PROSPECTUS 800 SHARES, SERIES W
LIQUIDATION PREFERENCE, $25,000 PER SHARE [LOGO]
RMR F.I.R.E. FUND
AUCTION PREFERRED SHARES
OFFERING. RMR F.I.R.E. Fund ("we," "us" or the "Fund"), a recently
organized, non-diversified, closed end management investment company, is
offering 800 Series W auction preferred shares. These shares are referred to in
this prospectus as "Preferred Shares."
INVESTMENT OBJECTIVE. Our investment objective is to provide high total
returns to shareholders through a combination of capital appreciation and
current income. We will attempt to achieve this objective by investing in
securities issued by financial, insurance and real estate companies, or F.I.R.E.
companies. "F.I.R.E." is a commonly used acronym for the combined financial
services, insurance and real estate industries. There can be no assurance that
we will meet our investment objective.
INVESTMENT POLICIES Generally, in normal market conditions, we expect that
at least 80% of our managed assets will be invested in securities issued by
F.I.R.E. companies. Our managed assets are equal to the net asset value of our
common shares plus the liquidation preference of the Preferred Shares and the
principal amount of any borrowings outstanding. Our initial investments will be
primarily in common shares of F.I.R.E. companies.
OUR ADVISOR. Our Advisor, RMR Advisors, Inc., began managing investment
companies in December 2003. Our portfolio management team has extensive
experience in the F.I.R.E. industries. One member of this team has over 20 years
experience managing investments in financial services and insurance companies
while the other two members have 40 years of combined experience in the real
estate industry.
INVESTING IN OUR PREFERRED SHARES INVOLVES RISKS DESCRIBED IN "RISK FACTORS"
BEGINNING ON PAGE 13. THE MINIMUM PURCHASE AMOUNT OF THE PREFERRED SHARES IS
$25,000.
PER SHARE TOTAL(1)
---------- ------------
Public Offering Price.................................... $25,000 $ 20,000,000
Sales Load(1) ........................................... $ 250 $ 200,000
------- ------------
Proceeds to the Fund..................................... $24,750 $ 19,800,000
----------------------
(1) Sales commissions resulting from the issuance of the Preferred Shares will
be borne by the Fund. Other offering costs paid by the Fund, estimated to be
$177,654, are not included in this amount.
The Preferred Shares will be delivered in book-entry form through the
facilities of The Depository Trust Company, on or about December 20, 2004.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
RBC CAPITAL MARKETS A.G. EDWARDS
----------------
December 16, 2004
DISTRIBUTIONS AND OTHER INFORMATION. Investors in Preferred Shares will be
entitled to receive cash distributions at an annual rate that may vary for the
successive rate periods for the Preferred Shares. The distribution rate for the
initial rate period will be 2.25%. The initial distributions will be paid on
December 23, 2004 and the initial rate period will be 3 days from the date of
issuance, which is December 20, 2004. For subsequent rate periods, the Preferred
Shares will pay distributions based on a rate set at auctions. These auctions
will usually be held every 7 days. Preferred shares have a liquidation
preference of $25,000 per Share, plus any accumulated, unpaid distributions.
Preferred Shares also have priority over the Fund's common shares as to
distribution of assets as described in this prospectus. See "Description of
Preferred Shares."
After the initial rate period described in this prospectus, investors may
buy or sell Preferred Shares through an order placed at auction with or through
a broker-dealer in accordance with the procedures specified in this prospectus.
You should review carefully the detailed information regarding the auction
procedures which appears in this prospectus and our Statement of Additional
Information ("SAI") and should note that (i) an order placed at an auction
constitutes an irrevocable commitment to hold, purchase or sell Preferred Shares
based upon the results of the related auction, (ii) settlement for purchases and
sales will be on the business day following the auction and (iii) ownership of
Preferred Shares will be maintained in book-entry form by or through The
Depository Trust Company ("DTC") (or any successor securities depository). The
Preferred Shares are redeemable, in whole or in part, at our option on the
second business day prior to any date distributions are paid on the Preferred
Shares, and will be subject to mandatory redemption in certain circumstances at
a redemption price of $25,000 per share, plus accumulated but unpaid
distributions to the date of redemption. See "Description of Preferred
Shares--Redemption."
You should read this prospectus, which contains important information about
us, before deciding whether to invest in our Preferred Shares, and retain it for
future reference. Our SAI, dated December 16, 2004 containing additional
information about us, has been filed with the Securities and Exchange
Commission, or SEC, and is incorporated by reference in its entirety into this
prospectus. You may request a free copy of the SAI, the table of contents of
which is on page 48 of this prospectus, by calling 1-866-790-8165 or
1-617-332-9530 or by writing to us. You can get the same information free from
the SEC's EDGAR database on the Internet (http://www.sec.gov).
The Preferred Shares will be senior to our outstanding common stock. The
Preferred Shares will not be listed on an exchange. Our common shares are traded
on the American Stock Exchange ("AMEX") under the symbol "RFR." It is a
condition of closing this offering that the Preferred Shares at the time of
closing carry ratings of AAA from Fitch Ratings, Inc., or Fitch, and of Aaa from
Moody's Investors Service, Inc., or Moody's.
OUR PREFERRED SHARES DO NOT REPRESENT A DEPOSIT OR OBLIGATION OF, AND ARE
NOT GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION,
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY OTHER
GOVERNMENTAL AGENCY.
ii
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary............ 1
Financial Highlights.......... 10
The Fund...................... 11
Use of Proceeds............... 11
Capitalization................ 12
Risk Factors.................. 13
Investment Objective and
Policies.................... 23
Interest Rate Transactions.... 25
Management of the Fund........ 26
Description of Preferred
Shares...................... 28
The Auction................... 36
PAGE
--------
Description of Common
Shares...................... 41
Certain Provisions in the
Declaration of Trust........ 41
Repurchase of Fund Shares..... 43
Tax Matters................... 43
Underwriting.................. 45
Custodian and Transfer
Agents...................... 47
Legal Matters................. 47
Table of Contents of the
Statement of Additional
Information................. 48
You should rely only on the information contained or incorporated by
reference into this prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with different information. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the cover page of this prospectus. If a material change occurs in
our business, financial condition, results of operations or prospects during the
period when a prospectus is required to be delivered when effecting transactions
in our Preferred Shares, we will be required under the Federal securities laws
to amend our prospectus to reflect such change and an updated prospectus will be
delivered by those persons required to deliver a prospectus.
Until January 10, 2005, (25 days after the date of this prospectus), all
dealers that buy, sell or trade our Preferred Shares, 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.
iii
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN OUR PREFERRED SHARES. YOU SHOULD REVIEW THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF
ADDITIONAL INFORMATION, ESPECIALLY THE INFORMATION SET FORTH AT "RISK FACTORS."
The Fund.......................... RMR F.I.R.E. Fund is a recently organized, non-diversified,
closed end management investment company that commenced
operations in November 2004. Our common shares are traded on
the AMEX under the symbol "RFR."
The Offering...................... We are offering shares of preferred stock, par value $.0001 per
share, which have been designated Series W auction preferred
shares, with a purchase price of $25,000 per share. The shares
of preferred stock offered hereby are called "Preferred Shares"
in the rest of this prospectus. The Preferred Shares are
offered through RBC Dain Rauscher Inc. and A.G. Edwards &
Sons, Inc. ("Underwriters"). See "Underwriting."
Issuance of the Preferred Shares represents leverage financing
of the Fund. The Preferred Shares entitle their holders to
receive cash distributions at an annual rate that may vary for
the successive rate periods for the Preferred Shares. In
general, except as described under "--Distributions and Rate
Periods" below and "Description of Preferred
Shares--Distributions and Rate Periods," the rate period for
the Preferred Shares will be 7 days. The auction agent
("Auction Agent") will determine the distribution rate for a
particular rate period based on an auction conducted on the
business day next preceding the first day of that rate period.
See "The Auction."
The Preferred Shares will not be listed on an exchange.
Instead, investors may buy or sell Preferred Shares in an
auction by submitting orders to broker-dealers that have
entered into an agreement with the Auction Agent
("Broker-Dealers") or to a broker-dealer that has entered into
an agreement with a Broker-Dealer.
Investors in Preferred Shares will not receive certificates
representing ownership of their shares. DTC or its nominee for
the account of the investor's broker-dealer will maintain
record ownership of Preferred Shares in book-entry form. An
investor's broker-dealer, in turn, will maintain records of
that investor's beneficial ownership of Preferred Shares.
Investment Objective.............. Our investment objective is to provide high total returns to
shareholders through a combination of capital appreciation and
current income. We will attempt to achieve this objective by
investing in securities issued by F.I.R.E. companies.
Generally, a F.I.R.E. company is a company which derives at
least 50% of its
1
revenue directly or indirectly from, or has at least 50% of its
assets invested in, businesses that (i) provide financial
services, including banking, investing, lending, brokerage, tax
and retirement services, (ii) sell or service insurance,
including life, health, mortgage, property, casualty, workers
compensation or liability insurance and re-insurance; and
(iii) own, lease, manage, construct, sell or broker real
estate. F.I.R.E. companies include, for example, commercial
banks, investment banks, finance companies, insurance
companies, stock brokerage firms, money management companies,
real estate agents, retirement planning services, tax
preparation services, home builders, mortgage originators,
construction companies and real estate investment trusts. There
can be no assurance that we will achieve our investment
objective. Our investment objective is a fundamental policy and
cannot be changed without shareholder approval.
Investment Strategy and Use of
Proceeds........................ We intend to use the proceeds of this offering to make
investments in securities issued by F.I.R.E. companies.
Generally, under normal market conditions, our investment
strategy will be as follows:
- At least 80% of our managed assets will be invested in
securities issued by F.I.R.E. companies. Managed assets
not so invested will be invested in other equity and debt
securities and in money market instruments.
- Initially, we expect our investments will be primarily in
common shares of F.I.R.E. companies. Over time, our
managed assets may include a combination of common shares,
debt and preferred securities, including securities
convertible into common shares. Most or all of our managed
assets will not be investment grade rated, including all
of our investments in common shares.
- In anticipation of, or in response to, adverse market
conditions or for cash management purposes, we may
temporarily hold all or a portion of our assets in cash,
money market instruments, commercial paper, shares of
money market funds, investment grade bonds or other
investment grade debt securities, including government
securities. Our investment objective may not be achieved
during these times.
- In connection with our use of leverage, we may enter into
interest rate swap or cap transactions or purchase or sell
futures or options on futures.
- We will not invest in the securities of any company
managed by our Advisor or by any affiliate of our Advisor.
Ratings of Preferred Shares....... The Preferred Shares will carry a rating of Aaa from Moody's
and AAA from Fitch at the time of closing. There can be no
assurance that the Preferred Shares will carry a rating of Aaa
from Moody's and AAA from Fitch at all times in the future.
These ratings are
2
an assessment of the capacity and willingness of an issuer to
pay preferred stock obligations. The ratings are not a
recommendation to purchase, hold or sell those shares inasmuch
as the ratings do not comment as to market price or suitability
for a particular investor. The ratings also do not address the
likelihood that an owner of Preferred Shares will be able to
sell such shares in an auction or otherwise. The ratings are
based on information furnished to Moody's and Fitch by us and
our Advisor and information obtained from other sources. The
ratings may be changed, suspended or withdrawn in the rating
agencies' discretion as a result of changes in, or the
unavailability of, such information. See "Description of
Preferred Shares--Rating Agency Guidelines and Asset Coverage."
Investment Advisor................ Our Advisor is our investment manager. Our Advisor has a
limited history, having begun the substantial part of its
current business activities in December 2003. As of
December 8, 2004, our Advisor had $270 million of assets under
management.
One member of our portfolio management team has over 20 years
of experience managing investments in the financial services
and insurance companies; the two other members of this team
have 40 years of combined experience in the real estate
industry. Affiliates of our Advisor have extensive experience
in managing public companies. We believe that the experience of
our management team affords us a competitive advantage in
evaluating securities which are issued by F.I.R.E. companies.
We pay our Advisor a monthly fee equal to an annual rate of
0.85% of our average daily managed assets (I.E., the net asset
value of our common shares plus the liquidation preference of
our Preferred Shares and the principal amount of any borrowings
outstanding). Because this fee is calculated on the basis of
our managed assets, our use of leverage, including the issuance
of Preferred Shares, increases the fee paid to our Advisor. For
the five years after November 22, 2004, our Advisor has agreed
to waive its fees equal to an annual rate of 0.25% of our
average daily managed assets.
Custodian......................... State Street Bank and Trust Company serves as custodian of our
assets.
Administration and
Subadministration............... Our Advisor also acts as our administrator. Substantially all
administrative activities are conducted on our behalf by State
Street Bank and Trust Company, as subadministrator.
Transfer Agent.................... The Bank of New York will serve as our transfer agent with
respect to our Preferred Shares.
Auction Agent..................... The Bank of New York will serve as our auction agent.
3
Principal Risks................... AUCTION RISK. If an auction fails you may not be able to sell
some or all of your Preferred Shares. Neither the
Broker-Dealers nor we are obligated to purchase Preferred
Shares in an auction or otherwise, nor are we required to
redeem Preferred Shares in the event of a failed auction.
SECONDARY MARKET RISK. If you try to sell your Preferred Shares
between auctions you may not be able to sell any or all of your
shares or you may not be able to sell them for your purchase
price plus accumulated and unpaid distributions, especially
when market interest rates are rising. If we designate a
special rate period, changes in interest rates are more likely
to affect the price you would receive if you sold your shares
in the secondary market. You may transfer your shares outside
of auctions only to or through a Broker-Dealer, as defined in
our Amended and Restated Bylaws, or a broker-dealer that has
entered into an agreement with a Broker-Dealer. Broker-Dealers
are not required to maintain a market for Preferred Shares.
RATINGS AND ASSET COVERAGE RISK. A rating agency could
downgrade or withdraw its rating of the Preferred Shares, which
could affect their liquidity and their value in a secondary
market. The value of our investment portfolio may decline,
reducing the asset coverage for the Preferred Shares. We may be
forced to redeem your Preferred Shares to meet regulatory or
rating agency requirements or may voluntarily redeem your
shares.
LEVERAGE RISK. Our leveraged capital structure creates special
risks not associated with unleveraged funds having similar
investment objectives and policies. For example, if short term
interest rates rise, distribution rates on the Preferred Shares
set at auction may rise so that the amount of distributions to
be paid to holders of Preferred Shares ("Preferred
Shareholders") exceeds the income from our investment
portfolio.
If the value of our investment portfolio declines, our asset
coverage for the Preferred Shares will decline.
In addition to the risks described above, certain risks of
investing affect your investment and may limit our ability to
pay Preferred Share distributions, reduce the value of our
investment portfolio, impair our ability to meet our asset
coverage requirements on the Preferred Shares or make your
investment in Preferred Shares more volatile. These risks
include:
LIMITED OPERATING HISTORY. We are a recently organized company
that commenced operations in November 2004.
LIMITED EXPERIENCE OF OUR ADVISOR. Our Advisor has limited
experience managing registered investment companies.
NON-DIVERSIFICATION RISK. Because we are non-diversified, we
can invest a greater percentage of our assets in securities of
a single
4
company than can a diversified fund under the Investment
Company Act of 1940. Accordingly, the value of our investment
portfolio and your investment in our Preferred Shares may be
more volatile than an investment in a diversified fund.
CONCENTRATION OF INVESTMENTS. Our investment portfolio will be
focused upon securities in only three closely related
industries. A decline in the profitability of one or more of
these industries generally is likely to cause a decline in the
value of our investment portfolio.
F.I.R.E. INDUSTRIES RISKS. Our focus on securities issued by
F.I.R.E. companies incorporates the risks arising in these
businesses, including the following:
- BANK CONSOLIDATION RISKS. We expect that many of our
investments in bank stocks will be made in anticipation of
the acquisition of one bank by another bank. There is no
assurance that acquisitions will occur or that
acquisitions will enhance the value of the companies in
which we invest.
- INVESTMENT RISKS. Many banks and insurance companies own
and trade substantial portfolios of investments for their
own account and are exposed to credit risk and trading
losses.
- LENDING RISKS. Commercial loans made by banks often
involve a higher degree of credit risk than other types of
loans because they depend on the cash flow of the
borrower's business to service the debt rather than value
of pledged collateral.
- INSURANCE COMPANY RISKS. Severe weather conditions and
other catastrophes may result in an increase in claims
experienced by an insurer, particularly property and
casualty insurers. A downgrade of an insurer's financial
strength ratings could cause its customers to choose
other, more highly rated competitors, and its revenue may
decrease.
- BROKERAGE, INVESTMENT BANKING, AND OTHER TRANSACTION BASED
SERVICES RISKS. Declines in the volume of securities
trading and in market liquidity will generally result in
lower revenues and lower profits at stock brokerages,
investment banks and other financial services firms which
are engaged in transaction based services.
- MONEY MANAGEMENT RISKS. Earnings of most mutual fund
operators and other money management businesses are
dependent upon the value of assets under management.
Declines in stock market values generally reduce earnings
of money management businesses.
- REAL ESTATE COMPANY RISKS. There are many factors that may
negatively affect the values of securities issued by real
estate companies. For example: new development in excess
of increased demand lowers real estate values; occupancies
or rents
5
of office buildings and industrial properties usually rise
more slowly than general improvements in the economy;
retail properties are vulnerable to changes in consumer
spending practices and to bankruptcies of large tenants;
and apartment buildings can be negatively affected when
housing ownership becomes more affordable.
- INTEREST RATE RISKS. Many F.I.R.E. companies experience
reduced profits or losses when interest rates change.
- RISKS OF COMPETITION. Most segments of the F.I.R.E.
industries are highly competitive.
- REGULATORY RISKS. Many companies in F.I.R.E. industries
are subject to extensive regulations which may adversely
affect their ability to achieve business objectives.
INTEREST RATE RISKS. When interest rates rise, the market
values of dividend paying securities usually fall. Most of our
investments will be in dividend paying securities.
We may mitigate, but are unlikely to eliminate, the interest
rate risk associated with a rising level of required
distributions on our Preferred Shares by investing in interest
rate hedges. Interest rate risks may be magnified if we hedge
interest rates based upon expectations concerning interest
rates that prove inaccurate.
BELOW INVESTMENT GRADE SECURITIES RISKS. None of the common
shares in which we will invest are expected to be rated. In
addition, we expect that some of our investments may be in
ratable securities which are below investment grade. Because we
will invest in unrated or below investment grade rated
securities, your investment in our Preferred Shares will
involve a greater risk of loss than an investment which is
focused only on higher rated securities.
ANTI-TAKEOVER PROVISIONS. Our declaration of trust and bylaws
contain provisions which limit the ability of any person to
acquire control of us or to convert us to an open end fund. If
we are converted to an open-end investment company, we will be
required to redeem your Preferred Shares.
FINANCIAL MARKET RISK. Your investment in our Preferred Shares
will represent an indirect investment in the securities we own.
Most of the securities we will own will be traded on a
securities exchange or in the over the counter markets. The
prices of these securities in which we will invest will
fluctuate from day to day and may decline in value.
MARKET DISRUPTION RISK. Volatility in securities markets
precipitated by terrorist attacks, war or other events such as
those that have occurred since 2001 may have negative effects
on those markets. The value of securities in which we intend to
invest and your
6
Preferred Shares may be more volatile or decline in the event
of future terrorist activity, war or instability.
INFLATION RISK. Inflation will cause our expenses to increase
and may cause the value of our investment portfolio to decline.
Distributions and Rate Periods.... For the Preferred Shares, the initial distribution rate per
annum is 2.25%, the initial distribution payment date is
December 23, 2004 and the initial rate period is 3 days. For
subsequent rate periods, the Preferred Shares will pay
distributions based on a rate set at auctions normally held
every 7 days.
In most instances, distributions are payable on the first
business day following the end of the rate period. The rate set
at an auction will not exceed a maximum rate (which is
determined in accordance with procedures described in our
bylaws).
Distributions on Preferred Shares will be cumulative from the
date the shares are first issued and will be paid only out of
legally available funds.
We may designate a special rate period of more than 7 days if
we provide notice to the Auction Agent, have sufficient
clearing bids at the auction and deposit funds with the Auction
Agent for any redemption. In addition, full cumulative
distributions, any amounts due with respect to mandatory
redemptions and any additional distributions payable prior to
such date must be paid in full. The distribution payment dates
for special rate periods will be set out in the notice
designating a special rate period. We may designate a special
rate period if market conditions indicate that a longer rate
period would provide us greater stability or attractive
distribution rates.
See "Description of Preferred Shares--Distribution and Rate
Periods" and "The Auction."
The Preferred Shares will not be listed on an exchange.
Instead, you may place orders to buy or sell Preferred Shares
at an auction that normally is held on the last business day of
the preceding rate period by submitting orders to 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 Preferred Shares outside of
auctions, but may discontinue this activity at any time. There
is no assurance that a secondary market will exist or, if one
does exist, that it will provide Preferred Shareholders with
liquidity. You may transfer Preferred 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.
7
The first auction date for the Preferred Shares is
December 22, 2004 and each subsequent auction will normally be
held for those shares every 7 days. The first auction date for
the Preferred Shares will be the business day before the
distribution payment date for the initial rate period for those
shares. 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.
Asset Maintenance................. Under our bylaws, which establish the rights and preferences of
the Preferred Shares, we must maintain:
- asset coverage for the Preferred Shares as required by
Moody's and Fitch or by any other rating agency we engage
to rate the Preferred Shares, and
- asset coverage (as defined in the 1940 Act) of at least
200% with respect to senior securities that are stock,
including the Preferred Shares.
In the event that we do not maintain these coverage tests or
cure any deficiencies in the time allowed, some or all of the
Preferred Shares will be subject to mandatory redemption. See
"Description of Preferred Shares--Redemption--Mandatory
Redemption."
Based on the composition of our portfolio as of December 8,
2004, the asset coverage of the Preferred Shares as measured
pursuant to the 1940 Act would be approximately 275% if we were
to issue all of the Preferred Shares offered in this
prospectus, representing approximately 36% of our average daily
total assets, minus liabilities other than any aggregate
indebtedness that is entered into for purposes of leverage.
Voting Rights..................... The 1940 Act requires that the holders of the Preferred Shares
and any other preferred shares of the Fund, voting as a
separate class, have the right to elect at least two trustees
of the Fund and to elect a majority of the trustees at any time
when two years' distributions on the Preferred Shares or any
other preferred shares are unpaid.
As required under our declaration of trust, bylaws and the 1940
Act, certain other matters must be approved by a vote of all
shareholders of all classes voting together and by a vote of
the holders of Preferred Shares and any other preferred shares
of the Fund tallied separately. Each common share, each
Preferred Share, and each share of any other series of
preferred shares of the Fund is entitled to one vote per share.
See "Description of Preferred Shares--Voting Rights" and
"Certain Provisions in the Declaration of Trust."
Redemption........................ Although we will not ordinarily redeem Preferred Shares, we may
be required to redeem Preferred Shares if, for example, we do
not meet an asset coverage ratio required by law or required by
our
8
bylaws or in order to correct a failure to meet a rating agency
guideline in a timely manner. See "Description of Preferred
Shares--Redemption--Mandatory Redemption." We also may redeem
Preferred Shares voluntarily in certain circumstances. See
"Description of Preferred Shares--Redemption--Optional
Redemption."
Liquidation....................... The liquidation preference of the Preferred Shares is $25,000
per share, plus an amount equal to accumulated but unpaid
distributions (whether or not earned or declared by us). See
"Description of Preferred Shares--Liquidation."
The Preferred Shares will constitute stock, and distributions
Federal Income Taxation........... by us with respect to the Preferred Shares will generally
constitute dividends to the extent of our current or
accumulated earnings and profits as calculated for federal
income tax purposes. Some portion of such dividends will and
some portion will not qualify for the recently enacted reduced
maximum federal income tax rate on certain dividends. As such,
some portion of such dividends will be taxable as qualified
dividend income and some portion will be taxable as ordinary
income to holders. Distributions of net capital gain (the
excess of net long term capital gain over net short term
capital loss) that we designate as capital gain dividends will
be treated as long term capital gains in the hands of holders
receiving such distributions. The Internal Revenue Service
("IRS") currently requires that a regulated investment company
that has two or more classes of stock allocate to each such
class proportionate amounts of each type of its income (such as
ordinary income and capital gains) based upon the percentage of
total dividends distributed to each class for the taxable year.
Accordingly, we intend each taxable year to allocate capital
gain dividends among our common shares and Preferred Shares in
proportion to the total dividends paid to each class during or
with respect to such year. This intent is predicated upon a
grant of exemptive relief by the SEC from certain requirements
of the 1940 Act. If we are not granted this exemptive relief,
we may be required to pay tax on capital gains and our
shareholders may be treated as having received ordinary income
dividends in respect of these capital gains. See "Tax Matters"
in this prospectus and also "Distributions on Common
Shares--Level Dividend Rate Policy," "Distributions on Common
Shares--Managed Dividend Policy," and "Tax Matters" in the
Statement of Additional Information.
9
FINANCIAL HIGHLIGHTS
The following table includes selected data for a common share outstanding
throughout the period and other performance information derived from our
financial information included in the SAI dated December 16, 2004.
Information contained in the table below under the headings "Per Common
Share Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of our investment
operations through December 8, 2004. Because we were recently organized, the
table covers only a short period of operations during which a substantial
portion of our portfolio was held in temporary investments pending investment in
accordance with our investment objectives and policies. Accordingly, the
information presented below may not necessarily be indicative of our future
operating performance.
FOR THE PERIOD
NOVEMBER 22, 2004*
THROUGH DECEMBER 8, 2004
------------------------
(UNAUDITED)
PER COMMON SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period**...................... $ 24.03
LOSS FROM INVESTMENT OPERATIONS:
Net investment loss......................................... (0.03)
Net unrealized loss on investments.......................... (0.16)
-------
Total from investment operations............................ (0.19)
Offering costs charged to capital........................... (0.04)
-------
Net asset value, end of period.............................. $ 23.80
=======
Market value, end of period................................. $ 24.00
=======
Total investment return based on NAV***..................... (0.9%)
Total investment return based on market value***............ (4.0%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).................... $35,319
Ratio of expenses to average net assets (before expense
waiver)****............................................... 3.6%
Ratio of expenses to average net assets (net of expense
waiver)****............................................... 3.4%
Ratio of net investment loss (net of expense waiver) to
average net assets ****................................... (2.5%)
Portfolio turnover rate..................................... 0.0%
----------------------
* Commencement of operations.
** Net asset value at November 22, 2004, reflects the deduction of the average
sales load of $0.97 per share paid by the holders of common shares from the
$25.00 offering price. We paid a sales load of $1.125 per share on
1,280,000 shares sold to the public and no sales load on 200,000 shares sold
to affiliates of our Advisor for $25.00 per share.
*** Total investment return on net asset value is calculated assuming a purchase
at the offering price of $25.00 per share less the average sales load of
$0.97 per share paid by common shareholders and a sale at the net asset
value on December 8, 2004. Total investment return on market value is
calculated assuming a purchase at the offering price of $25.00 per share and
a sale at the current market price on December 8, 2004. Total investment
return on net asset value and total investment return on market value are
not computed on an annualized basis. Results represent past performance and
do not guarantee future results.
****Annualized. These ratios do not reflect the effect of costs of Preferred
Shares, including payments of distributions to Preferred Shareholders,
because there were no Preferred Shares outstanding during the period shown.
See financial information and accompanying notes in our SAI.
10
THE FUND
We are a recently organized, non-diversified, closed end management
investment company registered under the 1940 Act. We were organized as a
Massachusetts business trust on August 6, 2004. We issued an aggregate of
1,480,000 common shares, par value $0.001 per share, pursuant to the initial
public offering thereof and commenced operations in November 2004. Our common
shares are traded on the AMEX under the symbol "RFR". Our principal business
location is 400 Centre Street, Newton, Massachusetts 02458, and our telephone
number is 617-332-9530.
The following provides information about our outstanding shares as of
December 8, 2004:
AMOUNT HELD BY
AMOUNT THE FUND FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------- ---------- -------------- -----------
Common.................................................. * 0 1,484,000
Preferred............................................... 8,000 0 0
--------------------
* An unlimited number of shares of capital shares of beneficial interest of
the Fund are authorized under our declaration of trust. The board of
trustees may classify or reclassify any unissued shares of beneficial
interest from time to time without shareholder approval into one or more
classes of preferred or other shares of beneficial interest by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, or terms of redemption of
such shares of beneficial interest. The board of trustees has classified
8,000 shares of beneficial interest as Series W Preferred Shares, and has
authorized the issuance of those Preferred Shares.
USE OF PROCEEDS
The net proceeds of this offering of Preferred Shares will be approximately
$19.6 million after payment of the sales load and the estimated offering
expenses. We expect to invest the net proceeds of the offering in a manner
consistent with the investment objectives and policies described in this
prospectus. We currently anticipate that we will be able to invest substantially
all of the net proceeds within three months after the closing of this offering.
Pending investment in accordance with our investment objective and policies, we
anticipate that the net proceeds will be invested in U.S. government securities
or other high quality, short term money market instruments, including shares of
money market funds managed by one or more of the underwriters.
11
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of December 8, 2004, and as adjusted as of December 8, 2004, to give effect to
the issuance of the Preferred Shares offered in this prospectus. The net
proceeds of our offering of common shares were $35.6 million. The total offering
expenses paid by us with respect to this offering (which do not include the
sales load) are estimated to be $177,654 and such expenses will be deducted from
our common shareholders' equity.
ACTUAL AS ADJUSTED
----------- -----------
Preferred Shares, par value $.0001 per share (no shares
issued; 800 shares issued and outstanding as adjusted, at
$25,000 per share liquidation preference)................. $ -- $20,000,000
Common shareholders' equity:
Common shares, par value, $.001 per share (1,484,000 shares
issued and outstanding)................................... $ 1,484 $ 1,484
Capital in excess of par value attributable to common shares
(1)....................................................... 35,594,516 35,216,862
Undistributed investment loss--net.......................... (39,034) (39,034)
Accumulated realized gain (loss)--net....................... -- --
Unrealized gain (loss) on investments--net.................. (238,079) (238,079)
----------- -----------
Net assets attributable to common shares (1)................ $35,318,887 $34,941,233
=========== ===========
Managed assets (1).......................................... $35,318,887 $54,941,233
--------------------
(1) As adjusted is net of estimated Preferred Shares offering costs, including
the sales load, of $377,654.
In connection with the rating of the Preferred Shares, we have established
in our bylaws various portfolio covenants to meet rating agency guidelines.
These covenants include, among other things, investment diversification
requirements and requirements that investments included in our portfolio meet
specific industry and credit quality criteria. Market factors outside our
control may affect our ability to meet the criteria of rating agencies set forth
in our portfolio covenants. If we violate these covenants, we may be required to
cure the violation by redeeming all or a portion of the Preferred Shares. For
all regulatory purposes, the Preferred Shares will be treated as stock (rather
than indebtedness).
12
RISK FACTORS
WE ARE A NON-DIVERSIFIED, CLOSED END MANAGEMENT INVESTMENT COMPANY DESIGNED
PRIMARILY AS A LONG TERM INVESTMENT AND NOT AS A TRADING VEHICLE. WE DO NOT
INTEND TO BE A COMPLETE INVESTMENT PROGRAM. BECAUSE OF THE UNCERTAINTIES
INHERENT IN ALL INVESTMENTS, THERE CAN BE NO ASSURANCE THAT WE WILL ACHIEVE OUR
INVESTMENT OBJECTIVE. ALL STOCK MARKET INVESTMENTS INVOLVE RISKS, INCLUDING THE
RISK THAT YOU MAY LOSE SOME OR ALL OF YOUR INVESTMENT. YOUR PREFERRED SHARES AT
ANY TIME MAY BE WORTH LESS THAN YOU INVESTED, EVEN AFTER TAKING INTO ACCOUNT
DISTRIBUTIONS WHICH MAY BE DUE TO YOU. BEFORE DECIDING TO PURCHASE ANY OF OUR
SHARES YOU SHOULD CONSIDER THE FOLLOWING MATERIAL RISKS:
RISKS OF INVESTING IN PREFERRED SHARES
AUCTION RISK
There is no assurance that any particular auction will be successful and
your ability to sell your Preferred Shares may be largely dependent on the
success of an auction. You may not be able to sell your Preferred Shares at an
auction if the auction fails; that is, if there are more Preferred Shares
offered for sale than there are buyers for those Preferred Shares. Also, if you
place a hold order at an auction (an order to retain Preferred Shares) only at a
specified rate, and that specified rate exceeds the rate set at the auction, you
will not retain your Preferred Shares. Additionally, if you elect to buy or
retain Preferred Shares without specifying a rate below which you would not wish
to continue to hold those Preferred Shares, and the auction sets a rate below
the current market rate, you may receive a lower rate of return on your
Preferred Shares than the market rate. Finally, the rate period may be changed,
subject to certain conditions and with notice to the holders of the Preferred
Shares, which could also affect the liquidity of your investment. Neither the
Broker-Dealers nor we are obligated to purchase Preferred Shares in an auction
or otherwise, nor are we required to redeem Preferred Shares in the event of a
failed auction. See "Description of Preferred Shares" and "The Auction--Auction
Procedures."
SECONDARY MARKET RISK
If you try to sell your Preferred Shares between auctions, you may not be
able to sell any or all of your shares, or you may not be able to sell them for
your purchase price or their $25,000 per share liquidation preference plus
accrued distributions. The value of income securities typically falls when
market interest rates rise, and securities with longer maturities or interest
rate reset periods are often affected more than securities whose maturities or
interest rate reset periods are short. Accordingly, if we designate a special
rate period (a rate period of more than 7 days for the Preferred Shares),
changes in interest rates are more likely to affect the price you would receive
if you sold your shares in the secondary market. Only Broker-Dealers or persons
who have relationships with Broker-Dealers may submit bids at our Preferred
Shares auctions and this restriction may limit the potential buyers for
Preferred Shares, even though we do not anticipate imposing significant
restrictions on transfers to other persons. Broker-Dealers that participate in a
secondary trading market for Preferred Shares are not required to maintain this
market, and we are not required to redeem shares if either an auction or an
attempted secondary market sale fails. The Preferred Shares will not be listed
on a stock exchange or the Nasdaq Stock Market. Accordingly, there is no
assurance that you will have liquidity of investment.
13
RATINGS AND ASSET COVERAGE RISK
In order to obtain ratings of Aaa and AAA from Moody's and Fitch,
respectively, we must satisfy certain asset coverage and diversification
requirements. See "Description of Preferred Shares--Rating Agency Guidelines and
Asset Coverage" for a more detailed description of the asset tests we must meet.
While it is a condition to the closing of the offering that Moody's and Fitch
assign ratings of Aaa and AAA, respectively, to the Preferred Shares, the
ratings do not eliminate or mitigate the risks of investing in Preferred Shares.
A rating agency could downgrade its rating or withdraw its rating of Preferred
Shares, which may make Preferred Shares less liquid at an auction or in a
secondary market, although such downgrade or withdrawal may result in higher
distribution rates. If a rating agency downgrades or withdraws its rating of
Preferred Shares, we may alter our portfolio or redeem Preferred Shares, if
appropriate, to address rating agency concerns. Moreover, the asset coverage and
diversification requirements may have an impact on our investment decisions. For
example, we may prefer investments which provide superior coverage and
diversification to investments which may provide superior income or growth
prospects.
In certain circumstances we may not earn sufficient income from our
investments to pay distributions on the Preferred Shares. The value of our
investment portfolio may decline, reducing the asset coverage for the Preferred
Shares. We may be forced to redeem Preferred Shares to meet regulatory
requirements or may voluntarily redeem Preferred Shares in certain
circumstances.
LEVERAGE RISK
We use leverage for investment purposes by issuing Preferred Shares. It is
currently anticipated that, taking into account the Preferred Shares being
offered in this prospectus, the amount of leverage will represent approximately
36% of our managed assets.
Our leveraged capital structure creates special risks not associated with
unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the Fund
and the Preferred Shares' asset coverage. We may from time to time consider
changing the amount of our leverage in response to actual or anticipated changes
in interest rates or the value of our investment portfolio. There can be no
assurance that our leverage strategies will be successful.
In addition, if the distribution rate on the Preferred Shares exceeds the
net rate of return on our portfolio, our leverage will result in a lower net
asset value than if we were not leveraged. Any decline in the value of our
managed assets could increase the risk of us failing to meet our asset coverage
requirements, of losing our ratings on the Preferred Shares or, in an extreme
case, of our current investment income not being sufficient to pay distributions
on the Preferred Shares. Under such circumstances, we may be required to
liquidate portfolio securities to redeem or repurchase some or all of the
Preferred Shares, causing the possible realization of substantial losses and the
incurrence of transaction costs. Our asset coverage requirements in some cases,
may tend to restrict our flexibility to make investments.
We have no present intent to borrow money from banks or other financial
institutions or issue debt securities, although we may do so, particularly on a
temporary basis, for extraordinary or emergency purposes, including the payment
of distributions and the settlement of securities transactions which otherwise
might require untimely dispositions of our securities. If we use
14
additional leverage and realize losses or a decline in the value of our
investment portfolio, you may realize a larger loss on your investment in our
Preferred Shares than you would realize if we had not used additional leverage.
Because the fee paid to our Advisor is calculated on the basis of our
managed assets (which includes the liquidation preference of the Preferred
Shares), the fee will be higher when leverage is utilized, giving our Advisor an
incentive to favor the use of leverage.
The distribution rates on our Preferred Shares will be based typically on
short term interest rates. We intend to use part of the proceeds of this
offering to buy securities that pay distributions to us. These distribution
payments are typically, although not always, higher than short term interest
rates. If short term interest rates rise, distribution rates on the Preferred
Shares may rise and reduce our income. An increase in long term interest rates
could cause the value of our investment portfolio to decline and reduce the
asset coverage for the Preferred Shares. We may enter into interest rate swap or
cap transactions with the intent to reduce the risk posed by increases in short
term interest rates, but there is no guarantee that we will engage in these
transactions or that these transactions will be successful in reducing interest
rate risk.
PAYMENT RESTRICTIONS
Our ability to declare and pay distributions on our Preferred Shares and our
common shares is restricted by our bylaws unless, generally, we continue to
satisfy asset coverage requirements and in the case of common shares, unless all
accumulated dividends on Preferred Shares have been paid. See "Description of
Preferred Shares--Rating Agency Guidelines and Asset Coverage" and "Description
of Common Shares." The restrictions on our distributions might prevent us from
maintaining our qualification as a regulated investment company for federal
income tax purposes. Although we intend to redeem Preferred Shares if necessary
to meet asset coverage requirements, there can be no assurance that we will have
sufficient funds to redeem or that redemptions will allow us to maintain our
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").
GENERAL RISKS OF INVESTING IN THE FUND
LIMITED OPERATING HISTORY
We are a recently organized company that commenced operations in
November 2004.
LIMITED EXPERIENCE OF OUR ADVISOR
Our Advisor has limited experience managing a securities investment company
like the Fund. Our Advisor began the substantial part of its current business
activities in December 2003. As of December 8, 2004, our Advisor had
approximately $270 million of assets under management. See "Management of the
Fund."
NON-DIVERSIFICATION RISK
We are a non-diversified investment company. Because we are non-diversified,
as defined in the 1940 Act, we may make a significant part of our investments in
a limited number of securities. Because our investment portfolio will be less
diversified than that of most other investment companies, the value of our
investment portfolio and your investment in our Preferred Shares over time may
be more volatile than an investment in a diversified fund.
15
CONCENTRATION OF INVESTMENTS
Our investments will be focused upon securities in only three closely
related industries. A decline in the profitability of one or more of these
industries is likely to cause a decline in the market values of F.I.R.E.
securities in which we have invested and, consequently, a decline in the value
of our investment portfolio and our asset coverage for the Preferred Shares.
F.I.R.E. INDUSTRIES RISKS
Our investment focus on securities of F.I.R.E. companies incorporates the
risks, some of which may be more significant than others, arising in these
businesses, including the following:
- BANK CONSOLIDATION RISKS. We expect that many of our investments in bank
stocks will be made in anticipation of the acquisition of one bank by
another bank. We expect that some of our investments in companies which
are acquired may result in gains because of the premium paid over the
prior market price of the acquired bank. We expect that some of our
investments in banks which acquire others may result in gains because of
cost savings or revenue gains of the combined enterprise. However, an
acquirer's common share price often declines after an acquisition
announcement, despite the expectations of cost savings or revenue gains of
the combined enterprise. Also, despite the fact that there were in excess
of 1,000 mergers and acquisitions in the banking industry during the past
four years, there is no assurance that there will be mergers and
acquisitions in the future or that they will result in event gains or
increased profits for the surviving entities.
- INVESTMENT RISKS. Many F.I.R.E. companies own and trade substantial
portfolios of investments for their own account, and therefore, their
results of operations depend, in part, on the performance of their
investments and trading activities. F.I.R.E. companies in the lending
business are exposed to risks of loss resulting from non-payment by
borrowers of loans they extend. The financial condition of F.I.R.E.
companies may be impacted by changes in the business, financial condition
or operating results of the entities in which they invest. Defaults by
third parties in which F.I.R.E. companies have invested or even
unfavorable changes in the financial prospects or downgrades in the credit
ratings of investee entities can reduce the value of our investments in
F.I.R.E. companies and our asset coverage for the Preferred Shares.
- LENDING RISKS. Commercial loans made by banks and finance companies often
involve a higher degree of credit risk than other types of loans, in part,
because repayments often depend upon the cash flow of the borrowers'
businesses rather than the value of pledged collateral. In addition, a
significant portion of banks' or finance companies' commercial loans may
be unsecured or secured only by assets which can be unstable or subject to
rapid deterioration, such as inventory and accounts receivable. Although
F.I.R.E. companies in the lending business generally establish reserves
for their estimates of future losses, actual loss experience may be
substantially in excess of established reserves.
- INSURANCE COMPANY RISKS. Our investments in insurance companies will be
subject to insurance industry risks including the following:
- An insurer is liable for losses under the terms of the policies it
underwrites. Although insurance companies generally establish reserves
for losses they expect to experience, estimated reserves may be
inadequate.
16
- Severe weather conditions and other catastrophes may result in an
increase in the amount of claims experienced by an insurer,
particularly property and casualty insurers.
- An insurer's ability to write new or renewal policies is often
dependent upon its financial strength ratings. Financial strength
ratings are a measure of an insurance company's ability to pay
policyholder obligations. A reduction in an insurer's capital adequacy,
loss reserve adequacy or operating performance could result in a
downgrade of its financial strength rating. A downgrade of an insurer's
financial strength rating could cause its customers to choose other,
more highly rated competitors and its revenues may decrease.
- Many insurers try to mitigate the risks in their businesses by
reinsuring risks they underwrite. The reinsurance market has changed
dramatically over the past few years as a result of inadequate pricing,
poor underwriting and the significant losses incurred in conjunction
with the terrorist attacks on September 11, 2001. Insurers may be
unable to renew or obtain reinsurance policies because of these changes
in the reinsurance market or otherwise. If an insurer is unable to
renew its existing reinsurance or obtain new reinsurance, either its
exposure to losses may increase or it may have to reduce the number of
its underwriting commitments and, in either case, its profits may
decline.
- BROKERAGE, INVESTMENT BANKING AND OTHER TRANSACTION BASED SERVICES
RISKS. Many brokerage and investment banking businesses are dependent upon
transaction volumes for their profits. Declines in the volume of
securities trading and in market liquidity will generally result in lower
revenues from brokerage activities. Declines in economic activity
generally or changes in the economy that reduce the need for capital,
reduce the number of business combinations or that otherwise reduce demand
for investment banking services adversely affect the profitability of
F.I.R.E. companies which are in the business of providing transaction
based services and capital.
- MONEY MANAGEMENT RISKS. Many companies in the mutual fund and money
management businesses earn fees which are calculated based upon the value
of assets under management. Declines in the securities markets will reduce
the value of managed portfolios and often cause customers to withdraw
funds or withhold new investments. Also, during periods of market
volatility or declines it may be difficult for money management businesses
to reduce their operating costs. Accordingly, market declines generally
will have negative impacts upon the value of securities issued by
companies in the mutual fund and money management businesses.
- REAL ESTATE RISKS. Risks created by our investment focus on securities
issued by real estate companies include the following:
- Real estate values have been historically cyclical. As rents and
occupancies of real estate increase, property values increase and new
development occurs. Development activities have frequently exceeded
absorption of newly developed buildings. When this occurs, rents,
occupancy and property values decline, as does the value of securities
issued by real estate companies.
- During the past year office and industrial occupancies and rents have
declined in many parts of the United States. Increases in office and
industrial occupancies and rents
17
have historically lagged general economic recoveries and occupancies
and rents for office and industrial buildings may not improve in the
near future.
- The values of retail properties and the securities of companies that
own them are vulnerable to changes in consumer spending practices and
to bankruptcies of large tenants such as have occurred recently.
- The values of securities issued by companies that own apartment
buildings are often affected by changes in employment and sometimes to
decreased demand caused by the availability of low cost home ownership
financing.
- Some of our investments may be in securities of real estate companies
that own hotels and resorts. These properties usually require higher
levels of capital expenditures than other types of commercial real
estate. The financial performance of these properties and their values
are highly sensitive to general economic conditions and travel industry
changes. This sensitivity was demonstrated by the decline in hotel
operating performance experienced after the terrorist attacks on
September 11, 2001.
- The physical characteristics of healthcare facilities, age restricted
apartments, congregate care properties, assisted living facilities and
nursing homes and their operations are highly regulated and those
regulations often require capital expenditures or restrict the profits
realizable from these properties. Also, some of these properties are
highly dependent upon Medicare and Medicaid payments which are subject
to changes in governmental budgets and policies.
- Some of our investments may be in securities of real estate companies
that own properties that are leased on a net basis to single tenants.
The value of the securities issued by these companies may vary with the
financial strength or business prospects of their tenants.
- Real estate companies are also susceptible to special risks not shared
by the securities market generally. For example: real estate taxes and
insurance costs are large expenses of real estate companies, and these
costs have tended to increase materially within the past few years;
various environmental protection laws have made real estate owners and
previous owners responsible for clean up costs which can be material;
and other laws require real estate owners to incur capital expenditures
such as laws that require access by disabled persons.
- INTEREST RATE RISKS. Interest rate decreases can have adverse effects on
F.I.R.E companies, including:
- an increased likelihood that investments may be prepaid or re-financed
at lower rates; and
- a decreased ability to attract depositors.
Interest rate increases can have adverse effects on F.I.R.E. companies,
including:
- an increase in capital costs;
- a decline in the value of existing investments; and
- a decreased ability to make new investments.
18
- RISKS OF COMPETITION. Most segments of the F.I.R.E. industries are highly
competitive. Competition for some F.I.R.E companies may come from
specialty firms with more experience or market recognition in specific
areas or from diversified companies that have significantly greater
financial and other resources. If a F.I.R.E. company is unable to compete
effectively in its industry segment, its profitability may decline and the
value of any investment we have made in its securities may decline.
- REGULATORY RISKS. F.I.R.E. companies are subject to extensive state and
federal regulations. These regulations for financial services and
insurance companies are designed generally to protect consumers and not
shareholders of these companies like the Fund. These regulations relate to
licensing or other authorizations to conduct certain types of business,
capital and surplus requirements, production and distribution of marketing
materials, investment restrictions, the ability of consumers to prepay
loans, limitations on interest and other charges, oversight of customer
deposits, underwriting limitations, affiliate transactions, dividend
limitations, changes in control and a variety of other financial and
non-financial characteristics of F.I.R.E. companies. Failure to comply
with these regulations may subject the regulated company to penalties,
including fines and suspensions, which may adversely affect its financial
condition and results of operations. Changes in these laws and regulations
may further limit or eliminate a regulated company's discretion, make it
more expensive to conduct business or otherwise adversely affect the
company's ability to make profits or achieve its business objectives.
- COLLATERAL RISKS. F.I.R.E. companies in the business of lending are
exposed to risks associated with the assets pledged to them as collateral.
These risks can be significantly affected by the state of the market for
similar loans or for the underlying collateral. For example, in a market
where real estate loans are being made by many financial institutions, an
individual bank may determine to relax its lending criteria or lower its
target returns, increasing risks or lowering profitability. Changes in the
market for collateral may cause the value of collateral to decline and
increase the risk of default on loans secured by that collateral. Also, if
a lender is required to take possession of collateral on defaulted loans,
it may not have sufficient expertise to effectively manage or sell the
collateral.
- DISTRIBUTION CHANNEL RISKS. Many bank, financial services and insurance
companies distribute products such as mutual funds, insurance policies,
brokered deposits or residential and consumer loans through third party
agents. If these distribution relationships are discontinued or disrupted,
the affected companies may suffer reduced profits or losses and the value
of their securities may decline.
