As filed with the Securities and Exchange Commission on November 2, 2001
1933 Act File No.
1940 Act File No. 811-10491
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
[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. 3
NUVEEN REAL ESTATE INCOME FUND
Enter Name of Registrant as Specified in Charter
333 WEST WACKER DRIVE, CHICAGO, ILLINOIS 60606
Address of Principal Executive Offices (Number, Street, City, State and Zip
Code)
(312) 917-7700
Registrant's Telephone Number, including Area Code
GIFFORD R. ZIMMERMAN, ESQ. -- VICE PRESIDENT AND SECRETARY
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
Name and Address (Number, Street, City, State and Zip code) of Agent for Service
COPIES OF COMMUNICATIONS TO:
David A. Sturms, Esq Thomas S. Harman, Esq. Sarah Cogan, Esq.
Vedder, Price, Kaufman & Kammholz Morgan, Lewis & Bockius, LLP Simpson Thacher & Bartlett
222 N. LaSalle Street 1800 M Street, N.W. 425 Lexington Avenue
Chicago, IL 60601 Washington, D.C. 20036 New York, NY 10017
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
----------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT PRICE(1) REGISTRATION FEE(2)
----------------------------------------------------------------------------------------------------------------------------
Taxable Auctioned Preferred Shares
Series ................................. 40 $25,000 $1,000,000 $250
----------------------------------------------------------------------------------------------------------------------------
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(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to filing.
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES THAT: (1) FOR PURPOSES OF
DETERMINING ANY LIABILITY UNDER THE SECURITIES ACT OF 1933, THE INFORMATION
OMITTED FROM THE FORM OF PROSPECTUS FILED AS PART OF THIS REGISTRATION STATEMENT
IN RELIANCE UPON RULE 430A AND CONTAINED IN A FORM OF PROSPECTUS FILED BY THE
REGISTRANT PURSUANT TO RULE 424(b)(1) OR (4) OR 497(h) UNDER THE SECURITIES ACT
SHALL BE DEEMED TO BE PART OF THIS REGISTRATION STATEMENT AS OF THE TIME IT WAS
DECLARED EFFECTIVE. (2) FOR THE PURPOSE OF DETERMINING ANY LIABILITY UNDER THE
SECURITIES ACT OF 1933, 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.
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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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 2001
PROSPECTUS
$
NUVEEN REAL ESTATE INCOME FUND
TAXABLE AUCTIONED PREFERRED SHARES ("TAPS(R)")
SHARES SERIES
LIQUIDATION PREFERENCE $25,000 PER SHARE
------------------------
Nuveen Real Estate Income Fund (the "Fund") is a non-diversified,
closed-end management investment company. The Fund's primary investment
objective is high current income; and the Fund's secondary investment objective
is capital appreciation. Under normal market conditions, the Fund will invest at
least 90% of its total assets in income producing common stocks, preferred
stocks, convertible preferred stocks and debt securities issued by real estate
companies, such as real estate investment trusts ("REITs"); at least 80% of its
total assets in income producing equity securities issued by REITs; and up to
20% of its total assets in debt securities, including convertible debt
securities issued by real estate companies. In addition, the Fund will not
invest more than 25% of its total assets in non-investment grade preferred
stocks, convertible preferred stocks and debt securities (commonly known as
"junk bonds"); and 10% of its total assets in illiquid real estate securities.
There can be no assurance that the Fund will achieve its investment objectives.
The Fund's principal office is located at 333 West Wacker Drive, Chicago,
Illinois 60606, and its telephone number is (312) 917-7700. Investors are
advised to read this prospectus, which sets forth concisely the information
about the Fund that a prospective investor ought to know before investing, and
retain it for future reference. A statement of additional information dated
, 2001 containing additional information regarding the Fund has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference in its entirety into this prospectus. A copy of the
statement of additional information, the table of contents of which appears on
page of this prospectus, may be obtained without charge by calling the Fund at
(800) 257-8787. In addition, the SEC maintains a web site (http://www.sec.gov)
that contains the statement of additional information, material incorporated by
reference, and other information filed electronically with the SEC.
------------------------
INVESTING IN TAXABLE AUCTIONED PREFERRED SHARES ("TAPS") INVOLVES CERTAIN
RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 15.
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
------------------------
(R) Registered trademark of Nuveen Investments
PER SHARE TOTAL
--------- -----
Public Offering Price....................................... $25,000 $
Sales Load.................................................. $ $
Proceeds to Fund(1) (before expenses)....................... $ $
---------------
(1) Not including offering expenses payable by the Fund estimated to be
$ . The Fund and its investment advisor, Nuveen Institutional
Advisory Corp., ("NIAC"), have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended, and the Investment Company Act of 1940 (the "1940
Act"), as amended.
The underwriters are offering the shares of TAPS subject to various
conditions. The underwriters expect to deliver shares of TAPS in book-entry
form, through the facilities of the Depository Trust Company to purchasers on or
about , 2001.
------------------------
SALOMON SMITH BARNEY
NUVEEN INVESTMENTS
, 2001
The Fund is offering shares of Series TAPS. The shares are
referred to in this prospectus as "TAPS." The TAPS have a liquidation preference
of $25,000 per share, plus any accumulated, unpaid dividends. The TAPS also have
priority over the Fund's common shares as to distribution of assets as described
in this prospectus. The dividend rate for the initial dividend rate period will
be % for TAPS Series . The initial rate period is from the date of
issuance through , 2001. For subsequent rate periods, TAPS pay
dividends based on a rate set at auction, usually held every 28 days.
Prospective purchasers should carefully review the auction procedures described
in the prospectus and should note: (1) a buy order (called a "bid order") or
sell order is a commitment to buy or sell TAPS based on the results of an
auction; (2) auctions will be conducted by telephone; and (3) purchases and
sales will be settled on the next business day after the auction. TAPS are not
listed on an exchange. You may only buy or sell TAPS through an order placed at
an auction with or through a broker-dealer that has entered into an agreement
with the auction agent and the Fund, or in a secondary market maintained by
certain broker-dealers. These broker-dealers are not required to maintain this
market, and it may not provide you with liquidity.
The TAPS 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.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE FUND HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Financial Highlights........................................ 7
The Fund.................................................... 8
Use of Proceeds............................................. 8
Capitalization.............................................. 9
Portfolio Composition....................................... 9
The Fund's Investments...................................... 10
Risk Factors................................................ 15
How the Fund Manages Risk................................... 21
Management of the Fund...................................... 21
Description of TAPS......................................... 24
The Auction................................................. 36
Description of Borrowings................................... 38
Description of Common Shares................................ 39
Certain Provisions in the Declaration of Trust.............. 39
Repurchase of Fund Shares; Conversion to Open-End Fund...... 40
Tax Matters................................................. 41
Custodian, Transfer Agent, Dividend Disbursing Agent and 42
Redemption Agent..........................................
Underwriting................................................ 43
Legal Opinions.............................................. 43
Available Information....................................... 44
Special Note Regarding Forward-Looking Statements........... 44
Table of Contents for the Statement of Additional 45
Information...............................................
Until , 2001, (25 days after the date of this prospectus),
all dealers that buy, sell or trade the TAPS, 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.
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to the
more detailed information included elsewhere in this prospectus and the Fund's
Statement Establishing and Fixing the Rights and Preferences of Taxable
Auctioned Preferred Shares (the "Statement") attached as Appendix A to the
statement of additional information. Capitalized terms used but not defined in
this prospectus shall have the meanings given to such terms in the Statement.
The Fund...................... Nuveen Real Estate Income Fund (the "Fund") is
a non-diversified, closed-end management
investment company. See "The Fund." The Fund's
common shares, $.01 par value ("Common
Shares"), are traded on the American Stock
Exchange under the symbol "JRS." See
"Description of Common Shares." As of
, 2001, the Fund had
Common Shares outstanding and
net assets of $ .
Investment Adviser and
Subadviser.................... Nuveen Institutional Advisory Corp. ("NIAC")
is the Fund's investment adviser and Security
Capital Research & Management Incorporated
("Security Capital") is the Fund's subadviser.
NIAC is a wholly owned subsidiary of Nuveen
and Security Capital is an indirect wholly
owned subsidiary of Security Capital Group
Incorporated ("SCGI"). Security Capital is a
registered investment adviser with
approximately $2.4 billion in assets under
management as of September 30, 2001, all of
which were real estate securities. Security
Capital has been investing in public real
estate securities since 1995, through the open
market purchase of real estate securities as
well as through the negotiation and
structuring of private placements of
convertible preferred real estate securities.
Investment Objectives and
Policies...................... The Fund's primary investment objective is
high current income. Capital appreciation is a
secondary investment objective. The Fund's
investment objectives and certain investment
policies are considered fundamental and may
not be changed without shareholder approval.
See "The Fund's Investments."
Under normal market conditions, the Fund will
invest at least 90% of its total assets in
income-producing common stocks, preferred
stocks, convertible preferred stocks and debt
securities issued by real estate companies,
such as REITs. At least 80% of the Fund's
total assets will be invested in
income-producing equity securities issued by
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 markets. The Fund may invest
up to 20% of its total assets in debt
securities, including convertible debt
securities, issued or guaranteed by real
estate companies.
It is the Fund's intention to initially invest
approximately:
- 55% of its total assets in common stocks
issued by real estate companies;
- 40% of its total assets in preferred stocks
issued by real estate companies; and
1
- 5% of its total assets in convertible
preferred stocks issued by real estate
companies.
The actual percentage of common, preferred and
convertible preferred stocks and debt
securities in the Fund's portfolio may vary
over time.
The preferred stocks, convertible preferred
stocks and debt securities in which the Fund
may invest are sometimes collectively referred
to in this Prospectus as "Ratable Securities."
The Fund will not invest more than 25% of its
total assets in Ratable Securities of below
investment grade quality. Investment grade
quality Ratable Securities are those that have
received a rating no lower than Baa or BBB by
Moody's Investor Service, Inc. ("Moody's"),
Standard & Poor's, a division of the
McGraw-Hill Companies ("S&P"), or Fitch IBCA,
Inc. ("Fitch"). The Fund will not invest more
than 10% of its total assets in illiquid real
estate securities. The Fund will not enter
into short sales or invest in derivatives,
except as described in this Prospectus in
connection with interest rate swap or interest
rate cap transactions. See "Use of Leverage"
and "Interest Rate Transactions." The Fund
will not invest in real estate securities that
are controlled by Security Capital Group
Incorporated, an affiliate of the Fund's
investment subadviser, or its affiliates. See
"Management of the Fund -- Investment Adviser
and Subadviser." All of the Fund's investments
will be in securities of U.S. issuers and the
Fund will not invest more than 10% of its
total assets in the securities of any one
issuer.
A real estate company generally derives at
least 50% of its revenue from the ownership,
construction, financing, management or sale of
commercial, industrial or residential real
estate (or that has at least 50% of its assets
invested in such real estate). A common type
of real estate-company, a REIT, is a company
that pools investors' funds for investment
primarily in income-producing real estate or
in real estate related loans (such as
mortgages) or other interests. Therefore, a
REIT normally derives its income from rents or
from interest payments, and may realize
capital gains by selling properties that have
appreciated in value. A REIT is not taxed on
income distributed to shareholders if it
complies with several requirements relating to
its organization, ownership, assets and income
and a requirement that it distribute to its
shareholders at least 90% of its taxable
income (other than net capital gains) for each
taxable year and otherwise complies with the
requirements of the Internal Revenue Code of
1986, as amended (the "Code"). As a result,
REITs generally pay relatively high dividends
(as compared to other types of companies) and
the Fund intends to use these REIT dividends
in an effort to meet its primary objective of
high current income.
There can be no assurance that the Fund's
investment objectives will be achieved. See
"The Fund's Investments."
2
Use of Leverage............... The Fund intends to use financial leverage,
including issuing TAPS, for investment
purposes. The Fund currently anticipates its
use of leverage to represent approximately 30%
(and in no event exceeding 50%) of its total
assets, including the proceeds of such
leverage. In addition to issuing of TAPS, the
Fund may make further use of financial
leverage through borrowing, including the
issuance of commercial paper or notes.
Throughout this Prospectus, commercial paper,
notes or other borrowings sometimes may be
referred to as "Borrowings." Any Borrowings
will likely have seniority over the TAPS.
Payments to holders of TAPS in liquidation or
otherwise will be subject to the prior payment
of all outstanding indebtedness, including
Borrowings.
Interest Rate Transactions.... In connection with the Fund's anticipated use
of leverage through the issuance of TAPS or
through Borrowings, 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
TAPS or any variable rate Borrowings. The
payment obligations would be based on the
notional amount of the swap. In an interest
rate cap, the Fund would pay a premium to the
counterparty to the interest rate cap and, to
the extent that a specified variable rate
index exceeds a predetermined fixed rate,
would receive from the counterparty payments
of the difference based on the notional amount
of such cap. 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 any
interest rate swap or cap transactions having
a notional amount that exceeded the
outstanding amount of the Fund's leverage.
The Offering.................. The Fund is offering shares of
Series TAPS each at a purchase price
of $25,000 per share. TAPS are being offered
by the underwriters listed under
"Underwriting."
Risk Factors Summary.......... Risk is inherent in all investing. Therefore,
before investing you should consider certain
risks carefully when you invest in the Fund.
The primary risks of investing in TAPS are:
- if an auction fails you may not be able to
sell some or all of your shares;
- because of the nature of the market for
TAPS, you may receive less than the price
you paid for your shares if you sell them
outside of the auction, especially when
market interest rates are rising;
- a rating agency could downgrade TAPS, which
could affect liquidity;
3
- the Fund may be forced to redeem your shares
to meet regulatory or rating agency
requirements or may voluntarily redeem your
shares in certain circumstances;
- in extraordinary circumstances the Fund may
not earn sufficient income from its
investments to pay dividends;
- the TAPS will be junior to any Borrowings;
- any Borrowings may constitute a substantial
lien and burden on the TAPS by reason of its
prior 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 TAPS or purchase TAPS 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.
For additional general risks of investing in
the Fund, see "Risk Factors -- General Risks
of Investing in the Fund" below.
Trading Market................ TAPS are not listed on an exchange. Instead,
you may buy or sell TAPS at an auction that
normally is held weekly by submitting orders
to a broker-dealer that has entered into an
agreement with the auction agent and the Fund
(a "Broker-Dealer"), or to a broker-dealer
that has entered into a separate agreement
with a Broker-Dealer. In addition to the
auctions, Broker-Dealers and other
broker-dealers may maintain a secondary
trading market in TAPS outside of auctions,
but may discontinue this activity at any time.
There is no assurance that a secondary market
will provide shareholders with liquidity or
that the trading price in any secondary market
would be $25,000. You may transfer shares
outside of auctions only to or through a
Broker-Dealer, or a broker-dealer that has
entered into a separate agreement with a
Broker-Dealer.
The first auction date for the TAPS will be
, 2001, the business day before
the dividend payment date for the initial rate
period for the TAPS. The start date for
subsequent rate periods normally will be the
business day following the auction date unless
the then-current rate period is a special rate
period, or the day that normally would be the
auction date or the first day of the
subsequent rate period is not a business day.
Dividends and Rate Periods.... The table below shows the dividend rate for
the initial rate period of the TAPS offered in
this prospectus. For subsequent rate periods,
TAPS will pay dividends based on a rate set at
auctions, normally held every 28 days. In most
instances dividends are also paid every 28
days, on the day following the end of the rate
period. The Applicable Rate that results from
an Auction will not be lower than 80% of the
applicable AA Composite Commercial Paper Rate
(the "Minimum Rate") or greater than 150% (the
"Maximum Rate") of 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) at the close of business on
the Business Day
4
next preceding such Auction Date. See
"Description of TAPS -- Dividends and Dividend
Periods -- Determination of Dividend Rate" and
"The Auction."
The table below also shows the date from which
dividends on the TAPS will accumulate at the
initial rate, the dividend payment date for
the initial rate period and the day on which
dividends will normally be paid. If the day on
which dividends otherwise would be paid is not
a business day, then dividends will be paid on
the first business day that falls after that
day.
Finally, the table below shows the number of
days of the initial rate period for the TAPS.
Subsequent rate periods generally will be 28
days. The dividend payment date for special
rate periods of more than 28 days will be set
out in the notice designating a special rate
period. See "Description of TAPS -- Dividends
and Dividend Periods -- Notification of
Dividend Periods."
DIVIDEND
PAYMENT SUBSEQUENT NUMBER OF
INITIAL DATE OF DATE FOR DIVIDEND DAYS OF
DIVIDEND ACCUMULATION INITIAL RATE PAYMENT INITIAL RATE
RATE AT INITIAL RATE* PERIOD* DAY PERIOD
-------- ---------------- ------------ ---------- ------------
-------------------------------------------------
* All dates are 2001.
Ratings....................... It is a condition of the Underwriter's
obligation to purchase the TAPS that the TAPS
require a rating of "Aaa" from Moody's and
[" " from ].
Restrictions on Dividend
Redemption and Other
Payments.................... If the Fund issues any senior securities
representing indebtedness (as defined in the
1940 Act), including any Borrowings, under the
1940 Act, the Fund would not be permitted to
declare any dividend on TAPS unless, after
giving effect to such dividend, asset coverage
with respect to the Fund's senior securities
representing indebtedness, including
Borrowings, if any, is at least 200%. In
addition, the Fund would not be permitted to
declare any distribution on or purchase or
redeem TAPS unless, after giving effect to
such distribution, purchase or redemption,
asset coverage with respect to the Fund's
senior securities representing indebtedness,
including Borrowings, if any, is at least
300%. Dividends or other distributions on or
redemptions or purchases of TAPS would also be
prohibited at any time that an event of
default under the Borrowings, if any, has
occurred and is continuing. See "Description
of TAPS -- Restrictions on Dividend,
Redemption and Other Payments."
Asset Maintenance............. The Fund must maintain Eligible Assets having
an aggregated Discounted Value at least equal
to the TAPS Basic Maintenance Amount as of
each Valuation Date. The Fund also must
maintain asset coverage for the TAPS on a
non-discounted basis of at least
5
200% as of the last business day of each
month. See "Description of TAPS -- Asset
Maintenance."
The Discount Factors and guidelines for
calculating the Discounted Value of the Fund's
portfolio for purposes of determining whether
the TAPS Basic Maintenance Amount has been
satisfied have been established by Moody's and
in connection with the Fund's
receipt from Moody's and of the
"Aaa" and " ", respectively,
Credit Rating with respect to the TAPS on
their Date of Original Issue.
The Fund estimates that on the Date of
Original Issue, the 1940 Act TAPS Asset
Coverage, based on the composition of its
portfolio as of , 2000, after
giving effect to the issuance of the TAPS
($ million) and the deduction of
sales loads and estimated offering expenses
for such shares ($ ), will be %.
In addition, there may be additional asset
coverage requirements imposed in connection
with any Borrowings.
Redemption.................... Although the Fund will not ordinarily redeem
TAPS shares, it may be required to redeem
shares if, for example, the Fund does not meet
an asset coverage ratio required by law or to
correct a failure to meet a rating agency
guideline in a timely manner. The Fund
voluntarily may redeem TAPS in certain
conditions. See "Description of
TAPS -- Redemption."
Liquidation Preference........ The liquidation preference of the shares of
each series of TAPS will be $25,000 per share
plus accumulated but unpaid dividends, if any,
thereon. See "Description of
TAPS -- Liquidation."
Voting Rights................. Except as otherwise indicated, holders of TAPS
have one vote per share and vote together with
holders of Common Shares as a single class.
In connection with the election of the Board
of Trustees, the holders of outstanding shares
of Preferred Shares, including TAPS, as a
class, shall be entitled to elect two trustees
of the Fund. The holders of outstanding shares
of Common Shares and preferred shares of
beneficial interest ("Preferred Shares"),
including TAPS, voting together, shall elect
the remainder. However, upon the Fund's
failure to pay dividends on the Preferred
Shares in an amount equal to two full years of
dividends, the holders of Preferred Shares
have the right to elect, as a class, the
smallest number of additional Trustees as
shall be necessary to assure that a majority
of the Trustees has been elected by the
holders of Preferred Shares. The terms of the
additional Trustees shall end when the Fund
pays or provides for all accumulated and
unpaid dividends. See "Description of
TAPS -- Voting Rights."
Federal Income Taxes.......... Distributions with respect to the TAPS will
generally be subject to U.S. federal income
taxation. Because the Fund's portfolio income
will consist principally of dividend income
from REITs, which is not eligible for a
dividends received deduction, capital gain and
interest income, corporate investors in the
TAPS generally will not be entitled to the 70%
dividends received deduction. The Internal
6
Revenue Service ("IRS") currently requires
that a regulated investment company, which 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 gain) based upon the percentage of
total dividends distributed to each class for
the tax year. Accordingly, the Fund intends
each year to allocate ordinary income
dividends and capital gain dividends between
its Common Shares and the TAPS in proportion
to the total dividends paid to each class
during or with respect to such year. See "Tax
Matters."
7
FINANCIAL HIGHLIGHTS
Information contained in the table below under the headings "Per Share
Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's investment
operations on , 2001 until , 2001. Since the Fund
was recently organized and commenced operations on , 2001, the
table covers approximately weeks of operations, during which a substantial
portion of the Fund's portfolio was held in temporary investments pending
investment in municipal bonds that meet the Fund's investment objectives and
policies. Accordingly, the information presented may not provide a meaningful
picture of the Fund's operating performances.
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE:
Net Asset Value, Beginning of Period......................
Net Investment Income..................................
Net Gains or Losses on Securities (Both Realized and
Unrealized)...........................................
Total From Investment Operations.....................
Offering Costs............................................
Net Asset Value, End of Period............................
Per Share Market Value, End of Period.....................
Total Return on Net Asset Value...........................
Total Investment Return on Market Value...................
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (In Thousands)..................
Ratio of Expenses to Average Net Assets Before
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets
Before Reimbursement...................................
Ratio of Expenses to Average Net Assets After
Reimbursement..........................................
Ratio of Net Investment Income to Average Net Assets After
Reimbursement..........................................
Portfolio Turnover Rate...................................
Average Commission Rate Paid..............................
---------------
* Annualized
8
THE FUND
The Fund is a non-diversified, closed-end management investment company
registered under the 1940 Act. The Fund was organized as a Massachusetts
business trust on August 27, 2001 pursuant to a Declaration of Trust (the
"Declaration") governed by the laws of the Commonwealth of Massachusetts. On
, 2001, the Fund issued an aggregate of Common Shares
of beneficial interest, par value $.01 per share, pursuant to the initial public
offering thereof and commenced its operations. On , 2001, the
Fund issued an additional Common Shares in connection with the partial
exercise by the underwriters of the over-allotment option. The Fund's Common
Shares are traded on the American Stock Exchange (the "Exchange") under the
symbol "JRS." The Fund's principal office is located at 333 West Wacker Drive,
Chicago, Illinois 60606, and its telephone number is (800) 257-8787.
The following provides information about the Fund's outstanding shares as
of , 2001:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
-------------- ---------- --------------- -----------
Common Shares............................................ unlimited 0
TAPS..................................................... unlimited 0 0
Series................................................. 10,000 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ after
payment of the sales load and estimated offering costs.
The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objectives and policies as stated below, as soon as
practicable. It is anticipated that, under normal market conditions, such
investments will be completed no later than one month after the completion of
the offering. The Fund's actual investment timetable will depend on the
availability of such investments and other market conditions. Pending such
investment, it is anticipated that the proceeds will be invested in short-term
debt securities.
9
CAPITALIZATION
CAPITALIZATION
The following table sets forth the capitalization of the Fund as of
, 2001, and as adjusted on , 2001, to give effect to
the issuance of the shares of TAPS offered hereby.
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)}
SHAREHOLDERS' EQUITY:
Preferred Shares, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no
shares issued, and; shares issued, as adjusted,
respectively)..........................................
Common Shares, $.01 par value per share; unlimited shares
authorized, shares outstanding*...................
Paid-in surplus...........................................
Balance of undistributed net investment income............
Accumulated net realized gain (loss) from investment
transactions...........................................
Net unrealized appreciation (depreciation) of
investments............................................
Net assets................................................
---------------
* None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of , 2001, approximately % of the market value of
the Fund's portfolio was invested in . The following table sets forth
certain information with respect to the composition of the Fund's investment
portfolio as of , 2001.
10
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is high current income. Capital
appreciation is a secondary investment objective. The Fund has a policy of
concentrating its investments in the U.S. real estate industry and not in any
other industry. There can be no assurance that the Fund's investment objectives
will be achieved.
Under normal market conditions, the Fund:
- will invest at least 90% of its total assets in income producing equity
and debt securities of real estate companies. These equity securities can
consist of (i) common stocks, (ii) preferred stocks, (iii) rights or
warrants to purchase common stocks and preferred stocks, and (iv)
convertible preferred stocks;
- will invest at least 80% of its total assets in income producing equity
securities issued by REITs;
- will invest at least 40% of its total assets in common stocks; and
- may invest up to 20% of its total assets in debt securities, including
convertible debt securities, issued or guaranteed by real estate
companies.
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 markets.
It is the Fund's intention to initially invest approximately:
- 55% of its total assets in common stocks issued by real estate companies;
- 40% of its total assets in preferred stocks issued by real estate
companies; and
- 5% of its total assets in convertible preferred stocks issued by real
estate companies.
The actual percentage of common, preferred and convertible preferred
stocks, rights and warrants and debt securities in the Fund's portfolio may vary
over time based on Security Capital's assessment of market conditions.
The Fund will not invest more than 25% of its total assets in
non-investment grade Ratable Securities. Investment grade quality Ratable
Securities are those that have received a rating no lower than Baa or BBB by
Moody's, S&P or Fitch. See Appendix B in the Statement of Additional information
for a description of security ratings.
The Fund will not invest more than 10% of its total assets in illiquid real
estate securities. All of the Fund's investments will be in securities of U.S.
issuers, and the Fund will not invest more than 10% of its total assets in the
securities of any 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 "Use of Leverage" and "Interest Rate
Transactions." The Fund will not invest in real estate securities that are
controlled by SCGI or its affiliates.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and Preferred
Shares, including TAPS voting together as a single class, and of the holders of
a "majority of the outstanding" TAPS, if any, voting as a separate class. A
"majority of the outstanding" Common Shares means (i) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are present
or represented by proxy, or (ii) more than 50% of the shares, whichever is less.
See "Description of Shares -- TAPS -- Voting Rights" and the Statement of
Additional Information under "Description of Shares -- TAPS -- Voting Rights"
for additional information with respect to the voting rights of holders of TAPS.
11
INVESTMENT PROCESS
The organization and investment processes of Security Capital reflect its
belief that superior investment results are achieved through a dedication to
proprietary, fundamental research its investment process focuses on three
fundamental research disciplines that it believes play an important role in the
performance and pricing of real estate companies:
- real estate research;
- company analysis;
- and market strategy.
These are highly specialized disciplines and each impacts the performance
of real estate companies and the ultimate pricing of their securities. The
investment process integrates these three disciplines under the broad direction
of Security Capital's Portfolio Management Committee, the decision-making body
for investment strategies.
Real Estate Research. Research analysts focus on understanding the market
pressures and factors that affect rent growth, occupancy and development. This
understanding provides perspectives on future supply and demand trends for
property types in various markets and the relative impact for different
companies.
Company Analysis. Investment analysts focus on analyzing real estate
companies within Security Capital's defined universe of investments and modeling
their cash flow potential. They form a complete assessment of the company's
assets, operating management team and strategies through company and property
visits, careful scrutiny of regulatory filings and fieldwork. The recurring
output of the investment analysts includes a detailed five-year cash flow
forecast, an analysis of net asset value and a detailed qualitative assessment
of a company.
Market Strategy. Market strategy focuses on establishing appropriate cost
of capital thresholds for pricing real estate companies in Security Capital's
coverage universe of the companies. This effort requires consideration of the
risks underlying the securities as well as the appetite for and pricing of risk
in the broader equity and capital markets. With this understanding, discount
rates and terminal multiples are set that govern the key discounted cash flow
models and other valuation models employed. The definition and execution of
trading strategies is also an important part of market strategy.
Portfolio Construction. All investment decisions are directed by a
committee of senior investment professionals -- the Portfolio Management
Committee. The Committee meets formally on a weekly basis and informally
throughout the week to evaluate emerging real estate research and company
analysis, as well as key recurring reports, to create price forecasts to produce
a target portfolio for the Fund. This target portfolio integrates the critical
real estate and capital market expertise that helps to identify the most
attractive investment opportunities.
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 Statement of Additional Information.
Real Estate Companies. Under normal market conditions, the Fund will
invest at least 90% of its total assets in income producing common stocks,
preferred stocks, convertible preferred stocks and debt securities issued by
real estate companies, such as REITs. For purposes of the Fund's investment
policies, a real estate company is a company 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.
12
Real Estate Investment Trusts (REITs). Under normal market conditions, the
Fund will invest at least 80% of its total assets in income producing equity
securities issued by REITs. A REIT is a real estate company that pools
investors' funds for investment primarily in income producing real estate or in
real estate related loans (such as mortgages) or other interests. Therefore, a
REIT normally derives its income from rents or from interest payments, and may
realize capital gains by selling properties that have appreciated in value. A
REIT is not taxed on income distributed to shareholders if it complies with
several requirements relating to its organization, ownership, assets and income
and a requirement that it distribute to its shareholders at least 90% of its
taxable income (other than net capital gains) for each taxable year and
otherwise complies with the requirements of the Code. As a result, REITs tend to
pay relatively higher dividends than other types of companies, and the Fund
intends to use these REIT dividends in an effort to meet the high current income
goal of its investment objectives.
REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
Preferred Stocks. The Fund may invest in preferred stocks issued by real
estate companies. Preferred stocks pay fixed or floating rate dividends to
investors, and have a "preference" over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters.
Debt Securities. The Fund may invest up to 20% of its total assets in debt
securities, including convertible debt securities, issued or guaranteed by real
estate companies.
Lower-Rated Securities. The Fund will not invest more than 25% of its
total assets in Ratable Securities of below investment grade quality. Securities
of below grade investment quality (Ba/BB or below) are commonly referred to as
junk bonds. Securities of below investment grade quality are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal. The Fund may only invest in high yield securities
that are rated CCC or higher by S&P, rated Caa or higher by Moody's, or rated
CCC or higher by Fitch, or unrated securities determined by Security Capital to
be of comparable quality. The issuers of these securities have a currently
identifiable vulnerability to default as to payment of principal and interest
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
which are in default as to payment of principal and interest at the time of
purchase. For a description of security ratings, see Appendix B of the Statement
of Additional Information.
Illiquid Securities. The Fund will not invest more than 10% of its total
assets in illiquid real estate securities (i.e., securities that are not readily
marketable). For purposes of this restriction, illiquid securities include, but
are not limited to, restricted securities (securities the disposition of which
is restricted under the federal securities laws), securities that may only be
resold pursuant to Rule 144A under the Securities Act of 1933, as amended (the
"Securities Act"), but that are deemed to be illiquid, and repurchase agreements
with maturities in excess of seven days. The Board of Trustees or its delegate
has the ultimate authority to determine, to the extent permissible under the
federal securities laws, which securities are liquid or illiquid for purposes of
this 10% limitation. The Board of Trustees has delegated to Security Capital and
NIAC the day-to-day determination of the illiquidity of any security held by the
Fund, although it has retained oversight and ultimate responsibility for such
determinations. Although no definitive liquidity criteria are used, the Board of
Trustees has directed Security Capital and NIAC to look for such factors as (i)
the nature of the market for a security (including the institutional private
resale market; the frequency of trades and quotes for the security; the number
of dealers willing to purchase or sell the security; the amount of time normally
needed to dispose of the security; and the method of soliciting offers and the
mechanics of transfer), (ii) the terms of certain
13
securities or other instruments allowing for the disposition to a third party or
the issuer thereof (e.g., certain repurchase obligations and demand
instruments), and (iii) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than that which prevailed when it decided to
sell. Illiquid securities will be priced at fair value as determined in good
faith by the Board of Trustees or its delegate. If, through the appreciation of
illiquid securities or the depreciation of liquid securities, the Fund should be
in a position where more than 10% of the value of its net assets are invested in
illiquid securities, including restricted securities which are not readily
marketable, the Fund will take such steps as is deemed advisable, if any, to
protect liquidity.
Defensive Position. Upon Security Capital's recommendation, during
temporary defensive periods and in order to keep the Fund's cash fully invested,
including the period during which the net proceeds of the offering are being
invested, the Fund may deviate from its investment objectives and invest all or
any portion of its net assets in investment grade debt securities, without
regard to whether the issuer is a real estate company. In such a case, the Fund
may not pursue or achieve its investment objectives.
Other Investments. The Fund's cash reserves, held to provide sufficient
flexibility to take advantage of new opportunities for investments and for other
cash needs, will be invested in money market instruments. Money market
instruments in which the Fund may invest its cash reserves will generally
consist of obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities and such obligations which are subject to repurchase
agreements and commercial paper. See "Investment Policies and Techniques" in the
Statement of Additional Information.
