Total Net Assets Applicable to Common Shares................ $ 718,448,778
--------------
--------------
Total Net Assets Applicable to Common Shares consist of:
Common stock ($0.001 par value, 38,856,074 shares issued
and outstanding) (Notes 1 and 5)...................... $ 541,318,970
Distributions in excess of net investment income........ (6,197,802)
Accumulated net realized gain on investments............ 2,729,599
Net unrealized appreciation on investments and interest
rate swap transactions................................ 180,598,011
--------------
$ 718,448,778
--------------
--------------
Net Asset Value per Common Share:
($718,448,778[div]38,856,074 shares outstanding).......... $ 18.49
--------------
--------------
Market Price per Common Share............................... $ 16.70
--------------
--------------
Market Price Premium/(Discount) to Net Asset Value per
Common Share.............................................. (9.68)%
--------------
--------------
See accompanying notes to financial statements.
60
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
Investment Income (Note 1):
Dividend income......................................... $25,279,246
Interest income......................................... 25,030
-----------
Total Income........................................ 25,304,276
-----------
Expenses:
Investment management fees (Note 2)..................... 4,486,517
Preferred remarketing fees.............................. 423,078
Administration fees (Note 2)............................ 189,490
Reports to shareholders................................. 168,000
Professional fees....................................... 73,980
Custodian fees and expenses............................. 46,675
Directors' fees and expenses (Note 2)................... 20,976
Transfer agent fees and expenses........................ 10,817
Miscellaneous........................................... 62,094
-----------
Total Expenses...................................... 5,481,627
Reduction of Expenses (Note 2).......................... (1,689,042)
-----------
Net Expenses........................................ 3,792,585
-----------
Net Investment Income....................................... 21,511,691
-----------
Net Realized and Unrealized Gain/(Loss) on Investments
(Note 1):
Net realized gain on investments........................ 7,667,289
Net realized loss on interest rate swap transactions.... (4,515,027)
Net change in unrealized appreciation on investments.... (198,838)
Net change in unrealized depreciation on interest rate
swap transactions..................................... 6,031,257
-----------
Net realized and unrealized gain/(loss) on
investments....................................... 8,984,681
-----------
Net Increase Resulting from Operations...................... 30,496,372
Less Dividends and Distributions to Preferred Shareholders
from:
Net investment income................................... (2,025,340)
-----------
Net Increase in Net Assets from Operations Applicable to
Common Shares............................................. $28,471,032
-----------
-----------
See accompanying notes to financial statements.
61
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES (UNAUDITED)
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2004 DECEMBER 31, 2003
---------------- -----------------
Change in Net Assets Applicable to Common Shares:
From Operations:
Net investment income............................... $ 21,511,691 $ 40,209,268
Net realized gain on investments and interest rate
swap transactions................................. 3,152,262 8,538,886
Net change in unrealized appreciation/(depreciation)
on investments and interest rate swap
transactions...................................... 5,832,419 212,314,764
------------ ------------
Net increase in net assets resulting from
operations.................................... 30,496,372 261,062,918
------------ ------------
Less Dividends and Distributions to Preferred
Shareholders from:
Net investment income............................... (2,025,340) (2,449,183)
Net realized gain on investments.................... -- (1,294,045)
------------ ------------
Total dividends and distributions to preferred
shareholders.................................. (2,025,340) (3,743,228)
------------ ------------
Net increase in net assets from operations
applicable to common shares................... 28,471,032 257,319,690
------------ ------------
Less Dividends and Distributions to Common Shareholders
from:
Net investment income............................... (26,227,850) (29,555,562)
Net realized gain on investments.................... -- (15,615,873)
Tax return of capital............................... -- (10,118,665)
------------ ------------
Total dividends and distributions to common
shareholders.................................. (26,227,850) (55,290,100)
------------ ------------
Capital Stock Transactions (Note 5):
Increase in net assets from shares issued to common
shareholders for reinvestment of dividends........ -- 3,038,014
Increase in net assets from preferred offering cost
adjustment........................................ 121,909 --
Decrease in net assets from underwriting commissions
and offering expenses from issuance of preferred
shares............................................ -- (935,773)
------------ ------------
Net increase in net assets from capital stock
transactions.................................. 121,909 2,102,241
------------ ------------
Total increase in net assets applicable to
common shares................................. 2,365,091 204,131,831
Net Assets Applicable to Common Shares:
Beginning of period................................. 716,083,687 511,951,856
------------ ------------
End of period(a).................................... $718,448,778 $716,083,687
------------ ------------
------------ ------------
---------
(a) Includes distributions in excess of net investment income of $6,197,802 at
June 30, 2004 and undistributed net investment income of $543,697 at
December 31, 2003.
See accompanying notes to financial statements.
62
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(a)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
---------------- ----------------- ------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value per common share, beginning of
period....................................... $18.43 $13.25 $14.57
------ ------ ------
Income from investment operations:
Net investment income...................... 0.55(b) 1.04(b) 0.78
Net realized and unrealized gain/(loss) on
investments and interest rate swap
transactions............................. 0.24 5.69 (0.90)
------ ------ ------
Total income from investment
operations........................... 0.79 6.73 (0.12)
------ ------ ------
Less dividends and distributions to preferred
shareholders from:
Net investment income...................... (0.05) (0.07) (0.09)
Net realized gain on investments........... -- (0.03) (0.01)
------ ------ ------
Total dividends and distributions to
preferred shareholders............... (0.05) (0.10) (0.10)
------ ------ ------
Total from investment operations
applicable to common shares.......... 0.74 6.63 (0.22)
------ ------ ------
Less: Offering and organization costs charged
to paid-in capital -- common shares.... -- -- (0.03)
Offering and organization costs charged
to paid-in capital -- preferred
shares................................. -- (0.02) (0.09)
Preferred Offering Cost Adjustment....... --(c) -- --
Dilutive effect of common share
offering............................... -- -- (0.03)
------ ------ ------
Total offering and organization
costs................................ -- (0.02) (0.15)
------ ------ ------
Less dividends and distributions to common
shareholders from:
Net investment income...................... (0.68) (0.76) (0.64)
Net realized gain on investments........... -- (0.41) (0.08)
Tax return of capital...................... -- (0.26) (0.23)
------ ------ ------
Total dividends and distributions to
common shareholders.................. (0.68) (1.43) (0.95)
------ ------ ------
Net increase/(decrease) in net asset value per
common share................................. 0.06 5.18 (1.32)
------ ------ ------
Net asset value, per common share, end of
period....................................... $18.49 $18.43 $13.25
------ ------ ------
------ ------ ------
Market value, per common share, end of
period....................................... $16.70 $17.85 $13.05
------ ------ ------
------ ------ ------
Net asset value total return(d)............... 4.26%(e) 52.61% - 2.73%(e)
------ ------ ------
------ ------ ------
Market value return(d)........................ - 2.77%(e) 50.07% - 6.95%(e)
------ ------ ------
------ ------ ------
---------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.
(c) Less than $.005 per share. See Note 5.
(d) Total market value return is computed based upon the New York Stock Exchange
market price of the fund's shares and excludes the effects of brokerage
commissions. Dividends and distributions, if any, are assumed for purposes
of this calculation, to be reinvested at prices obtained under the fund's
dividend reinvestment plan. Total net asset value return measures the
changes in value over the period indicated, taking into account dividends
as reinvested.
(e) Not annualized.
See accompanying notes to financial statements.
63
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED) -- (CONTINUED)
FOR THE PERIOD
FOR THE FOR THE FEBRUARY 28, 2002(f)
SIX MONTHS ENDED YEAR ENDED THROUGH
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
---------------- ----------------- ------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shares, end of
period (in millions)......................... $ 718.4 $ 716.1 $ 512.0
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (before expense
reduction)(k)................................ 1.53%(h) 1.57% 1.52%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily net assets
applicable to common shares (net of expense
reduction)(k)................................ 1.06%(h) 1.09% 1.05%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(before expense reduction)(k)................ 5.53%(h) 6.39% 6.82%(h)
-------- -------- --------
-------- -------- --------
Ratio of net investment income to average
daily net assets applicable to common shares
(net of expense reduction)(k)................ 6.00%(h) 6.88% 7.29%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed
assets (before expense reduction)(g,k)....... 1.04%(h) 1.04% 1.04%(h)
-------- -------- --------
-------- -------- --------
Ratio of expenses to average daily managed
assets (net of expense reduction)(g,k)....... 0.72%(h) 0.72% 0.72%(h)
-------- -------- --------
-------- -------- --------
Portfolio turnover rate....................... 2.05%(i) 20.51% 12.37%(i)
-------- -------- --------
-------- -------- --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)... $340,000 $340,000 $280,000
-------- -------- --------
-------- -------- --------
Total shares outstanding (in 000's)........... 14 14 11
-------- -------- --------
-------- -------- --------
Asset coverage per share...................... $ 77,827 $ 77,653 $ 70,710
-------- -------- --------
-------- -------- --------
Liquidation preference per share.............. $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
Average market value per share(j)............. $ 25,000 $ 25,000 $ 25,000
-------- -------- --------
-------- -------- --------
---------
(f) Commencement of operations.
(g) Average daily managed assets represent the net assets applicable to common
shares plus the liquidation preference of preferred shares.
(h) Annualized.
(i) Not annualized.
(j) Based on weekly prices.
(k) Ratios do not reflect the effects of dividend payments to preferred
shareholders.
See accompanying notes to financial statements.
64
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a nondiversified,
closed-end management investment company.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.
Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.
Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq national list, are valued at the official closing prices as reported
by Nasdaq, the National Quotations Bureau or such other comparable sources as
the board of directors deems appropriate to reflect their fair market value.
However, certain fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by the board of
directors to reflect the fair market value of such securities. Where securities
are traded on more than one exchange and also over-the-counter, the securities
will generally be valued using the quotations the board of directors believes
reflect most closely the value of such securities.
Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.
Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of auction market preferred shares. The interest rate swaps are
intended to reduce or eliminate the risk that an increase in short-term interest
rates could have on the performance of the fund's common shares as a result of
the floating rate nature of leverage. In an interest rate swap, the fund agrees
to pay the other party to the interest rate swap (which is known as the
counterparty) a fixed rate payment in exchange for the counterparty agreeing to
pay the fund a variable rate payment that is intended to approximate the fund's
variable rate payment obligation on the auction market preferred shares. The
payment obligation is based on the notional amount of the swap. Depending on the
state of interest rates in general, the use of interest rate swaps could enhance
or harm the overall performance of the common shares. The market value of
interest rate swaps is based on pricing models that consider the time value of
money, volatility, the current market and contractual prices of the underlying
financial instrument. Unrealized gains are reported as an asset and unrealized
losses are reported as a liability on the Statement of Assets and Liabilities.
The change in value of swaps, including the periodic amounts of interest to be
paid or received on swaps, is reported as unrealized gains or losses in the
Statement of Operations. A realized gain or loss is
65
recorded upon payment or receipt of a periodic payment or termination of swap
agreements. Swap agreements involve, to varying degrees, elements of market and
counterparty risk, and exposure to loss in excess of the related amounts
reflected in the Statement of Assets and Liabilities.
Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such amounts are
based on estimates if actual amounts are not available, and actual amounts of
income, realized gain and return of capital may differ from the estimated
amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as an increase to
unrealized appreciation/(depreciation) on investments as necessary once the
issuers provide information about the actual composition of the distributions.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. Dividends to
shareholders are recorded on the ex-dividend date. A portion of the fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable components of the dividends from the fund's portfolio investments.
Net realized capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually.
Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from generally accepted accounting principles.
Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are declared
and recorded for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.
Series M28 and Series W preferred shares pay dividends based on a variable
interest rate set at auctions, normally held every 28 days. Dividends for
Series M28 and Series W preferred shares are declared and recorded for the
subsequent 28 day period on the auction date. In most instances, dividends are
payable every 28 days, on the first business day following the end of the
dividend period.
Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.
NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated policies of the fund, subject
to the general supervision of the board of directors of the fund. The investment
manager also performs certain administrative services for the fund.
For the services under the management agreement, the fund pays the
investment manager a monthly management fee, computed daily and payable monthly
at an annual rate of 0.85% of the fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of the preferred shares. For the six months ended
June 30, 2004, the fund incurred investment management fees of $4,486,517.
66
The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine and 0.02% of average daily
managed asset value in year 10. As long as this waiver continues, it may lower
the fund's expenses and increase its total return. For the six months ended
June 30, 2004, the investment manager waived management fees of $1,689,042.
Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the six months ended June 30, 2004, the fund incurred $105,565 in
administration fees.
Director's Fees: Certain directors and officers of the fund are also
directors, officers and/or employees of the investment manager. None of the
directors and officers so affiliated received compensation for their services.
For he six months ended June 30, 2004, fees and related expenses accrued for
nonaffiliated directors totaled $20,976.
NOTE 3. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, excluding short-term investments for the
six months ended June 30, 2004, totaled $24,246,705 and $21,808,617,
respectively.
NOTE 4. INCOME TAXES
At June 30, 2004 the cost of investments and net unrealized appreciation for
federal income tax purposes were as follows:
Aggregate cost.............................................. $873,717,521
------------
------------
Gross unrealized appreciation............................... $191,074,571
Gross unrealized depreciation............................... (1,954,854)
------------
Net unrealized appreciation on investments.................. 189,119,717
Net unrealized depreciation on interest rate swap
transactions.............................................. (8,521,706)
------------
Net unrealized appreciation................................. $180,598,011
------------
------------
NOTE 5. CAPITAL STOCK
The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.
During the six months ended June 30, 2004, the fund issued no shares of
common stock for the reinvestment of dividends. An adjustment of $121,909
related to preferred offering costs was credited to common stock during the six
months ended June 30, 2004.
On September 15, 2003, the fund issued 2,400 auction market preferred
shares, Series M28 (par value $0.001). Proceeds paid to the fund amounted to
$59,064,267 after deduction of underwriting commissions and offering expenses of
$935,733. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.
During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.
Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, (2) maintain the 1940 Act preferred
shares asset coverage, or (3) file a required certificate related to asset
coverage on time, the preferred shares
67
will be subject to a mandatory redemption at the redemption price of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. To the extent permitted under the 1940 Act and
Maryland Law, the fund at its option may without consent of the holders of
preferred shares, redeem preferred shares having a dividend period of one year
or less, In whole, or in part, on the business day after the last day of such
dividend period upon not less than 15 calendar days and not more than 40
calendar days prior to notice. The optional redemption price is $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. The fund's common shares and preferred shares have
equal voting rights of one vote per share and vote together as a single class.
In addition, the affirmative vote of the holders a majority, as defined in the
1940 Act, of the outstanding preferred shares shall be required to (1) approve
any plan of reorganization that would adversely affect the taxable auction
market preferred shares and (2) approve any matter that materially and adversely
affects the rights, preferences, or powers of that series.
NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS
The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products, UBS AG, Fleet National Bank, and Royal Bank of Canada.
Under the agreements the fund receives a floating rate of interest and pays a
respective fixed rate of interest on the nominal value of the swaps. Details of
the swaps at June 30, 2004 are as follows:
UNREALIZED
NOTIONAL FLOATING RATE(a) APPRECIATION/
COUNTERPARTY AMOUNT FIXED RATE (RESET MONTHLY) TERMINATION DATE DEPRECIATION
------------ ------ ---------- --------------- ---------------- ------------
Merrill Lynch Derivative
Products $46,000,000 4.5600% 1.150% April 5, 2005 $ (948,638)
Merrill Lynch Derivative
Products $46,000,000 5.2100% 1.150% April 5, 2007 (2,225,784)
Merrill Lynch Derivative
Products $46,000,000 5.5800% 1.150% April 5, 2009 (2,944,853)
UBS AG $24,000,000 4.4500% 1.238% April 15, 2005 (468,907)
UBS AG $24,000,000 5.1200% 1.238% April 15, 2007 (1,082,982)
UBS AG $24,000,000 5.4950% 1.238% April 15, 2009 (1,418,806)
Fleet National Bank $14,000,000 3.2125% 1.113% October 2, 2008 400,087
Royal Bank of Canada $14,000,000 3.6800% 1.280% October 22, 2008 168,177
------------
$ (8,521,706)
------------
------------
---------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
at June 30, 2004.