- GOVERNMENT PROGRAMS RISKS. Some F.I.R.E. companies profit from
participation in government sponsored loan or loan guarantee programs.
Some banks, financial services and insurance companies sell products
designed to allow the accumulation of investment earnings on a tax free or
tax reduced basis, to reduce estate taxes or accomplish other tax
objectives. Changes in tax and other law or regulation could reduce or
eliminate consumer interest in these products and reduce the profits of
F.I.R.E. companies engaged in these activities.
- SPECIALIZATION RISKS. Some F.I.R.E. companies focus exclusively on one or
a limited number of industries or specialty segments. For example, there
are many insurance companies that offer only one type of insurance,
lenders that focus their businesses on making one type of loan or lending
in one industry, brokerage firms and investment banks that focus their
19
businesses on one or only a few industries and there are real estate
companies that focus their businesses on a particular property type.
Because these undiversified business models magnify the impact of specific
business risks, these specialized F.I.R.E. companies may be more prone to
failure than more diversified companies.
- TECHNOLOGY RISKS. The businesses of many F.I.R.E. companies rely heavily
on communications and information systems, some of which are furnished by
third party service providers. A significant failure, interruption, breach
in security of these systems or an inability to obtain service from a
third party provider could have a material adverse effect on the financial
condition, results of operations and cash flows of the affected F.I.R.E.
companies.
- GEOGRAPHIC CONCENTRATION RISKS. Some F.I.R.E. companies are geographically
concentrated in one or a few states of the U.S., or one region of a
country or the world. Geopolitical events, region-specific changes in
regulation, migration or economic factors may have a significant impact on
the business and prospects of geographically concentrated companies.
INTEREST RATE RISK
When interest rates rise, the market values of dividend paying securities
usually fall. Because most of our investments will be in dividend paying
securities, both our net asset value and the asset coverage for our Preferred
Shares are likely to decline when interest rates rise. A material decline in our
net asset value may impair our ability to maintain required levels of asset
coverage for the Preferred Shares.
We may enter into interest rate swap or cap transactions to hedge against
changes in short term interest rates which affect the level of distributions on
our Preferred Shares or our cost of borrowings. These hedges may mitigate, but
will not eliminate, the impact on us of rising interest rates. If we enter an
interest rate swap, a decline in short term interest rates may result in an
increase in net amounts payable by us to the swap counterparty and a
corresponding decline in the value of the swap. If we purchase an interest rate
cap, a decline in short term interest rates may result in a decline in the value
of the cap. If we enter into interest rate hedging transactions, a decline in
short term interest rates may result in a decline in our net asset value. A
material decline in our asset value may impair our ability to maintain required
levels of asset coverage for the Preferred Shares. See "Interest Rate
Transactions."
BELOW INVESTMENT GRADE SECURITIES RISKS
The preferred shares and debt securities in which we may invest are
sometimes referred to as "ratable securities". A ratable security is generally
considered below investment grade if it is not rated at least Baa3, BBB-, or
BBB- by Moody's, Standard & Poor's, or S&P, or Fitch, respectively, or if the
ratable security has characteristics which are comparable to below investment
grade securities rated by Moody's, S&P or Fitch. The ratable securities in which
we will invest may be below investment grade and our investment policies do not
limit our ownership of below investment grade securities. In addition, none of
our investments in common equity securities are expected to be rated. Lower
rated securities tend to be more sensitive to adverse economic downturns or
adverse individual company developments than more highly rated securities. Lower
rated securities may provide only moderate protection of contractual or expected
payments of interest, distributions, dividends or principal. For these reasons,
these investments are considered speculative. Because we will invest in
speculative securities, your investment in our Preferred
20
Shares is likely to involve a greater risk of loss than an investment in a fund
that focuses only on higher rated securities. Furthermore, the secondary markets
in which lower rated securities are traded may be less liquid than the markets
for higher grade securities. Less liquidity in the secondary trading markets
could lower the price at which we can sell a lower rated security or cause large
fluctuations in our net asset value. If an issuer of lower rated securities
defaults, we may incur additional expenses to seek recovery, or to foreclose on,
take possession of and dispose of an issuer's assets, property or operations.
ANTI-TAKEOVER PROVISIONS
Our declaration of trust and bylaws contain provisions which limit the
ability of any person to acquire control of the Fund or to convert the Fund to
an open end investment company. For example, our board of trustees may strictly
enforce the provisions in our declaration of trust that prohibit any person or
group from owning more than 9.8%, in the aggregate by value as well as by class,
of our shares, including our Preferred Shares. If the Fund were converted to
open-end status, the Fund would have to redeem the Preferred Shares. See
"Certain Provisions in the Declaration of Trust."
FINANCIAL MARKET RISK
Your investment in our Preferred Shares will represent an indirect
investment in the securities owned by us. Some of the securities we will own are
traded on a national securities exchange or in the over the counter markets. The
prices of these shares and other securities in which we will invest will
fluctuate from day to day and may decline in value. The net asset value of the
Fund may be affected by a decline in financial markets in general. Our use of
preferred shares is leverage, which magnifies financial market risk.
MARKET DISRUPTION RISK
Since 2001, terrorist attacks, the war in Iraq and instability in the Middle
East have caused volatility in some securities markets. Periods of volatility
due to world events in the past have led to acute declines in the value of
securities, including some securities in which we may invest. Future terrorist
activity, war or other events could have similar effects and may cause the value
of our investments and our net asset value to decline and may impair our ability
to make distributions on your Preferred Shares.
INFLATION RISK
As inflation increases, our expenses may increase and cause the value of our
investment portfolio and our asset coverage for the Preferred Shares to decline.
SMALL COMPANY RISKS
Many F.I.R.E. companies in which we invest may be small or medium sized
companies compared to companies that are traded in capital markets generally,
and many F.I.R.E. companies use debt leverage to finance their businesses. This
combination of smaller equity capitalization and debt leverage may mean that
securities issued by some F.I.R.E. companies in which we invest may be more
volatile than securities issued by larger, less leveraged companies. These facts
can adversely affect our financial performance, especially if we purchase or
sell large amounts of an individual security within a short time.
21
LIQUIDITY RISKS
Some of the securities in which we will invest may not be registered with
the SEC, some may not be regularly traded on an established market or on any
organized market and some may be new series of securities or issued by new
companies and will therefore have no prior trading history. Investments in these
types of illiquid securities involve special risks. For example, we may not be
able to quickly dispose of these securities at prices which we might be able to
obtain if these securities were widely traded on established markets. If we find
the market for these investments to be illiquid at the time we determine to sell
these investments to meet our distributions, our leverage or other obligations,
or to accommodate changes in our portfolio of investments considered desirable
by our Advisor, we may need to increase our leverage or sell other investments,
either of which could increase other risks, reduce our asset coverage for our
Preferred Shares, reduce our net asset value or limit the future potential
returns. Limited liquidity can also depress the market price of securities and,
as a result, could reduce our net asset value, the value of our investment
portfolio, our asset coverage for the Preferred Shares and our ability to use
leverage.
REDEEMABLE SECURITIES RISKS
Some of the securities in which we invest may include prepayment rights at
prices either fixed or determined by formulas. Many of the preferred securities
in which we may invest have no maturity date, require perpetual payment of a
fixed coupon, but provide their issuers rights of redemption at fixed prices. If
we purchase these securities at prices that are in excess of their redemption
prices and if issuers of these securities exercise their redemption rights, we
may not realize the value for the premiums we paid and we may be unable to
reinvest the proceeds we receive to achieve as much income as we received on the
redeemed securities.
CONVERTIBLE SECURITIES RISKS
Some of our investments may be in convertible securities. Generally, upon
issuance, convertible securities offer lower yields than non-convertible
securities. A convertible security grants the holder an option to either hold
the security and collect contractual interest and principal payments from the
issuer or exchange the security for different securities, typically common
shares of the issuer. As a result of this option, convertible securities have
characteristics of both equity and debt securities. When investors believe that
conversion may result in greater value than holding the security without
conversion, the security will generally exhibit risks similar to risks
associated with that company's equity securities. When investors believe that
holding the security is likely to produce greater value than conversion, the
security will generally exhibit risks similar to risks associated with debt
securities generally and that issuer's debt securities in particular.
22
INVESTMENT OBJECTIVE AND POLICIES
Our investment objective is to provide high total returns to shareholders
through a combination of capital appreciation and current income. We will
attempt to achieve this objective by investing in securities issued by F.I.R.E.
companies. Our investment objective is fundamental, meaning it cannot be changed
without shareholder approval as described in the SAI. To achieve our objective
we intend to operate as follows:
CONCENTRATION. We intend to concentrate our investments in securities
issued by companies involved in the F.I.R.E. industries. Under normal market
conditions, at least 80% of our total investments will be in securities issued
by F.I.R.E. companies.
TYPES OF SECURITIES. Initially we expect our investments will be primarily
in common shares of F.I.R.E. companies. Depending upon its evaluation of market
conditions, including the availability and market prices of individual
securities, our Advisor's expectations of total returns available in each
subcategory, general economic conditions and other factors, our Advisor will
determine the portion of our assets to be invested in common shares, preferred
shares, debt securities and convertible debt and preferred securities and to be
invested in any subcategory of F.I.R.E. securities.
For purposes of our investment policies, a F.I.R.E. company is an entity
which directly or indirectly derives at least 50% of its revenues from, or has
at least 50% of its assets invested in, businesses that: (i) provide financial
services to other entities or individuals, including, but not limited to,
banking, investing, lending, brokerage, tax and retirement preparation and
planning; (ii) sell or service insurance, including, but not limited to, life,
health, mortgage, property, casualty, workers compensation or liability
insurance and companies that provide re-insurance; and (iii) own, lease, manage,
construct, sell or broker real estate. F.I.R.E. companies include, for example,
commercial banks, investment banks, finance companies, insurance companies,
stock brokerage firms, money management companies, retirement planning service
companies, tax planning and preparation service companies, home builders, real
estate brokers, mortgage originators, construction companies and real estate
investment trusts. Our Advisor may change the percentage of our assets invested
in any one subcategory of F.I.R.E. companies, e.g., in banks, insurance
companies, brokerage companies, money management companies or real estate
companies, based upon our Advisor's opinion of the best way to achieve our
investment objective.
Our Advisor's decisions regarding the types of securities and the
percentages of our assets to be invested in each individual security or
subcategory of F.I.R.E. securities will be based on the availability and market
price of individual securities, our Advisor's expectation from time to time
regarding the total returns available by investing in each individual security
or subcategory of F.I.R.E. securities, general economic conditions and other
factors.
COMMON SHARES. Common shares represent the equity ownership of a company.
Common shareholders generally elect directors and are entitled to vote on the
issuing company's major transactions. Common shareholders generally have no
entitlement to distributions, but they receive distributions when and as
declared by boards of directors or boards of trustees. Our Advisor will evaluate
a number of factors in deciding whether to invest in common shares of individual
companies. These factors will include the financial condition of the companies,
the industry and segment of the industry in which the companies do business, the
economic and market conditions affecting the companies, the companies' growth
potential, the security of the companies' current common share dividend, if any,
the potential for increases in the common share prices and our Advisor's
assessment of the quality of the companies' managements.
23
PREFERRED SHARES. Preferred shares pay fixed or floating distributions to
investors and have a preference over common shares in the payment of
distributions and the liquidation of the issuing companies' assets. This means
that companies generally must pay distributions on their preferred shares before
paying any distributions on their common shares. Preferred shareholders usually
have no or limited rights to vote for corporate directors or on other matters.
The relative percentage of preferred shares compared to other types of
securities in our investment portfolio will vary over time based on our
Advisor's assessment of market conditions. In deciding whether to invest in
preferred shares and in which preferred shares to invest, our Advisor expects to
consider the securities available, the yields available, the ratings applicable
to the preferred shares, the trading liquidity of the particular issuances of
preferred shares, issuers' call rights, if any, applicable to the preferred
shares and the quality of the issuing companies generally.
DEBT SECURITIES. Debt securities are borrowing obligations. Debt securities
may be secured by the assets of the borrower or they may be unsecured. Unsecured
debt securities may be senior debt which ranks equally with most other debt
obligations of an issuer or subordinated debt which generally is not paid until
senior debt is satisfied. Some debt securities are issued by subsidiaries of a
parent company and some are issued directly by a parent company or are
guaranteed by the parent company. Some of the debt securities in which we may
invest may be non-investment grade debt securities, which are commonly referred
to as junk bonds. In deciding whether to invest in debt securities, our Advisor
will consider the ratings of the debt securities, the interest rates and other
terms applicable to the debt securities and the risk and business
characteristics of the issuers.
CONVERTIBLE SECURITIES. Convertible securities are securities which may be
exchanged for different securities. The most common forms of convertible
securities are debt securities or preferred shares that may be exchanged for
common shares of the same issuer at a fixed exchange ratio at the option of the
convertible securities holders. In deciding whether to invest in convertible
securities, our Advisor will consider the investment characteristics of the
primary security such as the ratings and the interest rates or distribution
yields, the investment characteristics of the securities into which the
convertible securities may be exchanged and the terms applicable to the exchange
transactions such as timing of the exchange elections and the ability of the
issuers to compel or accelerate exchange decisions and our Advisor's assessment
of the quality of the issuing companies and their managements.
NON-INVESTMENT GRADE RATABLE SECURITIES. Generally, preferred shares and
debt securities, including securities exchangeable for or convertible into
common equity shares, are considered ratable. Most ratable securities are rated
by one or more nationally recognized rating agencies, Moody's, S&P or Fitch.
Securities which are not investment grade rated are considered to have
speculative characteristics with regard to their capacities to pay interest,
distributions or principal according to stated terms. Debt securities that are
not investment grade quality are commonly referred to as junk bonds.
RELATED PARTY INVESTMENTS. Our Advisor is the investment manager of RMR
Real Estate Fund and RMR Hospitality and Real Estate Fund, and an affiliate of
our Advisor is the manager for each of Senior Housing Properties Trust, HRPT
Properties Trust and Hospitality Properties Trust and provides services to Five
Star Quality Care, Inc. The Fund will not invest in any securities issued by any
of these companies or any other company which is affiliated with us or our
Advisor.
DEFENSIVE POSITIONS. In anticipation of, or in response to, adverse market
conditions or for cash management purposes, we may temporarily hold all or any
portion of our assets in cash,
24
money market instruments, shares of money market funds, investment grade bonds
or other investment grade debt securities so that less than 80% of our total
investments are in securities of F.I.R.E. companies. If we decide to hold some
of our assets in cash, we may invest our cash reserves in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities,
collateralized repurchase agreements, commercial paper and shares of money
market funds. During periods when we have such investments, we may not achieve
our investment objective.
INTEREST RATE TRANSACTIONS
In connection with our use of leverage, we may enter into interest rate swap
or cap transactions. The decision as to whether to enter into interest rate swap
or cap transactions will be made by our Advisor based upon market conditions,
including expectations concerning future interest rates and the costs of such
interest rate protections and other factors our Advisor deems relevant. Interest
rate swaps involve our agreement to make fixed rate payments in exchange for
another party's agreement to make variable rate payments to us or vice versa. We
may also use an interest rate cap, which would require us to pay a premium,
usually up front, to another party. If we use an interest rate cap, to the
extent that a specified variable rate index exceeds a predetermined fixed rate,
we would be entitled to receive payments equal to the excess multiplied by a
notional amount. We intend to use interest rate swaps or caps only with the
intent to reduce the risk that an increase in short term interest rates could
have on our shares as a result of leverage, but our use of interest rate swaps
or caps is unlikely to eliminate this risk.
The use of interest rate swaps and caps is a specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Depending on the level of interest
rates in general, our use of these interest rate instruments could enhance or
harm the overall performance of the Fund. To the extent interest rates decline,
the net amount we pay under the interest rate swap could increase and the value
of the swap or cap could decline, lowering the net asset value of the Fund. In
addition, if short term interest rates are lower than our fixed rate of payment
on the interest rate swap, the swap will reduce our net earnings. If, on the
other hand, short term interest rates are higher than the fixed rate of payment
on the interest rate swap, the swap will enhance our net earnings if we receive
payment. Buying interest rate caps could enhance the performance of the Fund by
limiting our leverage expense. Buying interest rate caps could also decrease the
net earnings of the Fund if the premium paid by us for the cap is more than the
additional amount we would have been obligated to pay on our debt securities had
we not entered into the cap agreement. We do not intend to enter into interest
rate swap or cap transactions in a notional amount that would exceed the
expected outstanding amounts of our leverage.
Interest rate swaps and caps do not generally require us to deliver
securities or other underlying assets or principal, although we may pledge some
of our assets to serve as collateral for our payment obligations under an
interest rate swap. Accordingly, our risk of loss with respect to interest rate
swaps is usually limited to the net amount of interest payments that we are
contractually obligated to make. If the other party defaults, we would not be
able to use the anticipated net receipts under the swap or cap to offset our
Preferred Shares' distributions or interest payments on our borrowings, if any.
Depending on whether we would be entitled to receive net payments from the other
party on the swap or cap, which in turn would depend on the general state of
short term interest rates at that time, such a default may negatively impact our
ability to maintain required levels of asset coverage for the Preferred Shares.
Although we cannot
25
guarantee that the other party will not default, we will not enter into an
interest rate swap or cap transaction with any party that our Advisor believes
does not have the financial resources to honor its obligations under the
interest rate swap or cap transaction. Further, our Advisor will continually
monitor the financial stability of any other party to an interest rate swap or
cap transaction in an effort to protect our investments.
At the time the interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that we will not be able to obtain a
replacement transaction or that the terms of the replacement will not be as
favorable as the terms of the expiring transaction. If this occurs, it could
negatively impact our income and net asset value.
We may choose or be required to reduce or eliminate our use of Preferred
Shares or borrowings. This may cause us to terminate early all or a portion of
any swap or cap transaction before its maturity. Early termination of a swap may
result in a termination payment by or to us. We may also incur financial
penalties associated with early termination.
In connection with our use of leverage, we may purchase or sell futures or
options on futures, activities which are described in the SAI.
MANAGEMENT OF THE FUND
INVESTMENT ADVISOR
Our Advisor has a limited history, having begun the substantial part of its
current business activities in December 2003. As of December 8, 2004, our
Advisor had $270 million of assets under management. Our Advisor is an affiliate
of Reit Management and Research LLC. One member of our three member portfolio
management team has over 20 years of experience managing investments in the
financial services and insurance industries and the other two members of the
team have 40 years of combined experience in the real estate industry. We
believe that this combined experience of our management team affords us a
competitive advantage in evaluating the securities which are issued by F.I.R.E.
companies. However, our Advisor has only limited experience in managing a
securities business like the Fund. Our Advisor is located at 400 Centre Street,
Newton, Massachusetts 02458, and its telephone number is 617-796-8238.
TRUSTEES AND OFFICERS
The overall management of our business is controlled by our board of
trustees. Our board of trustees approves all significant agreements between us
and companies providing services to us. Our day to day operations are delegated
to our officers and to our Advisor, subject always to our investment objective,
restrictions and policies and to the general supervision of our board of
trustees. Two of our trustees are the beneficial owners of our Advisor. Some of
our officers are also officers of Reit Management and its affiliates. The names
and business addresses of our trustees and officers and their principal
occupations and other affiliations during the last five years are set forth
under "Management of the Fund" in the SAI.
PORTFOLIO MANAGERS
Our portfolio managers are:
- JAMES J. MCKELVEY. Mr. McKelvey is one of our Vice Presidents.
Mr. McKelvey has been employed by our Advisor since April 2004 and is one
of our Advisor's Vice Presidents. Since June 2004, Mr. McKelvey has been a
portfolio manager of RMR Real Estate Fund and RMR Hospitality and Real
Estate Fund. Prior to joining our Advisor, Mr. McKelvey
26
was a portfolio manager and senior research officer for John Hancock Funds
since 1997. Among other responsibilities at John Hancock Funds,
Mr. McKelvey was a senior member of the portfolio management team for John
Hancock Financial Industries Fund, John Hancock Regional Bank Fund, John
Hancock Bank and Thrift Opportunity Fund, John Hancock Financial Trends
Fund, and John Hancock Real Estate Fund.
- THOMAS M. O'BRIEN. Mr. O'Brien is our President and has been the President
and a portfolio manager of RMR Real Estate Fund and RMR Hospitality and
Real Estate Fund since their inception in December 2003 and April 2004,
respectively. Mr. O'Brien joined Reit Management in April 1996 and has
held various positions with Reit Management and companies which it manages
since then. He has been President and a Director of our Advisor since its
formation.
- BARRY M. PORTNOY. Mr. Portnoy is one of our trustees and has been a
portfolio manager and trustee of RMR Real Estate Fund and RMR Hospitality
and Real Estate Fund since their inception. He is also a Managing Trustee
of HRPT Properties, Hospitality Properties and Senior Housing and he has
held those positions since these companies began business in 1986, 1995
and 1999, respectively. Mr. Portnoy is also a director of Five Star and
has held this position since it was spun off from Senior Housing in 2001.
He is also a Director and 50% beneficial owner of Reit Management and of
our Advisor and a Vice President of our Advisor.
ADVISORY AGREEMENT
Under our investment management agreement with our Advisor (the "Advisory
Agreement"), our Advisor has agreed to provide us with a continuous investment
program, to make day to day investment decisions for us and generally to manage
our business affairs in accordance with our investment objective and policies,
subject to the general supervision of our board of trustees. Our Advisor also
provides persons satisfactory to our board of trustees to serve as our officers.
Our officers, as well as our other employees and trustees may be directors,
trustees, officers or employees of our Advisor and its affiliates.
Pursuant to the Advisory Agreement, we have agreed to pay our Advisor a
management fee for its investment management services computed at the annual
rate of 0.85% of our managed assets (which includes assets attributable to the
Preferred Shares), payable monthly. For the first five years of our operations,
our Advisor has contractually agreed to waive a portion of its management fee
equal to 0.25% of our managed assets.
In addition to the fee paid to our Advisor, we pay all other costs and
expenses of our operations, including, but not limited to, compensation of our
trustees (other than those affiliated with our Advisor), custodian, transfer
agency and distribution disbursing expenses, rating agency fees, legal fees,
costs of independent auditors, expenses of repurchasing shares, expenses in
connection with any borrowings or other capital raising activities, expenses of
being listed on a stock exchange, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, membership in investment company organizations,
insurance, expenses to maintain and administer our dividend reinvestment plan
and taxes, if any.
27
ADMINISTRATION AGREEMENT
Our Advisor performs administrative functions for us pursuant to an
Administration Agreement. Under the supervision of our Advisor, State Street
Bank and Trust Company has been selected as subadministrator to provide us with
substantially all of our fund accounting and other administrative services, as
more completely described in our SAI. Administrative costs are reimbursed to our
Advisor and consist of out of pocket or other incremental expenses, including
allocations of costs incurred by us, our Advisor and its affiliates and payments
to State Street. The fee paid to State Street is computed on the basis of our
managed assets at an annual rate equal to 0.04% of the first $250 million in
assets, 0.025% of the next $250 million, 0.015% of the next $250 million and
0.01% of such assets in excess of $750 million, with a minimum fee of $130,000.
State Street is paid monthly.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
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 the Preferred
Shares in article X of our bylaws, which is attached as Appendix A to the SAI.
GENERAL
Our declaration of trust authorizes our issuance of an unlimited number of
preferred shares, in one or more series, with rights as determined by our board
of trustees. Such shares may be issued by action of our board of trustees
without your approval. If the assets of the Fund increase, we may offer
additional preferred shares to maintain the leverage ratio of the Fund.
All Preferred Shares will have a liquidation preference of $25,000 per share
plus an amount equal to accumulated but unpaid distributions (whether or not
earned or declared by us). Preferred Shares will rank on parity with shares of
any other class or series of preferred stock of the Fund as to the payment of
periodic dividends or distributions, including distribution of assets upon
liquidation. All Preferred Shares carry one vote per share on all matters on
which such shares are entitled to be voted. Preferred Shares will, when issued,
be fully paid and non-assessable and have no preemptive, exchange, conversion or
cumulative voting rights.
DISTRIBUTIONS AND RATE PERIODS
GENERAL. The following is a general description of distributions and rate
periods for the Preferred Shares. The initial rate period will be 3 days. The
distribution rate for this period will be 2.25% per annum. Subsequent rate
periods normally will be 7 days for the Preferred Shares, and the distribution
rate for each rate period will be determined by an auction generally held on the
business day before commencement of the rate period. Subject to certain
conditions, we may change the length of subsequent rate periods, depending on
our needs and our Advisor's outlook for interest rates and other market factors,
by designating them as special rate periods. See "--Designations of Special Rate
Periods" below.
DISTRIBUTION PAYMENT DATES. Distributions on Preferred Shares will be
payable, when, as and if declared by our board of trustees, out of legally
available funds in accordance with our declaration of trust, bylaws and
applicable law. Each distribution rate determined in an auction generally will
apply to the period beginning on the first business day after the auction and
lasting
28
through the date of the next auction. If distributions are payable on a day that
is not a business day, then distributions will generally be payable on the next
day if such day is a business day, or as otherwise specified in our declaration
of trust or bylaws.
Distributions will be paid through DTC on each distribution payment date.
The distribution payment date will normally be the first business day after the
rate period ends. DTC, in accordance with its current procedures, is expected to
distribute amounts received from the Auction Agent in same-day funds on each
distribution payment date to agent members (members of DTC that will act on
behalf of existing or potential Preferred Shareholders). These agent members are
in turn expected to pay these distributions to the persons for whom they are
acting as agents. The current Broker-Dealers have indicated that distribution
payments will be available in same-day funds on each distribution payment date
to customers that use a Broker-Dealer or a Broker-Dealer's designee as agent
member.
CALCULATION OF DISTRIBUTION PAYMENT. We compute the amount of distributions
per share payable on Preferred Shares by determining a rate, derived by
multiplying the stated rate in effect by a fraction. The numerator of this
fraction will normally be the number of days in the rate period or part thereof,
and the denominator of the fraction will be 360 for any rate period, including a
special rate period. This rate is multiplied by $25,000 to arrive at the
distributions per share. Distributions on Preferred Shares will accumulate from
the date of their original issue, which is expected to be December 20, 2004. For
each rate period after the initial rate period, the distribution rate will be
the rate determined at auction, except as described below. The distribution rate
that results from an auction generally will not be greater than the maximum
applicable rate.
The maximum applicable rate for any regular rate period will be (as set
forth in the table below) the greater of (A) the applicable percentage of the
Reference Rate or (B) the applicable spread plus the Reference Rate. The
"Reference Rate" is the applicable LIBOR Rate for a dividend period or a special
distribution period of fewer than 365 days), or the applicable Treasury Index
Rate (for a special distribution period of 365 days or more.) In the case of a
special rate period, the maximum applicable rate will be specified by the Fund
in the notice of the special rate period for such distribution payment period.
The applicable percentage and applicable spread will be determined based on the
lower of the credit rating or ratings assigned to the Preferred Shares by Fitch
and Moody's. If Fitch and Moody's or both do not make such rating available, the
rate will be determined by reference to equivalent ratings issued by a
substitute rating agency. The "Treasury Index Rate" is the average yield to
maturity for certain U.S. Treasury securities having substantially the same
length to maturity as the applicable distribution period for the Preferred
Shares.
29
APPLICABLE PERCENTAGE TABLE
RATINGS FOR APPLICABLE
PREFERRED SHARES PERCENTAGE
---------------------------------------- OF REFERENCE APPLICABLE
MOODY'S FITCH RATE SPREAD
--------------------- ---------------- ------------ ----------
Aa3 or higher AA- or higher 150% 150 bps
A3 to A1 A- to A+ 200% 200 bps
Baa3 to Baa1 BBB- to BBB+ 225% 225 bps
Ba1 and lower BB+ and lower 275% 275 bps
Assuming the Fund maintains an Aaa/AAA rating on the Preferred Shares, the
practical effect of the different methods used to calculate the maximum
applicable rate is shown in the table below:
MAXIMUM MAXIMUM
APPLICABLE APPLICABLE RATE METHOD USED TO
RATE USING THE USING THE DETERMINE THE
APPLICABLE APPLICABLE MAXIMUM
REFERENCE RATE PERCENTAGE SPREAD APPLICABLE RATE
-------------- -------------- --------------- ---------------
1% 1.50% 2.50% Spread
2% 3.00% 3.50% Spread
3% 4.50% 4.50% Either
4% 6.00% 5.50% Percentage
5% 7.50% 6.50% Percentage
6% 9.00% 7.50% Percentage
On or prior to each distribution payment date, we are required to deposit
with the Auction Agent sufficient funds for the payment of declared
distributions. The failure to make such deposit will not result in the
cancellation of any auction. We do not intend to establish any reserves for the
payment of distributions.
In most cases, if an auction for Preferred Shares is not held when
scheduled, the distribution rate for the corresponding rate period will be the
maximum rate on the date the auction was scheduled to be held. The maximum rate
would not apply, for example, if an auction could not be held when scheduled
because the New York Stock Exchange was closed for three or more consecutive
business days due to circumstances beyond its control or the Auction Agent was
not able to conduct an auction in accordance with the Auction Procedures (as
defined below) due to circumstances beyond its control.
DISTRIBUTION RESTRICTIONS. While any of the Preferred Shares are
outstanding, we generally may not pay or set apart for payment, any dividend or
other distribution in respect of our common shares (other than in additional
common shares or rights to purchase common shares) or repurchase any of our
common shares (except by conversion into or exchange for shares of the Fund
ranking junior to the Preferred Shares as to the payment of dividends and other
distributions, including the distribution of assets upon liquidation) unless
each of the following conditions has been satisfied:
- In the case of the Moody's coverage requirements, immediately after such
transaction, the aggregate Moody's discounted value (i.e., the aggregate
value of our portfolio discounted according to Moody's criteria) would be
equal to or greater than the Preferred Shares Basic
30
Maintenance Amount (i.e., the amount necessary to pay all outstanding
obligations of the Fund with respect to the Preferred Shares, any
preferred stock outstanding, expenses for the next 90 days and any other
liabilities of the Fund) (see "--Rating Agency Guidelines and Asset
Coverage" below);
- In the case of Fitch's coverage requirements, immediately after such
transaction, the aggregate Fitch discounted value (i.e., the aggregate
value of our portfolio discounted according to Fitch criteria) would be
equal to or greater than the Preferred Shares Basic Maintenance Amount;
- Immediately after such transaction, the 1940 Act Preferred Shares Asset
Coverage (as defined in this prospectus under "--Rating Agency Guidelines
and Asset Coverage" below) is met;
- Full cumulative distributions on the Preferred Shares due on or prior to
the date of the transaction have been declared and paid or shall have been
declared and sufficient funds for the payment thereof are reasonably
expected by us to be available for payment on the date payment is due to
the Auction Agent; and
- We have redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in our
declaration of trust or bylaws.
We generally will not declare, pay or set apart for payment any distribution
on any of our shares ranking as to the payment of distributions on a parity with
Preferred Shares unless we have declared and paid or contemporaneously declare
and pay full cumulative distributions on the Preferred Shares through our most
recent distribution payment date. However, when we have not paid distributions
in full on the Preferred Shares through the most recent distribution payment
date or upon any shares of the Fund ranking, as to the payment of distributions,
on a parity with Preferred Shares through their most recent respective
distribution payment dates, the amount of distributions declared per share on
Preferred Shares and such other class or series of shares will in all cases bear
to each other the same ratio that accumulated distributions per share on the
Preferred Shares and such other class or series of shares bear to each other.
DESIGNATIONS OF SPECIAL RATE PERIODS. In certain circumstances we may
designate any succeeding subsequent rate period as a special rate period
consisting of a specified number of rate period days evenly divisible by 7,
subject to certain adjustments. A designation of a special rate period shall be
effective only if, among other things, (a) we shall have given certain notices
to the Auction Agent, which will include a report showing that, as of the third
business day next preceding the proposed special rate period, the Moody's
discounted value and Fitch discounted value, as applicable, were at least equal
to the Preferred Shares Basic Maintenance Amount; (b) an auction shall have been
held on the auction date immediately preceding the first day of such proposed
special rate period and sufficient clearing bids shall have existed in such
auction; and (c) if we shall have mailed a notice of redemption with respect to
any Preferred Shares, the redemption price with respect to such shares shall
have been deposited with the Auction Agent. In addition, full cumulative
distributions, any amounts due with respect to mandatory redemptions and any
additional distributions payable prior to such date must be paid in full or
deposited with the Auction Agent. We also must have portfolio securities with a
discounted value at least equal to the Preferred Shares Basic Maintenance
Amount. We will give Preferred Shareholders notice of a special rate period as
provided in our bylaws.
31
REDEMPTION
MANDATORY REDEMPTION. In the event we do not timely cure a failure to
maintain (a) a discounted value of our portfolio equal to the Preferred Shares
Basic Maintenance Amount in accordance with the requirements of the rating
agency or agencies then rating Preferred Shares, or (b) the 1940 Act Preferred
Shares Asset Coverage, Preferred Shares will be subject to mandatory redemption
on a date specified by our board of trustees out of funds legally available
therefor in accordance with our bylaws and applicable law, at the redemption
price of $25,000 per share plus an amount equal to accumulated but unpaid
distributions thereon (whether or not earned or declared by the Fund) to (but
not including) the date fixed for redemption. Any such redemption will be
limited to the number of Preferred Shares necessary to restore the required
discounted value or the 1940 Act Preferred Shares Asset Coverage, as the case
may be. See article X of our bylaws, attached as Appendix A to the SAI, for a
complete listing of the circumstances in which we must redeem Preferred Shares.
In determining the number of Preferred Shares required to be redeemed in
accordance with the foregoing, we will allocate the number of shares required to
be redeemed to satisfy the Preferred Shares Basic Maintenance Amount or the 1940
Act Preferred Shares Asset Coverage, as the case may be, pro rata among the
Preferred Shares and any other preferred shares of the Fund subject to
redemption or retirement. If fewer than all outstanding shares of any series
are, as a result, to be redeemed, we may redeem such shares pro rata from the
holders in proportion to their holdings, or by any other method that we deem
fair and equitable.
OPTIONAL REDEMPTION. We have the option to redeem shares of the Preferred
Shares, in whole or in part, out of funds legally available therefor. Any
optional redemption will occur on the second business day preceding a
distribution payment date at the redemption price per share of $25,000, plus an
amount equal to accumulated but unpaid distributions thereon (whether or not
earned or declared by us) to (but not including) the date fixed for redemption
plus the premium, if any, specified in a special redemption provision. No
Preferred Shares may be redeemed if the redemption would cause us to violate the
1940 Act or applicable law. We have the authority to redeem the Preferred Shares
for any reason.
Except for the provisions described above, nothing contained in our bylaws
limits any right of the Fund to purchase or otherwise acquire any Preferred
Shares 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 distributions on, or the mandatory or optional redemption price with
respect to, any shares for which Notice of Redemption has been given and we meet
the 1940 Act Preferred Shares Asset Coverage and the Preferred Shares Basic
Maintenance Amount test after giving effect to such purchase or acquisition on
the date thereof. Any shares that are purchased, redeemed or otherwise acquired
by us shall have no voting rights. If fewer than all the outstanding shares of
the Preferred Shares are redeemed or otherwise acquired by us, we shall give
notice of such transaction to the Auction Agent, in accordance with the
procedures agreed upon by our board of trustees.
32
LIQUIDATION
Subject to the rights of holders of shares ranking on a parity with
Preferred Shares with respect to the distribution of assets upon liquidation of
the Fund, whether voluntary or involuntary, the holders of Preferred Shares then
outstanding will be entitled to receive and to be paid out of the assets of the
Fund available for distribution to its shareholders, before any payment or
distribution is made on the common shares, an amount equal to the liquidation
preference with respect to such shares ($25,000 per share), plus an amount equal
to all distributions thereon (whether or not earned or declared by us)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds in connection with the liquidation of the Fund. After the payment
to Preferred Shareholders of the full preferential amounts provided for as
described herein, Preferred Shareholders as such shall have no right or claim to
any of our remaining assets.
Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
We are required under Moody's and Fitch guidelines to maintain assets having
in the aggregate a discounted value at least equal to the Preferred Shares Basic
Maintenance Amount. The discounted value of an asset (other than cash and cash
equivalents) is a specified percentage of its full value; this discounting is
intended to provide increased assurance of adequate asset coverage in the face
of expected or unexpected fluctuation in the value of the assets. Moody's and
Fitch have each established separate guidelines for determining discounted
value. To the extent any particular portfolio holding does not satisfy the
applicable rating agency's guidelines, all or a portion of such holding's value
will not be included in the calculation of discounted value (as defined by such
rating agency). The Moody's and Fitch guidelines impose certain diversification
requirements on our portfolio. Other than as needed to meet the asset coverage
tests, the Moody's and Fitch guidelines do not impose any absolute limitations
on the percentage of our assets that may be invested in holdings not eligible
for inclusion in the calculation of the discounted value of our portfolio. The
amount of ineligible assets included in our portfolio at any time depends upon
the rating, diversification and other characteristics of the assets included in
the portfolio. The Preferred Shares Basic Maintenance Amount includes the sum of
(a) the aggregate liquidation preference of Preferred Shares then outstanding
and (b) certain accrued and projected distribution and other payment obligations
of the Fund.
We are also required under the 1940 Act to maintain the 1940 Act Preferred
Shares Asset Coverage. Our 1940 Act Preferred Shares Asset Coverage is tested as
of the last business day of each month in which any senior equity securities are
outstanding and in connection with the declaration of any distribution on, or
repurchase of, any common or preferred stock. The minimum required 1940 Act
Preferred Shares Asset Coverage amount of 200% may be increased or decreased if
the 1940 Act is amended. Based on the composition of the portfolio of the Fund
and market conditions as of December 8, 2004, the 1940 Act Preferred Shares
Asset Coverage with respect to all of our preferred shares, assuming the
issuance on that date of all Preferred Shares offered hereby and giving effect
to the deduction of related sales load and related offering
33
costs estimated at $377,654 and the application of the net proceeds as described
under "Use of Proceeds" would have been computed as follows:
Value of Fund assets less liabilities not constituting
senior securities........................................ $54,941,233
=275%
-----------
Senior securities representing indebtedness plus $20,000,000
liquidation .............................................
value of the Preferred Shares
In the event we do not timely cure a failure to maintain (a) a discounted
value of our portfolio at least equal to the Preferred Shares Basic Maintenance
Amount in accordance with the requirements of the rating agency or agencies then
rating Preferred Shares, or (b) the 1940 Act Preferred Shares Asset Coverage, we
will be required to redeem Preferred Shares as described under
"Redemption--Mandatory Redemption" above.
We may, but are not required to, adopt any modifications to the guidelines
that may hereafter be established by Moody's or Fitch. Failure to adopt any such
modifications, however, may result in a change in the ratings described above or
a withdrawal of ratings altogether. In addition, any rating agency providing a
rating for Preferred Shares may, at any time, change or withdraw such rating.
The board of trustees may, without shareholder approval, amend, alter or repeal
any or all of the definitions and related provisions that have been adopted by
us pursuant to the rating agency guidelines in the event we receive confirmation
from Moody's or Fitch, or both, as appropriate, that any such amendment,
alteration or repeal would not impair the ratings then assigned by Moody's and
Fitch to Preferred Shares.
Our 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 without the vote or consent of the Preferred Shareholders or of any
other of our shareholders, provided that immediately following any such increase
we could meet the Preferred Shares Basic Maintenance Amount Test.
As described by Moody's and Fitch, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings on the Preferred Shares are not recommendations to purchase, hold or
sell those shares, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of Preferred Shares will
be able to sell such shares in an auction or otherwise. The ratings are based on
current information furnished to Moody's and Fitch by us and our Advisor and
information obtained from other sources. The ratings may be changed, suspended
or withdrawn as a result of changes in, or the unavailability of, such
information. Our common shares have not been rated by a rating agency.
A rating agency's guidelines will apply to Preferred Shares only so long as
such rating agency is rating such shares. We will pay certain fees to Moody's
and Fitch for rating Preferred Shares.
VOTING RIGHTS
Except as otherwise provided in this prospectus and in the SAI, in our
declaration of trust and our bylaws, or as otherwise required by law, holders of
Preferred Shares will have equal voting rights with holders of common shares and
holders of any other shares of preferred shares of the Fund (one vote per share)
and will vote together with holders of common shares and holders of any other
preferred shares of the Fund as a single class.
34
Holders of outstanding Preferred Shares, voting as a separate class, are
entitled at all times to elect two of our trustees. The remaining trustees
normally are elected by holders of common shares and preferred shares, including
Preferred Shares, voting together as a single class. If at any time
distributions (whether or not earned or declared by us) on outstanding preferred
shares, including Preferred Shares, shall be due and unpaid in an amount equal
to two full years' distributions thereon, and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the payment
of such distributions, then, as the sole remedy of holders of outstanding
Preferred Shares, the number of trustees constituting the board of trustees
shall be increased and holders of Preferred Shares shall be entitled to elect
additional trustees such that the trustees elected solely by Preferred
Shareholders will constitute a majority of our trustees, as described in our
bylaws. If we thereafter shall pay, or declare and set apart for payment, in
full, distributions payable on all outstanding Preferred Shares, the voting
rights stated in the preceding sentence shall cease, and the terms of office of
all of the additional trustees so elected by the Preferred Shareholders (but not
of the trustees with respect to whose election the holders of common shares were
entitled to vote or the two trustees the Preferred Shareholders have the right
to elect in any event), will terminate automatically.
So long as any Preferred Shares are outstanding, we will not, without the
affirmative vote or consent of holders of seventy-five percent (75%) of each
class of shares outstanding, authorize our conversion from a closed end to an
open end investment company. So long as any Preferred Shares are outstanding, we
will not, without the affirmative vote or consent of the holders of at least a
majority of the Preferred Shares outstanding at such time (voting together as a
separate class):
(a) authorize, create or issue, or increase the authorized or issued amount
of, any class or series of shares ranking prior to or on a parity with
the Preferred Shares with respect to payment of dividends or
distributions, including distribution of assets on dissolution,
liquidation or winding up the affairs of the Fund, or authorize, create
or issue additional preferred shares, unless, in the case of preferred
stock on a parity with the Preferred Shares, we obtain confirmation from
Moody's (if Moody's is then rating the Preferred Shares), Fitch (if Fitch
is then rating the Preferred Shares) or any substitute rating agency (if
any such substitute rating agency is then rating the Preferred Shares)
that the issuance of such a class or series would not impair the rating
then assigned by such rating agency to the Preferred Shares and we
continue to comply with Section 13 of the 1940 Act, the 1940 Act
Preferred Shares Asset Coverage requirements and the Preferred Shares
Basic Maintenance Amount requirements, in which case the vote or consent
of the holders of the Preferred Shares is not required;
(b) amend, alter or repeal the provisions of our bylaws by merger,
consolidation or otherwise, so as to adversely affect any preference,
right or power of the Preferred Shares or Preferred Shareholders;
provided, however, that (i) none of the actions permitted by the
exception to (a) above will be deemed to affect such preferences, rights
or powers, (ii) a division of Preferred Shares will be deemed to affect
such preferences, rights or powers only if the terms of such division
adversely affect the Preferred Shareholders and (iii) the authorization,
creation and issuance of classes or series of shares ranking junior to
the Preferred Shares with respect to the payment of dividends and
distributions, including distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund will be deemed to
affect such preferences, rights or powers only if Moody's or Fitch is
then rating the Preferred Shares and such issuance would, at the time
thereof,
35
cause us not to satisfy the 1940 Act Preferred Shares Asset Coverage or
the Preferred Shares Basic Maintenance Amount; or
(c) approve any reorganization (as such term is used in the 1940 Act)
adversely affecting the Preferred Shares.
So long as any Preferred Shares are outstanding, we shall not, without the
affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class, file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as we are solvent and do not foresee becoming
insolvent.
We will not approve any of the actions set forth in (a) or (b) above which
adversely affects the rights expressly set forth in our bylaws of a holder of
shares of a series of preferred shares differently than those of a holder of
shares of any other series of preferred shares without the affirmative vote or
consent of the holders of at least a majority of the shares of each series
adversely affected. Even with such a vote, some of the actions set forth in (a)
or (b) above may not be permitted under the 1940 Act. Unless a higher percentage
is provided for under our bylaws, the affirmative vote of the holders of a
majority of the outstanding Preferred Shares, voting together as a single class,
will be required to approve any plan of reorganization (including bankruptcy
proceedings) adversely affecting such shares or any action requiring a vote of
security holders under Section 13(a) of the 1940 Act. Under the 1940 Act, the
vote of a majority of the outstanding Preferred Shares means the affirmative
vote of the lesser of (a) 67% or more of the outstanding Preferred Shares
present at a meeting of Preferred Shareholders or represented by proxy if the
holders of more than 50% of the outstanding Preferred Shares are present or
represented by proxy or (b) more than 50% of the outstanding Preferred Shares.
However, to the extent permitted by Massachusetts law, our declaration of trust
and our bylaws, no vote of holders of common shares, either separately or
together with holders of Preferred Shares as a single class, is necessary to
take the actions contemplated by (a) and (b) above.
The foregoing voting provisions will not apply with respect to Preferred
Shares if, at or prior to the time when a vote is required, such shares shall
have been (i) redeemed or (ii) called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
THE AUCTION
GENERAL
Our bylaws provide that, except as otherwise described herein, the
applicable distribution rate for Preferred Shares for each rate period after the
initial rate period shall be equal to the rate per annum that the Auction Agent
advises us has resulted on the business day preceding the first day of such
subsequent rate period (an "auction date") from implementation of the auction
procedures (the "Auction Procedures") set forth in our bylaws and summarized
below, in which persons determine to hold or offer to sell or, based on
distribution rates bid by them, offer to purchase or sell Preferred Shares. Each
periodic implementation of the Auction Procedures is referred to herein as an
"auction." See our bylaws for a more complete description of the auction
process.
AUCTION AGENCY AGREEMENT. We will enter into an auction agency agreement
(the "Auction Agency Agreement") with the Auction Agent (currently, The Bank of
New York) that provides, among other things, that the Auction Agent will follow
the Auction Procedures for purposes of
36
determining the applicable rate for Preferred Shares so long as the applicable
rate is to be based on the results of an auction.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
us on a date no earlier than 60 days after such notice (30 days if such
termination is because amounts due to the Auction Agent are unpaid). If the
Auction Agent should resign, we will use our reasonable best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
same terms and conditions as the Auction Agency Agreement. We may remove the
Auction Agent at any time upon prior notice provided that prior to such removal
we 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 will enter into agreements (collectively,
the "Broker-Dealer Agreements") with one or more Broker-Dealers selected by us,
which provide for the participation of those Broker-Dealers in auctions for
Preferred Shares.
The Auction Agent will pay to each Broker-Dealer after each auction, from
funds provided by us, a service charge at the annual rate of 1/4 of 1%, for any
auction preceding a rate period of less than one year, or a percentage agreed to
by the Fund and the Broker-Dealer, for any auction preceding a rate period of
one year or more, of the liquidation preference ($25,000 per share) of the
Preferred Shares held by a Broker-Dealer's customer upon settlement in the
auction.
We 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 Auction Agent may not terminate the
Broker-Dealer Agreements without our consent.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for Preferred Shares,
each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of Preferred
Shares (a "Beneficial Owner") may submit orders with respect to such Preferred
Shares to that Broker-Dealer as follows:
- Hold order--indicating its desire to hold such shares without regard to
the applicable rate for the next rate period;
- Bid--indicating its desire to sell such shares at $25,000 per share if the
applicable rate for the next rate period thereof is less than the rate
specified; and/or
- Sell order--indicating its desire to sell such shares at $25,000 per share
without regard to the applicable rate for the next rate period thereof.
A Beneficial Owner may submit different orders and types of orders to its
Broker-Dealer with respect to Preferred Shares then held by the Beneficial
Owner. A Beneficial Owner that submits its bid with respect to Preferred Shares
to its Broker-Dealer having a rate higher than the applicable maximum rate on
the auction date will be treated as having submitted a sell order to its
Broker-Dealer. A Beneficial Owner that fails to submit an order to its
Broker-Dealer with respect to its shares will ordinarily be deemed to have
submitted a hold order with respect to its shares to its Broker-Dealer. However,
if a Beneficial Owner fails to submit an order with respect to such shares to
its Broker-Dealer for an auction relating to a special rate period of more than
28 days, such Beneficial Owner will be deemed to have submitted a sell order. A
sell order constitutes an irrevocable offer to sell the Preferred Shares subject
to the sell order. A Beneficial Owner that
37
offers to become the Beneficial Owner of additional Preferred Shares is, for
purposes of such offer, a potential beneficial owner as discussed below.