Portfolio Turnover. The Fund may engage in portfolio trading when
considered appropriate, but short-term trading will not be used as the primary
means of achieving the Fund's investment objectives. Although the Fund cannot
accurately predict its annual portfolio turnover rate, it is not expected to
exceed 50% under normal circumstances. However, there are no limits on the rate
of portfolio turnover, and investments may be sold without regard to length of
time held when, in the opinion of Security Capital, investment considerations
warrant such action. A higher turnover rate results in correspondingly greater
brokerage commissions and other transactional expenses which are borne by the
Fund. High portfolio turnover may result in the realization of net short-term
capital gains by the Fund which, when distributed to shareholders, will be
taxable as ordinary income. See "Tax Matters."
USE OF LEVERAGE
The Fund intends to use leverage through the issuance of TAPS, for
investment purposes. The Fund currently anticipates its use of leverage to
represent approximately 30% (and in no event to exceed 50%) of its total assets,
including the proceeds of such leverage. In addition to issuing TAPS, the Fund
may make further use of financial leverage through borrowing, including the
issuance of commercial paper or notes. See "Description of TAPS" and
"Description of Borrowings" below. The Fund employs financial leverage for the
purpose of acquiring additional income-producing investments when Security
Capital and NIAC believe that such use of proceeds will enhance the Fund's net
income. The amount of outstanding financial leverage may vary with prevailing
market or economic conditions. Leverage entails special risks. See "Risk
Factors -- Risks of Investing in TAPS -- Leverage Risk." The management fee paid
to Security Capital and NIAC will be calculated on the basis of the Fund's total
managed assets, including proceeds of financial leverage, so the fees will be
higher when leverage is utilized.
INTEREST RATE TRANSACTIONS
In connection with the Fund's anticipated use of leverage through its sale
of TAPS or Borrowings, the Fund may enter into interest rate swap or cap
transactions. Interest rate swaps involve the Fund's agreement
14
with the swap counterparty to pay a fixed rate payment in exchange for the
counterparty paying the Fund a variable rate payment that is intended to
approximate the Fund's variable rate payment obligation on TAPS or any variable
rate borrowing. The payment obligation would be based on the notional amount of
the swap.
The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount.
The Fund would use interest rate swaps or caps only with the intent to reduce or
eliminate the risk that an increase in short-term interest rates could have on
Common Share net earnings as a result of leverage.
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 in an aggregate notional amount that exceeds the
outstanding amount of the Fund's leverage.
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. Depending on the state of
interest rates in general, the Fund's use of interest rate swaps or caps could
enhance or harm the overall performance on the Common Shares. To the extent
there is a decline in interest rates, the value of the interest rate swap or cap
could decline, and could result in a decline in the net asset value of the
Common Shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
Common Share net earnings. If, on the other hand, short-term interest rates are
higher than the fixed rate of payment on the interest swap, the swap will
enhance Common Share net earnings. Buying interest rate caps could enhance the
performance of the Common Shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the Common Shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund would not enter into interest rate swap or cap
transactions in an aggregate notional amount that exceeds the outstanding amount
of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on TAPS or interest payments on Borrowings.
Depending on whether the Fund would be entitled to receive net payments from the
counterparty on the swap or cap, which in turn would depend on the general state
of short-term interest rates at that point in time, such a default could
negatively impact the performance of the Common Shares.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to sue the anticipated net receipts under the swap or cap
to offset the dividend payments on TAPS or interest payments on Borrowings.
Depending on whether the Fund would be entitled to receive net payments from the
counterparty on the swap or cap, which in turn would depend on the general state
of short-term rates at that point in time, such a default could negatively
impact the performance of the Common Shares.
Although this will not guarantee that the counterparty does not default the
Fund will not enter into an interest rate swap or cap transaction with any
counterparty that NIAC believes does not have the financial resources to honor
its obligation under the interest rate swap or cap transaction in an effort to
proactively protect the Fund's investments.
15
Although this will not guarantee that the counterparty does not default,
the Fund will not enter into an interest rate swap or cap transaction with any
counterparty that NIAC believes does not have the financial resources to honor
its obligation under the interest rate swap or cap transaction in an effort to
proactively protect the Fund's investments.
RISK FACTORS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing you should consider carefully the
following risks that you assume when you invest in TAPS.
RISKS OF INVESTING IN TAPS
Auction Risk. You may not be able to sell your TAPS shares at an auction
if the auction fails; that is, if there are more TAPS offered for sale than
there are buyers for those shares. Also, if you place hold orders (orders to
retain TAPS) at an auction only at a specified rate, and that bid rate exceeds
the rate set at the auction, you will not retain your TAPS. Finally, 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.
Secondary Market Risk. If you try to sell your TAPS between auctions, you
may not be able to sell any or all of your shares, or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated dividends.
If the Fund has designated a special rate period (a rate period of more than 28
days), changes in interest rates could affect the price you would receive if you
sold your shares in the secondary market. Broker-dealers that maintain a
secondary trading market for TAPS 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. TAPS are not registered
on a stock exchange or the NASDAQ stock market. If you sell your TAPS 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.
Accrued TAPS dividends, however, should at least partially compensate for the
increased market interest rates.
Ratings and Asset Coverage Risk. While Moody's and [ ] assign
ratings of "Aaa" or " " to TAPS, the ratings do not eliminate or necessarily
mitigate the risks of investing in TAPS. A rating agency could downgrade TAPS,
which may make your shares less liquid at an auction or in the secondary market,
though probably with higher resulting dividend rates. If a rating agency
downgrades TAPS, the Fund will alter its portfolio or redeem TAPS. The Fund may
voluntarily redeem TAPS under certain circumstances. See "Description of
TAPS -- Asset Maintenance" for a description of the asset maintenance tests the
Fund must meet.
Inflation Risk. Inflation is the reduction in the purchasing power of
money resulting from the increase in the price of goods and services. Inflation
risk is the risk that the inflation adjusted (or "real") value of your TAPS
investment or the income from that investment will be worth less in the future.
As inflation occurs, the real value of the TAPS and distributions declines. In
an inflationary period, however, it is expected that, through the auction
process, TAPS dividend rates would increase, tending to offset this risk.
Income Risk. The Fund's income is based primarily on the income it earns
from its investments, which vary widely over the short- and long-term. If the
Fund's income drops, over time the Fund's ability to make dividend payments with
respect to the TAPS may be impaired. Please see "-- General Risks of Investing
in the Fund" below for the general risks affecting the Fund.
Decline in Net Asset Value Risk. A material decline in the Fund's net
asset value may impair the Fund's ability to maintain required levels of asset
coverage. For a description of risks affecting the Fund, please see "-- General
Risks of Investing in the Fund" below.
16
Payment Restrictions. The Fund is prohibited from declaring, paying or
making any dividends or distributions on TAPS unless it satisfies certain
conditions. See "Description of TAPS -- Restrictions on Dividend, Redemption and
Other Payments." The Fund is also prohibited from declaring, paying or making
any dividends or distributions on Common Shares unless it satisfies certain
conditions. These prohibitions on the payment of dividends or distributions
might impair the Fund's ability to maintain its qualification as a regulated
investment company for federal income tax purposes. The Fund intends, however,
to redeem shares of TAPS if necessary to comply with the asset coverage
requirements. There can be no assurance, however, that such redemptions can be
effected in time to permit the Fund to distribute its income as required to
maintain its qualification as a regulated investment company under the Code. See
"Federal Taxation -- Federal Income Tax Treatment of the Fund."
Leverage Risk. The Fund uses financial leverage for investment purposes in
an amount currently anticipated to represent approximately 30% (and in no event
exceeding 50%) of its total assets (including the proceeds from such financial
leverage). In addition to issuing TAPS, the Fund may make further use of
financial leverage through borrowing, including the issuance of commercial paper
or notes. The Fund may also borrow funds (a) in connection with a loan made by a
bank or other party that is privately arranged and not intended to be publicly
distributed or (b) in an amount equal to up to 5% of its total assets for
temporary purposes only.
If the Fund issues any senior securities representing indebtedness (as
defined in the 1940 Act), including any Borrowings, under the requirements of
the 1940 Act, the value of the Fund's total assets, less all liabilities and
indebtedness of the Fund not represented by such senior securities, must be at
least equal, immediately after any such senior securities representing
indebtedness, to 300% of the aggregate value of such senior securities including
any Borrowings. Upon the issuance of TAPS, the value of the Fund's total assets,
less all liabilities and indebtedness of the Fund not represented by senior
securities must be at least equal, immediately after the issuance of the TAPS,
to 200% of the aggregate value of any senior securities, including any
Borrowings, and the TAPS.
If the Fund seeks an investment grade rating from one or more nationally
recognized statistical rating organizations for any commercial paper and notes
(which the Fund expects to do if it issues any such commercial paper or notes),
asset coverage or portfolio composition provisions in addition to and more
stringent than those required by the 1940 Act may be imposed in connection with
the issuance of such a rating. In addition, restrictions may be imposed on
certain investment practices in which the Fund may otherwise engage. Any lender
with respect to borrowings by the Fund may require additional asset coverage and
portfolio composition provisions as well as restrictions on the Fund's
investment practices.
The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. The
money borrowed pursuant to any Borrowings may constitute a substantial lien and
burden on the TAPS by reason of their prior claim against the income of the Fund
and against the net assets of the Fund in liquidation. The Fund may not be
permitted to declare dividends or other distributions, including shares with
respect to TAPS or purchase or redeem shares, including TAPS unless (i) at the
time thereof the Fund meets certain asset coverage requirements and (ii) there
is no event of default under any Borrowings, that is continuing. See
"Description of TAPS -- Restrictions on Dividend, Redemption and Other
Payments." In the event of a default under any Borrowings, the lenders may have
the right to cause a liquidation of the collateral (i.e., sell portfolio
securities) and if any such default is not cured, the lenders may be able to
control the liquidation as well.
The Fund reserves the right at any time, if it believes that market
conditions are appropriate, to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted by the 1940 Act and existing agreements between the Fund and
third parties.
Because the fee paid to Security Capital and NIAC will be calculated on the
basis of total managed assets, the fee will be higher when leverage is utilized,
giving Security Capital and NIAC an incentive to utilize leverage.
17
GENERAL RISKS OF INVESTING IN THE FUND
NEWLY-ORGANIZED
The Fund is a newly-organized, non-diversified closed-end management
investment company.
INVESTMENT RISK
The prices of the common stocks of real estate companies, including REITs,
and other securities in which the Fund invests, will fluctuate from day to day
and may -- in either the near term or over the long run -- decline in value.
Preferred stocks and debt securities are generally more sensitive to changes in
interest rates than common stocks.
Interest rate risk is the risk that fixed-income investments such as
preferred stocks and debt securities, and to a lesser extent dividend-paying
common stocks such as REIT common stocks, will decline in value because of
changes in market interest rates. When interest rates rise, the market value of
such securities generally will fall. The Fund's investment in such securities
means that the net asset value of the Fund will tend to decline if market
interest rates rise.
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, it is also subject to the risks associated with the direct ownership
of real estate. These risks include:
- declines in the value of real estate
- risks related to general and local economic conditions
- possible lack of availability of mortgage funds
- overbuilding
- extended vacancies of properties
- increased competition
- increases in property taxes and operating expenses
- changes in zoning laws
- losses due to costs resulting from the clean-up of environmental problems
- liability to third parties for damages resulting from environmental
problems
- casualty or condemnation losses
- limitations on rents
- changes in neighborhood values and the appeal of properties to tenants
- changes in interest rates
Thus, the value of the Fund's portfolio may change at different rates
compared to the value of the portfolio of a registered investment company with
investments in a mix of different industries and will depend on the general
condition of the economy. An economic downturn could have a material adverse
effect on the real estate markets and on real estate companies in which the Fund
invests, which in turn could result in the Fund not achieving its investment
objectives.
General Real Estate Risks. Real property investments are subject to
varying degrees of risk. The yield 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
18
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 economy. A retail property may be adversely affected by the growth of
alternative forms of retailing, bankruptcy, decline in drawing power, 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 an anchor or 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 relenting 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
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
19
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.
Other factors may contribute to the riskiness of real estate investments.
Insurance Issues. Certain of the real estate 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, would
impact the Fund's investment performance.
Financial Leverage. Real estate companies, including REITs, may be highly
leveraged and financial covenants may affect the ability of those companies 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 and 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.
20
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 but which fails to qualify as a REIT. In the
event of any such unexpected failure to qualify as a REIT, the real estate
company would be subject to corporate-level taxation, significantly reducing the
return to the Fund on its investment in such company. REITs could possibly fail
to qualify for tax-free pass-through of income under the Code, or to maintain
their exemptions from registration under the 1940 Act. The above factors may
also adversely affect a borrower's or a lessee's ability to meet its obligations
to the REIT. In the event of a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a creditor or lessor and may incur
substantial costs associated with protecting its investments.
INTEREST RATE TRANSACTIONS RISK
The Fund may enter into a swap or cap transaction to attempt to protect
itself from increasing dividend or interest expenses resulting from increasing
short-term interest rates. A decline in interest rates may result in a decline
in the value of the swap or cap, which may result in a decline in the net asset
value of the Fund. See "Interest Rate Transactions."
RISKS OF INVESTMENT IN LOWER-RATED SECURITIES
Fixed-income securities of below grade investment quality (Ba/BB or below)
are commonly referred to as junk bonds. Securities of below investment grade
quality are regarded as having predominately speculative characteristics with
respect to capacity to pay interest and repay principal.
Lower-rated securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of lower-rated securities have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. Yields on
lower-rated securities will fluctuate. If the issuer of lower-rated securities
defaults, the Fund may incur additional expenses to seek recovery.
The secondary markets in which lower-rated securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the net asset value of the Fund. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities, and adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon. New laws and
proposed new laws may adversely impact the market for lower-rated securities.
The Fund may only invest in high yield securities that are rated CCC or
higher by S&P, rated Caa or higher by Moody's, or rated CCC or higher by Fitch,
or unrated securities determined by Security Capital 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 which are in default at the time of purchase.
NON-DIVERSIFICATION
Because the Fund is classified as "non-diversified" under the 1940 Act, it
can invest a greater portion of its assets in obligations of a single issuer. As
a result, the Fund will be more susceptible than a more widely diversified fund
to any single corporate, economic, political or regulatory occurrence. See "The
Fund's Investments." In addition, the Fund is still required to satisfy certain
asset diversification rules in order to qualify as a regulated investment
company for federal income tax purposes.
21
RECENT DEVELOPMENTS
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, the U.S. securities markets were closed for a
four day period. These terrorist attacks and related events have led to
increased short-term market volatility and may have long- term effects on U.S.
and world economies and markets. In addition, the potential adverse impact on
Fund service providers may affect the Fund's operations, although the Fund is
not aware at this time of significant operating difficulties at its service
providers.
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 of the outstanding Common Shares and Preferred Shares, including TAPS,
voting together as a single class, and the approval of the holders of a majority
of the outstanding Preferred Shares, including TAPS, voting as a separate class.
The Fund is subject to guidelines which are more limiting than the investment
restriction set forth above in order to obtain and maintain ratings from Moody's
or [ ] on the TAPS. See "Investment Objectives -- Investment Restrictions"
in the statement of additional information for a complete list of the
fundamental and non-fundamental investment policies of the Fund.
LIMITED BORROWINGS
Under the requirements of the 1940 Act, the Fund, immediately after
issuance of any senior security representing indebtedness, including Borrowings,
must have an asset coverage of at least 300%. With respect to any senior
securities, including Borrowings, asset coverage means the ratio which the value
of the total assets of the Fund, less all liabilities and indebtedness not
represented by senior securities, including any Borrowings, bears to the
aggregate amount of such senior securities, including Borrowings issued by the
Fund. Certain types of Borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverages or portfolio
composition or otherwise. In addition, the Fund may be subject to certain
restrictions imposed by guidelines of one or more rating agencies which may
issue ratings for commercial paper or notes issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Board of Trust is responsible for the management of the Fund, including
supervision of the duties performed by NIAC and Security Capital. There are
seven trustees of the Fund, one of whom is an "interested person" (as defined in
the 1940 Act) and six of whom are not "interested persons." The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
INVESTMENT ADVISER AND SUBADVISER
NIAC, 333 West Wacker Drive, Chicago, Illinois 60606, serves as the
investment adviser to the Fund. NIAC serves as investment adviser to investment
portfolios with approximately $2.4 billion in assets under management as of
September 30, 2001. See the Statement of Additional Information under
"Investment Advisers."
NIAC is responsible for the selection of the subadviser and ongoing
monitoring of the subadviser, managing the Fund's business affairs and providing
certain clerical, bookkeeping and other administrative services.
22
NIAC is a wholly owned subsidiary of Nuveen, 333 West Wacker Drive,
Chicago, Illinois 60606. Founded in 1898, Nuveen and its affiliates have over
$75 billion of net assets under management or surveillance. Nuveen is a
subsidiary of The John Nuveen Company which, in turn, is a majority-owned
subsidiary of The St. Paul Companies, Inc., a publicly-traded company which is
principally engaged in providing property-liability insurance through
subsidiaries.
Security Capital, 11 South LaSalle Street, 2nd Floor, Chicago, Illinois
60603, is the subadviser to the Fund. Security Capital is an indirect, wholly
owned subsidiary of SCGI, a publicly traded company that is one of the country's
leading real estate investors and operators, with interests in companies having
a total market capitalization of $19 billion as of September 30, 2001.
Security Capital, which is registered as an investment adviser with the
Securities and Exchange Commission, commenced operations in January 1995 and had
approximately $2.4 billion in assets under management as of September 30, 2001.
A team of full-time Security Capital professionals, working together as the
Fund's Portfolio Management Committee, is primarily responsible for overseeing
the day-to-day operations of the Fund. See "The Fund's Investments -- Investment
Process."
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between NIAC and the Fund,
the Fund has agreed to pay for the services and facilities provided by NIAC an
annual management fee, payable on a monthly basis, according to the following
schedule:
AVERAGE DAILY MANAGED ASSETS(1) MANAGEMENT FEE
------------------------------- --------------
Up to $500 million.......................................... .9000%
$500 million to $1 billion.................................. .8750%
$1 billion to $1.5 billion.................................. .8500%
$1.5 billion to $2 billion.................................. .8200%
$2 billion and over......................................... .8000%
---------------
(1) Net assets including assets attributable to TAPS and the principal amount of
Borrowings.
Security Capital will receive from NIAC a percent of the management fee
(net of the reimbursements described below) according to the following schedule:
PERCENTAGE OF
MANAGEMENT FEE
--------------
Up to $125 million.......................................... 50.0%
$125 million to $150 million................................ 47.5%
$150 million to $175 million................................ 45.0%
$175 million to $200 million................................ 42.5%
$200 million and over....................................... 40.0%
In addition to the fee of NIAC, the Fund pays all other costs and expenses
of its operations, including compensation of its trustees (other than those
affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses of preparing, printing and distributing shareholder reports,
notices, proxy statements and reports to governmental agencies, and taxes, if
any.
23
For the first ten years of the Fund's operation, NIAC has contractually
agreed to reimburse the Fund for fees and expenses in the amounts, and for the
time periods, set forth below:
PERCENTAGE REIMBURSED
(AS A PERCENTAGE OF AVERAGE
YEAR ENDING NOVEMBER 30, DAILY NET ASSETS)*
------------------------ ---------------------------
2001**................ 0.30%
2002.................. 0.30%
2003.................. 0.30%
2004.................. 0.30%
2005.................. 0.30%
2006.................. 0.30%
PERCENTAGE REIMBURSED
(AS A PERCENTAGE OF AVERAGE
YEAR ENDING NOVEMBER 30, DAILY NET ASSETS)*
------------------------ ---------------------------
2007.................. 0.25%
2008.................. 0.20%
2009.................. 0.15%
2010.................. 0.10%
2011.................. 0.05%
---------------
* Net assets including assets attributable to Preferred Shares and the
principal amount of debt, if any.
** From the commencement of operations.
NIAC has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond November 30, 2011.
LEGAL PROCEEDINGS
A lawsuit brought in June 1996 (Green et al. v. Nuveen Advisory Corp., et
al.) by certain individual common shareholders of six leveraged closed-end funds
sponsored by Nuveen is currently pending in federal district court. The
plaintiffs allege that the leveraged closed-end funds engaged in certain
practices that violated various provisions of the 1940 Act and common law. The
plaintiffs also alleged, among other things, breaches of fiduciary duty by the
funds' directors and Nuveen Advisory Corp. ("Nuveen Advisory), an affiliate of
NIAC, and various misrepresentations and omissions in prospectuses and
shareholder reports relating to the use of leverage through the issuance and
periodic auctioning of preferred stock and the basis of the calculation and
payment of management fees to Nuveen Advisory and Nuveen. Plaintiffs also filed
a motion to certify defendant and plaintiff classes. The defendants filed
motions to dismiss the entire lawsuit asserting that the claims are without
merit and to oppose certification of any classes.
On March 30, 1999, the court entered a memorandum opinion and order (1)
granting the defendants' motion to dismiss all of plaintiffs' counts against the
defendants other than Nuveen Advisory, (2) granting Nuveen Advisory's motion to
dismiss all of plaintiffs' counts against it other than breach of fiduciary duty
under Section 36(b) of the 1940 Act, and (3) denying the plaintiffs' motion to
certify a plaintiff class and a defendant class. No appeal was made by
plaintiffs of this decision, and the remaining Section 36(b) count against
Nuveen Advisory has proceeded through the discovery phase.
As to alleged damages, plaintiffs have claimed as damages the portion of
all advisory compensation received by Nuveen Advisory from the funds during the
period from June 21, 1995 to the present that is equal to the proportion of each
of such fund's preferred stock to its total assets. The preferred stock
constitutes approximately one third of the funds' assets so the amount claimed
would equal approximately one third of management fees received by Nuveen
Advisory for managing the funds during this period, or more than $60 million.
Nuveen Advisory believes that it has no liability and that plaintiffs have
suffered no damages and has filed a motion for summary judgment as to both
liability and damages. Plaintiffs have filed a partial motion for summary
judgment as to liability only. In a memorandum opinion and order dated September
6, 2001, the court granted Nuveen Advisory's motion for summary judgment and
denied plaintiffs' motion for partial summary judgment, thereby terminating the
litigation before the court. Plaintiffs appealed this decision on October 8,
2001.
While the Fund cannot assure you that the litigation will be decided in
Nuveen Advisory's favor upon appeal, NIAC believes a decision, if any, against
it would have no material adverse effect on the Fund, its Common Shares, or the
ability of NIAC to perform its duties under the investment management agreement.
24
DESCRIPTION OF TAPS
The following is a brief description of the terms of TAPS. This description
does not purport to be complete and is subject to and qualified in its entirety
by reference to the more detailed description of TAPS in the Fund's Statement
Establishing and Fixing the Rights and Preferences of Taxable Auctioned
Preferred Shares (the "Statement") attached as Appendix A to the statement of
additional information.
GENERAL
The Fund's Declaration authorizes the issuance of an unlimited number of
preferred shares, par value $.01 per share, in one or more classes or series,
with rights as determined by the Board of Trustees without the approval of
common shareholders. The Statement currently authorizes the issuance of shares
of TAPS as follows: . The shares of TAPS have a liquidation preference
of $25,000 per share, plus all accumulated but unpaid dividends (whether or not
earned or declared) to the date of final distribution. The TAPS when issued and
sold through this Offering (i) will be fully paid and non-assessable, (ii) will
not be convertible into Common Shares or other capital stock of the Fund, (iii)
will have no preemptive rights, and (iv) will not be subject to any sinking
fund. The TAPS will be subject to optional and mandatory redemption as described
below under "-- Redemption."
Holders of TAPS will not receive certificates representing their ownership
interest in such shares. DTC will initially act as Securities Depository for the
Agent Members with respect to the TAPS.
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, the Auction Agent will act as the transfer agent,
registrar, and paying agent for the TAPS. Furthermore, the Auction Agent will
send notices to holders of TAPS of any meeting at which holders of TAPS have the
right to vote. See "-- Voting Rights" below. However, the Auction Agent
generally will serve merely as the agent of the Fund, acting in accordance with
the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any share of TAPS, so long
as the Fund is current in the payment of dividends on the TAPS and on any other
capital shares of the Fund ranking on a parity with the TAPS with respect to the
payment of dividends or upon liquidation.
DIVIDENDS AND DIVIDEND PERIODS
General. Holders of TAPS will be entitled to receive, when, as and if
declared by the Board of Trustees, out of funds legally available therefore,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "-- Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends so declared and payable shall be
paid to the extent permitted under the Code, and to the extent available and in
preference to and priority over any dividend declared and payable on the Common
Shares.
On the Business Day next preceding each Dividend Payment Date, the Fund is
required to deposit with the Paying Agent sufficient funds for the payment of
declared dividends. The Fund does not intend to establish any reserves for the
payment of dividends.
Each dividend will be paid by the Paying Agent to the record holder, which
holder is expected to be the nominee of the Securities Depository. The
Securities Depository will credit the accounts of the Agent Members of the
beneficial owners in accordance with the Securities Depository's normal
procedures. The Securities Depository's current procedures provide for it to
distribute dividends in same-day funds to Agent Members who are in turn expected
to distribute such dividends to the persons for whom they are acting as agents.
The Agent Member of a beneficial owner will be responsible for holding or
disbursing such payments on the applicable Dividend Payment Date to such
beneficial owner in accordance with the instructions of such beneficial owner.
25
Dividends in arrears for any past Dividend Period may be declared and paid
at any time, without reference to any regular Dividend Payment Date, to the
nominee of the Securities Depository. Any dividend payment shall first be
credited against the earliest declared but unpaid dividends.
Holders will not be entitled to any dividends, whether payable in cash,
property or shares, in excess of full cumulative dividends except as described
under "-- Determination of Dividend Rate" below. No interest will be payable in
respect of any dividend payment or payments which may be in arrears. See
"-- Default Period" below.
The amount of dividends per outstanding share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall 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) such share was outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be 365,
multiplying the amount so obtained by the liquidation value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
shall 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.
Determination of Dividend Rate. The dividend rate for the initial Dividend
Period (i.e. the period from and including the Date of Original Issue to and
including the initial Auction Date) and the initial Auction Date are set forth
on the inside cover page of the Prospectus. For each subsequent Dividend Period,
subject to certain exceptions, the dividend rate will be the Applicable Rate
that the Auction Agent advises the Fund has resulted from an Auction.
The initial Dividend Period for the TAPS shall be days. Dividend
Periods after the initial Dividend Period shall either be Standard Rate Periods
or, subject to certain conditions and with notice to holders, Special Rate
Periods.
A Special Rate Period will not be effective unless sufficient Clearing
Orders exist at the Auction in respect of such Special Rate Period (that is, in
general, the number of shares subject to Buy Orders by Potential Holders is at
least equal to the number of shares subject to Sell Orders by Existing Holders).
If Sufficient Clearing Orders do not exist at any Auction in respect of a
Special Rate Period, the Dividend Period commencing on the Business Day
succeeding such Auction will be the Standard Rate Period, and the holders of the
shares of the affected series will be required to continue to hold such shares
for such Standard Rate Period.
Dividends will accumulate at the Applicable Rate from the Date of Original
Issue and shall be payable on each Dividend Payment Date thereafter. For
Dividend Periods of one year or less, Dividend Payment Dates shall occur on the
Business Day next succeeding the last day of such Dividend Period and, if any,
monthly thereof. For Dividend Periods of more than one year, Dividend Payment
Dates shall occur on a monthly basis on the first day of each month within such
Dividend Period and on the Business Day following the last day of such Dividend
Period. Dividends will be paid through the Securities Depository on each
Dividend Payment Date.
Except during a Default Period as described below, the Applicable Rate
resulting from Auction will not be greater than the Maximum Rate, which is equal
to 150% of 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 (each, a "Reference Rate")), in each case
subject to upward but not downward adjustment in the discretion of the Board of
Trustees after consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund would be in compliance with the TAPS Basic
Maintenance Amount.
The Maximum Rate for the shares of TAPS will apply automatically following
an Auction for such shares in which Sufficient Clearing Orders have not been
made (other than because all shares of TAPS were subject to Submitted Hold
Orders) or following the failure to hold an Auction for any reason on the
Auction
26
Date scheduled to occur (except for circumstances in which the Dividend Rate is
the Default Rate, as described below).
The Minimum Rate will apply automatically following an Auction in respect
of a Standard Rate Period or fewer in which all of the outstanding shares are
subject to (or are deemed to be subject to) Submitted Hold Orders. The Minimum
Rate is 80% of the applicable AA Composite Commercial Paper Rate. No minimum
rate is specified for Auctions in respect of Dividend Periods of more than the
Standard Rate Period.
Prior to each Auction, Broker-Dealers will notify holders of the term of
the next succeeding Dividend Period as soon as practicable after the
Broker-Dealers have been so advised by the Fund. After each auction, on the
Auction Date, Broker-Dealers will notify holders of the Applicable Rate for the
next succeeding Dividend Period and of the Auction Date of the next succeeding
Auction.
Notification of Dividend Period. The Fund will designate the duration of
Dividend Periods of the TAPS; provided, however, that no such designation is
necessary for a Standard Rate Period and that any designation of a Special Rate
Period greater than 28 days shall be effective only if (i) notice thereof shall
have been given as provided herein, (ii) any failure to pay in the timely manner
to the Auction Agent the full amount of any dividend on, or the redemption price
of, the TAPS shall have been cured as set forth under "-- Default Period," (iii)
Sufficient Clearing Orders shall have existed in an Auction held on the Auction
Date immediately preceding the first day of such proposed Special Rate Period,
(iv) if the Fund shall have mailed a notice of redemption with respect to any
shares, as described under "-- Redemption" below, the Redemption Price with
respect to such shares shall have been deposited with the Paying Agent, and (v)
the Fund has confirmed that, as of the Auction Date next preceding the first day
of such Special Rate Period, it has Eligible Assets with an aggregate Discounted
Value at least equal to the TAPS Basic Maintenance Amount (as defined below) and
has consulted with the Broker-Dealers and has provided notice and a TAPS Basic
Maintenance Certificate (as defined below) to each Rating Agency which is then
rating the TAPS and so requires.
If the Fund proposes to designate any Special Rate Period greater than 28
days, not fewer than 15 (or two Business Days in the event the duration of the
Dividend Period prior to such Special Rate Period is fewer than 28 days) nor
more than 30 days prior to the first day of such Special Rate Period, notice
shall be (i) made by press release and (ii) communicated by the Fund by
telephonic or other means to the Auction Agent and confirmed in writing promptly
thereafter. Notwithstanding the foregoing, if the duration of the Dividend
Period prior to such Special Rate Period is fewer than 28 days, such notice
shall be given not less than [two] Business Days prior to such Special Rate
Period. Each such notice shall state (A) that the Fund proposes to exercise its
option to designate a succeeding Special Rate Period, specifying the first and
last days thereof and (B) that the Fund will, by 3:00 p.m. New York City time,
on the second Business Day next preceding the first day of such Special Rate
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Rate Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Special Rate Period in which latter event the succeeding Dividend Period
shall be a Standard Rate 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 Rate Period, the Fund shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as an Special Rate Period, specifying the
first and last days thereof and (B) the terms of the Specific Redemption
Provisions, if any; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate an Special Rate Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Rate Period to the Auction Agent or is
unable to make the confirmation described above by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such proposed
Special Rate Period,
27
the Fund shall be deemed to have delivered a notice to the Auction Agent with
respect to such Dividend Period to the effect set forth in clause (ii) above,
thereby resulting in a Standard Rate Period.
Default Period. A "Default Period" will commence on the applicable date
set forth below if the Fund fails to (i) declare prior to the close of business
on the second Business Day preceding any Dividend Payment Date, for payment on,
or (to the extent permitted as described below) within two Business Days after,
such Dividend Payment Date to the persons who held shares of TAPS as of 12:00
noon, New York City time, on the Business Day preceding such Dividend Payment
Date, the full amount of any dividend payable on such Dividend Payment Date,
(ii) deposit, irrevocably in trust, in same-day funds, with a designated paying
agent by 12:00 noon, New York City time, (A) on or (to the extent permitted as
described below) within two Business Days after any Dividend Payment Date the
full amount of any declared dividend on the relevant series of TAPS payable on
such Dividend Payment Date (together with the failure to timely declare
dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
Business Days after any date fixed for redemption of shares of TAPS called for
redemption, the applicable redemption price (a "Redemption Default"), or (iii)
maintain the "Aaa" Credit Rating unless the "Aaa" Credit Rating is restored by
the Dividend Payment Date next following the date on which the Fund fails to
maintain the "Aaa" Credit Rating (a "Rating Default"). A Default Period with
respect to a Dividend Default or a Redemption Default will consist of the period
commencing on and including the aforementioned Dividend Payment Date or
redemption date, as the case may be, and ending on and including the Business
Day on which, by 12:00 noon, New York City time, all unpaid dividends and unpaid
redemption price shall have been so deposited or shall have otherwise been made
available to the applicable holders in same day funds. A Default Period with
respect to a Rating Default shall commence as of the date on which the Fund
fails to maintain the "Aaa" or " " Credit Rating (provided that such Rating
Default shall be deemed not to have occurred and such Default Period shall not
commence if such Rating Default is cured by the next succeeding Dividend Payment
Date) and shall end on the earlier of the date on which such default is cured as
provided herein or the date on which the TAPS is mandatorily redeemed as
provided herein. Holders of two-thirds of the TAPS then outstanding may waive
any Dividend Default, Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend Period
commencing during a Default Period, will be equal to the Default Rate. The
Default Rate is the Reference Rate multiplied by three.