68
APPENDIX A
RATINGS OF INVESTMENTS
Description of certain ratings assigned by S&P and Moody's:
S&P
LONG-TERM
'AAA' -- An obligation rated 'AAA' has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
'AA' -- An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
'A' -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
'BBB' -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
'BB', 'B', 'CCC', 'CC', and 'C' -- Obligations rated 'BB', 'B', 'CCC', 'CC',
and 'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
'BB' -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
'B' -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
'CCC' -- An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
'CC' -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
'C' -- A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
'D' -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
'r' -- The symbol 'r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or
A-1
commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.
'N.R.' -- The designation 'N.R.' indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter of policy.
Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a
plus (+) or minus ( - ) sign designation to show relative standing within the
major rating categories.
SHORT-TERM
'A-1' -- A short-term obligation rated 'A-1' is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
'A-2' -- A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
'A-3' -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
'B' -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.
'C' -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
'D' -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
MOODY'S
LONG-TERM
'Aaa' -- Bonds rated 'Aaa' are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
'Aa' -- Bonds rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 'Aaa'
securities.
'A' -- Bonds rated 'A' possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
A-2
'Baa' -- Bonds rated 'Baa' are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
'Ba' -- Bonds rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
'B' -- Bonds rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
'Caa' -- Bonds rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
'Ca' -- Bonds rated 'Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
'C' -- Bonds rated 'C' are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from 'Aa' through 'Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
PREFERRED STOCK
Because of the fundamental differences between preferred stocks and bonds,
Moody's employs a variation of our familiar bond rating symbols in the quality
ranking of preferred stock.
These symbols, presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind that preferred
stock occupies a junior position to bonds within a particular capital structure
and that these securities are rated within the universe of preferred stocks.
'aaa' -- An issue rated 'aaa' is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
'aa' -- An issue rated 'aa' is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
'a' -- An issue rated 'a' is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
'baa' -- An issue rated 'baa' is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present, but may be questionable over any great
length of time.
'ba' -- An issue rated 'ba' is considered to have speculative elements. Its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
'b' -- An issue rated 'b' generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
A-3
'caa' -- An issue rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
'ca' -- An issue rated 'ca' is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.
'c' -- This is the lowest-rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: As in the case of bond ratings, Moody's applies to preferred stock
ratings the numerical modifiers 1, 2, and 3 in rating classifications 'aa'
through 'b'. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
PRIME RATING SYSTEM (SHORT-TERM)
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-4
APPENDIX B
ARTICLES SUPPLEMENTARY
COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
Articles Supplementary Creating And Fixing The Rights of
Series Taxable Auction Rate Preferred Shares
Cohen & Steers Quality Income Realty Fund, Inc., a Maryland corporation
having its principal office in the City of Baltimore in the State of Maryland
(the 'Corporation'), certifies to the State Department of Assessments and
Taxation of Maryland that:
First: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article FIFTH of its Articles of Incorporation, as amended
and supplemented (which as hereafter amended, restated and supplemented from
time to time, is together with these Articles Supplementary, the 'Charter'), and
the Maryland General Corporation Law (the 'MGCL'), the Board of Directors has
duly classified out of the Corporation's authorized and unissued common stock,
and authorized the creation and issuance of, shares of the Corporation's
Taxable Auction Rate Preferred Shares (par value $.001 per share) (the
'Preferred Shares') and has further classified all of such shares as 'Series
Preferred Shares,' liquidation preference $25,000 per share (herein referred to
as the 'Series').
Second: Pursuant to Section 2-411 of the MGCL and authority granted by
Article III of the Corporation's By-laws, the Board of Directors of the
Corporation has appointed a pricing committee (the 'Pricing Committee') and has
authorized such Pricing Committee to fix the terms of the Series, as set forth
herein.
Third: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the Series
are as follows:
DESIGNATION
Series Preferred Shares: A series of Preferred Shares, par value $.001 per
share, liquidation preference $25,000 per share, is hereby designated 'Series
Taxable Auction Rate Preferred Shares' (the 'Series'). Each share of the Series
may be issued on a date to be determined by the Board of Directors of the
Corporation or pursuant to their delegated authority; have an initial dividend
rate per annum, initial Dividend Period and an initial Dividend Payment Date as
will be determined in advance of the issuance thereof by the Board of Directors
of the Corporation or pursuant to their delegated authority; and have such other
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption, in addition to those
required by applicable law, or as are set forth in Part I and Part II of these
Articles Supplementary. The Series will constitute a separate series of
Preferred Shares of the Corporation.
Subject to the provisions of Section 11(b) of Part I hereof, the Board of
Directors of the Corporation may, in the future, reclassify additional shares of
the Corporation's unissued common stock as preferred stock, with the same
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and other terms herein
described, except that the dividend rate for its initial Dividend Period, its
initial Dividend Payment Date and any other changes in the terms herein set
forth will be as set forth in the Articles Supplementary with respect to the
additional shares.
As used in Part I and Part II of these Articles Supplementary, capitalized
terms will have the meanings provided in Section 17 of Part I and Section 1 of
Part II of these Articles Supplementary.
B-1
PART I: TERMS OF PREFERRED SHARES
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting the Series is
shares. No fractional shares of the Series will be issued.
(b) Shares of the Series which at any time have been redeemed or purchased
by the Corporation will, after such redemption or purchase, have the status of
authorized but unissued shares of preferred stock.
(c) Shares of the Series will rank on a parity with shares of any other
series of preferred stock of the Corporation (including any other Preferred
Shares) as to the payment of dividends to which such shares are entitled.
(d) No Holder of shares of the Series will have, solely by reason of being
such a holder, any preemptive or other right to acquire, purchase or subscribe
for any shares of the Series, Common Shares of the Corporation or other
securities of the Corporation which it may hereafter issue or sell.
2. Dividends.
(a) The Holders of shares of the Series will be entitled to receive, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, cumulative cash dividends on their shares at the Applicable Rate,
determined as set forth in paragraph (c) of this Section 2, and no more, payable
on the respective dates determined as set forth in paragraph (b) of this Section
2. Dividends on the Outstanding shares of the Series issued on the Date of
Original Issue will accumulate from the Date of Original Issue.
(b) (i) Dividends will be payable when, as and if declared by the Board of
Directors following the initial Dividend Payment Date, subject to subparagraph
(b)(ii) of this Section 2, on the shares of the Series, as follows:
(A) with respect to any Dividend Period of one year or less, on the
Business Day following the last day of such Dividend Period; provided,
however, if the Dividend Period is more than 91 days then on the 91st, 181st
and 271st days within such period, if applicable, and on the Business Day
following the last day of such Dividend Period; and
(B) with respect to any Dividend Period of more than one year, on a
quarterly basis on each January 1, April 1, July 1 and October 1 within such
Dividend Period and on the Business Day following the last day of such
Dividend Period.
(ii) If a day for payment of dividends resulting from the application of
subparagraph (b) above is not a Business Day, then the Dividend Payment Date
will be the first Business Day following such day for payment of dividends.
(iii) The Corporation will pay to the Paying Agent not later than 12:00
noon, New York City time, on each Dividend Payment Date for the Series, an
aggregate amount of immediately available funds equal to the dividends to be
paid to all Holders of the Series on such Dividend Payment Date. The Corporation
will not be required to establish any reserves for the payment of dividends.
(iv) All moneys paid to the Paying Agent for the payment of dividends will
be held in trust for the payment of such dividends by the Paying Agent for the
benefit of the Holders specified in subparagraph (b)(v) of this Section 2. Any
moneys paid to the Paying Agent in accordance with the foregoing but not applied
by the Paying Agent to the payment of dividends will, upon request and to the
extent permitted by law, be repaid to the Corporation at the end of 90 days from
the date on which such moneys were to have been so applied.
(v) Each dividend on the Series will be paid on the Dividend Payment Date
therefor to the Holders of the Series as their names appear on the stock ledger
or stock records of the Corporation on the Business Day next preceding such
Dividend Payment Date; provided, however, if dividends are in arrears, they may
be declared and paid at any time to Holders as their names appear on the stock
ledger or stock records of the Corporation on such date not exceeding 15
B-2
days preceding the payment date thereof, as may be fixed by the Board of
Directors. No interest will be payable in respect of any dividend payment or
payments which may be in arrears.
(c) (i) The dividend rate on Outstanding shares of the Series during the
period from and after the Date of Original Issue to and including the last day
of the initial Dividend Period therefor will be equal to the rate as determined
in the manner set forth under 'Designation' above. For each subsequent Dividend
Period for the Series, the dividend rate will be equal to the rate per annum
that results from an Auction (but the rate set at the Auction will not exceed
the Maximum Rate); provided, however, that if an Auction for any subsequent
Dividend Period of the Series is not held for any reason or if Sufficient
Clearing Orders have not been made in an Auction (other than as a result of all
shares of the Series being the subject of Submitted Hold Orders and other than
in an auction for a Special Dividend Period), then the dividend rate on the
shares of the Series for any such Dividend Period will be the Maximum Rate
(except (i) during a Default Period when the dividend rate will be the Default
Rate, as set forth in Section 2(c)(ii) below or (ii) after a Default Period and
prior to the beginning of the next Dividend Period when the dividend rate will
be the Maximum Rate at the close of business on the last day of such Default
Period). If the Corporation has declared a Special Dividend Period and there are
not Sufficient Clearing Orders, the dividend rate for the next rate period will
be the same as during the current rate period. If as a result of an
unforeseeable disruption of the financial markets, an Auction cannot be held for
a period of more than three business days, the dividend rate for the Subsequent
Dividend Period will be the same as the dividend rate for the current Dividend
Period.
(ii) Subject to the cure provisions in Section 2(c)(iii) below, a 'Default
Period' with respect to a particular Series will commence on any date the
Corporation fails to deposit irrevocably in trust in same-day funds, with the
Paying Agent by 12:00 noon, New York City time, (A) the full amount of any
declared dividend on the Series payable on the Dividend Payment Date (a
'Dividend Default') or (B) the full amount of any redemption price (the
'Redemption Price') payable on the date fixed for redemption (the 'Redemption
Date') (a 'Redemption Default') and together with a Dividend Default,
hereinafter referred to as 'Default').
Subject to the cure provisions of Section 2(c)(iii) below, a Default Period
with respect to a Dividend Default or a Redemption Default will end on the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and any unpaid Redemption Price will have been deposited irrevocably in trust in
same-day funds with the Paying Agent. In the case of a Dividend Default, the
Applicable Rate for each Dividend Period commencing during a Default Period will
be equal to the Default Rate, and each subsequent Dividend Period commencing
after the beginning of a Default Period will be a Standard Dividend Period;
provided, however, that the commencement of a Default Period will not by itself
cause the commencement of a new Dividend Period. No Auction will be held during
a Default Period.
(iii) No Default Period with respect to a Dividend Default or Redemption
Default will be deemed to commence if the amount of any dividend or any
Redemption Price due (if such default is not solely due to the willful failure
of the Corporation) is deposited irrevocably in trust, in same-day funds with
the Paying Agent by 12:00 noon, New York City time within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with an
amount equal to the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 360 for the
Series. The Default Rate will be equal to the Reference Rate multiplied by three
(3).
(iv) The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) will be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was Outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be 360
for the Series, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one (1)
year or more, the amount of dividends per share payable on any
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Dividend Payment Date (or in respect of dividends on another date in connection
with a redemption during such Dividend Period) will be computed as described in
the preceding sentence, except that it will be determined on the basis of a year
consisting of twelve 30-day months.
(d) Any dividend payment made on shares of the Series will first be credited
against the earliest accumulated but unpaid dividends.
(e) For so long as the shares of the Series are Outstanding, except as
otherwise contemplated by Part I of these Articles Supplementary, the
Corporation will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares ranking junior to the Series as to dividends or upon liquidation) with
respect to Common Shares or any other capital stock of the Corporation ranking
junior to the Series as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or other capital stock ranking junior to the Series (except by conversion
into or exchange for shares of the Corporation ranking junior to the Series as
to dividends and upon liquidation), unless (i) immediately after such
transaction, the Corporation would have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
and the 1940 Act Preferred Shares Asset Coverage would be achieved, (ii) all
cumulative and unpaid dividends due on or prior to the date of the transaction
have been declared and paid in full with respect to the Corporation's preferred
stock, including the Series or will have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent, and (iii) the Corporation
has redeemed the full number of shares of preferred stock required to be
redeemed by any mandatory provision for redemption including the Series required
to be redeemed by any provision for mandatory redemption contained in Section
3(a)(ii) of Part I of these Articles Supplementary.
(f) For so long as the shares of the Series are Outstanding, except as set
forth in the next sentence, the Corporation will not declare, pay or set apart
for payment on any series of stock of the Corporation ranking, as to the payment
of dividends, on a parity with the Series for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the Series
through their most recent Dividend Payment Date. When dividends are not paid in
full upon the Series through its most recent Dividend Payment Dates or upon any
other series of stock ranking on a parity as to the payment of dividends with
the Series through their most recent respective Dividend Payment Dates, all
dividends declared upon the Series and any other such series of stock ranking on
a parity as to the payment of dividends with the Series will be declared pro
rata so that the amount of dividends declared per share on the Series and any
other such series of preferred stock ranking on a parity therewith will in all
cases bear to each other the same ratio that accumulated dividends per share on
the Series and such other series of preferred stock ranking on a parity
therewith bear to each other.
3. Redemption.
(a) (i) After the initial Dividend Period, subject to the provisions of this
Section 3 and to the extent permitted under the 1940 Act and Maryland law, the
Corporation may, at its option, redeem in whole or in part out of funds legally
available therefor shares of the Series herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption not less than 15
calendar days and not more than 40 calendar days prior to the Redemption Date,
at a redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date ('Redemption Price'), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the relevant
Dividend Period by delivering a notice of redemption not less than 15 calendar
days and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus a redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealers and set forth in any
applicable Specific Redemption Provisions at the time of the designation of such
Dividend Period as set forth in Section 4 of Part I of these Articles
Supplementary; provided, however, that during a Dividend Period of more than one
year, no shares of the Series will be
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subject to optional redemption except in accordance with any Specific Redemption
Provisions approved by the Board of Directors after consultation with the
Broker-Dealers at the time of the designation of such Dividend Period.
Notwithstanding the foregoing, the Corporation will not give a notice of or
effect any redemption pursuant to this Section 3(a)(i) unless, on the date on
which the Corporation gives such notice and on the Redemption Date, (a) the
Corporation has available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable Redemption Date and having a value
not less than the amount (including any applicable premium) due to Holders of
the Series by reason of the redemption of the Series on the Redemption Date and
(b) the Corporation would have Eligible Assets with an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount
immediately subsequent to such redemption, if such redemption were to occur on
such date, it being understood that the provisions of paragraph (d) of this
Section 3 will be applicable in such circumstances in the event the Corporation
makes the deposit and takes the other action required thereby.
(ii) If the Corporation fails as of any Valuation Date to meet the Preferred
Shares Basic Maintenance Amount Test or, as of the last Business Day of any
month, the 1940 Act Preferred Shares Asset Coverage, and such failure is not
cured within ten Business Days following the relevant Valuation Date, in the
case of a failure to meet the Preferred Shares Basic Maintenance Amount Test, or
the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an 'Asset Coverage Cure
Date'), the Series will be subject to mandatory redemption out of funds legally
available therefor. The number of Shares of the Series to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of Shares of
the Series the redemption of which, if deemed to have occurred immediately prior
to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Corporation meeting the Preferred Shares Basic Maintenance Amount
Test, and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in
either case as of the relevant Asset Coverage Cure Date (provided that, if there
is no such minimum number of shares the redemption of which would have such
result, all Shares of the Series then Outstanding will be redeemed) and (B) the
maximum number of Shares of the Series that can be redeemed out of funds
expected to be available therefor on the Mandatory Redemption Date at the
Mandatory Redemption Price set forth in subparagraph (a)(iii) of this Section 3.
