As filed with the Securities and Exchange Commission on December 19, 2002
1933 Act File No. 333 -
1940 Act File No. 811 - 21206
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_] Pre-Effective Amendment No.
[_] Post-Effective Amendment No.
and
[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] Amendment No. 3
AEW Real Estate Income Fund
---------------------------
(Exact Name of Registrant as Specified in Charter)
399 Boylston Street, Boston, Massachusetts 02116
------------------------------------------------
(Address of Principal Executive Offices (Number Street, City, State, Zip Code))
(617) 449-2801
--------------
(Registrant's Telephone Number, including Area Code)
John E. Pelletier, Esq.
CDC IXIS Asset Management Services, Inc.
399 Boylston Street
Boston, Massachusetts 02116
(Name and Address (Number, Street, City, State, Zip Code) of Agent for Service)
Copy to:
John M. Loder, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Approximate Date of the Proposed Offering:
As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate box)
[X] when declared effective pursuant to section 8(c)
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
---------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Securities Amount Offering Price Per Aggregate Amount of
Being Registered Being Registered Unit Offering Price/1/ Registration Fee
------------------- ---------------- ---------------- ------------------ -----------------
Preferred Shares, 10 Shares $ 25,000.00 $ 250,000.00 $ 23.00
par value $0.00001
---------------------------------------------------------------------------------------------------
/1/ Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
============================================================================
AEW REAL ESTATE INCOME FUND
CROSS REFERENCE SHEET
PART A - PROSPECTUS
ITEM IN PART A OF FORM N-2
SPECIFIED IN PROSPECTUS LOCATION IN PROSPECTUS
Item 1. Outside Front Cover .......................... Outside Front Cover Page
Item 2. Cover Pages; Other Offering Information ...... Inside Front Cover Page; Outside Back Cover Page
Item 3. Fee Table and Synopsis ....................... Inapplicable
Item 4. Financial Highlights ......................... Inapplicable
Item 5. Plan of Distribution ......................... Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders ......................... Inapplicable
Item 7. Use of Proceeds .............................. Outside Front Cover Page; Prospectus Summary; Use of
Proceeds; Investment Objectives and Policies
Item 8. General Description of the Registrant ........ Outside Front Cover Page; Prospectus Summary; The
Fund; Investment Objectives and Policies; Principal
Risks of the Fund; Additional Risk Considerations;
Management of the Fund; Description of Preferred
Shares; The Auction; Description of Capital
Structure; Closed-End Structure; Possible Conversion
to Open-End Status; Repurchase of Shares;
Description of Shares; Certain Provisions in The
Declaration of Trust
Item 9. Management ................................... Prospectus Summary; Management of the Fund;
Custodian, Auction Agent and Transfer Agent
Item 10. Capital Stock, Long-Term Debt, and Other Investment Objectives and Policies; Capitalization;
Securities ................................... Interest Rate Transactions; Description of Preferred
Shares; Description of Capital Structure; Closed-End
Structure; Possible Conversion to Open-End Status;
Repurchase of Shares; Tax Matters
Item 11. Defaults and Arrears on Senior Securities .... Inapplicable
Item 12. Legal Proceedings ............................ Inapplicable
Item 13. Table of Contents of the Statement of Table of Contents of the Statement of Additional
Additional Information ....................... Information
PART B - STATEMENT OF ADDITIONAL INFORMAT ION
LOCATION IN STATEMENT OF ADDITIONAL INFORMATION
ITEM IN PART B OF FORM N-2
Item 14. Cover Page ................................... Cover Page
Item 15. Table of Contents ............................ Table of Contents
Item 16. General Information and History .............. Inapplicable
Item 17. Investment Objective and Policies ............ Investment Objectives and Policies; Investment
Restrictions
Item 18. Management ................................... Management of the Fund; Investment Advisory and
Other Services
Item 19. Control Persons and Principal Holders of ..... Management of the Fund
Securities
Item 20. Investment Advisory and Other Services ....... Investment Advisory and Other Services
Item 21. Brokerage Allocation and Other Practices ..... Portfolio Transactions and Brokerage; Determination
of Net Asset Value
Item 22. Tax Status ................................... Taxation
Item 23. Financial Statements ......................... Financial Statements
PART C - OTHER INFORMATION
The information required to be in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS Subject to Completion [AEW LOGO]
----------
Preliminary Prospectus dated , 2003
AEW Real Estate Income Fund
Auction Rate Preferred Shares
Shares, Series [ ]
Liquidation Preference $25,000 per share
----------------
AEW Real Estate Income Fund (the "Fund") is a recently organized,
non-diversified, closed-end management investment company.
. The Fund's primary investment objective is high current income; and
. The Fund's secondary investment objective is capital appreciation.
The Offering. The Fund is offering Series [ ] Auction Rate
Preferred Shares ("Preferred Shares"). The Preferred Shares will not be listed
on any exchange. Generally, investors may only buy and sell the Preferred Shares
through an order placed at an auction with or through a broker-dealer that has
entered into an agreement with the auction agent or in a secondary market that
certain broker-dealers may maintain. These broker-dealers are not required to
maintain a market in the Preferred Shares, and a secondary market, if one
develops, may not provide investors with liquidity.
Portfolio Contents. Under normal market conditions, the Fund will
invest at least 90% of its total assets in income-producing common shares,
preferred shares, convertible preferred shares and debt securities issued by
Real Estate Companies (companies, including real estate investment trusts
("REITs"), that generally derive at least 50% of their revenue from the
ownership, construction, financing, management or sale of commercial, industrial
or residential real estate, or have at least 50% of their assets invested in
such real estate). The Fund will, under normal market conditions, invest at
least 80% of its total assets in income-producing equity securities issued by
REITs. The Fund may invest in non-investment grade fixed income securities, such
as non-investment grade debt securities (commonly known as "junk bonds") and
non-investment grade preferred and convertible preferred shares, although the
Fund will not invest in a non-investment grade fixed income security if, as a
result of such investment, more than 25% of the Fund's total assets would be
invested in such securities. There can be no assurance that the Fund will
achieve its investment objectives. For more information on the Fund's investment
strategies, see "Investment Objectives and Policies" and "Principal Risks of the
Fund."
Investing in the Preferred Shares involves risks that are described in
the "Principal Risks of the Fund" beginning on page of this prospectus.
Certain of these risks are summarized in "Prospectus Summary - Principal Risks
of the Fund" and "--Additional Risk Considerations" beginning on page of the
prospectus. The minimum purchase amount of the Preferred Shares is $25,000.
----------------
Per Share Total
--------- -----
Public offering price .......................... $25,000 $
Sales load ..................................... $ $
Estimated offering expenses .................... $ $
Proceeds to the Fund ........................... $ $
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares are
first issued.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares, in
book-entry form, through the facilities of The Depository Trust Company on or
about February , 2003.
----------------
[Underwriters]
----------------
The date of this prospectus is __________, 2003.
(continued from previous page)
This prospectus sets forth concisely information about the Fund you
should know before investing. You should read the prospectus before deciding
whether to invest and retain it for future reference. A Statement of Additional
Information, dated , 2003 (the "SAI"), containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference in its entirety into
this prospectus. You can review the table of contents of the SAI on page of this
prospectus. You may request a free copy of the SAI by calling (800) 862-4863 or
by writing to the Fund. You may also obtain the SAI and other information
regarding the Fund on the SEC's web site (http://www.sec.gov).
Investors in the Preferred Shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for the Preferred Shares. The dividend rate for the initial dividend period will
be %. The initial dividend period for the Preferred Shares is from the
date of issuance through , 2003. For subsequent dividend periods, the
Preferred Shares will pay dividends based on a rate generally set at auctions
held every seven days. Generally, investors may only buy or sell Preferred
Shares through an order placed at an auction with or through a broker-dealer in
accordance with the procedures specified in this prospectus. Prospective
purchasers should carefully review the auction procedures described in this
prospectus, and should note:
. a buy order (called a "bid") or sell order is a commitment to buy
or sell Preferred Shares based on the results of an auction; and
. purchases and sales will be settled on the next business day after
the auction.
The Preferred Shares, which have no history of public trading, are not
listed on an exchange. Broker-dealers may maintain a secondary trading market in
the Preferred Shares outside of the auctions; however, they have no obligation
to do so, and there can be no assurance that a secondary market for the
Preferred Shares will develop or, if it does develop, that it will provide
holders with a liquid trading market (i.e., trading will depend on the presence
of willing buyers and sellers, and the trading price will be subject to
variables to be determined at the time of the trade by such broker dealers). A
general increase in the level of interest rates may have an adverse effect on
the secondary market price of the Preferred Shares, and an investor that sells
Preferred Shares between auctions may receive a price per share of less than
$25,000.
The Preferred Shares will be senior to the Fund's outstanding common
shares of beneficial interest, par value $0.00001 per share ("Common Shares"),
which are traded on the American Stock Exchange under the symbol "RIF." The
Preferred Shares have a liquidation preference of $25,000 per share, plus any
accumulated, unpaid dividends. The Preferred Shares also have priority over the
Common Shares as to distribution of assets. See "Description of Preferred
Shares." The Fund may redeem Preferred Shares as described under "Description of
Preferred Shares -- Redemption." It is a condition of closing this offering that
the Preferred Shares be offered with a rating of "Aaa" from Moody's Investors
Service, Inc. ("Moody's") and of "AAA" from Fitch Ratings ("Fitch").
The Preferred Shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depositary
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ....................................................... 5
FINANCIAL HIGHLIGHTS...................................................... 23
THE FUND ................................................................. 23
USE OF PROCEEDS .......................................................... 23
CAPITALIZATION ........................................................... 23
PORTFOLIO COMPOSITION .................................................... 23
INVESTMENT OBJECTIVES AND POLICIES ....................................... 24
INTEREST RATE TRANSACTIONS ............................................... 29
PRINCIPAL RISKS OF THE FUND .............................................. 30
ADDITIONAL RISK CONSIDERATIONS ........................................... 38
MANAGEMENT OF THE FUND ................................................... 39
DESCRIPTION OF PREFERRED SHARES .......................................... 41
THE AUCTION .............................................................. 48
NET ASSET VALUE .......................................................... 51
DESCRIPTION OF CAPITAL STRUCTURE ......................................... 51
CLOSED-END STRUCTURE ..................................................... 53
POSSIBLE CONVERSION TO OPEN-END STATUS ................................... 53
REPURCHASE OF SHARES ..................................................... 54
TAX MATTERS .............................................................. 54
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST ........................... 56
UNDERWRITING ............................................................. 58
CUSTODIAN, AUCTION AGENT AND TRANSFER AGENT .............................. 59
LEGAL MATTERS ............................................................ 59
AVAILABLE INFORMATION .................................................... 59
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ............. 60
---------------
You should rely only on the information contained or incorporated by
reference in this prospectus. The Fund has not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. The Fund is not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information in this prospectus is accurate only as of the
date of this prospectus. The Fund's business, financial condition and prospects
may have changed since that date.
-4-
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in the Fund's Preferred Shares. You
should review the more detailed information contained in this prospectus and in
the SAI, especially the information set forth under the headings "Principal
Risks of the Fund" and "Additional Risk Considerations."
The Fund ..................... AEW Real Estate Income Fund (the "Fund") is a
recently organized, non-diversified, closed-end
management investment company. The Fund
commenced operations on November 26, 2002 in
connection with an initial public offering of
3,750,000 Common Shares. As of January ,
2003, the Fund had Common Shares outstanding
and managed assets of approximately $ . The
Fund's Common Shares are traded on the American
Stock Exchange under the symbol "RIF." The
Fund's principal office is located at 399
Boylston Street, Boston, Massachusetts 02116,
and its telephone number is (800) 862-4863. See
"The Fund."
The Offering ................. The Fund is offering Series [ ] Preferred
Shares, $0.00001 par value, at a purchase price
of $25,000 per share plus dividends, if any,
that have accumulated from the date the Fund
first issues the Preferred Shares. The
Preferred Shares are being offered by a group
of underwriters led by .
The Preferred Shares entitle their holders to
receive cash dividends at an annual rate that
may vary for the successive dividend periods
for the Preferred Shares. In general, except as
described under "Description of Preferred
Shares -- Dividends and Rate Periods," the
dividend period for the Preferred Shares will
be seven days. The auction agent will determine
the dividend rate for a particular rate period
by an auction conducted on the business day
immediately prior to the start of that rate
period. See "The Auction."
The Preferred Shares are not listed on an
exchange. Instead, investors will generally buy
or sell Preferred Shares in an auction by
submitting orders to broker-dealers that have
entered into an agreement with the auction
agent.
Generally, investors in Preferred Shares will
not receive certificates representing ownership
of their shares. The securities depository (The
Depository Trust Company or any successor) or
its nominee for the account of the investor's
broker-dealer will maintain record ownership of
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.
-5-
Investment Manager, AEW Management and Advisors, L.P. is the Fund's
Administrator and investment manager (the "Investment Manager").
Sub-Administrator ............. The Investment Manager is a real estate
investment advisory firm that provides
investment management and related services to
institutional and retail investors. Together
with its affiliates operating under the AEW
name, the Investment Manager managed
approximately $ billion of client capital as of
December 31, 2002. The Investment Manager is a
subsidiary of CDC IXIS Asset Management North
America, L.P., which, together with its
subsidiaries and affiliates in the U.S., Europe
and Asia, managed approximately $ billion in
assets for institutions and individuals as of
December 31, 2002. An affiliate of the
Investment Manager, CDC IXIS Asset Management
Services, Inc. ("CDC IXIS Services"), has
responsibility for providing or procuring
administrative services for the Fund and
assisting the Fund with operational needs
pursuant to an Administrative Services
Agreement. As permitted by the Administrative
Services Agreement, CDC IXIS Services has
entered into an agreement with Investors Bank &
Trust Company to perform certain administrative
functions subject to the supervision of CDC
IXIS Services (the "Sub-Administration
Agreement"). See "Management of the Fund --
Administrative Services and Sub-Administration
Agreements."
Fees and Expenses ............. The Fund will pay the Investment Manager a
monthly fee computed at the annual rate of
0.80% of average daily managed assets (which
include the liquidation preference of the
Preferred Shares and the principal amount of
any borrowings used for leverage). The
Investment Manager has contractually agreed to
waive a portion of its investment management
fees in the amount of 0.25% of average daily
managed assets for the first five years of the
Fund's operations (through November 29, 2007),
and in declining amounts for each of the four
years thereafter (through November 29, 2011).
See "Management of the Fund-- Investment
Management Agreement."
Under the Administrative Services Agreement,
the Fund pays CDC IXIS Services a monthly
administration fee computed on the basis of the
average daily managed assets of the Fund at an
annual rate equal to 0.06% of the first $300
million in assets and 0.0575% of assets in
excess of $300 million, with a minimum annual
fee of $150,000. Under the Sub-Administration
Agreement, CDC IXIS Services (and not the Fund)
pays Investors Bank & Trust Company, the Fund's
sub-administrator, a monthly fee computed on
the basis of the managed assets of the Fund at
an annual rate equal to 0.015% of the first
$300 million in assets and 0.012% thereafter.
See "Management of the Fund-- Administrative
Services and Sub-Administration Agreements."
Investment Objectives and
Policies ...................... The Fund's primary investment objective is high
current
-6-
income. Capital appreciation is a secondary
investment objective. There can be no assurance
that the Fund's investment objectives will be
achieved. The Fund's investment objectives and
certain investment policies are considered
fundamental and may not be changed without
shareholder approval. See "Investment
Objectives and Policies."
Under normal market conditions, the Fund will
invest at least 90% of its total assets in
income-producing common shares, preferred
shares, convertible preferred shares and debt
securities issued by Real Estate Companies,
including real estate investment trusts, or
"REITs." A "Real Estate Company" is a company
that generally derives at least 50% of its
revenue from the ownership, construction,
financing, management or sale of commercial,
industrial or residential real estate (or has
at least 50% of its assets invested in such
real estate). As part of this policy, the Fund
may also invest in rights or warrants to
purchase income-producing common and preferred
shares of Real Estate Companies. Under normal
market conditions, the Investment Manager
expects to invest approximately 60% to 80% of
the Fund's total assets in common shares of
Real Estate Companies and approximately 20% to
40% of its total assets in preferred shares,
including convertible preferred shares, issued
by Real Estate Companies. Under normal market
conditions, at least 80% of the Fund's total
assets will be invested in income-producing
equity securities issued by REITs. A
significant portion of the equity securities of
the Real Estate Companies in which the Fund
invests are expected to trade on a national
securities exchange or in the
over-the-counter-market. A REIT is a Real
Estate Company that pools investors' funds for
investment primarily in income-producing real
estate or in real estate-related loans (such as
mortgages) or other interests. REITs are
generally not taxed on income distributed to
shareholders provided they distribute to their
shareholders substantially all of their income
and otherwise comply with the requirements of
the Internal Revenue Code of 1986, as amended
(the "Code"). As a result, REITs generally pay
relatively high dividends (as compared to other
types of companies). The Fund intends to use
these REIT dividends in an effort to meet its
primary objective of high current income. The
Fund will primarily invest in Equity REITs,
which invest the majority of their assets
directly in real property and derive their
income primarily from rents. The Fund may
invest up to 20% of its total assets in U.S.
Government obligations and debt securities,
including convertible debt securities, issued
by Real Estate Companies. The preferred shares,
convertible preferred shares and debt
securities in which the Fund may invest are
sometimes collectively referred to in this
prospectus as "Fixed Income Securities." The
Fund may invest in Fixed Income Securities that
are below investment grade quality. A Fixed
Income Security will
-7-
be considered to be investment grade if, at the
time of investment, such security has a rating
of "BBB" or higher by Fitch or Standard &
Poor's Ratings Services ("S&P") or "Baa" or
higher by Moody's or an equivalent rating by
another nationally recognized statistical
rating agency or, if unrated, is judged to be
of comparable quality by the Investment
Manager. The Fund will not invest in a
non-investment grade Fixed Income Security if,
as a result of such investment, more than 25%
of the Fund's total assets would be invested in
non-investment grade Fixed Income Securities.
The Fund may invest up to 10% of its total
assets in securities of non-U.S. issuers
located in countries that are members of the
Organisation For Economic Co-operation and
Development. The Fund may invest in securities
that are illiquid so long as no more than 10%
of the total assets of the Fund (taken at
market value at the time of investment) would
be invested in such securities. The Fund will
not invest more than 15% of its total assets
(taken at market value at the time of
investment) in the securities of any one issuer
other than the U.S. Government. The Fund may
invest in interest rate swap or interest rate
cap transactions in order to reduce the
interest rate risk inherent in the Fund's
underlying investments and capital structure.
See "Interest Rate Transactions." The Fund may
also purchase or sell futures or options on
futures to hedge interest rate risks. See
"Investment Objectives and Policies" and
"Principal Risks of the Fund."
In anticipation of or in response to adverse
market conditions, for cash management
purposes, or for defensive purposes, the Fund
may temporarily hold all or a portion of its
assets in cash, money market instruments, or
bonds or other debt securities. The Fund would
be unable to achieve its investment objectives
if a substantial portion of its assets
consisted of such instruments.
Leverage ....................... The Fund expects to utilize financial leverage
on an ongoing basis for investment purposes.
The Fund anticipates that, immediately after
the completion of the offering of Preferred
Shares, the Preferred Shares (together with any
other outstanding forms of leverage) will
represent approximately 35% of the Fund's
managed assets. This amount may vary, but the
Fund will not incur leverage (including
Preferred Shares and other forms of leverage)
in an amount exceeding 50% of its managed
assets. "Managed assets" means the net asset
value of the Common Shares plus the liquidation
preference of any preferred shares (including
the Preferred Shares) and the principal amount
of any borrowings used for leverage. Although
the Fund may in the future offer other
preferred shares, the Fund does not currently
intend to offer preferred shares other than the
Preferred Shares offered in this prospectus.
As an alternative to Preferred Shares (during
periods in
-8-
which no Preferred Shares are outstanding), the
Fund may incur leverage through the issuance of
commercial paper or notes or other borrowings.
Any Preferred Shares or borrowings will have
seniority over the Common Shares.
The Fund generally will not utilize leverage if
it anticipates that it would result in a lower
return to holders of the Fund's Common Shares
("Common Shareholders") over time than if
leverage were not used. Use of financial
leverage creates an opportunity for increased
income for Common Shareholders, but, at the
same time, creates the possibility for greater
loss (including the likelihood of greater
volatility of dividends on the Common Shares
and of the net asset value and market price of
the Common Shares), and there can be no
assurance that the Fund's use of leverage will
be successful. Because the fees received by the
Investment Manager are based on the managed
assets of the Fund (including assets
represented by the Preferred Shares and other
leverage), the Investment Manager has a
financial incentive for the Fund to issue the
Preferred Shares and incur other leverage. See
"Principal Risks of the Fund -- General Risks
of Investing in the Fund -- Leverage Risk."
Interest Rate Transactions ..... In order to reduce the interest rate risk
inherent in the Fund's underlying investments
and capital structure, the Fund may enter into
interest rate swap or cap transactions. The use
of interest rate swaps and caps is a highly
specialized activity that involves investment
techniques and risks different from those
associated with ordinary portfolio security
transactions. In an interest rate swap, the
Fund would agree to pay to the other party to
the interest rate swap (the "counterparty") a
fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a
variable rate payment that is intended to
approximate the Fund's variable rate payment
obligation on the Preferred Shares or any
variable rate borrowing. The payment
obligations would be based on the notional
amount of the swap. In an interest rate cap,
the Fund would pay a premium to the
counterparty to the interest rate cap and, to
the extent that a specified variable rate index
exceeds a predetermined fixed rate, would
receive from the counterparty payments of the
difference based on the notional amount of such
cap. Depending on the state of interest rates
in general, the Fund's use of interest rate
swaps or caps could increase or decrease the
value of the Fund's investment portfolio. To
the extent there is a decline in interest
rates, the value of the interest rate swap or
cap could decline, and this could reduce asset
coverage on the Preferred Shares or negatively
impact the Fund's ability to make dividend
payments on the Preferred Shares. In addition,
if the counterparty to an interest rate swap or
cap defaults, the Fund would be obligated to
make the payments that it had intended to
avoid. Depending on whether the Fund would be
entitled to
-9-
receive net payments from the
counterparty on the swap or cap,
which in turn would depend on, among
other things, the general state of
short-term interest rates, such
default could negatively impact the
value of the Fund's investment
portfolio. In addition, there is a
risk that the Fund will not be able
to enter into suitable interest rate
swap or cap transactions, or that
the terms of an interest rate swap
or cap transaction will be less
favorable to the Fund than expected.
Similarly, at the time an interest
rate swap or cap transaction
terminates, the Fund may not be able
to obtain a replacement transaction,
or the terms of any replacement
transaction may not be as favorable
to the Fund. If these situations
occur, they could reduce asset
coverage on the Preferred Shares or
have a negative impact on the Fund's
ability to make dividend payments on
the Preferred Shares. If the Fund
fails to maintain the required 200%
asset coverage of the liquidation
value of the outstanding Preferred
Shares or if the Fund loses its
expected AAA/Aaa rating on the
Preferred Shares or fails to
maintain other covenants, the Fund
may be required to redeem some or
all of the Preferred Shares.
Similarly, the Fund could be
required to prepay the principal
amount of any borrowings. Such
redemption or prepayment likely
would result in the Fund seeking to
terminate early all or a portion of
any swap or cap transaction. Early
termination of a swap or cap could
result in a termination payment by
the Fund. The Fund does not intend
to enter into interest rate swap or
cap transactions having a notional
amount that exceeds the outstanding
amount of the Fund's leverage. In
addition to using swaps and caps,
the Fund may also purchase or sell
futures contracts or options on
futures contracts in an attempt to
hedge interest rate risks. See
"Principal Risks of the Fund--
General Risks of Investing in the
Fund-- Leverage Risk" and "Interest
Rate Transactions" for additional
information.
Principal Risks of the Fund ............ Risk is inherent in all investing.
Therefore, before investing in the
Preferred Shares and the Fund, you
should consider certain risks
carefully.
The following paragraphs summarize
the principal risks to which the
Fund and the Preferred Shares are
subject. For a more complete
discussion of these risks, see
"Principal Risks of the Fund."
Risks of Investing in the Preferred
Shares
The primary risks of investing in
the Preferred Shares include:
Interest Rate Risk. The Preferred
Shares pay dividends based on
shorter-term interest rates. The
Fund purchases real estate equity
securities that pay dividends that
are based on the performance of the
issuers. The Fund also may buy real
estate debt securities that pay
interest based
-10-
on longer-term yields. These
dividends and interest payments are
typically, although not always,
higher than shorter-term interest
rates. Real Estate Company
dividends, as well as longer-term
and shorter-term interest rates,
fluctuate. If shorter-term interest
rates rise, dividend rates on
Preferred Shares may rise so that
the amount of dividends paid to
holders of Preferred Shares exceeds
the income from the portfolio
securities. Because income from the
Fund's entire investment portfolio
(not just the portion of the
portfolio purchased with the
proceeds of the Preferred Shares
offering) is available to pay
dividends on Preferred Shares,
however, dividend rates on Preferred
Shares would need to exceed the net
return on the Fund's portfolio by a
wide margin before the Fund's
ability to pay dividends on
Preferred Shares would be
jeopardized. If long-term interest
rates rise, this could negatively
impact the value of the Fund's
investment portfolio and thus reduce
the amount of assets serving as
asset coverage for Preferred Shares.
Auction Risk. You may not be able to
sell your Preferred Shares at an
auction if the auction fails, i.e.,
if there are more Preferred Shares
offered for sale than there are
buyers for those shares. Also, if
you place a bid order (an order to
retain Preferred Shares) at an
auction only at a specified rate,
and that rate exceeds the rate set
at the auction, your order will be
deemed an irrevocable offer to sell
your Preferred Shares, and you will
not retain your Preferred Shares.
Additionally, if you buy Preferred
Shares or elect to retain Preferred
Shares without specifying a rate
below which you would not wish to
buy or continue to hold those
shares, and the auction sets a
below-market rate, you may receive a
lower rate of return on your
Preferred Shares than the market
rate for similar investments. The
dividend period for the Preferred
Shares may be changed by the Fund,
subject to certain conditions and
with notice to the holders of the
Preferred Shares, which could also
affect the liquidity of your
investment. See "Description of
Preferred Shares" and "The Auction."
Secondary Market Risk. If you try to
sell your Preferred Shares between
auctions, you may not be able to
sell any or all of your shares, or
you may not be able to sell them for
$25,000 per share or $25,000 per
share plus accumulated dividends.
Changes in interest rates could
affect the price you would receive
if you sold your Preferred Shares in
the secondary market, particularly
if the Fund has designated a special
rate period (a dividend period of
more than seven days).
Broker-dealers that maintain a
secondary trading market (if any)
for the Preferred Shares are not
required to maintain this market,
and the Fund is not required to
redeem shares if either an auction
or an attempted secondary market
sale fails because of a lack of
buyers. The Preferred Shares are not
registered on a stock exchange or
The Nasdaq Stock
-11-
Market, Inc. ("NASDAQ"). If you sell
your Preferred Shares between
auctions, you may receive less than
the price you paid for them,
especially when market interest
rates have risen since the last
auction or during a special rate
period.
Ratings and Asset Coverage Risk.
While it is a condition to the
closing of the offering that Moody's
assigns a rating of "Aaa" and Fitch
assigns a rating of "AAA" to the
Preferred Shares, these ratings do
not eliminate or necessarily
mitigate the risks of investing in
Preferred Shares. In addition,
Moody's, Fitch or another rating
agency rating the Preferred Shares
could downgrade the Preferred
Shares, which may make your shares
less liquid at an auction or in the
secondary market. If a rating agency
downgrades the Preferred Shares, the
Fund may (but is not required to)
alter its portfolio in an effort to
improve the rating, although there
is no assurance that it will be able
to do so to the extent necessary to
restore the prior rating. See
"Additional Risk Considerations --
Portfolio Turnover." In addition,
the Fund may be forced to redeem
your Preferred Shares to meet
regulatory or rating agency
requirements. The Fund may also
voluntarily redeem Preferred Shares
under certain circumstances. See
"Description of Preferred Shares --
Redemption." The asset coverage
requirements imposed by a rating
agency may limit the Fund's ability
to invest in certain securities or
utilize certain investment
techniques that the Investment
Manager might otherwise consider
desirable. See "Description of
Preferred Shares -- Rating Agency
Guidelines and Asset Coverage" for a
description of the rating agency
guidelines with which the Fund must
currently comply.
Restrictions on Dividends and Other
Distributions. Restrictions imposed
on the declaration and payment of
dividends or other distributions to
the holders of the Fund's Common
Shares and Preferred Shares, both by
the 1940 Act and by requirements
imposed by rating agencies, might
impair the Fund's ability to
maintain its qualification as a
regulated investment company for
federal income tax purposes. While
the Fund intends to redeem Preferred
Shares to enable the Fund to
distribute its income as required to
maintain its qualification as a
regulated investment company under
the Code, there can be no assurance
that such redemptions can be
effected in time to meet the
requirements of the Code. See "Tax
Matters."
Portfolio Investments Risk. In
certain circumstances, the Fund may
not earn sufficient income from its
investments to pay dividends on
Preferred Shares. In addition, the
value of the Fund's investment
portfolio may decline, reducing the
asset coverage for the Preferred
Shares. If an issuer whose
securities the Fund purchases
experiences financial difficulties,
defaults, or is otherwise affected
by adverse market factors, there may
be a negative impact on the income
and/or asset value of the Fund's
investment portfolio, which will
reduce asset coverage for the
Preferred Shares and make it more
difficult for the Fund to pay
dividends on the Preferred Shares.
General Risks of Investing in the
Fund
In addition to the risks described
above, certain general risks
relating to an investment in the
Fund may under certain circumstances
reduce the Fund's ability to pay
dividends and meet its asset
coverage requirements on the
-12-
Preferred Shares. These risks
include:
Limited Operating History. The Fund
is a recently organized,
non-diversified, closed-end
management investment company that
has been operational for less than
three months.
Investment Risk: An investment in
the Fund is subject to investment
risk, including the possible loss of
the entire principal amount that you
invest.
Issuer Risk. The value of an equity
or debt security may decline for a
number of reasons that directly
relate to the Real Estate Company
that issues it, such as management
performance, financial leverage and
reduced demand for the Real Estate
Company's properties and services.
Interest Rate Risk. Interest rate
risk is the risk that fixed-income
investments such as preferred
shares, U.S. Government obligations
and debt securities, and to a lesser
extent dividend-paying common stocks
such as REIT common shares, will
decline in value because of changes
in interest rates. When interest
rates rise, the market value of such
securities generally will fall. The
Fund's investment in such securities
means that the value of the Fund's
investment portfolio may decline if
market interest rates rise, and such
a decline would reduce asset
coverage on the Preferred Shares.
Also, during periods of declining
interest rates, many mortgages may
be refinanced, which may reduce the
yield from securities of Real Estate
Companies that invest primarily in
loans secured by real estate and
generally derive their income
primarily from interest payments on
mortgage loans. This risk is
commonly known as "prepayment risk."
The Fund's use of leverage through
the issuance of the Preferred Shares
may tend to magnify interest rate
risk. See "Principal Risks of the
Fund -- General Risks of Investing
in the Fund -- Leverage Risk." The
Fund may use swaps, caps, futures
contracts and options on futures
contracts to help control interest
rate risk. See "Investment
Objectives and Policies -- Portfolio
Composition -- Short Sales and
Derivatives" and "Interest Rate
Transactions."
General Real Estate Risks. Because
the Fund concentrates its assets in
the real estate industry, the Fund's
performance will be closely linked
to the performance of the real
estate markets. Property values may
fall due to supply and demand
disparities, increasing vacancies or
declining rents resulting from
economic, legal, cultural or
technological developments. Real
Estate Company prices also may drop
because of the failure of borrowers
to pay their loans and poor
management. Many Real Estate
Companies (including REITs) utilize
leverage, which increases investment
risk and could adversely affect a
Real Estate Company's operations and
-13-
market value in periods of
unfavorable interest rate movements.
In addition, there are risks
associated with particular sectors
of the real estate industry.
Retail Properties. Retail properties
are affected by the overall health
of the national and relevant local
economy and may be adversely
affected by the growth of
alternative forms of retailing,
bankruptcy, departure or cessation
of operations of a tenant, a shift
in consumer demand due to
demographic changes, spending
patterns and lease terminations.
Office Properties. Office properties
are affected by the overall health
of the national and relevant local
economy, as well as by other factors
such as a downturn in the businesses
operated by their tenants,
obsolescence, non-competitiveness
and the high capital expenditures
needed to operate such properties.
Hotel Properties. The risks of hotel
properties include, among other
things, the necessity of a high
level of continuing capital
expenditures, competition, increases
in operating costs that may not be
offset by increases in revenues,
dependence on business and
commercial travelers and tourism,
increases in fuel costs and other
expenses of travel, and adverse
effects of general and local
economic conditions. Hotel
properties tend to be more sensitive
to adverse economic conditions and
competition than many other
commercial properties.
Healthcare Properties. Healthcare
properties and healthcare providers
are affected by a number of
significant factors, including
federal, state and local laws
governing licenses, certification,
adequacy of care, pharmaceutical
distribution, rates, equipment,
personnel and other factors
regarding operations; continued
availability of revenue from
government reimbursement programs
(primarily Medicaid and Medicare)
and from private sector health
insurance providers; and competition
on a local and regional basis. The
failure of any healthcare operator
to comply with governmental laws and
regulations may affect its ability
to operate its facility or receive
government reimbursements.
Multifamily/Residential Properties.
The value and successful operation
of a multifamily/residential
property may be affected by a number
of factors such as the location of
the property, the ability of the
management team, the type of
services provided by the property,
the level of mortgage rates, the
presence of competing properties,
adverse economic conditions in the
locale, the relocation of tenants to
new properties with better
amenities, oversupply, and rent
control laws or other laws affecting
such properties.
Self-Storage Properties. The value
and successful
-14-
operation of a self-storage
property may be affected by a
number of factors, such as the
ability of the management team,
the location of the property,
the presence of competing
properties, changes in traffic
patterns, and adverse effects of
general and local economic
conditions.
Insurance Risk. Certain of the
Real Estate Companies in which
the Fund invests may carry
comprehensive liability, fire,
flood, earthquake extended
coverage and rental loss
insurance with various policy
specifications, limits and
deductibles. Should any type of
uninsured loss occur (or if an
insurer is unwilling or unable
to pay on a claim), the Real
Estate Company could lose its
investment in, and anticipated
profits and cash flows from, a
number of properties. Such a
loss would impact the value of
the Fund's investment portfolio.
Financial Leverage Risk. Real
Estate Companies may be highly
leveraged and financial
covenants may affect the ability
of Real Estate Companies to
operate effectively or pay
dividends. If the principal
payments of a Real Estate
Company's debt cannot be
refinanced, extended or paid
with proceeds from other capital
transactions, such as new equity
capital, the Real Estate
Company's cash flow may not be
sufficient to pay dividends or
to repay all maturing debt
outstanding, which would impact
the value of the Fund's
investment portfolio.
Environmental Issues. In
connection with the ownership
(direct or indirect), operation,
management and development of
real properties that may contain
hazardous or toxic substances, a
Real Estate Company may be
considered an owner, operator or
responsible party of such
properties and, therefore, may
be potentially liable for
removal or remediation costs as
well as certain other costs,
including governmental fines and
liabilities for injuries to
persons and property. The
existence of any such
environmental liability could
have a material adverse effect
on the results of operations and
cash flow of any such Real
Estate Company and, as a result,
the asset coverage on the
Preferred Shares or the amount
available to make distributions
on shares of the Fund could be
reduced.
Smaller Companies. Even the
larger Real Estate Companies in
the industry tend to be small to
medium-sized companies in
relation to the equity markets
as a whole. Real Estate Company
shares, therefore, can be more
volatile than, and perform
differently from, larger company
stocks. There may be less
trading in a smaller company's
stock, which means that buy and
sell transactions in that stock
could have a larger impact on
the stock's price than is the
case with larger company stocks.