Each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Minimum Rate Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Dividend
Period. Any dividend due on any Dividend Payment Date (if, prior to 12:00 noon,
New York City time, on such Dividend Payment Date, the Fund has declared such
dividend payable on or within two Business Days after such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date) or redemption price with
respect to such shares not paid to such persons when due may (if such default is
not solely due to the willful failure of the Fund) be paid to such persons in
the same form of funds by 12:00 noon, New York City time, on any of the first
two Business Days after such Dividend Payment Date or due date, as the case may
be, provided that such amount is accompanied by an additional amount for such
period of non-payment at the Default Rate applied to the amount of such default
based on the actual number of days comprising such period divided by 365. For
the purposes of the foregoing, payment to a person in same-day funds made on or
before 12:00 noon New York City time on any Business Day at any time will be
considered equivalent to payment to that person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any payment
made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.
Subject to the foregoing, and any requirements of Massachusetts law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the TAPS, the Fund intends to distribute such net
investment income to the holders of the Common Shares. The term "net investment
income" includes interest, dividends, short-term capital gains and other income
received or accrued less the advisory fee, bank custodian charges, taxes (except
capital gains taxes) and other expenses properly
28
chargeable against income, but generally does not include net capital gains,
dividends paid in shares of stock, transfer taxes, brokerage or other capital
charges or distributions designated as a return of capital. The Fund also
intends to distribute any realized net capital gains (defined as the excess of
net long-term capital gains over net short-term capital losses) annually to the
holders of the Common Shares (subject to the prior rights of the holders of the
TAPS) subject to the foregoing and any requirements of Massachusetts law.
RESTRICTIONS ON DIVIDEND, REDEMPTION AND OTHER PAYMENTS
Under the 1940 Act, the Fund may not (i) declare any dividend with respect
to the TAPS if, at the time of such declaration (and after giving effect
thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including all outstanding senior indebtedness of the
Fund, including the Fund's obligations under any Borrowings, would be less than
200% (or such other percentage as may in the future be specified in or under the
1940 Act as the minimum asset coverage for senior securities representing
indebtedness of a closed-end investment company as a condition of declaring
dividends on its preferred shares) or (ii) declare any other distribution on the
TAPS or purchase or redeem shares of TAPS if at the time of the declaration (and
after giving effect thereto), asset coverage with respect to the Fund's senior
securities representing indebtedness, including any Borrowings, would be less
than 300% (or such higher percentage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
representing indebtedness of a closed-end investment company as a condition of
declaring distributions, purchases or redemptions of its shares of beneficial
interest). "Senior securities representing indebtedness" generally means any
bond, debenture, note or similar obligation or instrument constituting a
security (other than shares of beneficial interest) and evidencing indebtedness
and includes the Fund's obligations under any Borrowings. For purposes of
determining asset coverage for senior securities representing indebtedness in
connection with the payment of dividends or other distributions on or purchases
or redemptions of stock, the term "senior security" does not include any
promissory note or other evidence of indebtedness issued in consideration of any
loan, extension or renewal thereof, made by a bank or other person and privately
arranged, and not intended to be publicly distributed. The term "senior
security" also does not include any such promissory note or other evidence of
indebtedness in any case where such a loan is for temporary purposes only and in
an amount not exceeding 5% of the value of the total assets of the Fund at the
time when the loan is made; a loan is presumed under the 1940 Act to be for
temporary purposes if it is repaid within 60 days and is not extended or
renewed; otherwise it is presumed not to be for temporary purposes. For purposes
of determining whether the 200% and 300% asset coverage requirements described
above apply in connection with dividends or distributions on or purchases or
redemptions of TAPS, such asset coverages may be calculated on the basis of
values calculated as of a time within 48 hours (not including Sundays or
holidays) next preceding the time of the applicable determination. In addition,
a declaration of a dividend or other distribution on or purchase or redemption
of TAPS may be prohibited (i) at any time that an event of default under any
Borrowings has occurred and is continuing; or (ii) after giving effect to such
declaration, the Fund would not have eligible portfolio holdings with an
aggregated Discounted Value at least equal to any asset coverage requirements
associated with such Borrowings; or (iii) the Fund has not redeemed the full
amount of Borrowings, if any, required to be redeemed by any provision for
mandatory redemption.
Upon failure to pay dividends for two years or more, the holders of TAPS
will acquire certain additional voting rights. See "-- Voting Rights" below.
Such rights shall be the exclusive remedy of the holders of TAPS upon any
failure to pay dividends on the TAPS.
For so long as any shares of TAPS are outstanding, except in connection
with the liquidation of the Fund, or a refinancing of the TAPS as provided in
the Statement, the Fund 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, if any, ranking junior to the TAPS as to dividends or
upon liquidation) in respect to Common Shares or any other shares of the Fund
ranking junior to or on a parity with the TAPS as to dividends or upon
liquidation, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior to the TAPS as
to dividends and upon liquidation) or any such parity shares (except by
conversion into or exchange for shares of the Fund
29
ranking junior to or on a parity with the TAPS as to dividends and upon
liquidation), unless (i) there is no event of default under any Borrowings that
is continuing; (ii) immediately after such transaction, the Fund would have
Eligible Assets with an aggregate Discounted Value at least equal to the TAPS
Basic Maintenance Amount (as defined below) (see "-- Asset Maintenance"); (iii)
immediately after such transaction, the Fund would have eligible portfolio
holdings with an aggregated discounted value at least equal to the asset
coverage requirements under any Borrowings; (iv) full cumulative dividends on
the TAPS due on or prior to the date of the transaction have been declared and
paid; (v) the Fund has redeemed the full number of shares of TAPS required to be
redeemed by any provision for mandatory redemption contained in the Statement
(see "-- Redemption"); and (vi) the Fund has redeemed the full amount of any
Borrowings required to be redeemed by any provision for mandatory redemption.
REDEMPTION
Optional Redemption. To the extent permitted under the 1940 Act and
Massachusetts law, the Fund at its option may redeem shares of TAPS having a
Dividend Period of one year or less, in whole or in part, on the Dividend
Payment Date upon not less than 15 days' and not more than 40 days' prior
notice. The optional redemption price per share shall 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. Shares of TAPS 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 shall not effect any optional redemption unless
after giving effect thereto (i) the Fund has available certain 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 TAPS by reason of the
redemption of TAPS on such date fixed for the redemption and (ii) the Fund would
have Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount.
The Fund also reserves the right to repurchase TAPS in market or other
transactions from time to time in accordance with applicable law and at a price
that may be more or less than the liquidation preference of the TAPS, but is
under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any Valuation
Date, Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount or, as of the last Business Day of any month, the
1940 Act TAPS Asset Coverage, and such failure is not cured within two Business
Days following such Valuation Date in the case of a failure to maintain the TAPS
Basic Maintenance Amount or the last Business Day of the following month in the
case of a failure to maintain the 1940 Act TAPS Asset Coverage as of such last
Business Day (each an "Asset Coverage Cure Date"), the TAPS will be subject to
mandatory redemption out of funds legally available therefore. See "-- Asset
Maintenance." The number of shares of TAPS to be redeemed in such circumstances
will be equal to the lesser of (i) the minimum number of shares of TAPS 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 Fund
having sufficient Eligible Assets to restore the TAPS Basic Maintenance Amount
or 1940 Act TAPS 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
TAPS then outstanding will be redeemed), and (ii) the maximum number of shares
of TAPS that can be redeemed out of funds expected to be available therefore on
the Mandatory Redemption Date (as defined below) at the Mandatory Redemption
Price (as defined below).
The Fund shall allocate the number of shares required to be redeemed to
satisfy the TAPS Basic Maintenance Amount or the 1940 Act TAPS Asset Coverage,
as the case may be, among the holders of TAPS in proportion to the number of
shares they hold and shares of other Preferred Shares subject to mandatory
redemption provisions.
30
If the Fund at any time fails to maintain the "Aaa" or " " Credit Rating
for the TAPS, and such failure is not cured within 90 calendar days thereafter
(the "Rating Default Cure Date"), all shares of TAPS will be subject to
mandatory redemption out of funds legally available therefore, on the Mandatory
Redemption Date, and dividends thereon will be payable at the Default Rate until
such redemption is effected as provided above under "-- Dividends and Dividend
Periods -- Default Period." To maintain the "Aaa" or " " Credit
Rating, the Fund must maintain a rating for the TAPS in the highest rating
category from a nationally recognized statistical rating organization, as used
in the rules and regulations under the Exchange Act, which shall be Moody's.
Shares of TAPS may be subject to mandatory redemption in accordance with
the foregoing redemption provision notwithstanding the terms of any Specific
Redemption Provisions.
The Fund is required to effect such a mandatory redemption not later than
30 days after the Asset Coverage Cure Date or the Rating Default Cure Date, as
the case may be (the "Mandatory Redemption Date"), except that if the Fund does
not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of shares of TAPS which
are subject to mandatory redemption, or the Fund otherwise is unable to effect
such redemption on or prior to such Mandatory Redemption Date, the Fund will
redeem those shares of TAPS on the earliest practicable date on which the Fund
will have such funds available, upon notice to record owners of shares of TAPS
and the Paying Agent. The Fund's ability to make a mandatory redemption may be
limited by the provisions of the 1940 Act or Massachusetts law.
The redemption price per share in the event of any mandatory redemption
will be $25,000 per share, plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption,
plus (in the case of a Dividend Period of more than one year) any redemption
premium, if any, determined by the Board of Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption Provisions
(the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the 1940 Act, the Fund
will file a notice of its intention to redeem with the SEC so as to provide at
least the minimum notice required by such Rule or any successor provision
(notice currently must be filed with the SEC generally at least 30 days prior to
the redemption date). The Auction Agent will use its reasonable efforts to
provide telephonic notice to each holder of TAPS called for redemption not later
than the close of business on the Business Day immediately following the
Business 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 Fund). Such telephonic
notice will be confirmed promptly in writing not later than the close of
business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each holder of record of shares of TAPS
called for redemption, the Paying Agent (if different from the Auction Agent)
and the Securities Depository ("Notice of Redemption"). Notice of Redemption
will be addressed to the registered owners of the TAPS at their addresses
appearing on the share records of the Fund. Such notice will set forth (i) the
redemption date, (ii) the number and identity of shares of TAPS 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 redemption date, and (v) the provision under which
redemption shall be made.
If fewer than all of the shares of a series of TAPS are redeemed on any
date, the shares to be redeemed on such date will be selected by the Fund on a
pro rata basis in proportion to the number of shares held by such holders, by
lot or by such other method as is determined by the Fund to be fair and
equitable, subject to the terms of any Specific Redemption Provisions. Shares of
TAPS may be subject to mandatory redemption as described herein notwithstanding
the terms of any Specific Redemption Provisions. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder of
all of the shares of TAPS, and the Securities Depository will determine the
number of shares to be redeemed from the account of the Agent Member of each
beneficial owner. Each Agent Member will determine the number of shares to be
redeemed from the account of each beneficial owner for which it acts as agent.
An Agent Member may select
31
for redemption shares from the accounts of some beneficial owners without
selecting for redemption any shares from the accounts of other beneficial
owners. Notwithstanding the foregoing, if neither the Securities Depository nor
its nominee is the record holder of all of the shares, the particular shares to
be redeemed shall be selected by the Fund by lot, on a pro rata basis between
each series or by such other method as the Fund shall deem fair and equitable,
as contemplated above.
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be outstanding for any purpose. The Fund shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the shares of TAPS called for redemption on such date and
(ii) such other amounts, if any, to which holders of shares of TAPS called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Fund upon its
request. Thereupon the Paying Agent will be relieved of all responsibility to
the owners of such shares and such owners may look only to the Fund for payment.
So long as any shares of TAPS are held of record by the nominee of the
Securities Depository, the redemption price for such shares will be paid on the
redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures provide for it to distribute the amount of the
redemption price to Agent Members who, in turn, are expected to distribute such
funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no shares of
TAPS may be redeemed unless all dividends in arrears on the outstanding shares
of TAPS, and all capital stock of the Fund ranking on a parity with the TAPS
with respect to the payment of dividends or upon liquidation, have been or are
being contemporaneously paid or set aside for payment, except in connection with
the liquidation of the Fund in which case all shares of TAPS and all shares
ranking in a parity with the TAPS must receive proportionate amounts.
Except for the provisions described above, nothing contained in the
Statement limits any legal right of the Fund to purchase or otherwise acquire
any shares of TAPS 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 TAPS for which Notice of Redemption has been
given and the Fund is in compliance with the 1940 Act TAPS Asset Coverage and
has Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount after giving effect to such purchase or
acquisition on the date thereof. Any shares which are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the outstanding shares of TAPS are redeemed or otherwise acquired by the Fund,
the Fund shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Trustees.
ASSET MAINTENANCE
The Fund is required to satisfy two separate asset maintenance requirements
in respect of the TAPS: (i) the Fund must maintain assets in its portfolio that
have a value, discounted in accordance with the Rating Agency Guidelines, at
least equal to the aggregate liquidation preference of the TAPS plus specified
liabilities, payment obligations and other amounts; and (ii) the Fund must
maintain asset coverage for TAPS of at least 200%.
TAPS Basic Maintenance Amount. The Fund must maintain, as of each
Valuation Date on which any share of TAPS is Outstanding, Eligible Assets having
an aggregate Discounted Value at least equal to the TAPS Basic Maintenance
Amount, which is calculated separately for Moody's (if Moody's is then rating
the TAPS) and any Other Rating Agency which is then rating the TAPS and so
requires. If the Fund fails to
32
maintain Eligible Assets having an aggregated Discounted Value at least equal to
the TAPS Basic Maintenance Amount as of any Valuation Date and such failure is
not cured on or before the related Asset Coverage Cure Date, the Fund will be
required in certain circumstances to redeem certain of the shares of TAPS. See
"-- Redemption -- Mandatory Redemption."
The "TAPS Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to:
(i)(A) the sum of the products resulting from multiplying the number
of Outstanding TAPS 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) to and including the first Dividend Payment Date for
each Outstanding TAPS that follows such Valuation Date (or to the 30th day
after such Valuation Date, if such 30th day occurs before the first
following Dividend Payment Date); (C) the amount of anticipated Fund
non-interest expenses for the 90 days subsequent to such Valuation Date;
(D) the amount of the current outstanding balances of any indebtedness
which is senior to the TAPS plus interest actually accrued together with 30
days additional interest on the current outstanding balances calculated at
the current rate; and (E) any 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 Preferred Shares for which a Notice of Redemption has been
given, as of such Valuation Date, to the extent not reflected in any of
(i)(A) through (i)(D): less
(ii) the sum of any cash plus the value of any of the Fund's assets
irrevocably deposited by the Fund 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, it will be valued at its
face value).
Solely for purposes of calculating the TAPS Basic Maintenance Amount,
interest on borrowed funds outstanding as of any date will be treated as
dividend payments, at a deemed dividend rate equal to the interest rate payable
on such funds on the relevant date, but shall be subject to multiplication by
the larger of the factors that the Fund has been informed by each applicable
Rating Agency are applicable (as described in 1(C) above) only in the event that
interest on such borrowed funds is payable on the basis of a variable rate of
interest, and the interest rate is subject to change within the relevant 43-day
period.
The Market Value of the Fund's portfolio securities (used in calculating
the Discounted Value of Eligible Assets) is calculated in the same manner as the
Fund calculates its net asset value. See "Net Asset Value" in the Statement of
Additional Information.
The discount factors, the criteria used to determine whether the assets
held in the Fund's portfolio are Eligible Assets, and guidelines for determining
the market value of the Fund's portfolio holdings for purposes of determining
compliance with the TAPS Basic Maintenance Amount are based on criteria
established in connection with rating the TAPS. In no event shall the Discounted
Value of any asset of the Fund exceed its unpaid principal balance or face
amount as of the date of calculation. The Discount Factor relating to any asset
of the Fund, the TAPS Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio and
certain definitions and methods of calculation relating thereto may be changed
from time to time by the Fund, without shareholder approval, but only in the
event that the Fund receives written confirmation from each Rating Agency which
is then rating the TAPS and which so requires that any such changes would not
impair the "Aaa" or " " Credit Rating. If the Fund fails to maintain the "Aaa"
or " " Credit Rating and is unable to restore the "Aaa" Credit Rating by the
Rating Default Cure Date, the Fund will be required to redeem the TAPS. See
"-- Redemption -- Mandatory Redemption" above.
A rating agency's guidelines will apply to shares of TAPS only so long as
such rating agency is rating such shares. The Fund will pay certain fees to
Moody's and for rating shares of TAPS. The ratings assigned to
TAPS are not recommendations to buy, sell or hold shares of TAPS. Such ratings
may be subject
33
to revision or withdrawal by the assigning rating agent at any time. Any rating
of TAPS should be evaluated independently of any other rating.
1940 Act TAPS Asset Coverage. The Fund is also required to maintain, as of
the last Business Day on any month in which any share of TAPS is outstanding,
asset coverage of at least 200% (or such other percentage as may in the future
be specified in or under the 1940 Act as the minimum asset coverage for senior
securities representing shares of a closed-end investment company as a condition
of declaring dividends on its common shares) ("1940 Act TAPS Asset Coverage").
If the Fund fails to maintain the 1940 Act TAPS Asset Coverage as of the last
Business Day of any month and such failure is not cured as of the related Asset
Coverage Cure Date, the Fund will be required to redeem certain shares of TAPS.
See "-- Redemption -- Mandatory Redemption."
The Fund estimates that based on the composition of its portfolio as of
, 2001, after giving effect to the issuance of the TAPS
($ ) and the deduction of sales loads and estimated offering expenses
for such shares ($ ), the 1940 Act TAPS Asset Coverage will be computed
as follows:
Value of Fund assets less liabilities not
representing senior securities $
--------------------------------------------------------- = ------------ = %
Senior securities representing indebtedness $
plus aggregate liquidation preference of the TAPS
Notices. Upon the Date of Original Issue and in certain other
circumstances, the Fund is required to deliver to the Auction Agent and to any
Rating Agency which is then rating the TAPS (i) a certificate with respect to
the calculation of the TAPS Basic Maintenance Amount and the value of the
portfolio holdings of the Fund; (ii) a certificate with respect to the
calculation of the 1940 Act Asset Coverage; and (iii) a letter proposed by the
Fund's independent accountants regarding the accuracy of such calculations. See
"Description of TAPS -- Notices" in the Statement of Additional Information.
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of TAPS then outstanding and any
other shares ranking on a parity with the TAPS then outstanding, in preference
to the holders of Common Shares, will be entitled to payment, out of the assets
of the Fund, or the proceeds thereof, available for distribution to shareholders
after satisfaction of claims of creditors of the Fund, of a liquidation
distribution in the amount equal to $25,000 per share of the TAPS, plus an
amount equal to accumulated dividends (whether or not earned or declared but
without interest) to the date of payment of such distribution is made in full or
a sum sufficient for the payment thereof is set apart with the Paying Agent.
However, holders of TAPS will not be entitled to any premium to which such
holder would be entitled to receive upon redemption of such shares of TAPS.
After payment of the full amount of such liquidation distribution, the owners of
the TAPS will not be entitled to any further participation in any distribution
of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the assets of the Fund or proceeds thereof available
for distribution to shareholders after satisfaction of claims of creditors of
the Fund shall be insufficient to pay in full the liquidation distribution to
which owners of any shares of TAPS are entitled, such assets or the proceeds
thereof will be distributed ratably among the owners of the shares of TAPS and
any other shares ranking on a parity with TAPS until payment in full is made to
the owners of the shares of TAPS of the liquidation distribution to which they
are entitled, no dividend or other distribution shall be made to the holders of
Common Shares and no purchase, redemption or other acquisition for any
consideration by the Fund shall be made in respect of the Common Shares.
A consolidation or merger of the Fund with or into any other company or
companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund;
34
provided, however, that the consolidation, merger, sale, lease or exchange does
not materially adversely affect any designation, right, preference or limitation
of the TAPS or any shares issuable in exchange for shares of TAPS in any such
consolidation or merger.
To the extent other shares of TAPS are issued by the Fund, such shares will
share equally and on a pro rata basis with the TAPS then outstanding in
connection with any liquidation, dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated herein and except as otherwise required by
applicable law, holders of shares of TAPS have one vote per share and vote
together with holders of shares of Common Shares as a single class. Under
applicable rules of the American Stock Exchange, the Fund is currently required
to hold annual meetings of shareholders.
In connection with the election of the Board of Trustees, the holders of
outstanding Preferred Shares, including the TAPS, represented in person or by
proxy at said meeting, shall be entitled, as a class, to the exclusion of the
holders of all other securities and classes of beneficial interest of the Fund,
to elect two Trustees of the Fund. The holders of outstanding Common Shares and
Preferred Shares, including the TAPS, voting together as a single class, shall
elect the balance of the Trustees. Notwithstanding the foregoing, if (a) at the
close of business on any Dividend Payment Date accumulated dividends (whether or
not earned or declared) on outstanding shares of the Preferred Shares, including
outstanding TAPS, equal to at least two full years' dividends shall be due and
unpaid; or (b) any time holders of any other Preferred Shares are entitled under
the 1940 Act to elect a majority of the Trustees of the Fund, then the number of
members constituting the Board shall automatically be increased by the smallest
number that, when added to the two Trustees elected exclusively by the holders
of Preferred Shares as described above, would constitute a majority of the Board
as so increased by such smallest number; and at a special meeting of
shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Trustees are to be elected, the holders of
outstanding Preferred Shares, including the TAPS, voting as a separate class,
will be entitled to elect the smallest number of additional Trustees that,
together with the two Trustees which such holders will be in any event entitled
to elect, constitutes a majority of the total number of Trustees of the Fund as
so increased. The terms of office of the persons who are Trustees at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment, in full all dividends payable on all outstanding
Preferred Shares, including the TAPS, for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease, and the terms of office of
all of the additional Trustees elected by the holders of Preferred Shares,
including the TAPS (but not of the Trustees with respect to whose election the
holders of Common Shares were entitled to vote or the two Trustees the holders
of Preferred Shares, including the TAPS, have the right to elect in any event),
will terminate automatically. Any shares of TAPS issued after the date hereof
shall vote with the TAPS as a single class on the matters described above, and
the issuance of any other shares of TAPS by the Fund may reduce the voting power
of the TAPS.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares determined with reference to a "majority of outstanding voting
securities" as the term is defined in Section 2(a)(42) of the 1940 Act,
including the TAPS, voting as a class, is required to (i) amend, alter or repeal
any of the preferences, rights or powers of such class so as to affect
materially and adversely such preferences, rights or powers; (ii) increase the
authorized number of shares of TAPS; (iii) create, authorize or issue shares of
any class of capital stock ranking senior to or on a parity with the TAPS with
respect to the payment of dividends or the distribution of assets, or any
securities convertible into, or warrants, options or similar rights to purchase,
acquire or receive, such shares of capital stock ranking senior to or on parity
with the TAPS or reclassify any authorized shares of capital stock of the Fund
into any shares ranking senior to or on parity with the TAPS (except that, the
Board of Trustees, without the vote or consent of the holders of TAPS, may from
time to time authorize, create and classify, and the Fund may from time to time
issue, series or shares of Preferred Shares, including TAPS, ranking on a parity
with the TAPS with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up to the affairs of the Fund,
subject to continuing compliance by the Fund with the 1940 Act TAPS Asset
Coverage and TAPS Basic
35
Maintenance Amount requirements, or in connection with a refinancing of the
TAPS); (iv) 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; (v) create, incur or suffer to exist, or agree to create,
incur or suffer to exist, or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) the creation, incurrence or existence
of any material lien, mortgage, pledge, charge, security interest, security
agreement, conditional sale or trust receipt or other material encumbrance of
any kind upon any of the Fund's assets as a whole, except (A) liens the validity
of which are being contested in good faith by appropriate proceedings, (B) liens
for taxes that are not then due and payable or that can be paid thereafter
without penalty, (C) liens, pledges, charges, security interests, security
agreements or other encumbrances arising in connection with any indebtedness
permitted under clause (vi) below and (D) liens to secure payment for services
rendered including, without limitation, services rendered by the Fund's
custodian and the Auction Agent, or (vi) 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 TAPS Basic Maintenance Amount as of the immediately preceding
Valuation Date.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of TAPS, 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 such series in a manner different from that of
other series of 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 foregoing voting provisions will not apply with respect to the TAPS if,
at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption, and sufficient funds shall have been
deposited in trust to effect such redemption.
The Board of Trustees, without the vote or consent of any holder of the
Preferred Shares, including the TAPS, or any other shareholder of the Fund, may
from time to time amend, alter or repeal certain definitions primarily related
to Moody's rating of the TAPS provided that the Board of Trustees receives
written confirmation from Moody's and (if Moody's and/or
is then rating the TAPS) (with such confirmation in no event
being required to be obtained from a particular rating agency in the case of the
definitions relevant only to and adopted in connection with the rating of the
TAPS, if any, by any Other Rating Agency) that such amendment, alteration or
repeal would not impair the rating then assigned by Moody's and .
In addition, the Board of Trustees, without the vote or consent of any
holder of Preferred Shares, including TAPS, or any other shareholder of the
Fund, may from time to time adopt, amend, alter or repeal any or all of any
additional or other definitions or add covenants and other obligations of the
Fund (e.g., maintenance of minimum liquidity level) or confirm the applicability
of covenants and other obligations set forth herein in connection with obtaining
or maintaining the rating of Moody's, or any Other Rating Agency with respect to
TAPS and any such amendment, alteration or repeal will not be deemed to affect
the preferences, rights or powers of TAPS or the holders thereof, provided the
Board of Trustees receives written confirmation from the relevant rating agency
(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
another rating
36
agency's rating) that any such amendment, alteration or repeal would not
adversely affect the rating then assigned by such rating agency.
Also, subject to compliance with applicable law, the Board of Trustees 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 the Preferred Shares, including
TAPS, or any other shareholder of the Fund, and without receiving any
confirmation from any rating agency after consultation with the Broker-Dealers,
provided that immediately following any such increase the Fund would be in
compliance with the TAPS Basic Maintenance Amount.
Unless otherwise required by law, holders of shares of TAPS shall not have
any relative rights or preferences or other special rights other than those
specifically set forth in the Statement. The holders of shares of TAPS shall
have no rights to cumulative voting. In the event that the Fund fails to pay any
dividends on the shares of TAPS, the exclusive remedy of the holders shall be
the right to vote for Trustees as discussed above.
THE AUCTION
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for each series of TAPS so long as the Applicable Rate for
shares of such series is to be based on the results of an Auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of one
or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for TAPS.
The Auction Agent after each Auction for TAPS will pay to each
Broker-Dealer, from funds provided by the Fund, a service charge at the annual
rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate Period
of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of TAPS placed by such Broker-Dealer
at such Auction. For the purposes of the preceding sentence, TAPS 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 own account or 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 such Existing Holder continuing to hold such shares as a
result of the Auction or (ii) a Submitted Bid of a Potential Holder that
resulted in such 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.
37
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for series of TAPS,
each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares of
such series (a "Beneficial Owner") may submit orders ("Orders") with respect to
shares of such series to that Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold shares of such series without
regard to the Applicable Rate for shares of such series for the next Rate
Period thereof.
- Bid -- indicating its desire to sell shares of such series at $25,000 per
share if the Applicable Rate for shares of such series for the next Rate
Period thereof is less than the rate specified in such Bid (also known as
a hold-at-a-rate order).
- Sell Order -- indicating its desire to sell shares of such series at
$25,000 per share without regard to the Applicable Rate for shares of
such series for the next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of TAPS then held by such
Beneficial Owner. A Beneficial Owner of shares of such series that submits a Bid
with respect to shares of such series to its Broker-Dealer having a rate higher
than the Maximum Rate for shares of such series on the Auction Date therefore
will be treated as having submitted a Sell Order with respect to such shares to
its Broker-Dealer. A Beneficial Owner of shares of such series that fails to
submit an Order with respect to such shares to its Broker-Dealer will be deemed
to have submitted a Hold Order with respect to such shares of such series to its
Broker-Dealer; provided, however, that if a Beneficial Owner of shares of such
series fails to submit an Order with respect to shares of such series to its
Broker-Dealer for an Auction relating to a Rate Period of more than 28 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order
with respect to such shares to its Broker-Dealer. A Sell Order shall constitute
an irrevocable offer to sell the shares of TAPS subject thereto. A Beneficial
Owner that offers to become the Beneficial Owner of additional shares of TAPS
is, for purposes of such offer, a Potential Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of a series of
TAPS but that wishes to purchase shares of such series, or that is a Beneficial
Owner of shares of such series that wishes to purchase additional shares of such
series (in each case, a "Potential Beneficial Owner"), may submit Bids to its
Broker-Dealer in which it offers to purchase shares of such series at $25,000
per share if the Applicable Rate for shares of such series for the next Rate
Period thereof is not less than the rate specified in such Bid. A Bid placed by
a Potential Beneficial Owner of shares of such series specifying a rate higher
than the Maximum Rate for shares of such series on the Auction Date therefore
will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. 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 in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of TAPS held by it or customers who are Beneficial Owners will be
treated in the same manner as a Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of TAPS held by it. A Broker-Dealer may also
submit Orders to the Auction Agent for its own account as an Existing Holder or
Potential Holder, provided it is not an affiliate of the Fund.
If Sufficient Clearing Bids for a series of TAPS exist (that is, the number
of shares of such series subject to Bids submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Potential Holders with rates
equal to or lower than the Maximum Rate for shares of such series is at least
equal to the number of shares of such series subject to Sell Orders submitted or
deemed submitted to the Auction Agent
38
by Broker-Dealers as or on behalf of Existing Holders), the Applicable Rate for
shares of such series 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 shares of such series available for purchase in the Auction. If
Sufficient Clearing Bids a series of TAPS do not exist, the Applicable Rate for
shares of such series for the next succeeding Rate Period thereof will be the
Maximum Rate for shares of such series on the Auction Date therefore. In such
event, Beneficial Owners of shares of such series that have submitted or are
deemed to have submitted Sell Orders may not be able to sell in such Auction all
shares of such series subject to such Sell Orders. If Broker-Dealers submit or
are deemed to have submitted to the Auction Agent Hold Orders with respect to
all Existing Holders a series of TAPS, the Applicable Rate for shares of such
series for the next succeeding Rate Period thereof will be the All Hold Order
Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of a series of TAPS that is
fewer than the number of shares of such series 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
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.
SECONDARY MARKET TRADING AND TRANSFER OF TAPS
The Broker-Dealers are expected to maintain a secondary trading market of
TAPS outside of Auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that such secondary trading
market of TAPS will provide owners with liquidity of investment. TAPS are not
registered on any stock exchange or on the Nasdaq Stock Market. Investors who
purchase 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 such Rate
Period, the value of the shares may fluctuate in response to 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 therefore, depending upon market
conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of TAPS only in whole shares and only (1) pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the Auction Procedures,
(2) to a Broker-Dealer or (3) to such other persons as may be permitted by the
Fund; provided, however, that (a) a sale, transfer or other disposition of TAPS
from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition for purposes of the foregoing 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 Fund) to whom such transfer is made shall advise the Auction
Agent of such transfer.
DESCRIPTION OF BORROWINGS
The Declaration authorizes the Fund, without prior approval of holders of
Common and Preferred Shares, including TAPS, to borrow money. In this
connection, the Fund may issue notes or other evidence of indebtedness
(including bank borrowings or commercial paper) and may secure any such
borrowings by mortgaging, pledging or otherwise subjecting as security the
Fund's assets. In connection with such borrowing, the Fund may be required to
maintain minimum average balances with the lender or to pay a commitment or
39
other fee to maintain a line of credit. Any such requirements will increase the
cost of borrowing over the stated interest rate.
Limitations. Under the requirements of the 1940 Act, the Fund, immediately
after any Borrowings, must have an asset coverage of at least 300%. With respect
to any Borrowings, asset coverage means the ratio which the value of the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities, including a Borrowings (as defined in the 1940 Act), bears to
the aggregate amount of such Borrowings represented by senior securities issued
by the Fund. Certain types of Borrowings may result in the Fund being subject to
covenants in credit agreements relating to asset coverages or portfolio
composition or otherwise. In addition, the Fund may be subject to certain
restrictions imposed by guidelines of one or more rating agencies which may
issue ratings for commercial paper or notes issued by the Fund. Such
restrictions may be more stringent than those imposed by the 1940 Act.
Distribution Preference. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such Borrowings will be senior to
those of the TAPS shareholders, and the terms of any such Borrowings may contain
provisions which limit certain activities of the Fund, including the payment of
dividends to TAPS shareholders in certain circumstances.
Voting Rights. The 1940 Act does (in certain circumstances) grant to the
lenders to the Fund certain voting rights in the event of default in the payment
of interest on or repayment of principal. In the event that such provisions
would impair the Fund's status as a regulated investment company under the Code,
the Fund, subject to its ability to liquidate its relatively illiquid portfolio,
intends to repay the Borrowings. Any borrowing will likely be ranked senior or
equal to all other existing and future borrowings of the Fund, including TAPS.
The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Borrowings. If the Board of Trustees
determines to authorize any of the foregoing, the terms may be the same as, or
different from, the terms described above, subject to applicable law and the
Fund's Declaration.