(iii) In determining the shares of the Series required to be redeemed in
accordance with the foregoing Section 3(a)(ii), the Corporation will allocate
the number of shares required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount Test or the 1940 Act Preferred Shares Asset Coverage,
as the case may be, pro rata or among the Holders of the Series in proportion to
the number of shares they hold and shares of other preferred stock subject to
mandatory redemption provisions similar to those contained in this Section 3,
subject to the further provisions of this subparagraph (iii). The Corporation
will effect any required mandatory redemption pursuant to: (A) the Preferred
Shares Basic Maintenance Amount Test, as described in subparagraph (a)(ii) of
this Section 3, no later than 30 days after the Corporation last met the
Preferred Shares Basic Maintenance Amount Test, or (B) the 1940 Act Preferred
Shares Asset Coverage, as described in subparagraph (a)(ii) of this Section 3,
no later than 30 days after the Asset Coverage Cure Date (the 'Mandatory
Redemption Date'), except that if the Corporation does not have funds legally
available for the redemption of, or is not otherwise legally permitted to
redeem, the number of Shares of the Series which would be required to be
redeemed by the Corporation under clause (A) of subparagraph (a)(ii) of this
Section 3 if sufficient funds were available, together with shares of other
preferred stock which are subject to mandatory redemption under provisions
similar to those contained in this Section 3, or the Corporation otherwise is
unable to effect such redemption on or prior to such Mandatory Redemption Date,
the Corporation will redeem those Shares of the Series, and shares of other
preferred stock which it was unable to redeem, on the earliest practicable date
on which the Corporation will have such funds available, upon notice pursuant to
Section 3(b) to record owners of the Series to be redeemed and the Paying Agent.
The Corporation will deposit with the Paying Agent funds sufficient to redeem
the specified number of Shares of the Series with respect to a redemption
required under subparagraph (a)(ii) of this Section 3, by 1:00 P.M., New York
City time, of the
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Business Day immediately preceding the Mandatory Redemption Date. If fewer than
all of the Outstanding Shares of the Series are to be redeemed pursuant to this
Section 3(a)(iii), the number of shares to be redeemed will be redeemed pro rata
from the Holders of such shares in proportion to the number of the Shares of the
Series held by such Holders, by lot or by such other method as the Corporation
will deem fair and equitable, subject, however, to the terms of any applicable
Specific Redemption Provisions. 'Mandatory Redemption Price' means the
Redemption Price plus (in the case of a Dividend Period of one year or more
only) a redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions.
(b) In the event of a redemption pursuant to the foregoing Section 3(a), the
Corporation will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Corporation will deliver a notice of redemption to the Auction Agent (the
'Notice of Redemption') containing the information set forth below (i) in the
case of an optional redemption pursuant to Section 3(a)(i) above, one Business
Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the 10th
day preceding the Mandatory Redemption Date. Only with respect to shares held by
the Securities Depository, the Auction Agent will use its reasonable efforts to
provide telephonic notice to each Holder of shares of the Series called for
redemption not later than the close of business on the Business Day immediately
following the day on which the Auction Agent determines the shares to be
redeemed (or, during a Default Period with respect to such shares, not later
than the close of business on the Business Day immediately following the day on
which the Auction Agent receives Notice of Redemption from the Corporation). The
Auction Agent will confirm such telephonic notice in writing not later than the
close of business on the third Business Day preceding the date fixed for
redemption by providing the Notice of Redemption to each Holder of shares called
for redemption, the Paying Agent (if different from the Auction Agent) and the
Securities Depository. Notice of Redemption will be addressed to the registered
owners of shares of the Series at their addresses appearing on the share records
of the Corporation. Such Notice of Redemption will set forth (i) the date fixed
for redemption, (ii) the number and identity of shares of the Series to be
redeemed, (iii) the redemption price (specifying the amount of accumulated
dividends to be included therein), (iv) that dividends on the shares to be
redeemed will cease to accumulate on such date fixed for redemption, and (v) the
provision under which redemption will be made. No defect in the Notice of
Redemption or in the transmittal or mailing thereof will affect the validity of
the redemption proceedings, except as required by applicable law. If fewer than
all shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder will also specify the number of shares to be redeemed from
such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3, no
preferred stock, including the Series, may be redeemed at the option of the
Corporation unless all dividends in arrears on the Outstanding Series and any
other preferred stock have been or are being contemporaneously paid or set aside
for payment; provided, however, that the foregoing will not prevent the purchase
or acquisition of outstanding shares of preferred stock pursuant to the
successful completion of an otherwise lawful purchase or exchange offer made on
the same terms to holders of all outstanding shares of preferred stock.
(d) Upon the deposit of funds sufficient to redeem shares of the Series with
the Paying Agent and the giving of the Notice of Redemption to the Auction Agent
under paragraph (b) of this Section 3, dividends on such shares will cease to
accumulate and such shares will no longer be deemed to be Outstanding for any
purpose (including, without limitation, for purposes of calculating whether the
Corporation has met the Preferred Shares Basic Maintenance Amount Test or the
1940 Act Preferred Shares Asset Coverage), and all rights of the Holders of the
shares so called for redemption will cease and terminate, except the right of
such Holder to receive the redemption price specified herein, but without any
interest or other additional amount. Such redemption price will be paid by the
Paying Agent to the nominee of the Securities Depository. The Corporation will
be entitled to receive from the Paying Agent, promptly after the date fixed
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for redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the shares of the Series called for redemption on
such date and (ii) such other amounts, if any, to which Holders of shares of the
Series called for redemption may be entitled. Any funds so deposited that are
unclaimed at the end of two years from such redemption date will, to the extent
permitted by law, be paid to the Corporation, after which time the Holders of
shares of the Series so called for redemption may look only to the Corporation
for payment of the redemption price and all other amounts, if any, to which they
may be entitled; provided, however, that the Paying Agent will notify all
Holders whose funds are unclaimed by placing a notice in The Wall Street Journal
concerning the availability of such funds once each week for three consecutive
weeks. The Corporation will be entitled to receive, from time to time after the
date fixed for redemption, any interest earned on the funds so deposited.
(e) To the extent that any redemption for which Notice of Redemption has
been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption will be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of the Series will
be deemed to exist at any time after the date specified for redemption in a
Notice of Redemption when the Corporation will have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the redemption price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Corporation may not have redeemed shares of
the Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of the Series and will include those shares of the
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.
(f) All moneys paid to the Paying Agent for payment of the redemption price
of shares of the Series called for redemption will be held in trust by the
Paying Agent for the benefit of holders of shares so to be redeemed.
(g) So long as any shares of the Series are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.
(h) Except for the provisions described above, nothing contained in these
Articles Supplementary limits any right of the Corporation to purchase or
otherwise acquire any shares of the Series outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on, or the mandatory or
optional redemption price with respect to, any shares of the Series for which
Notice of Redemption has been given and the Corporation meets the 1940 Act
Preferred Shares Asset Coverage and the Preferred Shares Basic Maintenance
Amount Test after giving effect to such purchase or acquisition on the date
thereof. Any shares which are purchased, redeemed or otherwise acquired by the
Corporation will have no voting rights. If fewer than all the Outstanding shares
of the Series are redeemed or otherwise acquired by the Corporation, the
Corporation will give notice of such transaction to the auction agent, in
accordance with the procedures agreed upon by the Board of Directors.
(i) In the case of any redemption pursuant to this Section 3, only whole
shares of the Series will be redeemed, and in the event that any provision of
the Charter would require redemption of a fractional share, the Auction Agent
will be authorized to round up so that only whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary, including, without
limitation, Section 6(k) of Part I of these Articles Supplementary, the Board of
Directors, upon notification to each Rating Agency, may authorize, create or
issue other series of preferred stock, including other series of Preferred
Shares, ranking on a parity with the Series with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Corporation, to the extent permitted by the 1940 Act,
if upon issuance of any such series, either (A) the net proceeds from the sale
of such stock (or such portion thereof needed to redeem or
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repurchase the Outstanding Series) are deposited with the Paying Agent in
accordance with Section 3(d) of Part I of these Articles Supplementary, Notice
of Redemption as contemplated by Section 3(b) of Part I of these Articles
Supplementary has been delivered prior thereto or is sent promptly thereafter,
and such proceeds are used to redeem all Outstanding Shares of the Series or (B)
the Corporation would meet the 1940 Act Preferred Shares Asset Coverage, the
Preferred Shares Basic Maintenance Amount Test and the requirements of Section
12(b) of Part I of these Articles Supplementary.
4. Designation of Dividend Period.
(a) The initial Dividend Period for the Series will be as determined in the
manner set forth under 'Designation' above. The Corporation will designate the
duration of subsequent Dividend Periods of the Series; provided, however, that
no such designation is necessary for a Standard Dividend Period and, provided
further, that any designation of a Special Dividend Period will be effective
only if (i) notice thereof will have been given as provided herein, (ii) any
failure to pay in a timely manner to the Auction Agent the full amount of any
dividend on, or the redemption price of, the Series will have been cured as
provided above, (iii) Sufficient Clearing Orders will have existed in an Auction
held on the Auction Date immediately preceding the first day of such proposed
Special Dividend Period, (iv) if the Corporation will have mailed a Notice of
Redemption with respect to any shares and the redemption price with respect to
such shares will have been deposited with the Paying Agent, (v) in the case of
the designation of a Special Dividend Period, the Broker-Dealers will have
notified the Corporation in writing that it believes the Auction for the Special
Dividend Period will be successful, and (vi) each Rating Agency will have
confirmed in writing to the Corporation that such designation will not adversely
affect their respective then-current ratings of the Series.
(b) If the Corporation proposes to designate any Special Dividend Period,
not fewer than seven Business Days (or two Business Days in the event the
duration of the Dividend Period prior to such Special Dividend Period is fewer
than eight days) nor more than 30 Business Days prior to the first day of such
Special Dividend Period, notice will be (i) made by press release and
(ii) communicated by the Corporation by telephonic or other means to the Auction
Agent and each Broker-Dealer and confirmed in writing promptly thereafter. Each
such notice will state (A) that the Corporation proposes to exercise its option
to designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Applicable Rate for such Special Dividend Period
and (B) that the Corporation will by 3:00 P.M., New York City time, on the
second Business Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Dividend Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Dividend
Period, in which latter event the succeeding Dividend Period will be a Standard
Dividend Period. No later than 3:00 P.M., New York City time, on the second
Business Day next preceding the first day of any proposed Special Dividend
Period, the Corporation will deliver to the Auction Agent, who will promptly
deliver to the Broker-Dealers and Existing Holders, either:
(i) a notice stating (A) that the Corporation has determined to
designate the next succeeding Dividend Period as a Special Dividend Period,
specifying the first and last days thereof and (B) the terms of any Specific
Redemption Provisions; or
(ii) a notice stating that the Corporation has determined not to
exercise its option to designate a Special Dividend Period.
If the Corporation fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of paragraph (a) of this
Section 4 by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Dividend Period, the
Corporation will be deemed to have delivered a notice to the Auction Agent with
respect to such Dividend Period to the effect set forth in clause (ii) above,
thereby resulting in a Standard Dividend Period.
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5. Restrictions on Transfer. Shares of the Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Corporation or any Affiliate. Notwithstanding the foregoing, a
transfer other than pursuant to an Auction will not be effective unless the
selling Existing Holder or the Agent Member of such Existing Holder, in the case
of an Existing Holder whose shares are listed in its own name on the books of
the Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer,
in the case of a transfer between persons holding shares of the Series through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of the Series issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.
6. Voting Rights.
(a) Except as otherwise provided in the Charter or as otherwise required by
applicable law, (i) each Holder of shares of the Series will be entitled to one
vote for each share of the Series held on each matter on which the Holders of
the Series are entitled to vote, and (ii) the holders of the Outstanding shares
of preferred stock, including the Series, and holders of shares of Common Shares
will vote together as a single class on all matters submitted to the
stockholders; provided, however, that, with respect to the election of
directors, the holders of the Outstanding shares of preferred stock, including
the Series, represented in person or by proxy at a meeting for the election of
directors, will be entitled, as a class, to the exclusion of the holders of all
other securities and classes of capital stock, including the Common Shares, to
elect two directors of the Corporation, each share of preferred stock, including
the Series, entitling the holder thereof to one vote. The identities of the
nominees of such directorships may be fixed by the Board of Directors. Subject
to paragraph (b) of this Section 6, the holders of outstanding shares of Common
Shares and outstanding shares of preferred stock, including the Series, voting
together as a single class, will be entitled to elect the balance of the
directors.
(b) If at any time dividends on the Series will be unpaid in an amount equal
to two full years' dividends on the Series (a 'Voting Period'), the number of
directors constituting the Board of Directors will be automatically increased by
the smallest number of additional directors that, when added to the number of
directors then constituting the Board of Directors, will (together with the two
directors elected by the holders of preferred stock, including the Series,
pursuant to paragraph (a) of this Section 6) constitute a majority of such
increased number, and the holders of any shares of preferred stock, including
the Series, will be entitled, voting as a single class on a one-vote-per-share
basis (to the exclusion of the holders of all other securities and classes of
capital stock of the Corporation), to elect the smallest number of such
additional directors of the Corporation that will constitute a majority of the
total number of directors of the Corporation so increased. The Voting Period and
the voting rights so created upon the occurrence of the conditions set forth in
this paragraph (b) of Section 6 will continue unless and until all dividends in
arrears on the Series will have been paid or declared and sufficient cash or
specified securities are set apart for the payment of such dividends. Upon the
termination of a Voting Period, the voting rights described in this paragraph
(b) of Section 6 will cease, subject always, however, to the revesting of such
voting rights in the holders of preferred stock, including the Series, upon the
further occurrence of any of the events described in this paragraph (b) of
Section 6.
(c) As soon as practicable after the accrual of any right of the holders of
shares of preferred stock, including the Series, to elect additional directors
as described in paragraph (b) of this Section 6, the Corporation will notify the
Auction Agent, and the Auction Agent will call a special meeting of such
holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than ten nor more than 90 days after the date of
mailing of such notice. If the Corporation fails to send such notice to the
Auction Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting will be
the close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
preferred stock, including the Series, held during a Voting Period at which
directors are to be elected, such holders, voting
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together as a class (to the exclusion of the holders of all other securities and
classes of capital stock of the Corporation), will be entitled to elect the
number of directors prescribed in paragraph (b) of this Section 6 on a
one-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of shares of preferred stock,
including Holders of the Preferred Shares, present in person or by proxy will
have the power to adjourn the meeting without notice, other than an announcement
at the meeting, until a quorum is present.
(d) For purposes of determining any rights of the holders of the shares of
preferred stock, including the Series, to vote on any matter, whether such right
is created by these Articles Supplementary, by statute or otherwise, if
redemption of some or all of the shares of preferred stock, including the
Series, is required, no holder of shares of preferred stock, including the
Series, will be entitled to vote and no share of preferred stock, including the
Series, will be deemed to be 'outstanding' for the purpose of voting or
determining the number of shares required to constitute a quorum, if prior to or
concurrently with the time of determination, sufficient Deposit Securities for
the redemption of such shares have been deposited in the case of the Series in
trust with the Paying Agent for that purpose and the requisite Notice of
Redemption with respect to such shares will have been given as provided in
Section 3(b) of Part I of these Articles Supplementary and in the case of other
preferred stock the Corporation has otherwise met the conditions for redemption
applicable to such shares.
(e) The terms of office of all persons who are directors of the Corporation
at the time of a special meeting of Holders of the Series and holders of other
shares of preferred stock to elect directors pursuant to paragraph (b) of this
Section 6 will continue, notwithstanding the election at such meeting by the
holders of the number of directors that they are entitled to elect.
(f) Simultaneously with the termination of a Voting Period, the terms of
office of the additional directors elected by the Holders of the Series and
holders of shares of other preferred stock pursuant to paragraph (b) of this
Section 6 will terminate, the remaining directors will constitute the directors
of the Corporation and the voting rights of such holders to elect additional
directors pursuant to paragraph (b) of this Section 6 will cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.
(g) Unless otherwise required by law or in the Corporation's Charter, the
Holders of the Series will not have any relative rights or preferences or other
special rights other than those specifically set forth herein. In the event that
the Corporation fails to pay any dividends on the Series of the Corporation or
fails to redeem any Shares of the Series which it is required to redeem, or any
other event occurs which requires the mandatory redemption of the Series
and the required Notice of Redemption has not been given, other than the rights
set forth in paragraph (a) of Section 3 of Part I of these Articles
Supplementary, the exclusive remedy of the Holders of the Series will be the
right to vote for directors pursuant to the provisions of paragraph (b) of this
Section 6. In no event will the Holders of the Series have any right to sue for,
or bring a proceeding with respect to, such dividends or redemptions or damages
for the failure to receive the same.