Further, smaller companies may
have fewer business lines;
changes in any one line of
business, therefore, may have a
greater impact on a smaller
-15-
company's stock price than is
the case for a larger company.
Smaller company shares may also
perform differently in different
cycles than larger company
shares. Accordingly, Real Estate
Company shares can be more
volatile than -- and at times
will perform differently from --
large company shares such as
those found in the Dow Jones
Industrial Average.
As of December 31, 2002, the
market capitalization of REITs
ranged in size from
approximately $ million to
approximately $ billion.
REIT-related Risks. REITs are
subject to a highly technical
and complex set of provisions in
the Code. It is possible that
the Fund may invest in a Real
Estate Company that purports to
be a REIT but does not satisfy
all of the conditions of REIT
status in any year. In some
cases, the Real Estate Company
may still be able to qualify for
REIT status after payment of a
penalty tax. Otherwise, a Real
Estate Company that fails to
qualify for REIT status would be
subject to corporate-level
taxation. In either case, the
return to the Fund on its
investment in such company would
be reduced. REITs could possibly
fail to qualify for tax free
pass-through of income under the
Code, or to maintain their
exemptions from registration
under the Investment Company Act
of 1940, as amended (the "1940
Act"). The above factors may
also adversely affect the Fund's
investment in such a REIT. In
the event of a default by a
borrower or lessee, the REIT may
experience delays in enforcing
its rights as a mortgagee or
lessor and may incur substantial
costs associated with protecting
its investments.
Lower-rated Securities Risk.
Lower-rated preferred shares or
debt securities, or equivalent
unrated securities, which are
commonly known as "junk bonds,"
generally involve greater
volatility of price and risk of
loss of income and principal,
and may be more susceptible to
real or perceived adverse
economic and competitive
industry conditions than higher
grade securities. It is
reasonable to expect that any
adverse economic conditions
could disrupt the market for
lower-rated securities, have an
adverse impact on the value of
those securities, and adversely
affect the ability of the
issuers of those securities to
repay principal and interest on
those securities.
Interest Rate Transactions Risk.
The Fund may enter into a swap
or cap transaction to attempt to
protect itself from increasing
dividend or interest expenses
resulting from increasing
short-term interest rates. A
decline in interest rates may
result in a decline in the value
of the swap or cap, which may
result in a decline in the value
of the Fund's investment
portfolio. A sudden and dramatic
decline in interest rates may
result in a significant decline
in the value of the Fund's
investment portfolio, which
-16-
would reduce asset coverage on
the Preferred Shares. See
"Interest Rate Transactions."
These transactions may also
reduce the opportunity for gain
by offsetting any positive
effect of favorable movements in
the hedged interest rates.
Risks of Futures and Options on
Futures. The use by the Fund of
futures contracts and options on
futures contracts to hedge
interest rate risks can reduce
the opportunity for gain by
offsetting the positive effect
on favorable movements in the
hedged interest rates. The Fund
could lose money if the
counterparty to a futures
contract or option on a futures
contract is unwilling or unable
to honor its obligations to the
Fund. Furthermore, there is no
assurance that a liquid
secondary market will exist for
any particular futures contract
or option thereon at any
particular time. If the Fund
were unable to liquidate a
futures contract or an option on
a futures contract position due
to the absence of a liquid
secondary market or the
imposition of price limits, it
could incur substantial losses.
The Fund would continue to be
subject to market risk and
counterparty risk with respect
to the position.
Foreign Security Risk. The
prices of foreign securities may
be affected by factors not
present with U.S. securities,
including currency exchange
rates, political and economic
conditions, less stringent
regulation and higher
volatility. As a result, many
foreign securities may be less
liquid and more volatile than
U.S. securities.
Liquidity Risk. The Fund may
invest in securities that are
illiquid so long as no more than
10% of the total assets of the
Fund (taken at market value at
the time of investment) would be
invested in such securities.
Illiquid securities are those
that cannot be disposed of
within seven days in the
ordinary course of business at
approximately the amount at
which the Fund has valued the
securities. Illiquid securities
may trade at a discount from
comparable, more liquid
investments, and may be subject
to wide fluctuations in market
value. Also, the Fund may not be
able to dispose of illiquid
securities when that would be
beneficial at a favorable time
or price.
Risks of Warrants and Rights.
Warrants and rights are subject
to the same market risks as
stocks, but may be more volatile
in price. An investment in
warrants or rights may be
considered speculative. The
purchase of warrants or rights
involves the risk that the Fund
could lose the purchase value of
a warrant or right if the right
to subscribe to additional
shares is not exercised prior to
the warrant's or right's
expiration. Also, the purchase
of warrants and rights involves
the risk that the effective
price paid for the warrant or
right, added to the subscription
price of the related security,
may exceed the subscribed
security's market price, such as
when there is no movement in the
price of the underlying security
or
-17-
when the market price of the
underlying security decreases.
Inflation Risk. Inflation risk
is the risk that the value of
assets or income from
investments will be worth less
in the future as inflation
decreases the present value of
future payments. As inflation
increases, the real, or
inflation-adjusted, value of the
Preferred Shares and
distributions can decline.
However, during any periods of
rising inflation, Preferred
Share dividend payments may
increase, which would tend to
offset this risk.
Additional Risk Considerations ............. In addition to the principal
risks summarized above, the Fund
and the Preferred Shares are
also subject to additional
risks. See "Additional Risk
Considerations" for a more
detailed description of the
additional risks described
below.
Portfolio Turnover. The Fund may
engage in frequent and active
portfolio trading when
considered appropriate, but it
will not use short-term trading
as the primary means of
achieving its investment
objectives. There are no limits
on the rate of portfolio
turnover. A higher turnover rate
results in correspondingly
greater brokerage commissions
and other transactional
expenses, which are borne by the
Fund. High portfolio turnover
may result in the realization of
net short-term capital gains by
the Fund that, when distributed
to shareholders, will be taxable
as ordinary income.
Non-Diversified Status. Because
the Fund, as a "non-diversified"
investment company under the
1940 Act, can invest a greater
portion of its assets in
obligations of a single issuer
than, and invest in a smaller
number of individual issuers
than, a "diversified" fund, an
investment in the Fund presents
greater risk to you than an
investment in a diversified
company. The Fund will be more
susceptible than a diversified
fund to being adversely affected
by any single corporate,
economic, political or
regulatory occurrence. See
"Investment Objectives and
Policies." To help control this
risk, the Fund will not invest
more than 15% of its total
assets (taken at market value at
the time of investment) in the
securities of any one issuer
other than the U.S. Government.
In addition, the Fund intends to
diversify its investments to the
extent necessary to maintain its
status as a regulated investment
company under the Code. See
"Taxation" in the SAI.
Anti-Takeover Provisions. The
Fund's Amended and Restated
Agreement and Declaration of
Trust (the "Declaration")
includes provisions that could
have the effect of limiting the
ability of other entities or
persons to acquire control of
the Fund or convert the Fund to
open-end status. See "Certain
Provisions in Declaration of
-18-
Trust."
Recent Developments. As a result
of the terrorist attacks on the
World Trade Center and the
Pentagon on September 11, 2001,
some of the U.S. securities
markets were closed for a
four-day period. In addition,
certain auction agents for
auction rate preferred shares
similar to the Preferred Shares
were unable to run auctions
during that period. These
terrorist attacks and related
events have led to increased
short-term market volatility and
may have long-term effects on
U.S. and world economies and
markets. A similar disruption of
the financial markets could
adversely impact the Fund in
general and the Preferred Shares
in particular by, for example,
affecting interest rates,
auctions and auction
participants, such as the
auction agents and
broker-dealers, secondary
trading, ratings, credit risk,
inflation and other factors
relating to securities and other
financial instruments.
Certain Affiliations. Certain
broker-dealers may be considered
to be affiliated persons of the
Fund and/or the Investment
Manager due to their possible
affiliations with the Investment
Manager's parent, CDC IXIS Asset
Management North America, L.P.
Absent an exemption from the SEC
or other regulatory relief, the
Fund is generally precluded from
effecting certain principal
transactions with affiliated
brokers, and its ability to
purchase securities being
underwritten by an affiliated
broker or a syndicate including
an affiliated broker or to
utilize affiliated brokers for
agency transactions is subject
to regulatory and other
restrictions. This could limit
the Fund's ability to engage in
securities transactions and take
advantage of market
opportunities.
Given the risks described above,
an investment in the Fund may
not be appropriate for all
investors. You should carefully
consider your ability to assume
these risks before making an
investment in the Preferred
Shares.
Trading Market ............................. The Preferred Shares will not be
listed on a stock exchange.
Instead, you may buy or sell
Preferred Shares at a periodic
auction by submitting orders to
a broker-dealer that has entered
into a separate agreement with
the auction agent (a
"Broker-Dealer") or to a
broker-dealer that has entered
into an agreement with a
Broker-Dealer. In addition to
the auctions, Broker-Dealers and
other broker-dealers may (but
are not required to) maintain a
separate secondary trading
market in Preferred Shares, but
may discontinue this activity at
any time. You may transfer
shares outside of auctions only
to or through a Broker-Dealer, a
broker-dealer that has entered
into a separate agreement with a
Broker-Dealer, or other persons
as the Fund permits. There can
be no assurance that a secondary
trading market for the Preferred
Shares will develop or, if it
does develop, that it will
provide holders of Preferred
Shares with liquidity of
investment.
-19-
See "The Auction."
Ratings ......................... The Fund will issue the Preferred Shares only
if the Preferred Shares have received a
credit quality rating of "Aaa" from Moody's
and of "AAA" from Fitch. These ratings are an
assessment of the capacity and the
willingness of an issuer to pay preferred
stock obligations, and are not a
recommendation to purchase, hold or sell
those shares inasmuch as the rating does not
comment as to the market price or suitability
for a particular investor. Ratings issued by
a nationally recognized statistical rating
agency such as Moody's or Fitch do not
eliminate or mitigate the risks of investing
in the Preferred Shares. These ratings may be
changed, suspended or withdrawn in the rating
agencies' discretion. See "Principal Risks of
the Fund" and "Additional Risk
Considerations."
Dividends and Rate Periods ...... The table below shows the dividend rate, the
dividend payment date and the number of days
for the initial rate period of the Preferred
Shares. For subsequent dividend periods, the
Preferred Shares will normally pay dividends
based on a rate set at auctions held every
seven days. In most instances, dividends are
payable on the first business day following
the end of the rate period. The rate set at
auction will not exceed the applicable
maximum rate. See "Description of Preferred
Shares-- Dividends and Rate Periods."
Dividends on Preferred Shares will be
cumulative from the date the shares are first
issued and will be paid out of legally
available funds.
Initial Dividend Payment Subsequent
Dividend Date for Initial Rate Dividend Payment Number of Days in
Rate Period Day Initial Rate Period
-------- ------ --- -------------------
% ,2003
Notwithstanding the schedule above, the Fund
may, subject to certain conditions, designate
special rate periods of more than seven days
for the Preferred Shares. The Fund may not
designate a special rate period unless
sufficient clearing bids were made in the
most recent auction. In addition, full
cumulative dividends and any amounts due with
respect to mandatory redemptions or optional
redemptions must be paid in full or deposited
with the auction agent. The Fund also must
have received confirmation from Moody's and
Fitch or any substitute rating agency that
the proposed special rate period will not
adversely affect such agency's then-current
rating on the Preferred Shares and the lead
Broker-Dealer designated by the Fund,
initially ,
-20-
must not have objected to the declaration of
a special rate period. The dividend payment
date for a special rate period will be set
out in the notice designating the special
rate period. See "Description of Preferred
Shares - Dividends and Rate Periods."
Liquidation Preference .......... If the Fund is liquidated, the Fund must pay
to holders of Preferred Shares $25,000 per
share, plus accumulated but unpaid dividends,
if any, whether or not earned or declared.
See "Description of Preferred Shares -
Liquidation."
Asset Maintenance ............... Under the Fund's Amended and Restated Bylaws
(the "Bylaws"), which establish and fix the
rights and preferences of the Preferred
Shares, the Fund must maintain:
. asset coverage on the Preferred Shares as
required by the rating agencies rating the
Preferred Shares, and
. asset coverage of at least 200% with
respect to senior securities that are
stock, including the Preferred Shares, as
discussed in "Description of Preferred
Shares -- Rating Agency Guidelines and
Asset Coverage."
In the event that the Fund does not maintain
(or cure a failure to maintain) these
coverage tests, some or all of the Preferred
Shares will be subject to mandatory
redemption. Section 11 of the Bylaws, which
contains the terms of the Preferred Shares,
is attached as Appendix B to the SAI. See
"Description of Preferred Shares --
Redemption."
Based on the composition of the Fund's
portfolio as of , 2003, the Fund estimates
that the asset coverage of the Preferred
Shares, as measured pursuant to the 1940 Act
and the rules and regulations thereunder,
would be approximately % if the Fund were
to issue all of the Preferred Shares offered
in this prospectus, representing
approximately 35% of the Fund's managed
assets after their issuance. This asset
coverage will change from time to time.
Redemption ...................... The Fund will be required to redeem Preferred
Shares if it fails to meet the asset coverage
tests required by the 1940 Act and the rating
agencies rating the Preferred Shares or to
correct such a failure in a timely manner.
The Fund may voluntarily redeem Preferred
Shares, in whole or in part, under certain
circumstances. See "Description of Preferred
Shares-- Redemption." Although the Preferred
Shares are subject to redemption under
certain circumstances, unlike the shares of
an open-end investment company, the Preferred
Shares may not be redeemed at a shareholder's
option at net asset value.
-21-
Voting Rights ................... The 1940 Act requires that the holders of
Preferred Shares and any other outstanding
preferred shares of the Fund, voting together
as a single class separate from the Common
Shareholders, have the right to elect at
least two Trustees of the Fund at all times
and to elect a majority of the Trustees if
two years' dividends on the Preferred Shares
or any other preferred shares are unpaid
until all unpaid dividends on the Preferred
Shares and any other preferred shares are
paid or otherwise provided for by the Fund.
The holders of Preferred Shares and any other
outstanding preferred shares will vote as a
separate class on certain other matters as
required under the Declaration, the Bylaws,
or the 1940 Act. See "Description of
Preferred Shares--Voting Rights." 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.
Federal Income Taxation ......... In the opinion of Ropes & Gray, the Preferred
Shares will constitute equity of the Fund for
federal income tax purposes. The
distributions with respect to the Preferred
Shares (other than certain distributions in
redemption of Preferred Shares) will
constitute dividends to the extent of the
Fund's current or accumulated earnings and
profits, as calculated for federal income
tax purposes. Such dividends generally will
be taxable as ordinary income to holders.
Distributions of net capital gains (i.e., the
excess of net long-term capital gains over
net short-term capital losses) that are
designated by the Fund as capital gain
dividends will be treated as long-term
capital gains in the hands of holders
receiving such distributions. The Internal
Revenue Service (the "IRS") currently
requires that a regulated investment company
that has two or more classes of stock
allocate to each such class proportionate
amounts of each type of its income (such as
ordinary income and capital gains) based upon
the percentage of total dividends distributed
to each class for the tax year. Accordingly,
the Fund intends each year to allocate
capital gain dividends between and among its
Common Shares and Preferred Shares in
proportion to the total dividends paid to
each class during or with respect to such
year. Ordinary income dividends and dividends
qualifying for the dividends received
deduction will similarly be allocated between
classes. See "Tax Matters."
Custodian and Auction Agent ..... Investors Bank & Trust Company serves as the
Fund's custodian. will act as
auction agent, transfer agent, dividend
paying agent and redemption agent for the
Preferred Shares.
-22-
FINANCIAL HIGHLIGHTS
The information contained in the table below under the headings "Per
Share Operating Performance" and "Ratios/Supplemental Data" shows the unaudited
operating performance of the Fund from the commencement of the Fund's operations
on November 26, 2002 through January , 2003. Because the Fund is recently
organized and commenced operations on November 26, 2002, the table covers fewer
than [six] weeks of operations, during which a substantial portion of the Fund's
portfolio was held in temporary investments pending investment in real estate
securities that meet the Fund's investment objectives and policies. Accordingly,
the information presented may not provide a meaningful picture of the Fund's
operating performance.
For the Period From
November 26, 2002*
through _______, 2003
(Unaudited)
Per Share Operating Performance
Net Asset Value, Beginning of Period .................................................. $
Less Offering Costs Charged to Paid-in Capital ........................................ $
Income from Investment Operations:
Net Investment Income ........................................................ $
Net Realized and Unrealized Gain/(Loss) on Investments ....................... $
Total from Investment Operations ................................... $
Less Dividends and Distributions to Shareholders from:
Net Investment Income ........................................................ $
Net Realized Gain on Investments ............................................. $
Return of Capital ............................................................ $
Total Dividends and Distributions to Shareholders .................. $
Net Increase/(Decrease) in Net Assets ................................................. $
Net Asset Value, End of Period ........................................................ $
Per Share Market Value, End of Period ................................................. $
Total Return on NAV ................................................................... %(1)
Total Investment Return on Market Value ............................................... %(1)
Ratios/Supplemental Data:
Net Assets, End of Period (in thousands) ..................................... $
Ratio of Expenses to Average Daily Net Assets (before fee waiver) (2) ........ %(3)
Ratio of Expenses to Average Daily Net Assets (net of fee waiver) (2) ........ %(3)
Ratio of Net Investment Income to Average Daily Net Assets
(before fee waiver) (2) ................................................. %(3)
Ratio of Net Investment Income to Average Daily Net Assets
(net of fee waiver) (2) ............................................... %(3)
Portfolio Turnover Rate ...................................................... %(1)
------
* Date of commencement of operations
(1) Not annualized
(2) The Investment Manager has contractually agreed to waive a portion of its
investment management fees in the amount of 0.25% of average daily managed
assets for the first five years of the Fund's operations (through November 29,
2007), and in declining amounts for each of the four years thereafter (through
November 29, 2011).
(3) Annualized.
THE FUND
The Fund is a recently organized, non-diversified, closed-end
management investment company. The Fund was organized as a Massachusetts
business trust on September 18, 2002 and is registered as an investment company
under the 1940 Act. As a recently-organized entity, the Fund has a limited
operating history. The Fund's principal office is located at 399 Boylston
Street, Boston, Massachusetts 02116, and its telephone number is (800) 862-4863.
The Fund commenced operations on November 26, 2002 in connection with
an initial public offering of 3,750,000 of its Common Shares. The proceeds of
such offering were approximately $53,606,250 after the payment of organizational
and offering expenses. In connection with the initial public offering of the
Fund's Common Shares, the underwriters for the Common Shares were granted an
option to purchase up to an additional 562,500 Common Shares to cover
over-allotments. On , such underwriters purchased, at a price of $14.325
per Common Share, an additional Common Shares of the Fund pursuant to
the over-allotment option. The Fund's Common Shares are traded on the American
Stock Exchange under the symbol "RIF."
USE OF PROCEEDS
The net proceeds of the offering of Preferred Shares will be
approximately $ after payment of the estimated offering costs and the sales
load. The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objectives and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in accordance with its investment objectives and policies within three
months of the completion of the offering. Pending such use, it is anticipated
that the proceeds will be invested in U.S. Government securities or other high
quality short-term securities.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund
as of , 2003, and as adjusted to give effect to the issuance of the
Preferred Shares offered hereby (including estimated offering expenses and sales
load of $ ).
Actual As Adjusted
------ ------------
Series [ ] Preferred Shares, $0.00001 par value
(no shares issued; __________ shares issued, as adjusted,
at $25,000 per share liquidation preference) ............................ $ $
Common Shares, $0.00001 par value, unlimited shares authorized, __________
shares issued and outstanding ........................................... $ $
Undistributed net investment income ............................................ $ $
Accumulated net realized gain/loss on investment transactions .................. $ $
Net unrealized appreciation/(depreciation) on investments ...................... $ $
-------- -------
Net assets ..................................................................... $ $
======== =======
PORTFOLIO COMPOSITION
As of , 2003, % of the market value of the Fund's portfolio
was invested in securities of Real Estate Companies and % in U.S.
Government securities and other short-term investments. This information
reflects the composition of the Fund's assets at , 2003, and is not
necessarily representative of the Fund's portfolio as of the date hereof or at
any time in the future.
-23-
INVESTMENT OBJECTIVES AND POLICIES
General
The Fund's primary investment objective is high current income. Capital
appreciation is the Fund's secondary investment objective. There can be no
assurance that the Fund will achieve its investment objectives. The Fund's
investment objectives are fundamental and may not be changed without the
approval of shareholders. Unless otherwise indicated, the Fund's investment
policies are not fundamental and may be changed by the Board of Trustees without
the approval of shareholders. The Fund has a policy of concentrating its
investments (investing 25% or more of its assets) in the U.S. real estate
industry and not in any other industry. This investment policy is considered
fundamental and may not be changed without the approval of a majority of the
Fund's outstanding voting securities, as defined in the 1940 Act. Under normal
market conditions, the Fund will invest at least 90% of its total assets in
income-producing common shares, preferred shares, convertible preferred shares
(preferred shares that, during certain periods or upon the happening of certain
events, may be converted into common shares) and debt securities issued by Real
Estate Companies, including real estate investment trusts, or "REITs." Under
normal market conditions, at least 80% of the Fund's total assets will be
invested in income-producing equity securities issued by REITs. A significant
portion of the equity securities of Real Estate Companies in which the Fund
invests are expected to trade on a national securities exchange or in the
over-the-counter markets. The Fund may invest up to 20% of its total assets in
U.S. Government obligations and debt securities, including convertible debt
securities, issued by Real Estate Companies. The preferred shares, convertible
preferred shares and debt securities in which the Fund may invest are sometimes
collectively referred to in this prospectus as "Fixed Income Securities." The
Fund may invest in Fixed Income Securities that are below investment grade
quality, including securities that are unrated but judged to be of comparable
quality by the Investment Manager. A Fixed Income Security will be considered to
be investment grade if, at the time of investment, such security has a rating of
"BBB" or higher by Fitch or S&P or "Baa" or higher by Moody's or an equivalent
rating by a nationally recognized statistical rating agency or, if unrated, is
judged to be of comparable quality by the Investment Manager. The Fund will not
invest in a non-investment grade Fixed Income Security if, as a result of such
investment, more than 25% of the Fund's total assets would be invested in
non-investment grade Fixed Income Securities. At least 90% of the Fund's total
assets will be invested in securities of U.S. issuers. The Fund may invest in
securities that are illiquid so long as no more than 10% of the total assets of
the Fund (taken at market value at the time of investment) would be invested in
such securities. The Fund may invest up to 10% of its total assets in securities
of non-U.S. issuers located in countries that are members of the Organisation
For Economic Co-operation and Development. The Fund will not invest more than
15% of its total assets (taken at market value at the time of investment) in the
securities of any one issuer other than the U.S. Government, nor will it invest
directly in real estate or in securities of Real Estate Companies that are
controlled by the Investment Manager, CDC IXIS Asset Management North America,
L.P. or their respective affiliates.
In anticipation of or in response to adverse market conditions, for
cash management purposes or for defensive purposes, the Fund may temporarily
hold all or a portion of its assets in cash, money market instruments, or bonds
or other debt securities. The Fund would be unable to achieve its investment
objectives if a substantial portion of its assets consisted of such instruments.
The Fund will not enter into short sales or invest in derivatives,
except for interest rate hedging purposes as described in this prospectus. See
"Principal Risks of the Fund - General Risks of Investing in the Fund - Leverage
Risk" and "Interest Rate Transactions."
Investment Philosophy
The Investment Manager employs a value-oriented investment strategy
designed to identify securities that are priced below what it believes is their
intrinsic value. The Investment Manager believes that ultimately the performance
of Real Estate Companies' securities is dependent upon the performance of the
underlying real estate assets and company management as well as the overall
influence of capital markets. Consequently, when selecting securities for the
Fund, the Investment Manager draws upon the combined expertise of its real
estate, research and securities professionals.
-24-
Investment Process
When selecting investments for the Fund, the Investment Manager
generally considers the following factors that it believes help to identify
those Real Estate Companies whose securities represent the greatest value and
income and/or price appreciation potential:
Valuation. The Investment Manager has developed a proprietary model to
assess the relative value of each security in the Fund's investment universe.
This model is designed to estimate what a Real Estate Company's anticipated cash
flows are worth to a security investor (a capital markets value) and to a direct
real estate investor (a real estate value). The model helps the Investment
Manager to identify securities that it believes trade at discounts to either or
both of these model values relative to similar securities. The Investment
Manager will generally sell a security once it is considered overvalued or when
the Investment Manager believes that there is greater relative value in other
securities in the Fund's investment universe.
Price. The Investment Manager examines the historic pricing of each
Real Estate Company in the Fund's universe of potential investments. Those
securities that have under-performed in price, either in absolute terms or
relative to the Fund's universe in general, are generally given greater weight
than those that have over-performed.
Income. The Investment Manager further evaluates Real Estate Companies
by analyzing their dividend yields as well as other factors that influence the
sustainability and growth of dividends. These factors include cash flow,
leverage and payout ratios.
Catalysts. When evaluating a security, the Investment Manager also
seeks to identify potential catalysts that, in its opinion, could cause the
marketplace to re-value the security in the near term. These catalysts can be
macroeconomic, market-driven or company-specific in nature.
In order to control risk, the Investment Manager will endeavor to
maintain a portfolio that is broadly diversified within the U.S. real estate
industry, with exposure to securities representing major property types and
geographic areas. However, the Investment Manager's stock selection disciplines
and fundamental real estate market and property type analyses may lead the
Investment Manager to overweight or underweight particular property types and/or
geographic regions from time to time.
Portfolio Composition
The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the SAI.
Real Estate Companies. For purposes of these investment policies, a
Real Estate Company is one that:
. generally derives at least 50% of its revenues from the ownership,
construction, financing, management or sale of commercial, industrial, or
residential real estate; or
. has at least 50% of its assets invested in such real estate.
Under normal market conditions, the Fund will invest at least 90% of
its total assets in income-producing common shares, preferred shares,
convertible preferred shares (preferred shares that, during certain periods or
upon the happening of certain events, may be converted into common shares) and
debt securities issued by Real Estate Companies, including REITs. As part of
this policy, the Fund may also invest in rights or warrants to purchase
income-producing common and preferred shares of Real Estate Companies.
Real Estate Investment Trusts. Under normal market conditions, at least
80% of the Fund's total assets will be invested in income-producing equity
securities issued by REITs. A REIT is a Real Estate Company that pools
investors' funds for investment primarily in income-producing real estate or in
real estate-related loans (such as mortgages) or other interests. A REIT is not
taxed on income distributed to shareholders if, among other things, it
distributes to its shareholders substantially all of its taxable income (other
than net capital gains) for each taxable
-25-
year. As a result, REITs tend to pay relatively higher dividends than other
types of companies. The Fund intends to use these REIT dividends in an effort to
meet its primary objective of high current income.
REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs generally invest a majority of their assets in
income-producing real estate properties in order to generate cash flow from
rental income and gradual asset appreciation. The income-producing real estate
properties in which Equity REITs invest typically include properties such as
office buildings, retail and industrial facilities, hotels, apartment buildings
and healthcare facilities. Equity REITs can realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest the majority of
their assets in real estate mortgages and derive their income primarily from
interest payments on the mortgages. Hybrid REITs combine the characteristics of
both Equity REITs and Mortgage REITs. The Fund does not currently intend to
invest more than 10% of its total assets in Mortgage REITs or Hybrid REITs.
REITs can be listed and traded on national securities exchanges or can be
traded privately between individual owners. The Fund may invest in both publicly
and privately traded REITs.
Preferred Shares. Preferred shares pay fixed or floating dividends to
investors, and have a "preference" over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred shares before paying any dividends on its common shares.
Preferred shareholders usually have no right to vote for corporate directors or
on other matters. Under normal market conditions, the Investment Manager expects
to invest approximately 60% to 80% of the Fund's total assets in common shares
of Real Estate Companies and approximately 20% to 40% of its total assets in
preferred shares, including convertible preferred shares, issued by Real Estate
Companies. The actual percentage of common, preferred and convertible preferred
shares, rights and warrants, U.S. Government obligations and debt securities in
the Fund's portfolio may vary over time based on the Investment Manager's
assessment of market conditions.
U.S. Government Obligations. The Fund may invest in U.S. Government
obligations, provided that such investments, together with the Fund's
investments in debt securities (including convertible debt securities) do not
exceed 20% of the Fund's total assets, taken at market value at the time of
investment. Obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities include bills, notes and bonds. Obligations of
certain agencies and instrumentalities of the U.S. Government are supported by
the full faith and credit of the U.S. Treasury; others are supported by the
right of the issuer to borrow from the Treasury; others are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, though issued by an instrumentality chartered by the
U.S. Government, are supported only by the credit of the instrumentality. The
U.S. Government may choose not to provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not legally
obligated to do so.
Lower-rated Securities. The Fund may invest in non-investment grade quality
Fixed Income Securities. Non-investment grade quality Fixed Income Securities
are those that are not rated "Baa" or "BBB" or above by Moody's, Fitch or S&P
(or a comparable rating by another nationally recognized statistical rating
agency) or, if unrated, are judged to be of comparable quality by the Investment
Manager. If a Fixed Income Security is rated differently by two or more
nationally recognized statistical rating agencies, the Investment Manager may
rely on the higher rating if it believes that rating to be more accurate. The
Fund will not invest in a non-investment grade Fixed Income Security if, as a
result of such investment, more than 25% of the Fund's total assets would be
invested in non-investment grade Fixed Income Securities. In the event that a
downgrade of one or more investment grade quality Fixed Income Securities causes
the Fund to exceed this 25% limit, the Investment Manager will determine, in its
discretion, whether to sell any non-investment grade Fixed Income Securities to
reduce the percentage to below 25% of the Fund's total assets. It is possible,
therefore, that the value of non-investment grade Fixed Income Securities could
exceed 25% of the Fund's total assets for an indefinite period of time. The 25%
restriction described above does not limit the Fund's ability to invest in
securities other than Fixed Income Securities (such as common shares of Real
Estate Companies). The Investment Manager will monitor the credit quality of the
issuers of the Fund's Fixed Income Securities.
Securities that are below investment grade quality are regarded as having
predominately speculative characteristics with respect to capacity to pay
interest and repay principal. Debt securities that are below investment grade
quality are commonly referred to as "junk bonds." The Fund may only invest in
non-investment grade
-26-
securities that are rated "CCC" or higher by Fitch or S&P or "Caa" or higher by
Moody's (or a comparable rating by another nationally recognized statistical
rating agency), or unrated securities judged to be of comparable quality by the
Investment Manager. The issuers of these securities may be in default or have a
currently identifiable vulnerability to default on their payments of principal
and interest, or may otherwise be subject to present elements of danger with
respect to payments of principal or interest. However, the Fund may not invest
in securities that are in default as to payment of principal and interest at the
time of investment. See "Principal Risks of the Fund -- General Risks of
Investing in the Fund -- Risks Of Investment In Lower-Rated Securities." For a
description of security ratings, see Appendix A to the SAI.
Illiquid Securities. The Fund may invest in securities that are illiquid so
long as no more than 10% of the total assets of the Fund (taken at market value
at the time of investment) would be invested in such securities. The term
"illiquid securities" for these purposes means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. The above
limitation applies only at the time a security is purchased, and the Fund is not
required to dispose of securities if, due to market movements, greater than 10%
of the Fund's total assets are invested in illiquid securities.
The Board of Trustees has delegated to the Investment Manager the
day-to-day determination of the illiquidity of any security held by the Fund,
although it has retained oversight and ultimate responsibility for such
determinations. Certain illiquid securities may require pricing at fair value as
determined in good faith under the supervision of the Board of Trustees. See
"Net Asset Value." The Investment Manager may be subject to significant delays
in disposing of illiquid securities held by the Fund, and transactions in
illiquid securities may entail registration expenses and other transaction costs
that are higher than those for transactions in liquid securities. If adverse
market conditions were to develop during any such delay, the Fund might obtain a
less favorable price than that which prevailed when it decided to sell.
As discussed below under "Interest Rate Transactions," the Fund intends to
segregate cash or liquid securities with its custodian having a value at least
equal to the Fund's net payment obligations under any swap transaction, as
marked to market daily. The Fund will treat such amounts as illiquid for
purposes of its 10% limit on investments in illiquid securities.
Short Sales and Derivatives. The Fund will not enter into short sales or
invest in derivatives, except for interest rate hedging purposes as described in
this prospectus. See "Principal Risks of the Fund - General Risks of Investing
in the Fund - Leverage Risk" and "Interest Rate Transactions."
The Fund will only enter into futures contracts to hedge interest rate
risks. A futures contract is a two party agreement to buy or sell a specified
amount of a specified security, such as a U.S. Treasury security, for a
specified price at a designated date, time and place. Brokerage fees are
incurred when a futures contract is bought or sold, and margin deposits must be
maintained at all times when a futures contract is outstanding. The Fund may
purchase and sell futures contracts as an offset against the effect of expected
changes in interest rates. The Fund will only enter into futures contracts that
are traded on domestic futures exchanges and are standardized as to maturity
date and underlying financial instrument.
The Fund will only purchase or sell options on futures contracts to hedge
interest rate risks. Options on futures contracts give the purchaser the right,
in return for the premium paid, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified exercise price at any time during the period of the option.
Upon exercise of the option, the delivery of the futures contract position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures contract margin
account. If the Fund sells ("writes") options on futures contracts, it will
segregate cash or liquid securities in an amount necessary to cover its
obligations under the option, and will mark such amounts to market daily.
Non-Principal Investment Strategies
In addition to the investment strategies discussed above, the Fund may also
invest in other portfolio instruments or use other investment strategies,
including those listed below. For additional information about the Fund's
investments, please see the SAI.
-27-
Warrants and Rights. The Fund may invest in warrants or rights to purchase
income-producing common and preferred shares of Real Estate Companies. Warrants
are options to purchase equity securities at a specified price for a specified
period of time. Their prices do not necessarily move parallel to the prices of
the underlying securities. Rights are similar to warrants but normally have a
shorter duration and are typically distributed directly by the issuer to
shareholders. Rights and warrants generally have no voting rights, receive no
dividends and have no rights with respect to the assets of the issuer.
Temporary and Defensive Investments. In anticipation of or in response to
adverse market conditions, for cash management purposes or for defensive
purposes, the Fund may temporarily hold all or a portion of its assets in cash,
money market instruments, or bonds or other debt securities. The Fund would be
unable to achieve its investment objectives if a substantial portion of its
assets consisted of such instruments.
Securities Lending. The Fund may lend its portfolio securities (generally
to broker-dealers and other financial institutions) where such loans are
callable at any time and are continuously secured by segregated collateral equal
to no less than the market value, determined daily, of the loaned securities.
The Fund's net asset value would continue to reflect the value of the loaned
securities, and the Fund would continue to receive the income on the loaned
securities and would at the same time earn interest on the collateral or on the
investment of any cash collateral. The Fund presently intends to invest such
cash collateral in money market instruments listed below in "-- Other
Investments." The Fund will not lend portfolio securities representing more than
one-third of its total assets. The Fund may pay lending fees to the party
arranging the loan.
Lending securities involves a risk of loss to the Fund if and to the extent
that the market value of the securities loaned increases and the collateral is
not increased accordingly. Securities lending also involves the risk of loss of
rights in the collateral or delay in recovery of the collateral if the borrower
fails to return the security loaned or becomes insolvent.
Fundamental Investment Policies
The Fund has adopted certain fundamental investment policies designed to
limit investment risk and maintain portfolio diversification. These fundamental
investment policies may not be changed without the approval of the holders of a
majority of the outstanding common shares and Preferred Shares, voting as a
single class. A "majority of the outstanding" shares for these purposes means
(i) 67% or more of the shares present at a meeting, if the holders of more than
50% of the shares outstanding are present or represented by proxy, or (ii) more
than 50% of the shares outstanding, whichever of (i) or (ii) is less. The Fund
may become subject to guidelines which are more limiting than the investment
restrictions set forth above or in the SAI in order to obtain and maintain
ratings from Moody's and Fitch on the Preferred Shares. It is not currently
anticipated that these guidelines will materially impede the Investment Manager
from managing the Fund's portfolio in accordance with the Fund's investment
objectives and policies. See "Description of Preferred Shares -- Rating Agency
Guidelines and Asset Coverage." See "Investment Objectives and Policies" and
"Investment Restrictions" in the SAI for a complete list of the fundamental
investment policies of the Fund. "Description of Preferred Shares -- Voting
Rights" for additional information with respect to the voting rights of holders
of Preferred Shares.