A potential beneficial owner is either a customer of a Broker-Dealer that is
not a Beneficial Owner but wishes to purchase Preferred Shares or that is a
Beneficial Owner that wishes to purchase additional Preferred Shares. A
potential beneficial owner may submit bids to its Broker-Dealer in which it
offers to purchase Preferred Shares at $25,000 per share if the applicable rate
for such Preferred Shares for the next rate period is not less than the
specified rate in such bid. A bid placed by a potential beneficial owner
specifying a rate higher than the maximum rate on the auction date will not be
accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are Beneficial Owners and potential beneficial owners to the
Auction Agent. The Broker-Dealers will designate themselves (unless otherwise
permitted by us) as existing holders of shares subject to orders submitted or
deemed submitted to them by Beneficial Owners. They will designate themselves as
potential holders 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 these procedures. Any
order placed with the Auction Agent by a Broker-Dealer as or on behalf of an
existing holder or a potential holder will be treated the same way as an order
placed with a Broker-Dealer by a Beneficial Owner or potential beneficial owner.
Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an
order for any Preferred Shares held by it or customers who are Beneficial Owners
will be treated as a Beneficial Owner's failure to submit to its Broker-Dealer
an order in respect of Preferred Shares 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.
The applicable rate for Preferred Shares for the next succeeding rate period
thereof will be the lowest rate specified in the submitted bids which, taking
into account such rate and all lower rates in the submitted bids, would result
in existing holders and potential holders owning all the Preferred Shares
available for purchase in the auction.
If there are not sufficient clearing bids for Preferred Shares, the
applicable rate for the next rate period will be the maximum rate on the auction
date. However, if we have declared a special rate period and there are not
sufficient clearing bids, the election of a special rate period will not be
effective and a regular rate period will commence. If there are not sufficient
clearing bids, Beneficial Owners of Preferred Shares that have submitted or are
deemed to have submitted sell orders may not be able to sell in the auction all
Preferred Shares subject to such sell orders. If all of the applicable
outstanding Preferred Shares are the subject of submitted hold orders, then the
applicable rate for the next rate period will be 80% of the Reference Rate.
The Auction Procedures include a pro rata allocation of Preferred Shares for
purchase and sale that may result in an existing holder continuing to hold or
selling, or a potential holder purchasing, a number of Preferred Shares that is
different than the number of Preferred Shares specified in its order. To the
extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as existing holders or potential holders in respect of
customer orders will be required to make appropriate pro rata allocations among
their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a distribution payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same day funds to
DTC against delivery to their respective agent
38
members. DTC will make payment to the sellers' agent members in accordance with
DTC's normal procedures, which now provide for payment against delivery by their
agent members in same day funds.
The auctions for Preferred Shares will normally be held every 7 days, and a
rate period will normally begin on the following business day.
If an auction date is not a business day because the New York Stock Exchange
is closed for business for more than three consecutive business days due to an
act of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the Auction Agent is not able to conduct an auction
in accordance with the Auction Procedures for any such reason, then the
applicable rate for the next rate period will be the rate determined on the
previous auction date.
If a distribution payment date is not a business day because the New York
Stock Exchange is closed for more than three consecutive business days due to an
act of God, natural disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services, or the distribution payable on such date can not be
paid for any such reason, then:
- the distribution payment date for the affected rate period will be the
next business day on which we and our paying agent, if any, can pay the
distribution;
- the affected rate period will end on the day it otherwise would have
ended; and
- the next rate period will begin and end on the dates on which it otherwise
would have begun and ended.
The following is a simplified example of how a typical auction works. Assume
that we have 1,000 outstanding Preferred Shares and three current holders. The
three current holders and three potential holders submit orders through
Broker-Dealers at the auction:
Current Holder A Owns 500 shares, wants to sell Bid order of 1.2% rate for all 500
all 500 shares if distribution rate shares
is less than 1.2%
Current Holder B Owns 300 shares, wants to hold Hold order--will take the
distribution rate
Current Holder C Owns 200 shares, wants to sell Bid order of 1.0% rate for all 200
all 200 shares if distribution rate shares
is less than 1.0%
Potential Holder D Wants to buy 200 shares Places order to buy at or above 1.1%
Potential Holder E Wants to buy 300 shares Places order to buy at or above 1.0%
Potential Holder F Wants to buy 200 shares Places order to buy at or above 1.2%
The lowest distribution rate that will result in all 1,000 Preferred Shares
continuing to be held is 1.1% (the offer by D). Therefore, the distribution rate
will be 1.1%. Current holders B and C will continue to own their Preferred
Shares. Current holder A will sell its Preferred Shares because A's distribution
rate bid was higher than the distribution rate. Potential holder D will buy 200
Preferred Shares and potential holder E will buy 300 Preferred Shares because
their bid rates were at or below the distribution rate. Potential holder F will
not buy any Preferred Shares because its bid rate was above the distribution
rate.
39
SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES
The Broker-Dealers may maintain a secondary trading market in Preferred
Shares outside of auctions, but are not obligated to do so, and if they do, they
may discontinue such activity at any time. There can be no assurance that such
secondary trading market in Preferred Shares will provide owners with liquidity.
Our Preferred Shares will not be listed on any stock exchange or on the Nasdaq
Stock Market.
Investors who purchase our Preferred Shares in an auction (particularly if
we have declared a special rate period) should note that because the
distribution 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, depending upon market conditions.
A Beneficial Owner or an existing holder may sell, transfer or otherwise
dispose of Preferred Shares 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 Preferred Shares from a customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of 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 us) to whom such transfer is made shall advise the
Auction Agent of such transfer.
40
DESCRIPTION OF COMMON SHARES
Our declaration of trust authorizes our issuance of an unlimited number of
common shares. Our common shares have a par value of $.001 per share. As of the
date of this prospectus, there are 1,484,000 of our common shares outstanding.
Our board of trustees may determine to issue additional common shares without
shareholder approval. All common shares have equal rights to the payment of
dividends and the distribution of assets upon liquidation. Our common shares are
fully paid and non-assessable, and have no pre-emptive or conversion rights or
rights to cumulative voting.
If Preferred Shares are outstanding, common shareholders will not be
entitled to receive any distributions from us unless all accrued and payable
distributions on Preferred Shares have been paid, and unless asset coverage, as
defined in the 1940 Act, with respect to Preferred Shares is at least 200% after
giving effect to the distributions. Similarly, if borrowings are outstanding, we
may not pay distributions to common or preferred shareholders unless asset
coverage, as defined in the 1940 Act, with respect to outstanding borrowings is
at least 300% after giving effect to the distributions.
Our common shares are traded on the AMEX under the symbol "RFR". We intend
to hold annual meetings of shareholders.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, you, as a shareholder of a Massachusetts business
trust, are entitled to the same limitations of liability as shareholders of
private, for profit corporations. There is a remote possibility, however, that
you could, under certain circumstances, be held liable for our obligations to
the extent the courts of another state refused to recognize such limited
liability in a controversy involving our obligations. Our declaration of trust
disclaims shareholder liability for acts or obligations of the Fund and requires
that notice of such disclaimer be given in each agreement, obligation or
instrument that we or our trustees enter. Our declaration of trust provides for
indemnification out of our property of any shareholder held liable on account of
being or having been our shareholder. Thus, your risk of incurring financial
loss due to shareholder liability is limited to circumstances in which a court
refuses to recognize Massachusetts law concerning limited liability of
shareholders of a Massachusetts business trust, the complaining party is held
not to be bound by our disclaimer and we are unable to meet our indemnification
obligations.
Our declaration of trust contains provisions that could limit the ability of
other entities or persons to acquire control of us or to convert us to an open
end fund, including, but not limited to, the following:
- Our board of trustees is divided into three classes having initial terms
of one, two and three years, respectively. At each annual meeting of
shareholders, the terms of only one class of trustees expires and new
trustees are elected for terms of three years. This provision of our
declaration of trust could delay for up to two years the replacement of a
majority of our board of trustees.
- The number of our trustees is currently five. However, our board of
trustees may increase the number of trustees. Vacancies on our board of
trustees, including vacancies caused by an expansion in our board of
trustees, may be filled by a majority action of our trustees then in
office. These provisions of our declaration of trust may prevent a change
in the majority of our board of trustees for longer than two years.
41
- Our trustees may only be removed from office for cause and by a vote of
75% of our shareholders, which are entitled to vote for election of such
trustee.
- Our declaration of trust contains provisions which restrict any one person
or group of persons from owning more than 9.8% of our shares.
- The affirmative vote of 75% of our board of trustees and of 75% of each
class of our shareholders entitled to vote on the matter is required to
convert the Fund from a closed end to an open end investment company.
- Except as otherwise provided in this prospectus, the following actions
require the affirmative vote or consent of at least a majority of the
trustees then in office and of at least 75% of our shareholders:
- the merger, consolidation, reorganization or recapitalization of the
Fund to combine the Fund with another entity;
- the sale, lease or transfer of all or substantially all of our assets;
or
- the liquidation or termination of the Fund; and
provided, further, if any of the foregoing actions are approved by 75% of
our board of trustees then in office, then the shareholders vote required
to accomplish these actions shall be eliminated unless such a vote is
required by applicable law, and if applicable law requires shareholder
approval, the vote required will be the higher of (i) a majority of the
voting shareholders or (ii) the least amount permitted by applicable law.
- Notwithstanding the above, only a majority vote of our board of trustees
then in office is required to encumber, pledge or secure any or all our
assets in connection with our use of leverage.
- The provisions of our declaration of trust, including those described
above, may only be amended by the affirmative vote of a majority of our
board of trustees then in office and 75% of all our shareholders;
provided, however, that only a majority vote of our board of trustees is
required to change the domicile of our existence without changing the
substance of our declaration of trust; and, provided, further, that if the
amendment is approved by 75% of our board of trustees then in office no
shareholder approval will be required unless such a vote is required by
applicable law, and if applicable law requires shareholder approval, the
vote required will be the higher of (i) a majority of the voting
shareholders or (ii) the least amount permitted by applicable law.
- Our declaration of trust contains provisions which generally prevent
shareholder nominations of trustees from being considered at shareholder
annual meetings unless specified or requested information is provided and
we receive notice of these matters at least 90 and not more than 120 days
prior to the first anniversary of the date of mailing of the notice for
the preceding year's annual meeting. Shareholder nominations must also be
made in compliance with other requirements for shareholder nominations set
forth in our declaration of trust and bylaws. Shareholder nominations that
meet the requirements of our declaration of trust will not be included in
our proxy for an annual meeting unless those nominations are also
supported by our board of trustees, but they may be considered at the
annual meeting whether or not they are supported by our board of trustees.
- Our declaration of trust and bylaws permit shareholder meetings to be
called only by our board of trustees, subject to the provisions of
applicable law.
42
The votes required to approve our conversion from a closed end to an open
end investment company or to approve transactions constituting a plan of
reorganization are higher than those required by the 1940 Act.
The provisions of our declaration of trust described above could have the
effect of depriving common shareholders of opportunities to sell their shares at
a premium over the then current market price of the common shares. These
provisions may prevent a third party from obtaining control of us in a tender
offer or similar transaction. The overall effect of these provisions is to
render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of us to negotiate with our management and
board of trustees regarding the price to be paid and facilitating the continuity
of our investment objective and policies.
There are other provisions of our declaration of trust and bylaws which may
prevent a change of control or which you may believe are not in your best
interests as a shareholder. You should read our declaration of trust and bylaws
on file with the SEC for the full text of these provisions.
REPURCHASE OF FUND SHARES
We are a closed end investment company and therefore common shareholders do
not have the right to cause us to redeem their common shares. Instead, liquidity
will be provided through trading in the open market. We may repurchase common
shares on the open market in accordance with the 1940 Act and the rules and
regulations thereunder, but we are under no obligation to do so. Any
determination to repurchase common shares would reduce the asset coverage for
the Preferred Shares and might make it necessary or desirable for us to redeem
Preferred Shares. As described above in "Description of Preferred
Shares--Distributions and Rate Periods--Distribution Restrictions," the
repurchase of common shares may be restricted or prohibited at times when there
exist unpaid distributions on the Preferred Shares.
TAX MATTERS
The following brief discussion of federal income tax matters assumes you are
a U.S. shareholder and that you hold your Preferred Shares as a capital asset.
More information concerning the federal income tax consequences of acquiring,
owning and disposing of our shares is included in the SAI.
We intend to be qualified under the regulated investment company ("RIC")
provisions of the Code, although we cannot give complete assurance that we will
so qualify. A RIC must generally derive at least 90% of its gross income from
investment activities and own a sufficiently diversified portfolio of
securities. More information concerning our qualification and taxation as a RIC
is included in the SAI.
The Preferred Shares will constitute stock, and distributions by us with
respect to the Preferred Shares (other than distributions in redemption of
Preferred Shares that are treated as exchanges of stock under
Section 302(b) of the Code) will constitute dividends to the extent of our
current and accumulated earnings and profits as calculated for federal income
tax purposes. It is possible, however, that the IRS might take a contrary
position, asserting, for example, that the Preferred Shares constitute debt. If
this position were upheld, the discussion of the treatment of distributions
below would not apply. Instead, distributions to you would constitute interest,
whether or not they exceeded our earnings and profits, would be included in full
in your income,
43
and would be taxed as ordinary income. Our counsel believes that such a
position, if asserted by the IRS, would be unlikely to be upheld by a competent
court.
The IRS currently requires that a RIC that has two or more classes of stock
allocate to each such class proportionate amounts of each type of its income
(such as ordinary income and capital gains) based upon the percentage of total
dividends distributed to each class for the taxable year. Accordingly, we intend
each taxable year to allocate capital gain dividends among our common shares and
Preferred Shares in proportion to the total dividends paid to each class during
or with respect to such year. This intent is predicated upon exemption from
requirements of the 1940 Act which generally limit capital gain distributions to
once per year. If we are not granted this exemptive relief, then in order to
satisfy both the 1940 Act and the federal income tax requirements, we may be
forced to retain capital gains and pay tax on those retained gains at the Fund
level, all without the benefit of deemed gain distributions and deemed tax
credits to our shareholders; in addition, our shareholders may be treated as
having received ordinary income dividends in respect of the retained capital
gains. In short, in the absence of the exemptive order, compliance with both the
1940 Act and the RIC federal income tax requirements will result in double
taxation of gains that we have to retain and pay tax on, or alternatively, we
may accelerate capital losses and defer capital gains, even if this would be
contrary to our otherwise desired investment objectives, in an attempt to
minimize the net capital gains that could become subject to double taxation.
With the issuance of the Preferred Shares and in the absence of the exemptive
order, the 1940 Act requirement of limited capital gain designations becomes
even more mathematically limiting, and therefore the potential for double
taxation of net capital gains increases. See "Distributions on Common
Shares--Level Dividend Rate Policy" and "Distributions on Common Shares--Managed
Dividend Policy" in the Statement of Additional Information.
Distributions paid to you out of our "investment company taxable income"
will generally be taxable to you as ordinary income to the extent of allocable
earnings and profits. Distributions of net capital gain (the excess of net long
term capital gain over net short term capital loss), if any, are taxable to you
as long term capital gain, regardless of how long you have held your shares. We
intend to distribute to our shareholders substantially all of our "investment
company taxable income," as well as our net capital gain. A distribution of an
amount in excess of allocable earnings and profits is treated as a nontaxable
return of capital to the extent of your tax basis in your shares and reduces
that basis, and any such distributions in excess of your basis are treated as if
they were gains from a sale of your shares.
A distribution will be treated as paid to you in the current calendar year
if it is declared by us in and has a record date in October, November or
December of the current year and is paid by January 31 of the following year.
Each year, we will notify you of the tax status of dividends and other
distributions which we have paid.
If you sell your shares, you may realize a capital gain or loss, which will
be long term or short term generally depending on your holding period for the
shares.
We may be required to withhold U.S. federal income tax, currently at the
rate of 28%, from distributions payable to you if:
- you fail to provide us with your correct taxpayer identification number;
- you fail to make required certifications; or
- you have been notified by the IRS that you are subject to backup
withholding.
44
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the
maximum federal income tax rate to 15% on net capital gain recognized by
individuals and "qualified dividend income" individuals receive from certain
domestic and foreign corporations, provided certain holding period and other
requirements are met, sometimes referred to as QDI. If we make distributions of
net capital gain, you will generally be eligible for the reduced rate. The
reduced rate will also apply to capital gains recognized by individuals who sell
shares that they have held for more than one year. The reduced rate does not
apply to short term capital gains. Under the act, the reduced rate will cease to
apply for taxable years beginning after December 31, 2008. Because we expect
that some of our investments will be in dividend paying common and preferred
shares of F.I.R.E. companies eligible to pay QDI, our distributions to you
attributable to QDI received by us from these investments will also generally be
eligible for treatment as QDI. Similarly, our distributions of net capital gains
will generally be eligible for the reduced 15% federal tax rate. The
distributions we make to you attributable to our investments in pass through
entities like real estate investment trusts generally will not qualify as QDI.
Rather, the classification of our distributions attributable to these
investments will be determined by the classification of the distributions we
receive from these investments as ordinary income, long term capital gains,
unrecaptured Section 1250 gains from the sale of real property or nontaxable
returns of capital. Other income distributed by us will be taxed at ordinary
income rates. After a calendar year end some pass through entities change the
classification of the distributions they have made during that year, which might
result at that time in our also having to reclassify some of the distributions
we made to you. These changes would be reflected in a Form 1099, together with
other tax information. You should consult with your tax advisor to determine the
consequences of these tax laws.
Our distributions to you may also be subject to state and local taxes. You
should consult with your tax advisor regarding your particular tax consequences
of investing in the Preferred Shares.
UNDERWRITING
RBC Dain Rauscher Inc., whose principal business address is 60 South 6th
Street, Minneapolis, Minnesota 55402, and A.G. Edwards & Sons, Inc., whose
principal business address is 1 North Jefferson St., St. Louis, Missouri 63103,
are acting as underwriters in this offering. Subject to the terms and conditions
described in an underwriting agreement among us, RBC Dain Rauscher Inc. and A.G.
Edwards & Sons, Inc., we have agreed to sell to RBC Dain Rauscher Inc. and A.G.
Edwards & Sons, Inc., and RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc.
have agreed to purchase from us, the Preferred Shares.
RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc. will each purchase
400 shares. The Underwriters have agreed to purchase all of the shares sold
under the underwriting agreement if any of these shares are purchased. We have
agreed to indemnify RBC Dain Rauscher Inc., A.G. Edwards & Sons, Inc. and their
controlling persons against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments one or both of RBC Dain
Rauscher Inc. and A.G. Edwards & Sons, Inc. may be required to make in respect
of those liabilities.
RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc. are offering the
shares, subject to prior sale, when, as and if issued to and accepted by them,
subject to approval of legal matters by their counsel, including the validity of
the shares, and other conditions contained in the underwriting agreement, such
as the receipt by RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc. of
officers' certificates and legal opinions and the receipt by the Fund of ratings
of
45
AAA from Fitch and Aaa from Moody's on the Preferred Shares as of the time of
the closing of this offering. RBC Dain Rauscher Inc. and A.G. Edwards &
Sons, Inc. reserve the right to withdraw, cancel or modify offers to the public
and to reject orders in whole or in part.
RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc. have advised the Fund
that they and other participants in the auction rate securities market have
received letters from the Securities and Exchange Commission requesting that
each of them voluntarily conduct an investigation regarding their respective
practices and procedures in those markets. RBC Dain Rauscher Inc. and A.G.
Edwards & Sons, Inc. are cooperating with the Securities and Exchange Commission
in this process. No assurance can be given as to whether the results of this
process will affect the market for Preferred Shares or the auctions.
COMMISSIONS AND DISCOUNTS
RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc. have advised us that
they propose initially to offer the Preferred Shares to the public at $25,000
per share plus accumulated distributions, if any, and may offer to dealers at
that price less a concession not in excess of $137.50 per Preferred Share. The
total sales load of $250 per share is equal to 1.0% of the initial offering
price and will be paid by us. RBC Dain Rauscher Inc. and A.G. Edwards &
Sons, Inc. may allow, and the dealers may reallow, a discount not in excess of
$37.50 per share to other dealers. After the offering, the public offering
price, concession, discount and other selling terms may be changed. We will also
reimburse RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc. for filing fees
and expenses (including legal fees and disbursements) incident to securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Preferred Shares, estimated not to exceed $25,000.
The settlement date for the purchase of the Preferred Shares will be
December 20, 2004 as agreed upon by RBC Dain Rauscher Inc., A.G. Edwards & Sons,
Inc., the Fund and our Advisor pursuant to Rule 15c6-1 under the Securities
Exchange Act of 1934.
OTHER RELATIONSHIPS
We anticipate that RBC Dain Rauscher Inc., A.G. Edwards & Sons, Inc. or
their respective affiliates may, from time to time, act in auctions as a
Broker-Dealer and receive fees as set forth under "The Auction" and in the SAI.
RBC Dain Rauscher Inc. and A.G. Edwards & Sons, Inc. 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, us.
In connection with the initial offering of our common shares, our Advisor,
and not the Fund, agreed to pay to RBC Capital Markets Corporation a fee equal
to, in the aggregate, 0.15% per annum of the Fund's managed assets net of
managed assets attributable to sales of shares to affiliates of our Advisor in
our initial offering of common shares. This fee will be paid quarterly in
arrears during the term of our advisory contract, and any renewal thereafter,
with the Advisor. The aggregate fees paid during the term of the contract plus
reimbursement of legal expenses of RBC Capital Markets Corporation will not
exceed 4.5% (the additional compensation will not exceed 4.4% and expenses
reimbursed will not exceed 0.1%) of the total price of the common shares in
their initial public offering. Such amount plus the sales load related thereto
will be limited to 9% of the total price of the common shares in their initial
public offering.
46
RBC Dain Rauscher Inc., A.G. Edwards & Sons, Inc. and their affiliates have
provided and may in the future provide various investment banking and financial
advisory services from time to time to affiliates of our Advisor, its affiliates
or their clients or affiliates.
CUSTODIAN AND TRANSFER AGENTS
Our custodian is State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110. Our custodian performs custodial, fund accounting
and portfolio accounting services for us. Our transfer agent with respect to our
Preferred Shares is currently The Bank of New York. Our transfer agent with
respect to our common shares is Wells Fargo Bank, N.A., Shareowner Services,
P.O. Box 64854, St. Paul, Minnesota 55164-0854.
LEGAL MATTERS
Certain legal matters in connection with our Preferred Shares will be passed
upon for us by Sullivan & Worcester LLP. Sullivan & Worcester LLP also acts as
legal counsel to our Advisor, Reit Management and their affiliates. Barry M.
Portnoy, one of our trustees and a director and 50% beneficial owner of our
Advisor is a former chairman of Sullivan & Worcester LLP.
Certain legal matters will be passed upon for the Underwriters by Goodwin
Procter LLP.
47
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
--------
General Information......................................... 3
Additional Information About Investment Policies and
Restrictions.............................................. 3
Management of the Fund...................................... 8
Compensation of Trustees.................................... 14
Administrative Services..................................... 15
Portfolio Transactions and Brokerage........................ 16
Determination of Net Asset Value............................ 17
Additional Information Concerning the Auctions of Preferred
Shares.................................................... 18
Distributions on Common Shares.............................. 19
Tax Matters................................................. 20
Performance Information..................................... 28
Independent Registered Public Accounting Firm............... 28
Additional Information...................................... 28
Financial Statements........................................ F-1
Appendix A--Article X of the Amended and Restated Bylaws.... A-1
48
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800 SHARES, SERIES W
[LOGO]
AUCTION PREFERRED SHARES
----------------
LIQUIDATION PREFERENCE, $25,000 PER SHARE
------------------------
RBC CAPITAL MARKETS A.G. EDWARDS
------------
PROSPECTUS
------------------
DECEMBER 16, 2004
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
RMR F.I.R.E. FUND
400 CENTRE STREET, NEWTON, MASSACHUSETTS 02458
(617) 332-9530
THIS STATEMENT OF ADDITIONAL INFORMATION, OR SAI, IS NOT A PROSPECTUS, BUT
SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF RMR F.I.R.E. FUND, DATED
DECEMBER 16, 2004, AS SUPPLEMENTED FROM TIME TO TIME. THIS SAI IS INCORPORATED
BY REFERENCE IN ITS ENTIRETY INTO THE PROSPECTUS. COPIES OF THE SAI AND
PROSPECTUS MAY BE OBTAINED FREE OF CHARGE BY WRITING TO US OR CALLING US AT THE
ADDRESS OR TELEPHONE NUMBER SHOWN ABOVE. YOU MAY ALSO OBTAIN A COPY OF OUR
PROSPECTUS AND SAI ON THE SEC'S WEBSITE (http://www.sec.gov).
THIS SAI IS DATED DECEMBER 16, 2004.
-1-
TABLE OF CONTENTS
PAGE
----
General Information............................................................... 3
Additional Information About Investment Policies and Restrictions................. 3
Management of the Fund............................................................ 8
Compensation of Trustees.......................................................... 14
Administrative Services........................................................... 15
Portfolio Transactions and Brokerage.............................................. 16
Determination of Net Asset Value.................................................. 17
Additional Information Concerning the Auctions of Preferred Shares................ 18
Distributions on Common Shares.................................................... 19
Tax Matters....................................................................... 20
Performance Information........................................................... 28
Independent Registered Public Accounting Firm..................................... 28
Additional Information............................................................ 28
Financial Statements.............................................................. F-1
Appendix A - Article X of the Amended and Restated Bylaws......................... A-1
-2-
GENERAL INFORMATION
RMR F.I.R.E. Fund ("we", "us" or the "Fund") is a recently organized,
non-diversified, closed end management investment company organized as a
Massachusetts business trust. The information contained in this SAI supplements
our prospectus. Terms used but not defined in this SAI have the same meaning as
in the prospectus. You should not invest in our shares before first reading our
prospectus.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES AND RESTRICTIONS
Our material investment objective, restrictions, policies and techniques are
described in our prospectus. We have also adopted other policies and investment
restrictions, as described below. Except as specifically stated, our investment
policies, restrictions and techniques are not fundamental and may be changed by
our board of trustees without the approval of the shareholders. Our investment
objective is a fundamental policy and cannot be changed without a vote of our
shareholders.
U.S. GOVERNMENT OBLIGATIONS
We may periodically invest in obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These include bills, notes and
bonds issued by the U.S. Treasury, as well as "stripped" or "zero coupon" U.S.
Treasury obligations representing future interest or principal payments on U.S.
Treasury notes or bonds. Stripped securities are sold at a discount to their
face value, and may exhibit greater price volatility than interest bearing
securities since investors receive no payment until maturity. U.S. Government
agencies and instrumentalities include entities having varying levels of support
from the U.S. Treasury; sometimes these entities are: (i) supported by the full
faith and credit of the U.S. Treasury; (ii) supported by the right to borrow
from the Treasury; (iii) supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and (iv) supported only by the
credit of the instrumentality chartered by the U.S. Government.
CASH RESERVES
Cash reserves may be held for defensive reasons or to provide sufficient
flexibility to take advantage of new opportunities for investments and for other
reasons, and may be invested in money market instruments.
Money market instruments in which we may invest include U.S. Government
obligations which are subject to repurchase agreements. Repurchase agreements
may be entered into with member banks of the Federal Reserve System or primary
dealers (as designated by the Federal Reserve Bank of New York) in U.S.
Government securities. Other acceptable money market instruments include
commercial paper rated investment grade by any one nationally recognized rating
agency, such as Moody's, S&P or Fitch, certificates of deposit or bankers'
acceptances issued by domestic banks having total assets in excess of one
billion dollars, and money market mutual funds.
REPURCHASE AGREEMENTS
To invest temporarily available cash, we may enter into repurchase agreements. A
repurchase agreement requires us to purchase securities subject to our
simultaneous agreement to resell and redeliver these securities to a
counterparty, who agrees to buy the securities from us at a fixed price and
future time. Repurchase agreements may be considered loans to the counterparty,
collateralized by the underlying securities. If we enter into a repurchase
agreement, our Advisor will evaluate and monitor the creditworthiness of the
vendor. The principal risk to the Fund in investing in repurchase agreements is
the inability of the counterparty to pay the agreed upon sum on the repurchase
date; in the event of a
-3-
default, the repurchase agreement provides us the right to sell the underlying
collateral. If the value of the collateral declines after we enter a repurchase
agreement, or if the seller defaults, we could incur a loss of both principal
and interest. Our Advisor monitors the value of the repurchase agreement
collateral in an effort to determine that the value of the collateral at least
equals the agreed upon repurchase price to be paid to us. Our right to sell the
repurchase agreement collateral after a counterparty default could be delayed or
impaired in the event of bankruptcy of the counterparty.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
We may contract for the purchase or sale with future delivery ("futures
contracts") of securities, aggregates of debt securities and financial indices,
and options thereon in connection with our hedging and other risk management
strategies. We will enter futures contracts only for bona fide hedging, risk
management and other appropriate portfolio management purposes. Our futures
contracts, if any, will be in accord with the rules and regulations of the
Commodity Futures Trading Commission.
The principal risks to the Fund relating to the use of futures contracts
principally arise from changes in the market value of the securities or
instruments underlying the futures contract, possible lack of a liquid market
for closing out or selling a futures contract position and the possibility that
a futures contract will give rise to an obligation of the Fund to meet margin,
collateral or other payment requirements.
FOREIGN SECURITIES
We have no present intention to invest a significant portion of our managed
assets in securities denominated in currencies other than the U.S. dollar or in
U.S. dollar denominated securities issued by non-U.S. entities, but we may
determine to do so at any time and from time to time without limitation. These
securities may subject us to additional investment risks which may not be
present in U.S. dollar denominated securities issued by U.S. entities. For
example, foreign securities may be subject to currency risks or to foreign
government taxes which reduce their value. There may be less information
publicly available about a foreign issuer than about a U.S. issuer, and a
foreign issuer is not generally subject to uniform accounting, auditing and
financial reporting standards and practices comparable to those in the U.S.
Other risks of investing in foreign securities include political or economic
instability in the country involved, the difficulty of predicting international
trade patterns and the possibility of imposition of exchange controls. The
prices of such securities may be more volatile than those of domestic
securities. With respect to certain foreign countries, there is a possibility of
expropriation of assets or nationalization, imposition of withholding or income
taxes on dividends, interest or capital gains, difficulty in obtaining and
enforcing judgments against foreign entities or diplomatic developments which
could affect investment in these countries. Losses and other expenses may be
incurred in converting between various currencies in connection with purchases
and sales of foreign securities.
Foreign stock markets are generally not as developed or efficient as, and may be
more volatile than, those in the U.S. Foreign stock markets usually have
substantially less volume than U.S. markets and the Fund's investment securities
may be less liquid and subject to more rapid and erratic price movements than
securities of comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable U.S. securities and such levels
may not be sustainable. There is generally less government supervision and
regulation of foreign stock exchanges, brokers, banks and listed companies
abroad than in the U.S. Moreover, settlement practices for transactions in
foreign markets may differ from those in U.S. markets. Such differences may
include delays beyond periods customary in the U.S. and practices, such as
delivery of securities prior to receipt of payment, which increase the
likelihood of a "failed settlement", which can result in losses to the Fund.
-4-
The value of foreign investments and the investment income derived from them may
also be affected unfavorably by changes in currency exchange control
regulations. Although the Fund will invest only in securities denominated in
foreign currencies that are fully exchangeable into U.S. dollars without legal
restriction at the time of investment, there can be no assurance that currency
controls will not be imposed subsequently. In addition, the value of foreign
fixed income investments may fluctuate in response to changes in U.S. and
foreign interest rates.
Foreign brokerage commissions, custodial expenses and other fees are also
generally higher for foreign securities than for securities traded in the U.S.
Consequently, our overall expense ratio may increase if we invest in foreign
securities.
Fluctuations in exchange rates may also affect the earning power and asset value
of the foreign entity issuing a security, even one denominated in U.S. dollars.
Dividend and interest payments will be repatriated based on the exchange rate at
the time of disbursement, and restrictions on capital flows may be imposed.
ZERO COUPON SECURITIES
We may invest in zero coupon securities, which are debt obligations that do not
entitle the holder to any periodic payment of interest prior to maturity or that
specify a future date when the securities begin to pay current interest. Zero
coupon securities are issued and traded at a discount from their face amount or
par value. This discount varies depending on prevailing interest rates, the time
remaining until cash payments begin, the liquidity of the security and the
perceived credit quality of the issuer.
Zero coupon securities are required to be redeemed by the issuer at face value
at maturity. The discount on zero coupon securities ("original issue discount"
or "OID") must be taken into income by us as it accrues prior to the receipt of
any actual payments. Because we must distribute substantially all of our
investment company taxable income (including accrued original issue discount) to
our shareholders each year for federal income and excise tax purposes, we may
have to dispose of portfolio securities under disadvantageous circumstances to
generate cash, or to increase our use of leverage, to satisfy our distribution
requirements.
The market prices of zero coupon securities are more volatile than the prices of
securities that pay interest periodically. The market prices of zero coupon
securities respond to changes in interest rates to a greater degree than other
types of debt securities having a similar maturity and credit quality. On the
other hand, because there are no periodic interest payments to be reinvested
prior to maturity, zero coupon securities eliminate the reinvestment risk and
lock in a rate of return to maturity.
BUSINESS LOANS
Although we have no present intention to do so, we may invest up to 10% of our
managed assets in loans extended to businesses by banks or other financial
institutions. If we purchase a loan or a participation in a loan, we acquire
some or all of the interest of a bank or other lending institution in a loan to
a corporate borrower. Many such loans are secured, and most impose restrictive
covenants which must be met by the borrower. These loans are made generally to
finance internal growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans may be in default at the
time of purchase. We may also purchase trade or other claims against companies,
which generally represent money owed by the company to a supplier of goods or
services. These claims may also be purchased at a time when the company is in
default. Certain of the loans acquired by us may involve revolving credit
facilities or other standby financing commitments which obligate us to pay
additional cash on a certain date or on demand.
-5-
The highly leveraged nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market conditions. Loans and other
direct investments may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may exist to resell
such instruments. As a result, we may be unable to sell such investments at an
opportune time or may have to resell them at less than fair market value.
ILLIQUID SECURITIES
We may invest up to 25% of our managed assets in illiquid securities and other
securities which are not readily marketable, including non-negotiable time
deposits and certain restricted securities not deemed by the Fund's Board of
Trustees to be liquid. Securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, which have been determined to be liquid, will
not be considered by our Advisor to be illiquid or not readily marketable and,
therefore, are not subject to this limit. Our inability to dispose of illiquid
or not readily marketable investments readily or at a reasonable price could
impair our ability to raise cash for investment or other purposes. The liquidity
of securities purchased by us which are eligible for resale pursuant to Rule
144A will be monitored by our Advisor on an ongoing basis, subject to the
oversight of the Trustees.
PORTFOLIO TURNOVER RATE
Our turnover rate is calculated by dividing the proceeds from our sales of
securities (or the cost of those securities, if lower) that are equities or that
had an original maturity or expiration date of more than one year at the time of
acquisition during a year by the average month end value of all of our
investments during that year that also were equities or had an original maturity
or expiration date of more than one year at the time of acquisition. Under
normal conditions, we do not intend to engage in trading activities for the
purpose of realizing short term gains. Rather, we intend to purchase and sell
securities to accomplish our investment objective and in consideration of our
then current view of prevailing or anticipated market and other conditions that
we believe may impact the value of those securities. For example, we may sell
portfolio assets in anticipation of changes in interest rates generally, or in
anticipation of changes in the business or prospects for a specific issuer of
securities. Higher turnover rates generally will result in increased transaction
costs. Transaction costs reduce net asset value. Although there can be no
assurance in this matter, we do not expect that our turnover rate under normal
market conditions and after the initial investment period following this
offering will be greater than 100%.
SHORT SALES
We may enter into a "short sale" of securities in circumstances in which, at the
time the short position is open, we own at least an equal amount of the
securities sold short or own preferred stocks or debt securities, convertible or
exchangeable without payment of further consideration, into an equal number of
securities sold short. This kind of short sale, which is referred to as one
"against the box," may be entered into by us to, for example, lock in a sale
price for a security we do not wish to sell immediately.
We may also make short sales of a security we do not own, in anticipation of a
decline in the market value of that security. To complete such a transaction, we
must borrow the security to make delivery to the buyer. We are then obligated to
replace the borrowed security at a future date. The price at such time may be
more or less than the price at which we sold the security. Until the borrowed
security is replaced, we are required to pay the security's owner any dividends
or interest which are paid or accrued during the period of the loan. To borrow
the security, we also may be required to pay a premium. Until we replace a
borrowed security, we may segregate cash or other liquid assets with our
custodian at such a level that (i) the amount segregated plus any amount
deposited with the broker as collateral will equal the current
-6-
value of the security sold short and (ii) the amount segregated plus any amount
deposited with the broker as collateral will not be less than the market value
of the security at the time it was sold short. We will incur a loss as a result
of the short sale if the price of the security increases between the date of the
short sale and the date on which we replace the borrowed security. We will
realize a gain if the security declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the amount
of any loss increased, by the amount of any premium, dividends or interest we
may be required to pay in connection with a short sale. No more than one third
of our managed assets will be, when added together: (i) deposited as collateral
for the obligation to replace securities borrowed to effect short sales; and
(ii) segregated in connection with short sales.
INVESTMENT RESTRICTIONS
We have adopted investment restrictions limiting our activities. Specifically,
we:
1. will not issue senior securities (including borrowing money for other than
temporary purposes) except in conformity with the limits of the 1940 Act;
or pledge our assets other than to secure such issuances or borrowings or
in connection with permitted investment strategies;
2. will not borrow in excess of 33 1/3% of our total assets (including the
amount of borrowings) minus liabilities (other than the amount of
borrowings), except that we may borrow up to an additional 5% of our total
assets for temporary purposes;
3. will not act as an underwriter of securities issued by other persons,
except insofar as we may be deemed an underwriter in connection with the
disposition of securities;
4. will not purchase or sell real estate, except that we may invest in
securities of companies that deal in real estate or are engaged in the real
estate business, including real estate investment trusts, and securities
secured by real estate or such interests and we 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 our
ownership of such securities;
5. will not purchase or sell commodities or commodities contracts but we may
purchase or sell financial contracts including, but not limited to,
interest rate or currency hedges;
6. will not originate loans to other persons except by the lending of our
securities, through the use of repurchase agreements and by the purchase of
debt securities;
7. will make investments that will result in concentration (25% or more of the
value of our investments) in the securities of issuers primarily engaged in
a F.I.R.E. (financial services, insurance, or real estate) industry and not
in any other industries, provided, however, this does not limit our
investments in (i) U.S. Government obligations, or (ii) other obligations
issued by governments or political subdivisions of governments;
8. will invest, under normal market conditions, at least 80% of the value of
our managed assets in securities issued by companies in a F.I.R.E.
(financial services, insurance or real estate) industry unless we provide
our shareholders with at least 60 days' prior written notice in compliance
with SEC rules;
9. will not invest in puts, calls, straddles, spreads or any combination
thereof, representing more than 10% of our managed assets;
-7-
10. will not enter into short sales representing more than 5% of our managed
assets; and
11. will not invest in oil, gas or other mineral exploration programs,
development programs or leases, except that we may purchase securities of
companies engaging in whole or in part in such activities.
Policies numbered 1 through 7, above, are fundamental policies of ours. A
fundamental policy may not be changed without the vote of a majority of our
outstanding voting securities, as defined under the 1940 Act. Unless the
definition is changed by amendment to the 1940 Act, "majority of the outstanding
voting securities" means the lesser of (1) 67% or more of the shares present at
a meeting of our shareholders, if the holders of more than 50% of our
outstanding shares are present or represented by proxy, or (2) more than 50% of
our outstanding shares. Our non-fundamental policies may be changed by vote of a
majority of our board of trustees.
MANAGEMENT OF THE FUND
The overall management of our business and affairs is the responsibility of our
board of trustees. Our board of trustees is classified with respect to trustees
terms into three classes -- Class I, Class II and Class III -- with the trustees
in each Class to hold office until their successors are elected and qualified.
Each member of our board of trustees in Class I will hold office until the
annual meeting of shareholders in 2005, each member of the board of trustees in
Class II will hold office until the annual meeting of shareholders in 2006, and
each member of the board of trustees in Class III will hold office until the
annual meeting of shareholders in 2007. At each annual meeting of the
shareholders, the successors to the class of trustees whose term expires at that
meeting will be elected to hold office for a term expiring at the later of the
annual meeting of shareholders held in the third year following the year of
their election or the election and qualification of their successors. The terms
of our trustees are staggered, but election of our trustees is non-cumulative.
Holders of a plurality of our common shares and our Preferred Shares, voting
together, will elect trustees to fill the vacancies of trustees whose term
expires at each annual meeting of shareholders. While Preferred Shares are
outstanding, preferred shareholders will also be entitled to elect two trustees.
Preferred shareholders will be entitled to elect a majority of our trustees
under certain circumstances.
Our trustees will meet periodically throughout the year to oversee our
activities reviewing, among other things, our performance and the contractual
engagements with our various service providers. Management of our day to day
operations is delegated to our officers and our Advisor, subject always to our
investment objectives and policies and to the general supervision of our board
of trustees.
TRUSTEES AND OFFICERS
Our trustees and officers, their ages, and their principal occupations during
the past five years are set forth below. Unless otherwise indicated, the
business address of each is 400 Centre Street, Newton, Massachusetts 02458. Each
trustee who is deemed an "interested person" as defined in the 1940 Act is
indicated by an asterisk. Each trustee who is not an "interested person" as
defined in the 1940 Act is referred to as a "disinterested trustee."
-8-
NUMBER
POSITION(S) OF
HELD WITH PORTFOLIOS
FUND AND IN FUND
TERM OF COMPLEX
NAME, OFFICE AND PRINCIPAL OCCUPATION(S) OVERSEEN
ADDRESS LENGTH OF DURING PAST 5 YEARS AND BY
(AGE) TIME SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE TRUSTEE
----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
Barry M. Portnoy * Class III Chairman of Reit Management & Research LLC - 1986 to present; 3
(59) Trustee to Director and Vice President of our Advisor - July 2002 to
serve until present;
2007. Managing Director of Five Star. - 2001 to present;
August 2004 to Managing Trustee of Senior Housing- 1999 to present;
present. Managing Trustee of Hospitality Properties- 1995 to present;
Managing Trustee of HRPT Properties - 1986 to present.
Gerard M. Martin * Class II Director of Reit Management - 1986 to present; 3
(70) Trustee to Director and Vice President of our Advisor - July 2002 to
serve until present;
2006. Managing Director of Five Star - 2001 to present;
August 2004 to Managing Trustee of Senior Housing- 1999 to present;
present. Managing Trustee of Hospitality Properties - 1995 to present;
Managing Trustee of HRPT Properties - 1986 to present.
DISINTERESTED
TRUSTEES
Frank J. Bailey Class II Partner in the Boston law firm of Sherin and Lodgen LLP; Trustee 3
(48) Trustee of Hospitality Properties Trust - 2003 to present; Trustee of
to serve Senior Housing Properties Trust - 2002 to present.
until
2006.
September
2004 to present.
Arthur G. Class III President and Chief Executive Officer of Gainesborough 3
Koumantzelis Trustee to Investments LLC - June 1998 to present; Trustee of Hospitality
(73) serve Properties Trust - 1995 to present; Director of Five Star
until 2007. Quality Care, Inc. - 2001 to present; Trustee of Senior
September Housing Properties Trust - 1999 to 2003.
2004 to
present.
-9-
John L. Class I Executive Director and trustee of the Yawkey Foundation (a 3
Harrington Trustee to charitable trust) and a trustee of the JRY Trust (a charitable
(67) serve until trust) - 1982 to present; Chief Executive Officer of the
2005. Boston Red Sox Baseball Club - 1982 to 2002; Trustee of
September Hospitality Properties Trust - 1995 to present; Director of
2004 to Five Star Quality Care, Inc. - 2001 to January 2004; Trustee
present. of Senior Housing Properties Trust - 1999 to present.
The SEC has recently promulgated rules which, when effective, are likely to
result in board member changes or additions so that at least 75% of our trustees
will not be "interested persons" as defined under the 1940 Act.
----------
* Indicates a trustee who is an "interested person" of the Fund as defined by
the 1940 Act by virtue of control of our Advisor.
EXECUTIVE OFFICERS
Thomas M. O'Brien President. President and Director of our Advisor - July 2002 to present;
(38) August 2004 to President of RMR Real Estate Fund - July 2002 to present;
present. President of RMR Hospitality and Real Estate Fund - January
2004 to present;
Vice President of Reit Management - April 1996 to present;
Treasurer and Chief Financial Officer, Hospitality Properties-
April 1996 to October 2002;
Executive Vice President, Hospitality Properties- October 2002
to December 2003.
Mark L. Kleifges Treasurer. Vice President of Reit Management - 2002 to present;
(44) August 2004 to Treasurer of RMR Real Estate Fund - November 2003 to present;
present. Treasurer of RMR Hospitality and Real Estate Fund - January
2004 to present;
Vice President of our Advisor - December 2003 to September 2004;
Treasurer of our Advisor - September 2004 - present;
Treasurer and Chief Financial Officer, Hospitality Properties -
2002 to present;
Partner, Arthur Andersen LLP - 1993-2002.
-10-
Jennifer B. Clark Secretary. Vice President of Reit Management - 1999 to present;
(43) August 2004 to Secretary of RMR Real Estate Fund and Clerk of our Advisor -
present. July 2002 to present;
Secretary of RMR Hospitality and Real Estate Fund - January
2004 to present;
Vice President of HRPT Properties - 1999 to present;
Partner, Sullivan & Worcester LLP - 1997 to 1999.
James J. McKelvey Vice President. Vice President of our Advisor - July 2004 to present;
(45) August 2004 to Vice President of RMR Real Estate Fund and RMR Hospitality and
present. Real Estate Fund - July 2004 to present;
Portfolio Manager of RMR Real Estate Fund and RMR Hospitality
and Real Estate Fund - June 2004 to present;
Portfolio Manager and Senior Research Officer for John
Hancock Funds -- May 1997 to April 2004.
John C. Popeo Vice President. Treasurer of Reit Management - 1997 to present;
(44) August 2004 to Treasurer of RMR Real Estate Fund - July 2002 to November 2003;
present. Vice President of RMR Real Estate Fund - November 2003 to
present;
Vice President of RMR Hospitality and Real Estate Fund -
January 2004 to present;
Treasurer of our Advisor - July 2002 to September 2004;
Vice President of our Advisor - September 2004 to present;
Treasurer and Chief Financial Officer of HRPT Properties-
1997 to present.
Adam D. Portnoy Vice President. Vice President of Reit Management - September 2003 to present;
(34) August 2004 to Vice President of our Advisor - December 2003 to present;
present. Vice President of RMR Real Estate Fund - February 2004 to
present;
Vice President of RMR Hospitality and Real Estate Fund -
January 2004 to present;
Executive Vice President of HRPT Properties - December 2003 to
present;
Senior Investment Officer, International Finance Corporation -
June 2001 - July 2003;
Vice President, ABN AMRO Investment Banking
- January 2001 - May 2001;
President and CEO, Surfree.com, Inc. - June 1997 - June 2000.
Each of our executive officers is elected at the meeting of our board of
trustees immediately following each annual meeting of our shareholders. All our
executive officers serve at the discretion of our board of trustees.
COMMITTEES OF THE BOARD
We have an Audit Committee consisting of disinterested trustees. The Audit
Committee's functions are to: engage independent accountants to conduct an
annual audit of our financial statements; review with
-11-
the independent accountants the outline, scope and results of our annual audit;
and review the performance and fees charged by the independent accountants for
professional services. In addition, our Audit Committee will meet with the
independent accountants and representatives of management to review accounting
activities and our financial reporting and controls. To date, the Audit
Committee has not met.
We have a Nominating Committee and a Compensation Committee, each consisting of
disinterested trustees. The function of the Nominating Committee is to recommend
candidates for election to our board of trustees as disinterested trustees. The
Nominating Committee considers nominations by shareholders as provided by our
declaration of trust and bylaws. See "Certain Provisions of the Declaration of
Trust" in the prospectus. The function of the Compensation Committee is to
determine and review the fees paid to our trustees. To date, neither the
Nominating Committee nor the Compensation Committee has met.
We have a Valuation Committee consisting of Messrs. Portnoy, Martin and O'Brien,
and the Advisor's personnel as are deemed necessary by these identified members
from time to time. Our Valuation Committee determines the value of any of our
securities and assets for which market quotations are not readily available or
for which valuation cannot otherwise be provided. To date, the Valuation
Committee has not met.
APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT
As described in the prospectus, we and our Advisor are parties to an investment
management agreement (the "Advisory Agreement"). Our board of trustees,
including a majority of our disinterested trustees, has the responsibility under
the 1940 Act to approve the Advisory Agreement and has done so for an initial
two year term commencing on the effective date of the Fund's Registration
Statement and will do so annually thereafter. In determining to approve the
Advisory Agreement, our trustees reviewed materials provided by the Advisor and
considered: (1) the level of fees and estimated expense ratio of the Fund as
compared to competitive funds of a comparable size and the fact that the fees to
be charged and the estimated expense ratio of the Fund are reasonable as
compared to other funds; (2) the nature and quality of the services rendered by
the Advisor recognizing, in particular, the experience of affiliates of the
Advisor in the F.I.R.E. industries and in managing public companies; (3)
anticipated benefits derived by the Advisor from its relationship with the Fund;
(4) the costs of providing services to the Fund; (5) the anticipated
profitability of the Fund to the Advisor; and (6) the benefits, in particular
the research and related services, within the meaning of Section 28(e) of the
Securities Exchange Act of 1934 which may be derived by the Advisor as a result
of allocation of our brokerage transactions and the fact that the Advisor does
not expect to seek or participate in these so-called "soft-dollar" arrangements.
They also considered that the Advisor agreed to pay all of our organizational
costs and our offering expenses for the initial offering of the Fund's common
shares, other than the sales load, that exceeded an amount equal to $0.05 per
common share issued to non-affiliates. On September 22, 2004, based on their
evaluation of all material factors discussed above the board of trustees, and
separately, the disinterested trustees, voted to approve the Advisory Agreement.
The Advisor, as sole shareholder, also approved the Advisory Agreement on
September 22, 2004.
TRUSTEE OWNERSHIP
The following table sets forth, for each trustee, the aggregate dollar range of
our equity securities beneficially owned as of November 22, 2004. The
information as to beneficial ownership is based on statements furnished to us by
each trustee.
-12-
AGGREGATE DOLLAR
RANGE OF EQUITY
SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN
DOLLAR RANGE OF EQUITY BY TRUSTEE IN FAMILY OF
SECURITIES IN THE FUND INVESTMENT COMPANIES
AS OF NOVEMBER 22, AS OF NOVEMBER 22,
NAME OF TRUSTEE 2004 (1) 2004
---------------------------------------------------------------------------------
Barry M. Portnoy Over $100,000 Over $100,000
Gerard M. Martin Over $100,000 Over $100,000
Frank J. Bailey None $1 - $10,000(2)
John L. Harrington None Over $100,000
Arthur G. Koumantzelis None $1 - $10,000(2)
(1) As of December 31, 2003, the Fund was not in existence, and
accordingly no trustees owned securities in the Fund.
(2) As of December 31, 2003, this trustee owned no equity securities
in the family of registered investment companies overseen by this
trustee.
PRINCIPAL SHAREHOLDERS
As of December 1, 2004 our common shares were our only class of shares
outstanding. To our knowledge, as set forth more fully below, our officers
and trustees own, as a group, in the aggregate 204,000 shares representing
13.5% of our outstanding common shares as of December 1, 2004. No other
persons, except as set forth below, to our knowledge, own of record or
beneficially more than 5% of our common shares as of December 1, 2004.
PERCENTAGE OF THE FUND'S OUTSTANDING
RECORD SHAREHOLDERS NUMBER OF COMMON SHARES SHARES AS OF DECEMBER 1, 2004
------------------- ----------------------- ------------------------------------
Cede & Co. 1,280,000 86.3%
PERCENTAGE OF THE FUND'S OUTSTANDING
BENEFICIAL SHAREHOLDERS NUMBER OF COMMON SHARES SHARES AS OF DECEMBER 1, 2004
----------------------- ----------------------- ------------------------------------
Barry M. Portnoy 102,000(1) 6.9%
Gerard M. Martin 102,000(1) 6.9%
(1) 100,000 shares are held indirectly by virtue of such person's 100%
ownership of a corporation which owns such shares and 2,000 shares
are held indirectly by virtue of such person's 50% ownership of our
Advisor.
PROXY VOTING POLICES AND PROCEDURES
The Fund has adopted policies and procedures for voting proxies solicited by
issuers whose securities are held by the Fund. The Fund's policies and
procedures are implemented by the Advisor. The vote with respect to most routine
issues presented in proxy statements is expected to be cast in accordance with
the position of the issuer's management, unless it is determined by the Advisor
or the board of trustees of the Fund that supporting management's position would
adversely affect the investment merits of owning the issuer's security. However,
each issue will be considered on its own merits, and a position of management
found not to be in the best interests of the Fund's shareholders will not be
supported.
Proxies solicited by issuers whose securities are held by the Fund will be voted
solely in the interests of the shareholders of the Fund. Any conflict of
interest will be resolved in the way that will most benefit the Fund and its
shareholders. The Advisor shall not vote proxies for the Fund until it has
determined that a conflict of interest does not exist, is not material or a
method of resolving such conflict of interest has been agreed upon by the board
of trustees. If the conflict of interest is determined to be material, the
conflict shall be disclosed to the board of trustees and the Advisor will follow
the instructions of the board of trustees.
-13-
COMPENSATION OF TRUSTEES
We expect to pay each trustee who is not an interested person an annual fee
and a fee for attending trustees' meetings in person or by telephone,
together with out of pocket expenses relating to attendance at such meetings.
In addition, the trustee members of our Committees who are not interested
persons will receive a fee for each Committee meeting attended, other than
meetings held on days on which there is also a board of trustees' meeting or
another Committee meeting for which they are paid. Trustee compensation may
be adjusted from time to time. Our trustees receive no pension or retirement
benefits from us.
Because we were formed in August 2004, during the year ended December 31,
2003, the trustees of the Fund did not receive any compensation for serving
as our trustees. Set forth in the table below is the compensation estimated
to be paid to the trustees by the Fund for the period beginning November 22,
2004 and ending on December 31, 2004 and the amounts received by or owed to
such persons during the year ended December 31, 2003, for serving as trustees
of RMR Real Estate Fund and RMR Hospitality and Real Estate Fund, which are
investment companies that are also managed by our Advisor.
Estimated Compensation Total Compensation
from Fund for Current from Fund and Fund
Name of Trustee Fiscal Year Complex as of 12/31/03
-----------------------------------------------------------------------------
Barry M. Portnoy $ 0 $ 0
Gerard M. Martin $ 0 $ 0
Frank J. Bailey $ 2,750 $ 10,000
John L. Harrington $ 2,750 $ 10,000
Arthur G. Koumantzelis $ 2,750 $ 10,000
ADMINISTRATIVE SERVICES
In addition to the Investment Advisory Agreement described in our prospectus, we
have entered into an Administration Agreement with our Advisor. Pursuant to this
Administration Agreement, our Advisor performs administrative and accounting
functions for us, including: (i) providing office space, telephones, office
equipment and supplies for us; (ii) authorizing expenditures and approving bills
for payment on our behalf; (iii) supervising preparation of the periodic
updating of our registration statement, including our prospectus and SAI, for
the purpose of filings with the SEC and state securities regulators and
monitoring and maintaining the effectiveness of such filings, as appropriate;
(iv) preparation of periodic reports to our shareholders and filing of these
reports with the SEC, and other forms filed with the SEC, notices of dividends,
capital gains distributions and tax credits and attending to routine
correspondence and other communications with shareholders; (v) supervising the
daily pricing of our investment portfolio and the publication of the net asset
value of our shares, earnings reports and other financial data; (vi) monitoring
relationships with organizations providing services to us, including our
attorneys, accountants, custodian, transfer agent and printers; (vii)
supervising compliance by us with record keeping requirements under the 1940 Act
and regulations thereunder; (viii) maintaining books and records for us (or
causing their maintenance by the custodian and transfer agent); (ix) preparing
and filing of tax reports; and (x) monitoring our compliance with the Code. Our
Advisor also provides us with such personnel as we may from time to time request
for the performance of clerical, accounting and other office services described
above, as well as coordinating matters with our sub-administrator, transfer
agent,
-14-
custodian and dividend reinvestment plan agent. The personnel rendering these
services, who may act as our officers, may be employees of the Advisor or its
affiliates.
Pursuant to the Administration Agreement and with the approval of our board of
trustees, our Advisor has chosen State Street Bank and Trust Company as
sub-administrator. Under the sub-administration agreement, State Street Bank is
responsible for performing most of the foregoing administrative functions,
including: (i) determining our net asset value and preparing these figures for
publication; (ii) maintaining certain of our books and records that are not
maintained by the Advisor, custodian or transfer agent; (iii) preparing
financial information for our income tax returns, proxy statements, shareholders
reports and SEC filings; and (iv) responding to some shareholder inquiries.
For reviewing the work performed by State Street Bank and for performing
administrative services not provided by State Street Bank, we do not pay our
Advisor any fee in addition to its advisory fees. Instead, under our
Administration Agreement, we reimburse our Advisor for its costs of these
services, including the monthly fees paid to State Street which are described in
the prospectus under its sub-administration agreement and a reasonable
allocation of the costs of goods and services provided by our Advisor and its
affiliates to us and to third parties.
CODE OF ETHICS
We and our Advisor have adopted codes of ethics in compliance with Rule 17j-1
under the 1940 Act. These codes, among other things, restrict management
personnel investments in certain securities, including investments in initial
public offerings and in private placements. Generally, these restrictions
prohibit management personnel and our trustees from purchasing or selling any
security if they knew or reasonably should have known at the time of the
transaction that, within the most recent 15 days, we had been considering for
purchase or sale, or are purchasing or selling such security. Restricted
investments generally require pre-approval by an officer, committee or our board
of trustees as deemed appropriate by the board of trustees. 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 http://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 by forwarding a written request, together with the
appropriate duplicating fee, to the SEC's Public Reference Section, 450 5th St.,
N.W., Washington, DC 20549-0102, or by e-mail request at publicinfo@sec.gov.
PRIVACY POLICY
We are committed to maintaining your privacy and to safeguarding your nonpublic
personal information.
We do not receive any nonpublic personal information relating to you if you
purchase shares through an intermediary that acts as the record owner of our
shares. If you are the record owner of our shares, we may receive nonpublic
personal information on your account documents or other forms and also have
access to specific information regarding your fund share transactions, either
directly or through Wells Fargo Bank, N.A., our transfer agent and Plan Agent.
We do not disclose any nonpublic personal information about you or any former
shareholders to anyone, except as permitted by law or as is necessary to service
your account. We restrict access to nonpublic personal information about you to
our Advisor, our Advisor's employees and other service providers with a
legitimate business need for the information.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of our board of trustees, decisions to buy and sell
securities for us and negotiation of the brokerage commissions which we pay are
made by our Advisor. Transactions on U.S. stock exchanges involve our payment of
negotiated brokerage commissions. There is generally no stated commission in the
case of securities traded in the over the counter market but the price we pay
usually includes an undisclosed dealer commission or mark up. In certain
instances, we may make purchases of underwritten issues at prices which include
underwriting fees.
Subject to the supervision of our board of trustees, our Advisor is authorized,
for the purchase and sale of our portfolio securities, to employ such securities
dealers and brokers and to negotiate brokerage commissions on our behalf as may,
in the judgment of the Advisor, implement our policy of obtaining the best net
results taking into account such factors as: the net price available; the
reliability, integrity and financial condition of the broker; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker to our investment performance on a continuing basis. Accordingly, the
cost of the brokerage commissions to us in any transaction may be greater than
available from other brokers if the difference is reasonably justified by other
aspects of the portfolio services offered. For example, our Advisor may cause us
to pay a broker that provides research services to our Advisor an amount of
commission for a transaction in excess of the amount of commission another
broker would have charged for that transaction, if our Advisor 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 our Advisor's ongoing responsibilities to us.
Moreover, research and investment information may be provided by brokers at no
cost to our Advisor and this information will be available to benefit us and any
other accounts advised by our Advisor and its affiliates. In that case, not all
of the information will be used for our benefit. While broker provided services
and information may be useful in varying degrees and may tend to reduce our
Advisor's expenses, it is not possible to estimate its value and in the opinion
of our Advisor it does not reduce our Advisor's expenses in a determinable
amount. The extent to which our Advisor makes use of statistical, research and
other services furnished by brokers is considered by our Advisor in the
allocation of brokerage business, but there is no formula by which such business
is allocated. Our Advisor may also take into account payments made by brokers
effecting transactions for us to other persons on our behalf for services (such
as custodial or professional fees).
Investment decisions for the Fund and any other entities which are or may become
investment advisory clients of our Advisor are made independently of one another
with a view to achieving their respective investment objectives. Investment
decisions are the product of many factors in addition to basic suitability for
the particular client involved (including the Fund). Some securities considered
for investment by the Fund may also be appropriate for other clients served by
our Advisor. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. If a purchase or sale of securities consistent with the investment
policies of the Fund and one or more of these clients served by our Advisor is
considered at or about the same time, transactions in such securities will be
allocated among the Fund and clients in a manner deemed fair and reasonable by
our Advisor. Our Advisor may aggregate orders for the Fund with simultaneous
transactions entered into on behalf of its other clients. When this occurs, the
transactions are averaged as to price and allocated, in terms of amount, in
accordance with a formula considered to be equitable to the clients involved.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling the security. In some instances, one client may sell
a particular security to another client. Although in some cases these
arrangements may have a detrimental effect on the price or volume of the
securities as to the Fund, in other cases it is believed that the Fund's ability
to participate in volume transactions may produce better executions for it. In
any case, it is the judgment of
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our trustees that the desirability of the Fund's having its advisory
arrangements with our Advisor outweighs any disadvantages that may result from
contemporaneous transactions.
DETERMINATION OF NET ASSET VALUE
We value portfolio securities for which market quotations are readily available
at market value as indicated by the last sale price on the security's principal
market on the date of valuation. If there has been no sale on that day, the
securities are valued at the last available bid price on that day. Securities
traded primarily on the NASDAQ Stock Market, or NASDAQ, are normally valued by
the Fund at the NASDAQ Official Closing Price, or NOCP, provided by NASDAQ each
business day. The NOCP is the most recently reported price as of 4:00:06 p.m.,
Eastern time, unless that price is outside the range of the "inside" bid and
asked prices (i.e., the bid and asked prices that dealers quote to each other
when trading for their own accounts); in that case, NASDAQ will adjust the price
to equal the inside bid or asked price, whichever is closer. Because of delays
in reporting trades, the NOCP may not be based on the price of the last trade to
occur before the market closes.
Some fixed income securities may be valued using prices provided by a pricing
service, when our board of trustees believes the price reflects fair market
value.
Foreign securities not traded in U.S. dollars are converted into U.S. dollars
using exchange rates as of the close of the NYSE. The value of foreign
securities generally is based upon their closing prices reported by their
primary market. Foreign securities primarily traded outside the U.S. may be
traded on days which are not business days of the Fund. Because our net asset
value is determined only on our business days, significant changes in foreign
securities' value may impact our net asset value on days when our shares cannot
be purchased or sold.
We value our investments in securities with maturities within 60 days of our
purchase at their amortized cost, as determined by our board of trustees to be
their fair value. Amortized cost generally means our cost of the investment plus
the amortization to maturity of any discount or premium.
Any of our securities which are not readily marketable, which are not traded or
which have other characteristics of illiquidity will be valued at fair value as
determined in good faith by or under the supervision of our board of trustees.
Also, we may consider available securities pricing to be unreliable if
significant market or other events arise. When closing market prices or market
quotations are not available or are considered to be unreliable, our Valuation
Committee values securities under policies approved by our trustees that they
believe will accurately reflect fair value. Numerous factors may be considered
when determining fair value of a security, including available analyst, media or
other reports, trading in futures or ADRs and whether the issuer of the security
being fair valued has other securities outstanding.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS OF PREFERRED SHARES
GENERAL
DTC will act as the Securities Depository with respect to the Preferred Shares.
All of the Preferred Shares will be registered in the name of Cede & Co., as
nominee of the Securities Depository. The global certificate held by Cede & Co.
will bear a legend to the effect that such certificate is issued subject to the
provisions restricting transfers of the Preferred Shares contained in our
bylaws. We will also issue stop-transfer instructions to the transfer agent for
the Preferred Shares. Prior to the commencement of the right of holders of the
Preferred Shares to elect a majority of our trustees, in circumstances described
under "Description of Preferred Shares--Voting Rights" in the prospectus, Cede &
Co. will be the holder of
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record of the Preferred Shares. Owners of Preferred Shares are not entitled to
receive certificates representing their ownership interest.
DTC, a New York-chartered limited purpose trust company, performs services for
its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participants in the Preferred Shares, whether for
its own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent will act as our agent in connection with the auctions of the
Preferred Shares (the "Auctions"). In the absence of willful misconduct or gross
negligence on its part, the Auction Agent will not be liable for any action
taken, suffered, or omitted or for any error of judgment made by it in the
performance of its duties under the Auction Agency Agreement between the Fund
and the Auction Agent and will not be liable for any error of judgment made in
good faith unless the Auction Agent was grossly negligent in ascertaining the
facts pertinent to making such decision. We will indemnify the Auction Agent and
its officers, directors, employees and agents for, and hold it harmless against,
any loss, liability or expense incurred without gross negligence or willful
misconduct on the part of the Auction Agent arising out of or in connection with
its agency under the Auction Agency Agreement and under the Broker-Dealer
Agreements entered by the Auction Agent pursuant to the Auction Agency
Agreement, including the costs and expenses of defending itself against any
claim of liability in connection with its exercise or performance of any of its
duties thereunder, except such as may result from its gross negligence or
willful misconduct.
The Auction Agent may conclusively rely upon, as evidence of the identities of
the holders of the Preferred Shares, the Auction Agent's registry of holders,
and the results of auctions and notices from any Broker-Dealer (or other person,
if permitted by the Fund) with respect to transfers described under "The
Auction-Secondary Market Trading and Transfer of Preferred Shares" in the
prospectus and notices from the Fund. The Auction Agent is not required to
accept any such notice for an auction unless it is received by the Auction Agent
by 3:00 p.m., Eastern time, on the business day preceding such Auction.
BROKER-DEALERS
The Auction Agent after each Auction for Preferred Shares 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
distribution period of less than one year, or a percentage agreed to by the Fund
and the Broker-Dealer in the case of any Auction immediately preceding a
distribution period of one year or longer, of the liquidation preference
($25,000 per share) of the Preferred Shares placed by such Broker-Dealer at such
Auction. For purposes of the preceding sentence, the Preferred Shares will be
placed by a Broker-Dealer if such shares were (a) the subject of hold orders
deemed to have been submitted to the Auction Agent by the Broker-Dealer and
acquired by such Broker-Dealer for its customers who are beneficial owners of
those Preferred Shares (b) the subject of an order submitted by such
Broker-Dealer that is (i) a bid of an existing holder that resulted in the
existing holder continuing to hold Preferred Shares as a result of the Auction
or (ii) a bid of a potential holder that resulted in the potential holder
purchasing Preferred Shares as a result of the Auction or (iii) a valid hold
order.
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. A Broker-Dealer that submits an order for its own account in any
Auction might have an advantage over other bidders because it would have
knowledge of all orders submitted by it in
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that Auction; such Broker-Dealer, however, would not have knowledge of orders
submitted by other Broker-Dealers in that auction, if there are other
Broker-Dealers.
DISTRIBUTIONS ON COMMON SHARES
We intend to make regular monthly distributions to our common shareholders after
making payment or provision for payment of distributions on, or redeeming, our
preferred shares, and interest and required principal payments on our
borrowings, if any. We expect our initial common share distribution will be
declared approximately 60 days, and paid approximately 90 days, after the
completion of our closing of the initial public offering of our common shares,
which occurred on April 30, 2004. Although we do not anticipate that the amount
of our distributions to our common shareholders will impact our distributions to
our preferred shareholders, distributions to our preferred shareholders are on a
priority though limited basis and therefore may impact the amount available for
distribution to our common shareholders; the amount of our distributions and our
distributions policy are subject to periodic review and change by our board of
trustees based upon our performance, our expected performance and other factors
considered from time to time.
We expect to derive ordinary income primarily from distributions we receive on
our owned REIT shares. We may also earn ordinary income from interest and from
dividends we receive on other securities which we own. Our ordinary income will
be reduced by the expenses we incur. The 1940 Act allows us to distribute
ordinary income at any time and from time to time.
A portion of the distributions we receive on our owned REIT shares may be
classified by those REITs as capital gains or returns of capital. Capital gain
or loss may also be generated by us when we sell our investments for amounts
different than their adjusted tax basis. The 1940 Act generally does not permit
us to distribute capital gain income more than once per year unless we obtain
exemptive relief from the SEC, for which we have applied. See "--Managed
Dividend Policy".
LEVEL RATE DIVIDEND POLICY
We expect to make distributions to you equal in dollar amount per share each
month. This is referred to as a "level rate dividend policy". Because the 1940
Act generally limits our distribution of capital gains to once per year and the
Code limits our ability to retain capital gains, a level rate dividend policy
may require us to make a distribution of capital gains to you during the last
part of a calendar year which is larger than, or in addition, to the amount we
expect we could maintain on a regular monthly basis. The Fund does not expect to
make "returns of capital" by distributing amounts in excess of its net
investment company income and net capital gain income, nor does the Fund expect
to withhold a substantial part of its net investment company income and capital
gain income under this policy. However, there can be no assurance that the
Fund's distributions will equal its net investment company income and capital
gain income for any particular period.
MANAGED DIVIDEND POLICY
In December 2003, we applied to the SEC for exemptive relief under the 1940 Act
to implement a policy referred to as a "managed dividend policy." In effect, a
managed dividend policy will allow us to allocate, shortly after the end of each
year, portions of each monthly distribution which are to be treated by our
common shareholders as ordinary income, capital gains, or otherwise. If relief
is granted by the SEC and we adopt a managed dividend policy, it may have the
effect of eliminating or reducing the distribution variability that can be
associated with a level rate dividend policy. We believe that such a reduction
in variability may make it possible for us to pay regular monthly distributions
which are higher than those we might pay under a level dividend policy and that
a managed dividend policy will permit a fairer
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allocation to our shareholders of our periodic distributions among income and
capital gains which is more in accord with our shareholders' normal
expectations. There can be no assurance, however, that we will receive an order
which permits a managed dividend policy, or if received that we will implement
such a policy.
TAX MATTERS
Set forth below is a discussion of the material federal income tax aspects
concerning the Fund and the purchase, ownership and disposition of our Preferred
Shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. Unless otherwise noted, this discussion
assumes that you are a U.S. person and hold your shares as a capital asset. This
discussion is based on present provisions of the Code, related regulations and
existing judicial decisions and administrative pronouncements, all of which are
subject to change or differing interpretations, possibly with retroactive
effect. Prospective investors should consult their own tax advisers with regard
to the federal income tax consequences of the purchase, ownership or disposition
of our Preferred Shares, as well as tax consequences arising under the laws of
any state, locality, foreign country or other taxing jurisdiction.
TAXATION OF THE FUND
We intend to qualify each taxable year for treatment as a RIC, although we
cannot give complete assurance that we will so qualify. To qualify for this
treatment, we must generally, among other things: (a) derive at least 90% of our
gross income each taxable year from dividends, interest, payments with respect
to certain securities loans and gains from the sale or other disposition of
securities or foreign currencies, or other income (including gains from options,
futures or forward contracts) derived from our investing in securities or those
currencies; (b) distribute with respect to each taxable year at least 90% of our
investment company taxable income (consisting generally of net investment
income, net short term capital gain and net gains from certain foreign currency
transactions, if any, and determined without regard to any deduction for
dividends paid) for that year; and (c) diversify our holdings so that, at the
end of each quarter of each taxable year (1) at least 50% of the value of our
total assets is represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities limited in respect of any one
issuer to a value not greater than 5% of the value of our total assets and to
not more than 10% of the issuer's outstanding voting securities, and (2) not
more than 25% of the value of our total assets is invested in the securities
(other than those of the U.S. Government or other RICs) of any one issuer, or of
two or more issuers that we control (defined as owning 20% or more of the total
combined voting power of all classes of stock entitled to vote) and are engaged
in the same, similar or related trades or businesses.
If we qualify for treatment as a RIC, we generally will not be subject to
federal income tax on income and gains we timely distribute to our shareholders
(including capital gain dividends, as discussed below). If we fail to qualify
for treatment as a RIC for any taxable year, we would be taxed at regular
corporate rates on the full amount of our taxable income for that year without
being able to deduct the distributions we make to our shareholders and our
shareholders would treat all those distributions, including distributions of net
capital gain (i.e., the excess of net long term capital gain over net short term
capital loss), as dividends to the extent of our earnings and profits. In
addition, we could be required to recognize unrealized gains, pay substantial
taxes and interest and make substantial distributions before requalifying for
treatment as a RIC.
Generally, we intend to distribute at least annually to our shareholders all or
substantially all of our investment company taxable income. Generally, we also
will annually (1) distribute our net capital gain or (2) retain all or a portion
of our net capital gain for investment. If we retain any investment company
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taxable income or any net capital gain, we will be subject to tax at regular
corporate rates on the retained amount.
To the extent we fail to distribute in a calendar year at least an amount equal
to the sum of (1) 98% of our ordinary income for that year plus (2) 98% of our
capital gain net income for the one year period ending October 31 of that year,
plus 100% of any retained amount of either of our ordinary income or capital
gain net income from the prior year, we will be subject to a nondeductible 4%
excise tax. For these purposes, we will be treated as having distributed any
amount with respect to which we pay income tax. A distribution we pay to
shareholders in January of any year generally will be deemed to have been paid
on December 31 of the preceding year if the distribution is declared and payable
to shareholders of record on a date in October, November or December of that
preceding year. We generally intend to make distributions sufficient to avoid
imposition of material excise tax.
The 1940 Act generally limits our capital gain distributions to one per year,
although under some circumstances Section l9(b) and Rule 19b-1 of the 1940 Act
allow us up to three distributions per year that we may designate in whole or in
part as capital gain dividends. We have applied for an order from the Securities
and Exchange Commission that would permit us to designate each one of our
distributions, whether on our common or Preferred Shares, as a capital gain
dividend in whole or in part. If we receive the order, we expect to be able to
fully distribute our net capital gains to our shareholders in the form of one or
more distributions, and to do so in a manner that complies with the federal
income tax requirement for RIC taxation that capital gain dividends be
designated proportionately among various classes of our shares.
However, if we do not receive the order, then in order to satisfy both the 1940
Act requirement of limited capital gain designations and the RIC federal income
tax requirement of proportional capital gain designations, we may be forced to
retain capital gains and pay tax on those retained gains at the fund level, all
without the benefit of deemed gain distributions and deemed tax credits to our
shareholders; in addition, our shareholders may be treated as having received
ordinary income dividends in respect of the retained capital gains. In short, in
the absence of the order, compliance with both the 1940 Act and the RIC federal
income tax requirements will result in double taxation of gains that we have to
retain and pay tax on, or alternatively, we may accelerate capital losses and
defer capital gains, even if this would be contrary to our otherwise desired
investment objectives, in an attempt to minimize the net capital gains that
could become subject to double taxation. With the issuance of the Preferred
Shares and in the absence of the order, the 1940 Act requirement of limited
capital gain designations becomes even more mathematically limiting, and
therefore the potential for double taxation of net capital gains increases.
Although there can be no assurance in this regard, based on available precedent
we expect to receive the order. Accordingly, we expect to be able to fully
distribute our net capital gains to our shareholders in compliance with both the
1940 Act and the RIC federal income tax requirements, and thereby avoid any
double taxation on these net capital gains.
If at any time when Preferred Shares are outstanding we fail to meet the
Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred Shares Asset
Coverage, we will be required to suspend distributions to holders of our common
shares until such maintenance amount or asset coverage, as the case may be, is
restored. Such a suspension may prevent us from satisfying the RIC distribution
requirement and may therefore jeopardize our qualification as a RIC or cause us
to incur an income tax or excise tax liability, or both. If we do not timely
cure our failure to meet such maintenance amount or asset coverage when
Preferred Shares are outstanding, we will be required to redeem Preferred Shares
to maintain or restore such maintenance amount or asset coverage, as the case
may be, and such a redemption may allow us to avoid failing to qualify for
treatment as a RIC. There can be no assurance, however, that any such redemption
would achieve such objective.
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TAXATION OF SHAREHOLDERS
DISTRIBUTIONS. As long as we qualify for treatment as a RIC, distributions we
make to our shareholders from our investment company taxable income generally
will be taxable to them as ordinary income to the extent of our earnings and
profits. A portion of our distributions are likely to be classified based upon
the character of distributions we receive from real estate investment trusts,
e.g., as ordinary income, qualified dividend income, capital gains or return of
capital. We currently expect that a portion of the dividends we distribute to
our shareholders will be eligible for the dividends received deduction available
to corporations and eligible for the new reduced maximum federal income tax rate
on qualified dividend income received by individuals under the Jobs and Growth
Tax Relief Reconciliation Act of 2003 ("2003 Tax Act"). Distributions of net
capital gain that are properly designated as such will be taxable to each
shareholder as long term capital gain, regardless of how long the shareholder
has held the shares in the Fund. Under the 2003 Tax Act, capital gain dividends
that we pay with respect to gains recognized on sales or exchanges of capital
assets through December 31, 2008, as well as any dividends that we pay with
respect to qualified dividend income received by the Fund through December 31,
2008, will generally be subject to a maximum federal income tax rate of 15%.
If a portion of our income consists of qualifying dividends paid by U.S.
corporations, a portion of the dividends paid by us to corporate shareholders,
if properly designated, may be eligible for the dividends received deduction.
However, dividends a corporate shareholder receives and deducts pursuant to the
dividends received deduction are subject indirectly to the federal alternative
minimum tax.
Under the 2003 Tax Act, for taxable years beginning on or before December 31,
2008, distributions of investment income that qualifies to be designated by us
as derived from qualified dividend income will be taxed in the hands of
individuals at the rates applicable to long-term capital gain, provided holding
period and other requirements are met by the shareholder. Specifically, a
dividend paid by us to a shareholder will not be treated as qualified dividend
income of the shareholder (1) if the dividend is received with respect to any
share held for fewer than 61 days during the 121-day period beginning on the
date which is 60 days before the date on which such share becomes ex-dividend
with respect to such dividend, (2) to the extent that the recipient is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property
or (3) if the recipient elects to have the dividend treated as investment income
for purposes of the limitation on deductibility of investment interest.
Because we may earn income that is not qualified dividend income, such as
interest, payments in lieu of dividends on securities we may lend,
non-qualifying dividends (including a portion of distributions from real estate
investment trusts or other pass through entities), and net short-term capital
gains, the percentage of our dividends that will qualify as qualified dividend
income or for the dividends received deduction will likely be less than 100%. We
will notify our shareholders annually of the percentage of our dividends that
qualify as eligible for treatment as qualified dividend income.
Distributions on our shares are generally subject to federal income tax as
described herein, even if they are paid from income or gains we earned before
the shareholder's investment (and thus included in the price the shareholder
paid).
If we make a distribution to you in excess of our current and accumulated
earnings and profits, the excess distribution will be treated as a "return of
capital" to the extent of your tax basis in our shares and thereafter as capital
gain. A return of capital is not taxable, but it will reduce your tax basis in
our shares, and therefore reduce any loss or increase any gain on a subsequent
taxable disposition by you of our shares.
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We may designate all or a portion of any retained net capital gains as
undistributed capital gains in a notice to you, and if we do so, you will (1) be
required to include in your federal taxable income, as long term capital gain,
your share of the retained amount and (2) be entitled to credit your
proportionate share of the tax we paid on the retained amount against your
federal income tax liability, if any, and to claim a refund to the extent the
credit exceeds that liability. For federal income tax purposes, the tax basis in
your shares would be increased by the difference between the retained capital
gains included in your gross income and the tax credit claimed by you under
clause (2) of the preceding sentence.
If (1) we may redeem all or part of the Preferred Shares upon payment of a
premium, (2) based on all the facts and circumstances, we are more likely than
not to redeem such shares, and (3) such premium exceeds a specified de minimis
amount, it is possible that the holders of such shares may be required to accrue
the premium as a dividend (to the extent of our earnings and profits) in advance
of the receipt of cash representing such premium.
Although we do not anticipate that the amount of our distributions to our common
shareholders will impact our distributions to our preferred shareholders,
distributions to our preferred shareholders are on a priority though limited
basis and therefore may impact the amount available for distribution to our
common shareholders; the amount of our distributions and our distributions
policy are subject to periodic review and change by our board of trustees based
upon our performance, our expected performance and other factors considered from
time to time. The Internal Revenue Service currently requires that a RIC 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 capital gains)
based upon the percentage of total dividends paid out of earnings or profits to
each class for the tax year. Accordingly, the Fund intends each year to allocate
capital gain dividends between its common shares and preferred shares in
proportion to the total dividends paid out of earnings or profits to each class
with respect to such tax year. Dividends qualifying and not qualifying for the
dividends received deduction will similarly be allocated between and among these
classes. Distributions in excess of the Fund's current and accumulated earnings
and profits, if any, however, will not be allocated proportionately among the
common shares and preferred shares. Since the Fund's current and accumulated
earnings and profits will first be used to pay distributions on the preferred
shares, distributions in excess of such earnings and profits, if any, will be
made disproportionately to common shareholders.
We will notify shareholders annually as to the federal tax status of our
distributions to them.
SALE OR REDEMPTION OF SHARES. Your sale or other disposition of our shares may
give rise to a taxable gain or loss equal to the difference between the amount
realized and your adjusted basis in those shares. In general, any gain or loss
realized on a taxable disposition of shares will be treated as long term capital
gain or loss if the shares have been held for more than 12 months. Under the
2003 Tax Act, such gain is generally taxable to individuals at a maximum rate of
15% through December 31, 2008. However, if you sell shares at a loss within six
months of their purchase, that loss will be treated as long term, rather than
short term, to the extent of any capital gain dividends you received (or your
share of any retained capital gains designated) with respect to the shares. All
or a portion of any loss realized on a taxable disposition of our Preferred
Shares will be disallowed to the extent other Preferred Shares in the Fund are
purchased within 30 days before or after the disposition. In that case, the
basis in the newly purchased shares will be adjusted to reflect the disallowed
loss.
From time to time we may make a tender offer for some of our shares. A tender of
shares pursuant to such an offer would be a taxable event. If we decide to make
a tender offer, the tax consequences thereof will be disclosed in the documents
relating to the offer.
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We may, at our option, redeem Preferred Shares in whole or in part and we are
generally required to redeem Preferred Shares to the extent required to maintain
the Preferred Shares Basic Maintenance Amount and the 1940 Act Preferred Shares
Asset Coverage. Gain or loss, if any, resulting from such a redemption of
Preferred Shares will be taxed as gain or loss from the sale or exchange of
these shares rather than as a dividend but only if the redemption distribution
(a) is deemed not to be essentially equivalent to a dividend, (b) is in complete
redemption of the Preferred Shareholder's interest in the Fund, (c) is
"substantially disproportionate" with respect to the Preferred Shareholder's
interest in the Fund, or (d) with respect to a non-corporate Preferred
Shareholder, is in partial liquidation of the Fund. For purposes of (a), (b) and
(c) above, a Preferred Shareholder's ownership of common shares will be taken
into account.
BACKUP WITHHOLDING. We generally are required to withhold and remit to the U.S.
Treasury 28% (except as noted below) of all distributions (including capital
gain dividends) and redemption or repurchase proceeds otherwise payable to any
individual or certain other noncorporate shareholder who fails to properly
furnish us with a correct taxpayer identification number. Withholding at the 28%
rate also is required from all distributions otherwise payable to a shareholder
who fails to certify to us that he or she is not otherwise subject to that
withholding (together with the withholding described in the preceding sentence,
"backup withholding"). The backup withholding rate will increase to 31% for
amounts paid after December 31, 2010, unless Congress enacts legislation
providing otherwise. Backup withholding is not an additional tax, and any
amounts withheld with respect to a shareholder may be credited against the
shareholder's federal income tax liability.
TAX CONSEQUENCES OF CERTAIN INVESTMENTS
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT. We may acquire securities issued
with original issue discount, or OID. As a holder of those securities, we must
include in gross income the OID that accrues on them during the taxable year,
even if we receive no corresponding payment on them during the year. Because we
annually must distribute substantially all of our investment company taxable
income, including any OID, to satisfy the RIC distribution requirement and avoid
imposition of the excise tax as discussed above, we may be required in a
particular year to distribute as a dividend an amount that is greater than the
total amount of cash we actually receive. Those distributions will be made from
our cash assets or from the proceeds of sales of our portfolio securities, if
necessary. We may realize capital gains or losses from those sales, which would
increase or decrease our investment company taxable income and/or net capital
gain.
FOREIGN SECURITIES. Dividends and interest we receive, and gains we realize, on
our investments in foreign securities may be subject to income, withholding or
other taxes imposed by foreign countries and U.S. possessions that would reduce
the total return on these investments. Tax treaties between certain countries
and the United States may reduce or eliminate these taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors.
Although we have no present intention to do so, we may invest in the stock of
passive foreign investment companies ("PFICs"). A PFIC is any foreign
corporation (with certain exceptions) that, in general, meets either of the
following tests: (1) at least 75% of its gross income for the taxable year is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, if we hold stock
of a PFIC, we will be subject to federal income tax on a portion of any "excess
distribution" we receive on the stock or of any gain on our disposition of the
stock (collectively, "PFIC income"), plus interest thereon, even if we
distribute the PFIC income as a taxable dividend to our shareholders. The
balance of the PFIC income will be included in our investment company taxable
income and, accordingly, will not be taxable to us to the extent we distribute
that income to our shareholders.
-24-
If we invest in a PFIC and elect to treat the PFIC as a qualified electing fund
("QEF"), then in lieu of our incurring the foregoing tax and interest
obligation, we would be required to include in income each year our pro rata
share of the QEF's annual ordinary earnings and net capital gain - which we
would likely have to distribute to satisfy the RIC distribution requirement and
avoid imposition of the excise tax even if we did not in fact receive those
earnings and gain from the QEF. However, we will not be permitted to make a QEF
election with respect to an investment in a PFIC, unless the PFIC agrees to
provide us with information we need to comply with our tax filing obligations
under the QEF rules. As a result, a QEF election may not be available with
respect to an investment in a PFIC.
We may elect to "mark-to-market" any stock in a PFIC we own at the end of our
taxable year, provided the PFIC stock is "marketable" as defined under the PFIC
rules. "Marking-to-market," in this context, means including in ordinary income
for each taxable year the excess, if any, of the fair market value of the stock
over our adjusted basis therein as of the end of that year. Pursuant to this
election, we also may deduct (as an ordinary, not capital, loss) the excess, if
any, of our adjusted basis in the PFIC stock over the fair market value thereof
as of the taxable year-end, but only to the extent of any net mark-to-market
gains with respect to that stock included in our income for prior taxable years
under the election. Our adjusted basis in each PFIC's stock subject to the
election would be adjusted to reflect the amounts of income included and
deductions taken thereunder. We will likely have to distribute annually any
ordinary income resulting from marking PFIC stock to market in order to satisfy
the RIC distribution requirements and avoid imposition of the excise tax,
regardless of whether and to what extent we actually receive cash distributions
from the PFIC during that year. An investment in a PFIC may or may not consist
of stock that is "marketable", and therefore this election may not be available
with respect to an investment in a PFIC.
SECURITIES WITH UNCERTAIN TAX TREATMENT. Certain securities the Fund may
invest in are, or income from these securities is, subject to uncertain U.S.
federal income tax treatment or recharacterization by the IRS. If the Fund
encounters revised or recharacterized tax treatments, the timing or character
of income recognized by the Fund may be affected and may compel portfolio
changes that the Fund might not otherwise undertake to ensure compliance with
the tax rules applicable to RICs under the Code.
CERTAIN REAL ESTATE COMPANIES. Income that we derive from a real estate company
classified for federal tax purposes as a partnership (and not as a corporation
or real estate investment trust) will be treated as qualifying income under the
RIC income requirements only to the extent it is attributable to the
partnership's income items that would be qualifying income if realized directly
by us in the same manner as realized by the partnership. We will restrict our
investment in partnerships to maintain our qualification as a RIC.
NON-U.S. SHAREHOLDERS. The following discussion relates to the U.S. taxation
of a shareholder who is not a U.S. person (a "non-U.S. shareholder"), and
whose income from the Fund or the sale of shares of the Fund is not
effectively connected with a U.S. trade or business carried on by the
shareholder. Certain aspects of this discussion are modified by recent tax
law changes. See "American Jobs Creation Act" below.
Generally, the Fund's distributions of investment company taxable income,
including any dividends designated as qualified dividend income, will be
subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally
withheld from such distributions.
-25-
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will generally not be subject to
U.S. federal withholding tax unless the non-U.S. shareholder is a nonresident
alien individual and is physically present in the United States for more than
182 days during the taxable year and meets certain other requirements.
However, this withholding tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual
present in the United States for more than 182 days during the taxable year
is generally treated as a resident for U.S. income tax purposes; in that
case, he or she would generally be subject to U.S. federal income tax on his
or her worldwide income at the graduated rates applicable to U.S. citizens,
rather than the U.S. federal withholding tax. In the case of a non-U.S.
shareholder who is a nonresident alien individual, the Fund may be required
to backup withhold U.S. federal income tax on distributions of net capital
gain unless the non-U.S. shareholder certifies his or her non-U.S. status
under penalties of perjury or otherwise establishes an exemption.
Any gain that a non-U.S. shareholder realizes upon the sale or exchange of
our shares will ordinarily be exempt from U.S. federal income and withholding
tax unless (i) in the case of a shareholder who is a nonresident alien
individual, the gain is U.S. source income and such non-U.S. shareholder is
physically present in the United States for more than 182 days during the
taxable year and meets certain other requirements, or (ii) at any time during
the shorter of the period during which the non-U.S. shareholder held such
shares of the Fund and the five year period ending on the date of the
disposition of those shares, the Fund was a U.S. real property holding
corporation and the non-U.S. shareholder actually or constructively held more
than 5% of the shares of the same class of shares as the shares that were
disposed. In the case of clause (ii) of the proceeding sentence, the gain
would be taxed in the same manner as for a U.S. shareholder as discussed
above, a 10% U.S. federal withholding tax generally would be imposed on the
amount realized on the disposition of such shares, and the withheld amounts
would be credited against the non-U.S. shareholder's U.S. federal income tax
liability on such disposition.
A corporation is a U.S. real property holding corporation if the fair market
value of its U.S. real property interests equals or exceeds 50% of the fair
market value of such interests plus its interests in real property located
outside the United States plus any other assets used or held for use in a
business. In the case of the Fund, U.S. real property interests include
interests in stock of U.S. real property holding corporations (other than
stock of a domestically controlled REIT, holdings of 5% or less in the stock
of publicly traded U.S. real property holding corporations, or, for taxable
years beginning on or after January 1, 2005 but before January 1, 2008, stock
of a domestically controlled RIC) and certain participating debt securities.
While there can be no assurance in this regard, the Fund does not believe it
will ever be a U.S. real property holding corporation, nor does the Fund
believe it will ever be other than a domestically controlled RIC.
-26-
THE AMERICAN JOBS CREATION ACT OF 2004
DISTRIBUTIONS TO NON-U.S. SHAREHOLDERS. The American Jobs Creation Act of
2004 (the "Act") was signed into law on October 22, 2004. The Act modifies
the tax treatment of certain distributions from the Fund to shareholders who
are non-U.S. shareholders as described above. With certain exceptions, under
the Act, effective for taxable years of the Fund beginning after December 31,
2004 and before January 1, 2008, the Fund will not be required to withhold on
distributions properly designated as net short-term capital gains in excess
of net long-term capital losses or distributions of U.S. source interest
income that would not be subject to U.S. federal income tax if earned
directly by the non-U.S. shareholder.
In addition, the Act provides that a distribution attributable to the Fund's
gain from the sale of a U.S. real property interest (including the Fund's
gain from the sale of shares of certain REITs, RICs, and U.S. real property
holding corporations) will be subject to U.S. withholding when paid to a
non-U.S. shareholder. Such a distribution will also give rise to an
obligation on the part of the non-U.S. shareholder to file a U.S. federal
income tax return.
However, the Fund's gain from the sale of (i) shares of "domestically
controlled" REITs or RICs (generally, REITs or RICs that are less than 50%
owned by foreign persons) or (ii) shares representing, together with any
other shares owned by the Fund, 5% or less of a publicly traded class of
stock of any corporation (including REITs or RICs that are not domestically
controlled), will not be considered gain from a U.S. real property interest.
The Fund expects that substantially all of its investments in stock
potentially treated as a U.S. real property interest will qualify under
either or both of these exceptions to the Act's new withholding and tax
filing rules, but there can be no assurance in this regard.
REPORTABLE TRANSACTIONS. Generally, under the Act, penalties will be imposed
if (i) an individual recognizes a loss with respect to shares of the Fund of
$2 million or more, or (ii) a C corporation recognizes a loss with respect to
shares of the Fund of $10 million or more, and such shareholder does not file
IRS Form 8886 disclosing this loss. The penalty for failure to properly file
Form 8886 and properly disclose these "reportable transactions" is generally
$10,000 in the case of individuals, and $50,000 for other shareholders. We
believe that shareholders of a RIC such as the Fund are not excepted from
these reporting requirements, although future IRS guidance may extend such an
exception. The fact that a loss is reportable on Form 8886 does not affect
whether such loss is allowable for U.S. federal income tax purposes.
Prospective investors should consult their tax advisors concerning the
potential effect on them of these and other changes made by the Act.
PERFORMANCE INFORMATION
From time to time, we may state our total return, aggregate total return or
yield in advertisements or in reports and other communications to you. Our
performance will vary depending upon market conditions, the composition of our
portfolio and our operating expenses. Consequently, any historical performance
statement should not be considered a basis for predicting our performance in the
future. In addition, because our performance will fluctuate, it may not provide
a basis for comparing an investment in us with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing our performance with that of other investment companies also should
give consideration to the quality of the respective investment companies'
portfolio securities.
In reports or other communications to you or in advertising materials, we may
compare our performance with that of (i) other investment companies listed in
the rankings prepared by Lipper Analytical Services, Inc., publications such as
Barrons, Business Week, Forbes, Fortune, Institutional Investor, Kiplinger's
Personal Finance, Money, Morningstar Mutual Fund Values, The New York Times, The
Wall Street Journal and USA Today or other industry or financial publications or
(ii) the Standard and Poor's Index of 500 Stocks, the Dow Jones Industrial
Average, the NASDAQ Composite Index and other relevant indices and industry
publications. We may also compare the historical volatility of our portfolio to
the volatility of such indices during the same time periods. Volatility is a
generally accepted barometer of the
-27-
market risk associated with a portfolio of securities and is generally measured
in comparison to the stock market as a whole, the beta, or in absolute terms,
the standard deviation.
Returns are historical and include change in share price and reinvestment of
dividends and capital gains. An index generally is an unmanaged portfolio
intended to be representative of a particular industry or market segment. This
is not our performance and we will not seek to replicate any index. You cannot
invest directly in an index. There is no guarantee our performance will equal or
exceed any index performance.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP, with its principal place of business located at 200
Clarendon Street, Boston, Massachusetts 02116, serves as our independent
registered public accounting firm. Ernst & Young LLP provides audit services,
tax return preparation and assistance and consultation in connection with
review of our filings with the SEC. The statement of assets and liabilities
of the Fund as of October 18, 2004 appearing in the November 22, 2004 SAI
relating to our common shares offering, and incorporated by reference herein,
was audited by Ernst & Young LLP as set forth in their report thereon
appearing in the November 22, 2004 SAI, and was included in reliance upon
such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to
the shares offered hereby has been filed by us with the SEC, Washington, DC. The
prospectus and this SAI do not contain all the information set forth in the
Registration Statement, including the exhibits and schedules thereto. For
further information with respect to us and the shares offered hereby, reference
is made to the Registration Statement. Statements contained in the prospectus
and this SAI 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, DC, and copies of any part
thereof may be obtained from the Commission upon the payment of fees prescribed
by the Commission.