(h) For so long as any shares of preferred stock, including the Series, are
outstanding, the Corporation will not, without the affirmative vote of the
Holders of a majority of the outstanding preferred stock, (i) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Corporation or a substantial part of its property, or
make any assignment for the benefit of creditors, or, except as may be required
by applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other
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material encumbrance of any kind upon any of the Corporation's assets as a
whole, except (A) liens the validity of which are being contested in good faith
by appropriate proceedings, (B) liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (C) liens, pledges,
charges, security interests, security agreements or other encumbrances arising
in connection with any indebtedness senior to the Series, (D) liens, pledges,
charges, security interests, security agreements or other encumbrances arising
in connection with any indebtedness permitted under clause (iii) below and (E)
liens to secure payment for services rendered including, without limitation,
services rendered by the Corporation's Paying Agent and the Auction Agent; or
(iii) create, authorize, issue, incur or suffer to exist any indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness for
borrowed money or any direct or indirect guarantee of such indebtedness, except
the Corporation may borrow as may be permitted by the Corporation's investment
restrictions; provided, however, that transfers of assets by the Corporation
subject to an obligation to repurchase will not be deemed to be indebtedness for
purposes of this provision to the extent that after any such transaction the
Corporation has Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount as of the immediately
preceding Valuation Date.
(i) The affirmative vote of the holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock, including the Series,
voting as a separate class, will be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Corporation
under Section 13(a) of the 1940 Act. In the event a vote of holders of shares of
preferred stock is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Corporation will, not later than ten Business Days prior to the
date on which such vote is to be taken, notify each Rating Agency that such vote
is to be taken and the nature of the action with respect to which such vote is
to be taken and will, not later than ten Business Days after the date on which
such vote is taken, notify each Rating Agency of the results of such vote.
(j) The affirmative vote of the Holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock of any series, voting
separately from any other series, will be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the
Corporation's shares of capital stock. For purposes of the foregoing, no matter
will be deemed to adversely affect any rights, preference or power unless such
matter (i) alters or abolishes any preferential right of such series; (ii)
creates, alters or abolishes any right in respect of redemption of such series;
or (iii) creates or alters (other than to abolish) any restriction on transfer
applicable to such series. The vote of holders of any series described in this
Section (j) will in each case be in addition to a separate vote of the requisite
percentage of Common Shares and/or preferred stock necessary to authorize the
action in question.
(k) The Board of Directors, without the vote or consent of any holder of
shares of preferred stock, including the Series, or any other stockholder of the
Corporation, may from time to time amend, alter or repeal any or all of the
definitions contained herein, add covenants and other obligations of the
Corporation, or confirm the applicability of covenants and other obligations set
forth herein, all in connection with obtaining or maintaining the rating of any
Rating Agency with respect to the Series, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of the
Series or the Holders thereof, provided that the Board of Directors receives
written confirmation from each relevant Rating Agency (with such confirmation in
no event being required to be obtained from a particular Rating Agency with
respect to definitions or other provisions relevant only to and adopted in
connection with another Rating Agency's rating of the the Series) that any such
amendment, alteration or repeal would not adversely affect the rating then
assigned by such Rating Agency.
In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred
stock, including the Series, or any other stockholder of the
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Corporation, but only with confirmation from each Rating Agency, and after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Corporation would meet the Preferred Shares Basic Maintenance
Amount Test.
7. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of preferred stock, including the Series, will be entitled to receive out
of the assets of the Corporation available for distribution to stockholders,
after claims of creditors but before distribution or payment will be made in
respect of the Common Shares or to any other shares of stock of the Corporation
ranking junior to the preferred stock, as to liquidation payments, a liquidation
distribution in the amount of $25,000 per share (the 'Liquidation Preference'),
plus an amount equal to all unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not declared by the Board of
Directors, but excluding interest thereon), but such Holders will be entitled to
no further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. The Series will rank on a parity
with shares of any other series of preferred stock of the Corporation (including
the Series) as to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Corporation.
(b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of preferred stock, including the Series, will be insufficient to permit
the payment in full to such holders of the amounts to which they are entitled,
then such available assets will be distributed among the holders of all
outstanding shares of preferred stock, including the Series, ratably in any such
distribution of assets according to the respective amounts which would be
payable on all such shares if all amounts thereon were paid in full. Unless and
until payment in full has been made to the holders of all outstanding shares of
preferred stock, including the Series, of the liquidation distributions to which
they are entitled, no dividends or distributions will be made to holders of
Common Shares or any stock of the Corporation ranking junior to the preferred
stock as to liquidation.
(c) Neither the consolidation nor merger of the Corporation with or into any
other entity or entities, nor the sale, lease, exchange or transfer by the
Corporation of all or substantially all of its property and assets, will be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 7.
(d) After the payment to Holders of the Series of the full preferential
amounts provided for in this Section 7, the Holders of the Series as such will
have no right or claim to any of the remaining assets of the Corporation.
(e) In the event the assets of the Corporation or proceeds thereof available
for distribution to the Holders of the Series, upon dissolution, liquidation or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
will be insufficient to pay in full all amounts to which such Holders are
entitled pursuant to paragraph (a) of this Section 7, no such distribution will
be made on account of any shares of any other series of preferred stock unless
proportionate distributive amounts will be paid on account of the Series,
ratably, in proportion to the full distributable amounts to which holders of all
shares of preferred stock are entitled upon such dissolution, liquidation or
winding up.
(f) Subject to the rights of the holders of shares of other preferred stock
or after payment will have been made in full to the Holders of the Series as
provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of shares ranking junior to the Series with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation will, subject to any respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the Holders of the Series will not be entitled to
share therein.
8. Auction Agent. For so long as any Shares of the Series are Outstanding,
the Auction Agent, duly appointed by the Corporation to so act, will be in each
case a commercial bank, trust
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company or other financial institution independent of the Corporation and its
Affiliates (which, however, may engage or have engaged in business transactions
with the Corporation or its Affiliates) and at no time will the Corporation or
any of its Affiliates act as the Auction Agent in connection with the Auction
Procedures. If the Auction Agent resigns or for any reason its appointment is
terminated during any period that any shares of the Series are Outstanding, the
Corporation will use its best efforts to enter into an agreement with a
successor auction agent containing substantially the same terms and conditions
as the auction agency agreement. The Corporation may remove the auction agent
provided that prior to such removal the Corporation will have entered into such
an agreement with a successor auction agent.
9. 1940 Act Preferred Shares Asset Coverage. The Corporation will maintain,
as of the last Business Day of each month in which any Preferred Shares are
Outstanding, the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) will be the sole remedy in the event the Corporation fails
to do so.
10. Preferred Shares Basic Maintenance Amount. So long as any Shares of the
Series are Outstanding and any Rating Agency so requires, the Corporation will
maintain, as of each Valuation Date, Moody's Eligible Assets and S&P Eligible
Assets, as applicable, having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) will be the sole remedy in the event the Corporation fails to
do so.
11. Certain Other Restrictions. So long as any Shares of the Series are
Outstanding and S&P, Moody's or any Other Rating Agency that is rating such
shares so requires, the Corporation will not, unless it has received written
confirmation from S&P (if S&P is then rating the Series), Moody's (if Moody's is
then rating the Series) and (if applicable) such Other Rating Agency, that any
such action would not impair the rating then assigned by such Rating Agency to
the Series, engage in any one or more of the following transactions:
(a) purchase or sell futures contracts or options thereon with respect
to portfolio securities or write put or call options on portfolio
securities;
(b) except in connection with a refinancing of the Series, issue
additional shares of any series of preferred stock, including the Series or
reissue any shares of preferred stock, including the Series previously
purchased or redeemed by the Corporation;
(c) engage in any short sales of securities;
(d) lend portfolio securities;
(e) merge or consolidate into or with any other fund; or
(f) for purposes of valuation of Moody's Eligible Assets: (A) if the
Corporation writes a call option, the underlying asset will be valued as
follows: (1) if the option is exchange-traded and may be offset readily or
if the option expires before the earliest possible redemption of the Series,
at the lower of the Discounted Value of the underlying security of the
option and the exercise price of the option or (2) otherwise, it has no
value; (B) if the Corporation writes a put option, the underlying asset will
be valued as follows: the lesser of (1) exercise price and (2) the
Discounted Value of the underlying security; and (C) call or put option
contracts which the Corporation buys have no value. For so long as the
Series are rated by Moody's: (A) the Corporation will not engage in options
transactions for leveraging or speculative purposes; (B) the Corporation
will not write or sell any anticipatory contracts pursuant to which the
Corporation hedges the anticipated purchase of an asset prior to completion
of such purchase; (C) the Corporation will not enter into an option
transaction with respect to portfolio securities unless, after giving effect
thereto, the Corporation would continue to have Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount; (D) the Corporation will not enter into an option
transaction with respect to portfolio securities unless after giving effect
to such transaction the Corporation would continue to be in compliance with
the provisions relating to the Preferred Shares Basic Maintenance Amount;
(E) for purposes of the Preferred Shares Basic Maintenance Amount assets in
margin accounts are not Eligible Assets; (F) the Corporation
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will write only exchange-traded options on exchanges approved by Moody's (if
Moody's is then rating the Series); (G) where delivery may be made to the
Corporation with any of a class of securities, the Corporation will assume
for purposes of the Preferred Shares Basic Maintenance Amount that it takes
delivery of that security which yields it the least value; (H) the
Corporation will not engage in forward contracts; and (I) there will be a
quarterly audit made of the Corporation's options transactions by the
Corporation's independent auditors to confirm that the Corporation is in
compliance with these standards.
(g) For so long as any Preferred Shares are rated by S&P, the
Corporation will not purchase or sell futures contracts, write, purchase or
sell options on futures contracts or write put options (except covered put
options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from S&P that engaging in
such transactions will not impair the ratings then assigned to the Preferred
Shares by S&P.
12. Compliance Procedures for Asset Maintenance Tests. For so long as any
Preferred Shares are Outstanding and any Rating Agency so requires:
(a) As of each Valuation Date, the Corporation will determine (i) the
Market Value of each Eligible Asset owned by the Corporation on that date,
(ii) the Discounted Value of each such Eligible Asset, (iii) whether the
Preferred Shares Basic Maintenance Amount Test is met as of that date, (iv)
the value (as used in the 1940 Act) of the total assets of the Corporation,
less all liabilities, and (v) whether the 1940 Act Preferred Shares Asset
Coverage is met as of that date.
(b) Upon any failure to meet the Preferred Shares Basic Maintenance
Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation
Date, the Corporation may use reasonable commercial efforts (including,
without limitation, altering the composition of its portfolio, purchasing
Preferred Shares outside of an Auction or, in the event of a failure to file
a certificate on a timely basis, submitting the requisite certificate), to
meet (or certify in the case of a failure to file a certificate on a timely
basis, as the case may be) the Preferred Shares Basic Maintenance Amount
Test or 1940 Act Preferred Shares Asset Coverage on or prior to the Asset
Coverage Cure Date.
(c) Compliance with the Preferred Shares Basic Maintenance Amount and
1940 Act Asset Coverage Tests will be determined with reference to those
Preferred Shares which are deemed to be Outstanding hereunder.
(d) In the case of the asset coverage requirements for Moody's and S&P,
the auditors must certify once per calendar year the asset coverage test on
a date randomly selected by the auditor.
(e) The Corporation will deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (i)-(iii) of
paragraph (a) of this Section 12 (a 'Preferred Shares Basic Maintenance
Certificate') as of (A) the Date of Original Issue, (B) the last Valuation
Date of each month, (C) any date requested by any Rating Agency, (D) a
Business Day on or before any Asset Coverage Cure Date relating to the
Corporation's cure of a failure to meet the Preferred Shares Basic
Maintenance Amount Test, (E) any day that Common Shares or Preferred Shares
are redeemed and (F) any day the S&P Eligible Assets have an aggregate
discounted value less than or equal to 110% of the Preferred Shares Basic
Maintenance Amount. Such Preferred Shares Basic Maintenance Certificate will
be delivered in the case of clause (i)(A) on the Date of Original Issue and
in the case of all other clauses above on or before the seventh Business Day
after the relevant Valuation Date or Asset Coverage Cure Date.
(f) The Corporation will deliver to the Auction Agent and each Rating
Agency a certificate which sets forth a determination of items (iv) and (v)
of paragraph (a) of this Section 12 (a '1940 Act Preferred Shares Asset
Coverage Certificate') (i) as of the Date of Original Issue, and (ii) as of
(A) the last Valuation Date of each quarter thereafter, and (B) as of a
Business Day on or before any Asset Coverage Cure Date relating to the
failure to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act
Preferred Shares Asset
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Coverage Certificate will be delivered in the case of clause (i) on the Date
of Original Issue and in the case of clause (ii) on or before the seventh
Business Day after the relevant Valuation Date or the Asset Coverage Cure
Date. The certificates required by paragraphs (d) and (e) of this Section 12
may be combined into a single certificate.
(g) Within ten Business Days of the Date of Original Issue, the
Corporation will deliver to the Auction Agent and each Rating Agency a
letter prepared by the Corporation's independent auditors (an 'Auditor's
Certificate') regarding the accuracy of the calculations made by the
Corporation in the Preferred Shares Basic Maintenance Certificate and the
1940 Act Preferred Shares Asset Coverage Certificate required to be
delivered by the Corporation on the Date of Original Issue. Within ten
Business Days after delivery of the Preferred Shares Basic Maintenance
Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate
relating to the last Valuation Date of each fiscal quarter of the
Corporation, the Corporation will deliver to the Auction Agent and each
Rating Agency an Auditor's Certificate regarding the accuracy of the
calculations made by the Corporation in a Preferred Shares Basic Maintenance
Certificate with respect to a date randomly selected by the Corporation's
independent auditors during such fiscal quarter. In addition, the
Corporation will deliver to the persons specified in the preceding sentence
an Auditor's Certificate regarding the accuracy of the calculations made by
the Corporation on each Preferred Shares Basic Maintenance Certificate and
1940 Act Preferred Shares Asset Coverage Certificate delivered in relation
to an Asset Coverage Cure Date within ten days after the relevant Asset
Coverage Cure Date. If an Auditor's Certificate shows that an error was made
in any such report, the calculation or determination made by the
Corporation's independent auditors will be conclusive and binding on the
Corporation.
(h) The Auditor's Certificates referred to in paragraph (f) above will
confirm, based upon the independent auditor's review of portfolio data
provided by the Corporation, (i) the mathematical accuracy of the
calculations reflected in the related Preferred Shares Basic Maintenance
Amount Certificates and 1940 Act Preferred Shares Asset Coverage
Certificates and (ii) that, based upon such calculations, the Corporation
had, at such Valuation Date, met the Preferred Shares Basic Maintenance
Amount Test.
(i) In the event that a Preferred Shares Basic Maintenance Certificate
or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified
in this Section 12, the Corporation will be deemed to have failed to meet
the Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred
Shares Asset Coverage, as the case may be, on such Valuation Date for
purposes of Section 12(b) of Part I of these Articles Supplementary. In the
event that a Preferred Shares Basic Maintenance Certificate, a 1940 Act
Preferred Shares Asset Coverage Certificate or an applicable Auditor's
Certificate with respect to an Asset Coverage Cure Date is not delivered
within the time periods specified herein, the Corporation will be deemed to
have failed to meet the Preferred Shares Basic Maintenance Amount Test or
the 1940 Preferred Shares Asset Coverage, as the case may be, as of the
related Valuation Date.
13. Notice. All notices or communications hereunder, unless otherwise
specified in these Articles Supplementary, will be sufficiently given if in
writing and delivered in person, by telecopier or mailed by first-class mail,
postage prepaid. Notices delivered pursuant to this Section 13 will be deemed
given on the earlier of the date received or the date five-days after which such
notice is mailed, except as otherwise provided in these Articles Supplementary
or by the MGCL for notices of stockholders' meetings.
14. Waiver. To the extent permitted by Maryland law, Holders of at least
two-thirds of the Outstanding shares of the Series may waive any provision
hereof intended for their benefit in accordance with such procedures as may from
time to time be established by the Board of Directors.
15. Termination. In the event that no Shares of the Series are Outstanding,
all rights and preferences of such shares established and designated hereunder
will cease and terminate, and all obligations of the Corporation under these
Articles Supplementary will terminate.
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16. Amendment. Subject to the provisions of these Articles Supplementary,
the Board of Directors may, by resolution duly adopted without stockholder
approval (except as otherwise provided by these Articles Supplementary or
required by applicable law), amend these Articles Supplementary to reflect any
amendments hereto which the Board of Directors is entitled to adopt pursuant to
the terms of Section 6(k) of Part I of these Articles Supplementary without
stockholder approval. To the extent permitted by applicable law, the Board of
Directors may interpret, amend or adjust the provisions of these Articles
Supplementary to resolve any inconsistency or ambiguity or to remedy any patent
defect.