Other Investments
The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which the Fund
may invest its cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, repurchase
agreements collateralized by such obligations, commercial paper and shares of
money market funds. Subject to certain restrictions contained in any applicable
exemptive order issued by the SEC, these instruments may include investment
companies such as money market funds advised or subadvised by the Investment
Manager or its affiliates. To the extent the Fund purchases shares of a money
market fund, the Fund will indirectly bear its proportionate share of the
advisory fees and other operating expenses of such fund.
-28-
INTEREST RATE TRANSACTIONS
In order to reduce the interest rate risk inherent in the Fund's
investments and capital structure (including the use of leverage through the
issuance of Preferred Shares), the Fund may enter into interest rate swap or cap
transactions. The Fund would use interest rate swaps or caps only with the
intent to reduce or eliminate the risk that an increase in short-term interest
rates could have on Common Share net earnings as a result of leverage.
Interest rate swaps involve the Fund's agreement with the swap counterparty
to pay a fixed rate payment in exchange for the counterparty paying the Fund a
variable rate payment that is intended to approximate all or a portion of the
Fund's variable rate payment obligation on Preferred Shares or any variable rate
borrowing. The payment obligation would be based on the notional amount of the
swap, which will not exceed the amount of the Fund's leverage. The Fund intends
to segregate cash or liquid securities having a value at least equal to the
Fund's net payment obligations under any swap transaction, marked to market
daily. The Fund will treat such amounts as illiquid for purposes of its 10%
limit on investments in illiquid securities.
The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
payment from the counterparty of the difference based on the notional amount.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Common Shareholders will bear the
risks and costs associated with the Fund's use of interest rate transactions.
Depending on the state of interest rates in general, the Fund's use of interest
rate instruments could enhance or harm the value of the Fund's investment
portfolio. To the extent there is a decline in interest rates, the net amount
receivable by the Fund, if any, under the interest rate swap or cap could
decline, and this could reduce asset coverage on the Preferred Shares or affect
the Fund's ability to pay dividends on the Preferred Shares. In addition, if
short-term interest rates are lower than the Fund's fixed rate of payment on the
interest rate swap, the swap will reduce the Fund's net earnings. If, on the
other hand, short-term interest rates are higher than the fixed rate of payment
on the interest rate swap, the swap will enhance the Fund's net earnings. Buying
interest rate caps could enhance the Fund's performance by providing a maximum
leverage expense. Buying interest rate caps could also decrease the net earnings
of the Fund in the event that the premium paid by the Fund to the counterparty
exceeds the additional amount of dividends on Preferred Shares or interest on
borrowings that the Fund would have been required to pay had it not entered into
the cap agreement. The Fund has no current intention of entering into swaps or
caps other than as described in this prospectus. The Fund would not enter into
interest rate swap or cap transactions in an aggregate notional amount that
exceeds the outstanding amount of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with respect
to interest rate swaps is limited to the net amount of interest payments that
the Fund is contractually obligated to make. If the counterparty defaults, the
Fund would not be able to use the anticipated net receipts under the swap or cap
to offset the dividend payments on Preferred Shares or interest payments on
borrowings. Depending on whether the Fund would be entitled to receive net
payments from the counterparty on the swap or cap, which in turn would depend on
the general state of interest rates at that point in time, such a default could
negatively impact the performance of the Fund. The Fund will usually enter into
swaps or caps on a net basis; that is, the two payment streams will be netted
out in a cash settlement on the payment date or dates specified in the
instrument, with the Fund receiving or paying, as the case may be, only the net
amount of the two payments.
The Fund will not enter into an interest rate swap or cap transaction with
any counterparty that the Investment Manager believes does not have the
financial resources to honor its obligation under the interest rate swap or cap
transaction. Further, the Investment Manager will monitor the financial
stability of a counterparty to an interest rate swap or cap transaction in an
effort to protect the Fund's investments proactively. However, these measures
will not guarantee that the counterparty to a swap or cap transaction will not
default.
The Fund may not be able to enter into a suitable interest rate swap or cap
transaction when the Investment Manager believes such a transaction would be
appropriate, or the terms of the transaction may be less favorable then
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expected. In addition, at the time the interest rate swap or cap transaction
reaches its scheduled termination date, there is a risk that the Fund will not
be able to obtain a replacement transaction or that the terms of the replacement
will not be as favorable as those of the expiring transaction. If these
situations occur, they could have a negative impact on the value of the Fund's
investment portfolio.
The Fund may choose or be required to redeem some or all Preferred
Shares or prepay any borrowings. This redemption would likely result in the Fund
seeking to terminate early all or a portion of any swap or cap transaction. Such
early termination of a swap or cap could result in a termination payment by the
Fund. There may also be penalties associated with early termination.
The Fund may also purchase and sell futures contracts and options on
futures contracts to hedge interest rate risk. See "Investment Objectives and
Policies -- Portfolio Composition -- Short Sales and Derivatives."
To the extent approved by the Board of Trustees from time to time, the
Fund may pay the fees of third parties that may assist in the structuring and
negotiation of interest rate transactions. The Fund's ability to engage in
interest rate transactions may be limited by tax considerations.
PRINCIPAL RISKS OF THE FUND
Investing in the Fund involves risk, including the risk that you may
receive little or no return on your investment or that you may lose part or all
of your investment. Therefore, before investing you should consider carefully
the following risks that you assume when you invest in Preferred Shares.
The Fund is a recently organized, non-diversified, closed-end
management investment company designed primarily as a long-term investment and
not as a trading vehicle. The Fund is not intended to be a complete investment
program and, due to the uncertainty inherent in all investments, there can be no
assurance that the Fund will achieve its investment objectives.
RISKS OF INVESTING IN THE PREFERRED SHARES
Interest Rate Risk. The Preferred Shares pay dividends based on
shorter-term interest rates. The Fund purchases real estate equity securities
that pay dividends that are based on the performance of the issuers. The Fund
also may buy real estate debt securities that pay interest based on longer-term
yields. These dividends and interest payments are typically, although not
always, higher than shorter-term interest rates. Real Estate Company dividends,
as well as longer-term and shorter-term interest rates, fluctuate. If
shorter-term interest rates rise, dividend rates on Preferred Shares may rise so
that the amount of dividends paid to holders of Preferred Shares exceeds the
income from the portfolio securities. Because income from the Fund's entire
investment portfolio (not just the portion of the portfolio purchased with the
proceeds of the Preferred Shares offering) is available to pay dividends on
Preferred Shares, however, dividend rates on Preferred Shares would need to
exceed the net return on the Fund's portfolio by a wide margin before the Fund's
ability to pay dividends on Preferred Shares would be jeopardized. If long-term
interest rates rise, this could negatively impact the value of the Fund's
investment portfolio and thus reduce the amount of assets serving as asset
coverage for Preferred Shares. The Fund may enter into interest rate swap or cap
transactions with the intent to reduce or eliminate the risk posed by an
increase in short-term interest rates. However, there is no guarantee that the
Fund will engage in these transactions or that these transactions will be
successful in reducing or eliminating interest rate risk. See "Interest Rate
Transactions."
Auction Risk. You may not be able to sell your Preferred Shares at an
auction if the auction fails, i.e., if there are more Preferred Shares offered
for sale than there are buyers for those shares. Also, if you place a bid order
(an order to retain Preferred Shares) at an auction only at a specified rate,
and that rate exceeds the rate set at the auction, your order will be deemed an
irrevocable offer to sell your Preferred Shares, and you will not retain your
Preferred Shares. Additionally, if you buy Preferred Shares or elect to retain
Preferred Shares without specifying a rate below which you would not wish to buy
or continue to hold those shares, and the auction sets a below-market rate, you
may receive a lower rate of return on your Preferred Shares than the market rate
for similar investments. The dividend period for the Preferred Shares may be
changed by the Fund, subject to certain conditions and with
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notice to the holders of the Preferred Shares, which could also affect the
liquidity of your investment. See "Description of Preferred Shares" and "The
Auction."
Secondary Market Risk. If you try to sell your Preferred Shares between
auctions, you may not be able to sell any or all of your shares, or you may not
be able to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. Changes in interest rates could affect the price you would receive if
you sold your Preferred Shares in the secondary market, particularly if the Fund
has designated a special rate period (a dividend period of more than seven
days). Broker-dealers that maintain a secondary trading market (if any) for the
Preferred Shares are not required to maintain this market, and the Fund is not
required to redeem shares if either an auction or an attempted secondary market
sale fails because of a lack of buyers. The Preferred Shares are not registered
on a stock exchange or NASDAQ. If you sell your Preferred Shares between
auctions, you may receive less than the price you paid for them, especially when
market interest rates have risen since the last auction or during a special rate
period.
Ratings and Asset Coverage Risk. While it is a condition to the closing
of the offering that Moody's assigns a rating of "Aaa" and Fitch assigns a
rating of "AAA" to the Preferred Shares, these ratings do not eliminate or
necessarily mitigate the risks of investing in Preferred Shares. In addition,
Moody's, Fitch or another rating agency rating the Preferred Shares could
downgrade the Preferred Shares, which may make your shares less liquid at an
auction or in the secondary market. If a rating agency downgrades the Preferred
Shares, the Fund may (but is not required to) alter its portfolio in an effort
to improve the rating, although there is no assurance that it will be able to do
so to the extent necessary to restore the prior rating. See "Additional Risk
Considerations -- Portfolio Turnover." In addition, the Fund may be forced to
redeem your Preferred Shares to meet regulatory or rating agency requirements.
The Fund may also voluntarily redeem Preferred Shares under certain
circumstances. See "Description of Preferred Shares -- Redemption." The asset
coverage requirements imposed by a rating agency may limit the Fund's ability to
invest in certain securities or utilize certain investment techniques that the
Investment Manager might otherwise consider desirable. See "Description of
Preferred Shares -- Rating Agency Guidelines and Asset Coverage" for a
description of the rating agency guidelines with which the Fund must currently
comply.
Restrictions on Dividends and Other Distributions. Restrictions imposed
on the declaration and payment of dividends or other distributions to the
holders of the Fund's Common Shares and Preferred Shares, both by the 1940 Act
and by requirements imposed by rating agencies, might impair the Fund's ability
to maintain its qualification as a regulated investment company for federal
income tax purposes. While the Fund intends to redeem Preferred Shares to enable
the Fund to distribute its income as required to maintain its qualification as a
regulated investment company under the Code, there can be no assurance that such
redemptions can be effected in time to meet the requirements of the Code. See
"Tax Matters."
Portfolio Investments Risk. In certain circumstances, the Fund may not
earn sufficient income from its investments to pay dividends on Preferred
Shares. In addition, the value of the Fund's investment portfolio may decline,
reducing the asset coverage for the Preferred Shares. If an issuer whose
securities the Fund purchases experiences financial difficulties, defaults, or
is otherwise affected by adverse market factors, there may be a negative impact
on the income and/or asset value of the Fund's investment portfolio, which will
reduce asset coverage for the Preferred Shares and make it more difficult for
the Fund to pay dividends on the Preferred Shares.
GENERAL RISKS OF INVESTING IN THE FUND
Limited Operating History
The Fund is a recently organized, non-diversified, closed-end
management investment company that has been operational for less than three
months.
Investment Risk
An investment in the Fund is subject to investment risk, including the
possible loss of the entire principal amount that you invest.
Issuer Risk
The value of an equity or debt security may decline for a number of
reasons that directly relate to the Real Estate Company that issues it, such as
management performance, financial leverage and reduced demand for the Real
Estate Company's properties and services.
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Interest Rate Risk
Interest rate risk is the risk that fixed-income investments such as
preferred shares, U.S. Government obligations and debt securities, and to a
lesser extent dividend-paying common stocks such as REIT common shares, will
decline in value because of changes in interest rates. When interest rates rise,
the market value of such securities generally will fall. The Fund's investment
in such securities means that the value of the Fund's investment portfolio will
tend to decline if market interest rates rise. Also, during periods of declining
interest rates, many mortgages may be refinanced, which may reduce the yield
from securities of Real Estate Companies that invest primarily in loans secured
by real estate and generally derive their income primarily from interest
payments on mortgage loans. This risk is commonly known as "prepayment risk."
The Fund's use of leverage through the issuance of the Preferred Shares may tend
to magnify interest rate risk. See "-- Leverage Risk" below. The Fund may use
swaps, caps, futures contracts and options on futures contracts to help control
interest rate risk. See "Investment Objectives and Policies -- Portfolio
Composition -- Short Sales and Derivatives" and "Interest Rate Transactions."
General Risks of Securities Linked to the Real Estate Market
The Fund will not invest in real estate directly, but will invest in
real estate indirectly by purchasing securities issued by Real Estate Companies,
including REITs. However, because of the Fund's policy of concentrating in the
securities of companies in the real estate industry, it is also subject to the
risks associated with the direct ownership of real estate. These risks include:
. declines in the value of real estate
. risks related to general and local economic conditions
. possible lack of availability of mortgage funds
. overbuilding
. extended vacancies of properties
. increased competition
. increases in property taxes and operating expenses
. changes in zoning laws
. losses due to costs resulting from the clean-up of environmental
problems
. liability to third parties for damages resulting from environmental
problems
. casualty or condemnation losses
. limitations on rents
. changes in neighborhood values and the appeal of properties to tenants
. changes in interest rates
Thus, the value of the Fund's investment portfolio may change at
different rates compared to the value of the investment portfolio of a
registered investment company with investments in a mix of different industries
and will depend on the general condition of the economy. An economic downturn
could have a material adverse effect on the real estate markets and on Real
Estate Companies in which the Fund invests, which in turn could result in the
Fund not achieving its investment objectives.
General Real Estate Risks. Real property investments are subject to
varying degrees of risk. The yields available from investments in real estate
depend on the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., The Americans with Disabilities Act and tax
laws), supply and demand disparities, interest rate levels, and the availability
of financing. If the properties do not generate sufficient income to meet
operating expenses, including, where applicable, debt service, ground lease
payments, tenant improvements, third-party leasing commissions and other capital
expenditures, the income and ability of the Real Estate Company to make payments
of any dividends or interest and principal on its securities will be adversely
affected. In addition, real property may be subject to the quality of credit
extended and defaults by borrowers and tenants. The performance of the economy
in each of the regions in which the real estate owned by the Real Estate Company
is located affects occupancy, market rental rates
-32-
and expenses and, consequently, has an impact on the income from such properties
and their underlying values. The financial results of major local employers also
may have an impact on the cash flow and value of certain properties. In
addition, real estate investments are relatively illiquid and, therefore, the
ability of Real Estate Companies to vary their portfolios promptly in response
to changes in economic or other conditions is limited. A Real Estate Company may
also have joint venture investments in certain of its properties, and
consequently, its ability to control decisions relating to such properties may
be limited.
In addition to these risks, investments in real estate and Real Estate
Companies are also subject to risks that are specific to the investment sector
or type of property in which the Real Estate Companies are investing. Some of
these specific risks, which could have an adverse effect on the Fund's
portfolio, are discussed below.
Retail Properties. Retail properties are affected by the overall health
of the national and relevant local economy. A retail property may be adversely
affected by the growth of alternative forms of retailing, bankruptcy, decline in
drawing power, departure or cessation of operations of an anchor tenant, a shift
in consumer demand due to demographic changes, and/or changes in consumer
preference (for example, to discount retailers) and spending patterns. A retail
property may also be adversely affected if a significant tenant ceases operation
at such location, voluntarily or otherwise. Certain tenants at retail properties
may be entitled to terminate their leases if an anchor tenant ceases operations
at such property.
Office Properties. Office properties are also affected by the overall
health of the national and relevant local economy. Office properties generally
require their owners to expend significant amounts for general capital
improvements, tenant improvements and costs of reletting space. In addition,
office properties that are not equipped to accommodate the needs of modern
businesses may become functionally obsolete and thus non-competitive. Office
properties may also be adversely affected if there is an economic decline in the
businesses operated by their tenants. The risks of such an adverse effect are
increased if the property revenue is dependent on a single tenant or if there is
a significant concentration of tenants in a particular business or industry.
Hotel Properties. The risks of hotel properties include, among other
things, the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating, liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.
Also, hotels may be operated pursuant to franchise, management and
operating agreements that may be terminable by the franchiser, the manager or
the operator. On the other hand, it may be difficult to terminate an ineffective
operator of a hotel property.
Healthcare Properties. Healthcare properties and healthcare providers
are affected by several significant factors, including federal, state and local
laws governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare) and from private sector health
insurance providers; and competition in terms of appearance, reputation, quality
and cost of care with similar properties on a local and regional basis.
Governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursement. In addition, in the event that a tenant is in default
on its lease, a new operator or purchaser at a foreclosure sale will have to
apply in its own right for all relevant licenses if such new operator does not
already hold such licenses. There can be no assurance that such new licenses
could be obtained, and consequently, there can be no assurance that any
healthcare property subject to foreclosure will be disposed of in a timely
manner.
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Multifamily/Residential Properties. The value and successful operation
of a multifamily/residential property may be affected by a number of factors
such as the location of the property, the ability of management to provide
adequate maintenance and insurance, the types of services provided by the
property, the level of mortgage rates, presence of competing properties, the
relocation of tenants to new properties with better amenities, adverse economic
conditions in the locale, the amount of rent charged, and oversupply of units
due to new construction. In addition, multifamily properties may be subject to
rent control laws or other laws affecting such properties, which could impact
the cash flows of such properties.
Self-Storage Properties. The value and successful operation of a
self-storage property may be affected by a number of factors, such as the
ability of the management team, the location of the property, the presence of
competing properties, changes in traffic patterns, and adverse effects of
general and local economic conditions.
Insurance Issues. Certain Real Estate Companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, earthquake, extended coverage and rental loss insurance
with policy specifications, limits and deductibles customarily carried for
similar properties. However, such insurance is not uniform among Real Estate
Companies. Moreover, there are certain types of extraordinary losses that may be
uninsurable, or not insurable at economic rates. Certain properties may be
subject to catastrophic events, such as terrorism, earthquake activity, floods
or fires, for which insurance coverage cannot be economically obtained. Should a
property sustain damage as a result of a catastrophic event, even if the Real
Estate Company maintains appropriate insurance, the Real Estate Company may
incur substantial losses due to insurance deductibles, co-payments on insured
losses or uninsured losses. Should any type of uninsured loss occur (or if an
insurer is unwilling or unable to pay a claim), the Real Estate Company could
lose its investment in, and anticipated profits and cash flows from, a number of
properties, and the value of the Fund's investment in such Real Estate Company
may be impacted as a result.
Financial Leverage Risk. Real Estate Companies may be highly leveraged
and financial covenants may affect the ability of Real Estate Companies to
operate effectively. Real Estate Companies are subject to risks normally
associated with debt financing. If the principal payments of a Real Estate
Company's debt cannot be refinanced, extended or paid with proceeds from other
capital transactions, such as new equity capital, the Real Estate Company's cash
flow may not be sufficient to make scheduled interest payments or to repay
principal.
In addition, a Real Estate Company's obligation to comply with
financial covenants, such as debt-to-asset ratios and secured debt-to-total
asset ratios, and other contractual obligations may restrict a Real Estate
Company's range of operating activity. A Real Estate Company, therefore, may be
limited from incurring additional indebtedness, selling its assets and engaging
in mergers or making acquisitions that may be beneficial to the operation of the
Real Estate Company.
Environmental Issues. In connection with the ownership (direct or
indirect), operation, management and development of real properties that may
contain hazardous or toxic substances, a Real Estate Company may be considered
an owner or operator of such properties or as having arranged for the disposal
or treatment of hazardous or toxic substances and, therefore, may be potentially
liable for removal or remediation costs, as well as certain other costs,
including governmental fines and liabilities for injuries to persons and
property. The existence of any such environmental liability could have a
material adverse effect on the results of operations and cash flow of any such
Real Estate Company and, as a result, the asset coverage on the Preferred Shares
or the amount available to make distributions on shares of the Fund could be
reduced.
Smaller Companies. Even the larger REITs in the industry tend to be
small to medium-sized companies in relation to the equity markets as a whole.
There may be less trading in a smaller company's stock, which means that buy and
sell transactions in that stock could have a larger impact on the stock's price
than is the case with larger company stocks. Smaller companies also may have
fewer lines of business, so that changes in any one line of business may have a
greater impact on a smaller company's stock price than is the case for a larger
company. Further, smaller company stocks may perform differently in different
cycles than larger company stocks. Accordingly, REIT shares can be more volatile
than -- and at times will perform differently from -- large company stocks such
as those found in the Dow Jones Industrial Average.
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REIT-related Risks. REITs are subject to a highly technical and complex
set of provisions in the Code. It is possible that the Fund may invest in a Real
Estate Company that purports to be a REIT but does not satisfy all of the
conditions of REIT status in any year. In some cases, the Real Estate Company
may still be able to qualify for REIT status after payment of a penalty tax.
Otherwise, a Real Estate Company that fails to qualify for REIT status would be
subject to corporate-level taxation. In either case, the return to the Fund on
its investment in such company would be reduced. REITs could possibly fail to
qualify for tax free pass-through of income under the Code, or to maintain their
exemptions from registration under the 1940 Act. The above factors may also
adversely affect the Fund's investment in such a REIT. In the event of a default
by a borrower or lessee, the REIT may experience delays in enforcing its rights
as a mortgagee or lessor and may incur substantial costs associated with
protecting its investments.
Leverage Risk
The Fund expects to utilize financial leverage on an ongoing basis for
investment purposes. Leverage risk includes the risk associated with the
issuance of the Preferred Shares to leverage the Fund's Common Shares. The Fund
anticipates that, immediately after the completion of the offering of Preferred
Shares, the Preferred Shares will represent approximately 35% of the Fund's
managed assets. The precise amount of leverage used by the Fund may vary from
time to time, but the Fund will not incur leverage (including Preferred Shares
and other forms of leverage) in an amount exceeding 50% of its managed assets.
"Managed assets" means the net asset value of the Common Shares plus the
liquidation preference of any preferred shares (including the Preferred Shares)
and the principal amount of any borrowings used for leverage. Although the Fund
may in the future offer other preferred shares, the Fund does not currently
intend to offer preferred shares other than the Preferred Shares offered in this
prospectus.
As an alternative to Preferred Shares (i.e., during periods in which no
Preferred Shares are outstanding), the Fund may incur leverage through the
issuance of commercial paper or notes or other borrowings. Any Preferred Shares
or borrowings will have seniority over the Common Shares.
If the dividend or interest rate on the Preferred Shares or any
borrowings, as modified by any cap, or the payment rate set by any interest rate
swap, exceeds the net return on the Fund's portfolio investments, the use of
leverage will result in a lower net asset value than if the Fund were not
leveraged, and the Fund's ability to pay dividends and meet its asset coverage
requirements on the Preferred Shares will be reduced. Because the securities
included in the Fund's portfolio will typically pay interest based on
longer-term yields (or, in the case of common shares or preferred shares
purchased by the Fund, will pay dividends based on the longer-term performance
of the issuer), while the dividend rate on the Preferred Shares or interest
rates on other forms of leverage will be adjusted periodically, the Fund's net
asset value could be reduced as a result of using leverage even when both
long-term and short-term interest rates rise. Similarly, any decline in the net
asset value of the Fund's investments could result in the Fund being in danger
of failing to meet its asset coverage requirements or of losing its expected
"Aaa" and "AAA" ratings on the Preferred Shares. In an extreme case, the Fund's
current investment income might not be sufficient to meet the dividend
requirements on the Preferred Shares. In order to counteract such an event, the
Fund might need to liquidate investments in order to fund a redemption of some
or all of the Preferred Shares, which would cause the Fund to incur transaction
expenses and other costs and could result in the realization of net short-term
capital gains that, when distributed to shareholders, will be taxable as
ordinary income. There is no assurance that the Fund's leveraging strategy will
be successful.
To the extent that the Fund is required or elects to redeem any Preferred
Shares or prepay any borrowings, the Fund may need to liquidate investments to
fund such redemptions or prepayments. Liquidation at times of adverse economic
conditions may result in capital loss to the Fund and reduce asset coverage on
the Preferred Shares. In addition, such redemption or prepayment would likely
result in the Fund seeking to terminate early all or a portion of any swap or
cap transaction. Early termination of the swap or cap could result in a
termination payment by the Fund. See "Interest Rate Transactions."
While the Fund may from time to time consider reducing leverage in
response to actual or anticipated changes in interest rates in an effort to
mitigate the increased volatility of current income and net asset value
associated with leverage, there can be no assurance that the Fund will actually
reduce leverage in the future or that any reduction, if undertaken, will be
effective. Changes in the future direction of interest rates are very difficult
to predict accurately. If the Fund were to reduce leverage based on a prediction
about future changes to interest rates, and that prediction turned out to be
incorrect, the reduction in leverage would likely operate to reduce the Fund's
net
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asset value relative to the circumstance where the Fund had not reduced
leverage. The Fund may decide that this risk outweighs the likelihood of
achieving the desired reduction to volatility in income and Common Share price
if the prediction were to turn out to be correct, and determine not to reduce
leverage as described above.
Because the fees received by Investment Manager are based on the managed
assets of the Fund (including assets represented by the Preferred Shares and
other leverage), the Investment Manager has a financial incentive for the Fund
to issue the Preferred Shares and incur other leverage.
Risks of Investment in Lower-Rated Securities
Lower-rated securities, also known as "junk bonds," may be considered
speculative with respect to the issuer's continuing ability to make principal
and interest payments. Analysis of the creditworthiness of issuers of
lower-rated securities may be more complex than for issuers of higher quality
debt securities, and the Fund's ability to achieve its investment objectives
may, to the extent the Fund invests in lower-rated securities, be more dependent
upon the Investment Manager's credit analysis than would be the case if the Fund
were investing in higher quality securities. The Fund may only invest in
non-investment grade securities that are rated "CCC" or higher by Fitch or S&P
or "Caa" or higher by Moody's (or a comparable rating by another nationally
recognized statistical agency), or unrated securities judged to be of comparable
quality by the Investment Manager. The issuers of these securities may be in
default or have a currently identifiable vulnerability to default on their
payments of principal and interest or may otherwise be subject to present
elements of danger with respect to payments of principal or interest. However,
the Fund will not invest in securities that are in default as to payment of
principal and interest at the time of purchase.
Lower-rated securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of lower-rated securities have been found to generally be
less sensitive to interest-rate changes than more highly rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. Yields on lower-rated securities will fluctuate. If the issuer of
lower-rated securities defaults, the Fund may incur additional expenses to seek
recovery.
The secondary markets in which lower-rated securities are traded may be
less liquid than the market for higher grade securities. A lack of liquidity in
the secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the value of the Fund's investment portfolio. Adverse publicity
and investor perceptions may decrease the values and liquidity of high yield
securities.
It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of such securities, and adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon. New laws and
proposed new laws may adversely impact the market for lower-rated securities.
While securities carrying the fourth highest quality rating ("Baa" by
Moody's or "BBB" by Fitch or S&P or an equivalent rating from another nationally
recognized statistical rating agency or, if unrated, judged to be of comparable
quality by the Investment Manager) are considered investment grade and are
viewed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of risk than that
associated with investments in securities in the higher rating categories. Such
securities lack outstanding investment characteristics and, in fact, have
speculative characteristics as well. For example, changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher rated securities.
Interest Rate Transactions Risk
The Fund may enter into a swap or cap transaction to attempt to protect
itself from increasing dividend or interest expenses resulting from increasing
short-term interest rates. A decline in interest rates may result in a decline
in the value of the swap or cap, which may result in a decline in the value of
the Fund's investment portfolio.
-36-
A sudden and dramatic decline in interest rates may result in a significant
decline in the value of the Fund's investment portfolio. See "Interest Rate
Transactions."
Risks of Futures and Options on Futures
The use by the Fund of futures contracts and options on futures contracts
to hedge interest rate risks involves special considerations and risks.
Successful use of hedging transactions depends upon the Investment Manager's
ability to predict correctly the direction of changes in interest rates. There
can be no assurance that any particular hedging strategy will succeed or that
appropriate hedging transactions will be available on the terms desired. There
might be imperfect correlation, or even no correlation, between the price
movements of a futures or option contract and the movements of the interest
rates being hedged. Such a lack of correlation might occur due to factors
unrelated to the interest rates being hedged, such as market liquidity and
speculative or other pressures on the markets in which the hedging instrument is
traded. Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable movements in the
interest rates being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable movements in
the hedged interest rates. The Fund could lose money if the counterparty to a
futures contract or option on a futures contract is unwilling or unable to honor
its obligations to the Fund. There is no assurance that a liquid secondary
market will exist for any particular futures contract or option thereon at any
particular time. If the Fund were unable to liquidate a futures contract or an
option on a futures contract position due to the absence of a liquid secondary
market or the imposition of price limits, it could incur substantial losses. The
Fund would continue to be subject to market risk and counterparty risk with
respect to the position. There is no assurance that the Fund will use hedging
transactions. For example, if the Fund determines that the cost of hedging will
exceed the potential benefit to the Fund, the Fund will not enter into such
transactions.
Foreign Security Risk
The prices of foreign securities may be affected by factors not present
in U.S. markets. The dollar value of the Fund's foreign investments will be
affected by changes in the exchange rates between the dollar and the currencies
in which those investments are traded. The value of the Fund's foreign
investments may also be adversely affected by political and social instability
in their home countries and by changes in economic or taxation policies in those
countries. Foreign securities are also subject to the risks of nationalization,
expropriation or confiscatory taxation, currency blockage, and adverse political
changes or diplomatic developments.
Foreign companies generally are subject to less stringent regulations,
including financial and accounting controls, than are U.S. companies. As a
result, there generally is less publicly available information about foreign
companies than about U.S. companies. In addition, the securities markets of
other countries are smaller than U.S. securities markets. As a result, many
foreign securities may be less liquid and more volatile than U.S. securities.
Liquidity Risk
The Fund may invest in securities that are illiquid so long as no more
than 10% of the total assets of the Fund (taken at market value at the time of
investment) would be invested in such securities. The term "illiquid securities"
for these purposes means securities that cannot be disposed of within seven days
in the ordinary course of business at approximately the amount at which the Fund
has valued the securities. Illiquid securities may trade at a discount from
comparable, more liquid investments, and may be subject to wide fluctuations in
market value. Also, the Fund may not be able to dispose of illiquid securities
when that would be beneficial at a favorable time or price.
Risks of Warrants and Rights
Warrants and rights are subject to the same market risks as stocks, but
may be more volatile in price. Warrants and rights do not carry the right to
dividends or voting rights with respect to their underlying securities, and they
do not represent any rights in the assets of the issuer. An investment in
warrants or rights may be considered speculative. In addition, the value of a
warrant or right does not necessarily change with the value of the underlying
security, and a warrant or right ceases to have value if it is not exercised
prior to its expiration date. The purchase of warrants or rights involves the
risk that the Fund could lose the purchase value of a warrant or right if
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the right to subscribe to additional shares is not exercised prior to the
warrant's or right's expiration. Also, the purchase of warrants and rights
involves the risk that the effective price paid for the warrant or right, added
to the subscription price of the related security, may exceed the subscribed
security's market price. This may occur, for example, when there is no movement
in the price of the underlying security or when the market price of the
underlying security decreases.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the present
value of future payments. As inflation increases, the real, or
inflation-adjusted, value of the Preferred Shares and distributions can decline.
However, during any periods of rising inflation, Preferred Share dividend
payments may increase, which would tend to offset this risk.
ADDITIONAL RISK CONSIDERATIONS
Portfolio Turnover
The Fund may engage in frequent and active portfolio trading when the
Investment Manager considers it to be appropriate, but the Fund will not use
short-term trading as the primary means of achieving its investment objectives.
Although the Fund cannot accurately predict its annual portfolio turnover rate,
it is not expected to exceed 100% under normal circumstances. However, there are
no limits on the rate of portfolio turnover, and investments may be sold without
regard to the length of time held when, in the opinion of the Investment
Manager, investment considerations warrant such action. A higher turnover rate
results in correspondingly greater brokerage commissions and other transactional
expenses that are borne by the Fund. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund that, when distributed
to shareholders, will be taxable as ordinary income. See "Tax Matters."
Non-Diversified Status
Because the Fund, as a "non-diversified" investment company under the
1940 Act, can invest a greater portion of its assets in obligations of a single
issuer than, and invest in a smaller number of individual issuers than, a
"diversified" fund, an investment in the Fund presents greater risk to you than
an investment in a diversified company. The Fund will be more susceptible than a
diversified fund to being adversely affected by any single corporate, economic,
political or regulatory occurrence. See "Investment Objectives and Policies." To
help control this risk, the Fund will not invest more than 15% of its total
assets (taken at market value at the time of investment) in the securities of
any one issuer other than the U.S. Government. In addition, the Fund intends to
diversify its investments to the extent necessary to maintain its status as a
regulated investment company under the Code. See "Taxation" in the SAI.
Anti-Takeover Provisions
The Declaration includes provisions that may have the effect of limiting
the ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. See "Certain Provisions in the Declaration
of Trust."
Recent Developments
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, some of the U.S. securities markets were closed
for a four-day period. In addition, certain auction agents for auction rate
preferred shares similar to the Preferred Shares were unable to run auctions
during that period. These terrorist attacks and related events have led to
increased short-term market volatility and may have long-term effects on U.S.
and world economies and markets. A similar disruption of the financial markets
could adversely impact the Fund in general and the Preferred Shares in
particular by, for example, affecting interest rates, auctions and auction
participants, such as the auction agents and broker-dealers, secondary trading,
ratings, credit risk, inflation and other factors relating to securities and
other investments.
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Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of the
Fund and/or the Investment Manager due to their possible affiliations with CDC
IXIS Asset Management North America, L.P. Absent an exemption from the SEC or
other regulatory relief, the Fund is generally precluded from effecting certain
principal transactions with affiliated brokers, and its ability to purchase
securities being underwritten by an affiliated broker or a syndicate including
an affiliated broker or to utilize affiliated brokers for agency transactions is
subject to regulatory and other restrictions. This could limit the Fund's
ability to engage in securities transactions and take advantage of market
opportunities.
MANAGEMENT OF THE FUND
The business and affairs of the Fund are managed under the direction of
the Board of Trustees. Subject always to the investment objectives and policies
of the Fund and to the general supervision of the Trustees, the Investment
Manager is responsible for management of the Fund's investment portfolio. The
management of the Fund's day-to-day operations (other than investment
operations) is delegated to its officers and the Fund's administrator and
sub-administrator, subject always to the general supervision of the Trustees.
The names and business addresses of the Trustees and officers of the Fund and
their principal occupations and other affiliations during the past five years
are set forth under "Management of the Fund" in the SAI.
Investment Manager
The Investment Manager has been retained to provide investment advice,
and, in general, to conduct the investment program of the Fund under the overall
supervision and control of the Trustees of the Fund. The Investment Manager,
which is registered as an investment adviser with the SEC, is a real estate
investment advisory firm that provides investment management and related
services to institutional and retail investors. Together with its affiliates
operating under the AEW name, the Investment Manager managed approximately
$ billion of client capital as of December 31, 2002. The Investment
Manager is a subsidiary of (and therefore may be deemed to be controlled by) CDC
IXIS Asset Management North America, L.P., which, together with its subsidiaries
and affiliates in the U.S., Europe and Asia, managed approximately $
billion in assets for institutions and individuals as of December 31, 2002. The
Investment Manager's address is Two Seaport Lane, World Trade Center East,
Boston, Massachusetts 02210.