DESCRIPTION OF COMMON SHARES
The Declaration authorizes the issuance of an unlimited number of Common
Shares, par value $0.01 per share. All Common Shares have equal rights to the
payment of dividends and the distribution of assets upon liquidation. Common
Shares will, when issued, be fully paid and, subject to matters discussed in
"Certain Provisions in the Declaration of Trust," non-assessable, and will have
no pre-emptive or conversion rights or rights to cumulative voting. Whenever
TAPS are outstanding, Common Shareholders will not be entitled to receive and
distributions from the Fund unless all accrued dividends on TAPS have been paid,
and unless asset coverage (as defined in the 1940 Act) with respect to TAPS
would be at least 200% after giving effect to the distributions. See "-- TAPS"
below.
The Common Shares have been approved for listing on the American Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations. The Fund believes that the likelihood of such circumstances is
remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by
40
holders of at least two-thirds of the Common Shares and Preferred Shares,
including TAPS, voting together as a single class, except as described below, to
authorize (1) a conversion of the Fund from a closed-end to an open-end
investment company, (2) a merger or consolidation of the Fund, or a series or
class of the Fund, with any corporation, association, trust or other
organization or a reorganization or recapitalization of the Fund, or a series or
class of the Fund, (3) a sale, lease or transfer of all or substantially all of
the Fund's assets (other than in the regular course of the Fund's investment
activities), (4) in certain circumstances, a termination of the Fund, or a
series or class of the Fund, or (5) removal of trustees by shareholders, and
then only for cause, unless, with respect to (1) through (4), such transaction
has already been authorized by the affirmative vote of two-thirds of the total
number of trustees fixed in accordance with the Declaration or the Bylaws, in
which case the affirmative vote of the holders of at least a majority of the
Fund's Common Shares and Preferred Shares, including TAPS, outstanding at the
time, voting together as a single class, is required; provided, however, that
where only a particular class or series is affected (or, in the case of removing
a trustee, when the trustee has been elected by only one class), only the
required vote by the applicable class or series will be required. Approval of
shareholders is not required, however, for any transaction, whether deemed a
merger, consolidation, reorganization or otherwise whereby the Fund issues
Common Shares in connection with the acquisition of assets (including those
subject to liabilities) from any other investment company or similar entity.
None of the foregoing provisions may be amended except by the vote of at least
two-thirds of the Common Shares and Preferred Shares, including TAPS, voting
together as a single class. In the case of the conversion of the Fund to an
open-end investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
Preferred Shares, including TAPS, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's Preferred
Shares, including TAPS, outstanding at the time, voting as a separate class, or,
if such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or the Bylaws,
the affirmative vote of the holders of at least a majority of the Fund's
Preferred Shares, including TAPS, outstanding at the time, voting as a separate
class. The votes required to approve the conversion of the Fund from a
closed-end to an open-end investment company or to approve transactions
constituting a plan of reorganization which adversely affects the holders of
Preferred Shares, including TAPS, are higher than those required by the 1940
Act. The Board of Trustees believes that the provisions of the Declaration
relating to such higher votes are in the best interest of the Fund and its
shareholders. See the statement of additional information under "Certain
Provisions in the Declaration of Trust."
Reference should be made to the Declaration on file with the SEC for the
full text of these provisions.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or in
private transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Fund to an open-end investment company. The Fund
cannot assure you that its Board of Trustees will decide to take any of these
actions, or that share repurchases or tender offers will actually reduce market
discount.
If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares, including TAPS, 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 American Stock Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net
41
asset value, less any redemption charge that is in effect at the time of
redemption. See the Statement of Additional Information under "Certain
Provisions in the Declaration of Trust" for a discussion of the voting
requirements applicable to the conversion of the Fund to an open-end company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of Fund Shares; Conversion
to Open-End Fund" for a further discussion of possible action to reduce or
eliminate such discount to net asset value.
TAX MATTERS
The following is intended to be a general summary of certain federal income
tax consequences of investing in TAPs. It is not intended as a complete
discussion of all such tax consequences, nor does it purport to deal with all
categories of investors. INVESTORS ARE THEREFORE ADVISED TO CONSULT WITH THEIR
TAX ADVISERS BEFORE MAKING AN INVESTMENT IN THE FUND.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify for, and to elected to be treated as, a
regulated investment company under Subchapter M of the Code and intends to
qualify under those provisions each year. As a regulated investment company, the
Fund generally will not be subject to federal income tax on its investment
company taxable income and net capital gains (net long-term capital gains in
excess of the sum of net short-term capital losses and capital loss carryovers
from prior years), if any, that it distributes to shareholders. However, the
Fund would be subject to corporate income tax (currently at a 35% maximum
effective rate) on any undistributed income. The Fund intends to distribute to
its shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are also subject to a nondeductible 4% federal
excise tax. To prevent imposition of the tax, the Fund must distribute or be
deemed to have distributed, during each calendar year an amount equal to the sum
of (1) at least 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary losses) for the
twelve month period ending on October 31 of the calendar year, and (3) all such
ordinary income and capital gains for previous years that were not distributed
during such years. A distribution will be treated as having been paid on
December 31 if it is declared by the Fund in October, November or December with
a record date in such months and is paid by the Fund in January of the following
year. Accordingly, such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared. To prevent application of
the excise tax, the Fund intends to make distributions to satisfy the calendar
year distribution requirement.
If in any taxable year the Fund fails to qualify as a regulated investment
company under the Code, the Fund would be taxed in the same manner as an
ordinary corporation and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income. In addition, in the
event of a failure to qualify as a regulated investment company, the Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits, would generally constitute ordinary dividends, which
although eligible for the corporate dividends-received deduction, taxable to
shareholders as ordinary income, even though such distributions have otherwise
(in part) have been treated as long-term capital gains in such shareholders'
hands.
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TAPS
Under present law, the Fund is of the opinion that TAPS will constitute
stock of the Fund, and thus distributions with respect to TAPS (other than
described below and other than distributions in redemption of
42
TAPS subject to Section 302(b) of the Code) will generally constitute dividends
to the extent of the Fund's current or accumulated earnings and profits, as
calculated for federal income tax purposes. Such dividends generally will be
taxable as ordinary income to holders but will not qualify for the dividends
received deduction available to corporations under Section 243 of the Code.
Dividends designated by the Fund as capital gain distributions will be treated
as long-term capital gains in the hands of holders. The Service currently
requires that a regulated investment company that has two or more classes of
stocks allocate to each such class proportionate amounts of each type of its
income (such as ordinary income and capital gains). Accordingly, the Fund
intends to designate distributions made with respect to TAPS as capital gain
distributions in proportion to the TAPS share of total dividends paid during the
year. See "Tax-Matters -- Federal Income Tax Treatment of Holders of TAPS" in
the Statement of Additional Information.
SALE OF SHARES
The sale of shares of TAPS will generally be a taxable transaction for
federal income tax purposes. Selling holders of shares of TAPS will generally
recognize gain or loss in an amount equal to the difference between their
adjusted tax basis in the TAPS and the amount received in exchange therefor. If
such shares of TAPS are held as a capital asset, the gain or loss will generally
be a capital gain or loss. Similarly, a redemption by the Fund (including a
redemption resulting from liquidation of the Fund), if any, of all the shares of
TAPS actually and constructively held by a shareholder generally will give rise
to capital gain or loss if the shareholder does not own (and is not regarded
under certain tax law rules of constructive ownership as owning) any Common
Shares in the Fund and provided that the redemption proceeds do not represent
declared but unpaid dividends. Other redemptions may also give rise to capital
gain or loss, but must satisfy several conditions imposed by the Code to achieve
such treatment. Any loss realized upon a taxable disposition of shares of TAPS
held for six months or less will be treated as a long-term capital loss to the
extent of any distributions of net capital gain received with respect to such
shares.
BACKUP WITHHOLDING
The Fund may be required to withhold, for U.S. federal income taxes, a
portion of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or who fail to make
required certifications or if the Fund or a shareholder has been notified by the
Service that they are subject to backup withholding. Corporate shareholders and
other shareholders specified in the Code are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident aliens,
may be subject to U.S. withholding tax on certain distributions at a rate of 30%
or such lower rates as may be prescribed by any applicable treaty. Investors are
advised to consult their own tax advisors with respect to the application to
their own circumstances of the above-described general taxation rules and with
respect to the state, local or foreign tax consequences to them of an investment
in TAPS.
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND REDEMPTION AGENT
The custodian of the assets of the Fund is The Chase Manhattan Bank, P.O.
Box 660086, Dallas, Texas 75266-0086. The Custodian performs custodial, fund
accounting and portfolio accounting services. The Fund's transfer, shareholder
services and dividend paying agent is also The Chase Manhattan Bank. Bankers
Trust Company, 4 Albany Street, New York, New York 10006, a banking corporation
organized under the laws of New York, is the Auction Agent with respect to
shares of TAPS and acts as transfer agent, registrar, dividend disbursing agent
and redemption agent with respect to such shares.
43
UNDERWRITING
Salomon Smith Barney Inc. is acting as representative of the underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus, each underwriter named below has
agreed to purchase, and the Fund has agreed to sell to such underwriter, the
number of TAPS shares set forth opposite the name of such underwriter.
NUMBER OF
NAME SHARES
---- ---------
Salomon Smith Barney Inc. ..................................
Total..................................................
The underwriting 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 other conditions. The underwriters
are obligated to purchase all the TAPS shares if they purchase any of the
shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $ per share. The sales load the Fund will pay of $ per share
is equal to % of the initial offering price. The underwriters may allow,
and dealers may reallow, a concession not to exceed $ per share on sales to
other dealers. After the initial public offering, the underwriters may change
the public offering price and the other selling terms. Investors must pay for
any TAPS shares purchased in the initial public offering on or before
, 2001.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions after they
have ceased to be underwriters. The underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with, and
perform services for, the Fund. Nuveen may engage in these transactions only in
compliance with the 1940 Act.
The Fund anticipates that the underwriters or one of 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 statement of additional
information.
Nuveen, one of the underwriters, is the parent company of NIAC.
The Fund and NIAC have agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, or
to contribute payments to the underwriters may be required to make for any of
those liabilities.
The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10013.
The settlement date for the purchase of the TAPS shares will be ,
2001, as agreed upon by the underwriters, the Fund and NIAC pursuant to Rule
15c6-1 under the Securities Exchange Act of 1934.
LEGAL OPINIONS
Certain legal matters in connection with the shares of TAPS offered hereby
will be passed upon for the Fund by Vedder, Price, Kaufman & Kammholz, Chicago,
Illinois, and for the underwriters by Simpson Thacher & Bartlett, New York, New
York. Vedder, Price, Kaufman & Kammholz and Simpson Thacher & Bartlett may rely
as to certain matters of Massachusetts law on the opinion of Bingham Dana, LLP,
Boston, Massachusetts.
AVAILABLE 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 SEC. These
44
documents can be inspected and copied for a fee at the SEC's public reference
room, 450 Fifth Street, N.W., Washington, D.C. 20549, Northeast Regional Office,
233 Broadway, New York, NY 10279, and Chicago Regional Office, Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511. Reports, proxy statements, and other information about the Fund can
be inspected at the offices of the American Stock Exchange.
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 TAPS shares can be found in the
Fund's Registration Statement (including amendments, exhibits, and schedules) on
Form N-2 filed with the SEC. The SEC maintains a web site (http://www.sec.gov)
that contains each Fund's Registration Statement, other documents incorporated
by reference, and other information the Fund has filed electronically with the
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.nuveen.com.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this prospectus. As a result of the
foregoing and other factors, no assurance can be given as to the future results,
levels of activity or achievements, and neither the Fund nor any other person
assumes responsibility for the accuracy and completeness of such statements.
45
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Investment Objectives....................................... S-1
Investment Policies and Techniques.......................... S-2
Interest Rate Transactions.................................. S-6
Management of the Fund...................................... S-8
Portfolio Transactions and Brokerage........................ S-13
Net Asset Value............................................. S-14
Description of TAPS......................................... S-15
Additional Information Concerning the Auctions for TAPS..... S-16
Certain Provisions in the Declaration of Trust.............. S-18
Repurchase of Common Shares; Conversion to Open-End Fund.... S-19
Tax Matters................................................. S-21
Experts..................................................... S-25
Additional Information...................................... S-25
46
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$
NUVEEN REAL ESTATE
INCOME FUND
TAXABLE AUCTIONED PREFERRED SHARES
TAPS(R)
SHARES, SERIES
------------------------
PROSPECTUS
, 2001
------------------------
SALOMON SMITH BARNEY
NUVEEN INVESTMENTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The information in this statement of additional information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
statement of additional information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED ________ __, 2001
NUVEEN REAL ESTATE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
This statement of additional information relating to this offering does
not constitute a prospectus, but should be read in conjunction with the
prospectus relating thereto dated _______________ ___, 2001. This statement of
additional information does not include all information that a prospective
investor should consider before purchasing TAPS in this offering, and investors
should obtain and read the prospectus prior to purchasing such shares. A copy of
the prospectus may be obtained without charge by calling (800) 257-8787.
Capitalized terms used but not defined in this statement of additional
information have the meanings ascribed to them in the prospectus.
TABLE OF CONTENTS
PAGE
----
Investment Objectives ................................................. S-1
Investment Policies and Techniques .................................... S-2
Interest Rate Transactions ............................................ S-6
Management of the Fund ................................................ S-8
Portfolio Transactions and Brokerage .................................. S-13
Net Asset Value ....................................................... S-14
Description of TAPS ................................................... S-15
Additional Information Concerning the Auctions for TAPS ............... S-16
Certain Provisions in the Declaration of Trust ........................ S-18
Repurchase of Common Shares; Conversion to Open-End Fund .............. S-19
Tax Matters ........................................................... S-21
Experts ............................................................... S-25
Additional Information ................................................ S-25
The date of this statement of additional information is _________________, ___,
2001.
INVESTMENT OBJECTIVES
The Fund's primary investment objective is high current income. The
Fund's secondary investment objective is capital appreciation.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, (as hereinafter defined) voting together as a single class, and of
the holders of a majority of the outstanding Preferred Shares, including TAPS,
voting as a separate class:
1. Issue senior securities, as defined in the Investment
Company Act of 1940, other than (i) preferred shares which immediately
aster issuance will have asset coverage of at least 200%, (ii)
indebtedness which immediately after issuance will have asset coverage
of at least 300%, or (iii) the borrowings permitted by investment
restriction (2) set forth below;
2. Borrow money, except as permitted by the Investment Company
Act of 1940;
3. Act as underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities;
4. Purchase or sell real estate, 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;
5. Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, derivative instruments or from investing in securities or
other instruments backed by physical commodities);
6. Make loans, other than by entering into repurchase
agreements and through the purchase of debt securities in accordance
with its investment objectives, policies and limitations; and;
7. Purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total
assets would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer; provided that, with respect to 50% of
the Fund's assets, the Fund may invest up to 25% of its assets in the
securities of any one issuer.
For purposes of the foregoing and "Description of Shares - TAPS -
Voting Rights" below, "majority of the outstanding," when used with respect to
particular shares of the Fund, means (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is less.
Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its total assets in the aggregate in shares of other investment
companies and only up to 5% of its total assets in any
S-1
one investment company, provided the investment does not represent more than 3%
of the voting stock of the acquired investment company at the time such shares
are purchased. As a stockholder in any investment company, the Fund will bear
its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's management, advisory and administrative fees
with respect to assets so invested. Holders of Common Shares would therefore be
subject to duplicative expenses to the extend the Fund invests in other
investment companies. In addition, the securities of other investment companies
may also be leveraged and would therefore be subject to the same leverage risks
described herein. As described in the Prospectus in the section entitled
"Risks", the net asset value and market value of leveraged shares would be more
volatile and the yield to shareholders would tend to fluctuate more than the
yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
1. Sell securities short, unless the Fund owns or has the
right to obtain securities equivalent in kind and amount to the
securities sold at no added cost, and provided that transactions in
options, futures contracts, options on futures contracts, or other
derivative instruments are not deemed to constitute selling securities
short.
2. Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act of 1940
or any exemptive relief obtained thereunder.
3. Purchase securities of companies for the purpose of
exercising control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the
Prospectus.
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 will invest at least 90% of its total assets in income
producing common stocks, preferred stocks, convertible preferred stock and debt
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 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 markets.
The Fund will invest at least 40% of its total assets in common stocks. The Fund
will not invest more than 25% of its total assets in below or non-investment
grade preferred stocks, convertible preferred stocks and debt securities
(commonly known as "junk bonds"). The Fund may invest up to 20% of its total
assets in debt companies. The actual percentage of common, preferred and
convertible preferred stocks, rights and warrants and debt securities in the
Fund's portfolio may vary over time based on Security Capital's assessment of
market conditions.
S-2
REAL ESTATE COMPANIES
For purposes of the Fund's investment policies, a real estate company
is a company that securities, including:
- derives at least 50% of its revenues from the ownership,
construction, financing, management or sale of commercial,
industrial or residential real estate; or
- has at least 50% of its assets in such real estate.
REAL ESTATE INVESTMENTS TRUSTS (REITS)
A REIT is a company that pools investors' funds for investment
primarily in income-producing real estate or in real estate related loans (such
as mortgages) or other interests. Therefore, a REIT normally derives its income
from rents or from interest payments, and may realize capital gains by selling
properties that have appreciated in value. A REIT is not taxes on income
distributed to shareholders if it complies with several requirements relating to
its organization, ownership, assets and income and a requirement that it
distributes to its shareholders at least 90% of its taxable income (other than
net capital gains) for each taxable year and otherwise complies with the
requirements of the Code. As a result, REITs tend to pay relatively higher
dividends than other types of companies and the Fund intends to use these REIT
dividends in an effort to meet the current income goal of its investment
objectives.
REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.
PREFERRED STOCKS
Preferred stocks pay fixed or floating rate dividends to investors, and
have a "preference" over common stock in the payment of dividends and the
liquidation of a company's assets. This means that a company must pay dividends
on preferred stock before paying any dividends on its other matters. The Fund
may invest in preferred stocks issued by real estate companies. It is the Fund's
intention to initially invest approximately 30% of its total assets in preferred
stocks issued by real estate companies. The actual percentage of preferred
stocks in the Fund's portfolio may vary over time based on Security Capital's
assessment of market conditions.
LOWER-RATED SECURITIES
Securities of below grade investment quality (Ba/BB or below) are
commonly referred to as junk bonds. Securities of below investment grade quality
are regarded as having predominately speculative characteristics with respect to
capacity to pay interest and repay principal.
Lower-rated securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of lower-rated securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments.
Yields on lower-rated securities will fluctuate. If the issue of lower-rated
securities defaults, the Fund may incur additional expenses to seek recovery.
S-3
The secondary markets in which lower-rated securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the net asset value of our shares. Adverse publicity and
investor perceptions may decrease the values and liquidity of high yield
securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities, and adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon. New laws and
proposed new laws may adversely impact the market for lower-rated securities.
The Fund may only invest in high yield securities that are rated CCC or
higher by S&P, rated Caa or higher by Moody's, CCC or higher by Fitch, or
unrated securities determined by the Subadviser to be of comparable quality. The
issuers of these securities have a currently identifiable vulnerability to
default as to payment of principal and interest 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 which are in default as to
payment of principal and interest at the time of purchase.
ILLIQUID SECURITIES
The Fund will not enter into short sales or invest in derivatives,
except as described in the Prospectus and the Statement of Additional
Information in connection with the interest rate swap or interest rate cap
transactions. See "Interest Rate Transactions."
NO INVESTMENTS IN REAL ESTATE SECURITIES CONTROLLED BY SCGI
The Fund will not enter into short sales or invest in derivatives,
except as described in the Prospectus and the Statement of Additional
Information in connection with the interest rate swap or interest rate cap
transactions. See "Interest Rate Transactions."
NO INVESTMENTS IN REAL ESTATE SECURITIES CONTROLLED BY SCGI
The Fund will not invest in real estate securities that are controlled
by SCGI, an affiliate of the Subadviser, or its affiliates.
SHORT-TERM INVESTMENTS
For temporary defensive purposes or to keep cash on hand fully
invested, the Fund may invest up to 100% of its net assets in cash equivalents
and short-term fixed-income securities. Short-term taxable fixed income
investments are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government agency securities
including securities issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of
S-4
the agency or instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its credit. While
the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be
given that it always will do so since it is not so obligated by law.
The U.S. government, its agencies, and instrumentalities do not
guarantee the market value of their securities. Consequently, the value
of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in
a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate or return, and are
normally negotiable. The issue of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the certificate
on the date specified thereon. Under current FDIC regulations, the
maximum insurance payable as to any one certificate of deposit is
$100,000; therefore, certificates of deposit purchased by the Fund may
not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, if simultaneously agrees to resell and redeliver
such securities to the seller, who also simultaneously agrees to buy
back the securities at a fixed price and time. This assures a
predetermined yield for the Fund during its holding period, since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the
Fund to invest temporarily available cash. The Fund may enter into
repurchase agreements only with respect to obligations of the U.S.
government, its agencies or instrumentalities; certificates of deposit;
or bankers, acceptances in which the Fund may invest. Repurchase
agreements may be considered loans to the seller, limited to the
ability of the seller to pay the agreed-upon sum on the repurchase
date; in the event of default, the repurchase agreement provides that
the Fund is entitled to sell the underlying collateral. If the value of
the collateral declines after the agreement is entered into, and if the
seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Fund could
incur a loss of both principal and interest. The investment adviser
monitors the value of the collateral at the time the action is entered
into and at all times during the term of the repurchase agreement. The
investment adviser does so in an effect to determine that the value of
the collateral always equals or exceeds the agreed-upon repurchase
price to be paid to the Fund. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of the Fund to liquidate the
collateral could be delayed or impaired because of certain provisions
of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. NIAC and Security capital will
consider the financial condition of the corporation (e.g., earning
power, cash flow, and other liquidity ratios) and will continuously
monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper
rated in the highest categories by a major rating agency and which
mature within one year of the date of purchase or carry a variable or
floating rate of interest.
EXPECTED INITIAL PORTFOLIO COMPOSITION INDUSTRY SECTOR
The Fund expects its initial portfolio, after invest-up is completed,
will represent a range of industry sectors.
S-5
[PIE GRAPH APPEARS HERE]
By Industry Sector
Office 27.5%
Retail 23.5%
Multifamily 23.0%
Industrial 16.0%
Health Care 5.5%
Storage 3.0%
Diversified 1.5%
The Industry Sector allocations shown here are estimates based on
September 30, 2001 market conditions. Actual allocations may differ.
INTEREST RATE TRANSACTIONS
In connection with the Fund's anticipated use of leverage through its
sale of Fund Preferred Shares or Borrowings, the Fund may enter into interest
rate swap or cap transactions. Interest rate swaps involve the Fund's agreements
with the swap counterparty to pay fixed rate payment in exchange for the
counterparty paying the Fund a variable rate payment that is intended to
approximate the Fund's variable rate payment obligations on TAPS of any variable
rate Borrowings. The payment obligation would be based on the notional amount of
the swap. The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount.
The Fund would use interest rate swaps or caps only with the intent to reduce or
eliminate the risk that an increase in short-term interest rates could have on
Common Share net earnings as a result of leverage.
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 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. Depending on the state
of interest rates in general, the Fund's use of interest rate swaps or caps
could enhance or harm the overall performance on the Common Shares. To the ext
there is a decline in interest rates, the value of the interest rate swap or cap
could decline, and could result in a decline in the net asset value of the
Common Shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
Common Share net earnings. Buying interest rate caps could enhance the
performance of the Common Shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the Common Shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of selling an interest
rate swap or cap. The Fund would not enter into interest rate swap or cap
transactions in an aggregate notional amount that exceeds the outstanding amount
of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities
or other underlying assets of principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest payment
that the Fund is contractually obligated to make. If the counterparty defaults,
the Fund
S-6
would not be able to use the anticipated net receipts under the swap or cap to
offset the dividend payments on TAPS or interest payments on Borrowings.
Depending on whether the Fund would be entitled to receive net payments from the
counterparty on the swap or cap, which in turn would depend on the general state
of short-term interest rates at that point in time, such a default could
negatively impact the performance of the Common Shares. Although this will not
guarantee that the counterparty does not default, the Fund will not enter into
an interest rate swap or cap transaction with any counterparty that NIAC
believes does not have the financial resources to honor its obligation financial
stability of a counterparty to an interest rate swap or cap transaction in an
effort to proactively protect the Fund's investments. Further, NIAC will
continually monitor the financial stability of a counterparty to an interest
rate swap or cap transaction in an effort to proactively protect the Fund's
investments. In addition, at the time the interest rate swap or cap transaction
reaches its scheduled termination date, there is a risk that the Fund will not
be able to obtain a replacement transaction or that the terms of the replacement
will not be as favorable as on the expiring transaction. If this occurs, it
could have a negative impact on the performance of the Fund's Common Shares.
The Fund may choose or be required to redeem some or all of the
Preferred Shares, including TAPS, or prepay any Borrowings. This redemption
would likely result in the Fund seeking to terminate early all or a portion of
any swap or cap transaction. Such early termination of a swap 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.
S-7
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at seven, one of whom is an "interested" person (as the term
"interested" persons is defined in the Investment Company Act of 1940) and six
of whom are not "interested" persons. None of the trustees who are not
"interested" persons of the Fund has ever been a director or employee of, or
consultant to, Nuveen, SGCI or its affiliates. The names and business addresses
of the trustees and officers of the Fund and their principal occupations and
other affiliations during the past five years are set forth below, with those
trustees who are "interested" persons of the Fund indicated by an asterisk.
BIRTH POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS DATE WITH THE FUND PAST FIVE YEARS
---------------- ---- ------------- ---------------
Timothy R. Schwertfeger* 3/28/49 Chairman of the Board, Chairman and Director (since July 1996)
333 West Wacker Drive President and Trustee of The John Nuveen Company, Nuveen
Chicago, IL 60606 Investments, Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.;
prior thereto, Executive Vice President
and Director of The John Nuveen Company
and Nuveen Investments; Director (since
1992) and Chairman (since 1996) of Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.; Chairman and Director
(since January 1997) of Nuveen Asset
Management, Inc.; Director (since 1996)
of Institutional Capital Corporation;
Chairman and Director of Rittenhouse
Financial Services Inc. (since 1999);
Chief Executive Officer (since September
1999) of Nuveen Senior Loan Asset
Management Inc.
James E. Bacon 2/27/31 Trustee Business consultant and Treasurer,
114 W. 47th St. Cathedral of St. John the Divine (New
New York, NY 10036 York City); formerly (1992-1999),
Director of Lone Star Industries, Inc.;
previously, Director and Executive Vice
President of U.S. Trust Corporation and
Trustee of United States Trust Company of
New York.
William E. Bennett 10/16/46 Trustee Private Investor; previously, President
55 W. Monroe and Chief Executive Officer, Draper &
Chicago, IL 60606 Kramer, Inc. (September 1995 - August
1998).
Jack B. Evans 10/22/48 Trustee President, The Hall-Perrin Foundation, a
115 Third Street, S.E. private philanthropic corporation (since
Cedar Rapids, IA 52401 2996); Director, Alliant Energy; Director
and Vice Chairman United Fire & Casualty
Company; formerly President and Chief
Operating Officer, SCI Financial Group,
Inc., a regional financial services firm.
William L. Kissick 7/29/32 Trustee Professor, School of Medicine and the
University of Pennsylvania Wharton School of Management and former
224 NEB/2L Chairman, Leonard Davis Institute of
Philadelphia, PA 19104 Health Economics, University of
Pennsylvania.
S-8
BIRTH POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS DATE WITH THE FUND PAST FIVE YEARS
---------------- ---- ------------- ---------------
Thomas E. Leafstrand 11/11/31 Trustee Retired; previously, Vice President in
412 W. Franklin charge of Municipal Underwriting and
Wheaton, IL 60187 Dealer Sales at The Northern Trust Company
Sheila W. Wellington 2/24/32 Trustee President (since 1993) of Catalyst (a
250 Park Avenue not-for-profit organization focusing on
New York, NY 10003 women's leadership development in
business and the professions).
Alan G. Berkshire 12/28/60 Vice President and Senior Vice President and General Counsel
33 West Wacker Drive Assistant Secretary (since September 1998) and Secretary
Chicago, IL 60606 (since May 1998) of The John Nuveen
Company, Nuveen investments, Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.; Senior Vice President and
Secretary (since September 1999) of
Nuveen Senior Loan Asset Management Inc.;
prior thereto, Partner in the law firm of
Kirkland & Ellis.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President (since January 1999),
333 West Wacker Drive Treasurer previously Assistant Vice President (from
Chicago, IL 60606 January 1997) of Nuveen Investment,
Associate prior thereto; Vice President
and Treasurer (since September 1999) of
Nuveen Senior Loan Asset Management Inc.;
Chartered Financial Analyst.
Lorna C. Ferguson 10/24/45 Vice President Vice President of Nuveen Investments;
333 West Wacker Drive Vice President (since January 1998) of
Chicago, IL 60606 Nuveen Advisory and Nuveen Institutional
Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President Vice President (since December 1995),
333 West Wacker Drive previously Assistant Vice President (from
Chicago, IL 60606 September 1992 to December 1995), of
Nuveen Advisory Corp., Chartered
Financial Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President (since May 1998) of Nuveen
333 West Wacker Drive Controller Investments; Vice President (since
Chicago, IL 60606 September 1999) of Nuveen Senior Loan
Asset Management Inc.; Certified Public
Accountant.
David Lamb 3/22/63 Vice President Vice President (since March 2000) of
333 West Wacker Drive Nuveen Investment, previously Assistant
Chicago, IL 60606 Vice President (since January 1999);
prior thereto, Associate of Nuveen
Investments; Certified Public Accountant.
S-9
BIRTH POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS DATE WITH THE FUND PAST FIVE YEARS
---------------- ---- ------------- ---------------
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary and
333 West Wacker Drive Assistant Secretary Assistant General Counsel of Nuveen
Chicago, Il 60606 Investments; Vice President and Assistant
Secretary of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.'
Assistant Secretary of the John Nuveen
Company and (since January 1998) of
Nuveen Asset Management, Inc.; Vice
President and Assistant Secretary (since
September 1999) of Nuveen Senior Loan
Asset Management, Inc.
Edward F. Neild, IV 7/7/65 Vice President Vice President (since September 1996),
333 West Wacker Drive previously Assistant Vice President
Chicago, IL 60606 (since December 1993) of Nuveen Advisory
Corp., Portfolio Manager prior thereto;
Vice President (since September 1996),
previously Assistant Vice President
(since May 1995), of Nuveen Institutional
Advisory Corp.; Chartered Financial
Analyst.
Gifford R. Zimmerman 9/9/56 Vice President and Vice President, Assistant Secretary and
333 West Wacker Drive Secretary Associate General Counsel, formerly
Chicago, IL 60606 Assistant General Counsel, of Nuveen
Investments; Vice President, General
Counsel and Assistant Secretary of
Nuveen Advisory Corp, and Nuveen
Institutional Advisory Corp.; Vice
President and Assistant Secretary
(since September 1999) of Nuveen
Senior Loan Asset Management, Inc.;
Assistant Secretary of The John
Nuveen Company (since May 1994);
Chartered Financial Analyst.
William L. Kissick and Timothy R. Schwertfeger serve as members of the
Executive Committee of the Board of Trustees of the Fund. The Executive
Committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees. In addition
to the Fund, the Trustees are trustees of 14 Nuveen open-end and closed-end
funds advised by NIAC and two funds advised by Nuveen Senior Loan Asset
Management Inc. Mr. Schwertfeger is also a director or trustee, as the case may
be, of 30 Nuveen open-end funds and 66 Nuveen closed-end funds advised by Nuveen
Advisory Corp.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that permits any trustee
who is not an "interested person" of the Fund to elect to defer receipt of all
or a portion of his or her compensation as a trustee. The deferred compensation
of a participating trustee is credited to a book reserve account of the Trust
when the compensation would otherwise have been paid to the trustee. The value
of the trustee's deferral account at any time is equal to the value that the
account would have had if contributions to the account had been invested and
reinvested in shares of one or more of the eligible Nuveen funds. At the time
for commencing distributions from a trustee's deferral account, the trustee may
elect to receive distributions in a lump sum or over a period of five years. The
Fund will not be liable for any other fund's obligations to make distributions
under the Plan.
S-10
TOTAL COMPENSATION AMOUNT OF TOTAL
FROM FUND AND FUND COMPENSATION
NAME OF TRUSTEE FUND* COMPLEX** THAT HAS BEEN DEFERRED
--------------- ----- --------- ----------------------
James E. Bacon .............. $6,720 $45,500 $ 20,000
William E. Bennett*** ....... $6,720 N/A N/A
Jack B. Evans ............... $6,720 $45,500 $20,448
William L. Kissick .......... $6,720 $45,500 $18,000
Thomas E. Leafstrand ........ $7,720 $47,100 $20,996
Sheila W. Wellington ........ $6,720 $45,500 $40,895
* Based on the estimated compensation to be earned by the independent
trustees for the period from inception through the end of the Fund's first
full fiscal year for services to the Fund.
** Based on the total compensation paid to the trustees for the one year
period ending December 31, 2000 for services to the open-end and
closed-end funds advised by NIAC and Nuveen Senior Loan Asset Management
Inc.
*** Mr. Bennett was appointed to the Board in January 2001 and therefore
received no compensation in calendar year 2000.