-28-
FINANCIAL STATEMENTS
RMR F.I.R.E. FUND
PORTFOLIO OF INVESTMENTS -DECEMBER 8, 2004 (UNAUDITED)
COMPANY SHARES VALUE
------- ------ -----
COMMON STOCKS -- 59.0%
FINANCIAL SERVICES - 31.7%
BANKS
AmSouth Bancorporation 25,400 $ 648,208
Citigroup Inc. 12,100 560,109
Comerica Inc. 12,200 734,196
FNB Corp. 23,500 492,795
Farmers Capital Banking Corp. 2,000 76,000
First Comwlth Financial Corp. 28,000 422,520
First Horizon National Ccorp. 7,400 320,716
Firstmerit Corp. 18,200 490,308
Hudson United Bancorp. 15,100 588,296
JPMorgan Chase & Co. 7,500 281,625
Keycorp 11,100 366,522
National City Corp. 27,400 991,332
PNC Financial Services Group Inc. 8,700 477,021
Regions Financial Corp. 13,000 453,960
Susquehanna Bancshares Inc. 8,200 205,820
Trustco Bank Corp. 23,400 316,368
----------
7,425,796
THRIFTS
Beverly Hills Bancorp 100 966
Capitol Federal Financial 9,500 326,895
Flagstar Bancorp Inc. 22,600 492,680
New York Communinty Bancorp Inc. 49,700 970,641
Washington Mutual Inc. 15,500 625,115
----------
2,416,297
OTHER FINANCIAL SERVICES COMPANIES
Deluxe Corp 10,400 409,864
Friedman Billings Ramsey Group 10,000 198,300
Istar Financial Inc. 9,000 401,850
MCG Capital Corp. 18,000 298,800
----------
1,308,814
----------
TOTAL FINANCIAL SERVICES - (COST $11,367,131) 11,150,907
----------
REAL ESTATE - 27.3%
APARTMENTS
AMLI Residential Properties Trust 7,000 227,990
Apartment Investment & Management Co. 6,200 228,780
BNP Residential Properties Inc. 20,800 314,496
Post Properties Inc. 9,000 311,850
United Dominion Realty Trust Inc. 12,400 290,656
----------
1,373,772
SEE NOTES TO FINANCIAL STATEMENTS AND NOTES TO PORTFOLIO OF INVESTMENTS.
F-1
COMPANY SHARES VALUE
------- -------- ----------
DIVERSIFIED
Bedford Property Investors Inc. 9,000 $ 250,110
Colonial Properties Trust 3,000 119,040
Commercial Net Lease Realty 30,000 619,500
Crescent Real Estate Equities Co. 30,000 568,500
Lexington Corporate Properties Trust 28,400 635,308
Liberty Property Trust 11,700 497,016
----------
2,689,474
HEALTH CARE
Health Care REIT Inc. 7,000 253,960
Healthcare Realty Trust 3,000 124,620
Nationwide Health Properties Inc. 13,000 299,390
Windrose Medical Properties Trust 5,000 71,500
----------
749,470
HOSPITALITY
Eagle Hospitality Properties Trust 26,500 255,725
Winston Hotels 2,700 29,970
----------
285,695
INDUSTRIAL
First Industrial Realty Trust 6,300 257,481
OFFICE
Arden Realty Inc. 2,000 73,640
Equity Office Properties Trust 20,050 580,046
Glenborough Realty Trust Inc. 10,000 215,400
Maguire Properties Inc. 11,700 311,688
Reckson Associates Realty Corp. 5,500 185,020
----------
1,365,794
RETAIL
Glimcher Realty Trust 15,000 412,350
Heritage Properties Investment Trust 10,900 355,122
Mills Corp. 1,600 95,360
New Plan Excel Realty Trust Inc. 10,900 299,314
----------
1,162,146
SELF-STORAGE
Sovran Self-Storage Inc. 1,200 51,924
U-Store-It Trust 16,300 279,708
----------
331,632
SPECIALITY
American Financial Realty Trust 42,800 652,272
U.S.Restaurant Properties Inc. 43,000 772,280
----------
1,424,552
----------
TOTAL REAL ESTATE - (COST $9,670,739) 9,640,016
----------
TOTAL COMMON SHARES -- (COST $21,037,870) 20,790,923
----------
SEE NOTES TO FINANCIAL STATEMENTS AND NOTES TO PORTFOLIO OF INVESTMENTS.
F-2
COMPANY SHARES VALUE
------- -------- ------------
PREFERRED STOCKS--23.5%
FINANCIAL SERVICES--4.5%
MFA Mortgage Investors Inc. 13,800 $ 341,550
RAIT Investment Trust 50,000 1,249,000
------------
TOTAL FINANCIAL SERVICES - (COST $1,589,720) 1,590,550
REAL ESTATE - 19.0%
APARTMENT
Apartment Investment & Management Co., Series U 32,500 815,750
Apartment Investment & Management Co., Series V 27,700 702,472
------------
1,518,222
DIVERSIFIED
Bedford Property Investors Inc., Series B 30,000 768,750
PS Business Parks Inc., Series H 20,000 496,800
------------
1,265,550
HEALTH CARE
Health Care REIT Inc., Series F 16,900 429,260
HOSPITALITY
Winston Hotels Inc., Series B 35,000 892,500
OFFICE
Alexandria Real Estate Equities Inc., Series C 31,600 841,508
RETAIL
Glimcher Realty Trust, Series F 26,500 708,875
Glimcher Realty Trust, Series G 15,900 411,651
Mills Corp, Series E 9,500 259,540
Taubman Centers Inc., Series G 15,000 390,000
------------
1,770,066
------------
TOTAL REAL ESTATE - (COST $6,709,068) 6,717,106
------------
TOTAL PREFERRED SHARES - (COST $8,298,788) 8,307,656
------------
TOTAL EQUITY INVESTMENTS - (COST $29,336,658) 29,098,579
Short-Term Investments - 48.6%
U.S. GOVERNMENT AGENCY SECURITY -- 36.8%
United States Treasury Bills 1.62%, 12/09/2004 (cost
$13,000,000) 13,000,000
OTHER INVESTMENT COMPANIES - 3.4%
SSgA Money Market Fund, 1.6161%* (cost $1,198,050) 1,198,050
COMMERCIAL PAPER - 8.4%
State Street Corp., 1.6101%, 12/9/2004 (cost $1,289,000) 1,289,000
San Paolo U.S. Finance Company, 1.6101%, 12/9/2004 (cost
$1,700,000) 1,700,000
------------
2,989,000
------------
TOTAL SHORT TERM INVESTMENTS - (COST $17,187,050) 17,187,050
Total Investments -131.1% (cost $46,523,708) 46,285,629
Other assets less liabilities including net payable for
securities transactions entered but not settled - (31.1%) (10,966,742)
------------
Net assets applicable to shareholders -- 100% $ 35,318,887
============
* Rate reflects 7 day yield as of December 8, 2004
SEE NOTES TO FINANCIAL STATEMENTS AND NOTES TO PORTFOLIO OF INVESTMENTS.
F-3
RMR F.I.R.E. FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
December 8, 2004 (unaudited)
ASSETS
Investment in securities, at value (cost $46,523,708) $ 46,285,629
Other assets 1,157
------------
Total assets 46,286,786
------------
LIABILITIES
Payable for investment securities purchased 10,854,344
Advisory fees payable 9,333
Accrued expenses and other liabilities 104,222
------------
Total liabilities 10,967,899
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $ 35,318,887
============
COMPOSITION OF NET ASSETS
Common shares, $.001 par value per share; unlimited number
of shares authorized, 1,484,000 shares issued and
outstanding $ 1,484
Additional paid-in-capital 35,594,516
Cumulative net investment loss (39,034)
Net unrealized gain/(loss) on investments (238,079)
------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $ 35,318,887
============
NET ASSET VALUE PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
(based on 1,484,000 common shares outstanding) $ 23.80
============
SEE NOTES TO FINANCIAL STATEMENTS
F-4
RMR F.I.R.E. FUND
FINANCIAL STATEMENTS - CONTINUED
Statement of Operations
For the period November 22, 2004(a) to December 8, 2004 (unaudited)
INVESTMENT INCOME
Interest $ 13,121
---------
13,121
---------
EXPENSES
Professional services 21,600
Advisory 13,221
Administrative 6,122
Custodian 4,400
Shareholder reporting 2,500
Transfer agent 1,800
Trustee fees 1,100
Other 5,300
---------
Total expenses 56,043
Less: expenses waived by the Advisor (3,888)
---------
Net expenses 52,155
---------
Net investment loss (39,034)
---------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENT
TRANSACTIONS
Net realized gain on investment transactions -
Net unrealized loss on investment transactions (238,079)
---------
Realized and unrealized loss on investment transactions (238,079)
---------
Net decrease in net assets applicable to common
shareholders resulting from operations $(277,113)
=========
(a) COMMENCEMENT OF OPERATIONS.
SEE NOTES TO FINANCIAL STATEMENTS
F-5
RMR F.I.R.E. FUND
FINANCIAL STATEMENTS - CONTINUED
Statement of Changes in Net Assets
For the period November 22, 2004(a) to December 8, 2004 (unaudited)
Increase (decrease) in net assets resulting from operations
Net investment loss $ (39,034)
Net unrealized loss on investment transactions (238,079)
------------
Net decrease in net assets applicable to common
shareholders resulting from operations (277,113)
------------
CAPITAL SHARES TRANSACTIONS
Net proceeds from sale of common shares 35,496,000
------------
Total increase in net assets 35,218,887
Net assets applicable to common shareholders
Beginning of period 100,000
------------
End of period $ 35,318,887
============
COMMON SHARES ISSUED AND REPURCHASED
Shares outstanding, beginning of period 4,000
Shares sold 1,480,000
------------
1,484,000
============
(a) COMMENCEMENT OF OPERATIONS.
SEE NOTES TO FINANCIAL STATEMENTS
F-6
RMR F.I.R.E. FUND
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
December 8, 2004
(1) ORGANIZATION
RMR F.I.R.E. Fund (the "Fund") was organized as a Massachusetts business
trust on August 6, 2004, and is registered under the Investment Company Act
of 1940, as amended, as a non-diversified closed-end management investment
company. The Fund had no operations until November 22, 2004, other than
matters relating to the Fund's establishment, registration of the Fund's
common shares under the Securities Act of 1933, and the sale of a total of
4,000 Fund common shares for $100,000 to RMR Advisors, Inc., or RMR Advisors.
On November 22, 2004, the Fund agreed to sell 1,480,000 common shares in an
initial public offering including 200,000 shares sold to affiliates of RMR
Advisors. Proceeds to the Fund of $35,496,000 after deducting underwriting
commissions and offering expenses were received on November 29, 2004.
(2) INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements have been prepared without
audit. The Fund believes the disclosures made are adequate to make the
information presented not misleading. In the opinion of the Fund's
management, all adjustments, which include only normal recurring adjustments
considered necessary for a fair presentation, have been included. Because the
Fund recently commenced operations, the accompanying consolidated financial
statements cover only a short period of operations during which a substantial
portion of the Fund's assets were held in temporary investments pending
investment in accordance with the Fund's investment objectives and policies.
Accordingly, the Fund's operating results for this interim period are not
necessarily indicative of the results that may be expected in the future.
(3) USE OF ESTIMATES
Preparation of these financial statements in conformity with accounting
principles generally accepted in the United States requires the Fund's
management to make estimates and assumptions that may affect the amounts
reported in the financial statements and related notes. The actual results
could differ from these estimates.
(4) PORTFOLIO VALUATION
Investment securities of the Fund are valued at the latest sales price where
that price is readily available on that day; securities for which no sales
were reported on that day, unless otherwise noted, are valued at the last
available bid price on that day. Securities traded primarily on the NASDAQ
Stock Market ("NASDAQ") are normally valued by the Fund at the NASDAQ
Official Closing Price ("NOCP") provided by NASDAQ each business day. The
NOCP is the most recently reported price as of 4:00:06 p.m., Eastern time,
unless that price is outside the range of the "inside" bid and asked prices
(i.e., the bid and asked prices that dealers quote to each other when trading
for their own accounts); in that case, NASDAQ will adjust the price to equal
the inside bid or asked price, whichever is closer. Because of delays in
reporting trades,
F-7
the NOCP may not be based on the price of the last trade to occur before the
market closes. The Fund values all other securities by a method the Trustees
of the Fund believe accurately reflects fair value. Numerous factors may be
considered when determining fair value of a security, including available
analyst, media or other reports, trading in futures or ADRs and whether the
issuer of the security being fair valued has other securities outstanding.
Short-term debt securities with less than 60 days until maturity may be
valued at cost, which when combined with interest earned, approximates market
value.
(5) SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded on a trade date basis. Dividend income
is recorded on the ex-dividend date. Non-cash dividends included in dividend
income, if any, are recorded at the fair market value of the securities
received. Interest income, including accretion of original issue discount,
where applicable, and accretion of discount on short-term investments, is
recorded on the accrual basis. Realized gains and losses from securities
transactions are recorded on the basis of identified cost.
During the period ended December 8, 2004, there were purchases and sales
transactions (excluding short-term securities) of $29,336,658 and zero,
respectively. Brokerage commissions on securities transactions amounted to
$23,905 during the same period.
(6) ORGANIZATION EXPENSES AND COMMON OFFERING COSTS
RMR Advisors paid all the organizational expenses and offering costs (other
than the sales load) of the Fund's initial public offering of common shares
which exceeded $0.05 per common share sold to non-affliates. The total amount
incurred by RMR Advisors was approximately by $545,000. The Fund incurred
offering costs of $64,000 which were charged as a reduction of paid-in
capital.
(7) USE OF LEVERAGE
Subject to market conditions, the Fund intends to offer Preferred Shares
representing approximately 35% of the Fund's capital after issuance. The Fund
may issue Preferred Shares so long as after their issuance the liquidation
value of the Preferred Shares, plus the aggregate amount of senior securities
representing indebtedness, does not exceed 50% of the Fund's capital. The
Fund intends to invest the net proceeds of the Preferred Share offering in a
manner consistent with its investment objectives and policies.
(8) FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify in the future as a "regulated
investment company" and to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, such that it generally will not be
subject to federal income tax.
F-8
(9) DISTRIBUTABLE EARNINGS
The Fund earns income, net of expense, daily on its investments. The Fund
expects to make distributions from net investment income on a monthly basis.
Distributions from net realized capital gains, if any, are normally made in
December. Income dividends and capital gain distributions to shareholders are
recorded on the ex-dividend date. To the extent the Fund's net realized
capital gains, if any, can be offset by capital loss carry-forwards, it is
the policy of the Fund not to distribute such gains.
The Fund distinguishes between dividends on a tax basis and a financial
reporting basis. Only distributions in excess of accumulated tax basis
earnings and profits are reported in the financial statements as a tax return
of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes are classified
as distributions in excess of net investment income or accumulated net
realized gains in the components of net assets on the Statement of Assets and
Liabilities.
As of December 8, 2004, the Fund had not declared or paid distributions to
common shareholders. The Fund expects it will begin to make regular
distributions to its common shareholders in early 2005. The classification of
income for federal income tax purposes of the Fund is dependent upon the
classification of the income the Fund receives from its investments. Because
the issuers of a substantial portion of the securities the Fund expects to
purchase will not make their classifications until subsequent to year end
2004, and because the Fund has not yet closed its taxable year in 2004 and
does not at this time know the magnitude or timing of its securities
transactions prior to year end 2004, it is not possible at this time to
predict the amount or the components of distributable earnings on a federal
income tax basis for 2004. Although subject to adjustment, principally due to
the extent of distributions characterized by the issuers of the Fund's
investments as returns of capital during 2004, the cost of investments (other
than short term investments for which income tax basis will generally always
equal the carrying value of these investments) for federal income tax
purposes, gross unrealized appreciation and unrealized depreciation as of
December 8, 2004, are as follows:
Cost $ 29,336,658
==============
Gross unrealized appreciation $ 86,721
Gross unrealized depreciation (324,800)
--------------
Net unrealized appreciation/(depreciation) $ (238,079)
===============
(10) ADVISORY AND ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH
AFFILIATES
The Fund has an advisory agreement with RMR Advisors to provide the Fund with a
continuous investment program, to make day-to-day investment decisions and to
generally manage the business affairs of the Fund in accordance with its
investment objectives and policies. Pursuant to the Agreement, RMR Advisors is
compensated at an annual rate of 0.85% of the Fund's average daily managed
assets. Managed assets means the total assets of the Fund less liabilities
F-9
other than leverage. For purposes of calculating managed assets, the
liquidation preference of preferred shares or aggregate indebtedness
outstanding are considered to be leverage.
RMR Advisors has contractually agreed to waive a portion of its annual fee
equal to 0.25% of the Fund's average daily managed assets, for the first five
years of the Fund's operation after the initial public offering.
RMR Advisors, and not the Fund, has agreed to pay the lead underwriter of the
Fund's initial public offering an annual fee equal to 0.15% of the Fund's
managed assets. This fee will be paid quarterly in arrears during the term of
RMR Advisor's advisory agreement and is paid by the Advisor, not the Fund.
The aggregate fees paid during the term of the contract plus reimbursement of
legal expenses of the underwriters will not exceed 4.5% of the total price of
the common shares sold to non-affiliates in the initial public offering.
RMR Advisors also performs administrative functions for the Fund pursuant to
an administration agreement with the Fund. RMR Advisors has entered into a
sub-administration agreement with State Street Bank and Trust Company.
No director, officer or employee of the investment advisor, or any affiliate
of that entity, receives any compensation from the Fund for serving as an
officer or Trustee of the Fund. The Fund pays each Trustee (who is not a
director, officer or employee of the investment advisor) (a "Disinterested
Trustee") an annual fee of $2,500 plus $250 for each Board of Trustees'
meeting or committee meeting attended, other than meetings held on days on
which there is also a Board of Trustee's meeting or another committee meeting
for which they are paid. In addition, the Fund reimburses all Trustees for
travel and out-of-pocket expenses incurred in connection with attending Board
or committee meetings.
In connection with the Fund's initial public offering, affiliates of two Fund
Trustees who are the beneficial owners of RMR Advisors purchased an aggregate
of 200,000 Fund common shares (13.5% of the common shares outstanding) at the
public offering price of $25 per share. The Fund paid no sales load or
offering expenses on these shares.
F-10
RMR F.I.R.E. FUND
FINANCIAL HIGHLIGHTS
Selected data for a common share outstanding throughout the period.
FOR THE PERIOD
NOVEMBER 22, 2004*
THROUGH DECEMBER 8, 2004
------------------------
(UNAUDITED)
PER COMMON SHARE OPERATING PERFORMANCE
Net asset value, beginning of period** $ 24.03
LOSS FROM INVESTMENT OPERATIONS
Net investment loss (0.03)
Net unrealized loss on investments (0.16)
--------
Total from investment operations (0.19)
Offering costs charged to capital (0.04)
--------
Net asset value, end of period $ 23.80
--------
Market value, end of period $ 24.00
Total investment return based on NAV*** (0.9%)
Total investment return based on market value*** (4.0%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 35,319
Ratio of expenses to average net assets (before expense
waiver)**** 3.6%
Ratio of expenses to average net assets (net of expense
waiver)**** 3.4%
Ratio of net investment loss (net of expense waiver) to
average net assets**** (2.5%)
Portfolio turnover rate 0.0%
*Commencement of operations.
**Net asset value at November 22, 2004, reflects the deduction of the average
sales load of $0.97 per share paid by the holders of common shares from the
$25.00 offering price. We paid a sales load of $1.125 per share on 1,280,000
shares sold to the public and no sales load on 200,000 shares sold to
affiliates of our Advisor for $25.00 per share.
***Total investment return on net asset value is calculated assuming a
purchase at the offering price of $25.00 per share less the average sales
load of $0.97 per share paid by common shareholders and a sale at the net
asset value on December 8, 2004. Total investment return on market value is
calculated assuming a purchase at the offering price of $25.00 per share and
a sale at the current market price on December 8, 2004. Total investment
return on net asset value and total investment return on market value are not
computed on an annualized basis. Results represent past performance and do
not guarantee future results.
****Annualized. These ratios do not reflect the effect of costs of Preferred
Shares, including payments of distributions to Preferred Shareholders,
because there were no Preferred Shares outstanding during the period shown.
F-11
Appendix A
ARTICLE X
PREFERRED SHARES OF BENEFICIAL INTEREST
10.1 STATEMENT CREATING ONE SERIES OF PREFERRED SHARES.
DESIGNATION
SERIES W: 800 preferred shares, par value $.0001 per share,
liquidation preference $25,000 per share plus an amount equal to accumulated
but unpaid distributions thereon (whether or not earned or declared), are
hereby designated auction preferred shares, Series W (the "Series" or
"Preferred Shares"). Each share of the Series shall have an Applicable Rate
for its Initial Rate Period determined pursuant to a resolution of the Board
of Trustees and an initial Distribution Payment Date of December 23, 2004.
Preferred Shares may be marketed under the name "auction preferred
shares" or "Preferred Shares" or such other name as the Board of Trustees may
approve from time to time.
A-1
Each Preferred Share shall have such other preferences, rights, voting
powers, restrictions, limitations as to distributions, qualifications and terms
and conditions of redemption, in addition to those required by applicable law,
as are set forth in Parts I and II of Article X of these Bylaws. Subject to the
provisions of Section 5(c) of Part I hereof, the Board of Trustees of the Trust
may, in the future, reclassify additional shares of the Trust's capital shares
as Preferred Shares, with the same preferences, rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms and
conditions of redemption and other terms herein described, except that the
Applicable Rate for the Initial Rate Period, its initial Payment Date and any
other changes in the terms herein set forth shall be as set forth in the Bylaws
reclassifying such shares as Preferred Shares.
Capitalized terms used in Parts I and II of Article X of these Bylaws
shall have the meanings (with the terms defined in the singular having
comparable meanings when used in the plural and vice versa) provided in the
"Definitions" section immediately following, unless the context otherwise
requires.
DEFINITIONS
As used in Parts I and II of Article X of these Bylaws, 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) "APPROVED PRICE" means the "fair value" as determined by the Trust
in accordance with the valuation procedures adopted from time to time by
the Board of Trustees of the Trust and for which the Trust receives a
mark-to-market price (which, for the purpose of clarity, shall not mean
Market Value) from an independent source at least semi-annually.
(b) "AUDITOR'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of these Bylaws.
(c) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled
by, in control of or under common control with the Trust; PROVIDED,
HOWEVER, that for purposes of these Bylaws no Broker-Dealer controlled
by, in control of or under common control with the Trust 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 a Trustee of
the Trust, be deemed to be an Affiliate solely because such trustee,
director or executive officer is also a Trustee of the Trust.
(d) "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(e) "ALL HOLD RATE" shall mean 80% of the Reference Rate.
(f) "ANNUAL VALUATION DATE" shall mean the last Business Day of December
of each year.
(g) "APPLICABLE PERCENTAGE" shall mean the percentage determined based
on the lower of the credit ratings assigned to the Preferred Shares on
such date by Moody's and Fitch as follows:
A-2
Credit Ratings
-------------------------------------------- Applicable
Moody's Fitch Percentage
------------------ ------------------- ----------
Aa3 or higher AA- or higher 150%
A3 to A1 A- to A+ 200%
Baa3 to Baa1 BBB- to BBB+ 225%
Ba 1 and lower BB+ and lower 275%
For purposes of this definition, the "prevailing rating" of the
Preferred Shares shall be (i) Aaa/AAA if such shares have a rating of
Aaa by Moody's and AAA by Fitch and the equivalent of such ratings by
such agencies or a substitute rating agency or substitute rating
agencies; (ii) if not Aaa/AAA, then Aa3/AA- if such shares have a rating
of Aa3 or better by Moody's and AA- or better by Fitch or the equivalent
of such rating by such agencies or a substitute rating agency or
substitute rating agencies, (iii) if not Aa3/AA- or higher, then A3/A-
if such shares have a rating of A3 or better by Moody's and A- or better
by Fitch or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies, (iv) if not
A3/A- or higher, then Baa3/BBB- if such shares have a rating of Baa3 or
better by Moody's and BBB- or better by Fitch or the equivalent of such
ratings by such agencies or substitute rating agency or substitute
rating agencies, (v) if not Baa3/BBB- or higher, then below Baa3/BBB-.
The Applicable Percentage as so determined shall be further
subject to upward but not downward adjustment in the discretion of the
Board of Trustees of the Trust after consultation with the
Broker-Dealers, provided that immediately following any such increase
the Trust would be in compliance with the Preferred Shares Basic
Maintenance Amount. The Trust shall take all reasonable action necessary
to enable Moody's and Fitch to provide a rating for the Preferred
Shares. If Moody's or Fitch shall not make such a rating available, the
Trust shall select another rating agency to act as a substitute rating
agency. Notwithstanding the foregoing, the Trust shall not be required
to have more than one rating agency provide a rating for the Preferred
Shares.
(h) "APPLICABLE RATE" shall mean, for each Rate Period (i) if Sufficient
Clearing Orders exist for the Auction in respect thereof, the Winning
Bid Rate, (ii) if Sufficient Clearing Orders do not exist for the
Auction in respect thereof, the Maximum Rate, and (iii) in the case of
any Distribution Period if all the Preferred Shares are the subject of
Submitted Hold Orders for the Auction in respect thereof, the All Hold
Rate.
(i) "APPLICABLE SPREAD" means the spread determined based on the lower
of the credit ratings assigned to Preferred Shares on such date by
Moody's (if Moody's is then rating the Preferred Shares) and Fitch (if
Fitch is then rating the Preferred Shares) as follows:
Credit Ratings
-------------------------------------------- Applicable
Moody's Fitch Spread
------------------ ------------------- ----------
Aa3 or higher AA- or higher 150 bps
A3 to A1 A- to A+ 200 bps
Baa3 to Baa1 BBB- to BBB+ 225 bps
Ba 1 and lower BB+ and lower 275 bps
For purposes of this definition, the "prevailing rating" of the
Preferred Shares shall be (i) Aaa/AAA if such shares have a rating of
Aaa by Moody's and AAA by Fitch or the equivalent of such ratings by
such agencies or a substitute rating agency or substitute rating
agencies; (ii) if not Aaa/AAA, then Aa3/AA- if such shares have a rating
of Aa3 or better by Moody's and AA- or better by Fitch or the equivalent
of such rating by such agencies or a substitute rating agency or
substitute rating agencies, (iii) if not Aa3/AA- or higher, then A3/A-
if such shares have a rating
A-3
of A3 or better by Moody's and A- or better by Fitch or the equivalent
of such ratings by such agencies or a substitute rating agency or
substitute rating agencies, (iv) if not A3/A- or higher, then Baa3/BBB-
if such shares have a rating of Baa3 or better by Moody's and BBB- or
better by Fitch or the equivalent of such ratings by such agencies or
substitute rating agency or substitute rating agencies, (v) if not
Baa3/BBB- or higher, then below Baa3/BBB-.
The Applicable Spread as so determined shall be further 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 Trust would be in compliance
with the Preferred Shares Basic Maintenance Amount.
(j) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(k) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the
Trust and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for purposes of
determining the Applicable Rate for the Preferred Shares so long as the
Applicable Rate for such Preferred Shares is to be based on the results
of an Auction.
(l) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Trustees in accordance with Section 6 of Part
II of Article X of these Bylaws.
(m) "AUCTION DATE" with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(n) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of Article X of these Bylaws.
(o) "AVAILABLE PREFERRED SHARES" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of Article X of these Bylaws.
(p) "BANK LOANS" means direct purchases of, assignments of,
participations in and other interests in (a) any bank loan or (b) any
loan made by an investment bank, investment fund or other financial
institution, provided that such loan under this clause (b) is similar to
those typically made, syndicated, purchased or participated by a
commercial bank or institutional loan investor in the ordinary course of
business.
(q) "BENEFICIAL OWNER" with respect to shares of Preferred Shares, means
a customer (including broker dealers that are not Broker Dealers) of a
Broker-Dealer who is listed on the records of that Broker-Dealer (or, if
applicable, the Auction Agent) as a holder of Preferred Shares.
(r) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of Article X of these Bylaws.
(s) "BIDDER" and "BIDDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of Article X of these Bylaws;
PROVIDED, HOWEVER, that neither the Trust nor any affiliate thereof
shall be permitted to be a Bidder in an Auction, except that any
Broker-Dealer that is an affiliate of the Trust may be a Bidder in an
Auction, but only if the Orders placed by such Broker-Dealer are not for
its own account.
A-4
(t) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Trust or
any duly authorized committee thereof.
(u) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of a
Broker-Dealer in Part II of Article X of these Bylaws, that is a member
of, or a participant in, the Securities Depository or is an affiliate of
such member or participant, has been selected by the Trust and has
entered into a Broker-Dealer Agreement that remains effective.
(v) "BROKER-DEALER AGREEMENT" shall mean an agreement between the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer
agrees to follow the procedures specified in Part II of Article X of
these Bylaws.
(w) "BUSINESS DAY" shall mean a day on which the New York Stock Exchange
is open for trading and which is neither a Saturday, Sunday nor any
other day on which banks in New York, New York, are authorized or
obligated by law to close.
(x) "CLOSING TRANSACTION" shall have the meaning specified in paragraph
(a)(i)(A) of Section 13 of Part I of Article X of these Bylaws.
(y) "CODE" means the Internal Revenue Code of 1986, as amended.
(z) "COMMON SHARES" shall mean the outstanding common shares, par value
$.001 per share, of the Trust.
(aa) "CURE DATE" shall mean the Preferred Shares Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be.
(bb) "DATE OF ORIGINAL ISSUE" with respect to the Preferred Shares,
shall mean the date on which the Trust initially issued such shares.
(cc) "DECLARATION OF TRUST" shall have the meaning specified on the
first page of these Bylaws.
(dd) "DEPOSIT SECURITIES" shall mean cash and any obligations or
securities, including Short Term Money Market Instruments that are
Eligible Assets, rated at least AAA or F-1 by Fitch, P-1, MIG-1 or
VMIG-1 by Moody's or AAA or A-1 by S&P.
(ee) "DISCOUNTED VALUE" as of any Valuation Date, shall mean, (i) with
respect to a Fitch Eligible Asset or Moody's Eligible Asset that is not
currently callable or prepayable as of such Valuation Date at the option
of the issuer thereof, the quotient of the Market Value thereof divided
by the Fitch Discount Factor for a Fitch Eligible Asset or Moody's
Discount Factor for a Moody's Eligible Asset, (ii) with respect to a
Fitch Eligible Asset or Moody's Eligible Asset that is currently
callable as of such Valuation Date at the option of the issuer thereof,
the quotient as calculated above or the call price, plus accrued
interest or distributions, as applicable, whichever is lower, and (iii)
with respect to a Fitch Eligible Asset or Moody's Eligible Asset that is
prepayable, the quotient as calculated above or the par value, plus
accrued interest or distribution, as applicable, whichever is lower.
A-5
(ff) "DISTRIBUTION PAYMENT DATE" with respect to the Preferred Shares,
shall mean any date on which distributions are payable on the Preferred
Shares pursuant to the provisions of paragraph (d) of Section 2 of Part
I of Article X of these Bylaws.
(gg) "DISTRIBUTION PERIOD," with respect to the Preferred Shares, shall
mean the period from and including the Date of Original Issue of shares
of a series of Preferred Shares to but excluding the initial
Distribution Payment Date for shares of the Series and thereafter any
period from and including one Distribution Payment Date for shares of
the Series to but excluding the next succeeding Distribution Payment
Date for shares of the Series.
(hh) "EXISTING HOLDER," with respect to shares of Preferred Shares,
shall mean a Broker-Dealer (or any such other Person as may be permitted
by the Trust) that is listed on the records of the Auction Agent as a
holder of shares of the Series.
(ii) "EXPOSURE PERIOD" shall mean the period commencing on a given
Valuation Date and ending 41 days thereafter for Fitch and 49 days
thereafter for Moody's.
(jj) "FAILURE TO DEPOSIT," with respect to shares of a series of
Preferred Shares, shall mean a failure by the Trust to pay to the
Auction Agent, not later than 12:00 noon, Eastern time, (A) on any
Distribution Payment Date for shares of the Series, in funds available
on such Distribution Payment Date in New York, New York, the full amount
of any distribution (whether or not earned or declared) to be paid on
such Distribution Payment Date on any share of the Series or (B) on any
redemption date in funds available on such redemption date for shares of
the Series in New York, New York, the Redemption Price to be paid on
such redemption date for any share of the Series after notice of
redemption is mailed pursuant to paragraph (c) of Section 11 of Part I
of Article X of these Bylaws; PROVIDED, HOWEVER, that the foregoing
clause (B) shall not apply to the Trust's failure to pay the Redemption
Price in respect of Preferred Shares when the related Notice of
Redemption provides that redemption of such shares is subject to one or
more conditions precedent and any such condition precedent shall not
have been satisfied at the time or times and in the manner specified in
such Notice of Redemption.
(kk) "FITCH" means Fitch Ratings and its successors.
(ll) "FITCH DISCOUNT FACTOR" means, for purposes of determining the
Discounted Value of any Fitch Eligible Asset, the percentage determined
as follows. The Fitch Discount Factor for any Fitch Eligible Asset other
than the securities set forth below will be the percentage provided in
writing by Fitch.
(i) Municipal Obligations: the Fitch Discount Factor for Municipal
Obligations is the percentage determined by reference to the rating
on such asset and the shortest Exposure Period set forth opposite
such rating that is the same length as or is longer than the
Exposure Period, in accordance with the table set forth below.
RATING CATEGORY
Exposure Period AAA* AA* A* BBB* F1** Unrated***
--------------- --- -- - --- -- -------
7 weeks 151% 159% 166% 173% 136% 225%
8 weeks or less but
greater than 7 weeks 154% 161% 168% 176% 137% 231%
9 weeks or less but
greater than 8 weeks 158% 163% 170% 177% 138% 240%
A-6
----------
*Fitch rating (or, if not rated by Fitch, see the definition of "Fitch
Eligible Asset" below).
**Municipal Obligations rated F1 by Fitch (or, if not rated by Fitch, see
the definition of "Fitch Eligible Asset" below), which do not mature or
have a demand feature at par exercisable in 30 days and which do not have a
long-term rating.
***Includes Municipal Obligations rated less than BBB by Fitch (or, if not
rated by Fitch, see the definition of "Fitch Eligible Asset" below) and
unrated securities.
Notwithstanding the foregoing, (i) the Fitch Discount Factor for
short-term Municipal Obligations will be 115%, so long as such
Municipal Obligations are rated at least F2 by Fitch (or, if not
rated by Fitch, rated MIG-1, VMIG-1 or P-1 by Moody's or at least
A-1+ or SP-1+ by S&P) and mature or have a demand feature at par
exercisable in 30 days or less, and (ii) no Fitch Discount Factor
will be applied to cash or to Receivables for Municipal Obligations
Sold.
(ii) Corporate Debt Securities: the Fitch Discount Factor for
corporate debt securities is the percentage determined by reference
to the rating on such asset with reference to the remaining term to
maturity of such asset, in accordance with the table set forth
below.
FITCH DISCOUNT FACTORS FOR CORPORATE DEBT SECURITIES INCLUDING NON-INVESTMENT
GRADE BONDS
Terms to Maturity AAA AA A BBB BB Unrated(1)
----------------- --- -- - --- -- ----------
1 year or less 106% 108% 110% 112% 130% 152%
2 years or less (but longer
than 1 year) 106% 108% 110% 112% 130% 152%
3 years or less (but longer
than 2 years) 106% 108% 110% 112% 130% 152%
4 years or less (but longer
than 3 years) 111% 113% 115% 117% 134% 152%
5 years or less (but longer
than 4 years) 111% 113% 115% 117% 134% 152%
7 years or less (but longer
than 5 years) 114% 116% 118% 120% 136% 152%
10 years or less (but longer
than 7 years) 116% 118% 120% 122% 137% 152%
15 years or less (but longer
than 10 years) 120% 122% 124% 124% 139% 152%
30 years or less (but longer
than 15 years) 124% 127% 129% 129% 145% 152%
Greater than 30 years 124% 127% 129% 129% 145% 152%
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two other
Rating Agencies will be used to determine the Fitch Discount Factor (e.g., where
the S&P rating is A and the Moody's rating is Baa, a Fitch rating of BBB will be
A-7
used). If a security is not rated by Fitch but is rated by only one other Rating
Agency, then the rating on the security from the other Rating Agency will be
used to determine the Fitch Discount Factor (e.g., where the only rating on a
security is an S&P rating of AAA, a Fitch rating of AAA will be used, and where
the only rating on a security is a Moody's rating of Ba, a Fitch rating of BB
will be used). If a security is either not rated by any Rating Agency or is
rated below BB, the Trust will use the percent set forth under "Unrated" in the
table above.
The Fitch Discount Factors presented in the immediately preceding
table apply to corporate debt securities that are performing and
have a Market Value determined by a Pricing Service of an Approved
Price. The Fitch Discount Factor noted in the table above for a debt
security rated B by Fitch shall apply to any non-performing debt
security with a price equal to or greater than 90% of par. The
Fitch Discount Factor noted in the table above for a debt security
rated below B by Fitch shall apply to any non-performing debt
security with a price less than 90% of par but equal to or greater
than 20% of par. If a debt security does not have a Market Value
determined by a Pricing Service or an Approved Price, a rating two
rating categories below the actual rating on the debt security will
be used (e.g., where the actual rating is A-, the rating for debt
securities rated BB- will be used). The Fitch Discount Factor for a
debt security issued by a limited partnership that is not a Rule
144A Security shall be the Discount Factor determined in accordance
with the table set forth above multiplied by 105%.
The Fitch Discount Factors presented in the immediately preceding
table will also apply to corporate obligations backed by a
guarantee, a letter of credit or insurance issued by a third party.
If the third-party credit rating is the basis for the rating on the
obligation, then the rating on the third party will be used to
determine the Fitch Discount Factor in the table.
(iii) Common stock and warrants: The Fitch Discount Factor applied
to common stock will be:
Large-cap stocks: 200%
Mid-cap stocks: 233%
Small-cap stocks: 286%
Others: 370%
Small-cap stocks refer to stocks with a market capitalization
between $300 million to $2 billion. Mid-cap stocks refer to
stocks with a market capitalization between $2 billion to $10
billion. Large-cap stocks are companies having a market
capitalization greater than $10 billion.
(iv) Preferred stock: The Fitch Discount Factor applied to preferred
stock is the percentage determined by reference to the rating in
accordance with the table set forth below.
A-8
DISCOUNT
PREFERRED STOCK (1) FACTOR
------------------- --------
AAA 130%
AA 133%
A 135%
BBB 139%
BB 154%
Not rated or below BB 161%
Investment grade Dividends Received Deduction ("DRD") 164%
Not rated or below investment grade DRD 200%
(1) If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two
other Rating Agencies will be used to determine the Fitch Discount
Factor (e.g., where the S&P rating is A and the Moody's rating is Baa, a
Fitch rating of BBB will be used). If a security is not rated by Fitch
but is rated by only one other Rating Agency, then the rating on the
security from the other Rating Agency will be used to determine the
Fitch Discount Factor (e.g., where the only rating on a security is an
S&P rating of AAA, a Fitch rating of AAA will be used, and where the
only rating on a security is a Moody's rating of Ba, a Fitch rating of
BB will be used). If a security is either not rated by any Rating Agency
or is rated below BB, the Trust will use the percent set forth under
"Not rated or below BB" in the table above.
(v) Convertible securities: The Fitch Discount Factor applied to
convertible securities is (A) 200% for investment grade convertibles
and (B) 222% for below investment grade convertibles so long as such
convertible debt securities have neither (x) conversion premiums
greater than 100% nor (y) have a yield to maturity or yield to worse
of greater than 15% above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt securities
which have conversion premiums of greater than 100% is (A) 152% for
investment grade convertibles and (B) 179% for below investment
grade convertibles so long as such convertible debt securities do
not have a yield to maturity or yield to worse of greater than 15%
above the relevant Treasury curve.
The Fitch Discount Factor applied to convertible debt securities
which have a yield to maturity or yield to worse of greater than 15%
above the relevant Treasury curve is 370%.
If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two
other Rating Agencies will be used to determine the Fitch Discount
Factor (e.g., where the S&P rating is A and the Moody's rating is
Baa, a Fitch rating of BBB will be used). If a security is not rated
by Fitch but is rated by only one other Rating Agency, then the
rating on the security from the other Rating Agency will be used to
determine the Fitch Discount Factor (e.g., where the only rating on
a security is an S&P rating of AAA, a Fitch rating of AAA will be
used, and where the only rating on a security is a Moody's rating of
Ba, a Fitch rating of BB will be used). If a security is not rated
by any Rating Agency, the Trust will treat the security as if it
were below investment grade.
A-9
(vi) U.S. Government Securities:
DISCOUNT
TIME REMAINING TO MATURITY FACTOR
-------------------------- --------
1 year or less 101.5%
2 years or less (but longer than 1 year) 103%
3 years or less (but longer than 2 years) 105%
4 years or less (but longer than 3 years) 107%
5 years or less (but longer than 4 years) 109%
7 years or less (but longer than 5 years) 112%
10 years or less (but longer than 7 years) 114%
15 years or less (but longer than 10 years) 122%
20 years or less (but longer than 15 years) 130%
25 years or less (but longer than 20 years) 146%
Greater than 25 years 154%
(vii) Short-Term Investments and Cash: The Fitch Discount Factor
applied to short-term portfolio securities, including without
limitation Debt Securities, Short Term Money Market Instruments and
municipal debt obligations, will be (A) 100%, so long as such
portfolio securities mature or have a demand feature at par
exercisable within the Fitch Exposure Period; (B) 115%, so long as
such portfolio securities mature or have a demand feature at par not
exercisable within the Fitch Exposure Period; and (C) 125%, so long
as such portfolio securities neither mature nor have a demand
feature at part exercisable within the Fitch Exposure Period. A
Fitch Discount Factor of 100% will be applied to cash.
(viii) Rule 144A Securities: The Fitch Discount Factor applied to
Rule 144A Securities shall be the Discount Factor determined in
accordance with the table above under "Corporate Debt Securities" in
subsection (ii), multiplied by 110% until such securities are
registered under the Securities Act.
(ix) Asset-backed and mortgage-backed securities: The percentage
determined by reference to the asset type in accordance with the
table set forth below.
Asset Type (with time remaining to maturity, if applicable) Discount Factor
----------------------------------------------------------- ---------------
U.S. Treasury/agency securities (10 years or less) 118%
U.S. Treasury/agency securities (greater than 10 years) 127%
U.S. agency sequentials (10 years or less) 128%
U.S. agency sequentials (greater than 10 years) 142%
U.S. agency principal only securities 236%
U.S. agency interest only securities (with Market Value greater than 40% of par) 696%
U.S. agency interest only securities (with Market Value less than or equal to 40% of par) 214%
AAA LockOut securities, interest only 236%
A-10
U.S. agency planned amortization class bonds (10 years or less) 115%
U.S. agency planned amortization class bonds (greater than 10 years) 136%
AAA sequentials (10 years or less) 118%
AAA sequentials (greater than 10 years) 135%
AAA planned amortization class bonds (10 years or less) 115%
AAA planned amortization class bonds (greater than 10 years) 140%
Jumbo mortgage rated AAA(1) 123%
Jumbo mortgage rated AA(1) 130%
Jumbo mortgage rated A(1) 136%
Jumbo mortgage rated BBB(1) 159%
Commercial mortgage-backed securities rated AAA 131%
Commercial mortgage-backed securities rated AA 139%
Commercial mortgage-backed securities rated A 148%
Commercial mortgage-backed securities rated BBB 177%
Commercial mortgage-backed securities rated BB 283%
Commercial mortgage-backed securities rated B 379%
Commercial mortgage-backed securities rated CCC or not rated 950%
(1) Applies to jumbo mortgages, credit cards, auto loans, home equity loans,
manufactured housing and prime mortgage-backed securities not issued by a U.S.
agency or instrumentality.
(x) Real Estate Investment Trusts:
(a) For common stock and preferred stock of REITs and other
real estate companies, the Fitch Discount Factor applied shall
be:
REIT or other real estate company preferred stock 154%
REIT or other real estate company common stock 196%
(b) For corporate debt securities of REITs, Real Estate
Companies, and Lodging Companies, the Fitch Discount Factor
applied shall be:
Terms to Maturity AAA AA A BBB BB B Unrated
----------------- --- -- - --- -- - -------
1 year or less 111% 114% 117% 120% 121% 127% 127%
2 years or less (but longer than 1 year) 116% 123% 125% 127% 132% 137% 137%
3 years or less (but longer than 2 years) 121% 125% 127% 131% 133% 140% 152%
4 years or less (but longer than 3 years) 126% 126% 129% 132% 136% 140% 164%
5 years or less (but longer than 4 years) 131% 132% 135% 139% 144% 149% 185%
7 years or less (but longer than 5 years) 140% 143% 146% 152% 159% 167% 228%
10 years or less (but longer than 7 years) 141% 143% 147% 153% 160% 168% 232%
12 years or less (but longer than 10 years) 144% 144% 150% 157% 165% 174% 249%
15 years or less (but longer than 12 years) 148% 151% 155% 163% 172% 182% 274%
30 years or less (but longer than 15 years) 152% 156% 160% 169% 180% 191% 306%
A-11
If a security is not rated by Fitch but is rated by two other
Rating Agencies, then the lower of the ratings on the security
from the two other Rating Agencies will be used to determine the
Fitch Discount Factor (e.g., where the S&P rating is A and the
Moody's rating is Baa, a Fitch rating of BBB will be used). If a
security is not rated by Fitch but is rated by only one other
Rating Agency, then the rating on the security from the other
Rating Agency will be used to determine the Fitch Discount
Factor (e.g., where the only rating on a security is an S&P
rating of AAA, a Fitch rating of AAA will be used, and where the
only rating on a security is a Moody's rating of Ba, a Fitch
rating of BB will be used). Securities rated either below B or
not rated by any Rating Agency shall be treated as "Unrated" in
the table above.
(xi) Futures and call options: For purposes of the Preferred Shares
Basic Maintenance Amount, futures held by the Trust and call options
sold by the Trust shall not be included as Fitch Eligible Assets.
However, such assets shall be valued at Market Value by subtracting
the good faith margin and the maximum daily trading variance as of
the Valuation Date. For call options purchased by the Trust, the
Market Value of the call option will be included as a Fitch Eligible
Asset subject to a Fitch Discount Factor mutually agreed to between
the Trust and Fitch based on the characteristics of the option
contract such as its maturity and the underlying security of the
contract.
(xii) Securities lending: The Trust may engage in securities lending
in an amount not to exceed 10% of the Trust's total gross assets.
For purposes of calculating the Preferred Shares Basic Maintenance
Amount, such securities lent shall be included as Fitch Eligible
Assets with the appropriate Fitch Discount Factor applied to such
lent security. The obligation to return such collateral shall not be
included as an obligation/liability for purposes of calculating the
Preferred Shares Basic Maintenance Amount. However, the Trust may
reinvest cash collateral for securities lent in conformity with its
investment objectives and policies and the provisions of these
Bylaws. In such event, to the extent that securities lending
collateral received is invested by the Trust in assets that
otherwise would be Fitch Eligible Assets and the value of such
assets exceeds the amount of the Trust's obligation to return the
collateral on a Valuation Date, such excess amount shall be included
in the calculation of Fitch Eligible Assets by applying the
applicable Fitch Discount Factor to this amount and adding the
product to total Fitch Eligible Assets. Conversely, if the value of
assets in which securities lending collateral has been invested is
less then the amount of the Trust's obligation to return the
collateral on a Valuation Date, such difference shall be included as
an obligation/liability of the Trust for purposes of calculating the
Preferred Shares Basic Maintenance Amount. Collateral received by
the Trust in a securities lending transaction and maintained by the
Trust in the form received shall not be included as a Fitch Eligible
Asset for purposes of calculating the Preferred Shares Basic
Maintenance Amount.
(xiii) Swaps (including Total Return Swaps and Interest Rate Swaps):
Total Return and Interest Rate Swaps are subject to the following
provisions:
If the Trust has an outstanding gain from a swap transaction on
a Valuation Date, the gain will be included as a Fitch Eligible
Asset subject to the Fitch Discount Factor on the counterparty
to the swap transaction. At the time a swap is executed, the
Trust will only enter into swap transactions where the
counterparty has at least a Fitch rating of A- or Moody's rating
of A3.
A-12
(a) Only the cumulative unsettled profit and loss from a
Total Return Swap transaction will be calculated when
determining the Preferred Shares Basic Maintenance Amount. If
the Trust has an outstanding liability from a swap transaction
on a Valuation Date, the Trust will count such liability as an
outstanding liability from the total Fitch Eligible Assets in
calculating the Preferred Shares Basic Maintenance Amount.
(b) In addition, for swaps other than Total Return
Swaps, the Market Value of the position (positive or negative)
will be included as a Fitch Eligible Asset. The aggregate
notional value of all swaps will not exceed the Liquidation
Preference of the Outstanding Preferred Shares.