A team of professionals at the Investment Manager, working under the
Fund's portfolio manager, is primarily responsible for overseeing the day-to-day
operations of the Fund. That team is led by Matthew A. Troxell, who serves as
Portfolio Manager for the Fund. Mr. Troxell joined the Investment Manager in
1994 as a Vice President and became a Principal of the firm in 1997. He has 19
years of securities and portfolio management experience. Prior to joining the
Investment Manager, he was a Vice President and Assistant to the President of
Landmark Land Company and a Securities Analyst at A.G. Becker Paribas. Mr.
Troxell is a graduate of Tufts University (B.A.) and holds the designation of
Chartered Financial Analyst (CFA).
Investment Management Agreement
Under its Investment Management Agreement with the Fund, the Investment
Manager furnishes a continuous investment program for the Fund's portfolio,
makes the day-to-day investment decisions for the Fund, and generally manages
the Fund's investments in accordance with the stated policies of the Fund,
subject to the general supervision of the Board of Trustees of the Fund. The
Investment Manager also performs certain administrative services for the Fund
and provides persons satisfactory to the Trustees of the Fund to serve as
officers of the Fund. Such officers, as well as certain other employees and
Trustees of the Fund, may be directors, officers, or employees of the Investment
Manager or its affiliates, including CDC IXIS Services.
For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
..80% of the average daily managed assets of the Fund. "Managed assets" means the
net asset value of the Common Shares plus the liquidation preference of any
preferred shares (including the Preferred Shares) and the principal amount of
any borrowings used for leverage. In addition to
-39-
the monthly management fee, the Fund pays all other costs and expenses of its
operations, including compensation of its independent Trustees, custodian,
administrator, auction agent, Broker-Dealers, transfer agency and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses
associated with interest rate transactions (including, to the extent approved by
the Board of Trustees from time to time, the fees of third parties that may
assist in the structuring and negotiation of interest rate transactions),
expenses of repurchasing shares, expenses of issuing the Preferred Shares and
any other preferred shares of the Fund, listing expenses, trading, brokerage and
other investment expenses, interest expense, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any. The offering costs of the Preferred
Shares will be netted against paid-in capital. The Investment Manager has
contractually agreed to waive a portion of its investment management fees in the
amount of 0.25% of average daily managed assets (which include the liquidation
preference of any preferred shares and the principal amount of any borrowings
used for leverage) for the first five years of the Fund's operations, 0.20% of
average daily managed assets in year six, 0.15% of average daily managed assets
in year seven, 0.10% of daily managed assets in year eight and 0.05% of average
daily managed assets in year nine. The Investment Manager has not agreed to
waive any portion of its fees beyond year nine of the Fund's operations. See
"Summary of Fund Expenses." When the Fund is utilizing leverage (including
during the period when the Preferred Shares are outstanding), the fees paid to
the Investment Manager and its affiliates for investment advisory, management
and other services will be higher than if the Fund did not utilize leverage
because the fees paid will be calculated based on the Fund's managed assets,
which include the liquidation preference of the Preferred Shares and the
principal amount of any borrowings used for leverage. As a result, the
Investment Manager has a financial incentive for the Fund to issue Preferred
Shares or to otherwise incur leverage, which may create a conflict of interest.
See "Principal Risks of the Fund - General Risks of Investing in the Fund -
Leverage Risk."
Administrative Services And Sub-Administration Agreements
Under its Administrative Services Agreement with the Fund, CDC IXIS
Services provides certain administrative and accounting functions for the Fund,
including providing or procuring administrative services necessary for the
operations of the Fund, furnishing office space and facilities required for
conducting the business of the Fund and providing persons satisfactory to the
Trustees of the Fund to serve as officers of the Fund.
As permitted by the Administrative Services Agreement and with the approval
of the Board of Trustees of the Fund, CDC IXIS Services has entered into the
Sub-Administration Agreement with Investors Bank & Trust Company, as
sub-administrator. Under the Sub-Administration Agreement, Investors Bank &
Trust Company has assumed responsibility for certain fund administration
services, subject to the supervision of CDC IXIS Services.
Under the Administrative Services Agreement, the Fund pays CDC IXIS
Services a monthly administration fee computed on the basis of the average daily
managed assets of the Fund at an annual rate equal to 0.06% of the first $300
million in assets and 0.0575% of assets in excess of $300 million, with a
minimum annual fee of $150,000. Under the Sub-Administration Agreement, CDC IXIS
Services (and not the Fund) pays Investors Bank & Trust Company a monthly fee
computed on the basis of the managed assets of the Fund at an annual rate equal
to 0.015% of the first $300 million in assets and 0.012% thereafter.
Marketing Agent
CDC IXIS Asset Management Advisors Group (the "Advisors Group"), an
affiliate of the Investment Manager, acted as marketing agent for the Fund in
connection with the offering of the Fund's Common Shares by preparing marketing
materials and providing distribution support during the offering. In this
connection, the Advisors Group agreed, pursuant to an agreement with the
Investment Manager, (i) to reimburse the Investment Manager for one-half of the
amount by which the aggregate of all of the Fund's organizational expenses and
offering costs with respect to the offering of the Common Shares (other than the
sales load) exceeds $0.03 per Common Share and (ii) to bear a portion of any
ongoing asset-based fees to be paid by the Investment Manager to the
underwriters (other than ______________) in connection with the offering in the
amount of 21.8% of such fees in years one and two of the Fund's operations and
in declining amounts for each of the four years thereafter. As payment for these
services, the Investment Manager (and not the Fund) has agreed to pay the
Advisors Group a fee at the annual rate of 0.12% of net assets for years one and
two of the Fund's operations, 0.08% of net assets for years three and four, and
0.05% of net assets in years five and six. The Investment Manager has not agreed
to pay any fees to the Advisors Group (and the Advisors Group has not agreed to
bear any portion of any asset-based fees
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payable by the Investment Manager) beyond year six of the Fund's operations. The
Advisors Group and the Investment Manager, both of which are subsidiaries of CDC
IXIS Asset Management North America, L.P., may agree to change or eliminate
these payments at any time.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares. For a
more complete description of the Preferred Shares, please refer to the detailed
description of the Preferred Shares in Section 11 of the Bylaws, which is
attached as Appendix B to the SAI. Certain of the capitalized terms used herein
are defined in the Bylaws. This description does not purport to be complete and
is subject to and qualified in its entirety by reference to the Fund's
Declaration and Bylaws. The Declaration and Bylaws have been filed as exhibits
to the Registration Statement of which this prospectus is part.
General
Under the Declaration, the Fund is authorized to issue preferred shares
having such par value and such preferences, voting powers, terms of redemption,
if any, and special or relative rights or privileges (including conversion
rights, if any) as determined by the Board of Trustees, without the approval of
Common Shareholders. The Preferred Shares are preferred shares of beneficial
interest with $0.00001 par value per share per share. The Preferred Shares will
have a liquidation preference of $25,000 per share, plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared). The
Preferred Shares will rank on a parity with shares of any other series of
preferred shares of the Fund as to the payment of dividends and the distribution
of assets upon liquidation. The Preferred Shares carry one vote per share on all
matters on which such shares are entitled to vote. The Preferred Shares, when
issued by the Fund and paid for pursuant to the terms of this prospectus, will
be fully paid and, subject to matters discussed in "Anti-Takeover and Other
Provisions in the Declaration of Trust," non-assessable and will have no
preemptive, exchange or conversion rights. Any Preferred Shares repurchased or
redeemed by the Fund will be classified as authorized and unissued preferred
shares without designation as to series. The Preferred Shares will not be
subject to any sinking fund, but will be subject to mandatory redemption and
optional redemption under certain circumstances described below.
Dividends and Rate Periods
General. The following is a general description of dividends and rate
periods for the Preferred Shares. The initial rate period for the Preferred
Shares will be days, and the dividend rate for this period will be %. Subsequent
rate periods generally will be seven days, and the dividend rates for those
periods will generally be determined by auction. Further description of the
auction procedures can be found below under "The Auction" and in Section 11 of
the Bylaws, which is attached as Appendix B to the SAI. The Fund, subject to
certain conditions, may change the length of subsequent rate periods by
designating them as special rate periods. See "-- Designation of Special Rate
Periods" below.
Dividend Payment Dates. Dividends on Preferred Shares will be payable when,
as and if declared by the Board, out of legally available funds in accordance
with the Declaration, the Bylaws and applicable law. Dividend periods generally
will begin on the first business day after an auction. If dividends are payable
on a day that is not a business day, then dividends will generally be payable on
the next business day, or as otherwise specified in the Bylaws. The Fund, at its
discretion, may establish dividend payment dates in respect of any special rate
period of Preferred Shares consisting of more than seven days, provided that
such dates shall be set forth in the notice of special rate period relating to
such special rate period and certain other conditions are met.
Dividends will be paid through The Depository Trust Company ("DTC") on each
dividend payment date. The dividend payment date will normally be the first
business day after the dividend period ends. DTC, in accordance with its current
procedures, is expected to distribute dividends received from the auction agent
in same-day funds on each dividend payment date to members of DTC that will act
on behalf of existing or potential holders of Preferred Shares ("Agent
Members"). These Agent Members are in turn expected to distribute such dividends
to the persons for whom they are acting as agents. However, each of the current
Broker-Dealers has currently
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indicated to the Fund that dividend payments will be available in same-day funds
on each dividend payment date to customers that use a Broker-Dealer or a
Broker-Dealer's designee as Agent Member.
Calculation of Dividend Payment. The Fund computes the dividend per share
of each series of Preferred Shares by multiplying the applicable rate for such
series of shares in effect by a fraction. The numerator of this fraction will
normally be seven (i.e., the number of days in the rate period), and the
denominator will normally be 360. If the Fund has designated a special rate
period, then the numerator will be the number of days in the special rate
period, and the denominator will normally be 360. In either case, this rate is
then multiplied by $25,000 to arrive at the dividend per share.
Dividends on the Preferred Shares will accumulate from the date of their
original issue, which is __________, 2003. For each dividend payment period
after the initial rate period, the dividend rate will be the dividend rate
determined at auction, except as provided in the Bylaws. The dividend rate that
results from an auction will not be greater than the applicable maximum rate
described below.
The applicable maximum rate for any regular rate period will be the
applicable percentage (set forth in the table below) of the applicable "AA"
Composite Commercial Paper Rate (as defined below). The applicable percentage
for any regular rate period will generally be determined based on the lower of
the credit rating or ratings assigned to the Preferred Shares by Moody's and
Fitch on the auction date for such period. If Moody's or Fitch or both shall not
make such rating available, the rate shall be determined by reference to
equivalent ratings issued by a substitute rating agency. In the case of a
special rate period, (1) the applicable maximum rate will be specified by the
Fund in the notice of special rate period for such dividend payment period, (2)
the applicable percentage will be determined on the date two business days
before the first day of such special rate period and (3) the reference rate will
be the applicable "AA" Composite Commercial Paper Rate (for a rate period of
fewer than 183 days) or the Treasury Index Rate (as defined below) (for a rate
period of 183 days or more).
Applicable Percentage Payment Table
-----------------------------------
Applicable
Credit Ratings Percentage
-------------- ----------
Moody's Fitch
------- -----
"Aa3" or higher AA- or higher 150%
"A3" to "A1" A- to A+ 200%
"Baa3" to "Baa1" BBB- to BBB+ 225%
Below "Baa3" Below BBB- 275%
The "`AA' Composite Commercial Paper Rate" is the rate on commercial paper
issued by corporations whose bonds are rated AA by S&P as made available by the
Federal Reserve Bank of New York or, if such rate is not made available by the
Federal Reserve Bank of New York, the arithmetical average of such rates as
quoted to the auction agent by certain commercial paper dealers designated by
the Fund.
The "Treasury Index Rate" is the average yield to maturity for certain U.S.
Treasury securities having substantially the same length to maturity as the
applicable dividend period for the Preferred Shares. For a more detailed
description, please see the Bylaws.
Prior to each dividend payment date, the Fund is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. As
specified in the Bylaws, auctions will generally not be held if the Fund fails
to make such deposit. In such a situation, dividends for the next dividend
period would normally be paid at the applicable maximum rate. The Fund does not
intend to establish any reserves for the payment of dividends.
The Board of Trustees may amend the applicable maximum rate to increase the
percentage amount by which the reference rate described above is multiplied to
determine the applicable maximum rate shown without the vote or consent of the
holders of Preferred Shares or any other shareholder of the Fund, but only with
confirmation from each rating agency then rating the Preferred Shares that such
action will not impair such agency's then-current
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rating of the Preferred Shares, and after consultation with the Broker-Dealers,
provided that immediately following any such increase the Fund could meet the
Preferred Shares Basic Maintenance Amount test discussed below under "-- Rating
Agency Guidelines and Asset Coverage."
Restrictions on Dividends and Other Distributions. Except as provided
below, while the Preferred Shares are outstanding, the Fund generally may not
declare, pay or set apart for payment, any dividend or other distribution in
respect of its Common Shares (other than in additional Common Shares or rights
to purchase Common Shares). In addition, the Fund generally may not call for
redemption or redeem any of its Common Shares (except by conversion into or
exchange for shares of the Fund ranking junior to the Preferred Shares as to the
payment of dividends and the distribution of assets on liquidation). However,
the Fund is not confined by the above restrictions if:
. immediately after such dividend declaration or payment transaction,
(i) the discounted value of the Fund's portfolio (i.e., the aggregate
value of the Fund's portfolio according to criteria set forth by each
rating agency then rating the Preferred Shares) would be equal to or
greater than the Preferred Shares Basic Maintenance Amount and (ii)
the 1940 Act Preferred Shares Asset Coverage would be satisfied (see
"-- Rating Agency Guidelines and Asset Coverage" below);
. full cumulative dividends on the Preferred Shares due on or prior to
the Fund's most recently ended dividend period have been paid or have
been declared and sufficient funds for the payment thereof deposited
with the auction agent; and
. the Fund has redeemed the full number of Preferred Shares required to
be redeemed by any provision for mandatory redemption.
The Fund generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Fund ranking, as to the payment
of dividends, on a parity with the Preferred Shares unless the Fund has declared
and paid the lesser of full cumulative dividends or the same proportionate share
of dividends on the Preferred Shares through the most recent dividend payment
date. When the Fund has not paid dividends in full upon the Preferred Shares
through the most recent dividend payment date or upon any class or series of
shares of the Fund ranking, as to the payment of dividends, on a parity with the
Preferred Shares through their most recent respective dividend payment dates,
the amount of dividends declared per share on the Preferred Shares and such
other class or series of shares will in all cases bear to each other the same
ratio that accumulated dividends per share on the Preferred Shares and such
other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund may, in certain situations,
in consultation with the lead Broker-Dealer designated by the Fund (initially
), declare a special rate period on the Preferred Shares. To
declare a special rate period, the Fund will give notice (a "notice of special
rate period") to the auction agent and to each Broker-Dealer. The notice of
special rate period will state the length of the special rate period, which may
not be greater than five years. The Fund may not designate a special rate period
unless sufficient clearing bids for the Preferred Shares were made in the most
recent auction. In addition, full cumulative dividends and any amounts due with
respect to mandatory redemptions or optional redemptions must be paid in full or
deposited with the auction agent. The Fund also must have received confirmation
from Moody's and Fitch or any substitute rating agency that the proposed special
rate period will not impair such agency's then-current rating of the Preferred
Shares and the lead Broker-Dealer designated by the Fund must not have objected
to the declaration of a special rate period. The Fund may provide that, in order
to redeem Preferred Shares at the Fund's option during a special rate period,
the Fund must pay to holders of the Preferred Shares a "redemption premium" in
addition to the redemption price per share of $25,000 plus an amount equal to
the accumulated but unpaid dividends. A notice of special rate period will
specify whether the shares of a particular series of Preferred Shares will be
subject to optional redemption during such special rate period and, if so, the
redemption premium, if any, required to be paid by the Fund in connection with
such optional redemption.
The Fund's declaration of a special rate period may affect the liquidity of
your investment. A special rate period would be longer than a regular rate
period, and you would be unable to sell Preferred Shares in an auction for a
corresponding longer period of time. If you sell your Preferred Shares between
auctions, you may receive less
-43-
than the price you paid for them, especially when market interest rates have
risen. The risks described in this paragraph will become greater as the length
of the special rate period increases.
Voting Rights
Except as otherwise described in this prospectus and in the SAI or as
otherwise set forth in the Declaration or the Bylaws or required by law, holders
of Preferred Shares will have equal voting rights with Common Shareholders and
holders of any other preferred shares of the Fund (each class having one vote
per share) and will vote together with Common Shareholders and any other
preferred shares as a single class.
Holders of outstanding preferred shares of the Fund, including Preferred
Shares, voting as a separate class, are entitled to elect two of the Fund's
Trustees. The remaining Trustees are elected by Common Shareholders and holders
of preferred shares, including the Preferred Shares, voting together as a single
class. In addition, if at any time, dividends (whether or not earned or
declared) on any outstanding preferred shares of the Fund, including Preferred
Shares, are due and unpaid in an amount equal to two full years of dividends,
and sufficient cash or specified securities have not been deposited with the
auction agent for the payment of such dividends, the sole remedy of holders of
the outstanding preferred shares of the Fund is that the number of Trustees will
be automatically increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of preferred shares as described
above, would constitute a majority of the Trustees. The holders of preferred
shares of the Fund will be entitled to elect such Trustees at a special meeting
of holders of preferred shares held as soon as practicable after the occurrence
of such event and at all subsequent meetings at which Trustees are to be
elected. The terms of office of the persons who are Trustees at the time of that
election will continue. If the Fund thereafter pays in full (or otherwise
provides for) all dividends payable on all outstanding preferred shares of the
Fund, the special voting rights stated above will cease and the terms of office
of the additional Trustees elected by the holders of the preferred shares will
automatically terminate.
Unless a higher percentage is provided for under the Declaration or the
Bylaws or applicable law, the Fund will not, without the affirmative vote or
consent of the holders of at least a majority (as defined in the 1940 Act) of
the Preferred Shares outstanding at the time (voting together as a separate
class), except as noted below:
(a) authorize, create or issue any class or series of shares ranking
prior to or on a parity with the Preferred Shares with respect to payment
of dividends or the distribution of assets on liquidation, or authorize,
create or issue additional Preferred Shares, unless, in each case, the Fund
obtains written confirmation from Moody's (if Moody's is then rating the
Preferred Shares) and Fitch (if Fitch is then rating the Preferred Shares)
that such authorization, creation or issuance would not impair the rating
then assigned by such rating agency to the Preferred Shares, 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 the Bylaws if such
amendment, alteration or repeal would affect adversely the preferences,
rights or powers expressly set forth in the Declaration or the Bylaws of
holders of the Preferred Shares; or
(c) authorize the Fund's conversion from a closed-end to an open-end
investment company.
For purposes of the foregoing, no matter shall be deemed adversely to
affect any preference, right or power of a holder of Preferred Shares unless
such matter (i) adversely alters or abolishes any preferential right of the
Preferred Shares; (ii) creates, adversely alters or abolishes any right in
respect of redemption of such shares; or (iii) creates or adversely alters
(other than to abolish) any restriction on transfer applicable to such shares.
The vote of holders of any Preferred Shares described in this paragraph will in
each case be in addition to a separate vote of the requisite percentage, if any,
of Common Shares and/or preferred shares necessary to authorize the action in
question.
Unless a higher percentage is provided for under the Declaration or the
Bylaws or applicable law, the affirmative vote of the holders of a majority (as
defined in the 1940 Act) of the outstanding Preferred Shares, voting together as
a single class, will be required to approve any plan of reorganization
(including any plan of reorganization arising out of bankruptcy proceedings)
adversely affecting such shares or any action requiring a vote
-44-
of security holders under Section 13(a) of the 1940 Act, including, among other
things, changes in the Fund's investment restrictions designated as fundamental
under "Investment Restrictions" in the SAI and changes in the Fund's
subclassification as a closed-end investment company. However, to the extent
permitted by applicable law, no vote of Common Shareholders, either separately
or together with holders of preferred shares as a single class, is necessary to
take the actions contemplated by (a) and (b) above.
The foregoing voting provisions will not apply with respect to Preferred
Shares if, at or prior to the time when a vote is required, such shares have
been (i) redeemed or (ii) called for redemption and sufficient funds have been
deposited in trust to effect such redemption.
If a series of preferred shares other than the Preferred Shares is issued
in the future, it is anticipated that such series would have voting rights
comparable to those described above.
Rating Agency Guidelines and Asset Coverage
In connection with the Fund's receipt of a rating of "Aaa" from Moody's and
a rating of "AAA" from Fitch with respect to the Preferred Shares, the Fund is
required to maintain assets having in the aggregate a discounted value at least
equal to the Preferred Shares Basic Maintenance Amount. The Preferred Shares
Basic Maintenance Amount includes the sum of (a) the aggregate liquidation
preference of the preferred shares then outstanding (including the Preferred
Shares) and (b) certain accrued and projected payment obligations of the Fund,
including without limitation any accrued and projected dividends on the
preferred shares then outstanding (including the Preferred Shares).
Moody's and Fitch have each established separate guidelines for calculating
discounted value. These guidelines specify discount factors that the Fund must
apply to various types of securities in its portfolio for purposes of
calculating whether the discounted value of the Fund's assets equals the
Preferred Shares Basic Maintenance Amount (with the level of discount generally
becoming greater as the credit quality of a security becomes lower). In
addition, under the guidelines, certain types of securities (including
securities in which the Fund may otherwise invest) are not eligible for
inclusion in the calculation of the discounted value of the Fund's portfolio.
Such ineligible securities may include, for example, certain unrated debt
securities and the equity securities of issuers other than Real Estate
Companies. Accordingly, although the Fund may invest in such securities to the
extent set forth herein, it is currently anticipated that they will not
constitute a significant portion of the Fund's portfolio under normal
circumstances. The rating agency guidelines for calculating discounted value do
not impose any limitations on the percentage of the Fund's assets that may be
invested in ineligible assets, and the amount of ineligible assets included in
the Fund's portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio.
In addition, the Fund is required by the 1940 Act, as well as by the rating
agency guidelines, to maintain asset coverage of at least 200% with respect to
senior securities that are equity securities, including the Preferred Shares
("1940 Act Preferred Shares Asset Coverage"). The Fund's 1940 Act Preferred
Shares Asset Coverage is tested as of the last business day of each month in
which any senior equity securities are outstanding. The minimum required 1940
Act Preferred Shares Asset Coverage amount of 200% may be increased or decreased
if the 1940 Act is amended. Based on the composition of the portfolio of the
Fund and market conditions as of January , 2003, the 1940 Act Preferred Shares
Asset Coverage with respect to all of the Fund's preferred shares, assuming the
issuance on that date of all Preferred Shares offered hereby and giving effect
to the deduction of the related offering costs and sales load estimated at
$ , would have been computed as follows:
Value of Fund assets less liabilities not
constituting senior securities = $_______ = _____%
-------------------------------------------------
Senior securities representing indebtedness $
plus
liquidation value of the preferred shares
-45-
In the event the Fund does not timely cure a failure to maintain (a) a
discounted value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the Preferred Shares, the Fund will be required to redeem Preferred
Shares as described under "-- Redemption -- Mandatory Redemption" below.
In addition to the requirements described above, the rating agency
guidelines impose restrictions on the Fund's use of certain financial
instruments or investment techniques that the Fund might otherwise utilize. For
example, the guidelines limit the use of certain hedging transactions such as
futures contracts and options. The guidelines also limit the use of certain
other investment techniques, including borrowing of money, short sales, loans of
portfolio securities, and reverse repurchase agreements. For a complete
description of such restrictions, see Section 11 of the Bylaws, which is
attached as Appendix B to the SAI.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or Fitch. Failure to adopt any
such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any rating agency
providing a rating for the Preferred Shares may, at any time, change or withdraw
any such rating. The Trustees may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions that have been
adopted by the Fund pursuant to the rating agency guidelines in the event the
Fund receives written confirmation from Moody's and/or Fitch, as the case may
be, that any such amendment, alteration or repeal would not impair the rating
then assigned to the Preferred Shares.
As recently described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The rating on the Preferred Shares is not a recommendation to
purchase, hold or sell those shares, inasmuch as the rating does not comment as
to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
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
the Fund and the Investment Manager and information obtained from other sources.
The ratings may be changed, suspended or withdrawn as a result of changes in, or
the unavailability of, such information. The Fund's Common Shares have not been
rated by a nationally recognized statistical rating organization.
A rating agency's guidelines will apply to the Preferred Shares only so
long as the rating agency is rating the shares. The Fund will pay certain fees
to Moody's and Fitch for rating the Preferred Shares. A more detailed
description of how Moody's and Fitch calculate discounted value and the other
limitations imposed by the rating agencies is contained in Section 11 of the
Bylaws, which is attached as Appendix B to the SAI.
Liquidation
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with Preferred Shares with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of the
Fund (whether voluntary or involuntary), the holders of 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 will be made on the Common Shares or any other class of shares of
the Fund ranking junior to the Preferred Shares, an amount equal to the
liquidation preference with respect to such Preferred Shares ($25,000 per
share), plus an amount equal to all dividends thereon (whether or not earned or
declared by the Fund, but excluding the interest thereon) accumulated but unpaid
to (but not including) the date of final distribution in same-day funds in
connection with the liquidation of the Fund. If such assets of the Fund are
insufficient to make the full liquidation payment on the outstanding Preferred
Shares, no distribution shall be made on 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 liquidation unless proportionate
distributive amounts shall be paid on the Preferred Shares, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such liquidation. After the payment
to the holders of Preferred Shares of the full preferential amounts provided for
as described herein, the holders of Preferred Shares as such will have no right
or claim to any of the remaining assets of the Fund.
For purposes of the foregoing paragraph, a liquidation of the Fund does not
include:
-46-
. the sale of all or any portion of the property or business of the
Fund;
. the merger or consolidation of the Fund into or with any business
trust or other entity; or
. the merger or consolidation of any business trust or other entity into
or with the Fund.
Redemption
Mandatory Redemption. The Fund is required to maintain (a) a discounted
value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) the 1940 Act Preferred Shares Asset Coverage.
Eligible portfolio securities for the purposes of (a) above will be determined
from time to time by the rating agencies then rating the Preferred Shares. If
the Fund fails to maintain such asset coverage amounts and does not timely cure
such failure in accordance with the requirements of the rating agencies that
rate the Preferred Shares, the Fund must redeem all or a portion of the
Preferred Shares. This mandatory redemption will take place on a date that the
Trustees specify out of legally available funds in accordance with the
Declaration, the Bylaws and applicable law, at the redemption price of $25,000
per share, plus accumulated but unpaid dividends (whether or not earned or
declared) to (but not including) the date fixed for redemption. In determining
the number of Preferred Shares required to be redeemed in accordance with the
foregoing, the Fund will allocate the number of shares required to be redeemed
to satisfy the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage, as the case may be, pro rata among the
Preferred Shares and any other preferred shares of the Fund subject to
redemption or retirement. The mandatory redemption will be limited to the number
of Preferred Shares and any other preferred shares necessary to restore the
required discounted value or the 1940 Act Preferred Shares Asset Coverage, as
the case may be.
Optional Redemption. The Fund, at its option, may redeem the Preferred
Shares, in whole or in part, out of legally available funds. Any optional
redemption will occur on the second business day preceding any dividend
payment date at the optional redemption price per share of $25,000, plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared) to (but not including) the date fixed for redemption, plus the
premium, if any, specified in a special redemption provision. No Preferred
Shares may be redeemed if the redemption would cause the Fund to violate the
1940 Act. The Fund has the authority to redeem the Preferred Shares for any
reason and may redeem all or part of the outstanding Preferred Shares if it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return to Common Shareholders for any significant period of time than
that obtainable if the Common Shares were unleveraged. The Fund may exercise
such redemption option as to some or all of the Preferred Shares, subject to
certain limitations. The optional redemption of Preferred Shares will, if less
than all the Preferred Shares are redeemed, be made on a pro rata basis.
The Fund will not make any optional redemption unless (i) the Fund has
available certain deposit securities with maturities or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of the
Preferred Shares by reason of the redemption of the Preferred Shares on such
date fixed for the redemption and (ii) the Fund has eligible assets with an
aggregate discounted value at least equal to the Preferred Shares Basic
Maintenance Amount (both before and after giving effect to such redemption).
Notwithstanding the foregoing, if unpaid dividends exist with respect to
the Preferred Shares (whether or not earned or declared), no Preferred Shares
shall be redeemed (by either mandatory redemption or optional redemption) unless
all outstanding Preferred Shares are simultaneously redeemed; provided, however,
that this limitation will not apply to an otherwise lawful purchase or exchange
offer made on the same terms to the holders of all outstanding Preferred Shares.
Although the Preferred Shares are subject to redemption under certain
circumstances as described above and under "-- Mandatory Redemption," unlike the
shares of an open-end mutual fund, the Preferred Shares may not be redeemed at a
shareholder's option at net asset value.
-47-
THE AUCTION
General
Under the Bylaws, the applicable rate for the Preferred Shares for each
rate period after the initial rate period will generally be the rate that
results from an auction conducted as set forth in the Bylaws and summarized
below. In such an auction, persons determine to hold or offer to sell Preferred
Shares regardless of the rate set by the auction or offer to purchase or sell
Preferred Shares based on specific dividend rates bid by them. See Section 11 of
the Bylaws, which is attached as Appendix B of the SAI, for a more complete
description of the auction process.
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, ) which provides, among
other things, that the auction agent will follow the auction procedures set
forth in the Bylaws to determine the applicable rate for Preferred Shares so
long as the applicable rate for Preferred Shares is to be based on the results
of an auction.
The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 60 days after such notice. If the auction agent should
resign, the Fund will attempt to appoint another qualified institution to act as
auction agent. The Fund may remove the auction agent provided that prior to such
removal the Fund has entered into an agreement with a successor auction agent to
perform substantially similar services.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with one or
more Broker-Dealers selected by the Fund that provide for the participation of
those Broker-Dealers in auctions for Preferred Shares ("Broker-Dealer
Agreements").
The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge that will generally be at the
annual rate of 1/4 of 1% of the stated value ($25,000 per share) of the
Preferred Shares held by a Broker-Dealer's customers upon settlement in an
auction.
The Fund may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that at
least one Broker-Dealer Agreement is in effect after such termination.
Auction Procedures
Prior to the submission deadline on each auction date for the Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner of
Preferred Shares may submit the following types of orders with respect to
Preferred Shares to that Broker-Dealer:
1. Hold Order -- indicating its desire to hold Preferred Shares without
regard to the applicable rate for the next rate period.
2. Bid -- indicating its desire to purchase or hold the indicated number
of Preferred Shares at $25,000 per share if the applicable rate for
the next rate period is not less than the rate specified in the bid. A
bid order by an existing holder will be deemed an irrevocable offer to
sell Preferred Shares at $25,000 per share if the applicable rate for
the next rate period is less than the rate specified in the bid.
3. Sell Order -- indicating its desire to sell Preferred Shares at
$25,000 per share without regard to the applicable rate for the next
rate period.
A beneficial owner of Preferred Shares may submit different types of orders
to its Broker-Dealer with respect to different Preferred Shares then held by the
beneficial owner. A beneficial owner that submits a bid to its Broker-Dealer
having a rate higher than the applicable maximum rate on the auction date will
be treated as having submitted a sell order to its Broker-Dealer. A beneficial
owner that fails to submit an order to its Broker-Dealer will ordinarily be
deemed to have submitted a hold order to its Broker-Dealer. However, if a
beneficial owner fails to submit an order for some or all of its shares to its
Broker-Dealer for an auction relating to a rate period of more than 91 days,
such beneficial owner will be deemed to have submitted a sell order for such
shares to its Broker-Dealer. A
-48-
sell order constitutes an irrevocable offer to sell the Preferred Shares subject
to the sell order. A beneficial owner that offers to become the beneficial owner
of additional Preferred Shares is, for the purposes of such offer, a potential
holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of Preferred Shares but that wishes to purchase Preferred
Shares or a beneficial owner that wishes to purchase additional Preferred
Shares. A potential holder may submit bids to its Broker-Dealer in which it
offers to purchase Preferred Shares at $25,000 per share if the applicable rate
for the next rate period is not less than the rate specified in such bid. A bid
placed by a potential holder specifying a rate higher than the applicable
maximum rate on the auction date will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
Unless otherwise permitted by the Fund, the Broker-Dealers will designate
themselves as existing holders of shares subject to orders submitted or deemed
submitted to them by beneficial owners. They will also designate themselves as
potential holders of shares subject to orders submitted to them by potential
holders. However, neither the Fund nor the auction agent will be responsible for
a Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any 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 that it is not an affiliate of the Fund.
There are sufficient clearing bids in an auction if the number of Preferred
Shares subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates equal to or lower than the
applicable maximum rate is at least equal to the sum of the number of Preferred
Shares subject to sell orders submitted or deemed submitted to the auction agent
by Broker-Dealers for existing holders and the number of Preferred Shares
subject to bids specifying rates higher than the applicable maximum rate
submitted or deemed submitted to the auction agent by Broker-Dealers for
existing holders. If there are sufficient clearing bids, the applicable rate for
the Preferred Shares for the next succeeding rate period thereof will be the
lowest rate specified in the submitted bids that, taking into account such rate
and all lower rates bid by Broker-Dealers as or on behalf of existing holders
and potential holders, would result in such existing holders and potential
holders owning the Preferred Shares available for purchase in the auction.
If there are not sufficient clearing bids, the applicable rate for the next
rate period will be the applicable maximum rate on the auction date. 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 shares subject to such sell orders. If all of the
outstanding Preferred Shares are the subject of submitted hold orders, then the
rate period following the auction will automatically be the same length as the
preceding rate period and the applicable rate for the next rate period will be
80% of the reference rate (i.e., 80% of the applicable "AA" Composite Commercial
Paper Rate (for a rate period of fewer than 183 days) or Treasury Index Rate
(for a rate period of 183 days or more)).
The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of Preferred Shares that is different
from the number of shares specified in its order. To the extent the allocation
procedures have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their Agent Members in same-day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which
currently provide for payment against delivery by their Agent Members in
same-day funds.
The auctions for Preferred Shares will normally be held every seven days,
and each subsequent rate period will normally begin on the following business
day.
-49-
The first auction for the Preferred Shares will be held on ,
2003, the business day preceding the dividend payment date for the initial
dividend period. Thereafter, except during special rate periods, auctions for
the Preferred Shares normally will be held every seven days thereafter, and each
subsequent dividend period for the Preferred Shares normally will begin on the
following business day.
If an auction date is not a business day because the New York Stock
Exchange is closed for business for more than three consecutive business days
due to an act of God, natural disaster, extreme weather, act of war, civil or
military disturbance, act of terrorism, sabotage, riots or a loss or malfunction
of utilities or communications services, or the auction agent is not able to
conduct an auction in accordance with the auction procedures for any such
reason, then the dividend rate for the next dividend period will be the dividend
rate determined on the previous auction date.
If a dividend payment date is not a business day because the New York
Stock Exchange is closed for business for more than three consecutive business
days due to an act of God, natural disaster, extreme weather, act of war, civil
or military disturbance, act of terrorism, sabotage, riots or a loss or
malfunction of utilities or communications services, or the dividend payable on
such date cannot be paid for any such reason then:
. the dividend payment date for the affected dividend period will
be the next business day on which the Fund and its paying agent,
if any, can pay the dividend;
. the affected dividend period will end on the day it otherwise
would have ended; and
. the next dividend period will begin and end on the dates on
which it otherwise would have begun and ended.
The following is a simplified example of how a typical auction works.
Assume that the Fund has 1,000 outstanding 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 all 500 Bid order of 2.1% rate for
shares if auction rate is less than 2.1% all 500 shares
Current Holder B ............. Owns 300 shares, wants to hold Hold order-- will take the
auction rate
Current Holder C ............. Owns 200 shares, wants to sell all 200 Bid order of 1.9% rate for
shares if auction rate is less than 1.9% all 200 shares
Potential Holder D ........... Wants to buy 200 shares if auction rate Places order to buy 200
is 2.0% or greater shares at or above 2.0%
Potential Holder E ........... Wants to buy 300 shares if auction rate Places order to buy 300
is 1.9% or greater shares at or above 1.9%
Potential Holder F ........... Wants to buy 200 shares if auction rate Places order to buy 200
is 2.1% or greater shares at or above 2.1%
The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 2.0% (the offer by D). Therefore, the dividend rate
will be 2.0%. Current holders B and C will continue to own their shares. Current
holder A will sell its shares because A's dividend rate bid was higher than the
dividend rate. Potential holder D will buy 200 shares and potential holder E
will buy 300 shares because their bid rates were at or below the dividend rate.