The Fund has no employees. Its officers are compensated by NIAC or
Nuveen.
INVESTMENT ADVISER AND SUBADVISER
NIAC acts as investment adviser to the Fund, with responsibility for
the overall management of the Fund. Its address is 333 West Wacker Drive,
Chicago, Illinois 60606. NIAC is responsible for the selection of the
sub-adviser, managing the Fund's business affairs and providing day-to-day
administrative services to the Fund. For additional information regarding the
management services performed by NIAC, see "Management of the Fund" in the
Fund's Prospectus.
NIAC is a wholly owned subsidiary of Nuveen, which is also a
co-managing underwriter of the Fund's shares. Nuveen is sponsor of the Nuveen
Defined Portfolios, registered unit investment trusts, is the principal
underwriter for the Nuveen Mutual Funds, and has served as co-managing
underwriter for the shares of the Nuveen Exchange-Traded Funds. Over 1,300,000
individuals have invested to date in Nuveen's funds and trusts. Founded in 1898,
Nuveen brings over a century of expertise to the municipal bond market.
According to data from CDA Weisenberger, Nuveen is a leading sponsor of
exchange-traded funds as measured by number of funds (78) and fund assets under
management ($30 billion) as of September 30, 2001. Overall, Nuveen and its
affiliates have over $75 billion in assets under management or surveillance.
Nuveen, like NIAC, is a subsidiary of The John Nuveen Company which, in turn, is
approximately 78% owned by The St. Paul Companies, Inc. ("St. Paul"). St. Paul
is a publicly-traded company located in St. Paul, Minnesota, and is principally
engaged in providing property-liability insurance through subsidiaries.
Security Capital, 11 South LaSalle Street, 2nd Floor, Chicago, Illinois
60603, is the subadviser to the Fund. Security Capital is an indirect, wholly
owned subsidiary of SCGI, a publicly traded company that is one of the country's
leading real estate investors and operators, with interests in companies having
a total market capitalization of $19 billion as of September 30, 2001.
Security Capital, which is registered as an investment adviser with the
Securities and Exchange Commission, commenced operations in January 1995 and had
assets under management of approximately $2.4 billion as of September 30, 2001.
A team of full-time Security Capital professions, working together as
the Fund's Portfolio Management Committee, is primarily responsible for
overseeing the day-to-day operations of the Fund. The Members of the Portfolio
Management Committee are as follows:
S-11
ANTHONY R. MANNO JR. is the Chief Investment Officer of Security
Capital, and Chairman of Security Capital Real Estate Mutual Funds
Incorporated and Security Capital Preferred Growth Incorporated. He is
a member of the Portfolio Management Committee and responsible for
overseeing all of the investment activities for Security Capital. Prior
to joining Security Capital in 1994, Mr. Manno spent 14 years with
LaSalle Partners Limited as a Managing Director, responsible for real
estate investment banking activities. Mr. Manno began his career in
real estate finance in 1974 at the First National Bank of Chicago. He
received his MBA in Finance with honors from the University of Chicago
and graduated Phi Beta Kappa from Northwestern University with a BA and
MA in Economics. Mr. Manno is also a CPA and was awarded an Elijah Watt
Sells Honorable Mention.
KENNETH D. STATZ is a Managing Director and Senior Market Strategist of
Security Capital and is a member of the Portfolio Management Committee,
where he is responsible for the development and implementation of
portfolio investment strategy. Prior to joining Security Capital in
1995, Mr. Statz was the Senior REIT Analyst for Goldman, Sachs & Co.
concentrating on research and underwriting for the REIT industry.
Previously, Mr. Statz was the REIT Portfolio Manager and a Managing
Director of Chancellor Capital Management and has 15 years of
experience in the real estate securities industry. Mr. Statz received
his MBA and BBA in Finance from the University of Wisconsin.
KEVIN W. BEDELL is a Senior Vice President of Security Capital and a
member of the Portfolio Management Committee where he directs the
Investment Analysis Team, which provides in-depth proprietary research
on publicly traded companies. Prior to joining Security Capital in
1996, Mr. Bedell spent nine years with LaSalle Partners Limited where
he was equity vice president and portfolio manager with responsibility
for strategic, operational and financial management of a private real
estate investment trust with commercial real estate investments in
excess of $1 billion. Mr. Bedell received his MBA in Finance from the
University of Chicago and his BA from Kenyon College.
DAVID E. ROSENBAUM is a Senior Vice President of Security Capital with
primary responsibility for origination and structuring of privately
negotiated investments. Prior to joining Security Capital in 1997, Mr.
Rosenbaum was a Vice President at Lazard Freres & Co., LLC, where he
structured investments in real estate operating companies. Previously,
he was an Associate in the New York and Chicago offices of Lazard
Freres & Co., LLC, where he executed merger and acquisition
transactions for real estate and hotel companies. Mr. Rosenbaum holds a
BA from Yale University.
See "The Fund's Investments - Investment Process" in the Fund's
Prospectus for more information.
Pursuant to an investment management agreement between NIAC and the
Fund, the Fund has agreed to pay for the services and facilities provided by
Nuveen Advisory an annual management fee, payable on a monthly basis, according
to the following schedule.
S-12
AVERAGE DAILY NET ASSETS(1) MANAGEMENT FEE
--------------------------- --------------
Up to $500 million ..................... .9000%
$500 million to $1 billion ............. .8750%
$1 billion to $1.5 billion ............. .8500%
$1.5 billion to $2 billion ............. .8200%
$2 billion and over .................... .8000%
(1) Net assets including assets attributable to Fund Preferred Shares and the
principal amount of Borrowings.
Security Capital will receive from NIAC, a percent of the management
fee (net of the reimbursement described below) according to the following
schedule:
AVERAGE DAILY MANAGED ASSETS(1) MANAGEMENT FEE
------------------------------- --------------
Up to $125 million .................... 50.0%
$125 million to $150 million .......... 47.5%
$150 million to $175 million .......... 45.0%
$175 million to $200 million .......... 42.5%
$200 million and over ................. 40.0%
(1) Net assets including assets attributable to TAPS and the principal amount
of Borrowings.
In addition to the fee of NIAC, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses of issuing any TAPS, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
All fees and expenses are accrued daily and deducted before payment of
dividends to investors. The investment management agreement has been approved by
a majority of the disinterested trustees of the Fund and the sole shareholder of
the Fund.
For the first ten years of the Fund's operation, NIAC has contractually
agreed to reimburse the Fund for fees and expenses in the amounts, and for the
time periods, set forth below:
PERCENTAGE PERCENTAGE
REIMBURSED REIMBURSED
(AS A PERCENTAGE OF (AS A PERCENTAGE OF
YEAR ENDING AVERAGE DAILY NET YEAR ENDING AVERAGE DAILY NET
NOVEMBER 30, ASSETS)(1) NOVEMBER 30, ASSETS)(1)
------------ ---------- ------------ ----------
2001(2) ............ .30% 2007 .25%
2002 ............... .30% 2008 .20%
2003 ............... .30% 2009 .15%
2004 ............... .30% 2010 .10%
2005 ............... .30% 2011 .05%
2006 ............... .30%
(1) Including net assets attributable to TAPS shares.
(2) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount
of income available for the Common Shareholders. NIAC has not agreed to
reimburse the Fund for any portion of its fees and expenses beyond November 30,
2011.
S-13
The Fund, NIAC Security Capital, Nuveen, Salomon Smith Barney Inc. and
other related entities have adopted codes of ethics which essentially prohibit
certain of their personnel, including the Nuveen fund portfolio manager, from
engaging in personal investments which compete or interfere with, or attempt to
take advantage of a client's, including the Fund's, anticipated or actual
portfolio transactions, and are designed to assure that the interests of
clients, including Fund shareholders, are placed before the interests of
personnel in connection with personal investment transactions. Text-only
versions of the codes of ethics can be viewed online or downloaded from the
EDGAR Database on the SEC's internet web site at www.sec.gov. You may also
review and copy those documents by visiting the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 202-942-8090. In addition, copies of the codes of
ethics may be obtained, after mailing the appropriate duplicating fee, by
writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington,
DC 20549-0102 or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, decisions to buy
and sell securities for the Fund and brokerage commission rates are made by
Security Capital. Transactions on stock exchanges involve the payment by the
Fund of 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 Funds 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, Security
Capital 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 a Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the trustees may
determine, Security Capital shall not be deemed to have acted unlawfully or to
have breached any duty solely by reason of it having caused the Fund to pay a
broker that provides research services 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 Security Capital
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 Security Capital's ongoing
responsibilities with respect to the Fund. Research and investment information
may be provided by these and other brokers at no cost to Security Capital 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 Security Capital's expenses, it is not possible to estimate its value
and in the option of Security Capital it does not reduce Security Capital's
expenses in a determinable amount. The extent to which Security Capital makes
use of statistical, research and other services furnished by brokers is
considered by Security Capital in the allocation of brokerage business but there
is no formula by which such business is allocated. Security Capital does so in
accordance with their judgment of the best interests of the Fund and its
shareholders. Security Capital 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, Security Capital may consider sales of shares of the
Fund as a fact in the selection of brokers and dealers to enter into portfolio
transactions with the Fund.
S-14
Certain other clients of Security Capital may have investment
objectives and policies similar to those of the Fund. Security Capital may, from
time to time, make recommendations which result in the purchase or sale of a
particular security by its other clients simultaneously with the Fund. If
transactions on behalf of more than one client during the same period increase
the demand for securities being sold, there may be an adverse effect on the
price of such securities. It is the policy of Security Capital to allocate
advisory recommendations and the placing of orders in a manner which is deemed
equitable to Security Capital to the accounts involved, including the Fund. When
two or more of the clients of Security Capital (including the Fund) are
purchasing or selling the same security on a given day through the same
broker-dealer, such transactions may be averaged as to price.
Under the 1940 Act, the Fund may not purchase portfolio securities from
any underwriting syndicate of which Nuveen is a member except under certain
limited conditions set forth in Rule 10f-3. The rule sets forth requirements
relating to, among other things, the terms of an issue purchased by the Fund,
the amount of securities which may be purchased in any one issue and the assets
of the Fund that may be invested in a particular issue. In addition, purchases
of securities made pursuant to the terms of the Rule must be approved at least
quarterly by the Board of Trustees of the Fund, including a majority of the
members thereof who are not interested persons of the Fund.
NET ASSET VALUE
The Fund will determine the net asset value of its shares daily, as of
the close of regular session trading on the New York Stock Exchange (normally
4:00 p.m. eastern time). Net asset value is computed by dividing the value of
all assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding. Any swap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have a
positive or negative value for purposes of calculating net asset value. Any cap
transaction that the Fund enters into may, depending on the applicable interest
rate environment, have no value or a positive value. In addition, accrued
payments to the Fund under such transactions will be assets of the Fund and
accrued payments by the Fund will be liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Trustees shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ("NASDAQ") National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
adviser to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the mean of the current bid and asked
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 Trustees
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 Trustees to
reflect the fair market value of such securities. The prices provided by a
pricing service take into account institutional
S-15
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 Trustees believes reflect most closely the value of such
securities.
DESCRIPTION OF TAPS
Notices. The Fund must deliver a certificate with respect to the
calculation of the TAPS Basic Maintenance Amount and the value of the portfolio
holdings of the Fund (a "TAPS Basic Maintenance Certificate") (i) to the Auction
Agent, each Rating Agency which is then rating the TAPS and which so requires as
of (a) the Business Day preceding the Date of Original Issue and (b) any
Valuation Date on which the Fund fails to have Eligible Assets with an aggregate
Discounted Value at least equal to 125% of the TAPS Basic Maintenance Amount,
(ii) to the Auction Agent, each Rating Agency which is then rating the TAPS and
which so requires as of (a) every fourth Valuation Date after the Date of
Original Issue for the first year following the Date of Original Issue, (b) if
the Fund fails to have Eligible Assets with an aggregate Discounted Value at
least equal to the TAPS Basic Maintenance Amount, and (c) on request by each
Rating Agency, as applicable, (iii) to the Auction Agent, each Rating Agency
which is then rating the TAPS and which so requires as of (a) the Valuation Date
next following the date of redemption by the Fund of shares of Common Shares
which, together with all other shares of Common Shares purchased during the six
months preceding such date, equal in excess of ______ shares of Common Shares,
and (b) the last Valuation Date of each fiscal quarter and a Valuation Date
during such fiscal quarter randomly selected by the Fund's independent
accountants as provided below, and (iv) to the Auction Agent, each Rating Agency
which is then rating the TAPS and which so requires as of a Business Day on or
before any Asset Coverage Cure Date relating to the Fund's cure of a failure to
have Eligible Assets with an aggregate Discounted Value at least equal to the
TAPS Basic Maintenance Amount. Such TAPS Basic Maintenance Certificate shall be
delivered in the case of clause (i)(a) on the Date of Original Issue and in the
case of clauses (i)(b), (ii), (iii) and (iv) above on or before the third
Business Day after the relevant Valuation Date or Asset Coverage Cure Date.
The Fund is required to deliver to the Auction Agent, each Rating
Agency which is then rating the TAPS and which so requires, a certificate with
respect to the calculation of the 1940 Act TAPS Asset Coverage and the value of
the portfolio holdings of the Fund (a "1940 Act TAPS Asset Coverage
Certificate") (i) as of the Business Day preceding the Date of Original Issue
with respect to TAPS, and (ii) as of (a) the last Valuation Date of each quarter
thereafter, and (b) as of the Business Day on or before the Asset Coverage Cure
Date relating to the failure to satisfy the 1940 Act Asset Coverage (as defined
under "Description of Senior Notes -- Asset Maintenance"). Such 1940 Act TAPS
Asset Coverage Certificate shall 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 third
Business Day after the relevant Valuation Date or the Asset Coverage Cure Date.
Such certificate must be accompanied by a certificate from the Fund's
accountants certifying as to the accuracy of the Fund's calculations.
On the Date of Original Issue, the Fund shall deliver to the Auction
Agent, each Rating Agency which is then rating the TAPS and which so requires, a
letter prepared by the Fund's independent accountants (an "Accountant's
Certificate") regarding the accuracy of the calculations made by the Fund in the
TAPS Basic Maintenance Certificate and the 1940 Act TAPS Asset Coverage
Certificate required to be delivered by the Fund on the Date of Original Issue.
Within eight Business Days after the last Valuation Date of each fiscal quarter
of the Fund on which an TAPS Basic Maintenance Certificate is required to be
delivered, the Fund will deliver to the Auction Agent, each Rating Agency which
is then rating the TAPS and which so requires, an Accountant's Certificate
regarding the accuracy of the calculations made by the Fund in such TAPS Basic
Maintenance Certificate and in any other TAPS Basic
S-16
Maintenance Certificate randomly selected by the Fund's independent accountants
during such fiscal quarter. Within eight Business Days after the last Valuation
Date of each fiscal quarter of the Fund on which a 1940 Act TAPS Asset Coverage
Certificate is required to be delivered, the Fund will deliver to the Auction
Agent, each Rating Agency which is then rating the TAPS and which so requires an
Accountant's Certificate regarding the accuracy of calculations made by the Fund
in such 1940 Act TAPS Asset Coverage Certificate. In addition, the Fund will
deliver to the relevant persons specified in the preceding sentence an
Accountant's Certificate regarding the accuracy of the calculations made by the
Fund on each TAPS Basic Maintenance Certificate and 1940 Act TAPS Asset Coverage
Certificate required to be delivered as of a Business Day on or before any Asset
Coverage Cure Date, within five days after the relevant Asset Coverage Cure
Date. If an Accountant's Certificate delivered with respect to an Asset Coverage
Cure Date shows an error was made in the Fund's report with respect to such
Asset Coverage Cure Date, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund with respect
to such reports. If any other Accountant's Certificate shows that an error was
made in any such report, the calculation or determination made by the Fund's
independent accountants will be conclusive and binding on the Fund; provided,
however, any errors shown in the Accountant's Certificate filed on a quarterly
basis shall not be deemed to be a failure to have Eligible Assets with an
aggregate Discounted Value at least equal to the TAPS Basic Maintenance Amount
on such prior Valuation Dates. In the event that a TAPS Basic Maintenance
Certificate or 1940 Act TAPS Asset Coverage Certificate or the applicable
Accountant's Certificates with respect to an applicable Asset Coverage Cure Date
are not delivered within the time periods specified in the Statement, the Fund
shall be deemed to have failed to have Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount or the 1940
Act TAPS Asset Coverage, as the case may be, as of the related Valuation Date,
and such failure shall be deemed not to have been cured as of such Asset
Coverage Cure Date for purposes of the mandatory redemption provisions.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR TAPS
GENERAL
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for each series of TAPS so long as the Applicable Rate for
shares of such series is to be based on the results of an Auction.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for TAPS. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company ("DTC") will act as
the Securities Depository for the Agent Members with respect to each series of
TAPS. One certificate for all of the shares of each series of TAPS will be
registered in the name of Cede, 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 TAPS contained in the
Statement. The Fund will also issue stop-transfer instructions to the transfer
agent for each series of TAPS. Prior to the commencement of the right of holders
of preferred shares to elect a majority of the Fund's trustees, as described
under "Description of TAPS -- Voting Rights" in the prospectus, Cede will be the
holder of record of all shares of each series of TAPS and owners of such shares
will not be entitled to receive certificates representing their ownership
interest in such shares.
S-17
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in TAPS, whether for its own account or as a
nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of TAPS, the Auction Agent's registry of Existing
Holders, the results of Auctions and notices from any Broker-Dealer (or other
Person, if permitted by the Fund) with respect to transfers described under "The
Auction -- Secondary Market Trading and Transfer of TAPS" in the prospectus and
notices from the Fund. The Auction Agent is not required to accept any such
notice for an Auction unless it is received by the Auction Agent by 3:00 p.m.,
New York City time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of TAPS will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of TAPS placed by such Broker-Dealer
at such Auction. For the purposes of the preceding sentence, TAPS 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 own account or 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 such Existing Holder continuing to hold such shares as a
result of the Auction or (ii) a Submitted Bid of a Potential Holder that
resulted in such Potential Holder purchasing such shares as a result of the
Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Fund may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it might
have an advantage over other Bidders because it would have
S-18
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.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder liability
for debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is very remote.
The Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund. Specifically, the
Declaration requires a vote by holders of at least two-thirds of the Common
Shares and Preferred Shares, including TAPS, voting together as a single class,
except as described below, to authorize (1) a conversion of the Fund from a
closed-end to an open-end investment company, (2) a merger or consolidation of
the Fund, or a series or class of the Fund, with any corporation, association,
trust or other organization or a reorganization or recapitalization of the Fund,
or a series or class of the Fund, (3) a sale, lease or transfer of all or
substantially all of the Fund's assets (other than in the regular course of the
Fund's investment activities), (4) in certain circumstances, a termination of
the Fund, or a series or class of the Fund or (5) removal of trustees, and then
only for cause, unless, with respect to (1) through (4), such transaction has
already been authorized by the affirmative vote of two-thirds of the total
number of trustees fixed in accordance with the Declaration or the By-laws, in
which case the affirmative vote of the holders of at least a majority of the
Fund's Common Shares and Preferred Shares, including TAPS, outstanding at the
time, voting together as a single class, is required, provided, however, that
where only a particular class or series is affected (or, in the case of removing
a trustee, when the trustee has been elected by only one class), only the
required vote by the applicable class or series will be required. Approval of
shareholders is not required, however, for any transaction, whether deemed a
merger, consolidation, reorganization or otherwise whereby the Fund issues
shares in connection with the acquisition of assets (including those subject to
liabilities) from any other investment company or similar entity. None of the
foregoing provisions may be amended except by the vote of at least two-thirds of
the Common Shares and Preferred Shares, including TAPS, voting together as a
single class. In the case of the conversion of the Fund to an open-end
investment company, or in the case of any of the foregoing transactions
constituting a plan of reorganization which adversely affects the holders of
Preferred Shares, including TAPS, shares, the action in question will also
require the affirmative vote of the holders of at least two-thirds of the Fund's
Preferred Shares, including TAPS, outstanding at the time, voting as a separate
class, or, if such action has been authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the affirmative vote of the holders of at least a
majority of the Fund's Preferred Shares, including TAPS, outstanding at the
time, voting as a separate class. The votes required to approve the conversion
of the Fund from a closed-end to an open-end investment company or to approve
transactions constituting a plan of reorganization which adversely affects the
holders of Preferred Shares, including TAPS, are higher than those required by
the 1940 Act. The Board of Trustees believes that the provisions of the
Declaration relating to such higher votes are in the best interest of the Fund
and its shareholders.
Reference should be made to the Declaration on file with the Securities
and Exchange Commission for the full text of these provisions.
S-19
The Declaration provides that the obligations of the Fund are not
binding upon the trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
investment company may frequently trade at prices lower than net asset value,
the Fund's Board of Trustees has currently determined that, at least annually,
it will consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of Common Shares, which may include the
repurchase of such shares in the open market or in private transactions, the
making of a tender offer for such shares at net asset value, or the conversion
of the Fund to an open-end investment company. There can be no assurance,
however, that the Board of Trustees will decide to take any of these actions, or
that share repurchases or tender offers, if undertaken, will reduce market
discount.
Notwithstanding the foregoing, at any time when the Fund's Preferred
Shares, including TAPS, are outstanding, the Fund may not purchase, redeem or
otherwise acquire any of its Common Shares unless (1) all accrued Preferred
Shares, including TAPS, dividends have been paid and (2) at the time of such
purchase, redemption or acquisition, the net asset value of the Fund's portfolio
(determined after deducting the acquisition price of the Common Shares) is at
least 200% of the liquidation value of the outstanding Preferred Shares,
including TAPS (expected to equal the original purchase price per share plus any
accrued and unpaid dividends thereon). The staff of the Securities and Exchange
Commission currently requires that any tender offer made by a closed-end
investment company for its shares must be at a price equal to the net asset
value of such shares on the close of business on the last day of the tender
offer. Any service fees incurred in connection with any tender offer made by the
Fund will be borne by the Fund and will not reduce the stated consideration to
be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of the Fund at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of Common Shares or a tender offer for such shares if
(1) such transactions, if consummated, would (a) result in the delisting of the
Common Shares from the American Stock Exchange, or (b) impair the Fund's status
as a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code") (which would make the Fund a taxable entity, causing the
Fund's income to be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such
S-20
transactions or otherwise materially adversely affecting the Fund, (b) general
suspension of or limitation on prices for trading securities on the American
Stock Exchange, (c) declaration of a banking moratorium by federal or state
authorities or any suspension of payment by United States or state banks in
which the Fund invests, (d) material limitation affecting the Fund or the
issuers of its portfolio securities by federal or state authorities on the
extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Fund or its shareholders if shares were
repurchased. The Board of Trustees of the Fund may in the future modify these
conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's Common Shares and Preferred Shares,
including TAPS, outstanding at the time, voting together as a single class, and
of the holders of at least two-thirds of the Fund's Preferred Shares, including
TAPS, outstanding at the time, voting as a separate class, provided, however,
that such separate class vote shall be a majority vote if the action in question
has previously been approved, adopted or authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or By-laws. See the prospectus under "Certain Provisions in the
Declaration of Trust" for a discussion of voting requirements applicable to
conversion of the Fund to an open-end company. If the Fund converted to an
open-end company, it would be required to redeem all Preferred Shares, including
TAPS, then outstanding, and the Fund's Common Shares would no longer be listed
on the American Stock Exchange. Shareholders of an open-end investment company
may require the company to redeem their shares on any business day (except in
certain circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charge, if any, as might be in effect at the time of
redemption. In order to avoid maintaining large cash positions or liquidating
favorable investments to meet redemptions, open-end companies typically engage
in a continuous offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
The Board of Trustees of the Fund may at any time propose conversion of the Fund
to an open-end company depending upon their judgment as to the advisability of
such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when Preferred Shares, including TAPS, are outstanding will increase the
leverage applicable to the outstanding Common Shares then remaining.
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of the Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
S-21
TAX MATTERS
The following is intended to be a general summary of certain federal
income tax consequences of investing in TAPS. It is not intended as a complete
discussion of all such tax consequences, nor does it purport to deal with all
categories of investors. INVESTORS ARE THEREFORE ADVISED TO CONSULT WITH THEIR
TAX ADVISERS BEFORE MAKING AN INVESTMENT IN THE FUND.
FEDERAL INCOME TAX TREATMENT OF THE FUND
The Fund intends to qualify for, and to elect to be treated as a
regulated investment company under Subchapter M of the Code and intends to
qualify under those provisions each year. To qualify as a regulated investment
company, the Fund must, among other things, (a) derive in each taxable year at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in stocks, securities or currencies; and (b) diversify its
holdings so that, at the end of each quarter of its fiscal year, (i) at least
50% of the market value of the Fund's assets is represented by cash and cash
items, U.S. Government securities, securities of other regulated investment
companies and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater in value
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies).
As a regulated investment company, in any fiscal year with respect to
which the Fund distributes at least 90% of its net investment income (i.e., the
Fund's investment company taxable income, as that term is defined in the Code,
without regard to the deduction for dividends paid), the Fund (but not its
shareholders) generally will be relieved of U.S. federal income taxes on its net
investment income and net capital gain (i.e., the Fund's net long-term capital
gain in excess of the sum of net short-term capital loss and capital loss
carryovers from prior years, if any) that it distributes to shareholders.
However (currently imposed at a maximum rate of 35%), the Fund will be subject
to federal income tax on any undistributed net investment income and net capital
gain. Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax
payable by the Fund. To avoid the tax, the Fund must distribute, or be deemed to
have distributed, during each calendar year an amount equal to the sum of (1) at
least 98% of its ordinary income for the calendar year, (2) at least 98% of its
capital gain net income for the twelve-month period ending on October 31 of the
calendar year, and (3) all ordinary income and capital gain net income for
previous years that were not distributed during such years. For this purpose,
any income or gain retained by the Fund that is subject to corporate tax will be
considered to have been distributed by year-end. To prevent application of the
excise tax, the Fund intends to make distributions to satisfy the calendar year
distribution requirement. Compliance with the calendar year distribution
requirement may limit the extent to which the Fund will be able to retain its
net capital gain for investment.
If in any taxable year the Fund fails to qualify as a regulated
investment company under the Code, the Fund will be taxed in the same manner as
an ordinary corporation and distributions to its shareholders will not be
deductible by the Fund in computing its taxable income. In addition, in the
event of failure to qualify as a regulated investment company, the Fund's
distributions, to the extent derived from the Fund's current or accumulated
earnings and profits, will constitute dividends which although eligible for the
corporate dividends-received deduction will be taxable to shareholders as
ordinary income, even though those distributions might otherwise (at least in
part) have been treated as long-term capital gain in the shareholder's hands.
If the Fund does not meet the asset coverage requirements of the 1940
Act, the Fund will be required to suspend distributions to the holders of the
Common Shares and/or the Preferred Shares until the asset coverage is restored.
See "Description of TAPS -- Dividends and Dividend Periods." Such a
S-22
suspension of distributions might prevent the Fund from distributing 90% of its
net investment income, as is required in order to qualify for taxation as a
regulated investment company, or cause the Fund to incur a tax liability, a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.
Upon any failure to meet the asset coverage requirements of the 1940
Act, the Fund intends to repurchase or redeem (to the extent permitted under the
1940 Act) TAPS in order to maintain or restore the requisite asset coverage and
avoid failure to remain qualified as a regulated investment company. The
determination to repurchase or redeem TAPS and the amounts to be repurchased or
redeemed, if any, will be made in the sole discretion of the Fund.
Use of the Fund's cash to repurchase or redeem TAPS may adversely
affect the Fund's ability to distribute annually at least 90% of its net
investment income, which distribution is required to qualify for taxation as a
regulated investment company. The Fund may also recognize income in connection
with funding repurchases or redemptions of TAPS, and such income would be taken
into account in determining whether or not the above-described distribution
requirements have been met. Depending on the size of the Fund's assets relative
to its outstanding senior securities, redemption of TAPS might restore asset
coverage. Payment of distributions after restoration of asset coverage could
requalify (or avoid a disqualification of) the Fund as a regulated investment
company, depending upon the facts and circumstances.
Investments of the Fund in securities issued at a discount (or treated
as if issued at a discount) or providing for deferred interest or payment of
interest in kind are subject to special tax rules that will affect the amount,
timing and character of distributions to shareholders. For example, with respect
to certain securities issued or treated as if issued at a discount, the Fund
will be required to accrue as income each year a portion of the discount and to
distribute such income each year in order to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Fund may have to borrow money or dispose of securities that it would
otherwise have continued to hold.
The Fund's transactions in forward contracts and options and futures
contracts will be subject to special provisions of the Code that, among other
things, may affect the character of gain and loss realized by the Fund (i.e.,
may affect whether gain or loss is ordinary or capital), accelerate recognition
of income to the Fund, defer Fund losses, and affect the determination of
whether capital gain and loss is characterized as long-term or short-term
capital gain or loss. These rules could therefore affect the character, amount
and timing of distributions to shareholders. These provisions also may require
the Fund to mark-to-market certain types of the positions in its portfolio
(i.e., treat them as if they were closed out), which may cause the Fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. The Fund will monitor its transactions, will make the
appropriate tax elections, and will make the appropriate entries in its books
and records when it acquires any option, futures contract, forward contract, or
hedged investment in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company and minimize the
imposition of income and excise taxes.
S-23
FEDERAL INCOME TAX TREATMENT OF HOLDERS OF TAPS
Under present law and based in part on the fact that there is no
express or implied agreement between or among a Broker-Dealer or any other
party, and the Fund or any owners of the TAPS, that the Broker-Dealer or any
other party will guarantee or otherwise arrange to ensure that an owner of TAPS
will be able to sell his or her shares, the Fund is of the opinion that the TAPS
will constitute stock of the Fund, and thus distributions with respect to the
TAPS (other than capital gain distributions and distributions in redemption of
the TAPS subject to section 302(b) of the Code) will generally constitute
dividends to the extent of the Fund's current or accumulated earnings and
profits, as calculated for federal income tax purposes. The following discussion
assumes such treatment will apply.
The Fund's income will consist of net investment income and may also
consist of net capital gain. The character of the Fund's income will not affect
the amount of dividends to which the holders of the TAPS are entitled. Holders
of the TAPS are entitled to receive only the amount of dividends as determined
by periodic auctions. For federal income tax purposes, however, the Internal
Revenue Service currently requires that a regulated investment company that has
two or more classes of shares allocate to each such class proportionate amounts
of each type of its income (such as ordinary income and net capital gain) for
each tax year. Accordingly, the Fund intends to designate distributions made
with respect to the Common Shares and the TAPS as consisting of particular types
of income (net capital gain, and ordinary income), in accordance with each
class's proportionate share of the total dividends paid to both classes. Thus,
each dividend paid with respect to the TAPS during a year will be designated as
ordinary income dividends and, if the Fund designates any dividend as a capital
gains dividend, capital gains in proportion to the TAPS's proportionate share of
the total dividends paid on the TAPS during the year to the total distributions
paid on both the TAPS and the Common Shares during the year. Each holder of the
TAPS during the year will be notified of the allocation within 60 days after the
end of the year. The amount of the net capital gain realized by the Fund may not
be significant, and there is no assurance that any such income will be realized
by the Fund in any year. Distributions of the Fund's net investment income are
taxable to shareholders as ordinary income. Distributions of the Fund's net
capital gain, if any, are taxable to shareholders at rates applicable to
long-term capital gains, regardless of the length of time the TAPS have been
held by holders. Distributions in excess of the Fund's earnings and profits will
first reduce a shareholder's adjusted tax basis in his or her shares of TAPS
and, after the adjusted tax basis is reduced to zero, will constitute capital
gains to a holder of shares of TAPS who holds his or her shares of TAPS as a
capital asset.
Although the Fund is required to distribute annually at least 90% of
its net investment income, the Fund is not required to distribute net capital
gain to the shareholders. The Fund may retain and reinvest such gains and pay
federal income taxes on such gains (the "net undistributed capital gain").
However, it is unclear whether a portion of the net undistributed capital gain
would have to be allocated to the TAPS for federal income tax purposes. Until
and unless the Fund receives acceptable guidance from the Internal Revenue
Service as to the allocation of the net undistributed capital gain between the
Common Shares and the TAPS, the Fund intends to distribute its net capital gain
for any year during which it has shares of TAPS outstanding. Such distribution
will affect the tax character but not the amount of dividends to which holders
of shares of TAPS are entitled.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December with a record date in such
months, and paid in January of the following year, will be treated as having
been distributed by the Fund and received by the shareholders on December 31. In
addition, solely for the purpose of satisfying the 90% distribution requirement
and the distribution requirement for avoiding income taxes, certain
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid during such taxable year. In such case, shareholders
will be treated as having received such dividends in the taxable year in which
the
S-24
distribution was actually made. The Service has ruled privately that dividends
paid following the close of the taxable year that are treated for tax purposes
as derived from income from the prior year will be treated as dividends "paid"
in the prior year for purposes of determining the proportionate share of a
particular type of income for each class. Accordingly, the Fund intends to treat
any such dividends that are paid following the close of a taxable year as "paid"
in the prior year for purposes of determining a class's proportionate share of a
particular type of income. However, the private ruling is not binding on the
Internal Revenue Service, and there can be no assurance that the Internal
Revenue Service will respect such treatment.