17. Definitions. As used in Part I and Part II of these Articles
Supplementary, the following terms will have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:
'AA' Composite Commercial Paper Rate' on any date means (i) the interest
equivalent of the 7-day rate, in the case of a Dividend Period which is 7
days or shorter; for Dividend Periods greater than 7 days but fewer than or
equal to 31 days, the 30-day rate; for Dividend Periods greater than 31 days
but fewer than or equal to 61 days, the 60-day rate; for Dividend Periods
greater than 61 days but fewer than or equal to 91 days, the 90 day rate;
for Dividend Periods greater than 91 days but fewer than or equal to 270
days, the rate described in clause (ii) below; for Dividend Periods greater
than 270 days, the Treasury Index Rate; on commercial paper on behalf of
financial issuers whose corporate bonds are rated 'AA' by S&P, or the
equivalent of such rating by another nationally recognized rating agency, as
announced by the Federal Reserve Bank of New York for the close of business
on the Business Day immediately preceding such date; or (ii) if the Federal
Reserve Bank of New York does not make available such a rate, then the
arithmetic average of the interest equivalent of such rates on commercial
paper placed on behalf of such issuers, as quoted on a discount basis or
otherwise by the Commercial Paper Dealers to the Auction Agent for the close
of business on the Business Day immediately preceding such date (rounded to
the next highest .001 of 1%). If any Commercial Paper Dealer does not quote
a rate required to determine the 'AA' Composite Commercial Paper Rate, such
rate shall be determined on the basis of the quotations (or quotation)
furnished by the remaining Commercial Paper Dealers (or Dealer), if any, or,
if there are no such Commercial Paper Dealers, by the Auction Agent as
agreed to by Merrill Lynch & Co. For purposes of this definition, (A)
'Commercial Paper Dealers' shall mean (1) Salomon Smith Barney Inc., Lehman
Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Goldman Sachs & Co.; (2) in lieu of any thereof, its respective Affiliate or
successor; and (3) in the event that any of the foregoing shall cease to
quote rates for commercial paper of issuers of the sort described above, in
substitution therefor, a nationally recognized dealer in commercial paper of
such issuers then making such quotations selected by the Corporation, and
(B) 'interest equivalent' of a rate stated on a discount basis for
commercial paper of a given number of days' maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of
1%) of (1) such rate expressed as a decimal, divided by (2) the difference
between (x) 1.00 and (y) a fraction, the numerator of which shall be the
product of such rate expressed as a decimal, multiplied by the number of
days in which such commercial paper shall mature and the denominator of
which shall be 360.
'Affiliate' means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Corporation; provided,
however, that no Broker-Dealer controlled by, in control of or under common
control with the Corporation will be deemed to be an Affiliate nor will any
corporation or any Person controlled by, in control of or under common
control with such corporation, one of the directors or executive officers of
which is a director of the Corporation be deemed to be an Affiliate solely
because such director or executive officer is also a director of the
Corporation.
'Agent Member' means a member of or a participant in the Securities
Depository that will act on behalf of a Bidder.
B-16
'All Hold Rate' means the 30-day 'AA' Composite Commercial Paper Rate in
the case of the Series Preferred Shares.
'Applicable Rate' means, with respect to the Series for each Dividend
Period (i) if Sufficient Clearing Orders exist for the Auction in respect
thereof, the Winning Bid Rate, (ii) if Sufficient Clearing Orders do not
exist for the Auction in respect thereof, the Maximum Rate, and (iii) in the
case of any Dividend Period if all the shares of the Series are the subject
of Submitted Hold Orders for the Auction in respect thereof, the All Hold
Rate.
'Approved Price' means the 'fair value' as determined by the Corporation
in accordance with the valuation procedures adopted from time to time by the
Board of Directors and for which the Corporation receives a mark-to-market
price (which, for the purpose of clarity, does not mean a Market Value
Price) from an independent source at least semi-annually.
'Asset Coverage Cure Date' has the meaning set forth in Section 3(a)(ii)
of these Articles Supplementary.
'Auction' means each periodic operation of the Auction Procedures.
'Auction Agent' means The Bank of New York unless and until another
commercial bank, trust company, or other financial institution appointed by
a resolution of the Board of Directors enters into an agreement with the
Corporation to follow the Auction Procedures for the purpose of determining
the Applicable Rate.
'Auction Date' means the first Business Day next preceding the first day
of a Dividend Period for the Series.
'Auction Procedures' means the procedures for conducting Auctions as set
forth in Part II of these Articles Supplementary.
'Auditor's Certificate' has the meaning set forth in Section 12(f) of
Part I of these Articles Supplementary.
'Beneficial Owner,' with respect to shares of the Series, means a
customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of the Series.
'Bid' has the meaning set forth in Section 2(a)(ii) of Part II of these
Articles Supplementary.
'Bidder' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary, provided however that neither the Corporation
nor any Affiliate will be permitted to be Bidder in an Auction.
'Board of Directors' or 'Board' means the Board of Directors of the
Corporation or any duly authorized committee thereof as permitted by
applicable law.
'Broker-Dealer' means any broker-dealer or broker-dealers, or other
entity permitted by law to perform the functions required of a Broker-Dealer
by the Auction Procedures, that has been selected by the Corporation and has
entered into a Broker-Dealer Agreement that remains effective.
'Broker-Dealer Agreement' means an agreement between the Auction Agent
and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
'Business Day' means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks
in The City of New York, New York are authorized or obligated by law to
close.
'Charter' has the meaning set forth in the preamble to these Articles
Supplementary.
'Code' means the Internal Revenue Code of 1986, as amended.
'Commission' means the Securities and Exchange Commission.
'Common Shares' means the shares of the Corporation's Common Stock, par
value $.001 per share.
B-17
'Corporation' has the meaning set forth in the preamble to these
Articles Supplementary.
'Date of Original Issue' means the date on which the Series is
originally issued by the Corporation.
'Default' has the meaning set forth in Section 2(c)(ii) of Part I of
these Articles Supplementary.
'Default Period' has the meaning set forth in Sections 2(c)(ii) or (iii)
of Part I of these Articles Supplementary.
'Default Rate' has the meaning set forth in Sections 2(c)(iii) of Part I
of these Articles Supplementary.
'Deposit Securities' means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets,
rated at least AAA or A-1 by S&P, except that, for purposes of optional
redemption, such obligations or securities will be considered 'Deposit
Securities' only if they also are rated at least P-1 by Moody's.
'Discount Factor' means the S&P Discount Factor (if S&P is then rating
the Series), the Moody's Discount Factor (if Moody's is then rating the
Series) or the discount factor established by any Other Rating Agency which
is then rating the Series and which so requires, whichever is applicable.
'Discounted Value' means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor, provided that with respect
to an Eligible Asset that is currently callable, Discounted Value will be
equal to the quotient as calculated above or the call price, whichever is
lower, and that with respect to an Eligible Asset that is prepayable,
Discounted Value will be equal to the quotient as calculated above or the
par value, whichever is lower.
'Dividend Default' has the meaning set forth in Section 2(c)(iii) of
Part I of these Articles Supplementary.
'Dividend Payment Date' with respect to the Series means any date on
which dividends are payable pursuant to Section 2(b) of Part I hereof.
'Dividend Period' means, with respect to the Series, the initial period
determined in the manner set forth under 'Designation' above, and
thereafter, the period commencing on the Business Day following each
Dividend Period for the Series and ending on the calendar day immediately
preceding the next Dividend Payment Date for the Series.
'Eligible Assets' means Moody's Eligible Assets (if Moody's is then
rating the Series), S&P Eligible Assets (if S&P is then rating the Series),
and/or Other Rating Agency Eligible Assets if any Other Rating Agency is
then rating the Series, whichever is applicable.
'Existing Holder' has the meaning set forth in Section 1(d) of Part II
of these Articles Supplementary.
'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Holder' means, with respect to the Series, the registered holder of
shares of the Series as the same appears on the stock ledger or stock
records of the Corporation.
'Investment Manager' means Cohen & Steers Capital Management, Inc.
'Liquidation Preference' means $25,000 per share of Series.
'Mandatory Redemption Date' has meaning set forth in Section 3(a)(iv) of
Part I of these Articles Supplementary.
'Mandatory Redemption Price' has the meaning set forth in Section
3(a)(iv) of Part I of these Articles Supplementary.
'Market Value' means the fair market value of an asset of the
Corporation as computed as follows: Securities listed on the New York Stock
Exchange at the last sale price reflected
B-18
on the consolidated tape at the close of the New York Stock Exchange on the
business day as of which such value is being determined provided that, if
there has been no sale on such day, the securities are valued at the closing
mean prices on such day and provided further that, if no prices are quoted
on such day, then the security is valued by such method as the Board of
Directors will determine in good faith to reflect its fair market value.
Readily marketable securities not listed on the New York Stock Exchange but
listed on other domestic or foreign securities exchanges or admitted to
trading on the National Association of Securities Dealers Automated
Quotations, Inc. ('NASDAQ') National List are valued in a like manner.
Portfolio securities traded on more than one securities exchange are valued
at the last sale price on the business day as of which such value is being
determined as reflected on the tape at the close of the exchange
representing the principal market for such securities. Readily marketable
securities traded in the over-the-counter market, including listed
securities whose primary market is believed by the Investment Manager to be
over-the-counter, but excluding securities admitted to trading on the NASDAQ
National List, are valued at the current bid prices as reported by NASDAQ
or, in the case of securities not quoted by NASDAQ, the National Quotation
Bureau or such other comparable source as the directors deem appropriate to
reflect their fair market value. The fair market value of certain
fixed-income securities is computed based upon (i) the basis of prices
provided by a Pricing Service or (ii) the lower of the value set forth in
bids from two independent dealers in securities, one of which bids will be
in writing, in each case with interest accrued added to such computation for
those assets of the Corporation where such computation does not include
interest accrued. The independent dealers from whom bids are sought will be
either (a) market makers in the securities being valued or (b) members of
the National Association of Securities Dealers, Inc. Where securities are
traded on more than one exchange and also over-the-counter, the securities
will generally be valued using the quotations the Board of Directors
believes reflect most closely the value of such securities.
'Maximum Rate' means, on any date on which the Applicable Rate is
determined, the applicable percentage of the 'AA' Composite Commercial Paper
Rate on the date of such Auction determined as set forth below based on the
lower of the credit ratings assigned to the Series by Moody's and S&P subject to
upward but not downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers; provided that immediately following
any such increase the Corporation would be in compliance with the Preferred
Shares Basic Maintenance Amount.
MOODY'S S&P APPLICABLE
CREDIT RATING CREDIT RATING PERCENTAGE
------------- ------------- ----------
Aa3 or Above AA- or Above 150%
A3 or A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 225%
Below Baa3 Below BBB- 275%
'Moody's' means Moody's Investors Service, Inc. and its successors at law.
'Moody's Discount Factor' means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined as follows. The
Moody's Discount Factor for any Moody's Eligible Asset other than the securities
set forth below will be the percentage provided in writing by Moody's.
B-19
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DISCOUNT FACTOR(1)(2)(3)
------------------------
Common stock of REITs 154%
Preferred stock of REITs
with Senior Implied Moody's (or S&P) rating: 154%
without Senior Implied Moody's (or S&P) rating: 208%
Preferred stock of Other Real Estate Companies
with Senior Implied Moody's (or S&P) rating: 208%
without Senior Implied Moody's (or S&P) rating: 250%
---------
(1) A Discount Factor of 250% will be applied to those assets in a single
Moody's Real Estate Industry/Property Sector Classification which exceed 30%
of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
Assets.
(2) A Discount Factor of 250% will be applied if dividends on such securities
have not been paid consistently (either quarterly or annually) over the
previous three years, or for such shorter time period that such securities
have been outstanding.
(3) A Discount Factor of 250% will be applied if the market capitalization
(including common stock and preferred stock) of an issuer is below $500
million.
(b) Debt Securities of REITs and Other Real Estate Companies:
TERMS OF
MATURITY OF
NON-INVESTMENT
GRADE BONDS Aaa Aa A Baa Ba B NR(1)
----------- --- -- - --- -- - -----
1 year or less 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than 2
years) 120% 123% 127% 131% 153% 168% 250%
4 years or less (but longer than 3
years) 126% 129% 133% 138% 161% 176% 250%
5 years or less (but longer than 4
years) 132% 135% 139% 144% 168% 185% 250%
7 years or less (but longer than 5
years) 139% 143% 147% 152% 179% 197% 250%
10 years or less (but longer than 7
years) 145% 150% 155% 160% 189% 208% 250%
15 years or less (but longer than 10
years) 150% 155% 160% 165% 196% 216% 250%
20 years or less (but longer than 15
years) 150% 155% 160% 165% 196% 228% 250%
30 years or less (but longer than 20
years) 150% 155% 160% 165% 196% 229% 250%
Greater than 30 years 165% 173% 181% 189% 205% 240% 250%
---------
(1) Unless conclusions regarding liquidity risk as well as estimates of both the
probability and severity of default for the corporation's or municipal
issuer's assets can be derived from other sources as well as combined with a
number of sources as presented by the Corporation to Moody's, securities
rated below B by Moody's and unrated securities, which are securities rated
by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
Assets. If a corporate or municipal debt security is unrated by Moody's, S&P
or Fitch, the Corporation will use the percentage set forth under 'Below B
and Unrated' in the Corporate or Municipal Debt Tables. Ratings assigned by
S&P or Fitch are generally accepted by Moody's at face value. However,
adjustments to face value may be made to particular categories of credits
for which the S&P and/or Fitch rating does not seem to approximate a Moody's
rating equivalent. Split rated securities assigned by S&P and Fitch will be
accepted at the lower of the two ratings.
(c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):
U.S. TREASURY SECURITIES U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY DISCOUNT FACTOR DISCOUNT FACTOR
-------------------------- --------------- ---------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 115%
3 years or less (but longer than 2 years) 118% 121%
4 years or less (but longer than 3 years) 123% 128%
5 years or less (but longer than 4 years) 128% 135%
7 years or less (but longer than 5 years) 135% 147%
10 years or less (but longer than 7 years) 141% 163%
15 years or less (but longer than 10 years) 146% 191%
20 years or less (but longer than 15 years) 154% 218%
30 years or less (but longer than 20 years) 154% 244%
B-20
(d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P or Fitch and
mature or have a demand feature at par exercisable within 49 days of the
relevant valuation date. A Moody's Discount Factor of 100% will be applied to
cash.
'Moody's Eligible Assets' means the following:
(a) Common Stock, Preferred Stock and any debt security of REITs and
Other Real Estate Companies. (i) Common stock of REITs and preferred
stock and any debt security of REITs and Other Real Estate Companies: (A)
which comprise at least 7 of the 14 Moody's Real Estate Industry/Property
Sector Classifications ('Moody's Sector Classifications') listed below
and of which no more than 35% may constitute a single such
classification; (B) which in the aggregate constitute at least 40
separate issues of common stock, preferred stock, and debt securities,
issued by at least 30 issuers; (C) issued by a single issuer which in the
aggregate constitute no more than 7.0% of the Market Value of Moody's
Eligible Assets, and (D) issued by a single issuer which, with respect to
50% of the Market Value of Moody's Eligible Assets, constitute in the
aggregate no more than 5% of Market Value of Moody's Eligible Assets; and
(ii) Unrated debt securities issued by an issuer which: (A) has not
filed for bankruptcy within the past three years; (B) is current on all
principal and interest on its fixed income obligations; (C) is current on
all preferred stock dividends; (D) possesses a current, unqualified
auditor's report without qualified, explanatory language and (E) in the
aggregate do not exceed 10% of the discounted Moody's Eligible Assets;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if
(i) the counterparty to the swap transaction has a short-term
rating of not less than P-1 by Moody's or A-1 by S&P or, if the
counterparty does not have a short-term rating, the counterparty's
senior unsecured long-term debt rating is A3 or higher by Moody's or
A+ or higher by S&P;
(ii) the original aggregate notional amount of the interest rate
swap transaction or transactions is not to be greater than the
liquidation preference of the Preferred Shares originally issued;
(iii) the interest rate swap transaction will be marked-to-market
daily;
(iv) an interest rate swap that is in-the-money is discounted at
the counterparty's corporate debt rating for the maturity of the swap
for purposes of calculating Moody's Eligible Assets; and
(v) an interest rate swap that is out-of-the money includes that
negative mark-to-market amount as indebtedness for purposes of
calculating the Preferred Shares Basic Maintenance amount;
(c) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's);
(d) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1, (B) in the case of demand deposits,
time deposits and overnight funds, the supporting entity is rated at
least A2, or (C) in all other cases, the supporting entity (1) is rated
A2 and the security matures within one month, (2) is rated A1 and the
security matures within three months or (3) is rated at least Aa3 and the
security matures within six months; provided, however, that for purposes
of this definition, such instruments (other than commercial paper rated
by S&P and not rated by Moody's) need not meet any otherwise applicable
Moody's rating criteria; and
B-21
(e) Cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the Valuation Date, (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within 49 days of the relevant valuation date) and
receivables for Moody's Eligible Assets sold if the receivable is due
within five Business Days of the Valuation Date, and if the trades which
generated such receivables are (A) settled through clearing house firms
with respect to which the Corporation has received prior written
authorization from Moody's or (B) (1) with counterparties having a
Moody's long-term debt rating of at least Baa3 or (2) with counterparties
having a Moody's Short-Term Money Market Instrument rating of at least
P-1.