Potential holder F will not buy any shares because its bid rate was above the
dividend rate.
For further description of the auction procedures, please see Section
11 of the Bylaws, which is attached as Appendix B to the SAI.
Secondary Market Trading and Transfer of Preferred Shares
The underwriters are not required to make a market in the Preferred
Shares. The Broker-Dealers (including the underwriters) may maintain a secondary
trading market for the Preferred Shares outside of auctions, but they are not
required to do so. There can be no assurance that a secondary trading market for
Preferred Shares will develop or, if it does develop, that it will provide
holders of Preferred Shares with liquidity of investment. The Preferred Shares
will not be registered on any stock exchange or on the NASDAQ market. Investors
who purchase Preferred
-50-
Shares in an auction (particularly if the Fund has declared a special rate
period) should note that, because the dividend rate on such shares will be fixed
for the length of that dividend period, the value of such shares may fluctuate
in response to the changes in interest rates, and may be more or less than their
original cost if sold on the open market in advance of the next auction thereof,
depending on market conditions.
You may sell, transfer, or otherwise dispose of Preferred Shares only
in whole shares and only:
. pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
. to a Broker-Dealer; or
. to such other persons as may be permitted by the Fund; provided,
however, that (x) if you hold your Preferred Shares in the name
of a Broker-Dealer, a sale or transfer of your Preferred Shares
to that Broker-Dealer, or to another customer of that
Broker-Dealer, will not be considered a sale or transfer for
purposes of the foregoing limitation if that Broker-Dealer
remains the existing holder of the Preferred Shares immediately
after the transaction; and (y) in the case of all transfers,
other than through an auction, the Broker-Dealer (or other
person, if the Fund permits) receiving the transfer will advise
the auction agent of the transfer.
NET ASSET VALUE
The Fund determines the net asset value of its Common Shares on each
day the New York Stock Exchange is open for business at the close of regular
trading (normally 4:00 p.m. Eastern time). Domestic debt securities and non-US.
securities are normally priced using data reflecting the earlier closing of the
principal markets for those securities. Information that becomes known to the
Fund or its agent after the Fund's net asset value has been calculated on a
particular day will not be used to adjust retroactively the price of a security
or the Fund's net asset value determined earlier that day.
The Fund determines net asset value per Common Share by dividing the
value of the Fund's securities, cash and other assets (including interest
accrued but not collected) less all its liabilities (including accrued expenses,
the liquidation preference of the Preferred Shares and dividends payable) by the
total number of Common Shares outstanding. The Fund values portfolio securities
for which market quotations are readily available at market value. The Fund's
short-term investments are valued at amortized cost when the security has 60
days or less to maturity.
In unusual circumstances, instead of valuing securities in the usual
manner, the Fund may value securities at fair value as determined in good faith
by the Board of Trustees or persons acting pursuant to procedures approved by
the Board, generally based on recommendations provided by the Investment Manager
or CDC IXIS Services. Fair valuation may also be required due to material events
that occur after the close of the relevant market but prior to the close of the
New York Stock Exchange. The effect of using fair value pricing is that the
Common Shares' net asset value will be subject to the judgment of the Board of
Trustees or its designee instead of being determined by the market.
Any swap transaction that the Fund enters into may, depending on the
applicable interest rate environment, have a positive or negative value for
purposes of calculating net asset value. Any cap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have no
value or a positive value. In addition, accrued payments to the Fund under such
transactions will be assets of the Fund and accrued payments by the Fund will be
liabilities of the Fund.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund is an unincorporated business trust established under the laws
of the Commonwealth of Massachusetts by the Declaration. The Declaration
provides that the Trustees of the Fund may authorize separate classes of shares
of beneficial interest. The Declaration authorizes an unlimited number of Common
Shares of beneficial interest and the Trustees have authorized ______ preferred
shares of beneficial interest. Preferred shares
-51-
may be issued in one or more series, with such par value and with such rights as
determined by the Board of Trustees, by action of the Board of Trustees without
the approval of the Common Shareholders. For a description of the Preferred
Shares, see "Description of Preferred Shares." The following table shows the
number of (i) shares authorized and (ii) shares outstanding for each class of
authorized securities of the Fund as of , 2003.
Number Number Held by or for Number
Title of Class Authorized the Account of the Fund Outstanding
-------------- ---------- ----------------------- -----------
Common Shares ................. Unlimited 0 _________
Series [ ] Preferred
Shares ....................... ________* 0 0
___________________
* Assumes authorization of Preferred Shares by the Board of
Trustees prior to the issuance of the Preferred Shares.
Common Shareholders are entitled to share equally in dividends declared
by the Board of Trustees payable to Common Shareholders and in the net assets of
the Fund available for distribution to Common Shareholders after payment of the
preferential amounts payable to holders of any outstanding preferred shares,
including the Preferred Shares. Neither Common Shareholders nor holders of
Preferred Shares have conversion rights or the right to cause the Fund to redeem
their shares. Upon liquidation of the Fund, after paying or adequately providing
for the payment of all liabilities of the Fund and the liquidation preference
with respect to any outstanding preferred shares, and upon receipt of such
releases, indemnities and refunding agreements as they deem necessary for their
protection, the Trustees may distribute the remaining assets of the Fund among
the Common Shareholders.
Pursuant to the Fund's Dividend Reinvestment Plan, all Common
Shareholders whose shares are registered in their own names will have all
dividends, including any capital gain dividends, reinvested automatically in
additional Common Shares by EquiServe Trust Company, N.A. as agent for the
Common Shareholders, unless the Common Shareholder elects to receive cash. The
Fund and EquiServe Trust Company, N.A. reserve the right to amend or terminate
the Dividend Reinvestment Plan.
Common Shareholders will vote with the holders of the Preferred Shares
and any other outstanding preferred shares on each matter submitted to a vote of
Common Shareholders, except as described under "Description of Preferred Shares
-- Voting Rights" and except as otherwise required by the Declaration, the
Bylaws or applicable law.
Shareholders of each class or series are entitled to one vote for each
share held. Except as provided under "Description of Preferred Shares -- Voting
Rights" and except as otherwise required by the Declaration, the Bylaws or
applicable law, holders of preferred shares, including the Preferred Shares,
voting as a separate class, are entitled to elect two Trustees, and the
remaining Trustees will be elected by holders of Common Shares and preferred
shares, voting as a single class.
Under the 1940 Act, so long as any Preferred Shares or any other
preferred shares are outstanding, Common Shareholders will not be entitled to
receive any dividends or other distributions from the Fund, unless at the time
of such declaration, (1) all accrued dividends on the Preferred Shares have been
paid and (2) the value of the Fund's total assets (determined after deducting
the amount of such dividend or other distribution), less all liabilities and
indebtedness of the Fund not represented by "senior securities" (as defined in
the 1940 Act), is at least 300% of the aggregate amount of senior securities
representing indebtedness (to the extent any such senior securities are
outstanding) and at least 200% of the aggregate amount of any senior securities
representing indebtedness plus the aggregate liquidation value of the
outstanding preferred shares (equal to the aggregate original purchase price of
the outstanding preferred shares plus any accrued and unpaid dividends thereon,
whether or not earned or declared and on a cumulative basis). In addition to the
requirements of the 1940 Act, the Fund is required to comply with other asset
coverage requirements as a condition of the Fund obtaining a rating of the
Preferred Shares from rating agencies. These requirements include an asset
coverage test more stringent than under the 1940 Act. See
-52-
"Description of Preferred Shares -- Dividends and Rate Periods -- Restrictions
on Dividends and Other Distributions."
The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.
The Common Shares of the Fund commenced trading on the American Stock
Exchange on November 26, 2002. On , 2003, the net asset value per Common
Share was $ , and the closing price per Common Share on the American Stock
Exchange was $ .
Other Issues Relating to the Preferred Shares
Under the 1940 Act, the Fund is permitted to have outstanding more than
one series of preferred shares of beneficial interest as long as no single
series has priority over another series as to the distribution of assets of the
Fund or the payment of dividends. Neither Common Shareholders nor holders of
Preferred Shares have pre-emptive rights to purchase any Preferred Shares or any
other preferred shares that the Fund may issue.
CLOSED-END STRUCTURE
The Fund is a closed-end management investment company (commonly
referred to as a closed-end fund). Closed-end funds differ from open-end
investment companies (which are generally referred to as mutual funds) in that
closed-end funds generally list their shares for trading on a stock exchange and
do not redeem their shares at the request of the shareholder. This means that,
if you wish to sell your common shares of a closed-end fund, you must trade them
on the market like any other stock at the prevailing market price at that time.
In contrast, shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or permitted under the 1940 Act) at their net asset value, less
any redemption charge that might be in effect at the time of redemption. In
order to avoid maintaining large cash positions or liquidating favorable
investments to meet redemptions, open-end investment companies typically engage
in a continuous offering of their shares. Open-end investment companies are thus
subject to periodic asset in-flows and out-flows that can complicate portfolio
management. By comparison, closed-end funds are generally better able to stay
fully invested in securities that are consistent with their investment
objectives, and also have greater flexibility to make certain types of
investments and use certain investment strategies such as financial leverage and
investments in illiquid securities.
Common shares of closed-end funds frequently trade at a discount to
their net asset value. Because of this possibility and the recognition that any
such discount may not be in the best interest of shareholders, the Fund's Board
of Trustees might consider from time to time repurchases of the Fund's Common
Shares in the open market or in private transactions, tender offers for shares
at net asset value or other programs intended to reduce the discount. The Fund
cannot guarantee or assure, however, that the Fund's Board will engage in any of
these actions. Nor is there any guarantee or assurance that such actions, if
undertaken, would result in shares trading at a price equal or close to net
asset value per share. See "Repurchase of Shares." The Board of Trustees might
also consider converting the Fund to an open-end investment company, which would
also require a vote of the shareholders of the Fund. See "Possible Conversion to
Open-End Status" and "Certain Provisions in the Declaration of Trust."
POSSIBLE CONVERSION TO OPEN-END STATUS
Subject to the voting and other provisions in the Declaration, the Fund
may be converted to an open-end investment company at any time by a vote of the
outstanding shares. See "Certain Provisions in the Declaration of Trust" for a
discussion of the shareholder and Trustee approval requirements applicable to
conversion of the Fund to an open-end investment company. If the Fund converted
to an open-end investment company, it would be required to redeem all Preferred
Shares then outstanding (requiring in turn that it liquidate a portion of its
investment portfolio) and the Fund's Common Shares would likely no longer be
listed on the American Stock Exchange. Conversion to open-end status could also
require the Fund to modify certain investment restrictions and policies. The
Board of Trustees may at any time propose conversion of the Fund to open-end
status, depending upon its judgment regarding the advisability of such action in
light of circumstances then prevailing. However, the Fund cannot assure you that
the Board of Trustees will decide to take or propose such a conversion.
-53-
REPURCHASE OF SHARES
Common shares of closed-end investment companies often trade at a
discount to net asset value, and the Fund's Common Shares may also trade at a
discount to their net asset value, although it is possible that they may trade
at a premium above net asset value. The market price of the Fund's Common shares
will be determined by such factors as dividend levels (which are in turn
affected by the return on the Fund's portfolio and expenses), relative demand
for and supply of shares in the market, the Fund's net asset value, call
protection, dividend stability, general market and economic conditions and other
factors beyond the control of the Fund. Although Common Shareholders will not
have the right to redeem their shares, the Fund may take action to repurchase
shares in the open market or in private transactions or make tender offers for
its shares at net asset value. The Fund cannot assure you that the Board of
Trustees will decide to take or propose any of these actions, or that share
repurchases or tender offers, if undertaken, will reduce market discount. For
more information, see "Repurchase of Shares; Conversion to Open-End Fund" in the
SAI. Repurchase of the Common Shares may have the effect of reducing any market
discount to net asset value.
There is no assurance that, if action is undertaken to repurchase or
tender for Common Shares, such action will result in the Common Shares trading
at a price which approximates their net asset value. Although share repurchases
and tenders could have a favorable effect on the market price of the Common
Shares, you should be aware that the acquisition of Common Shares by the Fund
will decrease the total assets of the Fund and, therefore, will have the effect
of increasing the Fund's expense ratio and may adversely affect the ability of
the Fund to achieve its investment objectives. To the extent the Fund may need
to liquidate investments to fund repurchases of shares, this may result in
portfolio turnover, which will result in additional expenses being borne by the
Fund, including brokerage commissions or dealer mark-ups and other transaction
costs on the sale of securities and reinvestment in other securities. Portfolio
turnover could give rise to a greater amount of taxable capital gains. The Board
of Trustees would typically consider the following factors to be relevant to a
potential decision to repurchase Common Shares: the extent and duration of the
discount, the liquidity of the Fund's portfolio, the impact (including the
expense) of any action on the Fund or its shareholders and market
considerations. Any share repurchases or tender offers will be made in
accordance with the requirements of the Securities Exchange Act of 1934, as
amended, and the 1940 Act.
TAX MATTERS
The following federal income tax discussion is based on the advice of
Ropes & Gray, counsel to the Fund, and reflects provisions of the Code, existing
Treasury Regulations, rulings published by the IRS, and other applicable
authority, as of the date of this prospectus. These authorities are subject to
change by legislative or administrative action. The following discussion is only
a summary of some of the important tax considerations generally applicable to
investments in the Fund. For more detailed information regarding tax
considerations, see the SAI. There may be other tax considerations applicable to
particular investors. In addition, income earned through an investment in the
Fund may be subject to state and local taxes.
The Fund intends to qualify each year for taxation as a regulated
investment company eligible for treatment under the provisions of Subchapter M
of the Code. If the Fund so qualifies and satisfies certain distribution
requirements, the Fund will not be subject to federal income tax on income
distributed in a timely manner to its shareholders in the form of dividends or
capital gain distributions.
In order for any portion of any distributions to holders of Preferred
Shares to be eligible to be treated as capital gain dividends, the Preferred
Shares must be treated as equity for federal income tax purposes. Based in part
on certain representations made by the Fund to Ropes & Gray relating to the lack
of any present intention to redeem or purchase Preferred Shares at any time in
the future, it is the opinion of Ropes & Gray that the Preferred Shares will
constitute equity for federal income tax purposes. This opinion relies in part
on a published ruling of the IRS stating that certain auction rate preferred
stock similar in many material respects to the Preferred Shares represents
equity. The opinion of Ropes & Gray represents only its best legal judgment and
is not binding on the IRS or the courts. If the IRS were to assert successfully
that variable rate preferred stock such as the Preferred Shares should be
treated as debt for federal income tax purposes, distributions on Preferred
Shares (including distributions designated by the Fund as capital gain
dividends) would be taxable as ordinary income (as opposed to capital gains).
Ropes &
-54-
Gray has advised the Fund that, should the IRS pursue in court the position that
the Preferred Shares should be treated as debt for federal income tax purposes,
the IRS would be unlikely to prevail.
To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by the Fund to its shareholders, including
holders of its preferred shares, must qualify for the dividends-paid deduction.
If the Fund realizes a long-term capital gain, it will be required to allocate
such gain between and among the Common Shares and any preferred shares issued by
the Fund in proportion to the total dividends paid to each class during the year
in which the income is realized.
If at any time when preferred shares are outstanding the Fund does not meet
applicable asset coverage requirements, it will be required to suspend
distributions to Common Shareholders until the requisite asset coverage is
restored. Any such suspension may cause the Fund to pay a 4% federal excise tax
(imposed on regulated investment companies that fail to distribute for a given
calendar year, generally, at least 98% of their net investment income and
capital gain net income) and income tax on undistributed income or gains, and
may, in certain circumstances, prevent the Fund from qualifying for treatment as
a regulated investment company. The Fund may redeem preferred shares in an
effort to comply with the distribution requirement applicable to regulated
investment companies and to avoid income and excise taxes. The Fund may have to
dispose of portfolio securities to generate cash for such redemption, which may
result in transaction expenses and gain at the Fund level and in further
distributions.
The Fund's investments in certain debt obligations may cause the Fund to
recognize taxable income in excess of the cash generated by such obligations.
Thus, the Fund could be required at times to liquidate other investments,
including when it is not advantageous to do so, in order to satisfy its
distribution requirements.
The Fund may at times buy investments at a discount from the price at which
they were originally issued, especially during periods of rising interest rates.
For federal income tax purposes, some or all of this market discount will be
included in the Fund's ordinary income and will be taxable to shareholders as
such.
For federal income tax purposes, distributions of investment income are
taxable as ordinary income, assuming the Fund has sufficient current or
accumulated earnings and profits. Whether distributions of capital gains are
taxed as ordinary income or capital gains is determined by how long the Fund
owned the investments that generated such capital gains, rather than how long a
shareholder has owned his or her shares. Distributions of gains from the sale of
investments that the Fund owned for more than one year that are designated by
the Fund as capital gain dividends will be taxable as capital gains.
Distributions of gains from the sale of investments that the Fund owned for one
year or less will be taxable as ordinary income. Distributions are taxable to
shareholders even if they are paid from income or gains earned by the Fund
before a shareholder's investment (and thus were included in the price the
shareholder paid). Any gain resulting from the sale or exchange of Fund shares
will generally also be subject to tax.
The Fund's investments in non-U.S. securities may be subject to non-U.S.
withholding taxes. In that case, the Fund's yield on those securities would be
decreased. Shareholders generally will not be entitled to claim a credit or
deduction with respect to foreign taxes. In addition, the Fund's investments in
non-U.S. securities or currencies other than the U.S. dollar may increase or
accelerate the Fund's recognition of ordinary income and may affect the timing
or amount of the Fund's distributions.
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, swap agreements, straddles and foreign
currencies will be subject to special tax rules (including mark-to-market,
constructive sale, straddle, wash sale and short sale rules), the effect of
which may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders.
If, in connection with the designation of a special rate period, (i) the
Fund provides in a notice of special rate period that the Fund may redeem all or
a portion of the Preferred Shares and that upon such redemption the holders of
the Preferred Shares may receive a premium in addition to receipt of a
redemption price per share equal to the sum of $25,000 plus an amount equal
to the accumulated but unpaid dividends thereon during the whole or any part of
the special rate period, (ii) based on all the facts and circumstances at the
time of the designation of the special rate period the Fund is more likely than
not to redeem such Preferred Shares during the special rate period, and (iii)
the premium to be paid upon redemption during such special rate period exceeds a
specified de minimis amount, it is possible that the holders of the Preferred
Shares will be required to accrue the premium as a dividend (to the extent of
the Fund's earnings and profits).
The Fund generally is required to withhold and remit to the U.S. Treasury a
percentage of the taxable dividends and other distributions paid to any
shareholder who fails to properly furnish the Fund with a correct taxpayer
identification number (TIN), who has under-reported dividend or interest income,
or who fails to certify to
-55-
the Fund that he or she is not subject to such withholding. The backup
withholding tax rate will be (i) 30% for amounts paid during 2002 and 2003, (ii)
29% for amounts paid during 2004 and 2005, and (iii) 28% for amounts paid during
2006 through 2010. The backup withholding rate will be 31% for amounts paid
after December 31, 2010, unless Congress enacts tax legislation providing
otherwise. In order for a foreign investor to qualify for exemption from the
back-up withholding tax rates and for reduced withholding tax rates under income
tax treaties, the foreign investor must comply with special certification and
filing requirements. Foreign investors in the Fund should consult their tax
advisers in this regard.
It is not expected that investors will be subject to the alternative
minimum tax as a result of an investment in the Fund. This section relates only
to federal income tax consequences of investing in the Fund; the consequences
under other tax laws may differ. Shareholders should consult their tax advisers
as to the possible application of foreign, state and local income tax laws to
Fund dividends and capital distributions. Please see the SAI for additional
information regarding the tax aspects of investing in the Fund.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. The Fund's Trustees are divided into three classes. At each
annual meeting of shareholders, the term of one class will expire and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, the Declaration provides that a Trustee may be removed only for cause
and only (i) by action of at least seventy-five percent (75%) of the outstanding
shares of the classes or series of shares entitled to vote for the election of
such Trustee, or (ii) by at least seventy-five percent (75%) of the remaining
Trustees.
As described below, the Declaration grants special approval rights with
respect to certain matters to members of the Board who qualify as "Continuing
Trustees," which term means a Trustee who either (i) has been a member of the
Board for a period of at least thirty-six months (or since immediately after the
initial registered public offering of the Fund's Common Shares, if less than
thirty-six months) or (ii) was nominated to serve as a member of the Board of
Trustees by a majority of the Continuing Trustees then members of the Board.
The Declaration requires the affirmative vote or consent of at least
seventy-five percent (75%) of the Board of Trustees and holders of at least
seventy-five percent (75%) of the Fund's shares (including Common Shares and
Preferred Shares) to authorize certain Fund transactions not in the ordinary
course of business, including a merger or consolidation, or certain sales, or
transfers, of Fund assets, unless the transaction is authorized by both a
majority of the Trustees and seventy-five percent (75%) of the Continuing
Trustees (in which case no shareholder authorization would be required by the
Declaration, but may be required in certain cases under the 1940 Act). The
Declaration also requires the affirmative vote or consent of holders of at least
seventy-five percent (75%) of each class of the Fund's shares entitled to vote
on the matter to authorize a conversion of the Fund from a closed-end to an
open-end investment company, unless the conversion is authorized by both a
majority of the Trustees and seventy-five percent (75%) of the Continuing
Trustees (in which case shareholders would have only the minimum voting rights
required by the 1940 Act with respect to the conversion). Also, the Declaration
provides that, subject to the terms of any Preferred Shares that may be set
forth in the Bylaws, the Fund may be terminated at any time by vote or consent
of at least seventy-five percent (75%) of the Fund's shares or, alternatively,
by vote or consent of both a majority of the Trustees and seventy-five percent
(75%) of the Continuing Trustees. The Declaration also requires the approval of
both a majority of the Trustees and seventy-five percent (75%) of the Continuing
Trustees for certain extraordinary
-56-
distributions from the Fund to shareholders. The voting provisions discussed in
this section are more restrictive than those required under the 1940 Act and
Massachusetts law. See "Certain Provisions in the Declaration of Trust" in the
SAI for a more detailed summary of these provisions.
The Trustees may from time to time grant other voting rights to
shareholders with respect to these and other matters as the Trustees may
consider necessary or desirable.
The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking control
of the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
provisions of the Declaration described above could have the effect of depriving
the Common Shareholders of opportunities to sell their Common Shares at a
premium over the then current market price of the Common Shares by discouraging
a third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. The Board of Trustees of the Fund has considered the
foregoing anti-takeover provisions and concluded that they are in the best
interests of the Fund and its shareholders.
The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's Bylaws,
both of which are on file with the SEC.
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
contains an express disclaimer of shareholder liability for debts or obligations
of the Fund and requires that notice of such limited liability be given in each
note, bond, contract, instrument, certificate or undertaking made or issued by
the Trustees or any officer or officers of the Fund. The Declaration further
provides for indemnification by the Fund for all loss and expense of any
shareholder or former shareholder held personally liable on account of being or
having been a shareholder of the Fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations. The Fund believes
that the likelihood of such circumstances is remote.
-57-
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated ,
2003, the underwriters named below have agreed to purchase, and the Fund has
agreed to sell to such underwriters, the number of Preferred Shares set forth
below.
Underwriter Number of
Preferred Shares
--
Total ...................................... ==
The purchase agreement provides that the obligations of the underwriters to
purchase the Preferred Shares included in this offering are subject to the
approval of certain legal matters by counsel and to other conditions, including,
without limitation, the receipt by the underwriters of customary closing
certificates, opinions and other documents and the receipt by the Fund of "Aaa"
and "AAA" ratings on the Preferred Shares from Moody's and Fitch, respectively,
as of the time of the closing of the offering. The underwriters are obligated to
purchase all the Preferred Shares sold under the purchase agreement if any of
the Preferred Shares are purchased. In the purchase agreement, the Fund and the
Investment Manager have agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, or
to contribute payments the underwriters may be required to make for any of those
liabilities.
The underwriters propose to initially offer some of the Preferred Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Preferred Shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The sales
load the Fund will pay of $ per share is equal to % of the initial offering
price of the Preferred Shares. After the initial public offering, the
underwriters may change the public offering price and the concession. Investors
must pay for any Preferred Shares purchased on or before , 2003.
The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions, although the
underwriters will not act as principals in any transaction until after they have
ceased to be underwriters.
The Fund anticipates that the underwriters or their affiliates may, from
time to time, act in auctions as broker-dealers and receive fees as set forth
under "The Auction." The underwriters are active underwriters of, and dealers
in, securities and act as market makers in a number of such securities, and
therefore can be expected to engage in portfolio transactions with, and perform
services for, the Fund.
The principal business address of is .
-58-
The settlement date for the purchase of the Preferred Shares will be
, 2002, as agreed upon by the underwriters, the Fund and the Investment Manager
pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934.
CUSTODIAN, AUCTION AGENT AND TRANSFER AGENT
The custodian of the assets of the Fund is Investors Bank & Trust Company,
200 Clarendon Street, Boston, Massachusetts 02116. The custodian performs
custodial and certain fund accounting services.
, , serves as the auction agent, transfer agent, registrar,
dividend paying agent and redemption agent for the Preferred Shares.
EquiServe Trust Company, N.A. and its affiliate, EquiServe, Inc., 150
Royall Street, Canton, Massachusetts 02021, serve as the Fund's transfer agent,
registrar, dividend disbursement agent and shareholder servicing agent for the
Fund's Common Shares, as well as agent for the Fund's Dividend Reinvestment Plan
for Common Shares.
LEGAL MATTERS
The validity of the shares offered hereby is being passed on for the Fund
by Ropes & Gray, Boston, Massachusetts, and certain other legal matters will be
passed on for the underwriters by .
may rely as to certain matters of Massachusetts law on
the opinion of Ropes & Gray.
AVAILABLE INFORMATION
The Fund is subject to certain informational requirements under the federal
securities laws and in accordance therewith is required to file reports, proxy
statements and other information with the SEC. Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the SEC, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Reports, proxy statements and other information
concerning the Fund can also be inspected at the offices of the American Stock
Exchange, 86 Trinity Place, New York, New York 10006.
Additional information regarding the Fund and the Preferred Shares is
contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Fund with
the SEC. This prospectus does not contain all of the information set forth in
the Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the Registration Statement. Statements contained in
this prospectus as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
A copy of the Registration Statement may be inspected without charge at the
SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC. The SEC maintains a Web site (http://www.sec.gov) that contains the
Registration Statement, other documents incorporated by reference, and other
information the Fund has filed electronically with the SEC, including proxy
statements and reports filed under the Securities Exchange Act of 1934.
-59-
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Investment Objectives and Policies .............................................
Investment Restrictions ........................................................
Management of the Fund .........................................................
Investment Advisory and Other Services .........................................
Portfolio Transactions and Brokerage ...........................................
Determination of Net Asset Value ...............................................
Distributions ..................................................................
Description of Shares ..........................................................
Additional Information Concerning the Auctions for Preferred Shares ............
Certain Provisions in the Declaration of Trust .................................
Repurchase of Shares; Conversion to Open-End Fund ..............................
Taxation .......................................................................
Performance-Related and Comparative and Other Information ......................
Counsel and Independent Accountants ............................................
Additional Information .........................................................
Financial Statements ...........................................................
Appendix A-- Ratings of Investments ............................................
Appendix B -Section 11 of the Amended and Restated Bylaws ......................
-60-
================================================================================
$
AEW Real Estate Income Fund
Auction Rate Preferred Shares
Shares, Series [ ]
Liquidation Preference $25,000 per Share
-------------------
P R O S P E C T U S
-------------------
[Underwriters]
, 2003
================================================================================
The information in this Statement of Additional Information is not
complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and it is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED __________, 2003
AEW REAl ESTATE INCOME FUND
399 Boylston Street
Boston, Massachusetts 02116
(800) 862-4863
STATEMENT OF ADDITIONAL INFORMATION
__________, 2003
AEW Real Estate Income Fund (the "Fund") is a recently organized,
non-diversified, closed-end management investment company organized as a
Massachusetts business trust on September 18, 2002.
This Statement of Additional Information relating to the Series [ ]
Auction Rate Preferred Shares ("Preferred Shares") of the Fund is not a
prospectus, but should be read in conjunction with the prospectus of the Fund,
dated __________, 2003, as supplemented from time to time (the "Prospectus").
This Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing Preferred Shares, and
investors should obtain and read the Prospectus prior to purchasing such shares.
This Statement of Additional Information is incorporated by reference in its
entirety into the Prospectus. Copies of the Statement of Additional Information
and Prospectus may be obtained free of charge by writing or calling the address
or phone number shown above. You may also obtain a copy of the Prospectus on the
web site (http://www.sec.gov) of the Securities and Exchange Commission ("SEC").
Capitalized terms used but not defined herein have the same meanings ascribed to
them in the Prospectus.
TABLE OF CONTENTS
TABLE OF CONTENTS 2
INVESTMENT OBJECTIVES AND POLICIES 3
INVESTMENT RESTRICTIONS 14
MANAGEMENT OF THE FUND 16
INVESTMENT ADVISORY AND OTHER SERVICES 22
PORTFOLIO TRANSACTIONS AND BROKERAGE 26
DETERMINATION OF NET ASSET VALUE 28
DISTRIBUTIONS 29
DESCRIPTION OF SHARES 32
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR PREFERRED SHARES 33
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST 35
REPURCHASE OF SHARES; CONVERSION TO OPEN-END FUND 37
TAXATION 40
PERFORMANCE-RELATED AND COMPARATIVE AND OTHER INFORMATION 47
COUNSEL AND INDEPENDENT ACCOUNTANTS 48
ADDITIONAL INFORMATION 48
FINANCIAL STATEMENTS 49
APPENDIX A A-1
APPENDIX B - SECTION 11 OF THE AMENDED AND RESTATED BYLAWS B-1
This Statement of Additional Information is dated __________, 2003.
-2-
INVESTMENT OBJECTIVES AND POLICIES
Additional Information Regarding Fund Investments
The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks set forth in the Prospectus. Except
as specifically provided herein, the Fund's investment policies are not
fundamental and may be changed by the Board of Trustees of the Fund without the
approval of the shareholders.
Investments In Real Estate Companies And Real Estate Investment Trusts
Under normal market conditions, the Fund will invest at least 90% of
its total assets in income-producing common shares, preferred shares,
convertible preferred shares (preferred shares that, during certain periods or
upon the happening of certain events, may be converted into common shares) and
debt securities issued by real estate companies, including real estate
investment trusts ("REITs"). For purposes of the Fund's investment policies, a
"Real Estate Company" is one that generally derives at least 50% of its revenues
from the ownership, construction, financing, management or sale of commercial,
industrial, or residential real estate; or has at least 50% of its assets
invested in such real estate. Under normal market conditions, at least 80% of
the Fund's total assets will be invested in income-producing equity securities
issued by REITs. It is the Fund's fundamental policy to concentrate its
investments in the U.S. real estate industry (including REITs) and not in any
other industry.
Lower-Rated Securities
Under rating agency guidelines, medium- and lower-rated securities and
comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium- and lower-rated securities may have
poor prospects of ever attaining any real investment standing, may have a
current identifiable vulnerability to default, may be unlikely to have the
capacity to pay interest and repay principal when due in the event of adverse
business, financial or economic conditions, and/or may be likely to be in
default or not current in the payment of interest or principal. Such securities
are considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations.
Accordingly, it is possible that these types of factors could reduce the value
of securities held by the Fund, with a commensurate effect on the asset coverage
on the Preferred Shares.
Changes by recognized rating services in their ratings of any
fixed-income security and in the ability of an issuer to make payments of
interest and principal may also affect the value of these investments. A
description of the ratings of certain rating agencies is set forth in Appendix
A. The ratings generally represent the opinions of those organizations as to the
quality of the securities that they rate. Such ratings, however, are relative
and subjective, are not absolute standards of quality, are subject to change and
do not evaluate the market risk or liquidity of the securities. Ratings of a
non-U.S. debt instrument, to the extent that those ratings are undertaken, are
related to evaluations of the country in which the issuer of the instrument is
located. Ratings generally take into account the currency in which a non-U.S.
debt instrument is denominated.
-3-
The secondary markets for lower-rated securities are generally not as
liquid as the secondary markets for higher rated securities. The secondary
markets for lower-rated securities are concentrated in relatively few market
makers and participants in the market are generally institutional investors,
including insurance companies, banks, other financial institutions and mutual
funds. In addition, the trading volume for lower-rated securities is generally
lower than that for higher-rated securities and the secondary markets could
contract under adverse market or economic conditions independent of any specific
adverse changes in the condition of a particular issuer. These factors may have
an adverse effect on the ability of the Fund to dispose of particular portfolio
investments, may adversely affect the value of the Fund's investment portfolio
and may limit the ability of the Fund to obtain accurate market quotations for
purposes of valuing securities and calculating net asset value. If the Fund is
not able to obtain precise or accurate market quotations for a particular
security, it will become more difficult to value its portfolio securities, and a
greater degree of judgment may be necessary in making such valuations. Less
liquid secondary markets may also affect the ability of the Fund to sell
securities at their fair value. If the secondary markets for lower-rated
securities contract due to adverse economic conditions or for other reasons,
certain liquid securities in the Fund's portfolio may become illiquid and the
proportion of the Fund's assets invested in illiquid securities may
significantly increase.
Prices for lower-rated securities may be affected by legislative and
regulatory developments to a greater extent than higher-rated securities. These
laws could adversely affect the Fund's investment practices and the value of its
investment portfolio, the secondary market for lower-rated securities, the
financial condition of issuers of these securities and the value of outstanding
lower-rated securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in lower-rated bonds and limiting the deductibility of interest by
certain corporate issuers of lower-rated bonds adversely affected the market in
the past.
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher rated securities. In
addition, such securities present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and subordinated to the prior payment of
senior indebtedness. The Fund also may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of principal
or interest on its portfolio holdings.
The Fund may only invest in non-investment grade securities that are
rated CCC or higher by Fitch Ratings ("Fitch") or Standard & Poor's Ratings
Services ("S&P") or Caa or higher by Moody's Investors Service, Inc. ("Moody's")
(or a comparable rating by another nationally recognized statistical rating
agency), or unrated securities determined to be of comparable quality by the
Investment Manager. The issuers of these securities may be in default or have a
currently identifiable vulnerability to default on their payments of principal
and
-4-
interest, or may otherwise be subject to present elements of danger with respect
to payments of principal or interest. The Fund will not invest in securities
that are in default as to payment of principal and interest at the time of
purchase.
Swap Agreements
The Fund may enter into interest rate swap or cap transactions for
purposes of attempting to reduce or eliminate the impact that an increase in
short-term interest rates could have on the Fund's investments and capital
structure. Swap transactions are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged (or
"swapped") between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate or in a "basket" of securities
representing a particular index. Commonly used swap transactions include: (i)
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; (ii) interest rate floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
fall below a specified level, or "floor"; and (iii) interest rate collars, under
which a party sells a cap and purchases a floor or vice versa in an attempt to
protect itself against interest rate movements exceeding given minimum or
maximum levels.
The "notional amount" of the swap transaction is only a fictitious
basis on which to calculate the obligations that the parties to a swap
transaction have agreed to exchange. Most swap transactions entered into by the
Fund would calculate the obligations on a "net basis." Consequently, the Fund's
obligations (or rights) under a swap transaction will generally be equal only to
the net amount to be paid or received under the transaction based on the
relative values of the positions held by each party to the transaction (the "net
amount"). Obligations under a swap transaction will be accrued daily (offset
against amounts owing to the Fund) and any accrued but unpaid net amounts owed
to a swap counterparty will be covered by segregating liquid assets. The Fund
will not enter into a swap transaction with any single party if the net amount
owed to or to be received under existing contracts with that party would exceed
5% of the Fund's total assets.