(c)(1) The underlying securities subject to a credit
default swap sold by the Trust will be subject to the applicable
Fitch Discount Factor for each security subject to the swap; (2)
If the Trust purchases a credit default swap and holds the
underlying security, the Market Value of the credit default swap
and the underlying security will be included as a Fitch Eligible
Asset subject to the Fitch Discount Factor assessed based on the
counterparty risk; and (3) the Trust will not include a credit
default swap as a Fitch Eligible Asset purchase by the Trust
without the Trust holding the underlying security or when the
Trust busy a credit default swap for a basket of securities
without holding all the securities in the basket.
(xiv) Senior Loans: The Fitch Discount Factor applied to senior,
secured floating rate Loans made to corporate and other business
entities ("Senior Loans") shall be the percentage specified in the
table below opposite such Fitch Loan Category:
Fitch Loan Category Discount Factor
------------------- ---------------
A 115%
B 130%
C 152%
D 370%
Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific
Fitch Loan Category, to the extent that any Fitch Eligible Asset
would fall within more than one of the Fitch Loan Categories, such
Fitch Eligible Asset shall be deemed to fall into the Fitch Loan
Category with the lowest applicable Fitch Discount Factor.
(xv) GNMAs, FNMAs, FHLMCs, etc.
(xvi) MBS, asset-backed and other mortgage-backed securities:
MBS: U.S. Government Agency (FNMA, FHLMC or GNMA) conforming
mortgage-backed securities with a stated maturity of 30 years shall
have a discount factor of 114% and conforming mortgage-backed
securities with a stated maturity of 15 years shall have a discount
factor of 111%.
Asset-backed and other mortgage-backed securities: The percentage
determined by reference to the asset type in accordance with the
table set forth below.
A-13
Asset Type (with time remaining to maturity, if applicable) Discount Factor
----------------------------------------------------------- ---------------
U.S. Treasury/agency securities (10 years or less) 118%
U.S. Treasury/agency securities (greater than 10 years) 127%
U.S. agency sequentials (10 years or less) 120%
U.S. agency sequentials (greater than 10 years) 142%
U.S. agency principal only securities 236%
U.S. agency interest only securities (with Market Value greater than 40% of par) 696%
U.S. agency interest only securities (with Market Value less than or equal to
40% of par) 271%
AAA Lock-Out securities, interest only 236%
U.S. agency planned amortization class bonds (10 years or less) 115%
U.S. agency planned amortization class bonds (greater than 10 years) 136%
AAA sequentials (10 years or less) 118%
AAA sequentials (greater than 10 years) 135%
AAA planned amortization class bonds (10 years or less) 115%
AAA planned amortization class bonds (greater than 10 years) 140%
Jumbo mortgage rated AAA(1) 123%
Jumbo mortgage rated AA(1) 130%
Jumbo mortgage rated A(1) 136%
Jumbo mortgage rated BBB(1) 159%
Commercial mortgage-backed securities rated AAA 131%
Commercial mortgage-backed securities rated AA 139%
Commercial mortgage-backed securities rated A 148%
Commercial mortgage-backed securities rated BBB 177%
Commercial mortgage-backed securities rated BB 283%
Commercial mortgage-backed securities rated B 379%
Commercial mortgage-backed securities rated CCC or not rated 950%
(1) Applies to jumbo mortgages, credit cards, auto loans, home equity loans,
manufactured housing and prime mortgage-backed securities not issued by a U.S.
agency or instrumentality.
(mm) "FITCH ELIGIBLE ASSETS" means:
(i) Cash (including interest and dividends due on assets rated (a)
BBB or higher by Fitch or the equivalent by another Rating Agency if
the payment date is within five (5) Business Days of the Valuation
Date, (b) A or higher by Fitch or the equivalent by another Rating
Agency if the payment date is within thirty (30) days of the
Valuation Date, and (c) A+ or higher by Fitch or the equivalent by
another Rating Agency if the payment date is within the Fitch
Exposure Period) and receivables for Fitch Eligible Assets sold if
the receivable is due within five (5) Business Days of the Valuation
Date, and if the trades which generated such receivables are settled
within five (5) Business Days;
(ii) Short Term Money Market Instruments so long as (a) such
securities are rated at least F1+ by Fitch or the equivalent by
another Rating Agency, (b) in the case of demand deposits,
A-14
time deposits and overnight funds, the supporting entity is rated at
least A by Fitch or the equivalent by another Rating Agency, or (c)
in all other case, the supporting entity (1) is rated at least A by
Fitch or the equivalent by another Rating Agency and the security
matures within one month, (2) is rated at least A by Fitch or the
equivalent by another Rating Agency and the security matures within
three months or (3) is rated at least AA by Fitch or the equivalent
by another Rating Agency and the security matures within six months;
(iii) Municipal Obligations that (i) pay interest in cash, (ii) do
not have their Fitch rating, as applicable, suspended by Fitch, and
(iii) are part of an issue of Municipal Obligations of at least
$10,000,000. In Addition, Municipal Obligations in the Trust's
portfolio must be within the following investment guidelines to be
Fitch Eligible Assets.
Minimum Maximum Single Maximum State
Issue Size Underlying Obligor Allowed
Rating ($ Millions) (1) Issuer (%) (2) (%) (2)(3)
-------- ---------------- ------------------ -------------
AAA 10 100 100
AA 10 20 60
A 10 10 40
BBB 10 6 20
BB 10 4 12
B 10 3 12
CCC 10 2 12
----------
(1) Preferred stock has a minimum issue size of $50 million.
(2) The referenced percentage represents maximum cumulation total for the
related rating category and each lower rating category.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) are each limited to 10% of Fitch Eligible Assets. For
diversification purposes, Puerto Rico will be treated as a state.
For purposes of applying the foregoing requirements and applying the
applicable Fitch Discount Factor, if a Municipal Obligation is not
rated by Fitch but is rated by Moody's and S&P, such Municipal
Obligation (excluding short-term Municipal Obligations) will be
deemed to have the Fitch rating which is the lower of the Moody's
and S&P rating. If a Municipal Obligation is not rated by Fitch but
is rated by Moody's or S&P, such Municipal Obligation (excluding
short-term Municipal Obligations) will be deemed to have such
rating. Eligible Assets shall be calculated without including cash;
and Municipal Obligations rated F1 by Fitch or, if not rated by
Fitch, rated MIG-1, VMIG-1 or P-1 by Moody's; or, if not rated by
Moody's, rated A-1+/AA or SP-1+/AA by S&P shall be considered to
have a long-term rating of A. When the Trust sells a Municipal
Obligation and agrees to repurchase such Municipal Obligation at a
future date, such Municipal Obligation shall be valued at its
Discounted Value for purposes of determining Fitch Eligible Assets,
and the amount of the repurchase price of such Municipal Obligation
shall be included as a liability for purposes of calculating the
Preferred Shares Basic Maintenance Amount. When the Trust purchases
a Fitch Eligible Asset and agrees to sell it at a future date, such
Fitch Eligible Asset shall be valued at the amount of cash to be
received by the Trust upon such future date, provided that
A-15
the counterparty to the transaction has a long-term debt rating of
at least A by Fitch and the transaction has a term of no more than
30 days; otherwise, such Fitch Eligible Asset shall be valued at the
Discounted Value of such Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Fitch Eligible Asset for purposes of determining the Preferred
Shares Basic Maintenance Amount to the extent it is (i) subject to
any material lien, mortgage, pledge, security interest or security
agreement of any kind (collectively, "Liens"), except for (a) Liens
which are being contested in good faith by appropriate proceedings
and which Fitch (if Fitch is then rating the Preferred Shares) has
indicated to the Trust will not affect the status of such asset as a
Fitch Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens to
secure payment for services rendered or cash advanced to the Trust
by the investment adviser, custodian or the Auction Agent, (d) Liens
by virtue of any repurchase agreement, and (e) Liens in connection
with any futures margin account; or (ii) deposited irrevocably for
the payment of any liabilities for purposes of determining the
Preferred Shares Basic Maintenance Amount.
(iv) U.S. Government Securities;
(v) Debt securities, if such securities have been registered under
the Securities Act or are restricted as to resale under federal
securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act as determined by the Trust's investment
manager or portfolio manager acting pursuant to procedures approved
by the Board of Trustees of the Trust; and such securities are
issued by (1) a U.S. corporation, limited liability company or
limited partnership, (2) a corporation, limited liability company or
limited partnership domiciled in a member of the European Union,
Argentina, Australia, Brazil, Chile, Japan, Korea, and Mexico or
other country if Fitch does not inform the Trust that including debt
securities from such foreign country will adversely impact Fitch's
rating of the Preferred Shares (the "Approved Foreign Nations"), (3)
the government of any Approved Foreign Nation or any of its
agencies, instrumentalities or political subdivisions (the debt
securities of Approved Foreign Nation issuers being referred to
collectively as "Foreign Bonds"), (4) a corporation, limited
liability company or limited partnership domiciled in Canada or (5)
the Canadian government or any of its agencies, instrumentalities or
political subdivisions (the debt securities of Canadian issuers
being referred to collectively as "Canadian Bonds"). Foreign Bonds
held by the Trust will qualify as Fitch Eligible Assets only up to a
maximum of 20% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. Similarly, Canadian Bonds held
by the Trust will qualify as Fitch Eligible Assets only up to a
maximum of 20% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. Notwithstanding the limitations
in the two preceding sentences, Foreign Bonds and Canadian Bonds
held by the Trust will qualify as Fitch Eligible Assets only up to a
maximum of 30% of the aggregate Market Value of all assets
constituting Fitch Eligible Assets. All debt securities satisfying
the foregoing requirements and restriction of this paragraph are
herein referred to as "Debt Securities."
(vi) Preferred stocks if (1) such securities provide for the
periodic payment of dividends thereon in cash in U.S. dollars or
euros and do not provide for conversion or exchange into, or have
warrants attached entitling the holder to receive equity capital at
any time over the respective lives of such securities, (2) the
issuer or such a preferred stock has common stock listed on either
the New York Stock Exchange, the American Stock Exchange or in the
over-the-counter market, and (3) the issuer of such a preferred
stock has a senior debt rating or
A-16
preferred stock rating from Fitch of BBB- or higher or the
equivalent rating by another Rating Agency. In addition, the
preferred stocks issue must be at least $50 million;
(vii) Common stocks (1)(a) which are traded on the New York Stock
Exchange, the American Stock Exchange or in the over-the-counter
market, (b) which, if cash dividend paying, pay cash dividends in
U.S. dollars, and (c) which may be sold without restriction by the
Trust; provided, however, that (i) common stock which, while a Fitch
Eligible Asset owned by the Trust, ceases paying any regular cash
dividend will no longer be considered a Fitch Eligible Assets until
60 calendar days after the date of the announcement of such
cessation, unless the issuer of the common stock has senior debt
securities rated at least A- by Fitch and (ii) the aggregate Market
Value of the Trust's holdings of the common stock of any issuer in
excess of 5% per U.S. issuer of the number of Outstanding shares
time the Market Value of such common stock shall not be a Fitch's
Eligible Asset; and (2) securities denominated in any currency other
than the U.S. dollar and securities of issuers formed under the laws
of jurisdictions other than the United States, its states and the
District of Columbia for which there are dollar-denominated American
Depository Receipts ("ADRs") which are traded in the United States
on exchanges or over-the-counter and are issued by banks formed
under the laws of the United States, its states or the District of
Columbia; provided, however, that the aggregate Market Value of the
Trust's holdings of securities denominated in currencies other than
the U.S. dollar and ADRs in excess of 3% of the aggregate Market
Value of the Outstanding shares of common stock of such issuer or in
excess of 10% of the Market Value of the Trust's Fitch Eligible
Assets with respect to issuers formed under the laws of any single
such non-U.S. jurisdiction other than Approved Foreign Nations shall
not be a Fitch Eligible Asset;
(viii) Rule 144A Securities;
(ix) Warrants on common stocks described in (vii) above;
(x) any common stock, preferred stock or any debt securities of
REITs or real estate companies;
(xi) Interest Rate Swaps or Interest Rate Caps entered into
according to International Swap Dealers Association ("ISDA")
standards if (1) the counterparty to the swap transaction has a
short-term rating of not less than F1 by Fitch or the equivalent by
another Rating Agency, or, if the swap counterparty does not have a
short-term rating, the counterparty's senior unsecured long-term
debt rating is AA or higher by Fitch or the equivalent by another
Rating Agency and (2) the original aggregate notional amount of the
Interest Rate Swap or Interest Rate Cap transaction or transactions
is not greater than the Liquidation Preference of the Preferred
Shares originally issued;
(xii) Swaps, including Total Return Swaps entered into according to
ISDA;
(xiii) Financial contracts, as such term is defined in Section
3(c)(2)(B)(ii) of the 1940 Act, not otherwise provided for in this
definition may be included in Fitch Eligible Assets, but, with
respect to any financial contract, only upon receipt by the Trust of
a writing from Fitch specifying any conditions on including such
financial contract in Fitch Eligible Assets and assuring the Trust
that including such financial contract in the manner so specified
would not affect the credit rating assigned by Fitch to the
Preferred Shares;
(xiv) asset-backed and mortgage-backed securities;
A-17
(xv) senior loans; and
(xvi) Fitch Hedging Transactions.
Where the Trust sells an asset and agrees to repurchase such asset
in the future, the Discounted Value of such asset will constitute a
Fitch Eligible Asset and the amount the Trust is required to pay
upon repurchase of such asset will count as a liability for the
purposes of the Preferred Shares Basic Maintenance Amount. Where the
Trust purchases an asset and agrees to sell it to a third party in
the future, cash receivable by the Trust thereby will constitute a
Fitch Eligible Asset if the long-term debt of such other party is
rated at least A- by Fitch or the equivalent by another Rating
Agency and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such purchased asset will constitute a Fitch
Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Fitch Eligible Asset to the extent that it has been irrevocably
deposited for the payment of (i)(a) through (i)(e) under the
definition of Preferred Shares Basic Maintenance Amount or to the
extent it is subject to any Liens, except for (a) Liens which are
being contested in good faith by appropriate proceedings and which
Fitch has indicated to the Trust will not affect the status of such
asset as a Fitch Eligible Asset, (b) Liens for taxes that are not
then due and payable or that can be paid thereafter without penalty,
(c) Liens to secure payment for services rendered or cash advanced
to the Trust by its investment manager or portfolio manager, the
Trust's custodian, transfer agent or registrar or the Auction Agent
and (d) Liens arising by virtue of any repurchase agreement.
Fitch diversification limitations: portfolio holdings as
described below must be within the following diversification and
issue size requirements in order to be included in Fitch's Eligible
Assets:
EQUITY SECURITIES Maximum Single Issuer (1)
----------------- -------------------------
Large-cap 5%
Mid-cap 5%
Small-cap 5%
(1) Percentages represent both a portion of the aggregate Market Value
and number of outstanding shares of the common stock portfolio.
DEBT SECURITIES Maximum Single Maximum Single Minimum Issue Size
RATED AT LEAST (1) Issuer (2) Industry (2)(3) ($ in million) (4)
------------------ -------------- --------------- ------------------
AAA 100% 100% $100
AA- 20% 75% $100
A- 10% 50% $100
BBB- 6% 25% $100
BB- 4% 16% $ 50
B- 3% 12% $ 50
CCC 2% 8% $ 50
A-18
(1) Not applicable to corporate debt securities of REITs, Real Estate Companies,
and Lodging Companies.
(2) Percentages represent a portion of the aggregate Market Value of corporate
debt securities.
(3) Industries are determined according to Fitch's Industry Classifications, as
defined herein.
(4) Preferred stock has a minimum issue size of $50 million, and mortgage pass
through issued by Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA") or the Government National Mortgage
Association ("GNMA"), which has no minimum issue size.
If a security is not rated by Fitch but is rated by two other Rating Agencies,
then the lower of the ratings on the security from the two other Rating Agencies
will be used to determine the Fitch Discount Factor (e.g., where the S&P rating
is A and the Moody's rating is Baa, a Fitch rating of BBB will be used). If a
security is not rated by Fitch but is rated by only one other Rating Agency,
then the rating on the security from the other Rating Agency will be used to
determine the Fitch Discount Factor (e.g., where the only rating on a security
is an S&P rating of AAA, a Fitch rating of AAA will be used, and where the only
rating on a security is a Moody's rating of Ba, a Fitch rating of BB will be
used). If a security is either rated below CCC or not rated by any Rating
Agency, the Trust will treat the security as if it were "CCC" in the table
above.
REIT AND OTHER REAL ESTATE COMPANY SECURITIES
5% issuer limitation (including common, preferred, debt
and other securities)
(nn) "FITCH HEDGING TRANSACTIONS" has the meaning set forth in paragraph
(b)(1) of Section 13 of Part I of Article X of these Bylaws.
(oo) "FITCH INDUSTRY CLASSIFICATIONS" means, for the purposes of
determining Fitch Eligible Assets, each of the following industry
classifications:
Aerospace & Defense
Automobiles
Banking, Finance & Real Estate
Broadcasting & Media
Building & Materials
Cable
Chemicals
Computers & Electronics
Consumer Products
Energy
Environmental Services
Farming & Agriculture
Food, Beverage & Tobacco
Gaming & Restaurants
Healthcare & Pharmaceuticals
Industrial/Manufacturing
Insurance
Leisure & Entertainment
Metals & Mining
Miscellaneous
Packaging and Containers
Paper & Forest Products
Retail
Sovereign
Structured Finance Obligations
Supermarkets & Drugstores
Telecommunications
Textiles & Furniture
Transportation
Utilities
A-19
The Trust shall use its discretion in determining which industry
classification is applicable to a particular investment.
(pp) "FITCH LOAN CATEGORY" means the following four categories (and, for
purposes of this categorization, the Market Value of a Fitch Eligible
Asset trading at par is equal to $1.00):
(i) "FITCH LOAN CATEGORY A" means Performing Bank Loans, which have
a Market Value or an Approved Price greater than or equal to 90% of
par.
(ii) "FITCH LOAN CATEGORY B" means: (A) Performing Bank Loans which
have a Market Value or an Approved Price of greater than or equal to
80% of par but less than 90% of par; and (B) non-Performing Bank
Loans which have a Market Value or an Approved Price greater than
or equal to 85% of par.
(iii) "FITCH LOAN CATEGORY C" means: (A) Performing Bank Loans which
have a Market Value or an Approved Price of greater than or equal to
70% of par but less than 80% of par; (B) non-Performing Bank Loans
which have a Market Value or an Approved Price of greater than or
equal to 75% of par but less than 85% of par; and (C) Performing
Bank Loans without an Approved Price rated BB- or higher by Fitch.
If a security is not rated by Fitch but is rated by two other Rating
Agencies, then the lower of the ratings on the security from the two
other Rating Agencies will be used to determine the Fitch Discount
Factor (e.g., where the S&P rating is A- and the Moody 's rating is
Baa1, a Fitch rating of BBB+ will be used). If a security is not
rated by Fitch but is rated by only one other Rating Agency, then
the rating on the security from the other Rating Agency will be used
to determine the Fitch Discount Factor (e.g., where the only rating
on a security is an S&P rating of AAA, a Fitch rating of AAA will be
used, and where the only rating on a security is a Moody's rating of
Ba3, a Fitch rating of BB- will be used).
(iv) "FITCH LOAN CATEGORY D" means Bank Loans not described in any
of the foregoing categories.
Notwithstanding any other provision contained above, for purposes of
determining whether a Fitch Eligible Asset falls within a specific Fitch
Loan Category, to the extent that any Fitch Eligible Asset would fall
within more than one of the Fitch Loan Categories, such Fitch Eligible
Asset shall be deemed to fall into the Fitch Loan Category with the
lowest applicable Fitch Discount Factor.
(qq) "FORWARD COMMITMENTS" shall have the meaning specified in paragraph
(a)(iv) of Section 13 of Part I of Article X of these Bylaws.
(rr) "HOLDER" with respect to shares of a series of Preferred Shares,
shall mean the registered holder of such shares as the same appears on
the record books of the Trust.
(ss) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of Article X of these
Bylaws.
(tt) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Trust an
independent public accountant or firm of independent public accountants
under the Securities Act of 1933, as amended from time to time.
A-20
(uu) "INITIAL RATE PERIOD" shall be the period from and including the
Date of Original Issue to but excluding December 23, 2004 with
respect to the Series.
(vv) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a
discount basis security, which is equal to the yield on an equivalent
interest-bearing security.
(ww) "INTEREST RATE CAP" means an options contract which puts an upper
limit on a floating exchange rate. The contract protects the holder from
rises in short-term interest rates by making a payment to the holder
when an underlying interest rate (the index or reference interest rate)
exceed a specified strike rate (the cap rate).
(xx) "LATE CHARGE" shall have the meaning specified in subparagraph
(e)(1)(B) of Section 2 of Part I of Article X of these Bylaws.
(yy) "LIBOR Dealers" means RBC Dain Rauscher and such other dealer or
dealers as the Trust may from time to time appoint, or, in lieu of any
thereof, their respective affiliates or successors.
(zz) "LIBOR Rate" on any Auction Date, means (i) the rate for deposits
in U.S. dollars for the designated Distribution Period, which appears on
display page 3750 of Moneyline's Telerate Service ("Telerate Page 3750")
(or such other page as may replace that page on that service, or such
other service as may be selected by the LIBOR Dealer or its successors
that are LIBOR Dealers) as of 11:00 a.m., London time, on the day that
is the London Business Day preceding the Auction Date (the "LIBOR
Determination Date"), or (ii) if such rate does not appear on Telerate
Page 3750 or such other page as may replace such Telerate Page 3750, (A)
the LIBOR Dealer shall determine the arithmetic mean of the offered
quotations of the Reference Banks to leading banks in the London
interbank market for deposits in U.S. dollars for the designated
Distribution Period in an amount determined by such LIBOR Dealer by
reference to requests for quotations as of approximately 11:00 a.m.
(London time) on such date made by such LIBOR Dealer to the Reference
Banks, (B) if at least two of the Reference Banks provide such
quotations, LIBOR Rate shall equal such arithmetic mean of such
quotations, (C) if only one or none of the Reference Banks provide such
quotations, LIBOR Rate shall be deemed to be the arithmetic mean of the
offered quotations that leading banks in The City of New York selected
by the LIBOR Dealer (after obtaining the Trust's approval) are quoting
on the relevant LIBOR Determination Date for deposits in U.S. dollars
for the designated Distribution Period in an amount determined by the
LIBOR Dealer (after obtaining the Trust's approval) that is
representative of a single transaction in such market at such time by
reference to the principal London offices of leading banks in the London
interbank market; provided, however, that if one of the LIBOR Dealers
does not quote a rate required to determine the LIBOR Rate, the LIBOR
Rate will be determined on the basis of the quotation or quotations
furnished by any substitute LIBOR Dealer or substitute LIBOR Dealers
selected by the Trust to provide such rate or rates not being supplied
by the LIBOR Dealer; provided further, that if the LIBOR Dealer and
substitute LIBOR Dealers are required but unable to determine a rate in
accordance with at least one of the procedures provided above, LIBOR
Rate shall be LIBOR Rate as determined on the previous Auction Date. If
the number of Distribution Period days shall be (i) 7 or more but fewer
than 21 days, such rate shall be the seven-day LIBOR rate; (ii) 21 or
more but fewer than 49 days, such rate shall be the one-month LIBOR
rate; (iii) 49 or more but fewer than 77 days, such rate shall be the
two-month LIBOR rate; (iv) 77 or more but fewer than 112 days, such rate
shall be the three-month LIBOR rate; (v) 112 or more but fewer than 140
days, such rate shall be the four-month LIBOR rate; (vi) 140 or more but
fewer that 168 days, such rate shall be the five-month
A-21
LIBOR rate; (vii) 168 or more but fewer 189 days, such rate shall be the
six-month LIBOR rate; (viii) 189 or more but fewer than 217 days, such
rate shall be the seven-month LIBOR rate; (ix) 217 or more but fewer
than 252 days, such rate shall be the eight-month LIBOR rate; (x) 252 or
more but fewer than 287 days, such rate shall be the nine-month LIBOR
rate; (xi) 287 or more but fewer than 315 days, such rate shall be the
ten-month LIBOR rate; (xii) 315 or more but fewer than 343 days, such
rate shall be the eleven-month LIBOR rate; and (xiii) 343 or more but
fewer than 365 days, such rate shall be the twelve-month LIBOR rate.
(aaa) "LIQUIDATION PREFERENCE" with respect to a given number of
Preferred Shares, means $25,000 times that number.
(bbb) "LONDON BUSINESS DAY" means any day on which commercial banks are
generally open for business in London.
(ccc) "MARKET VALUE" of any asset of the Trust shall mean the market
value thereof determined in accordance with the pricing procedures of
the Trust.
(ddd) "MAXIMUM RATE" shall mean, with respect to Preferred Shares for
any Distribution Period, the greater of (A) the Applicable Percentage of
the Reference Rate or (B) the Applicable Spread plus the Reference Rate
on the Auction Date. The Auction Agent will round each applicable
Maximum Rate to the nearest one-thousandth (0.001) of one percent per
annum, with any such number ending in five ten-thousandths of one
percent being rounded upwards to the nearest one-thousandth (0.001) of
one percent. Generally, the applicable distribution rate for any
Distribution Period for the Preferred Shares will not be more than the
Maximum Rate attributable to such shares. The Maximum Rate for the
Preferred Shares will depend on the credit rating assigned to such
shares and on the length of the Distribution Period.
(eee) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7
Rate Period Days for the Preferred Shares.
(fff) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(ggg) "MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining
the Discounted Value of any Moody's Eligible Asset, the percentage
determined as follows. The Moody's Discount Factor for any Moody's
Eligible Asset other than the securities set forth below will be the
percentage provided in writing by Moody's.
(i) CORPORATE DEBT SECURITIES: The percentage determined by reference
to the rating on such asset with reference to the remaining term to
maturity of such asset, in accordance with the table set forth below (NON
CONVERTIBLES).
MOODY'S RATING CATEGORY
Term to Maturity of
Corporate Debt Security(2) Aaa Aa A Baa Ba B Unrated(1)
-------------------------- --- -- - --- -- - -------
1 year or less ................................. 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) ....... 115 118 122 125 146 160 250
3 years or less (but longer than 2 years) ...... 120 123 127 131 153 168 250
4 years or less (but longer than 3 years) ...... 126 129 133 138 161 176 250
5 years or less (but longer than 4 years) ...... 132 135 139 144 168 185 250
7 years or less (but longer than 5 years) ...... 139 143 147 152 179 197 250
10 years or less (but longer than 7 years) ..... 145 150 155 160 189 208 250
15 years or less (but longer than 10 years) .... 150 155 160 165 196 216 250
20 years or less (but longer than 15 years) .... 150 155 160 165 196 228 250
30 years or less (but longer than 20 years) .... 150 155 160 165 196 229 250
Greater than 30 years .......................... 165 173 181 189 205 240 250
------------
(1) Unless conclusions regarding liquidity risk as well as estimates of both
the probability and severity of default for the Trust's assets can be
derived from other sources, securities rated below B by Moody's and unrated
securities covered by this section (i), which are securities rated by
neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
Assets. If a corporate debt security is unrated by Moody's, S&P or Fitch,
the Fund will use the percentage set forth under "Unrated" in this table.
Ratings assigned by S&P or Fitch are generally accepted by Moody's at
face value. However, adjustments to face value may be made to particular
categories of credits for which the S&P and/or Fitch rating does not seem
to approximate a Moody's rating equivalent. Split rated securities
assigned by S&P and Fitch will be accepted at the lower of the two
ratings.
A-22
(2) The Moody's Discount Factors for debt securities shall also be applied to
any derivative transaction, in which case the rating of the counterparty
shall determine the appropriate rating category.
For corporate debt securities that do not pay interest in U.S. dollars, the fund
sponsor will use the applicable currency conversion rates.
PREFERRED STOCK: The Moody's Discount Factor for taxable preferred stock shall
be(1):
Aaa 150%
Aa 155%
A 160%
Baa 165%
Ba 196%
B 216%
LESS THAN B or Not Rated 250%
(1) Rule 144A securities' Discount Factor will be increased by an additional
20%.
COMMON STOCK
Common Stocks (1) LARGE-CAP MID-CAP SMALL-CAP
Discount Factor 200% 205% 220%
(1) Market cap for Large-cap stocks are $10 billion and up, Mid-cap stocks
range between $2 billion and $10 billion, and Small-cap stocks are $2
billion and below.
CONVERTIBLE SECURITIES: (INCLUDING CONVERTIBLE PREFERRED)
Equity--the convertibles in this group would have a delta that ranges between
1-.8. For investment grade bonds the discount factor would be 195% and for below
investment grade securities the discount factor would be 229%.
Total Return--the convertibles in this group would have a delta that ranges
between .8-.4. For investment grade bonds the discount factor would be 192% and
for below investment grade securities the discount factor would be 226%.
Yield Alternative--the convertibles in this group would have a delta that
ranges between .4-0. For this category the discount factors used are based on
Moody's rating for corporate debt securities table.
Any unrated convertible bonds would receive a discount factor of 250%.
UPON CONVERSION TO COMMON STOCK, THE DISCOUNT FACTORS APPLICABLE TO COMMON STOCK
WILL APPLY.
(i) Common Shares and Preferred Shares of REITs and Other Real
Estate Companies:
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 154%
(1) A Discount Factor of 250% will be applied to those assets in a
single Moody's Real Estate Industry/Property Sector Classification
which exceeds 30% of Moody's Eligible Assets but are not greater than
35% of Moody's Eligible Assets.
(2) A Discount Factor of 250% will be applied if dividends on such
securities have not been paid consistently (either quarterly or
annually) over the previous three years, or for such shorter time period
that such securities have been outstanding.
(3) A Discount Factor of 250% will be applied if the market
capitalization (including common stock and preferred stock) of an
issuer is below $500 million.
(ii) Debt Securities of REITs and Other Real Estate Companies(1):
Moody's Rating Category
Term to Maturity of ----------------------- Unrated
Corporate Debt Security AAA AA A BAA BA B (2)
----------------------- --- -- - --- -- - -------
1 year or less 109% 112% 115% 118% 137% 150% 250%
2 years or less (but longer than 1 year) 115% 118% 122% 125% 146% 160% 250%
3 years or less (but longer than 2 years) 120% 123% 127% 131% 153% 168% 250%
4 years or less (but longer than 3 years) 126% 129% 133% 138% 161% 176% 250%
5 years or less (but longer than 4 years) 132% 135% 139% 144% 168% 185% 250%
7 years or less (but longer than 5 years) 139% 143% 147% 152% 179% 197% 250%
10 years or less (but longer than 7 years) 145% 150% 155% 160% 189% 208% 250%
15 years or less (but longer than 10 years) 150% 155% 160% 165% 196% 216% 250%
20 years or less (but longer than 15 years) 150% 155% 160% 165% 196% 228% 250%
30 years or less (but longer than 20 years) 150% 155% 160% 165% 196% 229% 250%
Greater than 30 years 165% 173% 181% 189% 205% 240% 250%
(1) The Moody's Discount Factors for debt securities shall also be
applied to any interest rate swap or cap, in which case the rating of
the counterparty shall determine the appropriate rating category.
(2) Unless conclusions regarding liquidity risk as well as estimates of
both the probability and severity of default for the Trust's assets can
be derived from other sources, securities rated below B by Moody's and
unrated securities, which are securities rated by neither Moody's, S&P
nor Fitch, are limited to 10% of Moody's Eligible Assets. If a
corporate, municipal or other debt security is unrated by Moody's, S&P
or Fitch, the Trust will use the percentage set forth under "Unrated" in
this table. Ratings assigned by S&P or Fitch are generally accepted by
Moody's at face value. However, adjustments to face value may be made to
particular categories of credits for which the S&P and/or Fitch rating
does not seem to approximate a Moody's rating equivalent. Split rated
securities assigned by S&P and Fitch will be accepted at the lower of
the two ratings.
(iii) U.S. Treasury Securities and U.S. Treasury Strips:
A-23
U.S. Government
Securities Discount U.S. Treasury Strips
Remaining Term to Maturity Factor Discount Factor
-------------------------- ------------------- --------------------
1 year or less 107% 107%
2 years or less (but longer than 1 year) 113% 115%
3 years or less (but longer than 2 years) 118% 121%
4 years or less (but longer than 3 years) 123% 128%
5 years or less (but longer than 4 years) 128% 135%
7 years or less (but longer than 5 years) 135% 147%
10 years or less (but longer than 7 years) 141% 163%
15 years or less (but longer than 10 years) 146% 191%
20 years or less (but longer than 15 years) 154% 218%
30 years or less (but longer than 20 years) 154% 244%
(iv) Short-term instruments: The Moody's Discount Factor applied to
short-term portfolio securities, including without limitation
corporate debt securities, Short Term Money Market Instruments and
municipal debt obligations, will be (A) 100%, so long as such
portfolio securities mature or have a demand feature at par
exercisable within 49 days of the relevant valuation date; (B) 115%,
so long as such portfolio securities do not mature within the
Moody's Exposure Period or have a demand feature at par not
exercisable within 49 days of the relevant valuation date; and (C)
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. The Moody's Discount Factor
applied to 2a-7 Money Market Funds will be 110%. A Moody's Discount
Factor of 100% will be applied to cash.
(hhh) "MOODY'S ELIGIBLE ASSETS" shall mean the following:
Corporate debt securities if (A) such securities are rated B3 or higher by
Moody's; (B) such securities provide for the periodic payment of interest in
cash in U.S. dollars or euros, except that such securities that do not pay
interest in U.S. dollars or euros shall be considered Moody's Eligible Assets if
they are rated by Moody's or S&P or Fitch; (C) for debt securities rated Ba1 and
below, no more than 10% of the original amount of such issue may constitute
Moody's Eligible Assets; (D) such securities have been registered under the
Securities Act or are restricted as to resale under federal securities laws but
are eligible for resale pursuant to Rule 144A under the Securities Act as
determined by the Fund's investment manager or portfolio manager acting pursuant
to procedures approved by the Board of Trustees, except that such securities
that are not subject to U.S. federal securities laws shall be considered Moody's
Eligible Assets if they are publicly traded; and (E) such securities are not
subject to extended settlement.
Notwithstanding the foregoing limitations, (x) corporate debt securities
not rated at least B3 by Moody's or not rated by Moody's shall be considered to
be Moody's Eligible Assets only to the extent the Market Value of such corporate
debt securities does not exceed 10% of the aggregate Market Value of all Moody's
Eligible Assets; provided, however, that if the Market Value of such corporate
debt securities exceeds 10% of the aggregate Market Value of all Moody's
Eligible Assets, a portion of such corporate debt securities (selected by the
Trust) shall not be considered Moody's Eligible Assets, so that the Market Value
of such corporate debt securities (excluding such portion) does not exceed 10%
of the aggregate Market Value of all Moody's Eligible Assets; and (y) corporate
debt securities rated by neither Moody's nor S&P nor Fitch shall be considered
to be Moody's Eligible Assets only to the extent such securities are issued by
entities which (i) have not filed for bankruptcy within the past three years,
(ii) are current on all principal and interest in their fixed income
obligations, (iii) are current on all preferred stock dividends, and (iv)
possess a current, unqualified auditor's report without qualified, explanatory
language.
Preferred stocks if (A) dividends on such preferred stock are cumulative,
(B) such securities provide for the periodic payment of dividends thereon
in cash in U.S. dollars or euros and do not provide for conversion or
exchange into, or have warrants attached entitling the holder to receive,
equity capital at any time over the respective lives of such securities,
(C) the issuer of such a preferred stock has common stock listed on either
the New York Stock Exchange or the American Stock Exchange, or NASDAQ and
(D) such preferred stock has paid consistent cash dividends in U.S. dollars
or euros over the last three years or has a minimum rating of A1 (if the
issuer of such preferred stock has other preferred issues outstanding that
have been paying dividends consistently for the last three years, then a
preferred stock without such a dividend history would also be eligible). In
addition, the preferred stocks must have the following diversification
requirements: (X) the preferred stock issue must be greater than $50
million and (Y) the minimum holding by the Trust of each issue of preferred
stock is $500,000 and the maximum holding of preferred stock of each issue
is $5 million. In addition, preferred stocks issued by transportation
companies will not be considered Moody's Eligible Assets;
common stocks (i) which (A) are traded on a nationally recognized stock
exchange or in the over-the-counter market, (B) if cash dividend paying,
pay cash dividends in US dollars and (C) may be sold without restriction
by the Corporation; PROVIDED, HOWEVER, that (y) common stock which, while
a Moody's Eligible Asset owned by the Corporation, ceases paying any
regular cash dividend will no longer be considered a Moody's Eligible Asset
until 71 days after the date of the announcement of such cessation, unless
the issuer of the common stock has senior debt securities rated at least
A3 by Moody's and (z) the aggregate Market Value of the Corporation's
holdings of the common stock of any issuer in excess of 4% in the case
of utility common stock and 6% in the case of non-utility common stock
of the aggregate Market Value of the Corporation's holdings shall not
be Moody's Eligible Assets, (ii) which are securities denominated in any
currency other than the US dollar or securities of issuers formed under the
laws of jurisdictions other than the United States, its states and the
District of Columbia for which there are dollar-denominated American
Depository Receipts ("ADRs") or their equivalents which are traded in the
United States on exchanges or over-the-counter and are issued by banks
formed under the laws of the United States, its states or the District of
Columbia or (iii) which are securities of issuers formed under the laws of
jurisdictions other than the United States (and in existence for at least
five years) for which no ADRs are traded; PROVIDED, HOWEVER, that the
aggregate Market Value of the Corporation's holdings of securities
denominated in currencies other than the US dollar and ADRs in excess of
(A) 6% of the aggregate Market Value of the Outstanding shares of common
stock of such issuer thereof or (B) 10% of the Market Value of the
Corporation's Moody's Eligible Assets with respect to issuers formed under
the laws of any single such non-U.S. jurisdiction other than Australia,
Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan,
the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland and the
United Kingdom, shall not be a Moody's Eligible Asset
(i) Common shares, preferred shares and any debt security of REITs
and Real Estate Companies.
(a) Common shares of REITs and preferred shares 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
shares, preferred shares, and debt securities, issued by at
least 20 issuers; (C) issued by a single issuer which in the
aggregate constitute no more than 50% 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
(b) Unrated debt securities or preferred 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 such debt security; (C) is current on such preferred security
distributions; (D) possesses a current, unqualified auditor's
report without qualified, explanatory language and (E) in the
aggregate, do not exceed 10% of the discounted Moody's Eligible
Assets;
(ii) Interest rate swaps or caps entered into according to
International Swap Dealers Association ("ISDA") standards if (a) the
counterparty to the swap transaction has a short-term rating of not
less than P-1 or, if the counterparty does not have a short-term
rating, the
A-24
counterparty's senior unsecured long-term debt rating is A3 or
higher and (b) the original aggregate notional amount of the
interest rate swap or cap transaction or transactions is not to be
greater than the liquidation preference of the Preferred Shares
originally issued. The interest rate swap or cap transaction will be
marked-to-market daily;
(iii) U.S. Treasury Securities and Treasury Strips;
(iv) Short-Term Money Market Instruments so long as (A) such
securities are rated at least P-1, (B) in the case of demand
deposits, time deposits and overnight funds, the depository
institution is rated at least A2, (C) such securities are of 2a-7
Money Market Funds, (D) such securities are repurchase agreements,
or (E) 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 Fitch 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; PROVIDED, HOWEVER, that such interest and
dividends may, at the Trust's discretion, be discounted at the same
rate as the related security or on such other basis as Moody's and
the Trust may agree from time to time) and receivables for Moody's
Eligible Assets sold if the receivable is due within five Business
Days of the Valuation Date.
Additionally, in order to merit consideration as an eligible asset, securities
should be issued by entities which:
o Have not filed for bankruptcy within the past year
o Are current on all principal and interest in their fixed income
obligations
o Are current on all preferred stock dividends
o Possess a current, unqualified auditor's report without qualified,
explanatory language.
In addition, portfolio holdings as described below must be within the
following diversification and issue size requirements in order to be included in
Moody's Eligible Assets:
MAXIMUM SINGLE MAXIMUM SINGLE MINIMUM ISSUE SIZE
RATINGS(1) ISSUER(2),(3) INDUSTRY(3),(4) ($ IN MILLION)(5)
---------- -------------- --------------- ------------------
Aaa 100% 100% $100
Aa 20 60 100
A 10 40 100
Baa 6 20 100
Ba 4 12 50(6)
B1-B2 3 8 50(6)
B3 or below 2 5 50(6)
------------
(1) Refers to the preferred stock and senior debt rating of the
portfolio holding.
(2) Companies subject to common ownership of 25% or more are
considered as one issuer.
(3) Percentages represent a portion of the aggregate Market Value of
corporate debt securities.
(4) Industries are determined according to Moody's Industry
Classifications, as defined herein.
(5) Except for preferred stock, which has a minimum issue size of $50
million.
(6) Portfolio holdings from issues ranging from $50 million to $100
million are limited to 20% of the Fund's total assets.
Equity Securities:
MAXIMUM SINGLE MAXIMUM SINGLE MINIMUM SINGLE
INDUSTRY CATEGORY ISSUER(%)(1) INDUSTRY(%)(1) STATE(%)(1)
----------------- -------------- -------------- --------------
Utility 4 50 7(2)
Industrial 4 45 7
Financial 5 N/A 6
Other 6 20 N/A
(iii) "MOODY'S HEDGING TRANSACTION" shall have the meaning specified in
paragraph (a)(i) of Section 13 of Part I of Article X of these Bylaws.
"Moody's Industry Classification" means, for the purposes of determining
Moody's Eligible Assets, each of the following industry classifications (or such
other classifications as Moody's may from time to time approve for application
to the Preferred Shares):
1. Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, and Ammunition
2. Automobile: Automobile Equipment, Auto-Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small Loan,
Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar,
Canned Foods, Corn Refiners, Dairy Products, Meat Products, Poultry
Products, Snacks, Packaged Foods, Candy, Gum, Seafood, Frozen Food,
Cigarettes, Cigars, Leaf/Snuff, Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(building-related only), Plumbing, Roofing, Wallboard, Real Estate,
Real Estate Development, REITs, Land Development
6. Chemicals, Plastics and Rubber: Chemicals (non-agricultural),
Industrial Gases, Sulfur, Plastics, Plastic Products, Abrasives,
Coatings, Paints, Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers made
of: Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non-Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School
Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution
12. Ecological: Pollution Control, Waste Removal, Waste Treatment and
Waste Disposal
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13. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service
Communicating Systems, Radios, TVs, Tape Machines, Speakers, Printers,
Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication, Securities
15. Farming and Agriculture: Livestock, Grains, Produce, Agriculture
Chemicals, Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary Drugs,
Research, Health Care Centers, Nursing Homes, HMOs, Hospitals,
Hospital Supplies, Medical Equipment
18. Home and Office Furnishings, House wares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
19. Hotels, Motels, Inns and Gaming
20. Insurance: Life, Property and Casualty, Broker, Agent, Surety
21. Leisure, Amusement, Motion Pictures, Entertainment: Boating, Bowling,
Billiards, Musical Instruments, Fishing, Photo Equipment, Records,
Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games,
Toy Manufacturing, Motion Picture Production Theaters, Motion Picture
Distribution
22. Machinery (Non-Agricultural, Non-Construction, Non-Electronic):
Industrial, Machine Tools, and Steam Generators
23. Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore
Production, Refractories, Steel Mill Machinery, Mini-Mills,
Fabricating, Distribution and Sales of the foregoing
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Service and
Drilling
25. Printing, Publishing, and Broadcasting: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers,
Textbooks, Radio, T.V., Cable Broadcasting Equipment
26. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders, Ship
Builders, Containers, Container Builders, Parts, Overnight Mail,
Trucking, Truck Manufacturing, Trailer Manufacturing, Air Cargo,
Transport
27. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail Order
Catalog, Showroom
28. Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
A-26
29. Textiles and Leather: Producer, Synthetic Fiber, Apparel Manufacturer,
Leather Shoes
30. Personal Transportation: Air, Bus, Rail, Car Rental
31. Utilities: Electric, Water, Hydro Power, Gas
32. Diversified Sovereigns: Semi-sovereigns, Canadian Provinces,
Supra-national Agencies
(jjj) "MOODY'S REAL ESTATE INDUSTRY/PROPERTY SECTOR CLASSIFICATION"
means, for the purposes of determining Moody's Eligible Assets, each of
the following Industry Classifications (as defined by the National
Association of Real Estate Investment Trusts, "NAREIT"):
1. Office
2. Industrial
3. Mixed
4. Shopping Centers
5. Regional Malls
6. Free Standing
7. Apartments
8. Manufactured Homes
9. Diversified
10. Lodging/Resorts
11. Health Care
12. Home Financing
13. Commercial Financing
14. Self Storage
The Trust 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.
(kkk) "1940 ACT" shall mean the Investment Company Act of 1940, as
amended from time to time.
A-27
(lll) "1940 ACT CURE DATE," with respect to the failure by the Trust to
maintain the 1940 Act Preferred Shares Asset Coverage (as required by
Section 6 of Part I of Article X of these Bylaws) as of the last
Business Day of each month, shall mean the last Business Day of the
following month.
(mmm) "1940 ACT PREFERRED SHARES ASSET COVERAGE" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Trust which are
shares, including all outstanding Preferred Shares (or such other asset
coverage as may in the future be specified in or under the 1940 Act as
the minimum asset coverage for senior securities which are shares or
stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock).
(nnn) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of Preferred Shares pursuant to paragraph (c) of Section 11
of Part I of Article X of these Bylaws.
(ooo) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with respect
to a Special Rate Period of shares of a series of Preferred Shares
pursuant to subparagraph (d)(i) of Section 4 of Part I of Article X of
these Bylaws.
(ppp) "ORDER" and "ORDERS" shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of Article X of these Bylaws.
(qqq) "OTHER REAL ESTATE COMPANIES" shall mean companies that generally
derive at least 50% of their revenue from real estate or have at least
50% of their assets in real estate, but not including REITs.
(rrr) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of Preferred Shares, the number of shares theretofore
issued by the Trust except, without duplication, (i) any shares of the
Series theretofore cancelled or delivered to the Auction Agent for
cancellation or redeemed by the Trust, (ii) any shares of the Series as
to which the Trust or any Affiliate thereof shall be an Existing Holder
and (iii) any shares of the Series represented by any certificate in
lieu of which a new certificate has been executed and delivered by the
Trust.
(sss) "PERFORMING" means with respect to any asset that is a Bank Loan
or other debt, the issuer of such investment is not in default of any
payment obligations in respect thereof.
(ttt) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or
other entity or a government or any agency or political subdivision
thereof.
(uuu) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series
of Preferred Shares, shall mean a customer (including broker dealers
which are not Broker Dealers) of a Broker-Dealer that is not a
Beneficial Owner of shares of the Series but that wishes to purchase
shares of the Series, or that is a Beneficial Owner of shares of the
Series that wishes to purchase additional shares of the Series.
(vvv) "POTENTIAL HOLDER," with respect to Preferred Shares, shall mean a
Broker-Dealer (or any such other person as may be permitted by the
Trust) that is not an Existing Holder of Preferred Shares or that is an
Existing Holder of Preferred Shares that wishes to become the Existing
Holder of additional Preferred Shares.
A-28
(www) "PREFERRED SHARES" shall have the meaning set forth in the first
paragraph of Article X of these Bylaws.
(xxx) "PREFERRED SHARES BASIC MAINTENANCE AMOUNT" as of any Valuation
Date, shall mean the dollar amount equal to the sum of (i)(A) the
product of the number of Preferred Shares outstanding on such date
(including Preferred Shares held by an Affiliate of the Trust but not
Preferred Shares held by the Trust) multiplied by $25,000 (plus the
product of the number of shares of any other series of preferred shares
outstanding on such date multiplied by the liquidation preference of
such shares) plus any redemption premium applicable to Preferred Shares
(or other preferred shares) then subject to redemption; (B) the
aggregate amount of distributions that will have accumulated at the
respective Applicable Rates (whether or not earned or declared) to (but
not including) the first respective Distribution Payment Dates for the
Preferred Shares outstanding that follows such Valuation Date; (C) the
aggregate amount of distributions that would accumulate on Preferred
Shares outstanding from such first Distribution Payment Dates therefor
referenced in (B) of this paragraph through the 45th day after such
Valuation Date at the respective Applicable Rates referenced in (B) of
this paragraph; (D) the amount of anticipated non-interest expenses of
the Trust for the 90 days subsequent to such Valuation Date; (E) the
amount of the current outstanding balances of any indebtedness or
obligations of the Trust senior in right of payment to the Preferred
Shares plus distributions accrued together with 30 days additional
distributions on the current outstanding balances calculated at the
current rate; and (F) any other current liabilities payable during the
30 days subsequent to such Valuation Date, including, without
limitation, indebtedness due within one year and any redemption premium
due with respect to the Preferred Shares for which a Notice of
Redemption has been sent, as of such Valuation Date, to the extent not
reflected in any of (i)(A) through (i)(E) (including, without
limitation, any liabilities incurred for the purpose of clearing
securities transactions) less (ii) the sum of any cash plus the value of
any of the Trust's assets irrevocably deposited by the Trust for the
payment of any of (i)(A) 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). Any documents to
be provided to Fitch pursuant to this section shall be delivered to
Fitch electronically at the following email address:
funds.surveillance@fitchratings.com.