'Moody's Real Estate Industry/ Property Sector Classification' means,
for the purposes of determining Moody's Eligible Assets, each of the
following Industry Classifications (as defined by the National Association
of Real Estate Investment Trusts, 'NAREIT'):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment in
consultation with the independent auditor and/or Moody's, as necessary.
'1933 Act' means the Securities Act of 1933, as amended.
'1940 Act' means the Investment Company Act of 1940, as amended.
'1940 Act Preferred Shares Asset Coverage' means asset coverage, as
determined in accordance with Section 18(h) of the 1940 Act, of at least
200% with respect to all outstanding senior securities of the Corporation
which are stock, including all Outstanding Preferred Shares (or such other
asset coverage as may in the future be specified in or under the 1940 Act as
the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring dividends on its
common shares), determined on the basis of values calculated as of a time
within 48 hours (not including Sundays or holidays) next preceding the time
of such determination.
'1940 Act Preferred Shares Asset Coverage Certificate' means the
certificate required to be delivered by the Corporation pursuant to Section
12(e) of these Articles Supplementary.
'Notice of Redemption' means any notice with respect to the redemption
of Preferred Shares pursuant to Section 3 of Part I of these Articles
Supplementary.
'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
B-22
'Other Rating Agency' means any rating agency other than S&P or Moody's
then providing a rating for the Series pursuant to the request of the
Corporation.
'Other Rating Agency Eligible Assets' means assets of the Corporation
designated by any Other Rating Agency as eligible for inclusion in
calculating the discounted value of the Corporation's assets in connection
with such Other Rating Agency's rating of the Preferred Shares.
'Other Real Estate Companies' companies which generally derive at least
50% of their revenue from real estate or has at least 50% of its assets in
real estate, but not including REITs.
'Outstanding' means, as of any date, Preferred Shares theretofore issued
by the Corporation except, without duplication, (i) any Preferred Shares
theretofore canceled, redeemed or repurchased by the Corporation, or
delivered to the Auction Agent for cancellation or with respect to which the
Corporation has given notice of redemption and irrevocably deposited with
the Paying Agent sufficient funds to redeem such shares and (ii) any
Preferred Shares represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Corporation.
Notwithstanding the foregoing, (A) for purposes of voting rights (including
the determination of the number of shares required to constitute a quorum),
any Preferred Shares as to which the Corporation or any Affiliate is the
Existing Holder will be disregarded and not deemed Outstanding; (B) in
connection with any Auction, any Preferred Shares as to which the
Corporation or any person known to the Auction Agent to be an Affiliate is
the Existing Holder will be disregarded and not deemed Outstanding; and
(C) for purposes of determining the Preferred Shares Basic Maintenance
Amount, Preferred Shares held by the Corporation will be disregarded and not
deemed Outstanding, but shares held by any Affiliate will be deemed
Outstanding.
'Paying Agent' means The Bank of New York unless and until another
entity appointed by a resolution of the Board of Directors enters into an
agreement with the Corporation to serve as paying agent, which paying agent
may be the same as the Auction Agent.
'Person' or 'Persons' means and includes an individual, a partnership,
the corporation, a trust, a corporation, a limited liability company, an
unincorporated association, a joint venture or other entity or a government
or any agency or political subdivision thereof.
'Potential Beneficial Owner or Holder' has the meaning set forth in
Section 1 of Part II of these Articles Supplementary.
'Preferred Shares' has the meaning set forth in Article FIRST of these
Articles Supplementary.
'Preferred Shares Basic Maintenance Amount' means as of any Valuation
Date as the dollar amount equal to the sum of:
(i)(A) the sum of the products resulting from multiplying the number
of Outstanding Shares of the Series on such date by the Liquidation
Preference (and redemption premium, if any) per share; (B) the aggregate
amount of dividends that will have accumulated at the Applicable Rate
(whether or not earned or declared) for each Outstanding Preferred Share
to the 30th day after such Valuation Date; (C) the aggregate amount of
dividends that would accumulate on shares of the Shares of the Series
outstanding from such first Dividend Payment Date therefor through the
56th day after such Valuation Date, at the Maximum Rate (plus the
aggregate amount of dividends that would accumulate on other outstanding
preferred shares from the first respective dividend payment date for
such shares after the Valuation Date through the 56th day after such
Valuation Date, at the respective maximum rates for such other
outstanding preferred shares); (D) the amount of anticipated
Corporation non-interest expenses for the 90 days subsequent to such
Valuation Date; (E) the amount of the current outstanding balances of
any indebtedness which is senior to the Shares of the Series plus
interest actually accrued together with 30 days additional interest
on the current outstanding balances calculated at the current rate;
(F) any other current liabilities payable during the 30 days subsequent
to such Valuation Date, including, without limitation, indebtedness
due within one year and any redemption premium due with respect to
Shares of the Series for which a Notice of Redemption has been
given, as of such Valuation Date, to the extent not reflected in any
B-23
of (i)(A) through (i)(E); and (G) any current liabilities as of such
Valuation Date to the extent not reflected in any of (i)(A) through
(i)(F): less
(ii) the sum of any cash plus the value of any of the Corporation's
assets irrevocably deposited by the Corporation for the payment of any
(i)(B) through (i)(F) ('value,' for purposes of this clause (ii), means
the Discounted Value of the security, except that if the security matures
prior to the relevant redemption payment date and is either fully
guaranteed by the U.S. Government or is rated at least P-1 by Moody's and
A-1 by S&P, it will be valued at its face value).
'Preferred Shares Basic Maintenance Amount Test' means a test which is
met if the lower of the aggregate Discounted Values of the Moody's Eligible
Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares
Basic Maintenance Amount.
'Preferred Shares Basic Maintenance Certificate' has the meaning set
forth in Section 12(d) of Part I of these Articles Supplementary.
'Pricing Service' means any of the following: Bloomberg, Bridge
Information Services, Data Resources Inc., Interactive Data, International
Securities Market Association, Merrill Lynch Securities Pricing Service,
Muller Data Corp., Reuters, Standard & Poors/J.J. Kenny, Telerate, Trepp
Pricing and Wood Gundy.
'Rating Agency' means Moody's and S&P as long as such rating agency is
then rating the Preferred Shares.
'Redemption Date' has the meaning set forth in Section 2(c)(ii) of Part
II of these Articles Supplementary.
'Redemption Default' has the meaning set forth in Section 2(c)(ii) of
Part I of these Articles Supplementary.
'Redemption Price' has the meaning set forth in Section 3(a)(i) of Part
I of these Articles Supplementary.
'Reference Rate' means, with respect to the determination of the Default
Rate, the applicable 'AA' Composite Commercial Paper Rate (for a Dividend
Period of fewer than 184 days) or the applicable Treasury Index Rate (for a
Dividend Period of 184 days or more).
'Registrar' means The Bank of New York, unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Corporation to serve as transfer agent.
'REIT' or real estate investment trust, means a company dedicated to
owning, and usually operating, income producing real estate, or to financing
real estate.
'S&P' means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors at law.
'S&P Discount Factor' means, for purposes of determining the Discounted
Value of any S&P Eligible Asset, the percentage determined as follows. The
S&P Discount Factor for any S&P Eligible Asset other than the securities set
forth below will be the percentage provided in writing by S&P:
B-24
(a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:
DIVERSIFICATION STANDARD
-------------------------------------
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
------- ------- ------- -------
MINIMUM NUMBER OF:
Issuers(1) 44 40 44 30
Real Estate Industry/Property Sectors(2) 10 8 7 7
PERCENT OF ASSETS IN:
Largest Real Estate Industry/Property Sector 17% 25% 30% 30%
2nd Largest Real Estate Industry/Property Sector 15% 20% 25% 25%
3rd Largest Real Estate Industry/Property Sector 12% 15% 15% 15%
4th Largest Real Estate Industry/Property Sector 12% 12% 12% 12%
S&P DISCOUNT FACTOR:
common stock 190% 208% 223% 231%
preferred stock(3) 157% 167% 174% 178%
---------
(1) Three issuers may each constitute 6% of assets and four issuers may each
constitute 5% of assets.
(2) As defined by NAREIT.
(3) Applies to preferred stock of real estate companies, subject to
diversification guidelines whereby at least 34% of the preferred assets are
rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
Moody's equivalent) or greater; and the balance of the preferred assets is
rated B - (or Moody's equivalent) or is unrated. The Discount Factor for
common stock will apply to preferred stock which is not in compliance with
the diversification standard.
(b) Debt Securities:
DIVERSIFICATION STANDARD
-------------------------------------
BOND RATING(1) LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4
-------------- ------- ------- ------- -------
A 116% 117% 119% 118%
A- 117% 119% 120% 120%
BBB+ 119% 121% 122% 122%
BBB 121% 122% 124% 124%
BBB- 122% 124% 126% 126%
BB+ 127% 130% 133% 132%
BB 133% 137% 141% 139%
BB- 139% 144% 149% 147%
B+ 152% 159% 166% 164%
B 163% 172% 182% 179%
B- 176% 188% 202% 197%
CCC+ 198% 212% 230% 224%
CCC 236% 262% 295% 284%
---------
(1) The S&P Discount Factors for debt securities will also be applied to any
interest rate swap or cap, in which case the rating of the counterparty will
determine the appropriate rating category.
(2) If a security is unrated by S&P but is rated by Moody's, the conversion
chart under S&P OC Test Rating Chart will apply.
(c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:
52-week Treasury Bills* 102%
Two-Year Treasury Notes 104%
Three-Year Treasury Notes 108%
Five-Year Treasury Notes 109%
10-Year Treasury Notes 115%
30-Year Treasury Bonds 126%
---------
* Treasury Bills with maturities of less than 52 weeks will be discounted at the
appropriate Short-Term Money Market Instrument levels. Treasury Bills that
mature the next day are considered cash equivalents and are valued at 100%.
Treasury Strips: Treasury interest-only Strips will apply the discount factor
for the Treasury category set forth above following the maturity of the Treasury
Strip, e.g., a Treasury interest-only Strip with a maturity of seven years will
apply the discount factor for the U.S. Treasury securities
B-25
with a 10-year maturity. Treasury principal-only Strips will apply the discount
factor that is two categories greater than its maturity, e.g., a Treasury
principal-only Strip with a maturity of seven years will apply the discount
factor for U.S. Treasury securities with a 30-year maturity.
(d) Cash and Cash Equivalents: The S&P Discount Factor applied to Cash and
Cash Equivalents will be (A) 100% and (B) 102% for those portfolio securities
which mature in 181 to 360 calendar days.
'S&P Eligible Assets' means the following:
(a) Common Stock, Preferred Stock and any debt securities of REITs
and Real Estate Companies;
(b) Interest rate swaps entered into according to International Swap
Dealers Association ('ISDA') standards if (i) the counterparty to the
swap transaction has a short-term rating of not less than A-1 or, if the
counterparty does not have a short-term rating, the counterparty's senior
unsecured long-term debt rating is A+ or higher and (ii) the original
aggregate notional amount of the interest rate swap transaction or
transactions is not to be greater than the liquidation preference of the
Preferred Shares originally issued. The interest rate swap transaction
will be marked-to-market daily;
(c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);
(d) Short-Term Money Market Instruments so long as (A) such
securities are issued by an institution, which, at the time of
investment, is a permitted bank (including commercial paper issued by a
corporation which complies with the applicable assumptions that follow)
('permitted bank' means any bank, domestic or foreign, whose commercial
paper is rated A-1+) provided, however, that Short-Term Money Market
Instruments with maturities of 30 days of less, invested in an
institution rated A-1 may comprise up to 20% of eligible portfolio
assets; and
(e) Cash, which is any immediately available funds in U.S. dollars or
any currency other than U.S. dollars which is a freely convertible
currency, and Cash Equivalents, which means investments (other than Cash)
that are one or more of the following obligations or securities: (i) U.S.
Government Securities; (ii) certificates of deposits of, banker's
acceptances issued by or money market accounts in any depository
institution or trust company incorporated under the laws of the United
States of America or any state thereof and subject to supervision and
examination by Federal and/ or state banking authorities, so long as the
deposits offered by such depository institution or trust company at the
time of such investments are rated and have a rating of at least 'P-1' by
Moody's and 'A-1+' by S&P (or, in the case of the principal depository
institution in a holding company system whose deposits are not so rated,
the long term debt obligations of such holding company are rated and such
rating is at least 'A-1' by Moody's and 'A+' by S&P); (iii) commercial
paper issued by any depositary institution or trust company incorporated
under the laws of the United States of America or any state thereof and
subject to supervision and examination by Federal and/or state banking
authorities, or any corporation incorporated under the laws of the United
States of America or any state thereof, so long as the commercial paper
of such issuer is rated and has at the time of such investment a short
term rating of at least 'P-1' by Moody's and 'A-1+' by S&P on its
commercial paper; (iv) securities bearing interest or sold at a discount
issued by any corporation incorporated under the laws of the United
States of America or any state thereof the obligations of which at the
time of such investment are rated and that have a credit rating of at
least 'P-1' by Moody's and 'A-1+' by S&P either at the time of such
investment or the making of a contractual commitment providing for such
investment; (v) shares of any money market fund organized under the laws
of a jurisdiction other than the United States, so long as such money
market fund is rated and has at the time of such investment a short-term
rating of at least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and
ownership of such investments will not cause the issuer to become engaged
in a trade or business within the United States for U.S. Federal income
tax purposes or subject the issuer to tax on a net income basis; and (vi)
unleveraged
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overnight repurchase obligations on customary terms with respect to
investments described in clauses (i) through (iv) above entered into a
depository institution, trust company or corporation that has a
short-term rating of at least 'A-1+' by S&P; provided, that (i) in no
event will Cash Equivalents include any obligation that provides for
payment of interest alone; (ii) Cash Equivalents referred to in clauses
(ii) and (iii) above will mature within 183 days of issuance; (iii)
either Moody's or S&P changes its rating system, then any ratings
included in this definition will be deemed to be an equivalent rating in
a successor rating category of Moody's or S&P, as the case may be; (iv)
if either Moody's or S&P is not in the business of rating securities,
then any ratings included in this definition will be deemed to be an
equivalent rating from another Rating Agency; (v) Cash Equivalents (other
than U.S. Government Securities or money market funds maintained by the
Custodian) will not include any such investment of more than $100 million
in any single issuer; and (vi) in no event will Cash Equivalents include
any obligation that is not denominated in Dollars, any synthetic
securities, any Securities with ratings containing an 'r' subscript, and
IOs or any POs (other than commercial paper with a maturity within 183
days of issuance).
'S&P OC Test Rating Chart' means the chart set forth below:
MOODY'S RATING MAPPED S&P RATING
-------------- -----------------
Aaa AA+
Aa1 AA
Aa2 AA-
Aa3 A+
A1 A
A2 A-
A3 BBB+
Baa1 BBB
Baa2 BBB-
Baa3 BB+
Ba1 BB-
Ba2 B+
Ba3 B
B1 B-
B2 CCC+
B3 CCC
Caa CCC-
NR or below Caa NR
'S&P Real Estate Industry/Property Sector Classification' means, for the
purposes of determining S&P Eligible Assets, each of the following Industry
Classifications (as defined by NAREIT):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
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13. Commercial Financing
14. Self Storage
The Corporation will use its discretion in determining which NAREIT
Industry Classification is applicable to a particular investment, and, when
necessary will consult with the independent auditor and/or S&P, as
necessary.