To the extent that the use of swaps and related transactions reduces
the value of the Fund's investment portfolio, such transactions could reduce
asset coverage on the Preferred Shares or have a negative impact on the Fund's
ability to make dividend payments on the Preferred Shares.
Foreign Securities
The Fund may invest up to 10% of its total assets in the securities of
non-U.S. issuers located in countries that are members of the Organisation For
Economic Co-operation and Development.
-5-
Investors should recognize that investing in the securities of foreign
issuers involves special considerations which are not typically associated with
investing in the securities of U.S. issuers. Investments in securities of
foreign issuers may involve risks arising from differences between U.S. and
foreign securities markets, including less volume, much greater price volatility
in and illiquidity of certain foreign securities markets, different trading and
settlement practices and less (or different) governmental supervision and
regulation, from changes in currency exchange rates, from high and volatile
rates of inflation, from economic, social and political conditions and, as with
domestic multinational corporations, from fluctuating interest rates.
Other investment risks include the possible imposition of foreign
withholding taxes on certain amounts of the Fund's income, the possible seizure
or nationalization of foreign assets and the possible establishment of exchange
controls, expropriation, confiscatory taxation, other foreign governmental laws
or restrictions which might affect adversely payments due on securities held by
the Fund, the lack of extensive operating experience of eligible foreign
sub-custodians and legal limitations on the ability of the Fund to recover
assets held in custody by a foreign sub-custodian or depository in the event of
the sub-custodian's or depository's bankruptcy or other event adversely
affecting such sub-custodian or depository.
In addition, there may be less publicly available information about a
foreign issuer than about a U.S. issuer, and foreign issuers may not be subject
to the same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of a foreign issuer may not reflect its financial
position or results of operations in the way they would be reflected had the
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. In addition, for an issuer that keeps accounting records
in local currency, inflation accounting rules may require, for both tax and
accounting purposes, that certain assets and liabilities be restated on the
issuer's balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses
or profits. Consequently, financial data may be materially affected by
restatements for inflation and may not accurately reflect the real condition of
those issuers and securities markets. Finally, in the event of a default in any
such foreign obligations, it may be more difficult for the Fund to obtain or
enforce a judgment against the issuers of such obligations.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, in some jurisdictions there may be no comparable provisions
under certain foreign laws to insider trading and similar investor protection
securities laws that apply with respect to securities transactions consummated
in the United States. Further, brokerage commissions and other transaction costs
on foreign securities exchanges generally are higher than in the United States.
The manner in which foreign investors may invest in companies in
certain foreign countries, as well as limitations on such investments, also may
have an adverse impact on the operations of the Fund. For example, the Fund may
be required in some countries to invest initially through a local broker or
other entity and then have the purchased shares re-registered in the name of the
Fund. Re-registration may be costly and may in some instances not occur on a
timely basis, resulting in a delay during which the Fund may be denied certain
of its rights as an investor.
-6-
Foreign markets have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Further, satisfactory custodial services for investment
securities may not be available in some countries having smaller capital
markets, which may result in the Fund incurring additional costs and delays in
transporting such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of the Fund are uninvested
and no return is earned thereon. The inability of the Fund to make intended
security purchases due to settlement problems or the risk of intermediary
counterparty failures could cause the Fund to forego attractive investment
opportunities. The inability to dispose of a portfolio security due to
settlement problems could result either in losses to the Fund due to subsequent
declines in the value of such portfolio security or, if the Fund has entered
into a contract to sell the security, could result in possible liability to the
purchaser.
Rules adopted under the Investment Company Act of 1940, as amended (the
"1940 Act"), permit the Fund to maintain its foreign securities and cash in the
custody of certain eligible non-U.S. banks and securities depositories. Certain
banks in foreign countries may not be "eligible sub-custodians," as defined in
the 1940 Act, for the Fund, in which event the Fund may be precluded from
purchasing securities in certain foreign countries in which it otherwise would
invest or may incur additional costs and delays in providing transportation and
custody services for such securities outside of such countries. The Fund may
encounter difficulties in effecting, on a timely basis, portfolio transactions
with respect to any securities of issuers held outside their countries. Other
banks that are eligible foreign sub-custodians may be recently organized or
otherwise lack extensive operating experience. In addition, in certain countries
there may be legal restrictions or limitations on the ability of the Fund to
recover assets held in custody by foreign sub-custodians in the event of the
bankruptcy of the sub-custodian.
Illiquid Securities
The Fund may invest in securities that are illiquid so long as no more
than 10% of the total assets of the Fund (taken at market value at the time of
investment) would be invested in such securities. The above limitation applies
only at the time a security is purchased, and the Fund is not required to
dispose of securities if, due to market movements, greater than 10% of the
Fund's total assets are invested in illiquid securities. The term "illiquid
securities" for these purposes means securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the securities. The staff of the SEC is presently
of the view that repurchase agreements maturing in more than seven days are
subject to this restriction. Until that position is revised, modified or
rescinded, the Fund will conduct its operations in a manner consistent with this
view. This limitation on investment in illiquid securities does not apply to
certain restricted securities, including securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial paper, that AEW
Management and Advisors, L.P. (the "Investment Manager") has determined to be
liquid under procedures approved by the Board of Trustees.
The Board of Trustees has delegated to the Investment Manager the
day-to-day determination of the illiquidity of any security held by the Fund,
although it has retained oversight and ultimate responsibility for such
determinations. Certain illiquid securities may
-7-
require pricing at fair value as determined in good faith under the supervision
of the Board of Trustees. See "Determination of Net Asset Value." The Investment
Manager may be subject to significant delays in disposing of illiquid securities
held by the Fund, and transactions in illiquid securities may entail
registration expenses and other transaction costs that are higher than those for
transactions in liquid securities. If adverse market conditions were to develop
during any such delay, the Fund might obtain a less favorable price than that
which prevailed when it decided to sell.
As discussed in the Prospectus under "Interest Rate Transactions," the
Fund intends to segregate cash or liquid securities with its custodian having a
value at least equal to the Fund's net payment obligations under any swap
transaction, as marked to market daily. The Fund will treat such amounts as
illiquid for purposes of its 10% limit on investments in illiquid securities.
Other Investment Companies
The Fund may invest in securities of open- or closed-end investment
companies that invest primarily in investments of the types in which the Fund
may invest directly. The Fund may invest in other investment companies either
during periods when it has large amounts of uninvested cash, such as the period
shortly after the Fund receives the proceeds of the offering of the Preferred
Shares, during periods when there is a shortage of attractive, real
estate-related investments available in the market, to gain exposure to foreign
markets, when the Investment Manager believes share prices of other investment
companies offer attractive values or when it believes such investments are
attractive investment opportunities. The Fund may invest in investment companies
that are advised by the Investment Manager or its affiliates (including
affiliated money market and short-term bond funds) to the extent permitted by
applicable law and/or pursuant to exemptive relief from the SEC. As a
stockholder in an investment company, the Fund will bear its ratable share of
that investment company's expenses and Fund shareholders would remain subject to
payment of the Fund's management fees with respect to assets so invested.
Holders of Common Shares ("Common Shareholders") would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. The Investment Manager will take expenses into account when
evaluating the investment merits of an investment in an investment company
relative to other investments. In addition, the securities of other investment
companies may also be leveraged and will therefore be subject to the same
leverage risks described in the Prospectus and herein. As described in the
Prospectus in the section entitled "Principal Risks of the Fund--General Risks
of Investing in the Fund--Leverage Risks," because the Fund utilizes leverage,
the value of the Fund's investment portfolio will tend to fluctuate more than if
it did not use leverage.
U.S. Government Securities
U.S. Government securities are obligations of, or guaranteed by, the
U.S. Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Fund's shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association, are supported by the full faith
and credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others, such as those of the
-8-
Student Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government-sponsored instrumentalities if it is not
obligated to do so by law. U.S. Government securities include securities that
have no coupons, or have been stripped of their unmatured interest coupons,
individual interest coupons from such securities that trade separately and
evidences of receipt of such securities. Such securities may pay no cash income,
and are purchased at a deep discount from their value at maturity. Custodial
receipts issued in connection with so-called trademark zero-coupon securities,
such as CATs and TIGRs, are not issued by the U.S. Treasury, and are therefore
not U.S. Government securities, although the underlying bond represented by such
receipt is a debt obligation of the U.S. Treasury. Other zero-coupon Treasury
securities (e.g., STRIPs and CUBEs) are direct obligations of the U.S.
Government.
Corporate Bonds
The Fund may invest in a wide variety of debt obligations of varying
maturities issued by U.S. and foreign corporations and other business entities,
including REITs. Bonds are fixed or variable rate debt obligations, including
bills, notes, debentures and similar instruments and securities. Bonds generally
are used by corporations and other issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and normally must
repay the amount borrowed on or before maturity. Certain bonds are "perpetual"
in that they have no maturity date. The Fund will invest in U.S.
dollar-denominated corporate bonds and may also invest in bonds denominated in
foreign currencies in accordance with the Fund's investment objectives and
policies as described in the Prospectus. The Fund has the flexibility to invest
in corporate bonds that are below investment grade quality. See "- Lower-Rated
Securities" above.
Many bonds, especially those issued at high interest rates, provide
that the issuer may repay them early. Issuers often exercise this right when
interest rates decline. Accordingly, holders of securities that may be called or
prepaid may not benefit fully from the increase in value that other fixed income
securities experience when rates decline. Furthermore, the Fund reinvests the
proceeds of the payoff at current yields, which typically are lower than those
paid by the security that was paid off. This is commonly known as "prepayment
risk."
Convertible Securities
The Fund may invest in convertible securities. A convertible debt
security is a bond, debenture, note, or other security that entitles the holder
to acquire common stock or other equity securities of the same or a different
issuer. Similarly, certain classes of preferred stock are convertible, meaning
the preferred stock is convertible into shares of common stock of the issuer. A
convertible security generally entitles the holder to receive interest or
dividends paid or accrued until the convertible security matures or is redeemed,
converted or exchanged. By holding a convertible security, the Fund can receive
a steady stream of interest payments or dividends and still have the option to
convert the security to common stock.
As a fixed income security, a convertible debt or equity security
tends to increase in market value when interest rates decline and to decrease
in value when interest rates rise. While
-9-
convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality, their value tends to increase as
the market value of the underlying stock increases and to decrease when the
value of the underlying stock decreases.
Convertible securities generally rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock. A convertible security may be subject to
redemption at the option of the issuer at a predetermined price. If a
convertible security held by the Fund is called for redemption, the Fund would
be required to permit the issuer to redeem the security and convert it to
underlying common stock, or would sell the convertible security to a third
party.
The Fund may also invest in so-called "synthetic convertible
securities," which are composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, the Fund may purchase a non-convertible debt security
and a warrant or option. The synthetic convertible differs from the true
convertible security in several respects. Unlike a true convertible security,
which is a single security having a unitary market value, a synthetic
convertible comprises two or more separate securities, each with its own market
value. Therefore, the "market value" of a synthetic convertible is the sum of
the values of its fixed income component and its convertible component. For this
reason, the values of a synthetic convertible and a true convertible security
may respond differently to market fluctuations.
Short Sales
A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will
decline. The Fund will not enter into short sales except for interest rate
hedging purposes as described in the Prospectus.
When the Fund makes a short sale on a security, it must borrow the
security sold short and deliver it to the broker-dealer through which it made
the short sale as collateral for its obligation to deliver the security upon
conclusion of the sale. The Fund may have to pay a fee to borrow particular
securities and is often obligated to pay over any accrued interest and dividends
on such borrowed securities.
If the price of the security sold short increases between the time of
the short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will realize a
capital gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer. A short sale is "against the box" to the extent
that the Fund contemporaneously owns, or has the right to obtain at no added
cost, securities identical to those sold short. The Fund may also engage in
so-called "naked" short sales (i.e., short sales that are not "against the
box"), in which case the Fund's losses could theoretically be unlimited, in
cases where the Fund is unable for whatever reason to close out its short
position.
-10-
Derivative Instruments
The Fund may invest in derivatives for interest rate hedging purposes
as described in the Prospectus. The Fund may purchase and sell (write) both put
options and call options on securities, swap agreements, and securities indexes,
and enter into interest rate and index futures contracts and purchase and sell
options on such futures contracts ("futures options") for these purposes. The
Fund may also use other types of instruments that are currently available or
that may be introduced in the future, including other types of options, futures
contracts or futures options, provided that their use is consistent with the
Fund's investment objectives.
The value of some derivative instruments in which the Fund may invest
may be particularly sensitive to changes in prevailing interest rates, and, like
the other investments of the Fund, the ability of the Fund to utilize these
instruments successfully may depend in part upon the ability of the Investment
Manager to forecast interest rates and other economic factors correctly. If the
Investment Manager incorrectly forecasts such factors and has taken positions in
derivative instruments contrary to prevailing market trends, the Fund could be
exposed to the risk of loss.
The Fund might not employ any derivatives, and no assurance can be
given that any strategy used will succeed. If the Investment Manager incorrectly
forecasts interest rates, market values or other economic factors in utilizing a
derivatives strategy for the Fund, the Fund might have been in a better position
if it had not entered into the transaction at all. Also, suitable derivative
transactions may not be available in all circumstances. The use of these
strategies involves certain special risks, including a possible imperfect
correlation, or even no correlation, between price movements of derivative
instruments and price movements of related investments. While some strategies
involving derivative instruments can reduce the risk of loss, they can also
reduce the opportunity for gain or even result in losses by offsetting favorable
price movements in related investments or otherwise, due to the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable or the possible need to sell a portfolio security
at a disadvantageous time because the Fund is required to maintain asset
coverage or offsetting positions in connection with transactions in derivative
instruments and due to the possible inability of the Fund to close out or to
liquidate its derivatives positions.
Short-Term Investments and Borrowings
In anticipation of or in response to adverse market conditions, for
cash management purposes, or for defensive purposes, the Fund may invest up to
100% of its net assets in cash equivalents and short-term fixed-income
securities. The Fund would be unable to achieve its investment objectives if a
substantial portion of its assets consisted of such investments. Short-term
fixed income investments include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities issued
by (a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration and the
Government National
-11-
Mortgage Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities
are supported by the right of the agency to borrow from the U.S. Treasury; (c)
the Federal National Mortgage Association, whose securities are supported by the
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its credit. While the U.S.
Government provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do so since
it is not so obligated by law. The U.S. Government, its agencies and
instrumentalities do not guarantee the market value of their securities.
Consequently, the value of such securities may fluctuate.
(2) Certificates of Deposit issued against funds deposited in a bank or
a savings and loan association. Such certificates are for a definite period of
time, earn a specified rate of return, and are normally negotiable. The issuer
of a certificate of deposit agrees to pay the amount deposited plus interest to
the bearer of the certificate on the date specified thereon. Under current FDIC
regulations, the maximum insurance payable as to any one certificate of deposit
is $100,000; therefore, certificates of deposit purchased by the Fund may not be
fully insured.
(3) Repurchase agreements, which involve purchases of debt securities.
At the time the Fund purchases securities pursuant to a repurchase agreement, it
simultaneously agrees to resell and redeliver such securities to the seller, who
also simultaneously agrees to buy back the securities at a fixed price and time.
This assures a predetermined yield for the Fund during its holding period, since
the resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the Fund to
invest temporarily available cash. The Fund may enter into repurchase agreements
only with respect to obligations of the U.S. Government, its agencies or
instrumentalities; certificates of deposit; or bankers' acceptances in which the
Fund may invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund is limited to
the ability of the seller to pay the agreed-upon sum on the repurchase date; in
the event of default, the repurchase agreement provides that the Fund is
entitled to sell the underlying collateral. If the value of the collateral
declines after the agreement is entered into, and if the seller defaults under a
repurchase agreement when the value of the underlying collateral is less than
the repurchase price, the Fund could incur a loss of both principal and
interest. The Investment Manager monitors the value of the collateral at the
time the action is entered into and at all times during the term of the
repurchase agreement. The Investment Manager does so in an effort to determine
that the value of the collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Fund. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of the Fund to liquidate the
collateral could be delayed or impaired because of certain provisions of the
bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory
notes, including variable rate master demand notes issued by corporations to
finance their current operations. Investments in commercial paper will be
limited to commercial paper rated in the highest categories by a major rating
agency and which mature within one year of the date of purchase or carry a
variable or floating rate of interest. Master demand notes are direct lending
arrangements between the Fund and a corporation. There is no secondary market
for such notes.
-12-
However, they are redeemable by the Fund at any time. The Investment Manager
will consider the financial condition of the corporation (e.g., earning power,
cash flow, and other liquidity measures) and will continuously monitor the
corporation's ability to meet all of its financial obligations, because the
Fund's liquidity might be impaired if the corporation were unable to pay
principal and interest on demand.
(5) Shares of other investment companies that in turn invest in
short-term investments, such as money market mutual funds. Subject to certain
restrictions contained in any applicable exemptive order issued by the SEC,
these investments may include investment companies such as money market funds
advised or subadvised by the Investment Manager or its affiliates.
The Fund may borrow money for temporary administrative purposes.
Subject to the terms of any applicable exemptive relief granted by the SEC, the
Fund may borrow for such purposes from other investment companies advised by the
Investment Manager or its affiliates in an inter-fund loan program. In such a
program, the Fund and affiliated funds would be permitted to lend and borrow
money for certain temporary purposes directly to and from one another.
Participation in such an inter-fund lending program would be voluntary for both
borrowing and lending funds, and the Fund would participate in an inter-fund
loan program only if the Board of Trustees determined that doing so would
benefit the Fund. Should the Fund participate in such an inter-fund lending
program, the Board of Trustees would establish procedures for the operation of
the program by the Investment Manager or an affiliate.
Portfolio Turnover
The Fund may engage in frequent and active portfolio trading when the
Investment Manager considers it to be appropriate, but the Fund will not use
short-term trading as the primary means of achieving its investment objectives.
Although the Fund cannot accurately predict its annual portfolio turnover rate,
it is not expected to exceed 100% under normal circumstances. However, there are
no limits on the rate of portfolio turnover, and investments may be sold without
regard to the length of time held when, in the opinion of the Investment
Manager, investment considerations warrant such action. A higher turnover rate
results in correspondingly greater brokerage commissions and other transactional
expenses that are borne by the Fund. High portfolio turnover may result in the
increased realization of net short-term capital gains by the Fund that, when
distributed to shareholders, will be taxable as ordinary income. See "Taxation."
Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of
the Fund and/or the Investment Manager due to their possible affiliations with
CDC IXIS Asset Management North America, L.P. Absent an exemption from the SEC
or other regulatory relief, the Fund is generally precluded from effecting
certain principal transactions with affiliated brokers, and its ability to
purchase securities being underwritten by an affiliated broker or a syndicate
including an affiliated broker or to utilize affiliated brokers for agency
transactions is subject to regulatory and other restrictions. This could limit
the Fund's ability to engage in securities transactions and take advantage of
market opportunities.
-13-
Other Investments; New Securities and Other Investment Techniques.
Although the Fund invests primarily in the securities of Real Estate
Companies, it may from time to time also invest in equity or debt securities of
issuers in other industries. Such investments may be subject to different or
additional risks, including, among others, the risk that market prices of equity
securities may rise and fall rapidly and unpredictably and the risk that debt
securities may lose value when interest rates rise.
New types of securities and other investment and hedging practices are
developed from time to time. The Investment Manager expects, consistent with the
Fund's investment objectives and policies, to invest in such new types of
securities and to engage in such new types of investment practices if the
Investment Manager believes that these investments and investment techniques may
assist the Fund in achieving its investment objectives. In addition, the
Investment Manager may use investment techniques and instruments that are not
specifically described herein.
INVESTMENT RESTRICTIONS
The investment objectives and the general investment policies and
investment techniques of the Fund are described in the Prospectus. The Fund's
investment objectives are fundamental, and the Fund has also adopted the
following investment restrictions as fundamental policies. The Fund's investment
objectives and the following investment restrictions may not be changed without
the approval of the holders of a majority of the outstanding shares (as defined
in the 1940 Act) of the Fund.
Under these policies:
(1) The Fund may not make short sales of securities or maintain a short
position or purchase securities on margin, except that the Fund may obtain
short-term credits as necessary for the clearance of security transactions, and
the Fund may make any short sales or maintain any short positions where the
short sales or short positions would not constitute "senior securities" under
the 1940 Act.
(2) The Fund may borrow money to the maximum extent permitted by law,
including without limitation (i) borrowing from banks or entering into reverse
repurchase agreements, or employing similar investment techniques, and pledging
its assets in connection therewith, and (ii) entering into reverse repurchase
agreements and transactions in options, futures, options on futures, and forward
foreign currency contracts.
(3) The Fund may not make loans, except that the Fund may purchase or
hold debt instruments in accordance with its investment objectives and policies.
This restriction does not apply to repurchase agreements or loans of portfolio
securities.
(4) The Fund may not act as an underwriter of securities of other
issuers except that, in the disposition of portfolio securities, it may be
deemed to be an underwriter under the federal securities laws.
-14-
(5) The Fund may not purchase or sell real estate, although it may
purchase securities of real estate investment trusts, issuers which deal in real
estate, securities which are secured by interests in real estate, and securities
which represent interests in real estate, and it may acquire and dispose of real
estate or interests in real estate acquired through the exercise of its rights
as a holder of debt obligations secured by real estate or interests therein.
(6) The Fund may not purchase or sell commodities, except that the Fund
may purchase and sell futures contracts and options, may enter into foreign
exchange contracts and may enter into swap agreements and other financial
transactions not requiring the delivery of physical commodities.
(7) The Fund may not issue senior securities, except for permitted
borrowings or as otherwise permitted under the 1940 Act.
In addition to these investment restrictions, the Fund will make
investments that will result in the concentration (as that term may be defined
by or interpreted under the 1940 Act and the rules and regulations thereunder)
of its investments in the securities of issuers primarily engaged in the real
estate industry (including real estate investment trusts) and not in any other
industry. This restriction does not apply to U.S. Government securities. For
purposes of this restriction, telephone, gas and electric public utilities are
each regarded as separate industries and finance companies whose financing
activities are related primarily to the activities of their parent companies are
classified in the industry of their parents. For purposes of this restriction
with regard to bank obligations, bank obligations are considered to be one
industry, and asset-backed securities are not considered to be bank obligations.
This policy may not be changed without the approval of the holders of a
"majority of the outstanding shares" (as defined in the 1940 Act) of the Fund.
In addition to the fundamental investment policies identified as such
above, the Fund has adopted, among others, the following non-fundamental
investment policy. Under normal market conditions, the Fund will invest at least
90% of its total assets in common shares, preferred shares, convertible
preferred shares and debt securities issued by Real Estate Companies (as defined
in this Statement of Additional Information) ("Basket Investments"). The Board
of Trustees of the Fund may change the preceding policy without shareholder
approval. However, so long as it is required by applicable law, the Fund will
not change the policy in order to reduce below 80% the portion of its net assets
(plus any borrowings for investment purposes) that the Fund will invest, under
normal market conditions, in Basket Investments unless it provides shareholders
with at least 60 days' written notice of such change.
The percentages and percentage limitations set forth above or in the
Prospectus, other than with respect to restriction (2) pertaining to borrowing,
will apply at the time of the purchase of a security and shall not be considered
violated unless an excess or deficiency occurs or exists immediately after and
as a result of a purchase of such security. Restrictions (1) and (7) shall be
interpreted based upon no-action letters and other pronouncements of the SEC or
its staff. Under current pronouncements, certain Fund positions are excluded
from the definition of "senior security" so long as the Fund maintains adequate
cover, segregation of assets or otherwise.
-15-
It is a condition of closing this offering that the Preferred Shares be
offered with a credit quality rating of "Aaa" from Moody's and of "AAA" from
Fitch. In order to obtain and maintain the required ratings, the Fund may be
required to comply with investment quality, diversification and other guidelines
established by such rating agencies. Such guidelines will likely be more
restrictive than the restrictions set forth above. The Fund does not anticipate
that such guidelines would have a material adverse effect on Common Shareholders
or the Fund's ability to achieve its investment objectives. Moody's and Fitch
receive fees in connection with their ratings issuances.
MANAGEMENT OF THE FUND
The Fund is governed by a Board of Trustees, which is responsible for
generally overseeing the conduct of Fund business and for protecting the
interests of shareholders. Subject to Massachusetts law and the provisions of
the Fund's Amended and Restated Agreement and Declaration of Trust and Amended
and Restated Bylaws (the "Bylaws"), the Trustees have all power necessary and
convenient to carry out this responsibility, including the election and removal
of the Fund's officers. The Trustees meet periodically throughout the year to
oversee the Fund's activities, review contractual arrangements with companies
that provide services to the Fund and review the Fund's performance.
The table below provides certain information regarding the Trustees and
officers of the Fund. For purposes of this table and for purposes of this
Statement, the term "Independent Trustee" means those Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Fund and, when
applicable, who have no direct or indirect financial interest in the approval of
a matter being voted on by the Board of Trustees. For purposes of this Statement
of Additional Information, the term "Interested Trustee" means those Trustees
who are "interested persons" of the Fund and, when applicable, who have a direct
or indirect financial interest in the approval of a matter being voted on by the
Board of Trustees.
---------------------------------------------------------------------------------------------------------------------------
Term of Number of
Office and Portfolios
Position(s) Length of Principal Occupation(s) in Fund
Held with Time During Past Complex
Name, Age and Address Fund Served 5 Years Overseen Other Directorships Held
---------------------- ---- ------ ------- -------- ------------------------
---------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
---------------------------------------------------------------------------------------------------------------------------
Graham T. Allison, Jr. (62) Trustee Term Douglas Dillon Professor 28 Director, Taubman Centers,
399 Boylston Street Contract expires and Director for the Inc.
Boston, MA 02116 Review and in 2003* Belfer Center of Science Board Member, USEC Inc.
Governance and International
Committee Since Affairs, John F. Kennedy
Member inception School of Government,
(October Harvard University
2002)
---------------------------------------------------------------------------------------------------------------------------
Daniel M. Cain (57) Trustee Term President and CEO, Cain 28 Trustee, Universal Health
452 Fifth Avenue Chairman expires Brothers & Company, Realty Income Trust
New York, NY 10018 of the in 2004* Incorporated (investment Director, eBenX, Inc.
Audit banking) Director, PASC
Committee Since
inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
Kenneth J. Cowan (70) Trustee Term Retired 28 None
399 Boylston Street Chairman expires
Boston, MA 02116 of the in 2004*
Contract
Review and
---------------------------------------------------------------------------------------------------------------------------
-16-
---------------------------------------------------------------------------------------------------------------------------
Term of Number of
Office and Portfolios
Position(s) Length of Principal Occupation(s) in Fund
Held with Time During Past Complex
Name, Age and Address Fund Served 5 Years Overseen Other Directorships Held
---------------------- ---- ------ ------- -------- ------------------------
---------------------------------------------------------------------------------------------------------------------------
Governance Since
Committee inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
Richard Darman (59) Trustee Term Partner, The Carlyle 28 Director, Frontier
399 Boylston Street Contract expires Group (investments); Ventures Corporation
Boston, MA 02116 Review and in 2003* Professor, John F. Director, Neptune
Governance Kennedy School of Communications Corporation
Committee Since Government, Harvard Director, Enumerate
Member inception University Solutions, Inc.
(October Director, AES Corp.
2002)
---------------------------------------------------------------------------------------------------------------------------
Sandra O. Moose (60) Trustee Term Senior Vice President 28 Director, Verizon
Exchange Place Audit expires and Director, The Boston Communications
Boston, MA 02109 Committee in 2005* Consulting Group, Inc. Director, Rohm and Haas
Member (management Company
Since consulting)
inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
John A. Shane (69) Trustee Term President, Palmer 28 Director, Eastern Bank
200 Unicorn Park Drive Audit expires Service Corporation Corporation; Director,
Woburn, MA 01801 Committee in 2005* (venture capital Gensym Corporation;
Member organization) Director, Overland
Since Storage, Inc.
inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
Pendleton P. White (71) Trustee Term Retired 28 None
6 Breckenridge Lane Contract expires
Savannah, GA 31411 Review and in 2003*
Governance
Committee Since
Member inception
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
---------------------------------------------------------------------------------------------------------------------------
John T. Hailer** (41) President Term as President and Chief 28 None
399 Boylston Street and Chief Trustee Executive Officer, CDC
Boston, MA 02116 Executive expires IXIS Asset Management
Officer in 2004* Distributors, L.P.;
Trustee Director and Executive
Since Vice President of CDC
inception IXIS Asset Management
(October Distribution Corporation
2002) ("CDC IXIS Distribution
Corporation"); and
President and Chief
Executive Officer of CDC
IXIS Asset Management
Advisers, L.P. ("CDC
IXIS Advisers");
formerly, Senior Vice
President, Fidelity
Investments
---------------------------------------------------------------------------------------------------------------------------
Peter S. Voss*** (55) Chairman Term Director, President and 28 Trustee, Harris Associates
399 Boylston Street of the expires Chief Executive Officer, Investment Trust****
Boston, MA 02116 Board in 2005* CDC IXIS Asset
Trustee Since Management North
inception America, L.P.
(October
2002)
---------------------------------------------------------------------------------------------------------------------------
OFFICERS
---------------------------------------------------------------------------------------------------------------------------
James J. Finnegan (42) Chief Not AEW Management and N/A N/A
399 Boylston Street Operating Applicable Advisors, L.P., -
---------------------------------------------------------------------------------------------------------------------------
-17-
---------------------------------------------------------------------------------------------------------------------------
Term of Number of
Office and Portfolios in
Position(s) Length of Principal Occupation(s) Fund
Held with Time During Past Complex
Name, Age and Address Fund Served 5 Years Overseen Other Directorships Held
---------------------- ---- ------ ------- -------- ------------------------
---------------------------------------------------------------------------------------------------------------------------
Boston, MA 02116 Officer (October Counsel,
2002) Managing Director, Vice
President and Clerk,
December 1996 to
present; AEW Capital
Management, L.P. -
General Counsel and
Principal, January 2000
to present, Assistant
General Counsel and Vice
President, December 1996
to January 2000; AEW
Advisors, Inc. -
Managing Director and
Vice President, December
1996 to Present; AEW
Investment Group, Inc. -
Vice President and
Assistant Clerk,
December 1996 to
Present; AEW Real Estate
Advisors, Inc. - Vice
President and Assistant
Clerk, December 1996 to
Present; Aldrich,
Eastman & Waltch, L.P.
- Assistant General
Counsel and Vice
President, October 1994
to December 1996;
Capital Management
Resources, L.P. -
General Counsel and Vice
President, July 1993 to
October 1994
---------------------------------------------------------------------------------------------------------------------------
Mark E. Bradley (42) Treasurer Not Senior Vice President N/A N/A
399 Boylston Street Applicable and Deputy Treasurer,
Boston, MA 02116 CDC IXIS Asset
Since Management Services,
inception Inc.; Vice President and
(October Assistant Treasurer, MFS
2002) Investment Management,
1997-2002; Vice
President, Putnam
Investments, 1994 to
1997; Senior Tax
Manager, Ernst & Young
LLP, 1985 to 1994
---------------------------------------------------------------------------------------------------------------------------
John E. Pelletier (38) Secretary Not Senior Vice President, N/A N/A
399 Boylston Street and Clerk Applicable General Counsel,
Boston, MA 02116 Secretary and Clerk, CDC
Since IXIS Distribution
inception Corporation; Senior Vice
(October President, General
2002) Counsel, Secretary and
Clerk, CDC IXIS Asset
Management Distributors,
L.P.; Senior Vice
President, General
Counsel, Secretary and
Clerk, CDC IXIS Asset
Management Advisers,
L.P.; Executive Vice
President, General
Counsel, Secretary,
Clerk, and Director, CDC
IXIS Asset Management
Services, Inc.;
formerly, Senior Vice
President and General
Counsel, Funds
Distributor, Inc.;
formerly, Vice President
and General Counsel,
Boston Institutional
Group; formerly, Senior
Vice President and
General Counsel,
Financial Research
---------------------------------------------------------------------------------------------------------------------------
-18-
---------------------------------------------------------------------------------------------------------------------------
Term of Number of
Office and Portfolios in
Position(s) Length of Principal Occupation(s) Fund
Held with Time During Past Complex
Name, Age and Address Fund Served 5 Years Overseen Other Directorships Held
---------------------- ---- ------ ------- -------- ------------------------
---------------------------------------------------------------------------------------------------------------------------
Corporation
---------------------------------------------------------------------------------------------------------------------------
*Subject to a Trustee's earlier retirement, resignation, disqualification
or removal from the Board. The current retirement age is 72.
**Mr. Hailer is an "interested person" of the Fund because he holds the
following positions with affiliated persons of the Fund: President and
Chief Executive Officer of CDC IXIS Asset Management Distributors, L.P.;
Director and Executive Vice President of CDC IXIS Distribution Corporation;
and President and Chief Executive Officer of CDC IXIS Advisers.
***Mr. Voss is an "interested person" of the Fund because he holds the
following positions with affiliated persons of the Fund: Director of CDC
IXIS Asset Management Services, Inc.; Director of CDC IXIS Distribution
Corporation; Director, President and Chief Executive Officer of CDC IXIS
Asset Management North America, L.P.; Director of AEW Capital Management,
Inc.; Director of Harris Associates, Inc.; Director of Jurika & Voyles,
Inc.; Director of Loomis, Sayles & Company, Inc.; Director of Reich & Tang
Asset Management Inc.; Director of Westpeak Investment Advisors, Inc.; and
Director of Vaughan, Nelson, Scarborough & McCullough, Inc.
****As of December 31, 2002, Harris Associates Investment Trust had [seven]
series that were overseen by its Board of Trustees.
Each Trustee of the Fund also serves as a trustee for CDC Nvest Funds
Trust I, II and III, CDC Nvest Companies Trust I, CDC Nvest Cash Management
Trust-Money Market Series and CDC Nvest Tax Exempt Money Market Trust
(collectively, the "CDC Nvest Trusts"), each of which is advised by affiliates
of the Investment Manager. Previous positions during the past five years with
CDC IXIS Asset Management Distributors, L.P. or CDC IXIS Advisers are omitted,
if not materially different from a trustee's or officer's current position with
such entity.
The Common Shareholders and the holders of the Preferred Shares
("Preferred Shareholders") will elect Trustees to fill the vacancies of Trustees
whose term expires at each annual meeting of shareholders. While the Preferred
Shares are outstanding, the Preferred Shareholders will be entitled to elect two
Trustees and the remaining Trustees shall be elected by Common Shareholders and
Preferred Shareholders, voting together as a single class, in each case in
accordance with the Fund's staggered board structure (see "Anti-Takeover and
Other Provisions in the Declaration of Trust"). Preferred Shareholders will be
entitled to elect a majority of the Fund's Trustees under certain circumstances.
The following table states the dollar range of equity securities
beneficially owned by each Trustee in the Fund and, on an aggregate basis, in
any registered investment companies overseen by the Trustees in the Fund's
"family of investment companies," which includes CDC Nvest AEW Real Estate Fund
(a series of CDC Nvest Companies Trust I), an open-end investment company that
is managed by the Investment Manager.
-19-
----------------------------------------------------------------------------------------------------------------------
Aggregate Dollar Range of Equity
Securities in All Funds Overseen by
Dollar Range of Equity Trustee in Family of Investment
Name of Trustee/1/ Securities in the Fund Companies
----------------- ------------------------ ------------
----------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
----------------------------------------------------------------------------------------------------------------------
[To be provided] [To be provided]
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES
----------------------------------------------------------------------------------------------------------------------
[To be provided] [To be provided]
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
(1) Except as disclosed above, no Trustee of the Fund owns securities of the
Fund or CDC Nvest AEW Real Estate Fund. Information about ownership is shown as
of December 31, 2002 for the CDC Nvest AEW Real Estate Fund. Because the Fund is
newly organized, information about ownership of its securities is shown as
of________, 2003.