(yyy) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to
the failure by the Trust to satisfy the Preferred Shares Basic
Maintenance Amount (as required by paragraph (a) of Section 7 of Part I
of Article X of these Bylaws) as of a given Valuation Date, shall mean
the seventh Business Day following such Valuation Date.
(zzz) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a report
signed by the President, Treasurer, Assistant Treasurer, Controller,
Assistant Controller or any Senior Vice President or Vice President of
the Trust which sets forth, as of the related Valuation Date, the assets
of the Trust, the Market Value and the Discounted Value thereof
(seriatim and in aggregate), and the Preferred Shares Basic Maintenance
Amount.
(aaaa) "PRICING SERVICE" shall mean any pricing service designated from
time to time in accordance with the Trust's pricing procedures.
(bbbb) "QUARTERLY VALUATION DATE" shall mean the last Business Day of
each March, June, September and December of each year, commencing on
December 31, 2004.
(cccc) "RATE PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the Initial Rate Period and any Subsequent Rate
Period, including any Special Rate Period.
A-29
(dddd) "RATE PERIOD DAYS" for any Rate Period or Distribution Period,
means the number of days that would constitute such Rate Period or
Distribution Period but for the application of paragraph (d) of Section
2 of Part I of Article X of these Bylaws or paragraph (b) of Section 4
of Part I of Article X of these Bylaws.
(eeee) "RATING AGENCY" means a nationally recognized statistical rating
organization, including Moody's, S&P, or Fitch.
(ffff) "REFERENCE BANKS" means four major banks in the London interbank
market selected by RBC Dain Rauscher Inc. or its affiliates or
successors or such other party as the Trust may from time to time
appoint.
(gggg) "REIT," or real estate investment trust, means a company
dedicated to owning, operating or financing real estate.
(hhhh) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in Section 11 of Part I of Article X of these Bylaws.
(iiii) "REFERENCE RATE" shall mean, with respect to the determination of
the Maximum Rate, the applicable LIBOR Rate (for a distribution period
or a special distribution period of fewer than 365 days), and the
applicable Treasury Index Rate (for a special distribution period of 365
days or more).
(jjjj) "S&P" shall mean Standard & Poor's Ratings Services and its
successors.
(kkkk) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended.
(llll) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company
and its successors and assigns or any other securities depository
selected by the Trust that agrees to follow the procedures required to
be followed by such securities depository in connection with the
Preferred Shares.
(mmmm) "SELL ORDER" and "SELL ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of Article X of these
Bylaws.
(nnnn) "SERIES" shall have the meaning given in the first paragraph of
Article X of these Bylaws.
(oooo) "SHORT-TERM MONEY MARKET INSTRUMENTS" shall mean the following
types of instruments if, on the date of purchase or other acquisition
thereof by the Trust, the remaining term to maturity thereof is not in
excess of 180 days:
(i) commercial paper rated A-1 or the equivalent if such commercial
paper matures in 30 days or A-1+ or the equivalent 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
A-30
subject to banking regulation under the laws of the United States,
any state thereof or the District of Columbia);
(iii) overnight funds;
(iv) U.S. Government Securities;
(v) registered investment companies that are money market funds in
compliance with Rule 2a-7 under the 1940 Act ("2a-7 Money Market
Funds"); and
(vi) overnight repurchase agreements.
(pppp) "SPECIAL RATE PERIOD," with respect to Preferred Shares, shall
have the meaning specified in paragraph (a) of Section 4 of Part I of
Article X of these Bylaws.
(qqqq) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified
in subparagraph (a)(i) of Section 11 of Part I of Article X of these
Bylaws.
(rrrr) "SUBMISSION DEADLINE" shall mean 1:00 P.M., Eastern 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.
(ssss) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of Article X
of these Bylaws.
(tttt) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II
of Article X of these Bylaws.
(uuuu) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II
of Article X of these Bylaws.
(vvvv) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II
of Article X of these Bylaws.
(wwww) "SUBSEQUENT RATE PERIOD," with respect to Preferred Shares, shall
mean the period from and including the first day following the Initial
Rate Period of Preferred Shares to but excluding the next Distribution
Payment Date for Preferred Shares and any period thereafter from and
including one Distribution Payment Date for Preferred Shares to but
excluding the next succeeding Distribution Payment Date for Preferred
Shares; PROVIDED, HOWEVER, that if any Subsequent Rate Period is also a
Special Rate Period, such term shall mean the period commencing on the
first day of such Special Rate Period and ending on the last day of the
last Distribution Period thereof.
(xxxx) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean
Credit Suisse First Boston or Merrill Lynch, Pierce, Fenner & Smith
Incorporated or their respective affiliates or successors, if such
entity is a U.S. Government securities dealer or such other entity
designated by the Trust; PROVIDED, HOWEVER, that none of such entities
shall be a U.S. Government Securities Dealer.
A-31
(yyyy) "SWAP" means a derivative transaction between two parties who
contractually agree to exchange the returns (or differentials in rates
of return) to be exchanges or "swapped" between the parties, which
returns are calculated with respect to a "notional amount," i.e., a
particular dollar amount invested at a particular interest rate or in a
"basket" of securities representing a particular index.
(i) "INTEREST RATE SWAP" means an arrangement whereby two parties
(called counterparties) enter into an agreement to exchange periodic
interest payments. The dollar amount the counterparties pay to each
other is an agreed-upon periodic interest rate multiplied by some
predetermined dollar principal, called the notional principal
amount. No principal is exchanged between parties to the
transaction; only interest is exchanged.
(ii) "TOTAL RETURN SWAP" means an agreement between counterparties
in which one party agrees to make payments of the total return from
underlying asset(s), which may include securities, baskets of
securities, or securities indices during the specified period, in
return for payments equal to a fixed or floating rate of interest or
the total return from other underlying asset(s).
(zzzz) "TREASURY BILL" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days or
less.
(aaaaa) "TREASURY FUTURES" shall have the meaning specified in paragraph
(a)(i) of Section 13 of Part I of Article X of these Bylaws.
(bbbbb) "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 Distribution 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 Distribution 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 Trust by at least three recognized dealers in U.S.
Government Securities selected by the Trust.
(ccccc) "TREASURY NOTE" shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or
less but more than 364 days.
(ddddd) "TREASURY NOTE RATE," on any date for any Rate Period, shall
mean (i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted
in The Wall Street Journal on such date for the Business Day next
preceding such date; or (ii) in the event that any such rate is not
published in The Wall Street Journal, then the yield as calculated by
reference to the arithmetic average of the bid price quotations of the
most recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as determined by bid price quotations
as of the close of business on the Business Day immediately preceding
such date obtained from the U.S. Government Securities Dealers to the
Auction Agent. If any U.S. Government Securities Dealer does not quote a
rate required to determine the Treasury Note Rate, the Treasury Note
Rate shall be determined on the
A-32
basis of the quotation or quotations furnished by the remaining U.S.
Government Securities Dealer or U.S. Government Securities Dealers and
any Substitute U.S. Government Securities Dealers selected by the Trust
to provide such rate or rates not being supplied by any U.S. Government
Securities Dealer or U.S. Government Securities Dealers, as the case may
be, or, if the Trust does not select any such Substitute U.S. Government
Securities Dealer or Substitute U.S. Government Securities Dealers, by
the remaining U.S. Government Securities Dealer or U.S. Government
Securities Dealers.
(eeeee) "TRUST" shall mean the entity named on the first page of these
Bylaws, which is the issuer of the Preferred Shares.
(fffff) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman
Government Securities Incorporated, Goldman, Sachs & Co., Salomon
Brothers Inc., Morgan Guaranty Trust Company of New York and any other
U.S. Government Securities Dealer selected by the Trust as to which
Moody's (if Moody's is then rating the Preferred Shares) or Fitch (if
Fitch is then rating the Preferred Shares) shall not have objected or
their respective affiliates or successors, if such entity is a U.S.
Government Securities Dealer.
(ggggg) "U.S. TREASURY SECURITIES" means direct obligations of the
United States Treasury that are entitled to the full faith and credit of
the United States.
(hhhhh) "U.S. TREASURY STRIPS" means securities based on U.S. Treasury
Securities created through the Separate Trading of Registered Interest
and Principal of Securities program.
(iiiii) "VALUATION DATE" shall mean, for purposes of determining whether
the Trust is maintaining the Preferred Shares Basic Maintenance Amount,
the last Business Day of each week.
(jjjjj) "VOTING PERIOD" shall have the meaning specified in paragraph
(b) of Section 5 of Part I of Article X of these Bylaws.
(kkkkk) "WINNING BID RATE" shall have the meaning specified in paragraph
(a) of Section 3 of Part II of Article X of these Bylaws.
PART I
1. NUMBER OF AUTHORIZED SHARES. The number of authorized shares
constituting the Series is 8,000 of which 800 shares will be issued on
December 20, 2004 or on such other date as the officers of the Trust may
determine.
2. DISTRIBUTIONS.
(a) RANKING. The Preferred Shares shall rank on a parity with each
other and with any other series of preferred shares as to the payment of
distributions by the Trust.
(b) CUMULATIVE CASH DISTRIBUTIONS. The Holders of Preferred Shares
shall be entitled to receive, when, as and if declared by the Board of
Trustees, out of funds legally available therefor in accordance with the
Declaration of Trust and applicable law, cumulative cash distributions
at the Applicable Rate for shares of the Series, determined as set forth
in paragraph (e) of this Section 2, and no more (except to the extent
set forth in Section 3 of this Part I), payable on the Distribution
Payment Dates with respect to shares of the Series determined
A-33
pursuant to paragraph (d) of this Section 2. Holders of Preferred Shares
shall not be entitled to any distribution, whether payable in cash,
property or shares, in excess of full cumulative distributions, as
herein provided, on Preferred Shares. No interest, or sum of money in
lieu of interest, shall be payable in respect of any distribution
payment or payments on Preferred Shares which may be in arrears, and,
except to the extent set forth in subparagraph (e)(i) of this Section 2,
no additional sum of money shall be payable in respect of any such
arrearage.
(c) DISTRIBUTIONS CUMULATIVE FROM DATE OF ORIGINAL ISSUE.
Distributions on Preferred Shares shall accumulate at the Applicable
Rate from the Date of Original Issue thereof.
(d) DISTRIBUTION PAYMENT DATES AND ADJUSTMENT THEREOF.
Distributions on Preferred Shares shall be payable for the Initial
Rate Period on December 23, 2004, and, if declared by the Board of
Trustees (which declaration may be by a single resolution for
multiple such dates), on each seventh day thereafter (or after the
Distribution Payment Date with respect to an intervening Special Rate
Period), with respect to the Preferred Share (each date being a
"Distribution Payment Date"); PROVIDED, HOWEVER, that:
(i) if the day on which distributions would otherwise be payable
on Preferred Shares is not a Business Day, then such distributions
shall be payable on such Preferred Shares on the first Business
Day that falls after such day, and
(ii) notwithstanding this paragraph (d) of Section 2, the Trust in
its discretion may establish the Distribution Payment Dates in
respect of any Special Rate Period of Preferred Shares consisting
of more than 7 Rate Period Days, with respect to the Series;
PROVIDED, HOWEVER, that such dates shall be set forth in the
Notice of Special Rate Period relating to such Special Rate
Period, as delivered to the Auction Agent, which Notice of Special
Rate Period shall be filed with the Secretary of the Trust; and
further provided that (1) any such Distribution Payment Date shall
be a Business Day and (2) the last Distribution Payment Date in
respect of such Special Rate Period shall be the Business Day
immediately following the last day thereof, as such last day is
determined in accordance with paragraph (b) of Section 4 of this
Part I.
(e) DISTRIBUTION RATES AND CALCULATION OF DISTRIBUTIONS.
(i) DISTRIBUTION RATES. The distribution rate on Preferred Shares
during the period from and after the Date of Original Issue of
Preferred Shares to and including the last day of the Initial Rate
Period of such Preferred Shares shall be equal to the rate per
annum determined with respect to such Preferred Shares pursuant to
a resolution of the Board of Trustees, as set forth under
"Designation." The initial distribution rate on any series of
preferred shares subsequently established by the Trust shall be
the rate set forth in or determined in accordance with the
resolutions of the Board of Trustees establishing such series. For
each Subsequent Rate Period of Preferred Shares, the distribution
rate on such Preferred Shares shall be equal to the rate per annum
that results from an Auction for shares of the Series on the
Auction Date next preceding such Subsequent Rate Period (but the
rate set at the Auction will not exceed the Maximum Rate);
PROVIDED, HOWEVER, that if:
(A) subject to Section 9 of Part II, an Auction for any
Subsequent Rate Period of Preferred Shares is not held for any
reason other than as described below or if Sufficient Clearing
Orders have not been made in an Auction (other than as a result
A-34
of all Preferred Shares being the subject of Submitted Hold
Orders), then the distribution rate on the shares of the Series
for such Subsequent Rate Period will be the Maximum Rate of the
Series on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect to
shares of the Series during any Rate Period thereof (other than
any Special Rate Period consisting of more than 364 Rate Period
Days or any Rate Period succeeding any Special Rate Period
consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), but, prior
to 12:00 Noon, Eastern time, on the third Business Day next
succeeding the date on which such Failure to Deposit occurred,
such Failure to Deposit shall have been cured in accordance with
paragraph (f) of this Section 2 and the Trust shall have paid to
the Auction Agent a late charge ("Late Charge") equal to the sum
of (1) if such Failure to Deposit consisted of the failure
timely to pay to the Auction Agent the full amount of
distributions with respect to any Distribution Period of shares
of the Series, an amount computed by multiplying (x) 200% of the
Reference Rate for the Rate Period during which such Failure to
Deposit occurs on the Distribution Payment Date for such
Distribution Period by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit
has not been cured in accordance with paragraph (f) of this
Section 2 (including the day such Failure to Deposit occurs and
excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the
outstanding shares of the Series and (2) if such Failure to
Deposit consisted of the failure timely to pay to the Auction
Agent the Redemption Price of the shares, if any, of the Series
for which Notice of Redemption has been mailed by the Trust
pursuant to paragraph (c) of Section 11 of this Part I, an
amount computed by multiplying (x) 200% of the Reference Rate
for the Rate Period during which such Failure to Deposit occurs
on the redemption date by (y) a fraction, the numerator of which
shall be the number of days for which such Failure to Deposit is
not cured in accordance with paragraph (f) of this Section 2
(including the day such Failure to Deposit occurs and excluding
the day such Failure to Deposit is cured) and the denominator of
which shall be 360, and applying the rate obtained against the
aggregate Liquidation Preference of the outstanding shares of
the Series to be redeemed, then no Auction will be held, in
respect of shares of the Series for the Subsequent Rate Period
thereof and the distribution rate for shares of the Series for
such Subsequent Rate Period will be the Maximum Rate on the
Auction Date for such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with respect to
shares of the Series during any Rate Period thereof (other than
any Special Rate Period consisting of more than 364 Rate Period
Days or any Rate Period succeeding any Special Rate Period
consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), and, prior
to 12:00 Noon, Eastern time, on the third Business Day next
succeeding the date on which such Failure to Deposit occurred,
such Failure to Deposit shall not have been cured in accordance
with paragraph (f) of this Section 2 or the Trust shall not have
paid the applicable Late Charge to the Auction Agent, then no
Auction will be held in respect of shares of the Series for the
first Subsequent Rate Period thereof thereafter (or for any Rate
Period thereof thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured in accordance
with paragraph (f) of this Section 2 and (2) the Trust pays the
applicable Late Charge to the Auction Agent (the condition set
forth in this clause (2) to apply only in the event Moody's is
rating such shares at the time the
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Trust cures such Failure to Deposit), in each case no later than
12:00 Noon, Eastern time, on the fourth Business Day prior to
the end of such Rate Period), and the distribution rate for
shares of the Series for each such Subsequent Rate Period for
shares of the Series shall be a rate per annum equal to the
Maximum Rate on the Auction Date for such Subsequent Rate Period
(but with the prevailing rating for shares of the Series, for
purposes of determining such Maximum Rate, being deemed to be
"Below "Baa3"/BBB-"); or
(D) any Failure to Deposit shall have occurred with respect to
shares of the Series during a Special Rate Period thereof
consisting of more than 364 Rate Period Days, or during any Rate
Period thereof succeeding any Special Rate Period consisting of
more than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured, and, prior to 12:00 Noon,
Eastern time, on the fourth Business Day preceding the Auction
Date for the Rate Period subsequent to such Rate Period, such
Failure to Deposit shall not have been cured in accordance with
paragraph (f) of this Section 2 or, in the event Moody's is then
rating such shares, the Trust shall not have paid the applicable
Late Charge to the Auction Agent (such Late Charge, for purposes
of this subparagraph (D), to be calculated by using, as the
Reference Rate, the Reference Rate applicable to a Rate Period
(x) consisting of more than 270 Rate Period Days and (y)
commencing on the date on which the Rate Period during which
Failure to Deposit occurs commenced), then no Auction will be
held with respect to shares of the Series for such Subsequent
Rate Period (or for any Rate Period thereof thereafter to and
including the Rate Period during which (1) such Failure to
Deposit is cured in accordance with paragraph (f) of this
Section 2 and (2) the Trust pays the applicable Late Charge to
the Auction Agent (the condition set forth in this clause (2) to
apply only in the event Moody's is rating such shares at the
time the Trust cures such Failure to Deposit), in each case no
later than 12:00 Noon, Eastern time, on the fourth Business Day
prior to the end of such Rate Period), and the distribution rate
for shares of the Series for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate for shares
of the Series on the Auction Date for such Subsequent Rate
Period (but with the prevailing rating for shares of the Series,
for purposes of determining such Maximum Rate, being deemed to
be "Below "Baa3"/BBB-").
(ii) CALCULATION OF DISTRIBUTIONS. The amount of distributions per
share payable on Preferred Shares on any date on which
distributions on shares of the Series shall be payable shall be
computed by multiplying the Applicable Rate for shares of the
Series in effect for such Distribution Period or Distribution
Periods or part thereof for which distributions have not been paid
by a fraction, the numerator of which shall be the number of days
in such Distribution Period or Distribution Periods or part
thereof and the denominator of which shall be 360, and applying
the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to
Preferred Shares shall have been cured (if such Failure to Deposit is
not solely due to the willful failure of the Trust to make the required
payment to the Auction Agent) with respect to any Rate Period of shares
of the Series if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Trust shall have paid to the
Auction Agent (A) all accumulated and unpaid distributions on shares of
the Series and (B) without duplication, the Redemption Price for shares,
if any, of the Series for which Notice of Redemption has been mailed by
the Trust pursuant to paragraph (c) of Section 11 of Part I of Article X
of these Bylaws; PROVIDED, HOWEVER, that the foregoing clause (B) shall
not apply to the Trust's failure to pay the Redemption Price in respect
A-36
of Preferred Shares when the related Redemption Notice provides that
redemption of such Preferred Shares is subject to one or more conditions
precedent and any such condition precedent shall not have been satisfied
at the time or times and in the manner specified in such Notice of
Redemption.
(g) DISTRIBUTION PAYMENTS BY TRUST TO AUCTION AGENT. The Trust shall
pay to the Auction Agent, not later than 12:00 Noon, Eastern time, on
each Distribution Payment Date for Preferred Shares, an aggregate amount
of funds available in The City of New York, New York, equal to the
distributions to be paid to all Holders of shares of the Series on such
Distribution Payment Date.
(h) AUCTION AGENT AS TRUSTEE OF DISTRIBUTION PAYMENTS BY TRUST. All
moneys paid to the Auction Agent for the payment of distributions shall
be held in trust for the payment of such distributions by the Auction
Agent for the benefit of the Holders specified in paragraph (i) of this
Section 2. Any moneys paid to the Auction Agent in accordance with the
foregoing but not applied by the Auction Agent to the payment of
distributions will, to the extent permitted by law, be repaid to the
Trust at the end of 90 days from the date on which such moneys were so
to have been applied.
(i) DISTRIBUTIONS PAID TO HOLDERS. Each distribution on Preferred
Shares shall be paid on the Distribution Payment Date therefor to the
Holders thereof as their names appear on the record books of the Trust
on the Business Day next preceding such Distribution Payment Date.
(j) DISTRIBUTIONS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID
DISTRIBUTIONS. Any distribution payment made on Preferred Shares shall
first be credited against the earliest accumulated but unpaid
distributions due with respect to such Preferred Shares. Distributions
in arrears for any past Distribution Period may be declared and paid at
any time, without reference to any regular Distribution Payment Date, to
the Holders as their names appear on the record books of the Trust on
such date, not exceeding 15 days preceding the payment date thereof, as
may be fixed by the Board of Trustees.
3. RESERVED.
4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Trust,
at its option, may designate any succeeding Subsequent Rate Period of
Preferred Shares as a special rate period consisting of a specified
number of Rate Period Days, other than the number of Rate Period Days
comprising a Minimum Rate Period, that is evenly divisible by seven,
subject to adjustment as provided in paragraph (b) of this Section 4
(each such period, a "Special Rate Period"). A designation of a Special
Rate Period shall be effective only if (A) notice thereof shall have
been given in accordance with paragraph (c) and subparagraph (d)(i) of
this Section 4, (B) an Auction for shares of the Series shall have been
held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids for shares of
the Series shall have existed in such Auction, and (C) if any Notice of
Redemption shall have been mailed by the Trust pursuant to paragraph (c)
of Section 11 of this Part I with respect to any shares of the Series,
the Redemption Price with respect to such shares shall have been
deposited with the Auction Agent. In the event the Trust wishes to
designate any succeeding Subsequent Rate Period for Preferred Shares as
a Special Rate Period consisting of more than 28 Rate Period Days, the
Trust shall notify Fitch (if Fitch is then rating the Preferred Shares)
and
A-37
Moody's (if Moody's is then rating the Preferred Shares) in advance of
the commencement of such Subsequent Rate Period that the Trust wishes to
designate such Subsequent Rate Period as a Special Rate Period and shall
provide Fitch (if Fitch is then rating the Preferred Shares) and Moody's
(if Moody's is then rating the Preferred Shares) with such documents as
either may request. In addition, full cumulative distributions, any
amounts due with respect to mandatory redemptions and any additional
distributions payable prior to such date must be paid in full or
deposited with the Auction Agent. The Trust also must have portfolio
securities with a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the
Trust wishes to designate a Subsequent Rate Period as a Special Rate
Period, but the day following what would otherwise be the last day of
such Special Rate Period is not a Thursday that is a Business Day in
case of the Series, then the Trust shall designate such Subsequent Rate
Period as a Special Rate Period consisting of the period commencing on
the first day following the end of the immediately preceding Rate Period
and ending on the first Wednesday that is followed by a Thursday that
is a Business Day preceding what would otherwise be such last day in
the case of the Series.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Trust proposes to
designate any succeeding Subsequent Rate Period of Preferred Shares as a
Special Rate Period pursuant to paragraph (a) of this Section 4, not
less than 7 (or such lesser number of days as determined by the Trust
with appropriate consultation with the Auction Agent and Broker-Dealers)
nor more than 30 days prior to the date the Trust proposes to designate
as the first day of such Special Rate Period (which shall be such day
that would otherwise be the first day of a Minimum Rate Period), notice
shall be mailed by the Trust by first-class mail, postage prepaid, to
the Holders of shares of the Series. Each such notice shall state (A)
that the Trust may exercise its option to designate a succeeding
Subsequent Rate Period of shares of the Series as a Special Rate Period,
specifying the first day thereof and (B) that the Trust will, by 11:00
A.M., Eastern time, on the second Business Day next preceding such date
(or by such later time or date, or both, as determined by the Trust with
appropriate consultation with the Auction Agent and Broker-Dealers)
notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Trust
shall specify the Special Rate Period designated, or (y) its
determination not to exercise such option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M., Eastern
time, on the second Business Day next preceding the first day of any
proposed Special Rate Period of shares of a series of Preferred Shares
as to which notice has been given as set forth in paragraph (c) of this
Section 4 (or such later time or date, or both, as determined by the
Trust with appropriate consultation with the Auction Agent and
Broker-Dealers), the Trust shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that
the Trust has determined to designate the next succeeding Rate
Period of shares of the Series as a Special Rate Period,
specifying the same and the first day thereof, (B) the Auction
Date immediately prior to the first day of such Special Rate
Period, (C) that such Special Rate Period shall not commence if
(1) an Auction for shares of the Series shall not be held on such
Auction Date for any reason or (2) an Auction for shares of the
Series shall be held on such Auction Date but Sufficient Clearing
Bids for shares of the Series shall not exist in such Auction
(other than because all Outstanding shares of the Series are
subject to Submitted Hold Orders), (D) the scheduled Distribution
Payment Dates for shares of the Series during such Special Rate
Period and (E) the Special Redemption Provisions, if any,
applicable to shares of the Series in respect of such Special Rate
Period, such notice to be
A-38
accompanied by a Preferred Shares Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed
Special Rate Period, Moody's Eligible Assets (if Moody's is then
rating the series in question) and Fitch Eligible Assets (if Fitch
is then rating the series in question) each have an aggregate
Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount as of such Business Day (assuming for purposes
of the foregoing calculation that (a) the Maximum Rate is the
Maximum Rate on such Business Day as if such Business Day were the
Auction Date for the proposed Special Rate Period, and (b) if
applicable, the Moody's Discount Factors applicable to Moody's
Eligible Assets and the Fitch Discount Factors applicable to Fitch
Eligible Assets are determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the
Trust, as described in the definitions of Moody's Discount Factor
and Fitch Discount Factor herein); or
(ii) a notice stating that the Trust has determined not to
exercise its option to designate a Special Rate Period of shares
of the Series and that the next succeeding Rate Period of shares
of the Series shall be a Minimum Rate Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Trust
fails to deliver either of the notices described in subparagraphs (d)(i)
or (d)(ii) of this Section 4 (and, in the case of the notice described
in subparagraph (d)(i) of this Section 4, a Preferred Shares Basic
Maintenance Report to the effect set forth in such subparagraph (if
either Moody's or Fitch is then rating the series in question)) with
respect to any designation of any proposed Special Rate Period to the
Auction Agent by 11:00 A.M., Eastern time, on the second Business Day
next preceding the first day of such proposed Special Rate Period (or by
such later time or date, or both, as determined by the Trust with
appropriate consultation with the Auction Agent and Broker-Dealers), the
Trust shall be deemed to have delivered a notice to the Auction Agent
with respect to such Special Rate Period to the effect set forth in
subparagraph (d)(ii) of this Section 4. In the event the Trust delivers
to the Auction Agent a notice described in subparagraph (d)(i) of this
Section 4, it shall file a copy of such notice with the Secretary of the
Trust, and the contents of such notice shall be binding on the Trust. In
the event the Trust delivers to the Auction Agent a notice described in
subparagraph (d)(ii) of this Section 4, the Trust will provide Moody's
(if Moody's is then rating the series in question) and Fitch (if Fitch
is then rating the series in question) a copy of such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER PREFERRED SHARE. Except as otherwise provided in the
Declaration of Trust or as otherwise required by law, (i) each Holder of
Preferred Shares shall be entitled to one vote for each Preferred Share
held by such Holder on each matter submitted to a vote of Shareholders
of the Trust, and (ii) the holders of outstanding shares of preferred
shares, including Preferred Shares, and of Common Shares shall vote
together as a single class; PROVIDED, HOWEVER, that, at any meeting of
the Shareholders of the Trust held for the election of Trustees, the
holders of outstanding shares of preferred shares, including Preferred
Shares, represented in person or by proxy at said meeting, shall be
entitled, as a class, to the exclusion of the holders of all other
securities and classes of shares of the Trust, to elect two Trustees of
the Trust (regardless of the total number of Trustees serving on the
Trust's Board of Trustees), each share of preferred shares, including
each Preferred Share, entitling the holder thereof to one vote;
provided, further, that if the Board of Trustees shall be divided into
one or more classes, the Board of Trustees shall determine to which
class or classes the Trustees elected by the holders of preferred shares
shall be assigned and the holders of the preferred shares shall only be
entitled to elect the Trustees so designated as being elected by the
holders of the preferred shares when their term shall have
A-39
expired; provided, finally, that such Trustees appointed by the holders
of preferred shares shall be allocated as evenly as possible among the
classes of Trustees. Subject to paragraph (b) of this Section 5, the
holders of outstanding Common Shares and preferred shares, including
Preferred Shares, voting together as a single class, shall elect the
balance of the Trustees.
(b) VOTING FOR ADDITIONAL TRUSTEES.
(i) VOTING PERIOD. Except as otherwise provided in the Declaration
of Trust or as otherwise required by law, during any period in
which any one or more of the conditions described in subparagraphs
(A) or (B) of this subparagraph (b)(i) shall exist (such period
being referred to herein as a "Voting Period"), the number of
Trustees constituting the Board of Trustees shall be automatically
increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of preferred shares,
including Preferred Shares, would constitute a majority of the
Board of Trustees as so increased by such smallest number; and the
holders of preferred shares, including Preferred Shares, shall be
entitled, voting as a class on a one-vote-per-share basis (to the
exclusion of the holders of all other securities and classes of
shares of the Trust), to elect such smallest number of additional
Trustees, together with the two Trustees that such holders are in
any event entitled to elect. A Voting Period shall commence:
(A) if at the close of business on any distribution payment date
accumulated distributions (whether or not earned or declared) on
any outstanding preferred shares, including Preferred Shares,
equal to at least two full years' distributions shall be due and
unpaid and sufficient cash or specified securities shall not
have been deposited with the Auction Agent for the payment of
such accumulated distributions; or
(B) if at any time holders of Preferred Shares are entitled
under the 1940 Act to elect a majority of the Trustees of the
Trust.
Upon the termination of a Voting Period, the voting rights
described in this subparagraph (b)(i) shall cease, subject always,
however, to the revesting of such voting rights in the Holders
upon the further occurrence of any of the events described in this
subparagraph (b)(i).
(ii) NOTICE OF SPECIAL MEETING. As soon as practicable after the
accrual of any right of the holders of preferred shares, including
Preferred Shares, to elect additional Trustees as described in
subparagraph (b)(i) of this Section 5, the Trust shall notify the
Auction Agent and the Auction Agent shall call a special meeting
of such registered holders, by mailing a notice of such special
meeting to such holders, such meeting to be held not less than 10
nor more than 30 days after the date of mailing of such notice. If
the Trust 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 registered 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 or on such other date as the Trust may determine. At any
such special meeting and at each meeting of holders of preferred
shares, including Preferred Shares, 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 shares of the Trust), shall be entitled to elect
the number of Trustees prescribed in subparagraph (b)(i) of this
Section 5 on a one-vote-per-share basis.
A-40
(iii) TERMS OF OFFICE OF EXISTING TRUSTEES. The terms of office of
all persons who are Trustees of the Trust at the time of a special
meeting of Holders and holders of other shares of preferred shares
of the Trust to elect Trustees shall continue, notwithstanding the
election at such meeting by the Holders and such other holders of
the number of Trustees that they are entitled to elect, and the
persons so elected by the Holders and such other holders, together
with the two incumbent Trustees elected by the Holders and such
other holders of preferred shares of the Trust and the remaining
incumbent Trustees elected by the holders of the Common Shares and
preferred shares, including Preferred Shares, shall constitute the
duly elected Trustees of the Trust.
(iv) TERMS OF OFFICE OF CERTAIN TRUSTEES TO TERMINATE UPON
TERMINATION OF VOTING PERIOD. Simultaneously with the termination
of a Voting Period, the terms of office of the additional Trustees
elected by the Holders and holders of other preferred shares of
the Trust pursuant to subparagraph (b)(i) of this Section 5 shall
terminate, the remaining Trustees shall constitute the Trustees of
the Trust and the voting rights of the Holders and such other
holders to elect additional Trustees pursuant to subparagraph
(b)(i) of this Section 5 shall cease, subject to the provisions of
the last sentence of subparagraph (b)(i) of this Section 5.
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS.
(i) INCREASES IN CAPITALIZATION. So long as any Preferred Shares
are outstanding, the Trust shall not, without the affirmative vote
or consent of the Holders of at least a majority of the Preferred
Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class: (a)
authorize, create or issue any class or series of shares ranking
prior to or on a parity with Preferred Shares with respect to the
payment of distributions or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the
Trust, or authorize, create or issue additional shares of any
series of Preferred Shares (except that, notwithstanding the
foregoing, but subject to the provisions of paragraph (c) of
Section 13 of this Part I, the Board of Trustees, without the vote
or consent of the Holders of Preferred Shares, may from time to
time authorize and create, and the Trust may from time to time
issue additional shares of Preferred Shares, or classes or series
of preferred shares ranking on a parity with Preferred Shares with
respect to the payment of distributions and the distribution of
assets upon dissolution, liquidation or winding up of the affairs
of the Trust; PROVIDED, HOWEVER, that if Moody's and Fitch (or
other NRSRO) is not then rating the Preferred Shares, the
aggregate liquidation preference of all Preferred Shares of the
Trust outstanding after any such issuance, exclusive of
accumulated and unpaid distributions, may not exceed
$200,000,000) or (b) amend, alter or repeal the provisions of the
Declaration of Trust, or these Bylaws, whether by merger,
consolidation or otherwise, so as to affect any preference, right
or power of such Preferred Shares or the Holders thereof;
PROVIDED, HOWEVER, that (i) none of the actions permitted by the
exception to (a) above will be deemed to affect such preferences,
rights or powers, (ii) a division or split of a Preferred Share
will be deemed to affect such preferences, rights or powers only
if the terms of such division adversely affect the Holders of
Preferred Shares and (iii) the authorization, creation and
issuance of classes or series of shares ranking junior to
Preferred Shares with respect to the payment of distributions and
the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust, will be deemed to affect
such preferences, rights or powers only if Moody's or Fitch is
then rating Preferred Shares and such issuance would, at the
time thereof, cause the Trust not to satisfy the
A-41
1940 Act Preferred Shares Asset Coverage or the Preferred Shares
Basic Maintenance Amount. So long as any Preferred Shares are
outstanding, the Trust shall not, without the affirmative vote or
consent of the Holders of at least a majority of the Preferred
Shares outstanding at the time, in person or by proxy, either in
writing or at a meeting, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or
any similar application under state law for so long as the Trust
is solvent and does not foresee becoming insolvent.
(ii) 1940 ACT MATTERS. Unless a higher percentage is provided for
in the Declaration of Trust, (A) the affirmative vote of the
Holders a "majority of the outstanding" (as such term is defined
in the 1940 Act) preferred shares of the Trust, including
Preferred Shares, voting as a separate class, shall be required to
approve (A) any plan of reorganization (as such term is used in
the 1940 Act) adversely affecting such shares and (B) any action
requiring a vote of security holders of the Trust under Section
13(a) of the 1940 Act. In the event a vote of Holders of Preferred
Shares is required pursuant to the provisions of Section 13(a) of
the 1940 Act, the Trust shall, not later than ten Business Days
prior to the date on which such vote is to be taken, notify
Moody's (if Moody's is then rating the Preferred Shares) and Fitch
(if Fitch is then rating the Preferred Shares) that such vote is
to be taken and the nature of the action with respect to which
such vote is to be taken. The Trust shall, not later than ten
Business Days after the date on which such vote is taken, notify
Moody's (if Moody's is then rating the Preferred Shares) and Fitch
(if Fitch is then rating the Preferred Shares) of the results of
such vote.
(d) BOARD MAY TAKE ACTIONS WITHOUT SHAREHOLDER APPROVAL. The Board of
Trustees may, without the vote or consent of the Holders of the
Preferred Shares, or any other shareholder of the Trust, from time to
time amend, alter or repeal any or all of the definitions of the terms
listed herein, or any provision of the Bylaws viewed by Moody's or Fitch
as a predicate for any such definition, and any such amendment,
alteration or repeal will not be deemed to affect the preferences,
rights or powers of the Preferred Shares or the Holders thereof,
provided the Board of Trustees receives confirmation from Moody's (if
Moody's is then rating the Preferred Shares) and Fitch (if Fitch is then
rating the Preferred Shares), that any such amendment, alteration or
repeal would not impair the ratings then assigned to the Preferred
Shares by Moody's (if Moody's is then rating the Preferred Shares) or
Fitch (if Fitch is then rating the Preferred Shares).
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 preferred shares, including Preferred Shares, or any
other shareholder of the Trust, and without receiving any confirmation
from any rating agency, after consultation with the Broker-Dealers,
provided that immediately following any such increase the Trust would
meet the Preferred Shares Basic Maintenance Amount Test.
(e) RELATIVE RIGHTS AND PREFERENCES. Unless otherwise required by law
or provided elsewhere in the Declaration of Trust, the Holders of
Preferred Shares shall not have any relative rights or preferences or
other special rights other than those specifically set forth herein.
(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of
Preferred Shares shall have no preemptive rights or rights to cumulative
voting.
A-42
(g) VOTING FOR TRUSTEES SOLE REMEDY FOR TRUST'S FAILURE TO PAY
DISTRIBUTIONS. In the event that the Trust fails to pay any
distributions on the Preferred Shares, the exclusive remedy of the
Holders shall be the right to vote for Trustees pursuant to the
provisions of this Section 5.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights
of the Holders to vote on any matter, whether such right is created by
these Bylaws, by the Declaration of Trust, by statute or otherwise, no
Holder shall be entitled to vote Preferred Shares and no Preferred
Shares shall be deemed to be "outstanding" for the purpose of voting or
determining the number of shares required to constitute a quorum if,
prior to or concurrently with the time of determination of shares
entitled to vote or shares deemed outstanding for quorum purposes, as
the case may be, the requisite Notice of Redemption with respect to such
shares shall have been mailed as provided in paragraph (c) of Section 11
of this Part I and the Redemption Price for the redemption of such
shares shall have been deposited in trust with the Auction Agent for
that purpose. No Preferred Shares held by the Trust or any affiliate of
the Trust (except for shares held by a Broker-Dealer that is an
affiliate of the Trust for the account of its customers) shall have any
voting rights or be deemed to be outstanding for voting or other
purposes.
6. 1940 ACT PREFERRED SHARES ASSET COVERAGE. THE TRUST SHALL MAINTAIN,
AS OF THE LAST BUSINESS DAY OF EACH MONTH IN WHICH ANY SHARE OF A SERIES OF
PREFERRED SHARES IS OUTSTANDING, THE 1940 ACT PREFERRED SHARES ASSET COVERAGE;
PROVIDED, HOWEVER, THAT THE REDEMPTION PURSUANT TO SECTION 11(b) OF THIS PART I
SHALL BE THE SOLE REMEDY IN THE EVENT THE TRUST FAILS TO DO SO.
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
(a) So long as Preferred Shares are outstanding, the Trust shall
maintain, on each Valuation Date, and shall verify to its satisfaction
that it is maintaining on such Valuation Date, (i) Fitch Eligible Assets
having an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount (if Fitch is then rating the
Preferred Shares) and (ii) Moody's Eligible Assets having an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount (if Moody's is then rating the Preferred Shares);
PROVIDED, HOWEVER, that the redemption pursuant to Section 11(b) of this
Part I shall be the sole remedy in the event the Trust fails to do so.
(b) On or before 5:00 P.M., Eastern time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the Preferred
Shares Basic Maintenance Amount, and on the third Business Day after the
Preferred Shares Basic Maintenance Cure Date with respect to such
Valuation Date, the Trust shall complete and deliver to Fitch (if Fitch
is then rating the Preferred Shares) and Moody's (if Moody's is then
rating the Preferred Shares) a Preferred Shares Basic Maintenance Report
as of the date of such failure or such Preferred Shares Basic
Maintenance Cure Date, as the case may be. The Trust shall also deliver
a Preferred Shares Basic Maintenance Report to Moody's (if Moody's is
then rating the Preferred Shares) and Fitch (if Fitch is then rating the
Preferred Shares), in each case on or before the seventh Business Day
after the last Business Day of each month. A failure by the Trust to
deliver a Preferred Shares Basic Maintenance Report pursuant to the
preceding sentence shall be deemed to be delivery of a Preferred Shares
Basic Maintenance Report indicating the Discounted Value for all assets
of the Trust is less than the Preferred Shares Basic Maintenance Amount,
as of the relevant Valuation Date.
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(c) Within ten Business Days after the date of delivery of a
Preferred Shares Basic Maintenance Report in accordance with paragraph
(b) of this Section 7 relating to a Quarterly Valuation Date that is
also an Annual Valuation Date, the Trust shall cause the Independent
Accountant to confirm in writing to Fitch (if Fitch is then rating the
Preferred Shares) and Moody's (if Moody's is then rating the Preferred
Shares) (i) the mathematical accuracy of the calculations reflected in
such Report (and in any other Preferred Shares Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by
the Trust during the quarter ending on such Annual Valuation Date), (ii)
that, in such Report (and in such randomly selected Report), the Trust
correctly determined in accordance with these Bylaws whether the Trust
had, at such Annual Valuation Date (and at the Valuation Date addressed
in such randomly-selected Report), Fitch Eligible Assets (if Fitch is
then rating the Preferred Shares) of an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount and Moody's
Eligible Assets (if Moody's is then rating the Preferred Shares) of an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, (iii) that, in such Report (and in such randomly
selected Report), the Trust determined whether the Trust had, at such
Annual Valuation Date (and at the Valuation Date addressed in such
randomly selected Report) in accordance with these Bylaws, with respect
to the Fitch ratings, the issuer name and issue size and coupon rate
listed in such Report, verified by the Independent Accountant by
reference to Bloomberg Financial Services or another independent source
approved by Moody's (if Moody's is then rating the Preferred Shares) and
Fitch (if Fitch is then rating the Preferred Shares) and the Independent
Accountant shall provide a listing in its letter of any differences,
(iv) with respect to the Moody's ratings, the issuer name, issue size
and coupon rate listed in such Report, that such information has been
verified by the Independent Accountant by reference to Bloomberg
Financial Services or another independent source approved by Moody's (if
Moody's is then rating the Preferred Shares) and Fitch (if Fitch is then
rating the Preferred Shares) and the Independent Accountant shall
provide a listing in its letter of any differences, (v) with respect to
the bid or mean price (or such alternative permissible factor used in
calculating the Market Value) provided by the custodian of the Trust's
assets to the Trust for purposes of valuing securities in the Trust's
portfolio, that the Independent Accountant has traced the price used in
such Report to the bid or mean price listed in such Report as provided
to the Trust and verified that such information agrees (in the event
such information does not agree, the Independent Accountant will provide
a listing in its letter of such differences) and (vi) with respect to
such confirmation to Moody's (if Moody's is then rating the Preferred
Shares) and Fitch (if Fitch is then rating the Preferred Shares), that
the Trust has satisfied the requirements of Section 13 of this Part I
with respect to portfolio holdings as of the date of such Report (such
confirmation is herein called the "Auditor's Confirmation"); PROVIDED,
HOWEVER, that the Independent Accountant may base the conclusions
related to (ii) through (vi) above on a sample of at least 25 securities
(or such other number of securities as the Independent Accountant and
Moody's (if Moody's is then rating the Preferred Shares) and Fitch (if
Fitch is then rating the Preferred Shares) may agree from time to time).
(d) Within ten Business Days after the date of delivery of a
Preferred Shares Basic Maintenance Report in accordance with paragraph
(b) of this Section 7 relating to any Valuation Date on which the Trust
failed to satisfy the Preferred Shares Basic Maintenance Amount, and
relating to the Preferred Shares Basic Maintenance Cure Date with
respect to such failure to satisfy the Preferred Shares Basic
Maintenance Amount, the Trust shall cause the Independent Accountant to
provide to Fitch (if Fitch is then rating the Preferred Shares) and
Moody's (if Moody's is then rating the Preferred Shares) an Auditor's
Confirmation as to such Preferred Shares Basic Maintenance Report.
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(e) If any Auditor's Confirmation delivered pursuant to paragraph (c)
or (d) of this Section 7 shows that an error was made in the Preferred
Shares Basic Maintenance Report for a particular Valuation Date for
which such Auditor's Confirmation was required to be delivered, or shows
that a lower aggregate Discounted Value for the aggregate of all Fitch
Eligible Assets (if Fitch is then rating the Preferred Shares) or
Moody's Eligible Assets (if Moody's is then rating the Preferred
Shares), as the case may be, of the Trust was determined by the
Independent Accountant, then in the absence of manifest error the
calculation or determination made by such Independent Accountant shall
be final and conclusive and shall be binding on the Trust, and the Trust
shall accordingly amend and deliver the Preferred Shares Basic
Maintenance Report to Fitch (if Fitch is then rating the Preferred
Shares) and Moody's (if Moody's is then rating the Preferred Shares)
promptly following receipt by the Trust of such Auditor's Confirmation.
(f) On or before 5:00 p.m., Eastern time, on the first Business Day
after the Date of Original Issue of any Preferred Shares, the Trust
shall complete and deliver to Fitch (if Fitch is then rating the
Preferred Shares) and Moody's (if Moody's is then rating the Preferred
Shares) a Preferred Shares Basic Maintenance Report as of the close of
business on such Date of Original Issue.
(g) On or before 5:00 p.m., Eastern time, on the seventh Business Day
after either (i) the Trust shall have redeemed Common Shares or (ii) the
ratio of the Discounted Value of Fitch Eligible Assets or the Discounted
Value of Moody's Eligible Assets to the Preferred Shares Basic
Maintenance Amount on any valuation date is less than or equal to 105%
or (iii) whenever requested by Moody's or Fitch, the Trust shall
complete and deliver to Fitch (if Fitch is then rating the Preferred
Shares) or Moody's (if Moody's is then rating the Preferred Shares), as
the case may be, a Preferred Shares Basic Maintenance Report as of the
date of such request.
8. RESERVED.
9. RESTRICTIONS ON DISTRIBUTIONS AND OTHER DISTRIBUTIONS.
(a) DISTRIBUTIONS ON SHARES OTHER THAN PREFERRED SHARES. Except as
set forth in the next sentence, no distributions shall be declared or
paid or set apart for payment on the shares of any class or series of
shares of the Trust ranking, as to the payment of distributions, on a
parity with Preferred Shares for any period unless full cumulative
distributions have been or contemporaneously are declared and paid on
the Preferred Shares through its most recent Distribution Payment Date.
When distributions are not paid in full upon the Preferred Shares
through its most recent Distribution Payment Date or upon the shares of
any other class or series of shares of the Trust ranking on a parity as
to the payment of distributions with Preferred Shares through their most
recent respective distribution payment dates, all distributions declared
upon Preferred Shares and any other such class or series of shares
ranking on a parity as to the payment of distributions with Preferred
Shares shall be declared pro rata so that the amount of distributions
declared per share on Preferred Shares and such other class or series of
shares shall in all cases bear to each other the same ratio that
accumulated distributions per share on the Preferred Shares and such
other class or series of shares bear to each other (for purposes of this
sentence, the amount of distributions declared per share of Preferred
Shares shall be based on the Applicable Rate for such share for the
Distribution Periods during which distributions were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES
UNDER THE 1940 ACT. The Board of Trustees shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other
distribution, upon the Common Shares, or purchase Common Shares, unless
in every such case the Preferred Shares
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have, at the time of any such declaration or purchase, an asset coverage
(as defined in and determined pursuant to the 1940 Act) of at least 200%
(or such other asset coverage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities
which are shares or stock of a closed-end investment company as a
condition of declaring dividends on its common shares or stock) after
deducting the amount of such dividend, distribution or purchase price,
as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so
long as any Preferred Shares are outstanding, and except as set forth in
paragraph (a) of this Section 9 and paragraph (c) of Section 12 of this
Part I, (A) the Trust shall not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to
subscribe for or purchase, Common Shares or other shares, if any,
ranking junior to the Preferred Shares as to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding
up) in respect of the Common Shares or any other shares of the Trust
ranking junior to or on a parity with the Preferred Shares as to the
payment of dividends or other distributions, including the distribution
of assets upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares (except by conversion into
or exchange for shares of the Trust ranking junior to the Preferred
Shares as to the payment of dividends and other distributions, including
the distribution of assets upon dissolution, liquidation or winding up),
or any such parity shares (except by conversion into or exchange for
shares of the Trust ranking junior to or on a parity with Preferred
Shares as to the payment of dividends and other distributions, including
the distribution of assets upon dissolution, liquidation or winding up),
unless (i) full cumulative distributions on Preferred Shares through its
most recently ended Distribution Period shall have been paid or shall
have been declared and sufficient funds for the payment thereof are
reasonably expected by the Trust to be available for payment on the date
payment is due to the Auction Agent and (ii) the Trust has redeemed the
full number of Preferred Shares required to be redeemed by any provision
for mandatory redemption pertaining thereto, and (B) the Trust shall not
declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or in options,
warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to Preferred Shares as to the payment of
dividends and other distributions, including the distribution of assets
upon dissolution, liquidation or winding up) in respect of Common Shares
or any other shares of the Trust ranking junior to Preferred Shares as
to the payment of dividends or other distributions, including the
distribution of assets upon dissolution, liquidation or winding up, or
call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except
by conversion into or exchange for shares of the Trust ranking junior to
Preferred Shares as to the payment of dividends and other distributions,
including the distribution of assets upon dissolution, liquidation or
winding up), unless immediately after such transaction the Discounted
Value of Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and Fitch Eligible Assets (if Fitch is then rating the
Preferred Shares) would each at least equal the Preferred Shares Basic
Maintenance Amount.