'Securities Depository' means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by
the Corporation that agrees to follow the procedures required to be followed
by such securities depository in connection with the Preferred Shares.
'Sell Order' has the meaning set forth in Section 2(b) of Part II of
these Articles Supplementary.
'Short-Term Money Market Instrument' means the following types of
instruments if, on the date of purchase or other acquisition thereof by the
Corporation, the remaining term to maturity thereof is not in excess of 180
days:
(i) commercial paper rated A-1 if such commercial paper matures in 30
days or A-1+ if such commercial paper matures in over 30 days;
(ii) demand or time deposits in, and banker's acceptances and
certificates of deposit of (A) a depository institution or trust company
incorporated under the laws of the United States of America or any state
thereof or the District of Columbia or (B) a United States branch office
or agency of a foreign depository institution (provided that such branch
office or agency is subject to banking regulation under the laws of the
United States, any state thereof or the District of Columbia);
(iii) overnight funds; and
(iv) U.S. Government Securities.
'Special Dividend Period' means a Dividend Period that is not a Standard
Dividend Period.
'Specific Redemption Provisions' means, with respect to any Special
Dividend Period of more than one year, either, or any combination of (i) a
period (a 'Non-Call Period') determined by the Board of Directors after
consultation with the Broker-Dealers, during which the shares subject to
such Special Dividend Period are not subject to redemption at the option of
the Corporation and (ii) a period (a 'Premium Call Period'), consisting of a
number of whole years as determined by the Board of Directors after
consultation with the Broker-Dealers, during each year of which the shares
subject to such Special Dividend Period will be redeemable at the
Corporation's option at a price per share equal to the Liquidation
Preference plus accumulated but unpaid dividends (whether or not earned or
declared) plus a premium expressed as a percentage or percentages of the
Liquidation Preference or expressed as a formula using specified variables
as determined by the Board of Directors after consultation with the
Broker-Dealers.
'Standard Dividend Period' means a Dividend Period of 7 days, unless the
day after such 7th day is not a Business Day, then the number of days
ending on the calendar day next preceding the next Business Day (such
Business Day, being the Dividend Payment Date for the Series).
'Submission Deadline' means 1:00 p.m., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the
Auction Agent from time to time.
'Transfer Agent' means The Bank of New York, unless and until another
entity appointed by a resolution of the Board of Directors enters into an
agreement with the Corporation to serve as Transfer Agent.
'Treasury Index Rate' means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the
same number of 30-day periods to
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maturity as the length of the applicable Dividend Period, determined, to the
extent necessary, by linear interpolation based upon the yield for such
securities having the next shorter and next longer number of 30-day periods
to maturity treating all Dividend Periods with a length greater than the
longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the
Federal Reserve System (currently in H.15 (519)); provided, however, if the
most recent such statistical release will not have been published during the
15 days preceding the date of computation, the foregoing computations will
be based upon the average of comparable data as quoted to the Corporation by
at least three recognized dealers in U.S. Government Securities selected by
the Corporation.
'U.S. Government Securities' means direct obligations of the United
States or by its agencies or instrumentalities that are entitled to the full
faith and credit of the United States and that, other than United States
Treasury Bills, provide for the periodic payment of interest and the full
payment of principal at maturity or call for redemption.
'Valuation Date' means the last Business Day of each week, or such other
date as the Corporation and Rating Agencies may agree to for purposes of
determining the Preferred Shares Basic Maintenance Amount.
'Voting Period' has the meaning set forth in Section 6(b) of Part I of
these Articles Supplementary.
'Winning Bid Rate' has the meaning set forth in Section 4(a)(iii) of
Part II of these Articles Supplementary.
18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.
PART II: AUCTION PROCEDURES
1. Certain Definitions. As used in Part II of these Articles Supplementary,
the following terms will have the following meanings, unless the context
otherwise requires and all section references below are to Part II of these
Articles Supplementary except as otherwise indicated: Capitalized terms not
defined in Section 1 of Part II of these Articles Supplementary will have the
respective meanings specified in Part I of these Articles Supplementary.
'Agent Member' means a member of or participant in the Securities
Depository that will act on behalf of existing or potential holders of the
Series.
'Available Shares of the Series' has the meaning set forth in Section
4(a)(i) of Part II of these Articles Supplementary.
'Existing Holder' means (a) a person who beneficially owns those shares
of the Series listed in that person's name in the records of the Auction
Agent or (b) the beneficial owner of those shares of the Series which are
listed under such person's Broker-Dealer's name in the records of the
Auction Agent, which Broker-Dealer will have signed a Master Purchaser's
Letter.
'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Master Purchaser's Letter' means the letter which is required to be
executed by each prospective purchaser of the Series or the Broker-Dealer
through whom the shares will be held.
'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
these Articles Supplementary.
'Potential Holder,' means (a) any Existing Holder who may be interested
in acquiring additional shares of the Series or (b) any other person who may
be interested in acquiring
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shares of the Series and who has signed a Master Purchaser's Letter or whose
shares will be listed under such person's Broker-Dealer's name on the
records of the Auction Agent which Broker-Dealer will have executed a Master
Purchaser's Letter.
'Sell Order' has the meaning set forth in Section 2(b) of Part II of
these Articles Supplementary.
'Submitted Bid Order' has the meaning set forth in Section 4(a) of Part
II of these Articles Supplementary.
'Submitted Hold Order' has the meaning set forth in Section 4(a) of Part
II of these Articles Supplementary.
'Submitted Order' has the meaning set forth in Section 4(a) of Part II
of these Articles Supplementary.
'Submitted Sell Order' has the meaning set forth in Section 4(a) of Part
II of these Articles Supplementary.
'Sufficient Clearing Orders' means that all Preferred Shares are the
subject of Submitted Hold Orders or that the number of shares of the Series
that are the subject of Submitted Buy Orders by Potential Holders specifying
one or more rates equal to or less than the Maximum Rate exceeds or equals
the sum of (A) the number of shares of the Series that are subject of
Submitted Hold/Sell Orders by Existing Holders specifying one or more rates
higher than the Maximum Applicable Rate and (B) the number of shares of the
Series that are subject to Submitted Sell Orders.
'Winning Bid Rate' means the lowest rate specified in the Submitted
Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
specifying such lowest rate and all other Submitted Hold/Sell Orders from
Existing Holders specifying lower rates were accepted and (B) each Submitted
Buy Order from Potential Holders specifying such lowest rate and all other
Submitted Buy Orders from Potential Holders specifying lower rates were
accepted, would result in the Existing Holders described in clause (A) above
continuing to hold an aggregate number of shares of the Series which, when
added to the number of shares of the Series to be purchased by the Potential
Holders described in clause (B) above and the number of shares of the Series
subject to Submitted Hold Orders, would be equal to the number of shares of
the Series.
2. Orders.
(a) On or prior to the Submission Deadline on each Auction Date for shares
of the Series:
(i) each Beneficial Owner of shares of the Series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of the Series held by
such Beneficial Owner which such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for shares of the Series for
the next succeeding Dividend Period of such shares;
(B) the number of Outstanding shares, if any, of the Series held by
such Beneficial Owner which such Beneficial Owner offers to sell if the
Applicable Rate for shares of the Series for the next succeeding Dividend
Period of shares of the Series will be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of the Series held by
such Beneficial Owner which such Beneficial Owner offers to sell without
regard to the Applicable Rate for shares of the Series for the next
succeeding Dividend Period of shares of the Series; and
(ii) each Broker-Dealer, using lists of Potential Beneficial Owners,
will in good faith for the purpose of conducting a competitive Auction in a
commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners,
on such lists to determine the number of shares, if any, of the Series which
B-30
each such Potential Beneficial Owner offers to purchase if the Applicable
Rate for shares of the Series for the next succeeding Dividend Period of
shares of the Series will not be less than the rate per annum specified by
such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C)
or (ii) of this paragraph (a) is hereinafter referred to as an 'Order' and
collectively as 'Orders' and each Beneficial Owner and each Potential
Beneficial Owner placing an Order with a Broker-Dealer, and such
Broker-Dealer placing an Order with the Auction Agent, is hereinafter
referred to as a 'Bidder' and collectively as 'Bidders,' an Order containing
the information referred to in clause (i)(A) of this paragraph (a) is
hereinafter referred to as a 'Hold Order' and collectively as 'Hold Orders';
an Order containing the information referred to in clause (i)(B) or (ii) of
this paragraph (a) is hereinafter referred to as a 'Bid' and collectively as
'Bids,' and an Order containing the information referred to in clause (i)(C)
of this paragraph (a) is hereinafter referred to as a 'Sell Order' and
collectively as 'Sell Orders.'
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of the
Series subject to an Auction on any Auction Date will constitute an irrevocable
offer to sell:
(A) the number of Outstanding shares of the Series specified in such Bid
if the Applicable Rate for shares of the Series determined on such Auction
Date will be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of the Series
to be determined as set forth in clause (iv) of paragraph (a) of Section 5
of this Part II if the Applicable Rate for shares of the Series determined
on such Auction Date will be equal to the rate specified therein; or
(C) the number of Outstanding shares of the Series specified in such Bid
if the rate specified therein will be higher than the Maximum Rate for
shares of the Series, or such number or a lesser number of Outstanding
shares of the Series to be determined as set forth in clause (iii) of
paragraph (b) of Section 5 of this Part II if the rate specified therein
will be higher than the Maximum Rate for shares of the Series and Sufficient
Clearing Bids for shares of the Series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
the Series subject to an Auction on any Auction Date will constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of the Series specified in such
Sell Order; or
(B) such number or a lesser number of Outstanding shares of the Series
as set forth in clause (iii) of paragraph (b) of Section 5 of this Part II
if Sufficient Clearing Bids for shares of the Series do not exist;
provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of the Series will not be liable to any Person for failing to sell
such shares pursuant to a Sell Order described in the proviso to paragraph (c)
of Section 3 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the
Corporation) with the provisions of Section 6 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.
(iii) A Bid by a Potential Holder of shares of the Series subject to an
Auction on any Auction Date will constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of the Series specified in such Bid
if the Applicable Rate for shares of the Series determined on such Auction
Date will be higher than the rate specified therein; or (B) such number or a
lesser number of Outstanding shares of the Series as set forth in clause (v)
of paragraph (a) of Section 5 of this Part II if the
B-31
Applicable Rate for shares of the Series determined on such Auction Date
will be equal to the rate specified therein.
(c) No Order for any number of shares of the Series other than whole shares
will be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for shares of the Series
of a series subject to an Auction on such Auction Date obtained by such
Broker-Dealer, designating itself (unless otherwise permitted by the
Corporation) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and will specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which will be the
Broker-Dealer unless otherwise permitted by the Corporation);
(ii) the aggregate number of shares of the Series that are the subject
of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of
the Series:
(A) the number of shares, if any, of the Series subject to any Hold
Order of such Existing Holder;
(B) the number of shares, if any, of the Series subject to any Bid of
such Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of the Series subject to any Sell
Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of the
Series, the rate and number of shares of the Series specified in such
Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of the
Series held by any Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent will deem a Hold Order to have
been submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of the Series held by such Existing Holder and not subject to
Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of the Series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline
for an Auction relating to a Special Dividend Period consisting of more than 91
Dividend Period days, the Auction Agent will deem a Sell Order to have been
submitted by or on behalf of such Existing Holder covering the number of
outstanding shares of the Series held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding Preferred
Shares of the Series subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(i) all Hold Orders for shares of the Series will be considered valid,
but only up to and including in the aggregate the number of Outstanding
shares of the Series held by such Existing Holder, and if the number of
shares of the Series subject to such Hold Orders exceeds the number of
Outstanding shares of the Series held by such Existing Holder, the number of
shares subject to each such Hold Order will be reduced pro rata to cover the
number of Outstanding shares of the Series held by such Existing Holder;
(ii) (A) any Bid for shares of the Series will be considered valid up to
and including the excess of the number of Outstanding shares of the Series
held by such Existing Holder over the number of shares of the Series subject
to any Hold Orders referred to in clause (i) above;
B-32
(B) subject to subclause (A), if more than one Bid of an Existing
Holder for shares of the Series is submitted to the Auction Agent with
the same rate and the number of Outstanding shares of the Series subject
to such Bids is greater than such excess, such Bids will be considered
valid up to and including the amount of such excess, and the number of
shares of the Series subject to each Bid with the same rate will be
reduced pro rata to cover the number of shares of the Series equal to
such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an
Existing Holder for shares of the Series is submitted to the Auction
Agent with different rates, such Bids will be considered valid in the
ascending order of their respective rates up to and including the amount
of such excess; and
(D) in any such event, the number, if any, of such Outstanding shares
of the Series subject to any portion of Bids considered not valid in
whole or in part under this clause (ii) will be treated as the subject of
a Bid for shares of the Series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of the Series will be considered valid
up to and including the excess of the number of Outstanding shares of the
Series held by such Existing Holder over the sum of shares of the Series
subject to valid Hold Orders referred to in clause (i) above and valid Bids
referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of the Series is submitted
to the Auction Agent by or on behalf of any Potential Holder, each such Bid
submitted will be a separate Bid with the rate and number of shares therein
specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, will be irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for shares
of the Series, the Auction Agent will assemble all valid Orders submitted or
deemed submitted to it by the Broker-Dealers in respect of shares of the Series
(each such Order as submitted or deemed submitted by a Broker-Dealer being
hereinafter referred to individually as a 'Submitted Hold Order,' a 'Submitted
Bid' or a 'Submitted Sell Order,' as the case may be, or as a 'Submitted Order'
and collectively as 'Submitted Hold Orders,' 'Submitted Bids' or 'Submitted Sell
Orders,' as the case may be, or as 'Submitted Orders') and will determine for
the Series:
(i) the excess of the number of Outstanding shares of the Series over
the number of Outstanding shares of the Series subject to Submitted Hold
Orders (such excess being hereinafter referred to as the 'Available Shares
of the Series');
(ii) from the Submitted Orders for shares of the Series whether:
(A) the number of Outstanding shares of the Series subject to
Submitted Bids of Potential Holders specifying one or more rates equal to
or lower than the Maximum Rate (for all Dividend Periods) for shares of
the Series; exceeds or is equal to the sum of
(B) the number of Outstanding shares of the Series subject to
Submitted Bids of Existing Holders specifying one or more rates higher
than the Maximum Rate (for all Dividend Periods) for shares of the
Series; and
(C) the number of Outstanding shares of the Series subject to
Submitted Sell Orders (in the event such excess or such equality exists
(other than because the number of shares of the Series in subclauses (B)
and (C) above is zero because all of the Outstanding shares of the Series
are subject to Submitted Hold Orders), such Submitted Bids in subclause
(A) above being hereinafter referred to collectively as 'Sufficient
Clearing Bids' for shares of the Series); and
(iii) if Sufficient Clearing Bids for shares of the Series exist, the
lowest rate specified in such Submitted Bids (the 'Winning Bid Rate' for
shares of the Series) which if:
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(A) (I) each such Submitted Bid of Existing Holders specifying such
lowest rate and (II) all other such Submitted Bids of Existing Holders
specifying lower rates were rejected, thus entitling such Existing
Holders to continue to hold the shares of the Series that are subject to
such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such
lowest rate and (II) all other such Submitted Bids of Potential Holders
specifying lower rates were accepted; would result in such Existing
Holders described in subclause (A) above continuing to hold an aggregate
number of Outstanding shares of the Series which, when added to the
number of Outstanding shares of the Series to be purchased by such
Potential Holders described in subclause (B) above, would equal not less
than the Available Shares of the Series.
(b) Promptly after the Auction Agent has made the determinations pursuant to
paragraph (a) of this Section 4, the Auction Agent will advise the Corporation
of the Maximum Rate for shares of the Series for which an Auction is being held
on the Auction Date and, based on such determination, the Applicable Rate for
shares of the Series for the next succeeding Dividend Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of the Series exist, that the
Applicable Rate for all shares of the Series for the next succeeding
Dividend Period thereof will be equal to the Winning Bid Rate for shares of
the Series so determined;
(ii) if Sufficient Clearing Bids for shares of the Series do not exist
(other than because all of the Outstanding shares of the Series are subject
to Submitted Hold Orders), that the Applicable Rate for all shares of the
Series for the next succeeding Dividend Period thereof will be equal to the
Maximum Rate for shares of the Series; or
(iii) if all of the Outstanding shares of the Series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of the Series
for the next succeeding Dividend Period thereof will be the All Hold Rate.