Standing Board Committees
The Contract Review and Governance Committee of the Fund is comprised
solely of Independent Trustees and considers matters relating to advisory,
subadvisory and distribution arrangements, potential conflicts of interest
between the Investment Manager and the Fund, and governance matters relating to
the Fund.
The Audit Committee of the Fund is comprised solely of Independent
Trustees and considers matters relating to the scope and results of the Fund's
audits and serves as a forum in which the independent accountants can raise any
issues or problems identified in the audit with the Board of Trustees. This
Committee also reviews and monitors compliance with stated investment objectives
and policies, SEC and Treasury regulations as well as operational issues
relating to the transfer agent, auction agent, administrator, sub-administrator
and custodian.
Each Committee of the Board has held [one] meeting to date.
Trustee Fees
The Fund pays no compensation to its officers or to its Interested
Trustees. Each other Trustee of the Fund receives a fee of $2,000 annually for
serving as a Trustee of the Fund, and a fee of $375 and related expenses for
each meeting of the Board of Trustees attended. Each Committee member receives a
fee of $2,000 annually for Committee service, and will also receive a meeting
fee of $200 for each additional meeting after the first four meetings of a
Committee during a given year. In addition, the Chairpersons of the Contract
Review and Governance and Audit Committees each receive an additional fee of
$1,000 per year.
During the year ended December 31, 2002 (the fiscal year ended January
31, 2003, for CDC Nvest Companies Trust I), the Trustees of the Fund received
the amounts set forth in the following table for serving as trustees of the CDC
Nvest Trusts. The table also includes amounts paid to the Trustees by the Fund
for service as Trustees during the partial fiscal year ended January 31, 2003.
-20-
Pension or Total
Compensation from Retirement Estimated Compensation
the Fund for the Benefits Annual from the
Fiscal Year Accrued as Benefits CDC Nvest
Ending January Part of Fund Upon Trusts and the
Name of Trustee 31, 2003 Expenses* Retirement* Fund*+
--------------- -------- ---------- ----------- ------
INDEPENDENT
Graham T. Allison, Jr. $ $0 $0 $
Daniel M. Cain $ $0 $0 $
Kenneth J. Cowan $ $0 $0 $
Richard Darman $ $0 $0 $
Sandra O. Moose $ $0 $0 $
John A. Shane $ $0 $0 $
Pendleton P. White $ $0 $0 $
INTERESTED
Peter S. Voss $0 $0 $0 $0
John T. Hailer $0 $0 $0 $0
-----------------------------------------
+Total Compensation represents amounts paid during 2002 (during the
fiscal year ended January 31, 2003, for CDC Nvest Companies Trust I) to a
trustee for serving on the board of trustees of 6 trusts with a total of 27
funds as of December 31, 2001, as well as amounts paid by the Fund during the
fiscal year ended January 31, 2003. Amounts include payments deferred by
Trustees for 2002 (for the year ended January 31, 2003, for CDC Nvest Companies
Trust I).
The Fund provides no pension or retirement benefits to its Trustees.
Shareholders
As of _________, 2003, the following person owned of record the number
of Common Shares noted below, representing the indicated percentage of the
Fund's outstanding shares as of such date and, except as noted below, no other
person owned of record or, to the knowledge of the Fund, owned beneficially 5%
or more of any class of shares of the Fund.
Shareholder Number of Common Percentage of the Fund's
Shares Outstanding Shares as of
_________, 2003
Cede & Co.
55 Water Street, 25/th/ Floor
New York, New York 10041-0001
-21-
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager
The Investment Manager has been retained to provide investment advice,
and, in general, to conduct the management and investment program of the Fund
under the overall supervision and control of the Trustees of the Fund. The
Investment Manager is a real estate investment advisory firm that provides
investment management and related services to institutional and retail
investors. The Investment Manager employs 180 investment professionals in
offices located in Boston, Los Angeles, Washington, DC, and London and utilizes
the resources of a dedicated in-house research group in place since 1988.
Together with its affiliates operating under the AEW name, the Investment
Manager managed approximately $___ billion of client capital as of December 31,
2002 (approximately $7.0 billion as of June 30, 2002), including the assets of
some of the nation's leading public and private pension funds, union retirement
funds, and university endowments. The Investment Manager managed approximately
$___ billion in REIT securities as of December 31, 2002 ($1.7 billion as of June
30, 2002). The Investment Manager's address is Two Seaport Lane, World Trade
Center East, Boston, Massachusetts 02210.
The Investment Manager is a registered investment adviser whose origins
date back to 1981. The Investment Manager is a limited partnership that is a
controlled affiliate of AEW Capital Management, L.P., which in turn is a
wholly-owned subsidiary of CDC IXIS Asset Management Holdings, LLC, which in
turn is a wholly-owned subsidiary of CDC IXIS Asset Management North America,
L.P. ("CDC IXIS North America"). CDC IXIS North America owns the entire limited
partnership interest in the Investment Manager. CDC IXIS North America, together
with its subsidiaries and affiliates in the U.S., Europe and Asia, managed
approximately $___ billion in assets for institutions and individuals as of
December 31, 2002 (approximately $310 billion as of June 30, 2002).
Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Trustees of the Fund.
Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of .80% of the
average daily value of the managed assets (which include the liquidation
preference on any preferred shares of the Fund (including the Preferred Shares)
and the principal amount on any borrowings used for leverage) of the Fund,
subject to certain fee waivers described in the Prospectus. During the time in
which the Fund is utilizing leverage, the fees paid to the Investment Manager
and its affiliates for investment management, administrative and other services
will be higher than if the Fund did not utilize leverage because the fees paid
will be calculated based on the Fund's managed assets, which include the
liquidation preference of any preferred shares of the Fund (including the
Preferred Shares) and the principal amount of any borrowings used for leverage.
Only the Fund's Common Shareholders bear the Fund's fees and expenses.
-22-
Trustee Approval of the Investment Management Agreement
The Board of Trustees approved the Investment Management Agreement at a
meeting held on October 10, 2002. As noted above, each Trustee also serves as a
trustee for the CDC Nvest Funds, including the CDC Nvest AEW Real Estate Fund,
an open-end investment company managed by the Investment Manager that
principally invests in the securities of real estate companies. As a result, the
Trustees, in their collective years of service as trustees of such funds, have
gained significant knowledge regarding matters such as the fees and expenses of
investment companies; the services generally provided by investment advisors to
an investment company; the benefits of the advisory relationship to an
investment advisor; and the operations and prior performance of the Investment
Manager.
In connection with their meeting, the Trustees met with representatives
of the Investment Manager, including investment advisory personnel, and reviewed
materials specifically relating to the Investment Management Agreement,
including materials prepared by Fund counsel and counsel to the Independent
Trustees. In considering the Investment Management Agreement, the Board of
Trustees, including the Independent Trustees, did not identify any single factor
as determinative. Matters considered by the Board of Trustees, including the
Independent Trustees, in connection with its approval of the Investment
Management Agreement included the following:
. the economic outlook and the general investment outlook in the
markets in which the Fund proposes to invest, as well as the
investment performance of a peer group of funds (including other
funds advised by the Investment Manager) and the performance of
an appropriate index.
. the Investment Manager's investment philosophy and process,
operational stability and financial condition, as well as the
size and experience of the Investment Manager's investment staff.
. the expected quality of the Investment Manager's services with
respect to compliance with the Fund's investment policies and
restrictions and its policies on personal securities
transactions.
. the nature, quality, and extent of services to be performed by
the Investment Manager pursuant to the Investment Management
Agreement.
. the Fund's expected expense ratio and the expense ratios of a
peer group of funds. They also considered (i) the Investment
Manager's agreement to waive a portion of its investment
management fees and the financial impact on the Investment
Manager of such waiver, and (ii) the amount and nature of fees
paid by shareholders, including the fact that the Investment
Manager has agreed to pay organizational expenses and offering
costs of the Fund (other than the sales load) that exceed $0.03
per Common Share. For these purposes, the Trustees took into
account not only the fees paid by the Fund, but also so-called
"fallout benefits" to the Investment Manager, such as the
engagement of CDC IXIS Asset Management Services, Inc., an
affiliate of the Investment Manager, to provide administrative
-23-
services to the Fund, and the expected benefits of research made
available to the Investment Manager by reason of brokerage
commissions generated by the Fund's securities transactions. In
evaluating the Fund's investment management fees, the Trustees
also took into account the demands, complexity and expected
quality of the investment management of the Fund. The Trustees
also noted the fact that, because the advisory fees paid to the
Investment Manager (as well as the fees paid to CDC IXIS Asset
Management Services, Inc.) by the Fund are based on the Fund's
managed assets, which include the liquidation preference on any
Preferred Shares and the principal amount of any borrowings used
for leverage, the Investment Manager has a financial incentive
for the Fund to issue Preferred Shares and use other forms of
leverage, which may create a conflict of interest between the
Investment Manager and the Fund's shareholders.
. the level of profits expected to be realized by the Investment
Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Trustees considered certain
ongoing commissions that are expected to be paid by the
Investment Manager out of its own assets to the underwriters for
the offering of the Common Shares and the Investment Manager's
agreement to waive a portion of its investment management fees.
. whether there is potential for realization of any economies of
scale with respect to the management of the Fund and whether the
Fund will appropriately benefit from such economies of scale.
Based on their evaluation of all factors that they deemed to be
material, including, but not limited to, those factors described above, and
assisted by the advice of independent counsel, the Trustees, including the
Independent Trustees, concluded that the proposed investment management fee
structure was fair and reasonable, and that approval of the Investment
Management Agreement was in the best interest of the Fund and its shareholders.
Administrative Services
Pursuant to an Administrative Services Agreement between the Fund and
CDC IXIS Asset Management Services, Inc. ("CDC IXIS Services"), an affiliate of
the Investment Manager, CDC IXIS Services also performs or arranges for the
performance of certain administrative and accounting functions for the Fund,
including: (i) providing persons satisfactory to the Trustees of the Fund to
serve as officers and, in that capacity, manage the daily operations of the
Fund; (ii) processing the payment of expenses for the Fund; (iii) supervising
the preparation of periodic reports to the Fund's shareholders; (iv) preparing
materials for Fund Board and Committee meetings; (v) supervising the pricing of
the Fund's investment portfolio and the publication of the net asset value of
the Fund's shares, earnings reports and other financial data; (vi) monitoring
relationships with organizations providing services to the Fund, including the
custodian, transfer agent, auction agent and printers; (vii) supervising
compliance by the Fund with record-keeping requirements under the 1940 Act and
regulations thereunder, maintaining books and records for the Fund (other than
those maintained by the Investment Manager, custodian and/or transfer agent) and
preparing and filing of tax
-24-
reports other than the Fund's income tax returns; and (viii) providing
executive, clerical and secretarial help needed to carry out these
responsibilities.
Under the terms of the Administrative Services Agreement, the Fund pays CDC
IXIS Services a monthly administration fee computed on the basis of the average
daily managed assets of the Fund at an annual rate equal to 0.06% of the first
$300 million in assets and 0.0575% of assets in excess of $300 million, with a
minimum annual fee of $150,000.
In accordance with the terms of the Administrative Services Agreement and
with the approval of the Fund's Board of Trustees, CDC IXIS Services has
retained Investors Bank & Trust Company as sub-administrator under a
sub-administration agreement (the "Sub-Administration Agreement"). Under the
Sub-Administration Agreement, Investors Bank & Trust Company has assumed
responsibility for performing certain of the foregoing administrative functions,
including (i) determining, together with the Fund's custodian, the Fund's net
asset value and preparing these figures for publication; (ii) maintaining
certain of the Fund's books and records that are not maintained by the
Investment Manager, CDC IXIS Services, the custodian or transfer agent; (iii)
preparing financial information for the Fund's income tax returns, proxy
statements, shareholder reports, and SEC filings; and (iv) responding to
shareholder inquiries.
Under the terms of the Sub-Administration Agreement, CDC IXIS Services (and
not the Fund) pays Investors Bank & Trust Company a monthly sub-administration
fee computed on the basis of the managed assets of the Fund at an annual rate
equal to 0.015% of the first $300 million in managed assets and 0.012%
thereafter. As discussed below under "Custodian and Auction Agent," Investors
Bank & Trust Company is also the Fund's custodian.
The personnel acting as officers of the Fund are employees or officers of
the Investment Manager, CDC IXIS Services or their affiliates. The Fund does not
pay for services performed by officers of the Investment Manager, CDC IXIS
Services or their affiliates, other than amounts payable under the Investment
Management and Administrative Services Agreements.
Marketing Agent
CDC IXIS Asset Management Advisors Group (the "Advisors Group"), an
affiliate of the Investment Manager, acted as marketing agent for the Fund in
connection with the offering of the Fund's Common Shares by preparing marketing
materials and providing distribution support during the offering. In this
connection, the Advisors Group agreed, pursuant to an agreement with the
Investment Manager, (i) to reimburse the Investment Manager for one-half of the
amount by which the aggregate of all of the Fund's organizational expenses and
offering costs with respect to the offering of the Common Shares (other than the
sales load) exceeds $0.03 per Common Share and (ii) to bear a portion of any
ongoing asset-based fees to be paid by the Investment Manager to the
underwriters (other than ___________________________________________________) in
connection with the offering in the amount of 21.8% of such fees in years one
and two of the Fund's operations and in declining amounts for each of the four
years thereafter. As payment for these services, the Investment Manager (and not
the Fund) has agreed to pay the Advisors Group a fee at the annual rate of 0.12%
of net assets for years one and two of the Fund's operations, 0.08% of net
assets for years three and four, and 0.05% of net assets in years
-25-
five and six. The Investment Manager has not agreed to pay any fees to the
Advisors Group (and the Advisors Group has not agreed to bear any portion of any
asset-based fees payable by the Investment Manager) beyond year six of the
Fund's operations. The Advisors Group and the Investment Manager, both of which
are subsidiaries of CDC IXIS Asset Management North America, L.P., may agree to
change or eliminate these payments at any time.
Custodian And Auction Agent
Investors Bank & Trust Company, which has its principal business office at
200 Clarendon Street, Boston, Massachusetts 02116, has been retained to act as
custodian of the Fund's investments. ________________, ____________________,
serves as auction agent, transfer agent, registrar, dividend paying agent and
redemption agent for the Preferred Shares. Neither Investors Bank & Trust
Company nor ____________________ has any part in deciding the Fund's investment
policies or which securities are to be purchased or sold for the Fund's
portfolio.
CDC IXIS Services remains responsible for monitoring and overseeing the
performance by Investors Bank & Trust Company and ______________, as
sub-administrator and custodian and auction agent, respectively, of their
obligations to the Fund under their respective agreements with the Fund, subject
to the overall authority of the Fund's Board of Trustees.
Code Of Ethics
The Fund and the Investment Manager have adopted Codes of Ethics pursuant
to Rule 17j-1 under the 1940 Act. The Codes of Ethics permit employees to invest
in securities for their own accounts, under certain circumstances, including
securities that may be purchased or held by the Fund. Text-only versions of the
codes of ethics may be viewed online or downloaded from the EDGAR Database on
the SEC's internet web site at www.sec.gov. You may also review and copy those
documents by visiting the SEC's Public Reference Room in Washington, DC.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 202-942-8090. In addition, copies of the Codes of Ethics may
be obtained, after mailing the appropriate duplicating fee, by writing to the
SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102
or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board and the oversight of the
Investment Manager, the Investment Manager is primarily responsible for the
Fund's portfolio decisions and the placing of the Fund's portfolio transactions.
Fixed-income securities, certain short-term securities and certain equities
normally will be purchased or sold from or to issuers directly or to dealers
serving as market makers for the securities at a net price, which may include
dealer spreads and underwriting commissions. Equity securities may also be
purchased or sold through brokers who will be paid a commission.
The general policy of the Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker
-26-
or dealer, the stability of the broker or dealer, execution and settlement
capabilities, time required to negotiate and execute the trade, research
services and the Investment Manager's arrangements related thereto (as described
below), overall performance, the dealer's risk in positioning the securities
involved, and the broker's commissions and dealer's spread or mark-up. While the
Investment Manager generally seeks the best price in placing its orders, the
Fund may not necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, as amended, the Investment Manager may select
brokers who charge a commission in excess of that charged by other brokers if
the Investment Manager determines in good faith that the commission to be
charged is reasonable in relation to the brokerage and research services
provided to the Investment Manager by such brokers. Research services generally
consist of research or statistical reports or oral advice from brokers and
dealers regarding particular companies, industries or general economic
conditions. The Investment Manager may also have arrangements with brokers
pursuant to which such brokers provide research services to the Investment
Manager in exchange for a certain volume of brokerage transactions to be
executed by such broker. While the payment of higher commissions increases the
Fund's costs, the Investment Manager does not believe that the receipt of such
brokerage and research services significantly reduces its expenses as the
Investment Manager. Arrangements for the receipt of research services from
brokers may create conflicts of interest.
Research services furnished to the Investment Manager by brokers who effect
securities transactions for the Fund may be used by the Investment Manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the Investment Manager by brokers who effect
securities transactions for other investment companies and accounts which the
Investment Manager manages may be used by the Investment Manager in servicing
the Fund. Not all of these research services are used by the Investment Manager
in managing any particular account, including the Fund.
Under the 1940 Act, "affiliated persons" of the Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
the Fund may purchase securities from underwriting syndicates of which the
Investment Manager or any of its affiliates (as defined in the 1940 Act) is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act. See "Investment Objectives and Policies - Certain Affiliations."
The Fund contemplates that, consistent with the policy of obtaining the
best net results, brokerage transactions may be conducted through "affiliated
broker/dealers," as defined in the 1940 Act. The Board of Trustees has adopted
procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to
ensure that all brokerage commissions paid to such affiliates are reasonable and
fair in the context of the market in which such affiliates operate. Any such
compensation will be paid in accordance with applicable SEC regulations.
Investment decisions for the Fund are made independently from those of
other funds or accounts managed by the Investment Manager. Such other funds or
accounts may also invest in the same securities as the Fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as the Fund, however, transactions in such
-27-
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security.
DETERMINATION OF NET ASSET VALUE
The method for determining the net asset value per Common Share is
summarized in the Prospectus.
The total net asset value of the Common Shares (the excess of the assets of
the Fund over the Fund's liabilities) is determined at the close of regular
trading (normally 4:00 p.m. Eastern time) on each day that the New York Stock
Exchange (the "Exchange") is open for trading. In addition, in the Investment
Manager's discretion, the Fund's shares may be priced on a day the Exchange is
closed for trading if the Investment Manager in its discretion determines that
it is advisable to do so based primarily upon factors such as whether (i) there
has been enough trading in that Fund's portfolio securities to affect materially
the net asset value of the Fund's shares and (ii) whether in the Investment
Manager's view sufficient information (e.g., prices reported by pricing
services) is available for the Fund's shares to be priced. The Fund does not
expect to price its shares on the following holidays: New Year's Day, Martin
Luther King Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Securities listed on a national
securities exchange or on the NASDAQ National Market System are valued at their
last sale price, or, if there is no reported sale during the day, the last
reported bid price estimated by a broker. Unlisted securities traded in the
over-the-counter market are valued at the last reported bid price in the
over-the-counter market or on the basis of yield equivalents as obtained from
one or more dealers that make a market in the securities. U.S. government
securities are traded in the over-the-counter market. Options, interest rate
futures and options thereon that are traded on exchanges are valued at their
last sale price as of the close of such exchanges. Securities for which current
market quotations are not readily available and all other assets are taken at
fair value as determined in good faith by the Board of Trustees, although the
actual calculations may be made by persons acting pursuant to procedures
approved by the Board.
Generally, trading in foreign government securities and other fixed-income
securities, as well as trading in equity securities in markets outside the
United States, is substantially completed each day at various times prior to the
close of the Exchange. Securities traded on a foreign exchange will be valued at
their last sale price (or the last reported bid price, if there is no reported
sale during the day), on the exchange on which they principally trade, as of the
close of regular trading on such exchange, except for securities traded on the
London Stock Exchange ("British Equities"). British Equities will be valued at
the mean between the last bid and last asked prices on the London Stock
Exchange. The value of other securities principally traded outside the United
States will be computed as of the completion of substantial trading for the day
on the markets on which such securities principally trade. Securities
principally traded outside the United States will generally be valued several
hours before the close of regular trading on the Exchange, generally 4:00 p.m.
Eastern time, when the Fund computes the net asset value of its Common Shares.
Occasionally, events affecting the value of securities principally traded
outside
-28-
the United States may occur between the completion of substantial trading of
such securities for the day and the close of the Exchange, which events will not
be reflected in the computation of the Fund's net asset value. If, in the
determination of the Board of Trustees or persons acting at their direction,
events materially affecting the value of the Fund's securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by or in accordance with procedures approved by the Fund's
Trustees. The effect of fair value pricing is that securities may not be priced
on the basis of quotations from the primary market in which they are traded, but
rather may be priced by another method that the Board of Trustees believes
accurately reflects fair value.
DISTRIBUTIONS
See "Description of Preferred Shares - Dividends and Rate Periods" and
"Description of Capital Structure" in the Prospectus for information related to
distributions made to Fund shareholders.
For tax purposes, the Fund is currently required to allocate net capital
gain and other taxable income, if any, between the Common Shares and the
Preferred Shares in proportion to total dividends paid to each class for the
year in which such capital gain or other taxable income is realized.
While any Preferred Shares are outstanding, the Fund may not declare any
cash dividend or other distribution on its Common Shares unless at the time of
such declaration (1) all accrued dividends on the Preferred Shares have been
paid, (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of any outstanding Preferred Shares, (3) the Fund has
redeemed the full number of Preferred Shares and any other preferred shares
outstanding required to be redeemed by any provision in the Bylaws requiring
mandatory redemption, and (4) other requirements imposed by any rating agencies
rating any Preferred Shares issued by the Fund have been met.
These limitations on the Fund's ability to make distributions on its Common
Shares could cause the Fund to incur income and excise tax and, under certain
circumstances, impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Taxation."
Level Rate Dividend Policy
Subject to the determination of the Board of Trustees to implement a
Managed Dividend Policy, as discussed below, commencing with the Fund's first
dividend, the Fund intends to make regular monthly cash distributions to Common
Shareholders at a level rate based on the projected performance of the Fund,
which rate may be adjusted from time to time ("Level Rate Dividend Policy").
Distributions can only be made from net investment income after paying accrued
dividends on the Preferred Shares and interest and required principal payments
on borrowings, if any, as well as making any required payments on any interest
rate transactions. The Fund's ability to maintain a Level Rate Dividend Policy
will depend on a number of factors, including the stability of income received
from its investments and dividends payable on the Preferred Shares and interest
and required principal payments on borrowings, if any. Over time,
-29-
the Fund intends to distribute all of its net investment income (after payment
of expenses, dividends on the Preferred Shares and interest on any borrowings).
At least annually, the Fund intends to distribute all of its net capital gain
and ordinary taxable income after paying expenses and paying any accrued
dividends on, or redeeming or liquidating, the Preferred Shares, or making
interest and required principal payments on borrowings, if any. The net income
of the Fund consists of all interest income accrued on portfolio assets less all
expenses of the Fund. Expenses of the Fund are accrued each day. In addition,
the Fund currently expects that a portion of its distributions will consist of
amounts in excess of investment company taxable income and net capital gain
derived from the non-taxable components of the cash flow from the real estate
underlying the Fund's portfolio investments. It is possible that amounts
distributed to the Fund from Real Estate Companies would be recharacterized as a
return of capital, in which case amounts distributed to Fund shareholders may
also be recharacterized as a return of capital. To permit the Fund to maintain a
more stable monthly distribution, the Fund will initially distribute less than
the entire amount of net investment income earned in a particular period. The
undistributed net investment income would be available to supplement future
distributions. As a result, the distributions paid by the Fund for any
particular monthly period may be more or less than the amount of net investment
income actually earned by the Fund during the period. Undistributed net
investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value. See "Taxation."
Managed Dividend Policy
The Fund intends to file an exemptive application with the Securities and
Exchange Commission seeking an order under the 1940 Act facilitating the
implementation of a Managed Dividend Policy. If and when the Fund receives the
requested relief, the Fund may, subject to the determination of its Board of
Trustees, implement a Managed Dividend Policy. Under a Managed Dividend Policy,
the Fund would intend to distribute a monthly fixed percentage of net asset
value to Common Shareholders. As with the Level Dividend Rate Policy,
distributions would be made only after paying expenses and paying dividends on
the Preferred Shares, and interest and required principal payments on
borrowings, if any. Under a Managed Dividend Policy, if, for any monthly
distribution, net investment income and net realized capital gain were less than
the amount of the distribution, the difference would be distributed from the
Fund's assets. It is possible that amounts distributed to the Fund from Real
Estate Companies would be recharacterized as a return of capital, in which case
amounts distributed to Fund shareholders may also be recharacterized as a return
of capital. The Fund's final distribution for each calendar year would include
any remaining net investment income and net realized capital gain undistributed
during the year. Pursuant to the requirements of the 1940 Act and other
applicable laws, a notice would accompany each monthly distribution with respect
to the estimated source of the distribution made. In the event the Fund
distributed in any calendar year amounts in excess of net investment income and
net realized capital gain (such excess, the "Excess"), such distribution would
decrease the Fund's total assets and, therefore, have the likely effect of
increasing the Fund's expense ratio. There is a risk that the Fund would not
eventually realize capital gains in an amount corresponding to a distribution of
the Excess. In addition, in order to make such distributions, the Fund may have
to sell a portion of its investment portfolio at a time when independent
investment judgment might not dictate such action. There is no guarantee that
the Fund will receive an exemptive order facilitating the implementation of a
Managed Dividend
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Policy or, if received, that the Fund will determine to implement a Managed
Dividend Policy. The Board of Trustees reserves the right to change the dividend
policy from time to time.
Dividend Reinvestment Plan
The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred to
as an "opt-out" plan. Each Common Shareholder will have all distributions of
dividends and capital gains automatically reinvested in additional Common Shares
by EquiServe Trust Company, N.A., as agent for shareholders pursuant to the Plan
(the "Plan Agent"), unless they elect to receive cash. The Plan Agent will
either (i) effect purchases of Common Shares under the Plan in the open market
or (ii) distribute newly issued Common Shares of the Fund. Shareholders who
elect not to participate in the Plan will receive all distributions in cash paid
by check mailed directly to the shareholder of record (or if the shares are held
in street or other nominee name, then to the nominee) by the Plan Agent, as
dividend disbursing agent. Common Shareholders whose Common Shares are held in
the name of a broker or nominee should contact the broker or nominee to
determine whether and how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Fund declares a dividend or makes a capital gain distribution,
the Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy Common Shares in the open market, on the American
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued Common Shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy Common Shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued Common
Shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent. Such withdrawal will be effective immediately if received not
less than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole Common Shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a Common Share
credited to such account. In the alternative, upon receipt of the participant's
instructions, Common Shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The Plan Agent maintains each shareholder's account in the Plan and
furnishes confirmations of all acquisitions made for the participant. Common
Shares in the account of each Plan participant will be held by the Plan Agent on
behalf of the participant. Proxy material relating to shareholders' meetings of
the Fund will include those shares purchased as well as shares held pursuant to
the Plan.
-31-
In the case of shareholders, such as banks, brokers or nominees, which hold
Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan.
The Plan Agent's fees for the handling of reinvestment of dividends and
other distributions will be paid by the Fund. Each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with the reinvestment of distributions.
There are no other charges to participants for reinvesting dividends or capital
gain distributions; however, the Fund reserves the right to amend the Plan to
include a service charge payable by the participants.
The automatic reinvestment of dividends and other distributions will not
relieve participants of any income tax that may be payable or required to be
withheld on such dividends or distributions. See "Taxation."
The Fund and the Plan Agent reserve the right to amend or terminate the
Plan. All correspondence concerning the Plan should be directed to the Plan
Agent by telephone at 1-800-730-6001.
The Fund has paid dividends, in each case in the amount of $.____ per
Common Share, on _____________ and ____________.
DESCRIPTION OF SHARES
Common Shares
The Fund's Declaration authorizes the issuance of an unlimited number of
Common Shares, par value $0.00001 per share. All Common Shares of the Fund have
equal rights as to the payment of dividends and the distribution of assets upon
liquidation of the Fund. The Common Shares currently outstanding have been fully
paid and, subject to matters discussed in "Certain Provisions in the Declaration
of Trust - Shareholder Liability" below, are non-assessable, and have no
pre-emptive or conversion rights or rights to cumulative voting. At any time
when the Preferred Shares are outstanding, Common Shareholders will not be
entitled to receive any distributions from the Fund unless all accrued dividends
on Preferred Shares have been paid, asset coverage (as defined in the 1940 Act)
with respect to Preferred Shares and certain forms of indebtedness would be at
least 200% and 300%, respectively, after giving effect to such distributions,
and other requirements imposed by any rating agencies rating the Preferred
Shares have been met. See " - Preferred Shares" below. See "Description of
Preferred Shares - Rating Agency Guidelines and Asset Coverage" and "Description
of Capital Structure" in the Prospectus.
-32-
The Common Shares are listed on the American Stock Exchange under the
symbol "RIF." The Fund intends to hold annual meetings of shareholders, as
required under the rules of the American Stock Exchange currently applicable to
listed companies.
Shares of closed-end investment companies may frequently trade at prices
lower than net asset value. Shares of closed-end investment companies like the
Fund that invest primarily in securities of real estate companies have during
some periods traded at prices higher than net asset value and during other
periods traded at prices lower than net asset value. There can be no assurance
that the Common Shares or shares of other similar funds will trade at a price
higher than net asset value in the future. The net asset value of the Common
Shares was reduced immediately following the offering of the Common Shares after
payment of the sales load and organizational and offering expenses. Whether
investors will realize gains or losses upon the sale of Common Shares will
depend entirely upon whether the market price of the Common Shares at the time
of sale is above or below the original purchase price for the shares. Since the
market price of the Fund's Common Shares will be determined by factors beyond
the control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Repurchase of Shares; Conversion to
Open-End Fund."
Preferred Shares
See "Description of Preferred Shares" and Description of Capital Structure"
in the Prospectus for information relating to the Preferred Shares. Article 11
of the Bylaws, which establishes many of the terms of the Preferred Shares, is
set forth in its entirety in Appendix B to this Statement of Additional
Information.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR PREFERRED SHARES
General
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, __________) which provides, among
other things, that the auction agent will follow the auction procedures set
forth in the Bylaws for purposes of determining the applicable rate for
Preferred Shares so long as the applicable rate for such shares is to be based
on the results of an auction.
Broker-Dealer Agreements. Each auction requires the participation of one or
more broker-dealers that have entered into a separate agreement with the auction
agent (each, a "Broker-Dealer"). The auction agent will enter into broker-dealer
agreements with one or more Broker-Dealers selected by the Fund that provide for
the participation of those Broker-Dealers in auctions for Preferred Shares.
Securities Depository. The Depository Trust Company ("DTC") will act as
securities depository for the agent members (defined below) with respect to the
Preferred Shares. One
-33-
certificate for the Preferred Shares will be registered in the name of Cede &
Co., as nominee of DTC. Such certificate will bear a legend to the effect that
such certificate is issued subject to the provisions restricting transfers of
Preferred Shares contained in the Bylaws. Prior to the commencement of the right
of Preferred Shareholders to elect a majority of the Fund's Trustees, as
described under "Description of Preferred Shares - Voting Rights" in the
Prospectus, Cede & Co. will be the holder of record of all Preferred Shares, and
owners of the Preferred Shares will not be entitled to receive certificates
representing their ownership interest in the Preferred Shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant (the "agent member") in Preferred
Shares, whether for its own account or as a nominee for another person.
Additional information concerning DTC and the DTC depository system is included
as an Exhibit to the Registration Statement of which this Statement of
Additional Information forms a part.
Auction Agent
The auction agent will act as agent for the Fund in connection with
auctions. In the absence of bad faith or negligence on its part, the auction
agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the auction
agency agreement.
The auction agent may rely upon, as evidence of the identities of the
existing holders of Preferred Shares, the auction agent's registry of existing
holders, the results of auctions and notices from any Broker-Dealer (or other
person, if permitted by the Fund) with respect to transfers described under "The
Auction" in the Prospectus and notices from the Fund. The auction agent is not
required to accept any such notice for an auction unless it is received by the
auction agent by 3:00 p.m., New York City time, on the business day preceding
such auction.
The auction agent may terminate the auction agency agreement upon notice to
the Fund on a date no earlier than 60 days after such notice. If the auction
agent should resign, the Fund will attempt to appoint a successor auction agent.
The Fund may remove the auction agent provided that prior to such removal the
Fund shall have entered into an agreement with a successor auction agent to
perform substantially similar services.
Broker-Dealers
After each auction for the Preferred Shares, the auction agent will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge that will
generally be at the annual rate of 1/4 of 1% of the stated value ($25,000) of
the Preferred Shares held by such Broker-Dealer's customers upon settlement in
such auction.
The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account,
unless the Fund notifies all
-34-
Broker-Dealers that they may no longer do so, in which case Broker-Dealers may
continue to submit hold orders and sell orders for their own accounts. Any
Broker-Dealer that is an affiliate of the Fund may submit orders in auctions,
but only if such orders are not for its own account. If a Broker-Dealer submits
an order for its own account in any auction, it might have an advantage over
other bidders because it would have knowledge of all orders submitted by it in
that auction; such Broker-Dealer, however, would not have knowledge of orders
submitted by other Broker-Dealers in that auction.
The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time upon five days' notice, provided that at
least one Broker-Dealer agreement is in effect after such termination.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Shareholder Liability
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the Fund's
Amended and Restated Declaration of Trust (the "Declaration") contains an
express disclaimer of shareholder liability for acts or obligations of the Fund
and requires that notice of such disclaimer be given in each note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or any officer or officers of the Fund. The Declaration also provides for
indemnification by the Fund for all loss and expense of any shareholder or
former shareholder held personally liable on account of being or having been a
shareholder of the Fund. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
such disclaimer is inoperative or the Fund is unable to meet its obligations,
and thus should be considered remote.
Anti-Takeover Provisions
As described below, the Declaration includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees, and could
have the effect of depriving shareholders of opportunities to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund.
The Fund's Trustees are divided into three classes (Class I, Class II and
Class III), having initial terms of one, two and three years, respectively. At
each annual meeting of shareholders, the term of one class will expire and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, subject to any voting powers of Common Shareholders or the Preferred
Shareholders, the Declaration provides that a Trustee may be removed only for
"cause" (as defined below) and only (i) by action of at least seventy-five
percent (75%) of the outstanding shares of the classes or series of shares
entitled to vote for the election of such Trustee, at a meeting called for such
purpose, or (ii) by a written instrument signed by at least seventy-five percent
(75%) of the remaining Trustees specifying the date when such removal shall
become effective. "Cause" for these
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purposes means willful misconduct, dishonesty or fraud on the part of the
Trustee in the conduct of his or her office or such Trustee being convicted of a
felony.
Except as provided in the next paragraph, the affirmative vote or
consent of at least seventy-five percent (75%) of the Board of Trustees and at
least seventy-five percent (75%) of the shares of the Fund outstanding and
entitled to vote thereon are required to authorize any of the following
transactions (each a "Material Transaction"): (1) a merger, consolidation or
share exchange of the Fund or any series or class of shares of the Fund with or
into any other person or company, or of any such person or company with or into
the Fund or any such series or class of shares; (2) the issuance or transfer by
the Fund or any series or class of shares (in one or a series of transactions in
any twelve-month period) of any securities issued by the Fund or such series or
class to any other person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of $1,000,000 or
more, excluding sales of securities of the Fund or such series or class in
connection with a public offering, issuances of securities of the Fund or such
series or class pursuant to a dividend reinvestment plan adopted by the Fund,
issuances of securities of the Fund or such series or class upon the exercise of
any stock subscription rights distributed by the Fund and issuances of
securities of the Fund or a series or class to all shareholders of the Fund or
such series or class on a pro rata basis; (3) a sale, lease, exchange, mortgage,
pledge, transfer or other disposition by the Fund or any series or class of
shares (in one or a series of transactions in any twelve-month period) to or
with any person of any assets of the Fund or such series or class having an
aggregate fair market value of $1,000,000 or more, except for transactions in
securities effected by the Fund or such series or class in the ordinary course
of its business or (4) any shareholder proposal as to specific investment
decisions made or to be made with respect to the assets of the Fund or a series
or class of shares. The same affirmative votes are required with respect to any
shareholder proposal as to specific investment decisions made or to be made with
respect to the Fund's assets or the assets of any series or class of shares of
the Fund.