10. RESERVED.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
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(i) Subject to the provisions of subparagraph (v) of this
paragraph (a), Preferred Shares may be redeemed, at the option
of the Trust, as a whole or from time to time in part, on the
second Business Day preceding any Distribution Payment Date for
shares of the Series, out of funds legally available therefor,
at a redemption price per share equal to the sum of $25,000
plus an amount equal to accumulated but unpaid distributions
thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption; PROVIDED, HOWEVER,
that (1) Preferred Shares are redeemable by the Trust during
the Initial Rate Period only on the second Business Day next
preceding the last Distribution Payment Date for such Initial
Rate Period; and (2) subject to subparagraph (ii) of this
paragraph (a), the Notice of Special Rate Period relating to a
Special Rate Period of Preferred Shares, as delivered to the
Auction Agent and filed with the Secretary of the Trust, may
provide that shares of the Series shall not be redeemable
during the whole or any part of such Special Rate Period
(except as provided in subparagraph (iv) of this paragraph (a))
or shall be redeemable during the whole or any part of such
Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein ("Special
Redemption Provisions").
(ii) A Notice of Special Rate Period relating to Preferred Shares
for a Special Rate Period thereof may contain Special Redemption
Provisions only if the Trust's Board of Trustees, after
consultation with the Broker-Dealer or Broker-Dealers for such
Special Rate Period of shares of the Series, determines that such
Special Redemption Provisions are in the best interest of the
Trust.
(iii) If fewer than all of the outstanding Preferred Shares are to
be redeemed pursuant to subparagraph (i) of this paragraph (a),
the number of shares of the Series to be redeemed shall be
determined by the Board of Trustees, and such shares shall be
redeemed pro rata from the Holders of shares of the Series in
proportion to the number of shares of the Series held by such
Holders or by such other method that the Board of Trustees deems
fair and equitable.
(iv) Subject to the provisions of subparagraph (v) of this
paragraph (a), Preferred Shares may be redeemed, at the option
of the Trust, as a whole but not in part, out of funds legally
available therefor, on the first day following any Distribution
Period thereof included in a Rate Period consisting of more
than 364 Rate Period Days if, on the date of determination of
the Applicable Rate for shares of the Series for such Rate
Period, such Applicable Rate equaled or exceeded on such date
of determination the Treasury Note Rate for such Rate Period,
at a redemption price per share equal to the sum of $25,000
plus an amount equal to accumulated but unpaid distributions
thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption
pursuant to paragraph (c) of this Section 11 in respect of a
redemption contemplated to be effected pursuant to this paragraph
(a) unless on such date (a) the Trust has available Deposit
Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to
Holders of Preferred Shares by reason of the redemption of such
shares on such redemption date and (b) the Discounted Value of
Moody's Eligible Assets (if Moody's is then rating the Preferred
Shares) and the Discounted Value of Fitch Eligible Assets (if
Fitch is then rating the Preferred Shares) each at least equal the
Preferred Shares Basic Maintenance Amount, and would at least
equal the Preferred Shares Basic Maintenance Amount immediately
subsequent to such redemption if such redemption were to occur on
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such date. The Trust shall not be required to have available
Deposit Securities as described in clause (a) of this subparagraph
(v) in respect of a redemption of any Preferred Shares, as a whole
or in part, contemplated to be effected pursuant to paragraph
11(a) where such redemption is subject to the issuance of shares
of any other series of preferred shares or debt or other leverage
of the Trust. For purposes of determining in clause (b) of the
second preceding sentence whether the Discounted Value of Moody's
Eligible Assets and Fitch Eligible Assets each at least equal the
Preferred Shares Basic Maintenance Amount, and would at least
equal the Preferred Shares Basic Maintenance Amount immediately
subsequent to such redemption, the Moody's Discount Factor
applicable to Moody's Eligible Assets and the Fitch Discount
Factor applicable to Fitch Discount Assets shall be determined by
reference, if applicable, to the first Exposure Period longer than
the Exposure Period then applicable to the Trust, as described in
the definition of Moody's Discount Factor and Fitch Discount
Factor herein.
(b) MANDATORY REDEMPTION. The Trust shall redeem, at a redemption
price equal to $25,000 per share plus accumulated but unpaid
distributions thereon (whether or not earned or declared) to (but not
including) the date fixed by the Board of Trustees for redemption,
certain of the Preferred Shares, if the Trust fails to have either
Moody's Eligible Assets with a Discounted Value or Fitch Eligible Assets
with a Discounted Value greater than or equal to the Preferred Shares
Basic Maintenance Amount, in accordance with the requirements of the
rating agency or agencies then rating the Preferred Shares, or fails to
maintain the 1940 Act Preferred Shares Asset Coverage and such failure
is not cured on or before the Preferred Shares Basic Maintenance Cure
Date or the 1940 Act Cure Date, as the case may be. The number of
Preferred Shares to be redeemed shall be equal to the lesser of (i) the
minimum number of Preferred Shares, together with all other preferred
shares subject to redemption or retirement, the redemption of which, if
deemed to have occurred immediately prior to the opening of business on
the Cure Date, would have resulted in the Trust's having both Moody's
Eligible Assets with a Discounted Value and Fitch Eligible Assets with a
Discounted Value greater than or equal to the Preferred Shares Basic
Maintenance Amount or maintaining the 1940 Act Preferred Shares Asset
Coverage, as the case may be, on such Cure Date (PROVIDED, HOWEVER, that
if there is no such minimum number of Preferred Shares and other
preferred shares the redemption or retirement of which would have had
such result, all Preferred Shares and other preferred shares then
outstanding shall be redeemed), and (ii) the maximum number of Preferred
Shares, together with all other preferred shares subject to redemption
or retirement, that can be redeemed out of funds expected to be legally
available therefore in accordance with the Declaration of Trust and
applicable law. In determining the Preferred Shares required to be
redeemed in accordance with the foregoing, the Trust shall allocate the
number required to be redeemed to satisfy the Preferred Shares Basic
Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage, as
the case may be, pro rata among Preferred Shares and other preferred
shares (and, then, pro rata among the Preferred Shares) subject to
redemption or retirement. The Trust shall effect such redemption on the
date fixed by the Trust therefore, which date shall not be earlier than
20 days (or such lesser number of days as determined by the Trust with
appropriate consultation with the Auction Agent and Broker-Dealers) nor
later than 40 days after such Cure Date, except that if the Trust does
not have funds legally available for the redemption of all of the
required number of Preferred Shares and other preferred shares that are
subject to redemption or retirement or the Trust otherwise is unable to
effect such redemption on or prior to 40 days after such Cure Date, the
Trust shall redeem those Preferred Shares and other preferred shares
which it was unable to redeem on the earliest practicable date on which
it is able to effect such redemption. If fewer than all of the
outstanding shares Preferred Shares are to be redeemed pursuant to this
paragraph (b), the number of Preferred Shares to be redeemed shall be
redeemed pro rata from the Holders of Preferred Shares
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in proportion to the number of Preferred Shares held by such Holders or
by such other method that the Board of Trustees deems fair and
equitable.
(c) NOTICE OF REDEMPTION. If the Trust shall determine or be required
to redeem Preferred Shares pursuant to paragraph (a) or (b) of this
Section 11, it shall mail a Notice of Redemption with respect to such
redemption by first class mail, postage prepaid, to each Holder of the
Preferred Shares to be redeemed, at such Holder's address as the same
appears on the record books of the Trust on the record date established
by the Board of Trustees. Such Notice of Redemption shall be so mailed
not less than 20 (or such lesser number of days as determined by the
Trust with appropriate consultation with the Auction Agent and
Broker-Dealers) nor more than 45 days prior to the date fixed for
redemption. Each such Notice of Redemption shall state: (i) the
redemption date; (ii) the number of Preferred Shares to be redeemed;
(iii) the CUSIP number for the shares of the Series; (iv) the Redemption
Price; (v) the place or places where the certificate(s) for such shares
(properly endorsed or assigned for transfer, if the Board of Trustees
shall so require and the Notice of Redemption shall so state) are to be
surrendered for payment of the Redemption Price; (vi) that distributions
on the shares to be redeemed will cease to accumulate on such redemption
date; and (vii) the provisions of this Section 11 under which such
redemption is made. If fewer than all Preferred Shares held by any
Holder are to be redeemed, the Notice of Redemption mailed to such
Holder shall also specify the number of shares of the Series to be
redeemed from such Holder. The Trust may provide in any Notice of
Redemption relating to a redemption contemplated to be effected pursuant
to paragraph (a) of this Section 11 that such redemption is subject to
one or more conditions precedent and that the Trust shall not be
required to effect such redemption unless each such condition shall have
been satisfied at the time or times and in the manner specified in such
Notice of Redemption.
(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any
distributions on Preferred Shares (whether or not earned or declared)
are in arrears, no Preferred Shares shall be redeemed unless all
outstanding shares of the Series are simultaneously redeemed, and the
Trust shall not purchase or otherwise acquire any shares of the Series;
PROVIDED, HOWEVER, that the foregoing shall not prevent the purchase or
acquisition of all outstanding shares of the Series 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 Series.
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by
reason of the absence of legally available funds therefor in accordance
with the Declaration of Trust and applicable law, such redemption shall
be made as soon as practicable to the extent such funds become
available. Failure to redeem Preferred Shares shall be deemed to exist
at any time after the date specified for redemption in a Notice of
Redemption when the Trust shall have failed, for any reason whatsoever,
to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been
mailed; PROVIDED, HOWEVER, that the foregoing shall not apply in the
case of the Trust's failure to deposit in trust with the Auction Agent
the Redemption Price with respect to any shares where (1) the Notice of
Redemption relating to such redemption provided that such redemption was
subject to one or more conditions precedent and (2) any such condition
precedent shall not have been satisfied at the time or times and in the
manner specified in such Notice of Redemption. Notwithstanding the fact
that the Trust may not have redeemed Preferred Shares for which a Notice
of Redemption has been mailed, distributions may be declared and paid on
Preferred Shares and shall include those Preferred Shares for which a
Notice of Redemption has been mailed.
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(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY TRUST. All
moneys paid to the Auction Agent for payment of the Redemption Price of
Preferred Shares called for redemption shall be held in trust by the
Auction Agent for the benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO
LONGER OUTSTANDING. Provided a Notice of Redemption has been mailed
pursuant to paragraph (c) of this Section 11, upon the deposit with the
Auction Agent (on the Business Day fixed for redemption thereby, in
funds available on that Business Day in The City of New York, New York)
of funds sufficient to redeem the Preferred Shares that are the subject
of such notice, distributions on such shares shall cease to accumulate
and such shares shall no longer be deemed to be outstanding for any
purpose, and all rights of the Holders of the shares so called for
redemption shall cease and terminate, except the right of such Holders
to receive the Redemption Price, but without any interest or other
additional amount, except as provided in subparagraph (e)(i) of Section
2 of this Part I and in Section 3 of this Part I. The Trust shall be
entitled to receive from the Auction Agent, promptly after the date
fixed for redemption, any cash deposited with the Auction Agent in
excess of (i) the aggregate Redemption Price of the Preferred Shares
called for redemption on such date and (ii) all other amounts to which
Holders of Preferred Shares called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of 90 days from such
redemption date shall, to the extent permitted by law, be repaid to the
Trust, after which time the Holders of Preferred Shares so called for
redemption may look only to the Trust for payment of the Redemption
Price and all other amounts to which they may be entitled.
(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption
pursuant to this Section 11, the Trust shall use its best efforts to
comply with all applicable conditions precedent to effecting such
redemption under the 1940 Act and any applicable Massachusetts law, but
shall effect no redemption except in accordance with the 1940 Act and
any applicable Massachusetts law.
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED. In the case of any
redemption pursuant to this Section 11, only whole Preferred Shares
shall be redeemed, and in the event that any provision of the
Declaration of Trust would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares
are redeemed.
(j) MODIFICATION OF REDEMPTION PROCEDURES. Notwithstanding any of the
foregoing provisions of this Section 11, the Trust may modify any or all
of the requirements relating to the Notice of Redemption provided that
(i) any such modification does not materially and adversely affect any
holder of Preferred Shares, and (ii) the Trust receives notice from
Moody's (if Moody's is then rating the Preferred Shares) and Fitch (if
Fitch is then rating the Preferred Shares) that such modification would
not impair the ratings assigned by Moody's and Fitch to the Preferred
Shares.
(k) PURCHASE OR OTHER ACQUISITION OF PREFERRED SHARES OUTSIDE OF AN
AUCTION. Except for the provisions described above, nothing contained in
these Bylaws limits any right of the Trust to purchase or otherwise
acquire any Preferred Shares 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 distributions on, or
the mandatory or optional redemption price with respect to, any
Preferred Shares for which Notice of Redemption has been given and the
Trust meets the 1940 Act Preferred Shares Asset Coverage and the
Preferred Shares Basic
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Maintenance Amount Test after giving effect to such purchase or
acquisition on the date thereof. Any shares that are purchased, redeemed
or otherwise acquired by the Trust shall have no voting rights. If fewer
than all the Outstanding Preferred Shares are redeemed or otherwise
acquired by the Trust, the Trust shall give notice of such transaction
to the Auction Agent, in accordance with the procedures agreed upon by
the Board of Trustees.
12. LIQUIDATION RIGHTS.
(a) RANKING. The Preferred Shares shall rank on a parity with each
other and with shares of any other series of preferred shares as to the
distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Trust.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation
or winding up of the affairs of the Trust, whether voluntary or
involuntary, the Holders of Preferred Shares then outstanding shall be
entitled to receive and to be paid out of the assets of the Trust
available for distribution to its Shareholders, before any payment or
distribution shall be made on the Common Shares or on any other class of
shares of the Trust ranking junior to the Preferred Shares upon
dissolution, liquidation or winding up, an amount equal to the
Liquidation Preference with respect to such shares plus an amount equal
to all distributions thereon (whether or not earned or declared but
excluding interest thereon) accumulated but unpaid to (but not
including) the date of final distribution in same day funds. After the
payment to the Holders of the Preferred Shares of the full preferential
amounts provided for in this paragraph (b), the Holders of Preferred
Shares as such shall have no right or claim to any of the remaining
assets of the Trust.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the Trust
available for distribution to the Holders of Preferred Shares upon any
dissolution, liquidation, or winding up of the affairs of the Trust,
whether voluntary or involuntary, shall be insufficient to pay in full
all amounts to which such Holders are entitled pursuant to paragraph (b)
of this Section 12, 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 the Preferred Shares with respect to the distribution of
assets upon such dissolution, liquidation or winding up unless
proportionate distributive amounts shall be paid on account of the
Preferred Shares, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively
entitled upon such dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity
with the Preferred Shares with respect to the distribution of assets
upon dissolution, liquidation or winding up of the affairs of the Trust,
after payment shall have been made in full to the Holders of the
Preferred Shares as provided in paragraph (b) of this Section 12, but
not prior thereto, any other series or class or classes of shares
ranking junior to the Preferred Shares with respect to the distribution
of assets upon dissolution, liquidation or winding up of the affairs of
the Trust shall, subject to the respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to
be paid or distributed, and the Holders of the Preferred Shares shall
not be entitled to share therein.
(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the sale of
all or substantially all the property or business of the Trust, nor the
merger or consolidation of the Trust into or with any corporation nor
the merger or consolidation of any corporation into or with the Trust
shall be a dissolution, liquidation or winding up, whether voluntary or
involuntary, for the purposes of this Section 12.
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13. FUTURES AND OPTIONS TRANSACTIONS; FORWARD COMMITMENTS.
(a) If Moody's is rating any Preferred Shares, then:
(i) For so long as any Preferred Shares are rated by Moody's, the
Trust will not buy or sell futures contracts, write, purchase or
sell call options on futures contracts or purchase put options on
futures contracts or write call options (except covered call
options) on portfolio securities unless it receives confirmation
from Moody's that engaging in such transactions would not impair
the ratings then assigned to such Preferred Shares by Moody's,
except that the Trust may purchase or sell exchange-traded futures
contracts based on the NAREIT Index (the "Real Estate Index") or
United States Treasury Bonds, Bills or Notes ("Treasury Futures"),
and purchase, write or sell exchange-traded put options on such
futures contracts and purchase, write or sell exchange-traded call
options on such futures contracts (collectively, "Moody's Hedging
Transactions"), subject to the following limitations:
(A) the Trust will not engage in any Moody's Hedging Transaction
based on the Real Estate Index (other than transactions which
terminate a futures contract or option held by the Trust by the
Trust's taking an opposite position thereto ("Closing
Transactions")) which would cause the Trust at the time of such
transaction to own or have sold outstanding futures contracts
based on the Real Estate Index exceeding in number 10% of the
average number of daily traded futures contracts based on the
Real Estate Index in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal;
(B) the Trust will not engage in any Moody's Hedging Transaction
based on Treasury Futures (other than Closing Transactions)
which would cause the Trust at the time of such transaction to
own or have sold (i) outstanding futures contracts based on
Treasury Futures having an aggregate Market Value exceeding 20%
of the aggregate Market Value of Moody's Eligible Assets owned
by the Trust and rated at least Aa by Moody's (or, if not rated
by Moody's, rated AA by S&P or Fitch), or (ii) outstanding
futures contracts based on Treasury Futures having an aggregate
Market Value exceeding 40% of the aggregate Market Value of all
securities of REITs and Other Real Estate Companies constituting
Moody's Eligible Assets owned by the Trust (other than Moody's
Eligible Assets already subject to a Moody's Hedging
Transaction) and rated Baa or A by Moody's (or, if not rated by
Moody's, rated Baa or A by S&P or Fitch) (for purpose of the
foregoing clauses (I) and (II), the Trust shall be deemed to own
futures contracts that underlie any outstanding options written
by the Trust);
(C) the Trust will engage in Closing Transactions to close out
any outstanding futures contract based on the Real Estate Index
if the amount of open interest in the Real Estate Index as
reported by The Wall Street Journal is less than 100; and
(D) the Trust will not enter into an option on futures
transaction unless, after giving effect thereto, the Trust would
continue to have Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount.
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(ii) For purposes of determining whether the Trust has Moody's
Eligible Assets with an aggregate Discounted Value that equals or
exceeds the Preferred Shares Basic Maintenance Amount, the
Discounted Value of Moody's Eligible Assets which the Trust is
obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows:
(A) assets subject to call options written by the Trust which
are either exchange-traded and "readily reversible" or which
expire within 49 days after the date as of which such valuation
is made shall be valued at the lesser of: (i) Discounted Value
and (ii) the exercise price of the call option written by the
Trust;
(B) assets subject to call options written by the Trust not
meeting the requirements of clause (A) of this sentence shall
have no value;
(C) assets subject to put options written by the Trust shall be
valued at the lesser of: (i) the exercise price and (ii) the
Discounted Value of the subject security.
(iii) For purposes of determining whether the Trust has Moody's
Eligible Assets with an aggregate Discounted Value that equals or
exceeds the Preferred Shares Basic Maintenance Amount, the
following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Trust:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) where the Trust is the seller under a futures contract, 10%
of the settlement price of the futures contract;
(D) where the Trust is the purchaser under a futures contract,
the settlement price of assets purchased under such futures
contract;
(E) the settlement price of the underlying futures contract if
the Trust writes put options on a futures contract and does not
own the underlying contract; and
(F) 105% of the Market Value of the underlying futures contracts
if the Trust writes call options on a futures contract and does
not own the underlying contract.
(iv) For so long as any Preferred Shares are rated by Moody's, the
Trust will not enter into any contract to purchase securities for
a fixed price at a future date beyond customary settlement time
(other than such contracts that constitute Moody's Hedging
Transactions that are permitted under Section 13(a)(ii) of this
Part I), except that the Trust may enter into such contracts to
purchase newly-issued securities on the date such securities are
issued ("Forward Commitments"), subject to the following
limitation:
(A) the Trust will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income
securities rated P-1, MTG-1 or MIG-1 by Moody's and maturing
prior to the date of the Forward Commitment with a Market Value
that equals or exceeds the amount of the Trust's obligations
under any Forward Commitments to which it is from time to time a
party or long-term fixed income
A-53
securities with a Discounted Value that equals or exceeds the
amount of the Trust's obligations under any Forward Commitment
to which it is from time to time a party; and
(B) the Trust will not enter into a Forward Commitment unless,
after giving effect thereto, the Trust would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal
to or greater than the Preferred Shares Basic Maintenance
Amount.
For purposes of determining whether the Trust has Moody's
Eligible Assets with an aggregate Discounted Value that equals or
exceeds the Preferred Shares Basic Maintenance Amount, the Discounted
Value of all Forward Commitments to which the Trust is a party and of
all securities deliverable to the Trust pursuant to such Forward
Commitments shall be zero.
(b) If Fitch is rating any Preferred Shares, then:
(i) For so long as any Preferred Shares are rated by Fitch, the
Trust will not buy or sell futures contracts, write, purchase or
sell call options on futures contracts or purchase put options on
futures contracts or write call options (except covered call
options) on portfolio securities unless it receives confirmation
from Fitch that engaging in such transactions would not impair the
ratings then assigned to such Preferred Shares by Fitch, except
that the Trust may purchase or sell exchange-traded futures
contracts based on the Real Estate Index or Treasury Futures, and
purchase, write or sell exchange-traded put options on such
futures contracts and purchase, write or sell exchange-traded call
options on such futures contracts (collectively, "Fitch Hedging
Transactions"), subject to the following limitations:
(A) the Trust will not engage in any Fitch Hedging Transaction
based on the Real Estate Index (other than Closing Transactions)
which would cause the Trust at the time of such transactions to
own or have sold outstanding futures contracts based on the Real
Estate Index exceeding in number 10% of the average number of
daily traded futures contracts based on the Real Estate Index in
the 30 days preceding the time of effecting such transaction (as
reported by The Wall Street Journal);
(B) the Trust will not engage in any Fitch Hedging Transaction
based on Treasury Futures (other than Closing Transactions)
which would cause the Trust at the time of such transaction to
own or have sold (i) outstanding futures contracts based on
Treasury Futures having an aggregate Market Value exceeding 20%
of the aggregate Market Value of Fitch Eligible Assets owned by
the Trust and rated at least AA by Fitch (or, if not rated by
Fitch, rated at least Aa by Moody's; or, if not rated by
Moody's, rated at least AA by S&P), or (ii) outstanding futures
contracts based on Treasury Futures having an aggregate Market
Value exceeding 40% of the aggregate Market Value of all Fitch
Eligible Assets owned by the Trust (other than Fitch Eligible
Assets already subject to a Fitch Hedging Transaction) and rated
at least BBB by Fitch (or, if not rated by Fitch, rated at least
Baa by Moody's, or, if not rated by Moody's, rated at least A by
S&P) (for purposes of the foregoing clauses (i) and (ii), the
Trust shall be deemed to own futures contracts that underlie any
outstanding options written by the Trust);
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(C) the Trust will engage in Closing Transactions to close any
outstanding futures contract based on the Real Estate Index if
the amount of open interest in the Real Estate Index as reported
by The Wall Street Journal is less than 100; and
(D) the Trust will not enter into an option on future
transaction unless, after giving effect thereto, the Trust would
continue to have Fitch Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount.
(ii) For purposes of determining whether the Trust has Fitch
Eligible Assets with an aggregate Discounted Value that equals or
exceeds the Preferred Shares Basic Maintenance Amount, the
Discounted Value of Fitch Eligible Assets which the Trust is
obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows:
(A) assets subject to call options written by the Trust which
are either exchange-traded and "readily reversible" or which
expire within 49 days after the date as of which such valuation
is made shall be valued at the lesser of: (i) Discounted Value
and (ii) the exercise price of the call option written by the
Trust;
(B) assets subject to call options written by the Trust not
meeting the requirements of clause (A) of this sentence shall
have no value;
(C) assets subject to put options written by the Trust shall be
valued at the lesser of: (i) the exercise price and (ii) the
Discounted Value of the subject security.
(iii) For purposes of determining whether the Trust has Fitch
Eligible Assets with an aggregate Discounted Value that equals or
exceeds the Preferred Shares Basic Maintenance Amount, the
following amounts shall be subtracted from the aggregate
Discounted Value of the Fitch Eligible Assets held by the Trust:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) where the Trust is the seller under a futures contract, 10%
of the settlement price of the futures contract;
(D) where the Trust is the purchaser under a futures contract,
the settlement price of assets purchased under such futures
contract;
(E) the settlement price of the underlying futures contract if
the Trust writes put options on a futures contract and does not
own the underlying contract; and
(F) 105% of the Market Value of the underlying futures contracts
if the Trust writes call options on a futures contract and does
not own the underlying contract.
(iv) For so long as any Preferred Shares are rated by Fitch, the
Trust will not enter into any contract to purchase securities for
a fixed price at a future date beyond customary settlement time
(other than such contracts that constitute Fitch Hedging
Transactions that
A-55
are permitted under Section 13(b)(ii) of this Part I), except that
the Trust may enter into Forward Commitments, subject to the
following limitation:
(A) the Trust will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income
securities rated F-1 by Fitch (or, if not rated by Fitch, rated
P-1, MTG-1 or MIG-1 by Moody's) and maturing prior to the date
of the Forward Commitment with a Market Value that equals or
exceeds the amount of the Trust's obligations under any Forward
Commitments to which it is from time to time a party or
long-term fixed income securities with a Discounted Value that
equals or exceeds the amount of the Trust's obligations under
any Forward Commitment to which it is from time to time a party;
and
(B) the Trust will not enter into a Forward Commitment unless,
after giving effect thereto, the Trust would continue to have
Fitch Eligible Assets with an aggregate Discounted Value equal
to or greater than the Preferred Shares Basic Maintenance
Amount.
For purposes of determining whether the Trust has Fitch
Eligible Assets with an aggregate Discounted Value that equals or
exceeds the Preferred Shares Basic Maintenance Amount, the
Discounted Value of all Forward Commitments to which the Trust is
a party and of all securities deliverable to the Trust pursuant to
such Forward Commitments shall be zero.
(c) For so long as any Preferred Shares are outstanding and Moody's
or Fitch or both is rating such shares, the Trust will not, unless it
has received confirmation from Moody's or Fitch or both, as applicable,
that any such action would not impair the rating then assigned by such
rating agency to such shares, engage in any one or more of the following
transactions:
(i) borrow money, except that the Trust may, without obtaining the
confirmation described above, borrow money for the purpose of
clearing securities transactions if
(A) the Preferred Shares Basic Maintenance Amount would continue
to be satisfied after giving effect to such borrowing and
(B) such borrowing (i) is privately arranged with a bank or
other person and is evidenced by a promissory note or other
evidence of indebtedness that is not intended to be publicly
distributed or (ii) is for "temporary purposes," is evidenced by
a promissory note or other evidence of indebtedness and is in an
amount not exceeding 5% of the value of the total assets of the
Trust at the time of the borrowing (for purposes of the
foregoing, "temporary purposes" means that the borrowing is to
be repaid within sixty days and is not to be extended or
renewed);
(ii) except as provided in Section 5 of this Part I, issue
additional Preferred Shares or any class or series of shares
ranking prior to or on a parity with Preferred Shares with respect
to the payment of dividends or other distributions, including the
distribution of assets upon dissolution, liquidation or winding up
of the Trust, or reissue any Preferred Shares previously purchased
or redeemed by the Trust;
(iii) engage in any short sales of securities;
(iv) lend securities;
A-56
(v) merge or consolidate into or with any other corporation or
entity;
(vi) for purposes of valuation of Moody's Eligible Assets: (A) if
the Trust writes a call option, the underlying asset will be
valued as follows:(1) if the option is exchange-traded and may be
offset readily or if the option expires before the earliest
possible redemption of the Series, at the lower of the Discounted
Value of the underlying security of the option and the exercise
price of the option or (2) otherwise, it has no value; (B) if the
Trust 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 Trust buys have no value. For so long as the
Series is rated by Moody's: (A) the Trust will not engage in
options transactions for leveraging or speculative purposes; (B)
the Trust will not write or sell any anticipatory contracts
pursuant to which the Trust hedges the anticipated purchase of an
asset prior to completion of such purchase; (C) the Trust will not
enter into an option transaction with respect to portfolio
securities unless, after giving effect thereto, the Trust would
continue to have Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic
Maintenance Amount; (D) the Trust will not enter into an option
transaction with respect to portfolio securities unless after
giving effect to such transaction the Trust would continue to be
in compliance with the provisions relating to the Preferred Shares
Basic Maintenance Amount; (E) for purposes of the Preferred Shares
Basic Maintenance Amount assets in margin accounts are not
Eligible Assets; (F) the Trust will write only exchange-traded
options on exchanges approved by Moody's (if Moody's is then
rating the Series); (G) where delivery may be made to the Trust
with any of a class of securities, the Trust will assume for
purposes of the Preferred Shares Basic Maintenance Amount that it
takes delivery of that security which yields it the least value;
(H) the Trust will not engage in forward contracts; and (I) there
will be a quarterly audit made of the Trust's options transactions
by the Trust's independent auditors to confirm that the Trust is
in compliance with these standards;
(vii) change a pricing service (which has been designated by
management or the Board of Trustees); and
(viii) enter into reverse repurchase agreements.
In the event any Preferred Shares are outstanding and another
nationally-recognized statistical rating organization is rating such
shares in addition to or in lieu of Moody's or Fitch, the Trust shall
comply with any restrictions imposed by such rating agency, which
restrictions may be more restrictive than those imposed by Moody's or
Fitch.
14. MISCELLANEOUS.
(a) AMENDMENT OF BYLAWS TO ADD ADDITIONAL SERIES. Subject to the
provisions of paragraph (c) of Section 10 of this Part I, the Board of
Trustees may, by resolution duly adopted, without shareholder approval
(except as otherwise provided by these Bylaws or required by applicable
law), approving an annex hereto, (1) reflect any amendments hereto which
the Board of Trustees is entitled to adopt pursuant to the terms of
these Bylaws without shareholder approval or (2) add additional series
of Preferred Shares or additional shares of a series of Preferred Shares
(and terms relating thereto) to the series and Preferred Shares
described herein. Each such additional series and all such additional
shares shall be governed by the terms of these Bylaws.
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(b) NO FRACTIONAL SHARES. No fractional Preferred Shares shall be
issued.
(c) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE
ACQUIRED BY THE TRUST. Preferred Shares that are redeemed, exchanged or
otherwise acquired by the Trust shall return to the status of authorized
and unissued Preferred Shares.
(d) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by
applicable law, the Board of Trustees may interpret or adjust the
provisions of these Bylaws to resolve any inconsistency or ambiguity or
to remedy any formal defect, and may amend these Bylaws with respect to
Preferred Shares prior to the issuance of shares of the Series.
(e) HEADINGS NOT DETERMINATIVE. The headings contained in these
Bylaws are for convenience of reference only and shall not affect the
meaning or interpretation of these Bylaws.
(f) NOTICES. All notices or communications, unless otherwise
specified in these Bylaws, shall be sufficiently given if in writing and
delivered in person or by facsimile or mailed by first-class mail,
postage prepaid. Notices delivered pursuant to this Section 14 shall be
deemed given on the earlier of the date received or the date five days
after which such notice is mailed, except as otherwise provided in these
Bylaws or by the Massachusetts Business Corporation Law for notices of
shareholders' meetings.
(g) EXEMPTION FROM OWNERSHIP RESTRICTIONS. Pursuant to Article V,
Sections 2.7(a)-(b) of the Declaration of Trust, for any Person who
holds Preferred Shares, the share ownership restrictions contained in
Article V, Sections 2.1(a)(i)-(ii) of the Declaration of Trust shall be
computed as though all Preferred Shares were not issued and outstanding.
PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for
Preferred Shares:
(i) each Beneficial Owner of shares of the Series may submit to
its Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of the Series held
by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for
shares of the Series for the next succeeding Rate Period of the
Series;
(B) the number of Outstanding shares, if any, of the Series held
by such Beneficial Owner which such Beneficial Owner offers to
sell if the Applicable Rate for shares of the Series for the
next succeeding Rate Period of shares of the 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 the Series held
by such Beneficial Owner which such Beneficial Owner offers to
sell without regard to the Applicable Rate for shares of the
Series for the next succeeding Rate Period of shares of the
Series; and
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(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 the
Series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of the Series for the
next succeeding Rate Period of shares of the 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 Preferred
Shares subject to an Auction on any Auction Date shall constitute
an irrevocable offer to sell:
(A) the number of Outstanding shares of the Series specified in
such Bid if the Applicable Rate for shares of the Series
determined on such Auction Date shall be less than the rate
specified therein;
(B) such number or a lesser number of Outstanding shares of the
Series to be determined as set forth in clause (iv) of paragraph
(a) of Section 4 of this Part II if the Applicable Rate for
shares of the Series determined on such Auction Date shall be
equal to the rate specified therein; or
(C) the number of Outstanding shares of the Series specified in
such Bid if the rate specified therein shall be higher than the
Maximum Rate for shares of the Series, or such number or a
lesser number of Outstanding shares of the Series to be
determined as set forth in clause (iii) of paragraph (b) of
Section 4 of this Part II if the rate specified therein shall be
higher than the Maximum Rate for shares of the Series and
Sufficient Clearing Bids for shares of the Series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
Preferred Shares subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of the Series specified in
such Sell Order; or
(B) such number or a lesser number of Outstanding shares of the
Series as set forth in clause (iii) of paragraph (b) of Section
4 of this Part II if Sufficient Clearing Bids for shares of the
Series do not exist; PROVIDED, HOWEVER, that a Broker-Dealer
that is an Existing Holder with respect to shares of a series of
Preferred Shares shall not be
A-59
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 Trust) 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 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 Preferred Shares subject to an Auction on any Auction Date
shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of the Series specified in
such Bid if the Applicable Rate for shares of the Series
determined on such Auction Date shall be higher than the rate
specified therein; or
(B) such number or a lesser number of Outstanding shares of the
Series as set forth in clause (v) of paragraph (a) of Section 4
of this Part II if the Applicable Rate for shares of the Series
determined on such Auction Date shall be equal to the rate
specified therein.
(c) No Order for any number of Preferred Shares other than whole
shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for
Preferred Shares subject to an Auction on such Auction Date obtained by
such Broker-Dealer, designating itself (unless otherwise permitted by
the Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it
by Potential Beneficial Owners, and shall specify with respect to each
Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of the Series that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of
shares of the Series:
(A) the number of shares, if any, of the Series subject to any
Hold Order of such Existing Holder;
(B) the number of shares, if any, of the Series subject to any
Bid of such Existing Holder and the rate specified in such Bid;
and
(C) the number of shares, if any, of the Series subject to any
Sell Order of such Existing Holder; and
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(iv) to the extent such Bidder is a Potential Holder of shares of
the Series, the rate and number of shares of the Series specified
in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such
rate up to the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding Preferred
Shares held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order to have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of the Series held by such
Existing Holder and not subject to Orders submitted to the Auction
Agent; PROVIDED, HOWEVER, that if an Order or Orders covering all of the
Outstanding shares of the Series held by any Existing Holder is not
submitted to the Auction Agent prior to the Submission Deadline for an
Auction relating to a Special 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 the Series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of
Outstanding Preferred Shares 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 the Series shall be considered
valid, but only up to and including in the aggregate the number of
Outstanding shares of the Series held by such Existing Holder, and
if the number of shares of the Series subject to such Hold Orders
exceeds the number of Outstanding shares of the Series held by
such Existing Holder, the number of shares subject to each such
Hold Order shall be reduced pro rata to cover the number of
Outstanding shares of the Series held by such Existing Holder;
(ii) (A) any Bid for shares of the Series shall be considered
valid up to and including the excess of the number of Outstanding
shares of the Series held by such Existing Holder over the number
of shares of the Series subject to any Hold Orders referred to in
clause (i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of the Series is submitted to the
Auction Agent with the same rate and the number of Outstanding
shares of the Series subject to such Bids is greater than such
excess, such Bids shall be considered valid up to and including
the amount of such excess, and the number of shares of the
Series subject to each Bid with the same rate shall be reduced
pro rata to cover the number of shares of the Series equal to
such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of
an Existing Holder for shares of the Series is submitted to the
Auction Agent with different rates, such Bids 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 the Series subject to any portion of Bids considered
not valid in whole or in part under this
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clause (ii) shall be treated as the subject of a Bid for shares
of the Series by or on behalf of a Potential Holder at the rate
therein specified; and
(iii) all Sell Orders for shares of the Series shall be considered
valid up to and including the excess of the number of Outstanding
shares of the Series held by such Existing Holder over the sum of
shares of the Series subject to valid Hold Orders referred to in
clause (i) above and valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more Preferred Shares 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
Preferred Shares, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of
shares of the Series (each such Order as submitted or deemed submitted
by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order,"
as the case may be, or as a "Submitted Order" and collectively as
"Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as
the case may be, or as "Submitted Orders") and shall determine for the
Series:
(i) the excess of the number of Outstanding Preferred Shares of
the Series over the number of Outstanding shares of the Series
subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Preferred Shares" of the Series);
(ii) from the Submitted Orders for shares of the Series whether:
(A) the number of Outstanding shares of the Series subject to
Submitted Bids of Potential Holders specifying one or more rates
equal to or lower than the Maximum Rate for shares of the Series
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of the Series subject to
Submitted Bids of Existing Holders specifying one or more rates
higher than the Maximum Rate for shares of the Series; and
(C) the number of Outstanding shares of the Series subject to
Submitted Sell Orders (in the event such excess or such equality
exists (other than because the number of shares of the Series in
subclauses (B) and (C) above is zero because all of the
Outstanding shares of the Series are subject to Submitted Hold
Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of the Series); and
(iii) if Sufficient Clearing Bids for shares of the Series exist,
the lowest rate specified in such Submitted Bids (the "Winning Bid
Rate" for shares of the Series) which if:
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(A) (I) each such Submitted Bid of Existing Holders specifying
such lowest rate and (II) all other such Submitted Bids of
Existing Holders specifying lower rates were rejected, thus
entitling such Existing Holders to continue to hold the shares
of the Series that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying
such lowest rate and (II) all other such Submitted Bids of
Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A)
above continuing to hold an aggregate number of Outstanding shares
of the Series which, when added to the number of Outstanding
shares of the Series to be purchased by such Potential Holders
described in subclause (B) above, would equal not less than the
Available Preferred Shares of the 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 Trust of the Maximum Rate for Preferred Shares for which an
Auction is being held on the Auction Date and, based on such
determination, the Applicable Rate for shares of the Series for the next
succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of the Series exist,
the Applicable Rate for all shares of the Series for the next
succeeding Rate Period thereof shall be equal to the Winning Bid
Rate for shares of the Series so determined;
(ii) if Sufficient Clearing Bids for shares of the Series do not
exist (other than because all of the Outstanding shares of the
Series are subject to Submitted Hold Orders), the Applicable Rate
for all shares of the Series for the next succeeding Rate Period
thereof shall be equal to the Maximum Rate for shares of the
Series; or
(iii) if all of the Outstanding shares of the Series are subject
to Submitted Hold Orders, the Applicable Rate for all shares of
the Series for the next succeeding Rate Period thereof shall be
the 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 Preferred
Shares 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 Preferred Shares have been made,
all Submitted Sell Orders with respect to shares of the 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 the Series
shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of the
Series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is higher than the Winning Bid Rate for
shares of the Series shall be accepted, thus requiring each such
Existing Holder to sell the Preferred Shares subject to such
Submitted Bids;
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(ii) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is lower than the Winning Bid Rate for
shares of the Series shall be rejected, thus entitling each such
Existing Holder to continue to hold the Preferred Shares subject
to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of the Series
specifying any rate that is lower than the Winning Bid Rate for
shares of the Series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of the Series
specifying a rate that is equal to the Winning Bid Rate for shares
of the Series shall be rejected, thus entitling such Existing
Holder to continue to hold the Preferred Shares subject to such
Submitted Bid, unless the number of Outstanding Preferred Shares
subject to all such Submitted Bids shall be greater than the
number of Preferred Shares ("remaining shares") in the excess of
the Available Preferred Shares of the Series over the number of
Preferred Shares 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
Preferred Shares subject to such Submitted Bid, but only in an
amount equal to the number of Preferred Shares of the Series
obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of
Outstanding Preferred Shares held by such Existing Holder subject
to such Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding Preferred Shares subject to such
Submitted Bids made by all such Existing Holders that specified a
rate equal to the Winning Bid Rate for shares of the Series; and
(v) each Potential Holder's Submitted Bid for shares of the Series
specifying a rate that is equal to the Winning Bid Rate for shares
of the Series shall be accepted but only in an amount equal to the
number of shares of the Series obtained by multiplying the number
of shares in the excess of the Available Preferred Shares of the
Series over the number of Preferred Shares 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 Preferred Shares subject to such Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding
Preferred Shares subject to such Submitted Bids made by all such
Potential Holders that specified a rate equal to the Winning Bid
Rate for shares of the Series.
(b) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have not been made (other than because all of the Outstanding
shares of the Series are subject to Submitted Hold Orders), subject to
the provisions of paragraph (d) of this Section 4, Submitted Orders for
shares of the Series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids for shares of
the Series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of the Series
specifying any rate that is equal to or lower than the Maximum
Rate for shares of the Series shall be rejected, thus entitling
such Existing Holders to continue to hold the Preferred Shares
subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of the Series
specifying any rate that is equal to or lower than the Maximum
Rate for shares of the Series shall be accepted; and
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(iii) Each Existing Holder's Submitted Bid for shares of the
Series specifying any rate that is higher than the Maximum Rate
for shares of the Series and the Submitted Sell Orders for shares
of the Series of each Existing Holder 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 the Series subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount equal to
the number of shares of the Series obtained by multiplying the
number of shares of the Series subject to Submitted Bids described
in clause (ii) of this paragraph (b) by a fraction, the numerator
of which shall be the number of Outstanding shares of the Series
held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the
aggregate number of Outstanding shares of the Series subject to
all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding Preferred Shares are subject to
Submitted Hold Orders, all Submitted Bids for shares of the 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
Preferred Share on any Auction Date, the Auction Agent shall, in such
manner as it shall determine in its sole discretion, round up or down
the number of Preferred Shares of the Series to be purchased or sold by
any Existing Holder or Potential Holder on such Auction Date as a result
of such procedures so that the number of shares so purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be
whole Preferred Shares.
(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 Preferred
Shares on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, allocate Preferred Shares of
the Series for purchase among Potential Holders so that only whole
Preferred Shares of the Series are purchased on such Auction Date as a
result of such procedures by any Potential Holder, even if such
allocation results in one or more Potential Holders not purchasing
Preferred Shares of the Series on such Auction Date.
(f) Based on the results of each Auction for Preferred Shares, the
Auction Agent shall determine the aggregate number of shares of the
Series to be purchased and the aggregate number of shares of the Series
to be sold by Potential Holders and Existing Holders and, with respect
to each Potential Holder and Existing Holder, to the extent that such
aggregate number of shares to be purchased and such aggregate number of
shares to be sold differ, determine to which other Potential Holder(s)
or Existing Holder(s) they shall deliver, or from which other Potential
Holder(s) or Existing Holder(s) they shall receive, as the case may be,
Preferred Shares of the Series.
Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing Holder
or Beneficial Owner of Preferred Shares 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 Preferred Shares that have been
made in respect of Potential Holders' or Potential Beneficial Owners'
Submitted Bids for shares of the Series that
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have been accepted in whole or in part shall constitute good delivery to
such Potential Holders and Potential Beneficial Owners.
(g) Neither the Trust nor the Auction Agent nor any affiliate of
either shall have any responsibility or liability with respect to the
failure of an Existing Holder, a Potential Holder, a Beneficial Owner, a
Potential Beneficial Owner or its respective Agent Member to deliver
Preferred Shares or to pay for Preferred Shares sold or purchased
pursuant to the Auction Procedures or otherwise.
5. RESERVED.
6. AUCTION AGENT.
For so long as any Preferred Shares are outstanding, the Auction Agent,
duly appointed by the Trust to so act, shall be in each case a commercial bank,
trust company or other financial institution independent of the Trust and its
affiliates (which however, may engage or have engaged in business transactions
with the Trust or its affiliates) and at no time shall the Trust or any of its
affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any Preferred Shares are outstanding, the Board of
Trustees shall use its best efforts promptly thereafter to appoint another
qualified commercial bank, trust company or financial institution to act as the
Auction Agent. The Auction Agent's registry of Existing Holders of Preferred
Shares shall be conclusive and binding on the Broker-Dealers. A Broker-Dealer
may inquire of the Auction Agent between 3:00 p.m. Eastern time on the Business
Day preceding an Auction for shares of a series of Preferred Shares and 9:30
a.m. Eastern time on the Auction Date for such Auction to ascertain the number
of shares in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is the
Existing Holder of fewer shares of the Series than specified by the Auction
Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer may so
inform the Auction Agent of that belief. Such Broker-Dealer shall not, in its
capacity as Existing Holder of shares of the Series, submit Orders in such
Auction in respect of shares of the Series covering in the aggregate more than
the number of shares of the Series specified by the Auction Agent in response to
such Broker-Dealer's inquiry.
7. TRANSFER OF PREFERRED SHARES.
Unless otherwise permitted by the Trust, a Beneficial Owner or an
Existing Holder may sell, transfer or otherwise dispose of Preferred Shares only
in whole shares and only pursuant to a Bid or Sell Order placed with the Auction
Agent in accordance with the procedures described in this Part II or to a
Broker-Dealer, PROVIDED, HOWEVER, that (a) a sale, transfer or other disposition
of Preferred Shares from a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer as the holder of such shares to that Broker-Dealer
or another customer of that Broker-Dealer shall not be deemed to be a sale,
transfer or other disposition for purposes of this Section 7 if such
Broker-Dealer remains the Existing Holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and (b) in the
case of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other Person, if permitted by the Trust) to whom such transfer is made shall
advise the Auction Agent of such transfer.
8. GLOBAL CERTIFICATE.
Prior to the commencement of a Voting Period, (i) all of the Preferred
Shares outstanding from time to time shall be represented by one global
certificate registered in the name of the Securities Depository or its nominee
and (ii) no registration of transfer of Preferred Shares shall be made on the
books of the Trust to any Person other than the Securities Depository or its
nominee.
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9. FORCE MAJEURE.
(a) Notwithstanding anything else set forth herein, if an Auction
Date is not a Business Day because the New York Stock Exchange is closed
for business for more than three consecutive business days due to an act
of God, natural disaster, act of war, civil or military disturbance, act
of terrorism, sabotage, riots or a loss or malfunction of utilities or
communications services or the Auction Agent is not able to conduct an
Auction in accordance with the Auction Procedures for any such reason,
then the Auction Rate for the next Distribution Period shall be the
Auction Rate determined on the previous Auction Date.
(b) Notwithstanding anything else set forth herein, if a Distribution
Payment Date is not a Business Day because the New York Stock Exchange
is closed for business for more than three consecutive business days due
to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction
of utilities or communications services or the distribution payable on
such date cannot be paid for any such reason, then:
(i) the Distribution Payment Date for the affected Distribution
Period shall be the next Business Day on which the Trust and its
paying agent, if any, are able to cause the distribution to be
paid using their reasonable best efforts;
(ii) the affected Distribution Period shall end on the day it
would have ended had such event not occurred and the Distribution
Payment Date had remained the scheduled date; and
(iii) the next Distribution Period will begin and end on the dates
on which it would have begun and ended had such event not occurred
and the Distribution Payment Date remained the scheduled date.
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