Most of the Fund's net investment income is expected to be derived from
dividends from REITs and interest-bearing securities. Accordingly, dividends
paid with respect to the TAPS generally will not qualify for the dividend
received deduction available to corporate shareholders. However, from time to
time, a portion of the Fund's net investment income may be attributable to
dividends on equity securities which are eligible for the dividends received
deduction under Section 243 of the Code. Corporate shareholders who otherwise
are eligible to claim the dividends received deduction under Section 243 of the
Code can deduct 70% of the portion of the TAPS dividend representing the
shareholder's portion of the Fund's eligible dividend income. The Internal
Revenue Service has ruled that corporate shareholders of a regulated investment
company must meet the 45-day holding requirements of Section 246(c)(1)(A) of the
Code with respect to the shares of the regulated investment company to qualify
for the dividends received deduction. The Fund will inform holders of shares of
TAPS of the source and tax status of all distributions shortly after the close
of each calendar year.
SALE OF SHARES
A holder's sale of shares of TAPS will be a taxable transaction for
federal income tax purposes. Selling holders of shares of TAPS will generally
recognize gain or loss in an amount equal to the difference between their
adjusted tax basis in the TAPS and the amount received in exchange therefor. If
such shares of TAPS are held as a capital asset, the gain or loss will generally
be a capital gain or loss. Similarly, a redemption (including a redemption by
the Fund resulting from liquidation of the Fund), if any, of all the shares of
TAPS actually and constructively held by a shareholder generally will give rise
to capital gain or loss if the shareholder does not own (and is not regarded
under certain tax law rules of constructive ownership as owning) any Common
Shares in the Fund and provided that the redemption proceeds do not represent
declared but unpaid dividends. Other redemptions may also give rise to capital
gain or loss, if several conditions imposed by the Code are satisfied. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are required within a period of 61 days beginning 30 days before and
ending 30 days after the disposition of the shares. In such a case, the basis of
the shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon a taxable disposition of shares of TAPS held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain received with respect to such shares.
BACKUP WITHHOLDING
The Fund may be required to withhold for U.S. federal income taxes a
portion of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or who fail to make
required certifications, or if the Fund or a shareholder has been notified by
the Internal Revenue Service that they are subject to backup withholding.
Corporate shareholders and other shareholders specified in the Code are exempt
from such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.
OTHER TAXATION
Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions at a
rate of 30%, or such lower rates as may be prescribed by
S-25
any applicable treaty. Investors are advised to consult their own tax advisors
with respect to the application to their own circumstances of the
above-described general taxation rules and with respect to the state, local or
foreign tax consequences to them of an investment in TAPS.
EXPERTS
The Financial Statements of the Fund as of _________ __, 2001,
appearing in this Statement of Additional Information have been audited by
Arthur Andersen LLP, 33 West Monroe Street, Chicago, Illinois 60603, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
is included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing. Arthur Andersen LLP provides accounting
and auditing services to the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2 relating to the shares offered
hereby, has been filed by the Fund with the Securities and Exchange Commission
(the "Commission"), Washington, D.C. The prospectus and this statement of
additional information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Registration Statement. Statements contained in the
prospectus and this statement of additional information as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
S-26
REPORT OF INDEPENDENT AUDITORS
AND
FINANCIAL STATEMENTS
F-1
APPENDIX A
NUVEEN REAL ESTATE INCOME FUND
STATEMENT ESTABLISHING AND FIXING THE RIGHTS AND
PREFERENCES OF TAXABLE AUCTIONED PREFERRED SHARES (THE "STATEMENT")
Nuveen Real Estate Income Fund, a Massachusetts business trust (the
"Trust"), certifies that:
FIRST: Pursuant to the authority expressly vested in the Board of the
Fund by Articles IV and VI of Fund's Declaration of Trust (which, as hereafter
restated or amended from time to time, are together with this Statement herein
called the "Declaration"), the Board of Trustees has, by resolution, authorized
the issuance of [______] Preferred Shares, $.01 par value, liquidation
preference of $[______] per share, classified as Series [__] Taxable Auctioned
Preferred Shares ("TAPS").
SECOND: The preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of such series of TAPS are as follows:
DESIGNATION
Series [__]: A series of [_____] Preferred Shares, liquidation
preference $[_____] per share, is hereby designated "Series [__] Taxable
Auctioned Preferred Shares" ("TAPS Series [__]"). Each share of TAPS Series [__]
shall have an Applicable Rate for its initial Dividend Period equal to [__]% per
annum and an initial Dividend Payment Date of [______, ____], and each share of
TAPS Series [__] shall 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 set
forth in the Declaration applicable to preferred shares of the Fund, as are set
forth in Part I and Part II of this Statement. The TAPS Series [__] shall
constitute a separate series of Preferred Shares of the Fund.
Subject to the provisions of Section 12(b) of Part I hereof, the Board
of Trustees of the Fund may, in the future, classify additional authorized but
unissued shares of the Fund's Preferred Shares as TAPS Series [__], with the
same preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption and other terms
of the respective series herein described, except that the Applicable Rate for
its initial Dividend Period, its initial Dividend Payment Date and any other
changes in the terms herein set forth shall be as set forth in an amendment to
this Statement.
As used in Part I and Part II of this Statement, capitalized terms
shall have the meanings provided in Section 18 of Part I.
PART I: TAPS TERMS
1. Number of Shares; Ranking.
(a) The initial number of authorized shares constituting
TAPS Series [__] is [______] shares. No fractional shares of TAPS Series [__]
shall be issued.
(b) Any shares of TAPS Series [__] which at any time have
been redeemed or purchased by the Fund shall, after such redemption or purchase,
have the status of authorized but unissued shares of Preferred Shares.
(c) The shares of TAPS Series [__] shall rank on a parity
with shares of any other series of Preferred Shares (including any other shares
of TAPS) as to the payment of dividends to which
such shares are entitled and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund.
(d) No holder of shares of TAPS Series [__] shall have,
solely by reason of being such a holder, any preemptive or other right to
acquire, purchase or subscribe for any shares of TAPS Series [__], shares of
Common Shares of the Fund or other securities of the Fund which it may hereafter
issue or sell.
2. Dividends.
(a) The Holders of shares of TAPS Series [__] shall be
entitled to receive, when, as and if declared by the Board of Trustees, 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 TAPS
Series [__] issued on the Date of Original Issue shall accumulate from the Date
of Original Issue.
(b) (i) Dividends shall be payable when, as and if
declared by the Board of Trustees following the initial Dividend Payment Date,
subject to subparagraph (b)(ii) of this Section 2, on the shares of TAPS Series
[__], with respect to any Dividend Period greater than 30 days on a monthly
basis on the first day of each month within such Dividend Period and on the
Business Day following the last day of such Dividend Period.
(i) If a day for payment of dividends resulting from
the application of subparagraph (b)(i) above is not a Business Day,
then the Dividend Payment Date shall be the day next succeeding such
day, or if the day next succeeding such day for payment of dividends is
not a Business Day, then the Dividend Payment Date shall be the first
Business Day prior to such day for payment of dividends that is next
succeeded by a Business Day; provided, however, that if the Securities
Depository pays dividends in same-day funds, and such day for payment
is not a Business Day, the Dividend Payment Date shall be the first
Business Day following such day for payment of dividends.
(ii) The Fund shall pay to the Paying Agent not later
than 3:00 p.m., New York City time, on the Business Day next preceding
each Dividend Payment Date for the shares of TAPS Series [__], an
aggregate amount of funds available on the next Business Day in the
City of New York, New York, equal to the dividends to be paid to all
Holders of such shares on such Dividend Payment Date. The Fund shall
not be required to establish any reserves for the payment of dividends.
(iii) All moneys paid to the Paying Agent for the
payment of dividends shall 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, including interest earned on such
moneys, will, to the extent permitted by law, be repaid to the Fund at
the end of 90 days from the date on which such moneys were to have been
so applied.
(iv) Each dividend on TAPS Series [__] shall be paid
on the Dividend Payment Date therefor to the Holders of that series as
their names appear on the share ledger or share records of the Fund on
the Business Day next preceding such Dividend Payment Date. Dividends
in arrears for any past Dividend Period may be declared and paid at any
time, without reference to any regular Dividend Payment Date, to the
Holders as their names appear on the
2
share ledger or share records of the Fund on such date, not exceeding
15 days preceding the payment date thereof, as may be fixed by the
Board of Trustees. 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 TAPS
Series [__] during the period from and after the Date of Original Issue to and
including the last day of the initial Dividend Period therefor shall be equal to
the rate per annum set forth under "Designation" above. For each subsequent
Dividend Period with respect to the shares of TAPS Series [__] Outstanding
thereafter, the dividend rate shall be equal to the rate per annum that results
from an Auction for Outstanding shares of TAPS Series [__] on the respective
Auction Date therefor next preceding such subsequent Dividend Period; provided,
however, that if an Auction for any subsequent Dividend Period of TAPS 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 TAPS Series [__]
being the subject of Submitted Hold Orders), then the dividend rate on the
shares of TAPS Series [__] for any such Dividend Period shall be the Maximum
Rate for such shares on the Auction Date for such Dividend Period (except (i)
during a Default Period when the dividend rate shall 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 shall be the
Maximum Rate at the close of business on the last of such Default Period). The
All Hold Rate will apply automatically following an Auction in which all of the
Outstanding shares of TAPS Series [__] are subject (or are deemed to be subject)
to Hold Orders. The rate per annum at which dividends are payable on shares of
TAPS Series [__] as determined pursuant to this Section 2(c)(i) shall be the
"Applicable Rate."
(ii) A "Default Period" will commence on the
applicable date set forth below if the Fund fails to (A) declare prior
to the close of business on the second Business Day preceding any
Dividend Payment Date, for payment on or (to the extent permitted as
described below) within two Business Days after such Dividend Payment
Date to the persons who held shares as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend payable on such Dividend Payment Date, (B)
deposit, irrevocably in trust, in same-day funds, with the Paying Agent
by 12:00 noon, New York City time, (I) on or (to the extent permitted
as described below) within two Business Days after any Dividend Payment
Date the full amount of any declared dividend on TAPS Series [__]
payable on such Dividend Payment Date (together with the failure to
timely declare dividends described in (A) above, hereinafter referred
to as a "Dividend Default") or (II) on or (to the extent permitted as
described below) within two Business Days after any date fixed for
redemption of shares of TAPS Series [__] called for redemption, the
applicable redemption price (a "Redemption Default") or (C) maintain
the "aaa" Credit Rating unless the "aaa" Credit Rating is restored by
the Dividend Payment Date next following the date on which the Fund
fails to maintain the "aaa" Credit Rating (a "Rating Default" and,
together with a Dividend Default and a Redemption Default, hereinafter
referred to as a "Default"). Holders of two-thirds of the TAPS then
outstanding may waive any Dividend Default, Redemption Default or
Rating Default. A Default Period with respect to a Dividend Default or
a Redemption Default will consist of the period commencing on and
including the aforementioned Dividend Payment Date or redemption date,
as the case may be, and ending on and including the Business Day on
which, by 12:00 noon, New York City time, all unpaid dividends and
unpaid redemption price shall have been so deposited or shall have
otherwise been made available to the applicable holders in same-day
funds. A Default Period with respect to a Rating Default shall commence
as of the date on which the Fund fails to maintain the "aaa" Credit
Rating (provided that such Rating Default shall be deemed not to have
occurred and such Default Period shall not commence if such Rating
Default is cured by the next succeeding Dividend Payment Date) and
shall end on the earlier of the date on which such default is cured as
provided herein or the date on which TAPS Series [__] is mandatorily
redeemed as provided herein. The Applicable Rate for each Default
Period, and each
3
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 shall be a Standard Rate Period;
provided, however, that the commencement of a Default Period will not
by itself cause the commencement of a new Dividend Period. No Auction
shall be held during a Default Period. Any dividend due on any Dividend
Payment Date (if, prior to 12:00 noon, New York City time, on such
Dividend Payment Date, the Fund has declared such dividend payable on
or within two Business Days after such Dividend Payment Date to the
persons who held such shares as of 12:00 noon, New York City time, on
the Business Day preceding such Dividend Payment Date) or redemption
price with respect to such shares not paid to such Persons when due may
(if such default is not solely due to the willful failure of the Fund)
be paid to such persons in the same form of funds by 12:00 noon, New
York City time, on any of the first two Business Days after such
Dividend Payment Date or due date, as the case may be, provided that
such amount is accompanied by an additional amount for such period of
non-payment at the Default Rate applied to the amount of such
non-payment based on the actual number of days comprising such period
divided by 365. For the purposes of the foregoing, payment to a person
in same-day funds made on or before 12:00 noon New York City time on
any Business Day at any time will be considered equivalent to payment
to that person in New York Clearing House (next-day) funds at the same
time on the preceding Business Day, and any payment made after 12:00
noon, New York City time, on any Business Day shall be considered to
have been made instead in the same form of funds and to the same person
before 12:00 noon, New York City time, on the next Business Day. The
Default Rate is equal to the Reference Rate multiplied by three.
(iii) 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) shall 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 365, 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 Dividend Payment Date (or in respect of dividends
on another date in connection with a redemption during such Dividend
Period) shall 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 TAPS Series
[__] shall first be credited against the earliest accumulated but unpaid
dividends due with respect to TAPS Series [__].
(e) For so long as the shares of the TAPS are
Outstanding, except as contemplated by Sections 3(j) and 7(e), the Fund 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, if any,
ranking junior to the TAPS as to dividends or upon liquidation) in respect to
Common Shares or any other shares of the Fund ranking junior to or on a parity
with the TAPS as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or any
other such junior shares (except by conversion into or exchange for shares of
the Fund ranking junior to the TAPS as to dividends and upon liquidation) or any
such parity shares (except by conversion into or exchange for shares of the Fund
ranking junior to or on a parity with the TAPS as to dividends and upon
liquidation), unless (i) immediately after such transaction, the Fund would have
Eligible Assets with an aggregate Discounted Value at least equal to the TAPS
Basic Maintenance Amount and the 1940 Act TAPS Asset Coverage
4
would be achieved, (ii) full cumulative dividends on the TAPS due on or prior to
the date of the transaction have been declared and paid and (iii) the Fund has
redeemed the full number of shares of the TAPS required to be redeemed by any
provision for mandatory redemption contained in Section 3(a)(ii).
(f) The Fund will not declare, pay or set apart for
payment any dividend or other distribution in respect to the TAPS Series [__]
unless (i) there is not an event of default under indebtedness senior to the
TAPS Series [__], if any, or (ii) immediately after such transaction, the Fund
would have eligible portfolio holdings with an aggregate discounted value at
least equal to the asset coverage requirements under the indebtedness senior to
the TAPS Series [__].
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
Massachusetts law, the Fund may, at its option, redeem in whole or in part out
of funds legally available therefor shares of TAPS 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 days and not more than 40 days prior to such redemption, 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 date
fixed for redemption ("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 days and
not more than 40 days prior to the date fixed for such redemption, at the
Redemption Price, plus a redemption premium, if any, determined by the Board of
Trustees 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 this Statement; provided, however,
that during a Dividend Period of more than one year no shares of TAPS Series
[__] will be subject to optional redemption except in accordance with any
Specific Redemption Provisions approved by the Board of Trustees after
consultation with the Broker-Dealers at the time of the designation of such
Dividend Period. Notwithstanding the foregoing, the Fund shall not give a notice
of or effect any redemption pursuant to this Section 3(a)(i) unless, on the date
on which the Fund intends to give such notice and on the date of redemption (a)
the Fund has available certain 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 TAPS Series [__] by reason of the redemption of TAPS Series [__] on such date
fixed for the redemption and (b) the Fund would have Eligible Assets with an
aggregate Discounted Value at least equal the TAPS 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 shall be applicable in such circumstances in the event the Fund makes
the deposit and takes the other action required thereby.
(i) If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an aggregate Discounted Value at
least equal to the TAPS Basic Maintenance Amount or, as of the last
Business Day of any month, the 1940 Act TAPS Asset Coverage, and such
failure is not cured within the last Business Day of the following
month as of such last Business Day (each an "Asset Coverage Cure
Date"), the TAPS will be subject to mandatory redemption out of funds
legally available therefor. The number of shares of TAPS to be redeemed
in such circumstances will be equal to the lesser of (A) the minimum
number of shares of TAPS 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 Fund having Eligible
Assets with an aggregate Discounted Value at least equal to the TAPS
Basic Maintenance Amount, or sufficient to satisfy 1940 Act TAPS 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
5
of which would have such result, all shares of TAPS then Outstanding
will be redeemed), and (B) the maximum number of shares of TAPS 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)(iv) of this Section 3.
(ii) If the Fund at any time fails to maintain the
"aaa" credit rating and the Fund is unable to restore the "aaa" credit
rating within 90 calendar days thereafter (the "Rating Default Cure
Date"), all shares of the TAPS will be subject to mandatory redemption
out of funds legally available therefor, on the Mandatory Redemption
Date at the Mandatory Redemption Price set forth in subparagraph
(a)(iv) of this Section 3.
(iii) In determining the shares of the TAPS required
to be redeemed in accordance with the foregoing Section 3(a)(ii), the
Fund shall allocate the number of shares required to be redeemed to
satisfy the TAPS Basic Maintenance Amount or the 1940 Act TAPS Asset
Coverage, as the case may be, pro rata among the Holders of shares of
the TAPS in proportion to the number of shares they hold and shares of
other Preferred Shares subject to mandatory redemption provisions
similar to those contained in this Section 3, subject to the further
provisions of this subparagraph (iv). The Fund shall effect any
required mandatory redemption pursuant to subparagraph (a)(ii) or
(a)(iii) of this Section 3 no later than 30 days after the Asset
Coverage Cure Date or the Rating Default Cure Date, as the case may be
(the "Mandatory Redemption Date"), except that if the Fund does not
have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, the number of shares of the TAPS which
would be required to be redeemed by the Fund under clause (A) of
subparagraph (a)(ii) or subparagraph (a)(iii) of this Section 3 if
sufficient funds were available, together with shares of other
Preferred Shares which are subject to mandatory redemption under
provisions similar to those contained in this Section 3, or the Fund
otherwise is unable to effect such redemption on or prior to such
Mandatory Redemption Date, the Fund shall redeem those shares of the
TAPS, and shares of other Preferred Shares which it was unable to
redeem, on the earliest practicable date on which the Fund will have
such funds available, upon notice pursuant to Section 3(b) to record
owners of shares of the TAPS to be redeemed and the Paying Agent. The
Fund will deposit with the Paying Agent funds sufficient to redeem the
specified number of shares of the TAPS with respect to a redemption
required under subparagraph (a)(ii) or subparagraph (a)(iii) of this
Section 3, by 1:00 p.m., New York City time, of the Business Day
immediately preceding the Mandatory Redemption Date. If fewer than all
of the Outstanding shares of the TAPS are to be redeemed pursuant to
this Section 3(a)(iv), the number of shares to be redeemed shall be
redeemed pro rata from the Holders of such shares in proportion to the
number of such shares held by such Holders, by lot or by such other
method as the Fund shall 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 Trustees after consultation with the
Broker-Dealers and set forth in any applicable Specific Redemption
Provisions.
(b) In the event of a redemption pursuant to Section
3(a), the Fund 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
Fund shall 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 subparagraph (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 subparagraph (a)(ii) or subparagraph (a)(iii) above, on
or prior to the 30th day preceding the Mandatory Redemption Date. The Auction
Agent will use its reasonable efforts to
6
provide telephonic notice to each Holder of shares of TAPS 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 Fund). The
Auction Agent shall 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 TAPS Series [__] at their addresses appearing on the share records of
the Fund. Such Notice of Redemption will set forth (i) the date fixed for
redemption, (ii) the number and identity of shares of TAPS 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 shall 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 shall also specify the number of shares to be redeemed
from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of
this Section 3, but subject to Section 7(e), no shares of the TAPS may be
redeemed unless all dividends in arrears on the Outstanding shares of the TAPS
and all capital stock of the Fund ranking on a parity with the TAPS with respect
to payment of dividends or upon liquidation, have been or are being
contemporaneously paid or set aside for payment; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all Outstanding
shares of the TAPS pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, Holders
of all Outstanding shares of the TAPS.
(d) Upon the deposit of funds sufficient to redeem shares
of TAPS 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 shall cease to accumulate and such shares shall no longer be
deemed to be Outstanding for any purpose (including, without limitation, for
purposes of calculating whether the Fund has maintained the requisite TAPS Basic
Maintenance Amount or the 1940 Act TAPS Asset Coverage), and all rights of the
holder of the shares so called for redemption shall 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 shall be
paid by the Paying Agent to the nominee of the Securities Depository. The Fund
shall be entitled to receive from the Paying Agent, promptly after the date
fixed for redemption, any cash deposited with the Paying Agent in excess of (i)
the aggregate redemption price of the shares of TAPS Series [__] called for
redemption on such date and (ii) such other amounts, if any, to which Holders of
shares of TAPS Series [__] called for redemption may be entitled. Any funds so
deposited that are unclaimed at the end of two years from such redemption date
shall, to the extent permitted by law, be paid to the Fund, after which time the
Holders of shares of TAPS Series [__] so called for redemption may look only to
the Fund for payment of the redemption price and all other amounts, if any, to
which they may be entitled. The Fund shall 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 shall 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
TAPS Series [__] shall be deemed to exist at any time after the date specified
for redemption in a Notice of Redemption when the Fund shall have failed, for
any reason whatsoever, to deposit in trust with the Paying Agent the
7
redemption price with respect to any shares for which such Notice of Redemption
has been given. Notwithstanding the fact that the Fund may not have redeemed
shares of TAPS Series [__] for which a Notice of Redemption has been given,
dividends may be declared and paid on shares of TAPS Series [__] and shall
include those shares of TAPS 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 TAPS Series [__] called for redemption shall
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 TAPS 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 this Statement limits any right of the Fund to purchase or
otherwise acquire any shares of TAPS 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 TAPS Series [__] for
which Notice of Redemption has been given and the Fund is in compliance with the
1940 Act TAPS Asset Coverage and has Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount after
giving effect to such purchase or acquisition on the date thereof. Any shares
which are purchased, redeemed or otherwise acquired by the Fund shall have no
voting rights. If fewer than all the Outstanding shares of TAPS Series [__] are
redeemed or otherwise acquired by the Fund, the Fund shall give notice of such
transaction to the Auction Agent, in accordance with the procedures agreed upon
by the Board of Trustees.
(i) In the case of any redemption pursuant to this
Section 3, only whole shares of TAPS Series [__] shall be redeemed, and in the
event that any provision of the Declaration would require redemption of a
fractional share, the Auction Agent shall be authorized to round up so that only
whole shares are redeemed.
(j) Notwithstanding anything herein to the contrary,
including, without limitation, Sections 2(e), 6(g) and 12 of Part I hereof, the
Board of Trustees may authorize, create or issue any class or series of stock
ranking prior to or on a parity with the TAPS with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund, to the extent permitted by the 1940 Act, as
amended, if, upon issuance, the net proceeds from the sale of such stock (or
such portion thereof needed to redeem or repurchase the Outstanding TAPS) are
deposited with the Auction Agent in accordance with Section 3(d) of Part I
hereof, Notice of Redemption as contemplated by Section 3(b) of Part I hereof
has been delivered prior thereto or is sent promptly thereafter, and such
proceeds are used to redeem all Outstanding TAPS.
4. Designation of Dividend Period.
(a) The initial Dividend Period for TAPS Series [__] is
as set forth under "Designation" above. The Fund will designate the duration of
subsequent Dividend Periods of TAPS Series [__]; provided, however, that no such
designation is necessary for a Standard Rate Period and, provided further, that
any designation of a Special Rate Period shall be effective only if (i) notice
thereof shall 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, TAPS Series [__] shall have been cured as provided above,
(iii) Sufficient Clearing Orders shall have existed in an Auction held on the
Auction Date
8
immediately preceding the first day of such proposed Special Rate Period, (iv)
if the Fund shall have mailed a Notice of Redemption with respect to any shares,
the redemption price with respect to such shares shall have been deposited with
the Paying Agent, and (v) in the case of the designation of an Special Rate
Period, the Fund has confirmed that as of the Auction Date next preceding the
first day of such Special Rate Period, it has Eligible Assets with an aggregate
Discounted Value at least equal to the TAPS Basic Maintenance Amount, and the
Fund has consulted with the Broker-Dealers and has provided notice of such
designation and an TAPS Basic Maintenance Certificate to Moody's (if Moody's is
than rating the TAPS) and any Other Rating Agency which is then rating the TAPS
and so requires.
(b) If the Fund proposes to designate any Special Rate
Period, not fewer than 7 (or two Business Days in the event the duration of the
Dividend Period prior to such Special Rate Period is fewer than 8 days) nor more
than 30 Business Days prior to the first day of such Special Rate Period, notice
shall be (i) made by press release and (ii) communicated by the Fund by
telephonic or other means to the Auction Agent and confirmed in writing promptly
thereafter. Each such notice shall state (A) that the Fund proposes to exercise
its option to designate a succeeding Special Rate Period, specifying the first
and last days thereof and (B) that the Fund will by 3:00 p.m., New York City
time, on the second Business Day next preceding the first day of such Special
Rate Period, notify the Auction Agent, who will promptly notify the
Broker-Dealers, of either (x) its determination, subject to certain conditions,
to proceed with such Special Rate Period, subject to the terms of any Specific
Redemption Provisions, or (y) its determination not to proceed with such Special
Rate Period, in which latter event the succeeding Dividend Period shall be a
Standard Rate 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 Rate Period, the Fund shall
deliver to the Auction Agent, who will promptly deliver to the Broker-Dealers
and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined
to designate the next succeeding Dividend Period as an Special Rate
Period, specifying the first and last days thereof and (B) the terms of
any Specific Redemption Provisions; or
(ii) a notice stating that the Fund has determined
not to exercise its option to designate a Special Rate Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Rate 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 Rate Period, the Fund shall be deemed to have
delivered a notice to the Auction Agent with respect to such Dividend Period to
the effect set forth in clause (ii) above, thereby resulting in a Standard Rate
Period.
9
5. Restrictions on Transfer. Shares of TAPS 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 Fund 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 TAPS
Series [__] through different Broker-Dealers, advises the Auction Agent of such
transfer. The certificates representing the shares of TAPS 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 Declaration or as
otherwise required by applicable law, (i) each Holder of shares of TAPS Series
[__] shall be entitled to one vote for each share of TAPS Series [__] held on
each matter submitted to a vote of shareholders of the Fund, and (ii) the
holders of Outstanding shares of Preferred Shares, including TAPS Series [__],
and shares of Common Shares shall vote together as a single class; provided,
however, that, at any meeting of the shareholders of the Fund held for the
election of trustees, the holders of Outstanding shares of Preferred Shares,
including TAPS Series [__], represented in person or by proxy at said meeting,
shall be entitled, as a class, to the exclusion of the holders of all other
securities and classes of capital stock of the Fund, to elect two trustees of
the Fund, each share of Preferred Shares, including TAPS Series [__], entitling
the holder thereof to one vote. Subject to paragraph (b) of this Section 6, the
holders of Outstanding shares of Common Shares and Preferred Shares, including
TAPS Series [__], voting together as a single class, shall elect the balance of
the trustees.
(b) During any period in which any one or more of the
conditions described below shall exist (such period being referred to herein as
a "Voting Period"), the number of trustees constituting the Board of Trustees
shall be automatically increased by the smallest number that, when added to the
two trustees elected exclusively by the holders of shares of Preferred Shares,
including TAPS Series [__], would constitute a majority of the Board of Trustees
as so increased by such smallest number; and the holders of shares of Preferred
Shares, including TAPS Series [__], shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of capital stock of the Fund), to elect such smallest
number of additional trustees, together with the two trustees that such holders
are in any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or declared)
on Preferred Shares, including TAPS Series [__], equal to at least two
full years' dividends shall be due and unpaid; or
(ii) if at any time holders of any other shares of
Preferred Shares are entitled under the 1940 Act to elect a majority of
the trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 6 shall cease, subject always, however, to the
revesting of such voting rights in the Holders of shares of Preferred Shares,
including TAPS 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 Shares, including TAPS Series [__], to
elect additional trustees as described in paragraph (b) of this Section 6, the
Fund shall notify the Auction Agent, and the Auction Agent shall call a special
meeting of such holders, by mailing a notice of such special meeting to such
holders, such meeting to be held not
10
less than 10 nor more than 30 days after the date of mailing of such notice. If
the Fund 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 shall be the close of business on the fifth
Business Day preceding the day on which such notice is mailed. At any such
special meeting and at each meeting of holders of shares of Preferred Shares,
including TAPS Series [__], held during a Voting Period at which trustees are to
be elected, such holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of capital stock of the Fund), shall
be entitled to elect the number of trustees prescribed in paragraph (b) of this
Section 6 on a one-vote-per-share basis.
(d) The terms of office of all persons who are directors
of the Fund at the time of a special meeting of holders of the TAPS and holders
of other Preferred Shares to elect trustees shall continue, notwithstanding the
election at such meeting by the holders and such other holders of the number of
trustees that they are entitled to elect, and the persons so elected by such
holders, together with the two incumbent trustees elected by such holders and
the remaining incumbent trustees elected by the holders of the Common Shares and
Preferred Shares, shall constitute the duly elected trustees of the Fund.
(e) Simultaneously with the termination of a Voting
Period, the terms of office of the additional directors elected by the Holders
of the TAPS and holders of other Preferred Shares pursuant to paragraph (b) of
this Section 6 shall terminate, the remaining trustees shall constitute the
trustees of the Fund and the voting rights of such holders to elect additional
trustees pursuant to paragraph (b) of this Section 6 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.
(f) So long as any of the shares of Preferred Shares,
including TAPS Series [__], are Outstanding, the Fund will not, without the
affirmative vote of the holders of a majority of the Outstanding shares of
Preferred Shares determined with reference to a "majority of outstanding voting
securities" as that term is defined in Section 2(a)(42) of the 1940 Act, voting
as a separate class, (i) amend, alter or repeal any of the preferences, rights
or powers of such class so as to affect materially and adversely such
preferences, rights or powers; (ii) increase the authorized number of shares of
Preferred Shares; (iii) create, authorize or issue shares of any class of
capital stock ranking senior to or on a parity with the Preferred Shares with
respect to the payment of dividends or the distribution of assets, or any
securities convertible into, or warrants, options or similar rights to purchase,
acquire or receive, such shares of capital stock ranking senior to or on a
parity with the Preferred Shares or reclassify any authorized shares of capital
stock of the Fund into any shares ranking senior to or on a parity with the
Preferred Shares (except that, notwithstanding the foregoing, but subject to the
provisions of either Section 3(j) or 12, as applicable, the Board of Trustees,
without the vote or consent of the holders of the Preferred Shares, may from
time to time authorize, create and classify, and the Fund may from time to time
issue, shares or series of Preferred Shares including other series of TAPS
ranking on a parity with the TAPS with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up to the
affairs of the Fund, and may authorize, reclassify and/or issue any additional
shares of the TAPS Series [__], including shares previously purchased or
redeemed by the Fund, subject to continuing compliance by the Fund with 1940 Act
TAPS Asset Coverage and TAPS Basic Maintenance Amount requirements); (iv)
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;
(v) 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
11
or existence of any material lien, mortgage, pledge, charge, security interest,
security agreement, conditional sale or trust receipt or other material
encumbrance of any kind upon any of the Fund's assets as a whole, except (A)
liens the validity of which are being contested in good faith by appropriate
proceedings, (B) liens for taxes that are not then due and payable or that can
be paid thereafter without penalty, (C) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection with
any indebtedness senior to the TAPS, (D) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection with
any indebtedness permitted under clause (vi) below and (E) liens to secure
payment for services rendered including, without limitation, services rendered
by the Fund's custodian and the Auction Agent; or (vi) 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 TAPS Basic Maintenance Amount as of the
immediately preceding Valuation Date.
(g) The affirmative vote of the holders of a majority of
the Outstanding shares of Preferred Shares, including TAPS Series [__], voting
as a separate class, 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. In the event a vote of holders of shares of Preferred Shares is required
pursuant to the provisions of Section 13(a) of the 1940 Act, the Fund shall, not
later than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's (if Moody's is then rating TAPS Series [__]) and any Other
Rating Agency which is then rating TAPS Series [__] and which so requires that
such vote is to be taken and the nature of the action with respect to which such
vote is to be taken and shall, not later than ten Business Days after the date
on which such vote is taken, notify Moody's and any such Other Rating Agency, as
applicable, of the results of such vote.
(h) The affirmative vote of the holders of a majority of
the Outstanding shares of TAPS 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 TAPS Series [__] in a
manner different from that of other series of 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 TAPS Series [__] described in this Section 6(i)
will in each case be in addition to a separate vote of the requisite percentage
of Common Shares and/or TAPS necessary to authorize the action in question.