Notwithstanding the approval requirements specified in the preceding
paragraph, the Declaration requires no vote or consent of the Fund's
shareholders to authorize a Material Transaction if the transaction is approved
by a vote of both a majority of the Board of Trustees and seventy-five percent
(75%) of the Continuing Trustees (as defined below), so long as all other
conditions and requirements, if any, provided for in the Fund's Bylaws and
applicable law (including any shareholder voting rights under the 1940 Act) have
been satisfied.
In addition, the Declaration provides that, subject to the voting power
of one or more classes of shares as set forth in the Bylaws, the Fund may be
terminated at any time by vote or consent of at least seventy-five percent (75%)
of the Fund's shares entitled to vote or, alternatively, by vote or consent of
both a majority of the Board of Trustees and seventy-five percent (75%) of the
Continuing Trustees (as defined below). A vote of both a majority of the Board
of Trustees and seventy-five percent (75%) of the Continuing Trustees (as
defined below) is required for distributions to the Fund's shareholders (in one
or a series of distributions) during any twelve-month period of any property (in
cash, shares or otherwise) with an aggregate fair market value in excess of 125%
of the income and gains (accrued or realized) of the Fund during such
twelve-month period.
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In certain circumstances, the Declaration also imposes shareholder
voting requirements that are more demanding than those required under the 1940
Act in order to authorize a conversion of the Fund from a closed-end to an
open-end investment company. See "Possible Conversion to Open-End Status" and
"Certain Provisions in the Declaration of Trust" in the Prospectus.
The Trustees may from time to time grant other voting rights to
shareholders with respect to these and other matters as the Trustees may
consider necessary or desirable.
As noted, the voting provisions described above could have the effect
of depriving Common Shareholders of an opportunity to sell their Common Shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar transaction.
In the view of the Fund's Board of Trustees, however, these provisions offer
several possible advantages, including: (1) requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid for the
amount of Common Shares required to obtain control; (2) promoting continuity and
stability; and (3) enhancing the Fund's ability to pursue long-term strategies
that are consistent with its investment objectives and management policies. The
Board of Trustees has determined that the voting requirements described above,
which are generally greater than the minimum requirements under the 1940 Act,
are in the best interests of the Fund's shareholders generally.
A "Continuing Trustee," as used in the discussion above, is any member
of the Fund's Board of Trustees who either (i) has been a member of the Board
for a period of at least thirty-six months (or since immediately after the
initial registered public offering of the Fund's Common Shares, if less than
thirty-six months) or (ii) was nominated to serve as a member of the Board of
Trustees by a majority of the Continuing Trustees then members of the Board.
The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's Bylaws,
both of which have been filed as exhibits to the Fund's registration statement
on file with the SEC.
Liability of Trustees
The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a Trustee against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
REPURCHASE OF SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders do not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and
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economic conditions and other factors beyond the control of the Fund. Common
shares of closed-end investment companies frequently trade at prices lower than
net asset value. They sometimes also trade at a premium to net asset value. The
Fund's Board of Trustees regularly monitors the relationship between the market
price and net asset value of the Common Shares. If the Common Shares were to
trade at a substantial discount to net asset value for an extended period of
time, the Fund's Board may consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of shares, which
may include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares at net asset value,
the conversion of the Fund to an open-end investment company, or other programs
intended to reduce the discount. The Board of Trustees currently considers the
following factors to be relevant to a consideration of any of the actions noted
above: the extent and duration of the discount, the liquidity of the Fund's
portfolio, the impact of any action on the Fund or its shareholders and general
market considerations. The Board of Trustees may decide not to take any of these
actions. The Fund has no present intention to repurchase its Common Shares and
generally would do so only in the circumstances described in this section.
Notwithstanding the foregoing, at any time when the Preferred Shares
are outstanding, the Fund may not purchase, redeem or otherwise acquire any of
its Common Shares unless (1) full cumulative dividends on the Preferred Shares
and any other preferred shares outstanding due on or prior to the date of the
transaction have been declared and paid or have been declared and sufficient
funds for the payment thereof deposited with the auction agent. (2) at the time
of such purchase, redemption or acquisition, the net asset value of the Fund's
portfolio (determined after deducting the acquisition price of the Common
Shares) is at least 200% of the liquidation value of the outstanding Preferred
Shares (expected to equal the original purchase price per share plus any accrued
and unpaid dividends thereon), (3) the Fund has redeemed the full number of
Preferred Shares and any other preferred shares outstanding required to be
redeemed by any provision in the Bylaws requiring mandatory redemption, and (4)
other requirements imposed by any rating agencies rating any Preferred Shares
issued by the Fund have been met.
Subject to its investment limitations, the Fund may borrow or use the
accumulation of cash to finance repurchase of shares or to make a tender offer.
Interest on any borrowings to finance share repurchase transactions or the
accumulation of cash by the Fund in anticipation of share repurchases or tenders
will reduce the Fund's income. Any share repurchase, tender offer or borrowing
that might be approved by the Board of Trustees would have to comply with the
Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and
regulations under each of those Acts.
The Fund's Board of Trustees may also from time to time consider
submitting to the holders of the shares of beneficial interest of the Fund a
proposal to convert the Fund to an open-end investment company. In determining
whether to exercise its sole discretion to submit this issue to shareholders,
the Board of Trustees would consider all factors then relevant, including the
relationship of the market price of the Common Shares to net asset value, the
extent to which the Fund's capital structure is leveraged and the possibility of
re-leveraging, the spread, if any, between the yields on securities in the
Fund's portfolio and interest and dividend charges on Preferred Shares or other
forms of leverage and general market and economic conditions.
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The Declaration requires the affirmative vote or consent of holders of
at least seventy-five percent (75%) of each class of the Fund's shares entitled
to vote on the matter to authorize a conversion of the Fund from a closed-end to
an open-end investment company, unless the conversion is authorized by both a
majority of the Board of Trustees and seventy-five percent (75%) of the
Continuing Trustees (as defined above under "Certain Provisions in the
Declaration of Trust--Anti-Takeover Provisions"). This seventy-five percent
(75%) shareholder approval requirement is higher than is required under the 1940
Act. In the event that a conversion is approved by the Trustees and the
Continuing Trustees as described above, the minimum shareholder vote required
under the 1940 Act would be necessary to authorize the conversion. Currently,
the 1940 Act would require approval of the holders of a "majority of the
outstanding" Common Shares and, if issued, Preferred Shares, voting together as
a single class, and the holders of a "majority of the outstanding" Preferred
Shares voting as a separate class, in order to authorize a conversion.
The Fund anticipates that it would not charge any sales or redemption
fees upon conversion to an open-end fund. The Fund also currently anticipates
that after any such conversion, shareholder redemptions would generally be made
in cash. However, if the Fund were to meet shareholder redemptions "in kind"
through the distributions of securities, shareholders would bear the risks of
holding such securities directly and would bear any brokerage costs or other
transactional expenses in connection with the sale of such securities.
If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Shares
likely would no longer be listed on the American Stock Exchange. Shareholders of
an open-end investment company may require the company to redeem their shares on
any business day (except in certain circumstances as authorized by or under the
1940 Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of redemption. In order to avoid maintaining
large cash positions or liquidating favorable investments to meet redemptions,
open-end companies typically engage in a continuous offering of their shares.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the shares
may be the subject of repurchase or tender offers at net asset value from time
to time, or that the Fund may be converted to an open-end investment company,
may reduce any spread between market price and net asset value that might
otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets, which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when Preferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining. See the Fund's Prospectus under
"Principal Risks of the Fund - General Risks of Investing in the Fund - Leverage
Risk."
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Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of Trustees would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact (including the expense) of any action that might be
taken on the Fund or its shareholders and market considerations. Based on these
considerations, even if the Fund's shares should trade at a discount, the Board
of Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisers with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction.
Taxation of the Fund
The Fund intends to elect to be treated as, and to qualify annually as,
a regulated investment company under Subchapter M of the Code.
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. Government securities or
the securities of other regulated investment companies) of a single issuer, or
two or more issuers which the Fund controls and are engaged in the same, similar
or related trades or businesses; and (c) distribute at least 90% of the sum of
its investment company taxable income (as that term is defined in the Code, but
without regard to the deduction for dividends paid) and net tax-exempt interest
each taxable year.
As a regulated investment company that is accorded special tax
treatment, the Fund generally will not be subject to U.S. federal income tax on
its investment company taxable income (which includes, among other items,
dividends, interest and net short-term capital gain in
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excess of net long-term capital loss) and net capital gain (the excess of net
long-term capital gain over net short-term capital loss), if any, that it
distributes to shareholders. The Fund intends to distribute to its shareholders,
at least annually, all or substantially all of its investment company taxable
income and net capital gain. However, if the Fund retains any net capital gain
or any investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, it may designate the retained amount as undistributed capital gains in a
notice to its shareholders who, if subject to federal income tax on long-term
capital gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their share of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Fund on such undistributed amount against their federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For federal income tax purposes the tax basis of shares owned by a
shareholder of the Fund will be increased by an amount equal under current law
to the difference between the amount of undistributed capital gains included in
the shareholder's gross income and the tax deemed paid by the shareholder under
clause (ii) of the preceding sentence.
If the Fund fails to distribute in a calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the one-year period ending on October 31 of the calendar year, and (3) any
ordinary income and capital gains for previous years that was not distributed
during those years, the Fund will be subject to a 4% excise tax on the
undistributed amount. A distribution will be treated as paid on December 31 of
the current calendar year if it is declared by the Fund in October, November or
December with a record date in such a month and paid by the Fund during January
of the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received. To
prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
If the Fund failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, the Fund
would be subject to tax on its taxable income at corporate rates (even if such
income were distributed to its shareholders), and all distributions out of
earnings and profits (including distributions of net capital gain) would be
taxed to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest and
make substantial distributions before requalifying as a regulated investment
company that is accorded special tax treatment.
Distributions
Dividends paid out of the Fund's current and accumulated earnings and
profits will, except in the case of capital gain dividends described below, be
taxable to a U.S. shareholder as ordinary income to the extent of the Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
Although such dividends generally will not qualify for the dividends received
deduction available to corporations under Section 243 of the Code, if a portion
of the Fund's income consists of qualifying dividends paid by U.S. corporations
(other than REITs), a portion of the dividends paid by the Fund to corporate
shareholders may be eligible for the corporate dividends received deduction.
Distributions of net capital gain (the
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excess of net long-term capital gain over net short-term capital loss), if any,
properly designated as capital gain dividends are taxable to a shareholder as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. A distribution of an amount in excess of the Fund's current and
accumulated earnings and profits will be treated by a shareholder as a return of
capital which is applied against and reduces the shareholder's basis in his or
her shares. A return of capital is not taxable, but it reduces a shareholder's
tax basis in his or her shares, thus reducing any loss or increasing any gain on
a subsequent taxable disposition by the shareholder of his or her shares. To the
extent that the amount of any such distribution exceeds the shareholder's basis
in his or her shares, the excess will be treated by the shareholder as gain from
a sale or exchange of the shares.
Dividends and distribution on the Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Distributions are taxable to a shareholder even if they are paid from
income or gains earned by the Fund prior to the shareholder's investment (and
thus included in the price paid by the shareholders).
The Internal Revenue Service ("IRS") currently requires that a
regulated investment company that has two or more classes of stock allocate to
each such class proportionate amounts of each type of its income (such as
ordinary income and capital gains) based upon the percentage of total dividends
paid out of earnings or profits to each class for the tax year. Accordingly, the
Fund intends each year to allocate capital gain dividends between its Common
Shares and 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 dividends on the Preferred Shares, distributions in excess of
such earnings and profits, if any, will be made disproportionately to Common
Shareholders.
Distributions will be treated in the manner described above regardless
of whether such distributions are paid in cash or in additional shares of the
Fund. A shareholder whose distributions are reinvested in shares will be treated
as having received a dividend equal to the fair market value of the new shares
issued to the shareholder or the amount of cash allocated to the shareholder for
the purchase of shares on its behalf.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions.
Sale Or Exchange of Fund Shares
Upon the sale, exchange or redemption of shares of the Fund which a
shareholder holds as a capital asset, such shareholder may realize a capital
gain or loss which will be long-term or
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short-term, depending upon the shareholder's holding period for the shares.
Generally, a shareholder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year.
However, all or a portion of any loss realized upon a taxable
disposition of Fund shares will be disallowed to the extent the shares disposed
of are replaced (including through reinvestment of dividends) within a period of
61 days beginning 30 days before and ending 30 days after the disposition. In
such a case, the basis of the newly purchased shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on a taxable
disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gain received by the shareholder (or amounts credited as undistributed
capital gains) with respect to such shares.
From time to time, the Fund may make a tender offer for its Common
Shares. It is expected that the terms of any such offer will require a tendering
shareholder to tender all Common Shares and dispose of all Preferred Shares
held, or considered under certain attribution rules of the Code to be held, by
such shareholder. Shareholders who tender all Common Shares and dispose of all
Preferred Shares held, or considered to be held, by them will be treated as
having sold their shares and generally will realize a capital gain or loss. If a
shareholder tenders fewer than all of its Common Shares, or retains a
substantial portion of its Preferred Shares, such shareholder may be treated as
having received a taxable dividend upon the tender of its Common Shares. In such
a case there is a risk that non-tendering shareholders will be treated as having
received taxable distributions from the Fund. Likewise, if the Fund redeems some
but not all of the Preferred Shares held by a Preferred Shareholder and such
shareholder is treated as having received a taxable dividend upon such
redemption, there is a risk that Common Shareholders and non-redeeming Preferred
Shareholders will be treated as having received taxable distributions from the
Fund. To the extent that the Fund recognizes net gains on the liquidation of
portfolio securities to meet such tenders of Common Shares, the Fund will be
required to make additional distributions to its Common Shareholders.
Nature of Fund's Investments
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
provisions.
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Original Issue Discount Securities and Payment-in-Kind Securities
The Fund may acquire debt obligations that are treated as issued
originally at a discount or having acquisition discount. Current federal tax law
requires a regulated investment company that holds a U.S. Treasury or other
fixed income zero-coupon security to accrue as income each year a portion of the
discount at which the security was issued, even though the holder receives no
interest payment in cash on the security during the year. In addition,
payment-in-kind securities will give rise to income which is required to be
distributed and is taxable even though the Fund holding the security receives no
interest payment in cash on the security during the year. Generally, the amount
of the discount is treated as interest income and is included in income over the
term of the debt security, even though payment of that amount is not received
until a later time, usually when the debt security matures. A portion of the
original issue discount includable in income with respect to certain high-yield
corporate debt obligations (including certain payment-in-kind securities) may be
treated as a dividend for certain U.S. federal income tax purposes. With respect
to certain short-term debt obligations, the Fund may make one or more elections
which could affect the character and timing of recognition of income.
Some of the debt obligations (with a fixed maturity date of more than
one year from the date of issuance) that may be acquired by the Fund in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a
debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the "accrued market discount" on
such debt security. Market discount generally accrues in equal daily
installments. The Fund may make one or more of the elections applicable to debt
obligations having market discount, which could affect the character and timing
of recognition of income.
If the Fund holds the foregoing kinds of securities, it may be required
to pay out as an income distribution each year an amount which is greater than
the total amount of cash interest the Fund actually received. Such distributions
may be made from the cash assets of the Fund or by liquidation of portfolio
securities, if necessary. The Fund may realize gains or losses from such
liquidations. In the event the Fund realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain distribution
than they would in the absence of such transactions.
Investment in Real Estate Investment Trusts
If the Fund invests in REITs that hold residual interests in real
estate mortgage investment conduits ("REMICs"), a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an "excess inclusion") will be subject to federal
income tax in all events. Excess inclusion income of a regulated investment
company, such as the Fund, will be allocated to shareholders of the regulated
investment company in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related REMIC
residual interest directly. In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a limited
exception for certain thrift institutions), (ii) will constitute unrelated
business taxable income to entities (including a qualified pension plan, an
individual
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retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity)
subject to tax on unrelated business income, thereby potentially requiring such
an entity that is allocated excess inclusion income, and otherwise might not be
required to file a tax return, to file a tax return and pay tax on such income,
and (iii) in the case of a foreign shareholder, will not qualify for any
reduction in U.S. federal withholding tax. In addition, if at any time during
any taxable year a "disqualified organization" (as defined in the Code) is a
record holder of a share in a regulated investment company, then the regulated
investment company will be subject to a tax equal to that portion of its excess
inclusion income for the taxable year that is allocable to the disqualified
organization, multiplied by the highest federal income tax rate imposed on
corporations. The Investment Manager does not intend on behalf of the Fund to
invest in REITs, a substantial portion of the assets of which consists of
residual interests in REMICs.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("foreign shareholder") depends on whether the income of
the Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the shareholder (see "Taxation--Investment in Real
Estate Investment Trusts" above)), which tax is generally withheld from such
distributions.
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will not be subject to U.S. tax at the
rate of 30% (or lower treaty rate) unless the foreign shareholder is a
nonresident alien individual and is physically present in the United States for
more than 182 days during the taxable year and meets certain other requirements.
However, this 30% tax on capital gains of nonresident alien individuals who are
physically present in the United States for more than the 182 day period only
applies in exceptional cases because any individual present in the United States
for more than 182 days during the taxable year is generally treated as a
resident for U.S. income tax purposes; in that case, he or she would be subject
to U.S. income tax on his or her worldwide income at the graduated rates
applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a
foreign shareholder who is a nonresident alien individual, the Fund may be
required to withhold U.S. income tax on distributions of net capital gain unless
the foreign shareholder certifies his or her non-U.S. status under penalties of
perjury or otherwise establishes an exemption. See "Taxation-Backup
Withholding," below. Any gain that a foreign shareholder realizes upon the sale
or exchange of such shareholder's shares of the Fund will ordinarily be exempt
from U.S. tax unless (i) in the case of a shareholder that is a nonresident
alien individual, the gain is U.S. source income and such shareholder is
physically present in the United States for more than 182 days during the
taxable year and meets certain other requirements, or (ii) at any time during
the shorter of the period during which the foreign shareholder held shares of
the Fund and the five year period ending on the date of the disposition of those
shares, the Fund was a "U.S. real property holding corporation" and the foreign
shareholder held more than 5% of the shares of the
-45-
Fund, in which event the gain would be taxed in the same manner as for a U.S.
shareholder as discussed above and a 10% U.S. withholding tax would be imposed
on the amount realized on the disposition of such shares to be credited against
the foreign shareholder's U.S. income tax liability on such disposition. A
corporation is a "U.S. real property holding corporation" if the fair market
value of its U.S. real property interests equals or exceeds 50% of the fair
market value of such interests plus its interests in real property located
outside the United States plus any other assets used or held for use in a
business. In the case of the Fund, "U.S. real property interests" include
interests in stock in U.S. real property holding corporations (other than an
interest in stock of a REIT controlled by U.S. persons at all times during the
five-year period prior to the disposition and holdings of 5% or less in the
stock of publicly traded U.S. real property holding corporations) and certain
participating debt securities.
Income Effectively Connected. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a foreign
shareholder, then distributions of investment company taxable income and capital
gain dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate shareholders may also be subject to the branch profits tax imposed by
the Code.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Fund.
Backup Withholding
The Fund generally is required to withhold U.S. federal income tax on
all taxable distributions and redemption proceeds payable to any non-corporate
shareholder who fails to provide the Fund with a correct taxpayer identification
number (TIN) or to make required certifications to the Fund that he or she is
not subject to withholding, or who has been notified by the IRS that he or she
is subject to backup withholding. Pursuant to tax legislation enacted in 2001,
the backup withholding tax rate will be (i) 30% for amounts paid during 2002 and
2003, (ii) 29% for amounts paid during 2004 and 2005, and (iii) 28% for amounts
paid during 2006 through 2010. This legislation will expire and the backup
withholding rate will be 31% for amounts paid after December 31, 2010, unless
Congress enacts tax legislation providing otherwise.
In order for a foreign shareholder to qualify for exemption from the
backup withholding tax rates and for reduced withholding tax rates under income
tax treaties, the foreign shareholder must comply with special certification and
filing requirements. Foreign shareholders in the Fund should consult their tax
advisers in this regard.
Corporate shareholders and certain other shareholders specified in the
Code generally are exempt from such backup withholding. Backup withholding is
not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
-46-
Other Taxation
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund.
PERFORMANCE-RELATED AND COMPARATIVE AND OTHER INFORMATION
From time to time, the Fund may quote the Fund's total return,
aggregate total return or yield in advertisements or in reports and other
communications to shareholders. The Fund's performance will vary depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing the Fund's
performance with that of other investment companies should give consideration to
the quality and maturity of the respective investment companies' portfolio
securities.
From time to time, the Fund and/or the Investment Manager may report to
shareholders or to the public in advertisements concerning the performance of
the Investment Manager or on the comparative performance or standing of the
Investment Manager in relation to other money managers. The Investment Manager
also may provide current or prospective private account clients, in connection
with standardized performance information for the Fund, performance information
for the Fund gross and/or net of fees and expenses for the purpose of assisting
such clients in evaluating similar performance information provided by other
investment managers or institutions. Comparative information may be compiled or
provided by independent ratings services or by news organizations. Any
performance information, whether related to the Fund or the Investment Manager,
should be considered in light of the Fund's investment objectives and policies,
characteristics and quality of the Fund, and the market conditions during the
time period indicated, and should not be considered to be representative of what
may be achieved in the future. Performance information for the Fund may be
compared to various unmanaged indexes.
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar
Inc. or other independent services. Comparison of the Fund to an alternative
investment should be made with consideration of differences in features and
expected performance. The Fund may obtain data from sources or reporting
services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund
believes to be generally accurate.
Past performance is not indicative of future results.
-47-
From the period from November 26, 2002 (commencement of the Fund's
operations) through _____, 2003, the Fund's net [increase/decrease] in net
assets resulting from investment operations was $___________.
COUNSEL AND INDEPENDENT ACCOUNTANTS
Ropes & Gray serves as counsel to the Fund, and is located at One
International Place, Boston, Massachusetts 02110. ____________________, located
at ___________________, has been appointed as independent accountants for the
Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby has been filed by the Fund with the SEC,
Washington, DC The Prospectus and this Statement of Additional Information do
not contain all the information set forth in the Registration Statement,
including any exhibits and schedules thereto. For further information with
respect to the Fund and the shares offered hereby, reference is made to the
Registration Statement. Statements contained in the Prospectus and this
Statement of Additional Information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. You may also review and copy the Registration Statement by
visiting the SEC's Public Reference Room in Washington, DC. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
202-942-8090. In addition, copies of the Registration Statement may be obtained,
after mailing the appropriate duplicating fee, by writing to the SEC's Public
Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail
request at publicinfo@sec.gov.
-48-
FINANCIAL STATEMENTS
[To be provided.]
-49-
APPENDIX A
RATINGS OF INVESTMENTS
Description of certain ratings assigned by S&P, Moody's and Fitch:
S&P
LONG-TERM
"AAA"--An obligation rated "AAA" has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
"AA"--An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
"A"--An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB"--An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
"BB," "B," "CCC," "CC," and "C"--Obligations rated "BB," "B," "CCC," "CC,"
and "C" are regarded as having significant speculative characteristics. "BB"
indicates the least degree of speculation and "C" the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
"BB"--An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B"--An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB," but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC"--An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC"--An obligation rated "CC" is currently highly vulnerable to
nonpayment.
A-1
"C"--A subordinated debt or preferred stock obligation rated "C" is
currently highly vulnerable to nonpayment. The "C" rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A "C" also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
"D"--An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
"r"--The symbol "r" is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
"N.R."--The designation "N.R." indicates that no rating has been requested,
that there is insufficient information on which to base a rating, or that S&P
does not rate a particular obligation as a matter of policy.
Note: The ratings from "AA" to "CCC" may be modified by the addition of a
plus (+) or minus ( - ) sign designation to show relative standing within the
major rating categories.
SHORT-TERM
"A-1"--A short-term obligation rated "A-1" is rated in the highest category
by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
"A-2"--A short-term obligation rated "A-2" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
"A-3"--A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"B"--A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.
A-2
"C"--A short-term obligation rated "C" is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
"D"--A short-term obligation rated "D" is in payment default. The "D"
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
MOODY'S
LONG-TERM
"Aaa"--Bonds rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa"--Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the "Aaa"
securities.
"A"--Bonds rated "A" possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
"Baa"--Bonds rated "Baa" are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba"--Bonds rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
"B"--Bonds rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-3
"Caa"--Bonds rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
"Ca"--Bonds rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
"C"--Bonds rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
PREFERRED STOCK
Because of the fundamental differences between preferred stocks and bonds,
Moody's employs a variation of our familiar bond rating symbols in the quality
ranking of preferred stock.
These symbols, presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind that preferred
stock occupies a junior position to bonds within a particular capital structure
and that these securities are rated within the universe of preferred stocks.
"aaa"--An issue rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
"aa"--An issue rated "aa" is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
"a"--An issue rated "a" is considered to be an upper-medium-grade preferred
stock. While risks are judged to be somewhat greater than in the "aaa" and "aa"
classifications, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
"baa"--An issue rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present, but may be questionable over any great
length of time.
"ba"--An issue rated "ba" is considered to have speculative elements. Its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
"b"--An issue rated "b" generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
A-4
"caa"--An issue rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
"ca"--An issue rated "ca" is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.
"c"--This is the lowest-rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: As in the case of bond ratings, Moody's applies to preferred stock
ratings the numerical modifiers 1, 2, and 3 in rating classifications "aa"
through "b". The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
PRIME RATING SYSTEM (SHORT-TERM)
Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-5
FITCH RATINGS
A brief description of the applicable Fitch Ratings ("Fitch") ratings symbols
and meanings (as published by Fitch) follows:
LONG-TERM CREDIT RATINGS
Investment Grade
AAA
Highest credit quality. `AAA' ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. `AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB
Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB
Speculative. `BB' ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B
Highly speculative. `B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for
A-6
continued payment is contingent upon a sustained, favorable business and
economic environment.
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A `CC' rating indicates that default of some kind appears
probable. `C' ratings signal imminent default.
DDD, DD, and D
Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. `DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. `DD' indicates
potential recoveries in the range of 50%-90%, and `D' the lowest recovery
potential, i.e., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated `DDD' have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated `DD' and `D' are generally undergoing a
formal reorganization or liquidation process; those rated `DD' are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
`D' have a poor prospect for repaying all obligations.
SHORT-TERM CREDIT RATINGS
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality . Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the
case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in
a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
A-7
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category, to categories below `CCC', or to short-term ratings other than `F1'.
`NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
`Rating Watch': Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a
one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are `stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.
A-8
APPENDIX B
AEW REAL ESTATE INCOME FUND
SECTION 11 OF THE AMENDED AND RESTATED BYLAWS
[To be provided]
B-1
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Included in Part A: Not applicable.
Included in Part B: To be filed by amendment.
2. Exhibits:
a.1 Agreement and Declaration of Trust dated September 18, 2002.
(1)
a.2. Amended and Restated Agreement and Declaration of Trust
dated October 10, 2002. (2)
b.1. Bylaws of the Registrant dated September 18, 2002. (1)
b.2. Amended and Restated Bylaws of Registrant dated October 10,
2002. (2)
b.3 Amended and Restated Bylaws of Registrant dated __________,
2003.*
c. None.
d.1 Article III (Shares) and Article V (Shareholders' Voting
Powers and Meetings) of the Amended and Restated Agreement
and Declaration of Trust. (2)
d.2 Article 10 (Shareholders' Voting Powers and Meetings) of the
Amended and Restated Bylaws of Registrant. (2)
d.3 Specimen Certificate representing the Registrant's preferred
shares of beneficial interest ("Preferred Shares").*
e. Terms and Conditions of Dividend Reinvestment Plan. (3)
f. None.
g. Investment Management Agreement between Registrant and AEW
Management and Advisors, L.P. (3)
h.1 Form of Purchase Agreement for the Preferred Shares.*
h.2 Form of Additional Compensation Agreement. (3)
i. None.
j. Form of Custodian Agreement with Investors Bank & Trust
Company. (3)
k.1 Form of Transfer Agency and Service Agreement with EquiServe
Trust Company, N.A. and EquiServe, Inc. (3)
k.2 Organizational and Offering Expenses Reimbursement Agreement
between Registrant and AEW Management and Advisors, L.P. (3)
k.3 Fee Waiver Agreement between Registrant and AEW Management
and Advisors, L.P.(3)
k.4 Administrative Services Agreement between Registrant and CDC
IXIS Asset Management Services, Inc.(3)
k.5 Form of Securities Lending Agreement between the Registrant
and Investors Bank & Trust Company. (3).
k.6 Form of Delegation Agreement between the Registrant and
Investors Bank & Trust Company. (3)
k.7 Form of Sub-Administration Agreement between CDC IXIS Asset
Management Services, Inc. and Investors Bank & Trust
Company. (3)
l. Opinion and consent of Ropes & Gray as to the Registrant's
Preferred Shares.*
m. None.
n. Consent of Registrant's independent accountants.*
o. None.
p. Subscription Agreement of AEW Management and Advisors, L.P.
dated November 11, 2002. (3)
q. None.
r.1 Code of Ethics of Registrant. (2)
r.2. Code of Ethics of AEW Management and Advisors, L.P. (2)
s.1 Power of Attorney for Preferred Shares, filed herewith.
* To be filed by amendment.
(1) Incorporated by reference from the Registrant's Registration
Statement on Form N-2, File No. 333-100018, filed on September
23, 2002.
(2) Incorporated by reference from Pre-Effective Amendment No.1 to
the Registrant's Registration Statement on Form N-2, File No.
333-100018, filed on October 28, 2002.
(3) Incorporated by reference from Pre-Effective Amendment No.2 to
the Registrant's Registration Statement on Form N-2, File No.
333-100018, filed on November 26, 2002.
Item 25: Marketing Arrangements
To be filed by amendment.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission Fees *
Printing and engraving expenses *
Legal fees *
Moody's Registration Fee *
Fitch Rating's Registration Fee *
Accounting expenses *
Miscellaneous expenses *
----
Total *
* To be completed by amendment.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At December 18, 2002
Number of
Title of Class Record Holders
Preferred Shares, par value $0.00001 0
Common Shares, par value $0.00001 To be filed by amendment
Item 29: Indemnification
Reference is made to Article VIII, Sections 1 through 4, of the
Registrant's Amended and Restated Agreement and Declaration of Trust, which is
incorporated by reference herein.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to trustees,
officers and controlling persons of the Registrant by the Registrant pursuant to
the Trust's Amended and Restated Agreement and Declaration of Trust, its Amended
and Restated Bylaws or otherwise, the Registrant is aware that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustees, officers or controlling
persons in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 30: Business and Other Connections of Investment Adviser
Descriptions of the business of AEW Management and Advisors, L.P., the
Registrant's investment manager, are set forth under the caption "Investment
Manager" under "Management of the Fund" and "Investment Advisory and Other
Services" respectively in the prospectus and Statement of Additional Information
forming part of this Registration Statement. The following sets forth business
and other connections of each director and executive officer (and persons
performing similar functions) of AEW Management and Advisors, L.P.
AEW Management and Advisors, L.P.
Two Seaport Lane
Boston, Massachusetts 02210
Name: Position with Advisor: Other Connections:
James J. Finnegan General Counsel, Managing Principal and General Counsel,
Director, Vice President and AEW Capital Management, L.P.;
Assistant Clerk Managing Director and Vice
President, AEW Advisors, Inc.;
Vice President and Assistant
Clerk, AEW Investment Group,
Inc.; Vice President and
Assistant Clerk, AEW Real Estate
Advisors, Inc.; Chief Operating
Officer of the Registrant
Jeffrey D. Furber Managing Director and Clerk Managing Partner and Chief
Executive Officer AEW Capital
Management, L.P.; Managing
Director, AEW Advisors, Inc.
Pamela J. Herbst President and Managing Director Principal, AEW Capital
Management, L.P. ; Director, AEW
Investment Group, Inc.; President
and Director, AEW Advisors, Inc.;
Managing Director, AEW Real
Estate Advisors, Inc.
J. Grant Monahan Managing Director and Clerk Principal and Chief Operating
Officer, AEW Capital Management,
L.P.; Managing Director, Vice
President and Clerk, AEW
Advisors, Inc.; Vice President,
Director and Clerk, AEW
Investment Group, Inc.; Vice
President, Managing Director and
Clerk, AEW Real Estate Advisors,
Inc.
Thomas E. Mullahey Director Principal, AEW Capital
Management, L.P.; Vice President,
AEW Investment Group, Inc.; Vice
President AEW Real Estate
Advisors, Inc.
Douglass M. Poutasse Managing Director Principal and Chief Investment
Strategist, AEW Capital
Management, L.P.; Managing
Director AEW Advisors, Inc.
Matthew A. Troxell Director Principal, AEW Capital
Management, L.P.
Item 31: Location of Accounts and Records
The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of Investors Bank & Trust
Company, 200 Clarendon Street, Boston, Massachusetts 02116, the Registrant's
custodian and sub administrator, EquiServe Trust Company, N.A. and EquiServe,
Inc., 150 Royall Street, Canton, Massachusetts 02021, the Registrant's transfer
agent, dividend disbursing agent and registrar, and/or CDC IXIS Asset Management
Services, Inc., 399 Boylston Street, Boston, MA 02116, the Registrant's
administrator.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its Preferred
Shares until it amends the prospectus filed herewith if (1) subsequent to the
effective date of its registration statement, the net asset value declines more
than 10 percent from its net asset value as of the effective date of the
registration statement, or (2) the net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form
of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared
effective; and
b. For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering
thereof.
6. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.
Notice
A copy of the Amended and Restated Agreement and Declaration of Trust of
AEW Real Estate Income Fund (the "Fund"), together with all amendments thereto,
is on file with the Secretary of The Commonwealth of Massachusetts, and notice
is hereby given that this instrument is executed on behalf of the Fund by any
officer of the Fund as an officer and not individually and that the obligations
of or arising out of this instrument are not binding upon any of the Trustees of
the Fund or shareholders of the Fund individually, but are binding only upon the
assets and property of the Fund.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boston, and the Commonwealth of Massachusetts, on the 19/th/ day of
December, 2002.
AEW Real Estate Income Fund
By: /s/ John T. Hailer
-------------------------------------------
John T. Hailer
President
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ John T. Hailer
----------------------------------
John T. Hailer President and Chief Executive Officer; December 19, 2002
Trustee
/s/ Mark E. Bradley
----------------------------------
Mark E. Bradley Treasurer, Principal Financial and December 19, 2002
Accounting Officer
GRAHAM T. ALLISON, JR.*
----------------------------------
Graham T. Allison, Jr. Trustee December 19, 2002
DANIEL M. CAIN*
----------------------------------
Daniel M. Cain Trustee December 19, 2002
KENNETH J. COWAN*
----------------------------------
Kenneth J. Cowan Trustee December 19, 2002
RICHARD DARMAN*
----------------------------------
Richard Darman Trustee December 19, 2002
SANDRA O. MOOSE*
----------------------------------
Sandra O. Moose Trustee December 19, 2002
JOHN A. SHANE*
----------------------------------
John A. Shane Trustee December 19, 2002
PETER S. VOSS*
----------------------------------
Peter S. Voss Chairman of the Board; Trustee December 19, 2002
PENDLETON P. WHITE*
----------------------------------
Pendleton P. White Trustee December 19, 2002
*By: /s/ John E. Pelletier
-----------------------
John E. Pelletier
Attorney-In-Fact
December 19, 2002
INDEX TO EXHIBITS
Exhibit Exhibit Name
s.1 Power of Attorney for Preferred Shares