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders will continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 4 of this Part II, the Submitted Bids and Submitted
Sell Orders will be accepted or rejected by the Auction Agent and the Auction
Agent will take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of the Series have been made,
all Submitted Sell Orders with respect to shares of the Series will be
accepted and, subject to the provisions of paragraphs (d) and (e) of this
Section 5, Submitted Bids with respect to shares of the Series will be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids with respect to shares of the Series will be rejected:
(i) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is higher than the Winning Bid Rate for shares
of the Series will be accepted, thus requiring each such Existing Holder
to sell the shares of the Series subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is lower than the Winning Bid Rate for shares of
the Series will be rejected, thus entitling each such Existing Holder to
continue to hold the shares of the Series subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of the Series
specifying any rate that is lower than the Winning Bid Rate for shares of
the Series will be accepted;
(iv) each Existing Holder's Submitted Bid for shares of the Series
specifying a rate that is equal to the Winning Bid Rate for shares of the
Series will be rejected, thus entitling such Existing Holder to continue
to hold the shares of the Series subject to such Submitted Bid, unless
the number of Outstanding shares of the Series subject
to all such Submitted Bids will be greater than the number of shares of
the Series
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('remaining shares') in the excess of the Available Shares of the Series
over the number of shares of the Series subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which event
such Submitted Bid of such Existing Holder will be rejected in part, and
such Existing Holder will be entitled to continue to hold shares of the
Series subject to such Submitted Bid, but only in an amount equal to the
shares of the Series obtained by multiplying the number of remaining
shares by a fraction, the numerator of which will be the number of
Outstanding shares of the Series held by such Existing Holder subject to
such Submitted Bid and the denominator of which will be the aggregate
number of Outstanding shares of the Series subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal to the
Winning Bid Rate for shares of the Series; and
(v) each Potential Holder's Submitted Bid for shares of the Series
specifying a rate that is equal to the Winning Bid Rate for shares of the
Series will be accepted but only in an amount equal to the number of
shares of the Series obtained by multiplying the number of shares in the
excess of the Available Shares of the Series over the number of shares of
the Series subject to Submitted Bids described in clauses (ii) through
(iv) of this paragraph (a) by a fraction, the numerator of which will be
the number of Outstanding shares of the Series subject to such Submitted
Bid and the denominator of which will be the aggregate number of
Outstanding shares of the Series subject to such Submitted Bids made by
all such Potential Holders that specified a rate equal to the Winning Bid
Rate for shares of the Series.
(b) If Sufficient Clearing Bids for shares of the Series have not been
made (other than because all of the Outstanding shares of the Series are
subject to Submitted Hold Orders), subject to the provisions of paragraph
(d) of this Section 5, Submitted Orders for shares of the Series will be
accepted or rejected as follows in the following order of priority and all
other Submitted Bids for shares of the Series will be rejected:
(i) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of the Series will be rejected, thus entitling such Existing
Holders to continue to hold the shares of the Series subject to such
Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of the Series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of the Series will be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of the Series
specifying any rate that is higher than the Maximum Rate for shares of
the Series and the Submitted Sell Orders for shares of the Series of each
Existing Holder will be accepted, thus entitling each Existing Holder
that submitted or on whose behalf was submitted any such Submitted Bid or
Submitted Sell Order to sell the shares of the Series subject to such
Submitted Bid or Submitted Sell Order, but in both cases only in an
amount equal to the number of shares of the Series obtained by
multiplying the number of shares of the Series subject to Submitted Bids
described in clause (ii) of this paragraph (b) by a fraction, the
numerator of which will be the number of Outstanding shares of the Series
held by such Existing Holder subject to such Submitted Bid or Submitted
Sell Order and the denominator of which will be the aggregate number of
Outstanding shares of the Series subject to all such Submitted Bids and
Submitted Sell Orders.
(c) If all of the Outstanding shares of the Series are subject to
Submitted Hold Orders, all Submitted Bids for shares of the Series will be
rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
the Series on any Auction Date, the Auction Agent will, in such manner as it
will determine in its sole discretion, round up or down the number of shares
of the Series to
B-35
be purchased or sold by any Existing Holder or Potential Holder on such
Auction Date as a result of such procedures so that the number of shares so
purchased or sold by each Existing Holder or Potential Holder on such
Auction Date will be whole shares of the Series.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 5 any Potential Holder would be entitled or
required to purchase less than a whole share of the Series on any Auction
Date, the Auction Agent will, in such manner as it will determine in its
sole discretion, allocate shares of the Series for purchase among Potential
Holders so that only whole shares of the Series are purchased on such
Auction Date as a result of such procedures by any Potential Holder, even if
such allocation results in one or more Potential Holders not purchasing the
Series on such Auction Date.
(f) Based on the results of each Auction for shares of the Series, the
Auction Agent will determine the aggregate number of shares of the Series to
be purchased and the aggregate number of shares of the Series to be sold by
Potential Holders and Existing Holders and, with respect to each Potential
Holder and Existing Holder, to the extent that such aggregate number of
shares to be purchased and such aggregate number of shares to be sold
differ, determine to which other Potential Holder(s) or Existing Holder(s)
they will deliver, or from which other Potential Holder(s) or Existing
Holder(s) they will receive, as the case may be, shares of the Series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial
Owner of shares of the Series with respect to whom a Broker-Dealer submitted
a Bid to the Auction Agent for such shares that was accepted in whole or in
part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent
Member to deliver such shares against payment therefor, partial deliveries
of shares of the Series that have been made in respect of Potential Holders'
or Potential Beneficial Owners' Submitted Bids for shares of the Series that
have been accepted in whole or in part will constitute good delivery to such
Potential Holders and Potential Beneficial Owners.
(g) Neither the Corporation nor the Auction Agent nor any affiliate of
either will have any responsibility or liability with respect to the failure
of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
Beneficial Owner or its respective Agent Member to deliver shares of the
Series or to pay for shares of the Series sold or purchased pursuant to the
Auction Procedures or otherwise.
6. Transfer of Preferred Shares. Unless otherwise permitted by the
Corporation, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of the Series only in whole shares and only pursuant
to a Bid or Sell Order placed with the Auction Agent in accordance with the
procedures described in this Part II or to a Broker-Dealer; provided, however,
that (a) a sale, transfer or other disposition of shares of the Series from a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer will not be deemed to be a sale, transfer or other disposition for
purposes of this Section 6 if such Broker-Dealer remains the Existing Holder of
the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other Person, if permitted by the
Corporation) to whom such transfer is made will advise the auction agent of such
transfer.
[Remainder of page left blank]
B-36
IN WITNESS WHEREOF, COHEN & STEERS QUALITY INCOME REALTY FUND, INC. has
caused these presents to be signed in its name and on its behalf by its
President and witnessed by its Assistant Secretary as of this day of
, 2004.
WITNESS:
By: ...........................................................................
Name: Lawrence B. Stoller
Title: Assistant Secretary
COHEN & STEERS QUALITY
INCOME REALTY FUND, INC.
By: .................................
Name: Martin Cohen
Title: President
THE UNDERSIGNED, President of the COHEN & STEERS QUALITY INCOME REALTY FUND,
INC., who executed on behalf of the Corporation the foregoing Articles
Supplementary hereby acknowledges the foregoing Articles Supplementary to be the
corporate act of the Corporation and hereby certifies to the best of his
knowledge, information, and belief that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
.....................................
Name: Martin Cohen
Title: President
B-37
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
Part A -- Financial Highlights for the six months ended June 30, 2004
(unaudited), the year ended December 31, 2003 (audited) and the
period February 28, 2002 through December 31, 2002 (audited)
Part B -- Report of Independent Accountants
-- Statement of Assets and Liabilities, as of December 31, 2003
(audited)
-- Statement of Operations, for the year ended December 31, 2003
(audited)
-- Statement of Changes in Net Assets, for the year ended
December 31, 2003 and the period February 28, 2002 through
December 31, 2002 (audited)
-- Notes to Financial Statements (audited)
-- Statement of Assets and Liabilities, as of June 30, 2004
(unaudited)
-- Statement of Operations for the six months ended June 30, 2004
(unaudited)
-- Statement of Changes in Net Assets for the six months ended
June 30, 2004 (unaudited) and the period February 28, 2002 through
December 31, 2002 (audited)
-- Financial Highlights for the six months ended June 30, 2004
(unaudited) and the period February 28, 2002 through December 31,
2002 (audited)
-- Notes to Financial Statements (unaudited)
All other financial statements, schedules and historical financial
information are omitted because the conditions requiring their filing do not
exist.
(2) Exhibits:
(a) -- Articles of Incorporation.'D'
Articles of Amendment'D''D'
(b) -- By-Laws. Incorporated by reference to the Registration
Statement.'D'
(c) -- Not applicable.
(d) -- (i) Form of Articles Supplementary Creating Series
Auction Rate Preferred Shares.**
-- (ii) Specimen Certificate for Series Auction Rate
Preferred Shares.**
(e) -- Dividend Reinvestment Plan.'D''D'
(f) -- Not applicable.
(g) -- Investment Management Agreement.'D''D'
(h) -- Form of Purchase Agreement.**
(i) -- Not applicable.
(j) -- Form of Master Custodian Agreement.'D''D'
(k) -- (i) Form of Transfer Agency, Registrar and Dividend
Disbursing Agreement.'D''D'
-- (ii) Form of Administration Agreement between the Fund
and the Investment Manager.'D''D'
-- (iii) Form of Administration Agreement between the Fund
and State Street Bank and Trust Company.'D''D'
-- (iv) Form of Auction Agency Agreement between the Fund
and The Bank of New York.**
-- (v) Form of Broker-Dealer Agreement.**
C-1
(l) -- (i) Opinion and Consent of Simpson Thacher & Bartlett LLP.**
-- (ii) Opinion and Consent of Venable LLP.**
(m) -- Not applicable.
(n) -- Consent of Independent Accountants.*
(o) -- Not applicable.
(p) -- Not applicable.
(q) -- Not applicable.
(r) -- (i) Code of Ethics of the Fund.'D''D'
-- (ii) Code of Ethics of Investment Manager.'D''D'
(s) -- Power of Attorney.'D''D'
---------
* Filed herewith.
** To be filed by subsequent amendment.
'D' Incorporated by reference to the Fund's Registration Statement on
Form N-2, (File Nos. 333-68150 and 811-10481) filed on August 22, 2001.
'D''D' Incorporated by reference to Amendment No. 1 to the Fund's Registration
Statement, (File Nos. 333-68150 and 811-10481) filed January 23, 2002.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The approximate expenses in connection with the Offering, all of which are
being borne by the Registrant, are as follows:
Printing Costs.............................................. $
Legal Fees.................................................. $
Auditing Fees............................................... $
Registration Fees........................................... $
S&P and Moody's Rating Initial Costs........................ $
Miscellaneous............................................... $
--------
$
--------
--------
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Set forth below is the number of record holders as of , 2003, of each
class of securities of the Registrant:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares...............................................
Series T AMPS, par value $0.001 per share...................
Series TH AMPS, par value $0.001 per share..................
Series F AMPS, par value $0.001 per share...................
Series W AMPS, par value $0.001 per share...................
Series M28 AMPS, par value $0.001 per share.................
Series Preferred Shares, par value $0.001 per share.......
C-2
ITEM 29. INDEMNIFICATION
It is the Registrant's policy to indemnify its directors, officers,
employees and other agents to the maximum extent permitted by Section 2-418 of
the General Corporation Law of the State of Maryland as set forth in Article
NINTH of Registrant's Charter (the 'Charter'), and Article VIII, of the
Registrant's By-Laws. The liability of the Registrant's directors and officers
is dealt with in Article NINTH of Registrant's Charter. The liability of Cohen &
Steers Capital Management, Inc., the Registrant's investment manager (the
'Investment Manager'), for any loss suffered by the Registrant or its
stockholders is set forth in Section 5 of the Investment Management Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER
The description of the Investment Manager under the caption 'Management of
the Fund' in the Prospectus and in the Statement of Additional Information,
respectively, constituting Parts A and B, respectively, of this Registration
Statement are incorporated by reference herein.
The following is a list of the Directors and Officers of the Investment
Manager. None of the persons listed below has had other business connections of
a substantial nature during the past two fiscal years.
NAME TITLE
---- -----
Robert H. Steers. Co-Chairman and Co-Chief Executive Officer, Director
Martin Cohen......................... Co-Chairman and Co-Chief Executive Officer, Director
Joseph M. Harvey..................... President
Adam Derechin........................ Chief Operating Officer
John J. McCombe...................... Executive Vice President
Douglas R. Bond...................... Executive Vice President
Lawrence B. Stoller.................. Senior Vice President and General Counsel
William F. Scapell................... Senior Vice President, Director of Fixed Income Investments
Robert Becker........................ Senior Vice President
William J. Frischling................ Senior Vice President
James S. Corl........................ Senior Vice President
Kevin P. Norton...................... Senior Vice President
Jay J. Chen.......................... Senior Vice President
Victor M. Gomez...................... Senior Vice President and Chief Financial Officer
Rahul Bhattacharjee.................. Vice President and Director of Investment Research
Anthony Dotro........................ Vice President
Mark Freed........................... Vice President
Robert Tisler........................ Vice President
Norbert Berrios...................... Vice President
Terrance R. Ober..................... Vice President
Thomas Bohjalian..................... Vice President
David Oakes.......................... Vice President
Hoyt Peters.......................... Vice President
(table continued on next page)
C-3
(table continued from previous page)
NAME TITLE
---- -----
Salvatore Rappa...................... Vice President and Associate General Counsel
John McLean.......................... Vice President and Associate General Counsel
Blair Lewis.......................... Vice President
Scott Collins........................ Vice President
Rizaldi Santiago..................... Controller
Cohen & Steers Capital Management, Inc. acts as Investment Manager of, in
addition to the Registrant, the following registered investment companies:
Cohen & Steers Advantage Income Realty Fund, Inc.
Cohen & Steers Institutional Realty Shares, Inc.
Cohen & Steers Realty Income Fund, Inc.
Cohen & Steers Premium Income Realty Fund, Inc.
Cohen & Steers Realty Shares, Inc.
Cohen & Steers REIT and Preferred Income Fund, Inc.
Cohen & Steers REIT and Utility Income Fund, Inc.
Cohen & Steers Select Utility Fund, Inc.
Cohen & Steers Total Return Realty Fund, Inc.
Cohen & Steers Realty Focus Fund, Inc.
Cohen & Steers Utility Fund, Inc.
American Skandia Trust -- AST Cohen & Steers Realty Portfolio
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
and the Rules thereunder will be maintained as follows: journals, ledgers,
securities records and other original records will be maintained principally at
the offices of the Registrant's Administrator and Custodian, State Street Bank
and Trust Company. All other records so required to be maintained will be
maintained at the offices of Cohen & Steers Capital Management, Inc., 757 Third
Avenue, New York, New York 10017.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(1) The Registrant undertakes to suspend the offering of Preferred Shares
until the prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of this Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) The Registrant undertakes that:
a. for the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in
C-4
reliance upon Rule 430A and contained in the form of prospectus filed
by the Registrant pursuant to 497(h) under the 1933 Act shall be
deemed to be part of the Registration Statement as of the time it was
declared effective; and
b. for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, its Statement of Additional Information.
C-5
SIGNATURES
Pursuant to requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York and the State of New York, on the 29th day of September 2004.
COHEN & STEERS QUALITY INCOME
REALTY FUND, INC.
By: /s/ MARTIN COHEN
.........................................
MARTIN COHEN
PRESIDENT, TREASURER (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER) AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Director, Chairman and Secretary September 29, 2004
...........................................
(ROBERT H. STEERS)
/s/ MARTIN COHEN Director, President and Treasurer September 29, 2004
.........................................
(MARTIN COHEN)
* Director September 29, 2004
.........................................
(BONNIE COHEN)
* Director September 29, 2004
.........................................
(GEORGE GROSSMAN)
* Director September 29, 2004
.........................................
(RICHARD J. NORMAN)
Director September 29, 2004
.........................................
(FRANK K. ROSS)
* Director September 29, 2004
.........................................
(WILLARD H. SMITH, JR.)
*By: /s/ MARTIN COHEN
......................................
MARTIN COHEN
ATTORNEY-IN-FACT**
C-6
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as.................................. 'D'
The division sign shall be expressed as.................................. [div]
Characters normally expressed as superscript shall be preceded by........ 'pp'