(i) The Board of Trustees, without the vote or consent of
any Holder of the Preferred Shares, including TAPS Series [__], or any other
shareholder of the Fund, may from time to time amend, alter or repeal any or all
of the definitions of the terms or provisions listed below, and any such
amendment, alteration or repeal will not be deemed to affect the preferences,
rights or powers of shares of TAPS or the Holders thereof, provided that the
Board of Trustees receives written confirmation from Moody's (if Moody's is then
rating TAPS Series [__]) (with such confirmation in no event being required to
be obtained from a particular rating agency in the case of the definitions
relevant only to and adopted in connection with the rating of TAPS Series [__],
if any, by any other rating agency) that such amendment, alteration or repeal
would not impair the rating then assigned by Moody's. In addition, the Board of
Trustees, without the vote or consent of any Holder of the Preferred Shares,
including TAPS Series [__], or any other shareholder of the Fund, may from time
to time adopt, amend, alter or repeal any or all of
12
any additional or other definitions or add covenants and other obligations of
the Fund (e.g., maintenance of minimum liquidity level) or confirm the
applicability of covenants and other obligations set forth herein in connection
with obtaining or maintaining the rating of Moody's or any Other Rating Agency
with respect to TAPS Series [__], and any such amendment, alteration or repeal
will not be deemed to affect the preferences, rights or powers of TAPS Series
[__] or the Holders thereof, provided the Board of Trustees receives written
confirmation from the relevant rating agency (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 another rating agency's rating)
that any such amendment, alteration or repeal would not adversely affect the
rating then assigned by such rating agency.
Definitions and Provisions Subject to Change by Trustee Action:
Approved Dealer
Approved Exchange
Approved Price
Approved Pricing Service
Approved Source
Asset Coverage Cure Date
Deposit Securities
Eligible Assets
Exposure Period
Market Value
Market Value Price
Maximum Rate
Minimum Rate
Moody's Advance Amount
Moody's Advance Rate
Moody's Eligible Assets
Moody's Industry Classification
1940 Act TAPS Asset Coverage
Short Term Money Market Instruments
TAPS Basic Maintenance Amount
TAPS Basic Maintenance Certificate
Volatility Factor
Section 12
In addition, subject to compliance with applicable law, the Board of
Trustees 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 the shares of the
Preferred Shares, including TAPS Series [__], or any other shareholder of the
Fund, and without receiving any confirmation from any rating agency after
consultation with the Broker-Dealers, provided that immediately following any
such increase the Fund would be in compliance with the TAPS Basic Maintenance
Amount.
(j) Unless otherwise required by law, holders of shares
of TAPS Series [__] shall not have any relative rights or preferences or other
special rights other than those specifically set forth herein. The holders of
shares of TAPS Series [__] shall have no rights to cumulative voting. In the
event that the Fund fails to pay any dividends on the shares of TAPS Series
[__], the exclusive remedy of the holders shall be the right to vote for
trustees pursuant to the provisions of this Section 6.
(k) The foregoing voting provisions will not apply with
respect to TAPS Series [__] if, at or prior to the time when a vote is required,
such shares have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.
7. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, the holders of TAPS
Series [__] then Outstanding, together with holders of shares of any class of
stock ranking on a parity with TAPS Series [__] upon dissolution, liquidation or
winding up, shall be entitled to receive and to be paid out of the assets of the
Fund (or the proceeds thereof) available for distribution to its shareholders
after satisfaction of claims of creditors of the Fund an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for shares of TAPS Series [__] shall be [____] per share, plus an amount equal
to all accumulated dividends thereon (whether or not earned or declared but
without interest) to the date
13
payment of such distribution is made in full or a sum sufficient for the payment
thereof is set apart with the Paying Agent. No redemption premium shall be paid
upon any liquidation even if such redemption premium would be paid upon optional
or mandatory redemption of the relevant shares.
(b) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, until payment in full
is made to the holders of TAPS Series [__] of the liquidation distribution to
which they are entitled, no dividend or other distribution shall be made to the
holders of shares of Common Shares or any other class of stock of the Fund
ranking junior to TAPS Series [__] upon dissolution, liquidation or winding up
and no purchase, redemption or other acquisition for any consideration by the
Fund shall be made in respect of the shares of Common Shares or any other class
of stock of the Fund ranking junior to TAPS Series [__] upon dissolution,
liquidation or winding up.
(c) A consolidation, reorganization or merger of the Fund
with or into any other trust or company, or a sale, lease or exchange of all or
substantially all of the assets of the Fund in consideration for the issuance of
equity securities of another trust or company shall not be deemed to be a
liquidation, dissolution or winding up, whether voluntary or involuntary, for
the purposes of this Section 7.
(d) After the payment to the Holders of TAPS Series [__]
of the full preferential amounts provided for in this Section 7, the holders of
TAPS Series [__] as such shall have no right or claim to any of the remaining
assets of the Fund.
(e) In the event the assets of the Fund or proceeds
thereof available for distribution to the Holders of TAPS Series [__], upon any
dissolution, liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall 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 shall be made on account of any shares of any other class or
series of Preferred Shares ranking on a parity with TAPS Series [__] with
respect to the distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account of
the shares of TAPS Series [__], ratably, in proportion to the full distributable
amounts to which holders of all such parity shares are entitled upon such
dissolution, liquidation or winding up.
(f) Subject to the rights of the holders of shares of any
series or class or classes of stock ranking on a parity with TAPS Series [__]
with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund, after payment shall have been made in
full to the holders of the shares of TAPS Series [__] as provided in paragraph
(a) of this Section 7, but not prior thereto, any other series or class or
classes of stock ranking junior to TAPS Series [__] with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund shall, 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 shares of TAPS Series [__] shall not
be entitled to share therein.
14
8. Auction Agent. For so long as any shares of TAPS Series [__]
are Outstanding, the Auction Agent, duly appointed by the Fund to so act, shall
be in each case a commercial bank, trust company or other financial institution
independent of the Fund and its Affiliates (which, however, may engage or have
engaged in business transactions with the Fund or its Affiliates) and at no time
shall the Fund 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 TAPS Series [__]
are Outstanding, the Fund shall use its best efforts promptly thereafter to
appoint another qualified commercial bank, trust company or financial
institution to act as the Auction Agent.
9. 1940 Act TAPS Asset Coverage. The Fund shall maintain, as of
the last Business Day of each month in which any shares of the TAPS are
Outstanding, asset coverage with respect to the TAPS which is equal to or
greater than the 1940 Act TAPS Asset Coverage; provided, however, that Section
3(a)(ii) shall be the sole remedy in the event the Fund fails to do so.
10. TAPS Basic Maintenance Amount. So long as shares of the TAPS
are Outstanding and Moody's or any Other Rating Agency which so requires is then
rating the shares of the TAPS, the Fund shall maintain, as of each Valuation
Date, Moody's Eligible Assets (if Moody's is then rating the TAPS) and (if
applicable) Other Rating Agency Eligible Assets having an aggregate Discounted
Value equal to or greater than the TAPS Basic Maintenance Amount; provided,
however, that Section 3(a)(ii) shall be the sole remedy in the event the Fund
fails to do so.
11. [Reserved]
12. Certain Other Restrictions. For so long as any shares of TAPS
Series [__] are Outstanding and Moody's or any Other Rating Agency which so
requires is then rating such shares, the Fund will not, unless it has received
written confirmation from Moody's (if Moody's is then rating TAPS Series [__])
and (if applicable) such Other Rating Agency that any such action would not
impair the rating then assigned by such rating agency to TAPS 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 unsecured put or uncovered call
options on portfolio securities;
(b) issue additional shares of TAPS Series [__] or any
class or series of shares ranking prior to or on a parity with TAPS Series [__]
with respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Fund, or reissue any shares of
TAPS Series [__] previously purchased or redeemed by the Fund;
(c) engage in any short sales of securities;
(d) lend portfolio securities; or
(e) merge or consolidate into or with any other
corporation.
For purposes of valuation of Moody's Eligible Assets: (A) if the Fund
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 TAPS 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 Fund 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 Fund buys have no value. For so long as
TAPS Series [__] is rated by Moody's: (A) the Fund will not engage in options
transactions for leveraging or speculative
15
purposes; (B) the Fund will not write or sell any anticipatory contracts
pursuant to which the Fund hedges the anticipated purchase of an asset prior to
completion of such purchase; (C) the Fund will not enter into an option
transaction with respect to portfolio securities unless, after giving effect
thereto, the Fund would continue to have Eligible Assets with an aggregate
Discounted Value equal to or greater than the TAPS Basic Maintenance Amount; (D)
the Fund will not enter into an option transaction with respect to portfolio
securities unless after giving effect to such transaction the Fund would
continue to be in compliance with the provisions relating to the TAPS Basic
Maintenance Amount; (E) for purposes of the TAPS Basic Maintenance Amount assets
in margin accounts are not Eligible Assets; (F) the Fund shall write only
exchange-traded options on exchanges approved by Moody's; (G) where delivery may
be made to the Fund with any of a class of securities, the Fund shall assume for
purposes of the TAPS Basic Maintenance Amount that it takes delivery of that
security which yields it the least value; (H) the Fund will not engage in
forward contracts; and (I) there shall be a quarterly audit made of the Fund's
options transactions by the Fund's independent accountants to confirm that the
Fund is in compliance with these standards.
13. Compliance Procedures for Asset Maintenance Tests. For so long
as any shares of TAPS Series [__] are Outstanding and Moody's or any Other
Rating Agency which so requires is then rating such shares:
(a) As of each Valuation Date, the Fund shall determine
in accordance with the procedures specified herein (i) the Market Value of each
Eligible Asset owned by the Fund on that date, (ii) the Discounted Value of each
such Eligible Asset using the Discount Factors, (iii) whether the TAPS Basic
Maintenance Amount is met as of that date, (iv) the value of the total assets of
the Fund, less all liabilities, and (v) whether the 1940 Act TAPS Asset Coverage
is met as of that date.
(b) Upon any failure to maintain the required TAPS Basic
Maintenance Amount or 1940 Act TAPS Asset Coverage on any Valuation Date, the
Fund may use reasonable commercial efforts (including, without limitation,
altering the composition of its portfolio, purchasing shares of the TAPS outside
of an Auction or in the event of a failure to file a certificate on a timely
basis, submitting the requisite certificate), subject to the fiduciary
obligations of the Board of Trustees, to reattain (or certify in the case of a
failure to file on a timely basis, as the case may be) the required TAPS Basic
Maintenance Amount or 1940 Act TAPS Asset Coverage on or prior to the Asset
Coverage Cure Date.
(c) Compliance with the TAPS Basic Maintenance Amount and
1940 Act TAPS Asset Coverage tests shall be determined with reference to those
shares of the TAPS which are deemed to be Outstanding hereunder.
(d) The Fund shall deliver a certificate which sets forth
a determination of items (i)-(iii) of paragraph (a) of this Section 13 (an "TAPS
Basic Maintenance Certificate") (i) to the Auction Agent, Moody's (if Moody's is
then rating TAPS Series [__]) and any Other Rating Agency which is then rating
TAPS Series [__] and which so requires as of (A) the Business Day preceding the
Date of Original Issue and (B) any Valuation Date on which the Fund fails to
have Eligible Assets with an aggregate Discounted Value at least equal to 115%
of the TAPS Basic Maintenance Amount, (ii) to the Auction Agent, Moody's (if
Moody's is then rating TAPS Series [__]) and any Other Rating Agency which is
then rating TAPS Series [__] and which so requires (A) as of every fourth
Valuation Date after the Date of Original Issue for the first year following the
Date of Original Issue, (B) if the Fund fails to have Eligible Assets with an
aggregate Discounted Value at least equal to TAPS Basic Maintenance Amount, and
(C) on request by Moody's or such Other Rating Agency, as applicable, (iii) to
the Auction Agent, Moody's (if Moody's is then rating TAPS Series [__]) and any
Other Rating Agency which is then rating TAPS Series [__] and which so requires
as of (A) the Valuation Date next following the date of redemption by the Fund
of shares of Common Shares which, together with all other shares of Common
16
Shares purchased during the six months preceding such date, equal in excess of
1,000,000 shares of Common Shares, and (B) the last Valuation Date of each
fiscal quarter and a Valuation Date during such fiscal quarter randomly selected
by the Fund's independent accountants as provided in Section 10(g), and (iv) to
the Auction Agent, Moody's (if Moody's is then rating TAPS Series [__]) and any
Other Rating Agency which is then rating TAPS Series [__] and which so requires
as of a Business Day on or before any Asset Coverage Cure Date relating to the
Fund's cure of a failure to have Eligible Assets with an aggregate Discounted
Value at least equal to the TAPS Basic Maintenance Amount. Such TAPS Basic
Maintenance Certificate shall be delivered in the case of clause (i)(A) on the
Date of Original Issue and in the case of clauses (i)(B), (ii), (iii) and (iv)
above on or before the third Business Day after the relevant Valuation Date or
Asset Coverage Cure Date.
(e) The Fund shall deliver to the Auction Agent, Moody's
(if Moody's is then rating TAPS Series [__]) and any Other Rating Agency which
is then rating TAPS Series [__] and which so requires a certificate with respect
to the calculation of the 1940 Act TAPS Asset Coverage and the value of the
portfolio holdings of the Fund (a "1940 Act TAPS Asset Coverage Certificate")
(i) as of the Business Day preceding the Date of Original Issue, and (ii) as of
(A) the last Valuation Date of each quarter thereafter, and (B) as of the
Business Day on or before the Asset Coverage Cure Date relating to the failure
to satisfy the 1940 Act TAPS Asset Coverage. Such 1940 Act TAPS Asset Coverage
Certificate shall 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 third Business Day after
the relevant Valuation Date or the Asset Coverage Cure Date.
(f) [Reserved]
(g) On the Date of Original Issue, the Fund shall deliver
to the Auction Agent, Moody's (if Moody's is then rating TAPS Series [__]) and
any Other Rating Agency which is then rating TAPS Series [__] and which so
requires a letter prepared by the Fund's independent accountants (an
"Accountant's Certificate") regarding the accuracy of the calculations made by
the Fund in the TAPS Basic Maintenance Certificate and the 1940 Act TAPS Asset
Coverage Certificate required to be delivered by the Fund as of the Date of
Original Issue. Within eight Business Days after the last Valuation Date of each
fiscal quarter of the Fund on which an TAPS Basic Maintenance Certificate is
required to be delivered, the Fund (x) will deliver to the Auction Agent,
Moody's (if Moody's is then rating TAPS Series [__]) and any Other Rating Agency
which is then rating TAPS Series [__] and which so requires an Accountant's
Certificate regarding the accuracy of the calculations made by the Fund in such
TAPS Basic Maintenance Certificate and in any other TAPS Basic Maintenance
Certificate randomly selected by the Fund's independent accountants during such
fiscal quarter. Within eight Business Days after the last Valuation Date of each
fiscal quarter of the Fund on which a 1940 Act TAPS Asset Coverage Certificate
is required to be delivered, the Fund will deliver to the Auction Agent, Moody's
(if Moody's is then rating TAPS Series [__]) and any Other Rating Agency which
is then rating TAPS Series [__] and which so requires an Accountant's
Certificate regarding the accuracy of the calculations made by the Fund in such
1940 Act TAPS Asset Coverage Certificate. In addition, the Fund will deliver to
the relevant persons specified in the preceding sentence an Accountant's
Certificate regarding the accuracy of the calculations made by the Fund on each
TAPS Basic Maintenance Certificate and 1940 Act TAPS Asset Coverage Certificate
delivered pursuant to clause (iv) of paragraph (d) or clause (ii)(B) of
paragraph (e) of this Section 13, as the case may be, within five days after the
relevant Asset Coverage Cure Date. If an Accountant's Certificate delivered with
respect to an Asset Coverage Cure Date shows an error was made in the Fund's
report with respect to such Asset Coverage Cure Date, the calculation or
determination made by the Fund's independent accountants will be conclusive and
binding on the Fund with respect to such reports. If any other Accountant's
Certificate shows that an error was made in any such report, the calculation or
determination made by the Fund's independent accountants will be conclusive and
binding on the Fund; provided, however, any errors shown in the
17
Accountant's Certificate filed on a quarterly basis shall not be deemed to be a
failure to maintain the TAPS Basic Maintenance Amount on any prior Valuation
Dates.
(h) The Accountant's Certificates referred to in
paragraph (g) will confirm, based upon the independent accountant's review, (i)
the mathematical accuracy of the calculations reflected in the related TAPS
Basic Maintenance Amount and 1940 Act TAPS Asset Coverage Certificates, as the
case may be, and (ii) that the Fund determined whether the Fund had, at such
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Basic Maintenance Amount in accordance with the Declaration.
(i) In the event that an TAPS Basic Maintenance
Certificate or 1940 Act TAPS Asset Coverage Certificate with respect to an
applicable Valuation Date is not delivered within the time periods specified in
this Section 13, the Fund shall be deemed to have failed to maintain the TAPS
Basic Maintenance Amount or the 1940 Act TAPS Asset Coverage, as the case may
be, on such Valuation Date for purposes of Section 13(b). In the event that an
TAPS Basic Maintenance Certificate or 1940 Act TAPS Asset Coverage Certificate
or the applicable Accountant's Certificates with respect to an applicable Asset
Coverage Cure Date are not delivered within the time periods specified herein,
the Fund shall be deemed to have failed to have Eligible Assets with an
aggregate Discounted Value at least equal to the TAPS Basic Maintenance Amount
or the 1940 TAPS Asset Coverage, as the case may be, as of the related Valuation
Date, and such failure shall be deemed not to have been cured as of such Asset
Coverage Cure Date for purposes of the mandatory redemption provisions.
18
14. [Reserved]
15. Notice. All notices or communications hereunder, unless
otherwise specified in this Statement, shall 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 15 shall be deemed given on
the earlier of the date received or the date five days after which such notice
is mailed.
16. Waiver. Holders of at least two-thirds of the Outstanding
shares of TAPS, acting collectively, or the TAPS Series [__], acting as a
separate series, may waive any provision hereof intended for their respective
benefit in accordance with such procedures as may from time to time be
established by the Board of Trustees.
17. Termination. In the event that no shares of TAPS Series [__]
are Outstanding, all rights and preferences of such shares established and
designated hereunder shall cease and terminate, and all obligations of the Fund
under this Statement, shall terminate.
18. Amendment. Subject to the provisions of Section 12 of this
Part I, the Board of Trustees may, by resolution duly adopted, without
shareholder approval (except as otherwise provided by this Statement or required
by applicable law), amend this Statement to (1) reflect any amendments hereto
which the Board of Trustees is entitled to adopt pursuant to the terms of this
Statement without shareholder approval or (2) add additional shares of TAPS
Series [__] (and terms relating thereto). All such additional shares shall be
governed by the terms of this Statement. To the extent permitted by applicable
law, the Board of Trustees may interpret, amend or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect.
19. Definitions. As used in Part I and Part II of this Statement,
the following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
(a) "Aaa" Credit Rating" means a credit rating in the
highest category of a nationally recognized statistical rating organization (as
used in the rules and regulations under the Securities Exchange Act of 1934)
which shall be Moody's.
(b) "AA Composite Commercial Paper Rate" on any date
means (i) the interest equivalent of the 30-day rate, in the case of a Dividend
Period which is a Standard Rate Period or shorter, or the 180-day rate, in the
case of all other Dividend Periods, on commercial paper on behalf of 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. For purposes of this definition, (A) "Commercial Paper Dealers"
shall mean (1) 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 Fund, and (B)
"interest equivalent" of a rate stated on a discount basis for
19
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.
(c) "Accountant's Certificate" has the meaning set forth
in Section 13(g) of this Part I.
(d) "Affiliate" means any person controlled by, in
control of or under common control with the Fund; provided that no Broker-Dealer
controlled by, in control of or under common control with the Fund shall be
deemed to be an Affiliate nor shall any corporation or any person controlled by,
in control of or under common control with such corporation one of the trustees,
directors or executive officers of which is also a trustee of the Fund be deemed
to be an Affiliate solely because such trustee, director or executive officer is
also a trustee of the Fund.
(e) "Agent Member" means a member of or participant in
the Securities Depository that will act on behalf of a Bidder.
(f) "All Hold Rate" means 80% of the "AA" Composite
Commercial Paper Rate.
(g) "Applicable Rate" means, with respect to TAPS 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 Applicable
Rate and (iii) in the case where all the shares of TAPS Series [__] are the
subject of Hold Orders for the Auction in respect thereof, the All Hold Rate.
(h) "Approved Price" means the "fair value" as determined
by the Fund in accordance with the valuation procedures adopted from time to
time by the Board of Trustees [and for which the Fund receives a mark-to-market
price (which, for the purposes of clarity, does not mean a Market Value Price)
from an independent source at least semi-annually.]
(i) "Asset Coverage Cure Date" has the meaning set forth
in Section 3(a)(ii).
(j) "Auction" means each periodic operation of the
procedures set forth under "Auction Procedures."
(k) "Auction Agent" means Bankers Trust Company unless
and until another commercial bank, trust company, or other financial institution
appointed by a resolution of the Board of Trustees enters into an agreement with
the Fund to follow the Auction Procedures for the purpose of determining the
Applicable Rate.
(l) "Auction Date" means the first Business Day next
preceding the first day of a Dividend Period for TAPS Series [__].
(m) "Auction Procedures" means the procedures for
conducting Auctions set forth in Part II hereof.
(n) "Beneficial Owner," with respect to shares of a
series of TAPS 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 such series.
20
(o) "Bid" shall have the meaning specified in paragraph (a) of
Section 1 of Part II of this Statement.
(p) "Bidder" shall have the meaning specified in paragraph (a)
of Section 1 of Part II of this Statement; provided, however, that neither the
Fund nor any affiliate thereof shall be permitted to be a Bidder in an Auction,
except that any Broker-Dealer that is an affiliate of the Fund may be a Bidder
in an Auction, but only if the Orders placed by such Broker-Dealer are not for
its own account.
(q) "Board of Trustees" means the Board of Trustees of the
Fund or any duly authorized committee thereof as permitted by applicable law.
(r) "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 Fund and
has entered into a Broker-Dealer Agreement that remains effective.
(s) "Broker-Dealer Agreement" means an agreement among the
Auction Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees
to follow the Auction Procedures.
(t) "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.
(u) "Code" means the Internal Revenue Code of 1986, as
amended.
(v) "Commercial Paper Dealers" has the meaning set forth in
the definition of AA Composite Commercial Paper Rate.
(w) "Commission" means the Securities and Exchange Commission.
(x) "Common Share" means the shares of beneficial interest,
par value $.01 per share, of the Fund.
(y) "Date of Original Issue" means the date on which TAPS
Series [__] is originally issued by the Fund.
(z) "Default Period" has the meaning set forth in Section
2(c)(ii) of this Part I.
(aa) "Default Rate" means the Reference Rate multiplied by
three (3).
(bb) "Deposit Securities" means cash and any obligations or
securities, including Short Term Money Market Instruments that are Eligible
Assets, rated at least AAA, A-2 or SP-2 by S&P, except that, for purposes of
section 3(a)(i) of this Part I, such obligations or securities shall be
considered "Deposit Securities" only if they are also rated at least P-2 by
Moody's.
(cc) "Discount Factor" means the Moody's Discount Factor (if
Moody's is then rating the Preferred Shares) or the discount factor established
by any Other Rating Agency which is then rating the Preferred Shares and which
so requires, whichever is applicable.
(dd) "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.
21
(ee) "Dividend Default" has the meaning set forth in Section
2(c)(iii) of this Part I.
(ff) "Dividend Period" means, with respect to TAPS Series
[__], the period commencing on the Date of Original Issue thereof and ending on
the date specified for such series on the Date of Original Issue thereof and
thereafter, as to such series, the period commencing on the day following each
Dividend Period for such series and ending on the day established for such
series by the Fund.
(gg) "Eligible Assets" means Moody's Eligible Assets (if
Moody's is then rating the TAPS) and/or Other Rating Agency Eligible Assets if
any Other Rating Agency is then rating the TAPS, whichever is applicable.
(hh) "Existing Holder," with respect to shares of a series of
TAPS, shall mean a Broker-Dealer (or any such other Person as may be permitted
by the Fund) that is listed on the records of the Auction Agent as a holder of
shares of such series.
(ii) "Exposure Period" means the period commencing on (and
including) a given Valuation Date and ending 41 days thereafter.
(jj) "Holder" means, with respect to TAPS Series [__], the
registered holder of shares of TAPS Series [__] as the same appears on the share
ledger or share records of the Fund.
(kk) "Hold Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
(ll) "Mandatory Redemption Date" has the meaning set forth in
Section 3(a)(iv) of this Part I.
(mm) "Mandatory Redemption Price" has the meaning set forth in
Section 3(a)(iv) of this Part I.
(nn) "Market Value" means the fair market value of an asset of
the Fund as computed as follows: [Securities listed on the New York Stock
Exchange at the last sale price reflected on the consolidated tape at the close
of the New York Stock Exchange on the business day as of which such value is
being determined provided that, if there has been no sale on such day, the
securities are valued at the mean of the closing bid and asked prices on such
day and provided further that, if no bid or asked prices are quoted on such day,
then the security is valued by such method as the Board of Trustees shall
determine in good faith to reflect its fair market value. Readily marketable
securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. ("NASDAQ") National
List are valued in a like manner. Portfolio securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities. Readily
marketable securities traded in the over-the-counter market, including listed
securities whose primary market is believed by the investment adviser to be
over-the-counter, but excluding securities admitted to trading on the NASDAQ
National List, are valued at the mean of the current bid and asked 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 Trustees deem
appropriate to reflect their fair market value. 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 Trustees to reflect the fair market value of
such securities. Where securities are traded on more than one exchange and also
over-the-counter, the
22
securities will generally be valued using the quotations the Board of Trustees
believes reflect most closely the value of such securities.]
(oo) "Maximum Rate" means, on any date on which the Applicable
Rate is determined, the rate equal to 150% of the applicable Reference Rate,
subject to upward but not downward adjustment in the discretion of the Board of
Trustees after consultation with the Broker-Dealers, provided that immediately
following any such increase the Fund would be in compliance with the TAPS Basic
Maintenance Amount.
(pp) "Minimum Rate" means, on any Auction Date with respect to
a Dividend Period of 28 days or fewer, 70% of the AA Composite Commercial Paper
Rate at the close of business on the Business Day next preceding such Auction
Date. There shall be no Minimum Rate on any Auction Date with respect to a
Dividend Period of more than 28 days.
(qq) "Moody's" means Moody's Investors Service, Inc. and its
successors at law.
(rr) "Moody's Discount Factor" means, for the purposes of
determining the TAPS Basic Maintenance Amount, the percentage determined below:
(i) Common Stock and Preferred Stock of REITs and Other
Real Estate Companies:
DISCOUNT FACTOR (1)(2)(3)
-------------------------
Common Stock of REITs............................................. 154%
Preferred Stock of REITs
with Senior 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 between
$150 million and $500 million.
(ii) Debt Securities of REITs and Other Real Estate
Companies(1):
MATURITY
IN YEARS AAA AA A BAA BA B CAA NR(2)
-------- ---- ---- ---- ---- ---- ---- ---- -----
1 109% 112% 115% 118% 119% 125% 225% 250%
2 115% 118% 122% 125% 127% 133% 225% 250%
3 120% 123% 127% 131% 133% 140% 225% 250%
4 126% 129% 133% 138% 140% 147% 225% 250%
5 132% 135% 139% 144% 146% 154% 225% 250%
7 139% 143% 147% 152% 156% 164% 225% 250%
10 145% 150% 155% 160% 164% 173% 225% 250%
15 150% 155% 160% 165% 170% 180% 225% 250%
20 150% 155% 160% 165% 170% 190% 225% 250%
30 150% 155% 160% 165% 170% 191% 225% 250%
23
----------
(1) The Moody's Discount Factors for debt securities shall also be applied
to any interest rate swap or cap, in which case the rating of the
counterparty shall determine the appropriate rating category.
(2) Unrated debt securities are limited to 10% of discounted Eligible
Assets. If a security is unrated by Moody's but is rated by S&P, a
rating two numeric ratings below the S&P rating will be used, e.g.,
where the S&P rating is AAA, a Moody's rating of Aa2 will be used;
where the S&P rating is AA+, a Moody's rating of Aa3 will be used. If a
security is unrated by either Moody's or S&P, the Corporation will use
the percentage set forth under "NR" in this table.
(iii) 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% 114%
3 years or less (but longer than 2 years)........ 118% 120%
4 years or less (but longer than 3 years)........ 123% 127%
5 years or less (but longer than 4 years)........ 128% 133%
7 years or less (but longer than 5 years)........ 135% 145%
10 years or less (but longer than 7 years)....... 141% 159%
15 years or less (but longer than 10 years)...... 146% 184%
20 years or less (but longer than 15 years)...... 154% 211%
30 years or less (but longer than 20 years)...... 154% 236%
(iv) 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
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.
(ss) "Moody's Eligible Asset" means the following:
(i) Common Stock, Preferred Stock and any debt security
of REITs and 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 classes of common stock, preferred
stock, and debt securities, issued by at least 30 issuers; (C) issued
by a single issuer which in the aggregate constitute no more than 7.0%
of the Market Value of Moody's Eligible Assets, (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 (E) and which are issued by REITs
or Other Real Estate Companies with a minimum market capitalization
(including common stock and preferred stock) of $150 million; 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,
24
unqualified auditor's report without qualified, explanatory language
and (E) in the aggregate, do not exceed 10% of the discounted Moody's
Eligible Assets;
(ii) 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 or, if the counterparty does not have a short-term
rating, the counterparty's senior unsecured long-term debt rating is
Aa3 or higher and (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;
(iii) U.S. Treasury Securities and Treasury Strips (as
defined by Moody's);
(iv) Short-Term Money Market Instruments so long as (A)
such securities are rated at least P-1, (B) in the case of demand
deposits, time deposits and overnight funds, the supporting entity is
rated at least A2, or (C) in all other cases, the supporting entity (1)
is rated A2 and the security matures within one month, (2) is rated A1
and the security matures within three months or (3) is rated at least
Aa3 and the security matures within six months; provided, however, that
for purposes of this definition, such instruments (other than
commercial paper rated by S&P and not rated by Moody's) need not meet
any otherwise applicable Moody's rating criteria; and
(v) Cash (including, for this purpose, interest and
dividends due on assets rated (A) Baa3 or higher by Moody's if the
payment date is within five Business Days of the Valuation Date, (B) A2
or higher if the payment date is within thirty days of the Valuation
Date, and (C) A1 or higher if the payment date is within 49 days of the
relevant valuation date) and receivables for Moody's Eligible Assets
sold if the receivable is due within five Business Days of the
Valuation Date, and if the trades which generated such receivables are
(A) settled through clearing house firms 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.
(tt) "Moody's Real Estate Industry/Property Sector
Classification" means, for the purposes of determining Moody's Eligible Assets,
each of the following Industry Classifications (as defined by the National
Association of Real Estate Investment Trusts, NAREIT):
(i) Office
(ii) Industrial
(iii) Mixed
(iv) Shopping Centers
(v) Regional Malls
(vi) Free Standing
(vii) Apartments
(viii) Manufactured Homes
(ix) Diversified
25
(x) Lodging/Resorts
(xi) Health Care
(xii) Home Financing
(xiii) Commercial Financing
(xiv) 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.
(uu) "1940 Act TAPS 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 Fund which are stock,
including all Outstanding TAPS (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 next preceding the time of
such determination.
(vv) "1940 Act" means the Investment Company Act of 1940, as
amended from time to time.
(ww) "1940 Act TAPS Asset Coverage Certificate" means the
certificate required to be delivered by the Fund pursuant to Section 13(e) of
this Part I.
(xx) "Non-Approved Price" means the price of Unquoted
Investments, including prices determined by the Fund in accordance with
procedures adopted by the Board of Trustees; provided, however, that the Fund
will receive a quotation from an Approved Source at least quarterly.
(yy) "Notice of Redemption" means any notice with respect to
the redemption of shares of TAPS pursuant to Section 3.
(zz) "Order" shall have the meaning specified in paragraph (a)
of Section 1 of Part II of this Statement.
(aaa) "Other Rating Agency" means any rating agency other than
Moody's then providing a rating for the TAPS pursuant to the request of the
Fund.
(bbb) "Other Rating Agency Eligible Assets" means assets of
the Fund designated by any Other Rating Agency as eligible for inclusion in
calculating the discounted value of the Fund's assets in connection with such
Other Rating Agency's rating of TAPS Series [__].
(ccc) "Outstanding" or "outstanding" means, as of any date,
shares of TAPS theretofore issued by the Fund except, without duplication, (i)
any shares of TAPS theretofore canceled, redeemed or repurchased by the Fund, or
delivered to the Auction Agent for cancellation or with respect to which the
Fund has given notice of redemption and irrevocably deposited with the Paying
Agent sufficient funds to redeem such shares of TAPS and (ii) any shares of TAPS
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Fund. Notwithstanding the foregoing, (A) for
purposes of voting rights (including the determination of the number of shares
required to constitute a quorum), any shares of the TAPS to which the Fund or
any Affiliate of the Fund shall be
26
the Existing Holder shall be disregarded and not deemed Outstanding; (B) in
connection with any Auction, any shares of the TAPS Series [__] as to which the
Fund or any person known to the Auction Agent to be an Affiliate of the Fund
shall be the Existing Holder thereof shall be disregarded and deemed not to be
Outstanding; and (C) for purposes of determining the TAPS Basic Maintenance
Amount, shares of TAPS held by the Fund shall be disregarded and not deemed
Outstanding but shares held by any Affiliate of the Fund shall be deemed
Outstanding.
(ddd) "Paying Agent" means Bankers Trust Company unless and
until another entity appointed by a resolution of the Board of Trustees enters
into an agreement with the Fund to serve as paying agent, which paying agent may
be the same as the Auction Agent.
(eee) "Person" or "person" means and includes an individual, a
partnership, a Fund, a trust, an unincorporated association, a joint venture or
other entity or a government or any agency or political subdivision thereof.
(fff) "Potential Beneficial Owner," with respect to shares of
a series of TAPS, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.
(ggg) "Preferred Share" means the preferred shares of
beneficial interest, par value $.01 per share, including the TAPS of the Fund
from time to time.
(hhh) "Rating Default" has the meaning set forth in Section
2(c)(ii) of Part I of this Statement.
(iii) "Rating Default Cure Date" has the meaning set forth in
Section 3(a)(iii) of this Part I.
(jjj) "Redemption Default" has the meaning set forth in
Section 2(c)(ii) of this Part I.
(kkk) "Redemption Price" has the meaning set forth in Section
3(a)(i) of this Part I.
(lll) "Reference Rate" means, with respect to the
determination of the Maximum 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).
(mmm) "REIT" or real estate investment trust, means a company
dedicated to owning, and usually operating, income producing real estate, or to
financing real estate.
(nnn) "Securities Act" means the Securities Act of 1933, as
amended from time to time.
(ooo) "Securities Depository" means The Depository Trust
Company and its successors and assigns or any successor securities depository
selected by the Fund that agrees to follow the procedures required to be
followed by such securities depository in connection with the shares of TAPS
Series [__].
(ppp) "Sell Order" shall have the meaning specified in
paragraph (a) of Section 1 of Part II of this Statement.
27
(qqq) "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.
(rrr) "Special Rate Period" means a Dividend Period that is
not a Standard Rate Period.
(sss) "Specific Redemption Provisions" means, with respect to
any Special Rate Period of more than one year, either, or any combination of (i)
a period (a "Non-Call Period") determined by the Board of Trustees after
consultation with the Broker-Dealers, during which the shares subject to such
Special Rate Period are not subject to redemption at the option of the Fund
pursuant to Section 3(a)(i) and/or Section 3(a)(ii) and/or 3(a)(iii) and (ii) a
period (a "Premium Call Period"), consisting of a number of whole years as
determined by the Board of Trustees after consultation with the Broker-Dealers,
during each year of which the shares subject to such Special Rate Period shall
be redeemable at the Fund's option pursuant to Section 3(a)(i) and/or in
connection with any mandatory redemption pursuant to Section 3(a)(ii) and/or
3(a)(iii) at a price per share equal to $25,000 plus accumulated but unpaid
dividends plus a premium expressed as a percentage or percentages of $25,000 or
expressed as a formula using specified variables as determined by the Board of
Trustees after consultation with the Broker-Dealers.
(ttt) "Standard Rate Period" means a Dividend Period of 28
days, unless such 28th day is not a Business Day, then the number of days ending
on the Business Day next preceding such 28th day.
(uuu) "Submission Deadline" means 1:30 P.M., New York City
time, on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time.
(vvv) "Submitted Bid" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(www) "Submitted Hold Order" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
(xxx) "Submitted Order" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
28
(yyy) "Submitted Sell Order" shall have the meaning specified
in paragraph (a) of Section 3 of Part II of this Statement.
(zzz) "Sufficient Clearing Bids" shall have the meaning
specified in paragraph (a) of Section 3 of Part II of this Statement.
(aaaa) "TAPS" means Taxable Auctioned Preferred Shares,
liquidation preference [_____] per share, Series [__] of the Fund or any other
series of Preferred Shares heretofore or hereinafter designated "Taxable
Auctioned Preferred Shares" by a Statement.
(bbbb) "TAPS Basic Maintenance Amount" as of any Valuation
Date means the dollar amount equal to the sum of
(i) (A) the sum of the products resulting from
multiplying the number of Outstanding TAPS 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) to and including
the first Dividend Payment Date for each Outstanding TAPS that follows
such Valuation Date (or to the 30th day after such Valuation Date, if
such 30th day occurs before the first following Dividend Payment Date);
(C) the amount of anticipated Fund non-interest expenses for the 90
days subsequent to such Valuation Date; (D) the amount of the current
outstanding balances of any indebtedness which is senior to the TAPS
plus interest actually accrued together with 30 days additional
interest on the current outstanding balances calculated at the current
rate; and (E) any 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 Preferred Shares for which a Notice of Redemption has been
given, as of such Valuation Date, to the extent not reflected in any of
(i)(A) through (i)(D): less
(ii) the sum of any cash plus the value of any of the
Fund's assets irrevocably deposited by the Fund 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, it will be valued at its face value).
(cccc) "TAPS Basic Maintenance Certificate" has the meaning
set forth in Section 13(d) of this Part I.
(dddd) "TAPS Series [__]" means the shares of Series [__] of
the TAPS or any other shares of Preferred Stock hereinafter designated as shares
of Series [__] of the TAPS.
(eeee) "Treasury Index Rate" means the average yield to
maturity for actively traded marketable U.S. Treasury fixed interest rate
securities having the same number of 30-day periods to maturity as the length of
the applicable Dividend Period, determined, to the extent necessary, by linear
interpolation based upon the yield for such securities having the next shorter
and next longer number of 30-day periods to maturity treating all Dividend
Periods with a length greater than the longest maturity for such securities as
having a length equal to such longest maturity, in all cases based upon data set
forth in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations shall be based upon the average of comparable data as quoted to the
Fund by at least three recognized dealers in U.S. Government securities selected
by the Fund.
29
(ffff) "U.S. Government Securities" mean securities that are
direct obligations of, and obligations the timely payment of principal and
interest on which is fully guaranteed by, the United States of America or any
agency or instrumentality of the United States of America, the obligations of
which are backed by the full faith and credit of the United States of America
and in the form of conventional bills, bonds and notes.
(gggg) "Valuation Date" means every Friday, or, if such day is
not a Business Day, the next preceding Business Day; provided, however, that the
first Valuation Date may occur on any other date established by the Fund;
provided, further, however, that such date shall be not more than one week from
the date on which TAPS Series [__] initially is issued.
(hhhh) "Volatility Factor" means 1.89.
(iiii) "Winning Bid Rate" has the meaning set forth in Section
3(a)(iii) of Part II of this Statement.
20. 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. Orders
(a) Prior to the Submission Deadline on each Auction Date
for shares of a series of TAPS:
(i) each Beneficial Owner of shares of such
series may submit to its Broker-Dealer by telephone or otherwise
information as to:
(A) the number of Outstanding shares,
if any, of such series held by such Beneficial Owner which
such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for shares of such series for
the next succeeding Rate Period of such shares; (B) the number
of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell if
the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall be less
than the rate per annum specified by such Beneficial Owner;
and/or
(C) the number of Outstanding shares,
if any, of such series held by such Beneficial Owner which
such Beneficial Owner offers to sell without regard to the
Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of
Potential Beneficial Owners, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable manner,
contact Potential Beneficial Owners (by telephone or otherwise),
including Persons that are not Beneficial Owners, on such lists to
determine the number of shares, if any, of such series which each such
Potential Beneficial Owner offers to purchase if the Applicable Rate
30
for shares of such series for the next succeeding Rate Period of shares
of such series shall not be less than the rate per annum specified by
such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A) (i), (B), (i) (C) or
(ii) of this paragraph (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 a series of TAPS subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of
such series specified in such Bid if the Applicable Rate for
shares of such series determined on such Auction Date shall be
less than the rate specified therein;
(B) such number or a lesser number of
Outstanding shares of such series to be determined as set
forth in clause (iv) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series
determined on such Auction Date shall be equal to the rate
specified therein; or
(C) the number of Outstanding shares of
such series specified in such Bid if the rate specified
therein shall be higher than the Maximum Rate for shares of
such series, or such number or a lesser number of Outstanding
shares of such series to be determined as set forth in clause
(iii) of paragraph (b) of Section 4 of this Part II if the
rate specified therein shall be higher than the Maximum Rate
for shares of such series and Sufficient Clearing Bids for
shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an
Existing Holder of shares of a series of TAPS subject to an Auction on
any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of
such series specified in such Sell Order; or
(B) such number or a lesser number of
Outstanding shares of such series as set forth in clause (iii)
of paragraph (b) of Section 4 of this Part II if Sufficient
Clearing Bids for shares of such series do not exist;
PROVIDED, HOWEVER, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of TAPS shall 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 2 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 Fund)
with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer
31
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 Beneficial Holder or a
Potential Holder of shares of a series of TAPS subject to an Auction on
any Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of
such series specified in such Bid if the Applicable Rate for
shares of such series determined on such Auction Date shall be
higher than the rate specified therein; or
(B) such number or a lesser number of
Outstanding shares of such series as set forth in clause (v)
of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of shares of TAPS other than
whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent
(a) Each Broker-Dealer shall submit in writing to the
Auction Agent prior to the Submission Deadline on each Auction Date all Orders
for shares of TAPS of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Fund) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order
(which shall be the Broker-Dealer unless otherwise permitted by the
Fund);
(ii) the aggregate number of shares of such
series that are the subject of such Order;
(iii) to the extent that such Bidder is an
Existing Holder of shares of such series:
(A) the number of shares, if any, of
such series subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of
such series subject to any Bid of such Existing Holder and the
rate specified in such Bid; and
(C) the number of shares, if any, of
such series subject to any Sell Order of such Existing Holder;
and
(iv) to the extent such Bidder is a Potential
Holder of shares of such series, the rate and number of shares of such
series specified in such Potential Holder's Bid.
32
(b) If any rate specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall round
such rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
shares of TAPS of a series held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a
Hold Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent; provided,
however, that if an Order or Orders covering all of the Outstanding shares of
such series held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem
a Sell Order to have been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is
submitted to the Auction Agent covering in the aggregate more than the number of
Outstanding shares of TAPS of a series subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for shares of such series shall be
considered valid, but only up to and including in the aggregate the
number of Outstanding shares of such series held by such Existing
Holder, and if the number of shares of such series subject to such Hold
Orders exceeds the number of Outstanding shares of such series held by
such Existing Holder, the number of shares subject to each such Hold
Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over the
number of shares of such series subject to any Hold Orders referred to
in clause (i) above;
(B) subject to subclause (A), if more than one
Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with the same rate and the
number of Outstanding shares of such series subject to such
Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such
excess, and the number of shares of such series subject to
each Bid with the same rate shall be reduced pro rata to cover
the number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more
than one Bid of an Existing Holder for shares of such series
is submitted to the Auction Agent with different rates, such
Bids shall be considered valid in the ascending order of their
respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of
such Outstanding shares of such series subject to any portion
of Bids considered not valid in whole or in part under this
clause (ii) shall be treated as the subject of a Bid for
shares of such series by or on behalf of a Potential Holder at
the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing
33
Holder over the sum of shares of such series subject to valid Hold
Orders referred to in clause (i) above and valid Bids referred to in
clause (ii) above.
(e) If more than one Bid for one or more shares of a
series of TAPS is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the rate
and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a
Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. 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 a series of TAPS, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding
shares of such series over the number of Outstanding shares of such
series subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available TAPS" of such series);
(ii) from the Submitted Orders for shares of such
series whether:
(A) the number of Outstanding shares of
such series subject to Submitted Bids of Potential Holders
specifying one or more rates between the Minimum Rate (for
Standard Rate Periods or less, only) and the Maximum Rate (for
all Rate Periods) for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of
such series subject to Submitted Bids of Existing Holders
specifying one or more rates between the Minimum Rate (for
Standard Rate Periods or less, only) and the Maximum Rate (for
all Rate Periods) for shares of such --- series; and
(C) the number of Outstanding shares of
such series subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because
the number of shares of such series in subclauses (B) and (C) above is
zero because all of the Outstanding shares of such series are subject
to Submitted Hold Orders), such Submitted Bids in subclause (A) above
being hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of
such series exist, the lowest rate specified in such Submitted Bids
(the "Winning Bid Rate" for shares of such series) which if:
(A) (I) each such Submitted Bid of
Existing Holders specifying such lowest rate and (II) all
other such Submitted Bids of Existing Holders specifying lower
34
rates were rejected, thus entitling such Existing Holders to
continue to hold the shares of such series that are subject to
such Submitted Bids; and
(B) (I) each such Submitted Bid of
Potential Holders specifying such lowest rate and (II) all
other such Submitted Bids of Potential Holders specifying
lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such
series which, when added to the number of Outstanding shares of such
series to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available TAPS of such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 3, the Auction Agent
shall advise the Fund of the Minimum Rate and Maximum Rate for shares of the
series of TAPS for which an Auction is being held on the Auction Date and, based
on such determination, the Applicable Rate for shares of such series for the
next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of
such series exist, that the Applicable Rate for all shares of such
series for the next succeeding Rate Period thereof shall be equal to
the Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of
such series do not exist (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such series for the next succeeding
Rate Period thereof shall be equal to the Maximum Rate for shares of
such series; or
(iii) if all of the Outstanding shares of such
series are subject to Submitted Hold Orders, that the Applicable Rate
for all shares of such series for the next succeeding Rate Period
thereof shall be All Hold Rate.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares
Existing Holders shall continue to hold the shares of TAPS that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of TAPS
have been made, all Submitted Sell Orders with respect to shares of such series
shall be accepted and, subject to the provisions of paragraphs (d) and (e) of
this Section 4, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is higher than the Winning Bid Rate for
shares of such series shall be accepted, thus requiring each such
Existing Holder to sell the shares of TAPS subject to such Submitted
Bids;
(ii) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be rejected, thus
35
entitling each such Existing Holder to continue to hold the shares of
TAPS subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of
such series specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be rejected, thus entitling such Existing
Holder to continue to hold the shares of TAPS subject to such Submitted
Bid, unless the number of Outstanding shares of TAPS subject to all
such Submitted Bids shall be greater than the number of shares of TAPS
("remaining shares") in the excess of the Available TAPS of such series
over the number of shares of TAPS subject to Submitted Bids described
in clauses (ii) and (iii) of this paragraph (a), in which event such
Submitted Bid of such Existing Holder shall be rejected in part, and
such Existing Holder shall be entitled to continue to hold shares of
TAPS subject to such Submitted Bid, but only in an amount equal to the
number of shares of TAPS of such series obtained by multiplying the
number of remaining shares by a fraction, the numerator of which shall
be the number of Outstanding shares of TAPS held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall
be the aggregate number of Outstanding shares of TAPS subject to such
Submitted Bids made by all such Existing Holders that specified a rate
equal to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of
such series specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be accepted but only in an amount equal to
the number of shares of such series obtained by multiplying the number
of shares in the excess of the Available TAPS of such series over the
number of shares of TAPS subject to Submitted Bids described in clauses
(ii) through (iv) of this paragraph (a) by a fraction, the numerator of
which shall be the number of Outstanding shares of TAPS subject to such
Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of TAPS subject to such Submitted Bids
made by all such Potential Holders that specified a rate equal to the
Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of TAPS
have not been made (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), subject to the provisions of
paragraph (d) of this Section 4, Submitted Orders for shares of such series
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower than the Maximum
Rate for shares of such series shall be rejected, thus entitling such
Existing Holders to continue to hold the shares of TAPS subject to such
Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower than the Maximum
Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of
such series specifying any rate that is higher than the Maximum Rate
for shares of such series and the Submitted Sell Orders for shares of
such series of each Existing Holder shall be accepted, thus entitling
each Existing Holder that submitted or on whose behalf was submitted
any such Submitted Bid or Submitted Sell Order to sell the shares of
such series subject to such Submitted
36
Bid or Submitted Sell Order, but in both cases only in an amount equal
to the number of shares of such series obtained by multiplying the
number of shares of such series subject to Submitted Bids described in
clause (ii) of this paragraph (b) by a fraction, the numerator of which
shall be the number of Outstanding shares of such series held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order
and the denominator of which shall be the aggregate number of
Outstanding shares of such series subject to all such Submitted Bids
and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of TAPS
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall 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 4,
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 a
series of TAPS on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, round up or down the number of shares
of TAPS of such series to be purchased or sold by any Existing Holder or
Potential Holder on such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of TAPS.
(e) If, as a result of the procedures described in clause
(v) of paragraph (a) of this Section 4, any Potential Holder would be entitled
or required to purchase less than a whole share of a series of TAPS on any
Auction Date, the Auction Agent shall, in such manner as it shall determine in
its sole discretion, allocate shares of TAPS of such series for purchase among
Potential Holders so that only whole shares of TAPS of such series are purchased
on such Auction Date as a result of such procedures by any Potential Holder,
even if such allocation results in one or more Potential Holders not purchasing
shares of TAPS of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a
series of TAPS, the Auction Agent shall determine the aggregate number of shares
of such series to be purchased and the aggregate number of shares of such series
to be sold by Potential Holders and Existing Holders and, with respect to each
Potential Holder and Existing Holder, to the extent that such aggregate number
of shares to be purchased and such aggregate number of shares to be sold differ,
determine to which other Potential Holder(s) or Existing Holder(s) they shall
deliver, or from which other Potential Holder(s) or Existing Holder(s) they
shall receive, as the case may be, shares of TAPS of such series.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares of a series of TAPS 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 TAPS that
have been made in respect of Potential Holders' or Potential Beneficial Owners'
Submitted Bids for shares of such series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any
affiliate of either shall have any responsibility or liability with respect to
the failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver shares of
TAPS of any series or to pay for shares of TAPS of any series sold or purchased
pursuant to the Auction Procedures or otherwise.
37
IN WITNESS WHEREOF, NUVEEN SENIOR INCOME FUND has caused these presents
to be signed in its name and on its behalf by its Vice-President, and its
corporate seal to be hereunto affixed and attested by its Assistant Secretary.
The Fund's Declaration of Trust is on file with the Secretary of State of the
Commonwealth of Massachusetts, and the said officers of the Fund have executed
this Statement as officers and not individually, and the obligations and rights
set forth in this Statement are not binding upon any such officers, or the
Trustees or shareholders of the Fund, individually, but are binding only upon
the assets and property of the Fund.
NUVEEN SENIOR INCOME FUND
By:
--------------------------------------
Gifford R. Zimmerman, Vice President
ATTEST:
-------------------------------------
Nicholas Dalmaso, Assistant Secretary
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as
published by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program. It
takes into consideration the creditworthiness of guarantors, insurers, or other
forms of credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors'
rights.
The issue ratings definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA An obligation rated "AAA" has the highest rating assigned
by Standard & Poor's. 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.
C-1
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 The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has
been taken, but payments on this obligation are being
continued.
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 Standard & Poor's 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.
Plus (+) or minus (-). The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
C-2
c The "c" subscript is used to provide additional
information to investors that the bank may terminate its
obligation to purchase tendered bonds if the long-term
credit rating of the issuer is below an investment-grade
level and/or the issuer's bonds are deemed taxable.
p The letter "p" indicates that the rating is provisional.
A provisional rating assumes the successful completion of
the project financed by the debt being rated and
indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely
completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the
risk of default upon failure of such completion. The
investor should exercise his own judgment with respect to
such likelihood and risk.
* Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow
agreement or closing documentation confirming investments
and cash flows.
r The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may
experience high volatility or high variability in
expected returns as a result of noncredit risks. Examples
of such obligations are securities with principal or
interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only
and principal-only mortgage securities. The absence of an
"r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in
total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as investment-grade
ratings) generally are regarded as eligible for bank investment. Also, the laws
of various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
A Standard & Poor's note rating reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment:
- Amortization schedule -- the larger the final maturity relative
to other maturities, the more likely it will be treated as a
note; and
- Source of payment -- the more dependent the issue is on the
market for its refinancing, the more likely it will be treated
as a note.
C-3
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 A short-term obligation rated "A-1" is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet
its financial commitment on the obligation is strong. Within
this category, certain obligations are designated with a plus
sign (+). 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 its
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 Standard & Poor's believes that such payments
will be made during such grace period. The "D" rating also will
be used upon the filing of a
C-4
bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Moody's Investors Service, Inc. -- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
Aaa Bonds which are 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 which are 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 risks appear somewhat
larger than in "Aaa" securities.
A Bonds which are 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 sometime in the future.
Baa Bonds which are 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 which are 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 which are 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 which are 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 which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C-5
C Bonds which are 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.
Issues that are secured by escrowed funds held in trust, reinvested in
direct, non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S. Government or Resolution Funding
Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
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.
SHORT-TERM LOANS
MIG 1/VMIG 1 This designation denotes superior credit quality.
Excellent protection is afforded by established cash
flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality.
Margins of protection are ample, although not as large
as in the preceding group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and
market access for refinancing is likely to be less
well-established.
SG This designation denotes speculative-grade credit
quality. Debt instruments in this category may lack
sufficient margins of protection.
COMMERCIAl PAPER
Issuers rated Prime-1 (or related supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures 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.
C-6
Issuers rated Prime-2 (or related 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, will 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 related supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc. -- A brief description of the applicable Fitch IBCA,
Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
INVESTMENT GRADE
AAA Highest credit quality. "AAA" ratings denote the lowest
expectation of credit risk. They are assigned only in
case of exceptionally strong capacity for timely payment
of financial commitments. This capacity is highly
unlikely to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low
expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation
of credit risk. The capacity for timely payment of
financial commitments is considered strong. This capacity
may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case
for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is
currently a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this
capacity. This is the lowest investment-grade category.
SPECULATIVE GRADE
BB Speculative. "BB" ratings indicate that there is a
possibility of credit risk developing, particularly as
the result of adverse economic change over time; however,
business or financial alternatives may be available to
allow financial commitments to be met. Securities rated
in this category are not investment grade.
B Highly speculative. "B" ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent
upon a sustained, favorable business and economic
environment.
C-7
CCC,CC, C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic
developments. A "CC" rating indicates that default of
some kind appears probable. "C" ratings signal imminent
default.
DDD, DD,
and D Default. The ratings of obligations in this category
are based on their prospects for achieving partial or
full recovery in a reorganization or liquidation of the
obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision,
the following serve as general guidelines. "DDD"
obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued
interest. "DD" indicates potential recoveries in the
range of 50%-90%, and "D" the lowest recovery potential,
i.e., below 50%. Entities rated in this category have
defaulted on some or all of their obligations. Entities
rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a
formal reorganization process. Entities rated "DD" and
"D" are generally undergoing a formal reorganization or
liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding
obligations, while entities rated "D" have a poor
prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+"
to denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment
of financial commitments, but the margin of safety is not as
great as in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term adverse
changes could result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC", or to short-term ratings other than
"F1".
"NR" indicates that Fitch does not rate the issuer or issue in question.
C-8
"Withdrawn": A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating Watch is typically resolved
over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over
a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are `stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action.
Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.
C-9
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements:
Statement of Net Assets, _______________, 2001 (audited)
Statement of Net Assets, _______________, 2001 (unaudited)
Statement of Operations from _______________, 2001 (commencement
of operations) to _______________, 2001 (unaudited)
Statement of Changes in Net Assets from _______________, 2001
(commencement of operations) to _______________, 2001
(unaudited)
Portfolio of Investments, _______________, 2001 (unaudited)
2. Exhibits:
a.1 Declaration of Trust dated August 27, 2001. Filed on
September 5, 2001 as Exhibit a to Registrant's
Registration Statement on Form N-2 (File No. 333-68948)
and incorporated herein by reference.*
a.2 Form of Statement Establishing and Fixing the Rights and
Preferences of Taxable Auctioned Preferred Shares
("TAPS"). Filed herewith as Appendix A to the Statement
of Additional Information contained herein.
b. By-Laws of Registrant. Filed on September 5, 2001 as
Exhibit b to Registrant's Registration Statement on Form
N-2 (File No. 333-68948) and incorporated herein by
reference.*
c. None.
d. Form of Share Certificate.**
e. Terms and Conditions of the Dividend Reinvestment Plan.
Filed on October 17, 2001 as Exhibit e to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-2 (File No. 333-68948) and incorporated herein
by reference.*
f. None.
g.1 Investment Management Agreement between Registrant and
Nuveen Institutional Advisory Corp. dated ___________,
2001.**
g.2 Investment Sub-Advisory Agreement between Nuveen
Institutional Advisory Corp. and Security Capital
Research & Management Incorporated dated ___________,
2001.**
h. Form of Underwriting Agreement.**
Part C-1
i. Nuveen Open-End and Closed-End Funds Deferred
Compensation Plan for Independent Directors and
Trustees. Filed on October 17, 2001 as Exhibit i to
Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 333-68948)
and incorporated herein by reference.*
j. Form of Exchange Traded Fund Custody Agreement between
Registrant and The Chase Manhattan Bank dated _________,
2001.**
k.1 Form of Shareholder Transfer Agency Agreement between
Registrant and Chase Manhattan Bank dated _________,
2001.**
k.2 Form of Expense Reimbursement Agreement between
Registrant and Nuveen Institutional Advisory Corp. dated
_________, 2001.**
l.1 Opinion and consent of Vedder, Price, Kaufman &
Kammholz.**
l.2 Opinion and consent of Bingham Dana LLP.**
m. None.
n. Consent of Arthur Andersen LLP.**
o. None.
p. Subscription Agreement of Nuveen Institutional Advisory
Corp. dated _________, 2001.**
q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.
Filed on September 5, 2001 as Exhibit r.1 to
Registrant's Registration Statement on Form N-2 (File
No. 333-68948) and incorporated herein by reference.*
r.2 Code of Ethics of Security Capital Research & Management
Incorporated. Filed on October 17, 2001 as Exhibit r.2
to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-2 (File No. 333-68948)
and incorporated herein by reference.*
r.3 Code of Ethics of Salomon Smith Barney Inc. Filed on
October 17, 2001 as Exhibit r.3 to Pre-Effective
Amendment No. 1 to Registrant's Registration Statement
on Form N-2 (File No. 333-68948) and incorporated herein
by reference.*
s. Powers of Attorney.*
-----------------
* Previously filed.
** To be filed by amendment.
ITEM 25: MARKETING ARRANGEMENTS
See Section 9g of the Underwriting Agreement to be filed as Exhibit h to
this Registration Statement.
Part C-2
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission fees...................... $ *
National Association of Securities Dealers, Inc. fees........ *
Printing and engraving expenses.............................. *
Legal Fees................................................... *
American Stock Exchange listing fees......................... *
Accounting expenses.......................................... *
Blue Sky filing fees and expenses............................ *
Transfer agent fees.......................................... *
Miscellaneous expenses....................................... *
---
Total..................................................... $ *
===
-------------------------
* To be completed by amendment.
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At , 2001
--------------
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Common Shares, $0.01 par value........................... 0
ITEM 29: INDEMNIFICATION
Section 4 of Article XII of the Registrant's Declaration of Trust
provides as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in
the conduct of his office;
(b) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not
involving a final adjudication (as provided in paragraph (a) or (b)) and
resulting in a payment by a Covered Person, unless there
Part C-3
has been either a determination that such Covered Person did not engage
in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or a
reasonable determination, based on a review of readily available facts
(as opposed to a full trial-type inquiry), that he did not engage in
such conduct:
(i) by a vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Section 4 shall be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses
arising out of any such advances; or
(b) a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in
office act on the matter) or independent legal counsel in a written
opinion shall determine, based upon a review of the readily available
facts (as opposed to a full trial-type inquiry), that there is reason to
believe that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is
not an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment
Trust Errors and Omission policies in the aggregate amount of $20,000,000 (with
a maximum deductible of $500,000) against liability and expenses of claims of
wrongful acts arising out of their position with the Registrant, except for
matters which involve willful acts, bad faith, gross negligence and willful
disregard of duty (i.e., where the insured did not act in good faith for a
purpose he or she reasonably believed to be in the best interest of Registrant
or where he or she had reasonable cause to believe this conduct was unlawful).
Part C-4
Section 8 of the Underwriting Agreement to be filed as Exhibit h.1 to
this Registration Statement provides for each of the parties thereto, including
the Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, 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 of 1933 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 of 1933 and will be governed by the final adjudication of such
issue.
ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Nuveen Institutional Advisory Corp. serves as investment adviser to the
following open-end and closed-end management type investment companies: Nuveen
Investment Trust, Nuveen Investment Trust II, Nuveen Investment Trust III,
Nuveen Select Tax-Free Income Portfolio, Nuveen Select Tax-Free Income Portfolio
2, Nuveen Insured California Select Tax-Free Income, Nuveen Insured New York
Select Tax-Free Income Portfolio, and Nuveen Select Tax-Free Income Portfolio 3.
Security Capital Research & Management Incorporated ("Security Capital")
serves as investment adviser to Security Capital Real Estate Mutual Funds Inc.,
an open-end management type investment company and subadvises 5 other open-end
funds.
Nuveen Institutional Advisory Corp. has no other clients or business at
the present time. Security Capital also offers separate account management for
certain institutional and high net worth clients. For a description of other
business, profession, vocation or employment of a substantial nature in which
any director or officer of the investment adviser who serve as officers or
Trustees of the Registrant has engaged during the last two years for his or her
account or in the capacity of director, officer, employee, partner or trustee,
see the descriptions under "Management of the Fund" in Part B of this
Registration Statement. Such information for the remaining senior officers of
NIAC appears below:
OTHER BUSINESS PROFESSION, VOCATION OR
NAME AND POSITION WITH NIAC EMPLOYMENT DURING PAST TWO YEARS
--------------------------- --------------------------------
John P. Amboian, President............................. President, formerly Executive Vice President,
of The John Nuveen Company, Nuveen
Investments Nuveen Advisory Corp., Nuveen
Asset Management, Inc. and Nuveen Senior Loan
Asset Management Inc. and Executive Vice
President and Director of Rittenhouse
Financial Services, Inc.
Margaret E. Wilson, Vice President and Controller .... Vice President and Controller of the John
Nuveen Company, Nuveen Investments and Nuveen
Advisory Corp. and Senior Vice President and
Controller of Nuveen Senior Loan Asset
Management Inc.; formerly CFO of Sara Lee
Corp., Bakery Division.
Part C-5
Set forth below is a list of each director and officer of Security
Capital indicating each business profession, vocation or employment of a
substantial nature in which such person has been, at any time during the past
two fiscal years, engaged for his or her own account or in the capacity of
director, officer, partner or trustee.
OTHER BUSINESS PROFESSION, VOCATION OR
NAME AND POSITION WITH SECURITY CAPITAL EMPLOYMENT DURING PAST TWO YEARS
--------------------------------------- --------------------------------
Anthony R. Manno, Jr., President and
Managing Director......................... Chairman of the Board, Managing Director and
President, Security Capital Real Estate
Mutual Funds Incorporated.
Kenneth D. Statz, Managing Director.......... Managing Director, Security Capital Real
Estate Mutual Funds Incorporated.
Russell C. Platt, Managing Director.......... --
Kevin Bedell, Senior Vice President.......... Senior Vice President, Security Capital Real
Estate Mutual Funds Incorporated.
David E. Rosenbaum, Senior Vice President.... --
Jeffrey C. Nellessen, Vice President,
Treasurer, and Assistant Secretary........ Vice President, Treasurer and Assistant
Secretary, Security Capital Real Estate
Mutual Funds Incorporated.
ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
Nuveen Institutional Advisory Corp., 333 West Wacker Drive, Chicago,
Illinois 60606, maintains the Declaration of Trust, By-Laws, minutes of trustees
and shareholders meetings and contracts of the Registrant and all advisory
material of the investment adviser.
Security Capital Research & Management Incorporated, 11 South LaSalle
Street, 2nd Floor, Chicago, Illinois 60606, maintains certain advisory material
of the subadviser.
The Chase Manhattan Bank, P.O. Box 660086, Dallas, Texas 75266-0086
maintains all general and subsidiary ledgers, journals, trial balances, records
of all portfolio purchases and sales, and all other required records not
maintained by Nuveen Institutional Advisory Corp.
ITEM 32: MANAGEMENT SERVICES
Not applicable.
ITEM 33: UNDERTAKINGS
Part C-6
1. Registrant undertakes to suspend the offering of its shares
until it amends its prospectus if (1) subsequent to the effective date
of its Registration Statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of the
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 purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of a registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by
the Registrant under Rule 497(h) under the Securities Act of 1933
shall be deemed to be part of the Registration Statement as of
the time it was declared effective.
b. For the purpose of determining any liability under the
Securities Act of 1933, 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 the 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 a written or oral request, any Statement of
Additional Information.
Part C-7
SIGNATURES
Pursuant to the 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 this City of Chicago, and State of Illinois, on the 2nd day of
November, 2001.
NUVEEN REAL ESTATE INCOME FUND
/s/ Gifford R. Zimmerman
----------------------------------------
Gifford R. Zimmerman, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller November 2, 2001
-------------------------
Stephen D. Foy (Principal Financial and
Accounting Officer)
Timothy R. Schwertfeger* Chairman of the Board and By: /s/ Gifford R. Zimmerman
------------------------
Trustee (Principal Executive Gifford R. Zimmerman
Officer) Attorney-In-Fact
November 2, 2001
James E. Bacon* Trustee
William E. Bennett* Trustee
Jack B. Evans* Trustee
William L. Kissick* Trustee
Thomas E. Leafstrand* Trustee
Sheila W. Wellington* Trustee
*Original powers of attorney authorizing Nicholas Dalmaso and Gifford R.
Zimmerman, among others, to execute this Registration Statement, and Amendments
thereto, for each of the trustees of Registrant on whose behalf this
Registration Statement is filed, have been executed and filed as an exhibit.